TAXATION LAW 2 Alyssa Cabalang

(C) (D)
(A) (B)
INCOME INCOME Capital Gains on Shares Capital Gains on Sale of
TAXPAYER NET INCOME PASSIVE
WITHIN WITHOUT of Stock NOT Traded in Real Property Located
TAX INCOME
Local in PH
RC   NIT FWT FWT FWT
RA  × NIT FWT FWT FWT
NRA-ETB  × NIT FWT FWT FWT
NRA-NETB  × GIT 25% GIT 25% FWT FWT
DC   NIT 30% FWT FWT FWT
RFC  × NIT 30% FWT FWT ×
NFRC  × GIT 30% GIT 30% FWT ×

The following are considered citizens of the Philippines:

1. Those who are citizens of the Philippines at the time of the adoption of the Constitution
2. Those whose fathers or mothers are citizens of the Philippines
RESIDENT CITIZEN
3. Those born before January 17, 1973 of Filipino mothers, who elect Philippine Citizenship
upon reaching the age of majority; and
4. Those who are naturalized in accordance with law

1. Who establishes to the satisfaction of the Commissioner the fact of his physical presence
abroad with intention to reside therein
2. One who works and derives income from abroad and whose employment thereat requires
NON-RESIDENT CITIZEN
him to be physically present abroad most of the time (must have been outside the
Philippines for not less than 183 days) during the taxable year.
3. One who leaves the Philippines to reside abroad as an immigrant, or for employment on a
permanent basis

A resident alien is an individual whose residence is within the Philippines and who is not a citizen. An
RESIDENT ALIEN alien will be considered a resident if the stay here is either definite and extended, or indefinite. An alien
actually present in the Philippines who is not a mere transient or sojourner is a resident of the
Philippines for purposes of the income tax.

A non-resident alien is an individual:

1. whose residence is not within the Philippines; and
2. who is not a citizen thereof
NON-RESIDENT ALIEN
An alien is considered a non-resident if he stays here for a definite short period of time. Once a taxpayer
is determined to be a non-resident alien, the test to determine whether the alien is a non-resident alien
engaged in trade or business is whether his total aggregate stay for a taxable year exceeds 180
days.

Worker, whether in public or private sector, who is paid not more than the statutory wage. Minimum
MINIMUM WAGE
wage earners shall be exempt from the payment of income tax on their taxable income. Further, their
EARNERS
holiday pay, overtime pay, night shift differential pay, and hazard pay received by them shall likewise
be exempt from income tax

KINDS OF INCOME SOURCE OF INCOME (Situs)

Service of compensation Place of performance
Rent Location of property
Royalties Place of use of intangible
Merchandising Place of sale
Gain on sale of personal property Place of sale
Gain on sale of real property Location of property
Interest Residence of debtor
Dividend
A. From Domestic A. Income within, if 50% or more of the gross
Corporation income of the foreign corporation for the
preceding 3 years prior to the declaration of
dividend or for such part of such period as the
corporation has been in existence, was derived
from sources within the Philippines

B. Income without, if less than 50% of the gross

B. From Foreign income of the foreign corporation for the
Corporation preceding 3 years prior to the declaration of
dividend or for such part of such period as the
corporation has been in existence, was derived
from sources within the Philippines
Sale of domestic shares Income within
Sale of foreign shares Income without
Farming income Place of farming activities
Mining Income Location of mines

[use at your own risk]

 Means all remuneration for services performed by an employee for his employer under an
employer-employee relationship unless specifically excluded by the Tax Code. This includes the
cash value of all remuneration paid in any medium other than cash. May be paid in money, or in
some medium other than money as for example, stocks, bonds, or other forms of property. The
test is whether such income is received by virtue of an employer-employee relationship.

items not included in compensation income

COMPENSATION 1. For agricultural labor paid entirely in products of the farm where the labor is performed
INCOME
2. For domestic service in a private home. A private home is the fixed place of aboard of an
individual or family. If the home is utilized primarily for the purpose of supplying board or
lodging to the public as a business enterprise, it ceases to be a private home and
remuneration paid for services performed therein is not exempted and should be included
in compensation income.
3. For casual labor not in the course of the employer’s trade or business
4. For services by a citizen or resident of the Philippines for a foreign government or an
international organization.

BUSINESS Business income refers to gross income derived from the conduct of trade or business or the
INCOME exercise of a profession.

Professional income refers to fees received by a professional from the practice of his profession
provided that there is no employer-employee relationship between him and his clients. It includes
PROFESSIONAL
the fees derived from engaging in an endeavor requiring special training as a professional as a
INCOME
means of livelihood, which includes, but is not limited to, the fees of CPAs, doctors, lawyers,
engineers and the like

Passive income is income derived from any activity in which the taxpayer does not materially
PASSIVE INCOME
participate.

INTEREST Interest income means the amount of compensation paid for the use of money or forbearance
INCOME from such use.

Royalties are any payment of any kind received as consideration for the use of or right to use any
patent, trademark, design or model, secret formula or process, industrial commercial or scientific
equipment, information concerning industrial, commercial or scientific experience.
ROYALTY
INCOME A sale of royalty on a regular basis for a consideration is considered an active business and any
gain therefrom shall be subject to the normal corporate income tax (see RMC 77-2003). Where a
person pays royalty to another for the use of its intellectual property, such royalty is passive income
of the owner and is therefore subject to final withholding tax.

Rental income refers to the amount or compensation paid for the use or enjoyment of a thing or
a right and implies a fixed sum or property amounting to a fixed sum to be paid at a stated time for
RENTAL INCOME
the use of the property. It includes all amount or property received from the lease contract, whether
used in business or not.

When is income taxable? (Elements of a taxable income)

1. There is income, gain or profit (existence of income). For tax purposes, income does not only refer to the money a
taxpayer receives but includes anything of value.
2. The income, gain or profit is not exempt from income tax. An income may have other elements but the law may
specifically exclude the same from income for tax purposes
3. The income, gain or profit is received or realized during the taxable year (realization of income). Even if there is
material gain, not excluded by law, if the material gain is not yet realized by the taxpayer, then there is no income
to speak of.

Doctrine of Constructive Receipt

The constructive receipt doctrine provides than an item is treated as income when it is credited to the account of
the taxpayer, or made unconditionally available to the taxpayer; no physical possession is required. Income is received not
only when it is actually handed to a taxpayer but also when it is merely constructively received by him.

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 GROSS INCOME
Except when otherwise provided, all
income derived from whatever source.
The phrase “all income derived from
whatever source” encompasses all
accessions to wealth, clearly realized,
and over which the taxpayers have
complete dominion. A gain constitutes
taxable income when its recipient has
such control over it that as a practical
matter, he derives readily realizable
economic value from it.
Income from whatever sources refers
to all income not expressly excluded or
exempted from the class of taxable
income, irrespective of the voluntary or
involuntary action of the taxpayer in
producing the income (GUTIERREZ V.
CIR, CTA CASE NO. 65, AUGUST 31,
1965)
Gains, money or otherwise derived
from all other illegal source fall within
the ambit of “income derived from
whatever source” and is subject to
income tax.
Including but not limited to the
following: (CARD-GRIP4)
a. Compensation
b. Annuities
c. Rents
d. Dividends
e. Gains from dealings in
property
f. Royalties
g. Interest
h. Prizes and winnings
i. Pensions
j. Partner’s share in the net
income of GPP
EXCLUSIONS
The term “exclusions” refers to items
that are not included in the
determination of gross income
because:
1. They represent return of capital or
are not income, gain or profit (e.g.
life insurance)
2. They are subject to another kind
of internal revenue tax (e.g. gifts,
bequests, devices)
3. They are income, gain or profits
that are expressly exempt from
income tax under the
Constitution, tax treaty, Tax
Code, or general or special law.
(e.g. PEZA)
The following shall not be included in
the determination of gross income and
shall be exempt from taxation:
a. Proceeds of life insurance
b. Amounts received by insured
as return of premium
c. Gifts, bequests, and devises
d. Compensation for injuries or
sickness
e. Income exempt under Treaty
f. Retirement benefits,
pensions, gratuities, etc.
g. Miscellaneous items
i. Income of foreign
governments
ii. Income derived by the
Government or its
political subdivisions
iii. Prizes and awards
iv. Prizes and awards in
sports competition
v. 13th month pay and other
benefits
Also, under Section 33(C), NIRC, the
following fringe benefits are not
taxable:
a. Fringe benefits authorized
and exempted from tax
under special laws
b. Contributions of the employer
for the benefit of the employee
to retirement, insurance and
hospitalization plans
c. Benefits given to rank and
file employees, whether
granted under a CBA or not
d. De minimis benefits
DEDUCTIONS
Deductions are items or amounts
authorized by law to be subtracted
from the pertinent items of gross
income to arrive at taxable income.
Deductions partake of the nature of tax
exemptions. Hence, they are likewise
strictly construed against the taxpayer.
The itemized deductions in Section
34(A) to (J) are available to all kinds of
taxpayers engaged in trade or
business or practice of profession in
the Philippines. This excludes citizens
and alien residents earning purely
compensation income.
General requisites before deductions
are allowed —
1. There must be a specific
provision of law allowing the
deductions, since deductions do
not exist by implication
2. The requirements of deductibility
must be met
3. There must be proof of
entitlement to the deductions
4. The deductions must not have
been waived
5. The withholding and payment of
the tax required must be shown
The allowable and itemized
deductions include:
a. Business Expenses (in
connection with taxpayer’s
trade, business or profession)
b. Interest on Indebtedness
c. Taxes in connection with
taxpayer’s business, trade or
profession [except income
taxes, estate and donor’s
taxes, special assessments,
and foreign income taxes
(unless the taxpayer does not
make use of the tax credit
privilege)]
d. Losses
e. Bad debts
f. Depreciation
g. Depletion
h. Charitable and other
contributions
i. Research and development
expenditures
j. Contributions to pension trusts
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What items are not deductible from gross income?
No deduction shall in any case be allowed in respect to:
1. Personal, living or family expenses
2. Any amount paid out for new buildings or for permanent improvements or betterments made to increase
the value of any property or estate. (Capital expenditures). Except intangible drilling and development costs
incurred in petroleum operations which may be deducted in full
3. Premiums paid on any life insurance policy covering the life of any officer or employee or of any person
financially interested in any trade or business carried on by the taxpayer, individual, or corporate when the
taxpayer is directly or indirectly a beneficiary under such policy
4. Losses from sales or exchanges of property directly or indirectly between related persons
a. Between members of a family
b. Between an individual and a corporation more than 50% in value of the outstanding stock of which
is owned by such individual (except in the case of distributions in liquidation)
c. Between two corporations more than 50% in value of the outstanding stock of each of which is owned
by the same individual if either one of the companies is a holding company
d. Between the grantor and a fiduciary of any trust
e. Between the fiduciary of a trust and the fiduciary of another trust if the same person is a grantor
with respect to each trust
f. Between a fiduciary of a trust and a beneficiary of such trust
5. Non-deductible interest (between related persons)
6. Bad debts between related parties
7. Fines and penalties due to late payment of tax

FRINGE BENEFITS DE MINIMIS BENEFITS

As defined by Section 33(B), the term “fringe benefit”
means any good, service or other benefit furnished or
granted in cash or in kind by an employer to an individual As defined by RR 3-98 [M AY 21, 1998], de minimis
employee (except rank and file employees) benefits are benefits of relatively small value offered or
furnished by the employer to his/her employees as a means
A fringe benefit tax is a final withholding tax (at 35%) of promoting the health, goodwill, contentment, efficiency of
imposed on the grossed-up monetary value of fringe benefit his/her employees.
furnished or granted to the employee except rank and file
employees by the employer.

Such as, but not limited to, the following: These include ONLY, pursuant to RR 5-2011, the following:

a. Housing; a. Monetized unused vacation leave credits of private

b. Expense account;
c. Vehicle of any kind;
d. Household personnel, such as maid, driver and
others;
e. Interest on loan at less than market rate to the
extent of the difference between the market rate
and actual rate granted;
f. Membership fees, dues and other expenses borne
by the employer for the employee in social and
athletic clubs or other similar organizations;
g. Expenses for foreign travel;
h. Holiday and vacation expenses;
i. Educational assistance to the employee or his
dependents; and
j. Life or health insurance and other non-life
insurance premiums or similar amounts in excess
of what the law allows
The law mandates that the employer shall assume the
fringe benefits tax imposed on the taxable fringe benefits of
the managerial or supervisory employees, but allows the
employer to deduct such fringe benefit tax as a business
expense from its gross income.
employees not exceeding ten (10) days during
the year
b. Monetized value of leave credits paid to
government officials and employees
c. Medical cash allowance to dependents of
employees, not exceeding P1,500 per employee
per semester or P250 per month
d. Rice subsidy of P2,000 or one (1) sack of 50 kg.
rice per month amounting to not more than P2,000
e. Uniform and clothing allowance not exceeding
P6,000 per annum
f. Actual medical assistance, e.g. medical allowance
to cover medical and healthcare needs, annual
medical check-up, maternity assistance, and
routine consultations, not exceeding P10,000 per
annum
g. Laundry allowance not exceeding P300 per
month
h. Employees achievement awards, e.g. for length of
service or safety achievement, with an annual
monetary value not exceeding P10,000
i. Gifts given during Christmas and major
anniversary celebrations not exceeding P5,000
per employee per annum
j. Daily meal allowance for overtime work and
night/graveyard shift not exceeding 25% of the
basic minimum wage
k. CBA agreement benefits and benefits derived from
productivity incentive schemes not exceeding
P10,000 per annum.

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Explain briefly whether the following items are taxable or non-taxable:
a) Income from jueteng;
b) Gains arising from expropriation of property;
c) Taxes paid and subsequently refunded;
d) Recovery of bad debts previously charged off;
e) Gain on the sale of a car used for personal purposes.

a) Taxable. The law imposes a tax on income from whatever source. [Sec. 32(A), NIRC] Gains, money or otherwise
derived from all other illegal source fall within the ambit of “income derived from whatever source” and is subject to
income tax.
b) Taxable. There is a material gain, not excluded by law, realized out of a closed and completed transaction. Gains
from dealings in property are part of gross income. [Sec. 32(A)(3), NIRC]
c) It depends. Taxes paid which are allowed as deduction from gross income are taxable when subsequently refunded
but only to the extent of the income tax benefit of said deduction. It follows that taxes paid which are not allowed as
deduction from gross income, i.e. income tax, donor’s tax, and estate tax, are not taxable when refunded.
d) Taxable under the TAX BENEFIT RULE. Recovery of bad debts previously allowed as deduction in the preceding
years shall be included as part of the gross income in the year of recovery to the extent of the income tax benefit of
said deduction. [Sec. 34(E)(1), NIRC] This is sometimes referred as the RECAPTURE RULES.
e) Taxable. Since the car is used for personal purposes, it is considered as a capital asset hence the gain is considered
income.

CORPORATIONS, PARTNERSHIPS, CO-OWNERSHIP

What are the kinds of partnerships under the Tax Code?

A. 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
B. Exempt partnerships – these are partnerships not considered as taxable entities for income tax purposes i.e.
General Professional Partnerships).

How do you determine if a partnership is taxable? (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 he business and dispose of the whole property.

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.

A and B, co-owners, bought 3 parcels of land in one transaction and bought 2 more parcels of land in another.
They decided to sell the 3 parcels to C and the 2 parcels to D. They realized a net profit gain and paid CGT. CIR
assessed them for deficiency corporate income tax. Is the co-ownership taxable as a corporation?
No. A co-ownership who own properties which produce income should not automatically be considered partners of
an unregistered partnership, or a corporation, within the purview of the income tax law. The essential elements of a
partnership are two, namely: (a) an agreement to contribute money, property or industry to a common fund; and (b) intent
to divide the profits among the contracting parties. Here, there is no evidence that petitioners entered into an agreement to
contribute money, property or industry to a common fund, and that they intended to divide the profits among themselves.
The sharing of returns does not in itself establish a partnership whether or not the persons sharing therein have a joint or
common right or interest in the property. There must be a clear intent to form a partnership, the existence of a juridical
personality different from the individual partners, and the freedom of each party to transfer or assign the whole property.

A and B inherited properties. They did not partition the same and instead invested them to a common fund and
divide the profits therefrom. Should they be classified as an unregistered partnership subject to corporate income
tax?
Yes. The income from inherited properties may be considered as individual income of the respective heirs only as
long as the inheritance or estate is not distributed, or, at least, partitioned. But the moment their respective known shares
are used as part of the common assets of heirs to be used in making profits, it is but proper that the income from such
shares should be considered as part of the taxable income of an unregistered partnership.

Note: Thus, we make a distinction. Before the partition of property, the income of the co-ownership arising from the death of a decedent
is not subject to income tax, if the activities of the co-owners are limited to the preservation of the property and the collection of the income
therefrom. However, after partition, should the co-owners invest the income of the co-ownership in any income-producing properties, they
would be constituting themselves into an unregistered partnership which is consequently subject to income tax as a corporation. A co-
ownership is subject to income tax when:
a) Co-ownership is formed or established voluntarily, or upon agreement of the parties, what was likely constituted is a business
partnership
b) The income of the co-ownership is invested by the co-owners in business or other income-producing properties, the co-owners
in effect constituted themselves into a business partnership

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 30% of taxable income from all sources within and without the Philippines
Domestic
2% of gross income if MCIT applies
Corporation
15% of gross income if the following conditions are met:
a) Tax effort ratio of 20% of GNP
Resident Foreign
b) Ratio of 40% of income tax collection to total tax revenue
Corporation
c) VAT tax effort of 4% of GNP
d) .9% ratio of the Consolidated Public Sector Financial Position (CPSFP) to GNP

Propriety 10% on their taxable income (except for passive income)

Educational
Institution 30% on their entire taxable income if the gross income from unrelated trade, business, or other
activity exceeds 50% of the total gross income of the institution. Include: income subject to tax,
Non-profit Hospital income which are exempt

GOCCs

Except—
Shall pay such rate of tax upon their taxable income as are imposed by Tax Code upon
GSIS
corporations or associations engaged in a similar business, industry, or activity.
SSS
PHIC
PCSO

2.5% of Gross Philippine Billing shall be paid by international carriers doing business in the
Philippines unless it is subject to a different tax rate under a tax treaty to which PH is a signatory
International
Gross Philippine Billing refers to gross revenue derived from carriage of persons, excess
Carriers
baggage, cargo, and mail origination from the Philippines in a continuous and uninterrupted
flight, irrespective of the place of sale or issue and the place of payment of ticket or passage
document
Generally, NRFC is subject to a FWT of 30% based on enumerated gross income from all
sources within the Philippines. Except—
25% of GIT from all sources
NR cinematographic film owner, lessor, or distributor
within Ph
4.5% of gross rentals or
Non-resident charter fees from leases or
Foreign Corporation NR owner of lessor of vessels charted by Ph nationals charters to Filipinos or
corporations as approved by
Maritime Industry Authority
NR owner of lessor of aircrafts, machineries, and other
7.5% of gross rentals or fees
equipment
Interest on foreign loans contracted on or after August 1, 1989 20% of the amount of interest
Income from transactions with depositary banks under the
Exempt
expanded Foreign Currency Deposit System

The following organizations shall not be subject to income tax in respect to income received by them:

1. Labor, agricultural or horticultural organization not organized principally for profit

2. Mutual savings bank not having a capital stock represented by shares and cooperative bank without capital
stock organized and operated for mutual purposes and without profit
3. A beneficiary society, order or association, operating for the exclusive benefit of the members such as a
fraternal organization operating under the lodge system, or a mutual aid association or a non-stock corporation
organized by employees providing for the payment of life, sickness, accident, or other benefits exclusively to the
members of such society, order, or association, or non-stock corporation or their dependents
4. Cemetery company owned and operated exclusively for the benefit of its members
5. Non-stock corporation or association organized and operated exclusively for religious, charitable,
scientific, athletic, or cultural purposes, or for the rehabilitation of veterans, no part of its net income or asset
shall belong to or inure to the benefit of any member, organizer, officer or any specific person
6. Business league, chamber of commerce, or board of trade, not organized for profit and no part of the net
income of which inures to the benefit of any private stockholder or individual
7. Civil league or organization not organized for profit but operated exclusively for the promotion of social welfare
8. A non-stock and non-profit educational institution
9. Government educational institution

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 10. Farmers or mutual typhoon or fire insurance company, mutual ditch or irrigation company, mutual or
cooperative telephone company or like organization of a purely local character, the income of which consists solely
of assessments, dues, and fees collected from members for the sole purpose of meeting its expenses; and
11. Farmers, fruit growers, or like association organized and operated as a sales agent for the purpose of marketing
the products of its members and turning back to them the proceeds of sales, less the necessary selling expenses
on the basis of the quantity of produce finished by them.
12. Child-caring or child-placing institution licensed and accredited by the DSWD to implement Foster Care
Program under Foster Care Act of 2012
13. Duly registered cooperative on income from transactions with members and non-members as long as the income
is related to its min business or purpose Provided, those with accumulated reserves and undivided net savings
exceeding 10 Million shall be exempt only on income from transactions with members
14. Homeowners association
15. Non-stock savings and loan association
16. Building and loan associations whose accounts are guaranteed by the Home Guaranty Corporation
17. Other organization exempt from income tax in accordance with special laws

Are all the activities of the enumerated exempt corporations exempt from tax?
No. Notwithstanding that they are exempt corporations, the income of whatever kind and character of the
organizations mentioned above from any of their properties, real or personal, or form any of their activities (unrelated)
conducted for profit regardless of the disposition made of such income shall be subject to tax imposed under the Code. The
exemption only refers to income received by these corporations from undertakings which are essential to or necessarily
connected with the purposes for which they were organized and operated.

What is the minimum corporate income tax (MCIT?)

A minimum corporate income tax of 2% of gross income shall be imposed on a domestic corporation and
resident foreign corporation beginning on the 4th 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 are exempted from MCIT?

MCIT shall apply ONLY to domestic corporations or resident foreign corporations subject to regular corporate
income tax of 30%. Accordingly, the following shall NOT be subject to MCIT:
1. Domestic corporations operating as propriety non-profit educational institution
2. Domestic corporations engaged in hospital operations which are non-profit
3. Domestic corporations engaged in business as depositary banks under the expanded Foreign Currency Deposit
4. Resident foreign corporations engaged in business as international carriers
5. Resident foreign corporations engaged as Offshore Banking Units
6. Resident foreign corporations engaged in business as ROHQs
7. Firms that are taxed under a special income tax regime such as PEZA and TIEZA
8. Real Estate Investment Trust

For purposes of MCIT, what is gross income?

For purposes of MCIT, the term "gross income" means gross sales less sales returns, discounts, and allowances
and cost of goods sold, in case of sale of goods, or gross revenue less sales returns, discounts, allowances and cost of
services/direct cost, in case of sale of services.
As noted by the Supreme Court in COMMISSIONER VS. PAL [JULY 7, 2009], inclusions and
exclusions/deductions from gross income for MCIT purposes are limited to those directly arising from the conduct of the
taxpayer’s business. It is thus more limited than the gross income used in the computation of basic corporate income tax.

Note: “Cost of goods sold” shall include all business expenses directly incurred to produce the merchandise to bring them to their present
location and use while “cost of services” shall mean all direct costs and expenses necessarily incurred to provide the services required
by the customs and clients.

What is an improperly accumulated earnings tax (IAET)?

In order to compel corporations to distribute or pay dividends to stockholders, the retention or accumulation of
earnings or profits beyond reasonable needs of the business is made subject to tax. The IAET is imposed upon
corporations which are formed or availed of for the purpose of avoiding the income tax with respect to its stockholders or
the stockholders of any other corporation by permitting earnings and profits to accumulate instead of being divided or
distributed.

What corporations are subject to IAET?

The IAET shall apply to 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. Taxable partnerships

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 5. GPPs
6. Non-taxable joint ventures
7. Enterprises registered under TIEZA and PEZA

What circumstances are 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. 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.
Also included as indicative of a purpose to avoid income tax are:
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 the “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.

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. For definite corporate expansion projects or programs
3. Earnings reserved for building, plant or equipment acquisitions
4. Earnings reserved for compliance with any loan or obligation established under a legitimate business
agreement
5. In case of subsidiaries of foreign corporations in the Philippines, all undistributed earnings intended or reserved
for investments in the Philippines.
6. When there is a legal prohibition for its distribution
7. In the case of Philippine subsidiaries of foreign corporations, undistributed earnings intended or reserved for
investments within the Philippines

What is a branch profits remittance tax (BPRT)?

Any profit remitted by a branch of a foreign corporation to its head office shall be subject to a tax of 15% of the total
profits applied or earmarked for remittance without any deduction for tax component, not the profit actually remitted abroad.
Profits remitted which are derived from activities with the PEZA are exempted.

What are dividends?

The term “dividends” means any distribution made by a corporation to its shareholders out of its earnings or profits
and payable to its shareholders, whether in money or in other property.

Note: To simplify matters – If the distribution is in money, it is called a cash dividend. If it is in property, it is called a property dividend.
If it is in stock, it is called a stock dividend. If it results from the distribution by a corporation of all its property or assets in complete
liquidation or dissolution, it is called a liquidating dividend.

Generally, a dividend has its source in the country where the corporation paying the dividend is incorporated
(residence of the corporation paying the dividend). Thus, if the dividend is received from a domestic corporation, it is
income within the Philippines. If the dividend is from the foreign corporation, it is income without the Philippines. The
exception to the general rule that dividends paid by a foreign corporation are from sources without the Philippines is when
a foreign corporation derives 50 percent of its gross income from sources within the Philippines for a three-year period
ending with the close of its taxable year preceding the declaration of its dividends

When is dividend income subject to tax?

It is taxable at the time of their declaration by the corporation, and not at the time of actual payment of dividends,
since dividend income is taxable whether actually or constructively received.

Are stock dividends subject to income tax?

No. As a general rule, stock dividends are not taxable because they only represents the transfer of surplus to capital
account. They are considered unrealized gain, and cannot be subjected to income tax until the gain has been realized. Mere
issuance thereof is not yet subject to income tax as they are nothing but an enrichment and mere representation of an
inchoate share in the capital asset. There are, however, some exceptions.

What are the exceptions to the rule that stock dividends are not subject to income tax?
1. Change in the stockholder’s equity, right or interest in the net assets of the corporation
2. Recipient is other than the shareholder
3. Cancellation or redemption of shares of sock
4. Distribution of treasury stocks
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 5. Dividends declared in the guise of treasury stock dividend to avoid the effects of income taxation
6. Different classes of stocks were issued

What is a tax-sparing provision (Section 28(B)(5)(b) of the Tax Code)?

Pursuant to this provision, a lower 15% FWT rate will be imposed on dividends received by an NRFC if the country
in which the NRFC is domiciled allows a tax credit against the tax due from the NRFC representing taxes deemed to have
been paid in the Philippines equivalent to 15%, which represents the different between the regular income tax of 30% and
the 15% tax on dividends.

DEALINGS IN PROPERTY

What are the transactions covered by the capital gains tax?

1. Sale
2. Exchange; or
3. Other disposition, including pacto de retro sales and other forms of conditional sales

Note: The phrase “sale, exchange, or other disposition” includes taking by the government through expropriation

What is the rule on capital gains from dispositions of real property?

The rate of 6% shall be imposed on capital gains presumed to have been realized by the seller from the sale,
exchange, or other disposition of real properties located in the Philippines classified as capital assets, including lacto de
retro sales and other forms of conditional sales based on the gross selling price or fair market value as determined by
the CIR, whichever is higher. The tax base shall be the entire selling price.
The capital gains tax must be paid within 30 days following each sale or disposition. In case of installment sale, the
return shall be filed within 30 days following the receipt of the first down payment and within 30 days following the
subsequent installment payments.

What is the basis of the 6% capital gains tax?

Whichever is the higher of—
1. The gross selling price; or
2. Current fair market value as determined below:
a. The FMV of real properties located in each zone or area as determined by the CIR after consultation
with competent appraisers both from the private and public sectors
b. The fair market value as shown in the schedule of values of the provincial and city assessors

What is the special rule for disposition of real property made by an individual to the government?
As provided in RR 8-98, in case of disposition of real property made by an individual to the government or to any of
its political subdivisions or agencies or to government-owned or controlled corporations, the seller may elect to:
1. compute the tax on the gain derived from such sale under the normal income tax rates; or
2. under a final capital gains tax of 6%

What are the conditions for the exemption of capital gains tax on the sale by a natural person of his principal
residence?
1. The 6% capital gains tax due shall be deposited in an account with an authorized agent bank under an Escrow
Agreement. It can only be released upon showing that the proceeds have been fully utilized within 18 months
2. The proceeds from the sale, exchange or disposition must be fully utilized in acquiring or constructing his new
principal residence within 18 calendar months from date of its sale. Proof must be submitted
3. The tax exemption may be availed of only once every 10 years
4. The historical cost or adjusted basis of his old principal residence sold, exchanged disposed shall be
carried over to the cost basis of his new principal residence
5. If there is no full utilization of the proceeds of sale, exchange or disposition of his old principal residence, he shall
be liable for deficiency capital gains tax of the utilized portion.

Note: The exemption applies to resident citizens and aliens. This is logical because if they are not residents, then there is
no principal place of residence.

Who is liable to pay the capital gains tax?

The seller is liable to pay the capital gains tax. As provided in RR NO. 8-98 [AUGUST 25, 1998], the capital gains
tax return will be filed by the seller within 30 days following each sale or disposition of real property.

Can the buyer pay the capital gains tax?

Yes. The buyer can retain the amount for the capital gains tax and pay it upon authority of the seller, or the seller
can pay the tax, depending on the agreement of the parties.

If a mortgagee foreclosed the mortgaged property but the mortgagor exercises his right of redemption within the
applicable period, will capital gains tax still be imposed on the foreclosure sale?
RR 4-99 [MARCH 9, 1999] provides that in case the mortgagor exercises his right of redemption within one year
from the issuance of the certificate of sale, no capital gains tax shall be imposed because no capital gains has been derived
by the mortgagor and no sale or transfer of real property was realized. If the mortgagor does not exercise his right of
redemption, capital gains tax on the foreclosure sale shall become due. In such case, the capital gains tax due will be based
on the bid price of the highest bidder.

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What are stocks classified as capital assets?
Stocks classified as capital assets mean all stocks and securities held by taxpayers other than dealers in securities.

Who are liable for capital gains tax on shares of stock?

1. Individual taxpayer, whether citizen or alien
2. Corporate taxpayer, whether domestic or foreign
3. Other taxpayers other than (1) and (2) such as estates, trusts, trust funds, and pension funds,

Who are exempt from capital gains tax on shares of stock?

1. Dealer in securities
2. Investors in shares of stock in a mutual fund company in connection with the gains realized by said investor upon
redemption of the said shares of stock
3. All other persons, whether natural or juridical, who are specifically exempt from NIRC taxes under existing
investment schemes and other special laws.

What is the rule on capital gains from sales of shares of stock?

Capital gains tax of 15% shall be imposed upon the net capital gains realized during the taxable year from the sale,
barter, exchange or other disposition of shares of stock in a domestic corporation EXCEPT shares, sold or disposed through
the stock exchange.
If shares of stock are listed and traded through local stock exchange, 6/10 of 1% of the gross selling price of gross
value in money of the shares of stock.

How is gain from the sale or other disposition of property computed?

The gain from the sale or other disposition of property shall be the excess of the amount realized therefrom over
the basis or adjusted basis for determining gain.

How is loss from the sale or other disposition of property computed?

The loss shall be the excess of the basis or adjusted basis for determining loss over the amount realized.

Note: Amount realized is the sum of the money received plus the fair market value of the property (other than money received).

What is the basis for determining gain or loss from the sale or exchange of property (Sec. 40B)?
Purchase The basis is the cost of the property
Inheritance The FMV as of the date of acquisition if the same was acquired
The basis shall be the same as if it would be in the hands of the donor or the last preceding
owner by whom it was not acquired by gift except if such basis is greater than FMV of the
Gift
property at the time of the gift then, for purpose of determining loss, the basis shall be such
FMV
For less than an
adequate
The basis of such property is the amount paid by the transferee for the property
consideration in
money or money’s
worth
a) Shares of stock received by transferor – original basis less the money received and fair
market value of property received, plus the amount treated as dividend of the
shareholder and the amount of any gain that was recognized on the exchange
Tax-free exchanges
b) Property transferred in the hands of the transferee – same as it would be in the hands
of transferor increased by the amount of the gain recognized to the transferor on the
transfer

What is the general rule in the recognition of gain or loss in an exchange of property?
As a general rule, the entire amount of the gain or loss shall be recognized upon the sale or exchange of property.
In other words, if there are gains, the gains shall be taxable. If there are losses, the losses shall be allowed as deductions.

What are the exceptions to the general rule?

1. No gains or loss recognized if in pursuance of a plan of merger or consolidation where there is an exchange solely
in kind (see Section 40(C)(2))
2. Gains recognized but loss not recognized in transactions between related parties (see Section 36(B))
3. Gains recognized but loss not recognized where the exchange is not solely in kind (see Section 40(C)(3))

What are the instances where no gain or loss is recognized (tax-free exchanges)?
No gain or loss shall be recognized if in pursuance of a plan of merger or consolidation:
1. A corporation which is a party to a merger or consolidation exchanges property solely for stock in a corporation,
which is a party to the merger or consolidation (property for stock)
2. A shareholder exchanges stock in a corporation, which is a party to a merger or consolidation solely for the stock
of another corporation also a party to a merger or consolidation (stock for stock)
3. A security holder of a corporation, which is a party to a merger or consolidation, exchanges his securities in such
corporation, solely for stock or securities in another corporation, a party to the merger or consolidation (security
for stock)

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 4. If property is transferred to a corporation by a person in exchange for stock or unit of participation in such a
corporation of which as a result of such exchange, said person, alone or together with others, not exceeding four
(4) persons gains control of said corporation provided that stocks issued for services shall not be considered as
issued in return for property (estate planning or transfer of a controlled corporation)

Note: An exchange solely in kind is an exchange of property with property with no money involved.

What is the basic consideration in determining whether a consolidation or merger is tax-free?

The basic consideration is the purpose of the merger or consolidation. The merger or consolidation must be
undertaken for a bona fide business purpose and not for the purpose of escaping the burden of taxation.

A, B, C were majority stockholders of ABC Theatrical Co. They were also majority stockholders of XYZ Theatrical
Co which was engaged in the same business. ABC and XYZ agreed to merge. Under the agreement, all business,
property, assets and goodwill of ABC will be transferred to XYZ in exchange for XYZ stocks for each stock held in
ABC. Is the exchange subject to capital gains tax?
No. As held in CIR v. RUFINO [FEBRUARY 27, 1987], It is well established that where stocks for stocks were
exchanged, and distributed to the stockholders of the corporations, parties to the merger or consolidation, pursuant to a
plan of reorganization, such exchange is exempt from capital gains tax. The basic consideration, of course, is the purpose
of the merger, as this would determine whether the exchange of properties involved therein shall be subject or not to the
capital gains tax. The criterion laid down by the law is that the merger" must be undertaken for a bona fide business purpose
and not solely for the purpose of escaping the burden of taxation." It is clear, in fact, that the purpose of the merger was to
continue the business of the Old Corporation, whose corporate life was about to expire, through the New Corporation to
which all the assets and obligations of the former had been transferred. The exemption from the tax of the gain derived from
exchanges of stock solely for stock of another corporation was intended to encourage corporations in pooling, combining
or expanding their resources conducive to the economic development of the country. The merger in question involved a
pooling of resources aimed at the continuation and expansion of business and so came under the letter and intendment of
the NIRC exempting from the capital gains tax exchanges of property.

Distinguish Exclusions from Deductions and Tax Credit

Exclusions from gross income refer to flow of wealth to the taxpayer which are not treated as part of gross income
for purposes of computing the taxpayer’s taxable income, due to the following reasons: (1) it is exempted by the Constitution
or a statute; or (2) it does not come within the definition of income. Deductions, on the other hand, are the amounts which
the law allows to be subtracted from gross income in order to arrive at net income. Tax Credit refers to amounts subtracted
from the computed tax in order to arrive at taxes payable.
Exclusions pertain to the computation of gross income, while deductions pertain to the computation of net income.
Exclusions are something received or earned by the taxpayer which do not form part of gross income while deductions
are something spent or paid in earning gross income.

What are the different taxable periods provided for in the Tax Code?
a. Calendar year – is an accounting period which starts from January 1 and ends on December 31
b. Fiscal year - is an accounting period of 12 months ending on the last day of any month other than December 31

What are ordinary assets?

1) Stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the
taxpayer if on hand at the close of the taxable year
2) Property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business
3) Property used in trade or business of a character that is subject to allowance for depreciation
4) Real property used in trade or business of the taxpayer

What are capital assets?

The term capital assets means property held by the taxpayer whether or not connected with his trade or business,
except those enumerated as ordinary assets in Section 39.

Can an ordinary asset be converted to a capital asset?

General Rule: No, the property is still an ordinary asset

Exceptions: Properties classified as ordinary assets for being used in business by a taxpayer engaged in business
other than real estate business are automatically converted into capital assets upon showing of proof that the same
have not been used in business for more than 2 years prior to the consummation of the taxable transactions
involving the properties. Further, if a real estate business transfers the property to an ordinary person, the nature
of the property can change in the hands of the buyer/transferee. Hence, if Pedro buys a lot from a real estate dealer,
the lot becomes a capital asset (from ordinary) in the hands of Pedro.

In case of involuntary transfer (like expropriation or foreclosure), the involuntary nature shall have NO effect on the
classification in the hands of the involuntary seller.

Can a capital asset be converted to an ordinary asset?

Yes. While RR No. 7-2003 provides a rule that once an asset is ordinary, it cannot be converted to a capital asset
(subject to the two year waiting period), jurisprudence has consistently held that a capital asset may become an ordinary
asset.
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What is the Tax Benefit Rule in relation to recovery of accounts previously written off?
Under the Tax Benefit Rule or Equitable Doctrine of Tax Benefit, the recovery of amounts deducted in previous
years shall be included as part of the gross income in the year of recovery to the extent of the income tax benefit of said
deduction.
If in the year the taxpayer claimed deduction of bad debts written-off, he realized a reduction of the income tax due
from him on account of said deduction, his subsequent recovery thereof from his debtor shall be treated as a receipt of
realized taxable income. Conversely, if the said taxpayer did not benefit from the deduction if the said bad debt written-off,
then his subsequent recovery shall be treated as a mere recovery or a return of capital, hence, not treated as receipt of
realized taxable income.

Net Loss Carry Over (NELCO) vs. Net Operating Loss Carry Over (NOLCO)
a) NOLCO refers to a concept in ordinary income taxation which is applicable only to a corporate taxpayer. If a
corporate taxpayer has more deductions than gross income, the corporation sustains net operating losses which
may be carried over for three (3) years. Consequently, if during the succeeding year, the taxpayer realized taxable
net income, this may be reduced by the net operating loss carried over from the previous year;
b) NELCO refers to a concept in capital gains taxation which is applicable only to individual taxpayers. This results
from exchanges of capital assets wherein gains and losses have been recognized such that during the taxable
period, after charging all capital losses from the capital gains, the taxpayer may either realize net capital gains
(included in the gross income therefore taxable) OR net capital loss (which may be carried over for the next year
only);
c) NOLCO pertains to expenses and deductions from gross income while NELCO pertains to exchanges of capital
assets;

Differentiate final withholding tax (FWT) from creditable withholding tax (CWT)
FINAL WITHHOLDING TAX CREDITABLE WITHHOLDING TAX
The amount of income tax withheld by the withholding Taxes withheld on certain income payments are intended
agent is constituted as a full and final payment of the to equal or at least approximate the tax due of the payee
income tax due from the payee on the said income on said income.
Payee of income is required to report the income and/or pay
The liability for payment of the tax rests primarily on the the difference between the tax withheld and the tax due on
payor as a withholding agent 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 return for The income recipient is still required to file an income tax
the particular income return, as prescribed in Sec. 51 and Sec. 52 of the NIRC.

Distinguish gross income from net income and taxable income

Gross Income pertains to all income minus exclusions. (In other words, all income subject to income tax). Whereas,
taxable Income are all pertinent items of gross income less deductions, if any, authorized for such types of income by Tax
Code or other special laws. Lastly, net income is gross income less the allowable deductions.

How do you determine if a tax is direct or indirect?

Direct taxes are taxes wherein the impact or liability for the payment of the tax as well as the incidence or burden
of the tax falls on the same person. On the other hand, indirect tax are taxes wherein the impact or the tax liability for the
payment of the tax falls on one person but the incidence or burden thereof can be shifted or passed to another.
In CIR v. PLDT [478 SCRA 61]), the Supreme Court distinguished direct taxes from indirect taxes by stating that direct
taxes are those that are extracted from the very person who, it is intended or desired, should pay them while indirect taxes
are those that are demanded, in the first instance, from, or are paid by, one person in the expectation and intention that he
can shift the burden to someone else.

How do you distinguish “schedular treatment from “global treatment” as used in income taxation?
Under the schedular tax system, the various types of income (i.e. compensation; business/professional income) are
classified accordingly and are accorded different tax treatments, in accordance with schedules characterized by graduated
tax rates. Since these types of income are treated separately, the allowable deductions shall likewise vary for each type of
income.
On the other hand, under the global tax system, all income received by the taxpayer are grouped together, without
any distinction as to type or nature of the income, and after deducting therefrom expenses and other allowable deductions,
are subjected to tax at a graduated or fixed rate.

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 Income Tax ESTATE TRUST
Arrangement whereby the trustor grants control of
certain property in the person of the trustee for the
benefit of beneficiary.

Trusts subject to income tax:

Mass of property, rights, and obligations left
behind by the decedent upon his death
Definition
For purposes of income tax, an estate may
be under judicial administration or one that
is not
a) Income accumulated for the benefit of
unborn or unascertained person or
persons with contingent interests
b) Income accumulated for future distribution
under the terms of the trust
c) Income is to be distributed currently by the
fiduciary to the beneficiaries
d) Income collected by a guardian of an
infant is held or distributed as the court may
direct
e) Income, in the discretion of fiduciary, may
either be distributed to the beneficiaries or
accumulated

Exempt: Employee’s Trust (Section 60B)

If irrevocable trust, trustee is the one who will file the
return and pay the tax

If revocable trust, income of such part of the trust

If under judicial administration, EXEC/AD shall be included in computing the taxable income of
shall file the return and pay the tax on the the GRANTOR
Who files the
net income of the estate
ITR pertaining
Revocable Trust is one where at any time the power
to the taxable
If not under judicial administration, heirs to revest in the grantor the title to any part of the
income of an
shall include in their respective returns theircorpus of trust is vested:
estate
distributive shares in the net income of the a) In the grantor alone or in conjunction with a
estate person not having substantial adverse
interest on the corpus
b) In any person not having a substantial
adverse interest in the disposition of such
part of the corpus or the income thereon
Gross Income Same as that of an individual taxpayer under Section 32(A)
Shall be computed in the same manner and on the same basis as in the case of self-employed
Taxable Income
individuals
a) Same items of deductions authorized under
a) Can take up the same items of Section 34
deductions authorized under b) Amount of income of the trust which is to be
Section 34 distributed currently to the beneficiaries
Deductible b) Amount of income of the estate that c) Amount of income collected by the guardian
Expenses is paid or credited to any legatee, of an infant which is to be held or distributed
heir, or beneficiary as the court may direct

Note: cash advances given to surviving Note: cash advances given to surviving spouse or
spouse or heir not deductible heir not deductible
Accounting
Calendar Year
Period
Where the property is sold after the
settlement of the estate by devisee, legatee, Where two or more trusts are created by the same
or heir at a price greater than the appraised trustor or grantor, and in each instance the
Miscellaneous
value placed upon it at the time he inherited beneficiary is the same person, the taxable income
Notes
the property from the decedent, the devisee, of all the trust shall be consolidated, and the tax
legatee, or heir is taxable individually on any computed on such consolidated income.
profit derived

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TRANSFER TAXES
Transfer taxes are those taxes imposed upon the privilege granted
by the state to the taxpayer so that he may transfer properties, real
or personal, without consideration. Transfer taxes are excise or
privilege taxes that are imposed on the act of passing ownership
of property and not taxes on the property transferred.
Transfer taxes are governed by the laws existing at the time the
transfer takes place. In particular –
a) Donations inter vivos are governed by the law existing
at the time of the effectivity of the donation since the
transfer takes place at that time
b) Donations mortis causa are governed by the law at the
time of death because it is at that time that the property
is transferred.
Donation inter vivos are not subject to estate taxes because the
transfer of the property takes effect during the lifetime of the donor.
The transfer is therefore subject to donor’s tax. On the other hand,
donation mortis cause are subject to estate taxes since the transfer
of the properties takes effect after the death of the decedent.
However, donation inter vivos, actually constituting taxable lifetime
lik transfer in contemplation of death or revocable transfers may
be taxed for estate tax purposes, the theory being that the
transferor’s control thereon extends up to the time of his death
Principle of mobilia sequuntur personam
Refers to the principle t6hat taxation of intangible personal
property generally follows the residence of domicile of the owner
thereof

ESTATE TAX

An estate tax is a tax imposed on the privilege of the decedent
to transmit property at death and is based on the entire net
estate, regardless of the number of heirs and relations to the
decedent. It is a tax levied, assessed, collected and paid upon
the privilege of gratuitously transferring the net estate of a
decedent to his heirs.
Gross Estate
The value of all the property, real or personal, tangible or
intangible, of the decedent wherever situated to the extent of his
interest at the time of his death as well as other items includible
in the gross estate (See Section 85, Tax Code)
Net Estate
The value of the gross estate less the ordinary and special
deductions (see Section 86, Tax Code)

Citizen and
All properties, real or personal, tangible or intangible, wherever situated, plus items includible in gross estate
Resident alien
Only those properties situated in the Philippines provided that with respect to intangible personal property, its
Non-resident alien
inclusion in the gross estate is subject to the rule of reciprocity under Section 104 of the Tax Code

DECEDENT’S GROSS ESTATE

It includes any interest having value or capable of being valued, transferred by the decedent at his death. If the
decedent owns only proportionate share in property, only the value of such share has to be included in the gross
estate. If he is entitled only to the use of the property, it is the value of that use that has to be included.
Decedent’s
Interest Examples:
i. Right of usufruct
ii. Leasehold rights

A transfer is considered made in contemplation of death when the impelling motive or reason for the transfer is
the thought of death, regardless of whether the transferor is near the possibility of death or not (See Section
85(B), Tax Code)

Factors should be considered in determining whether a transfer was made in contemplation of death
1. Age and state of health at the time of transfer
2. Length of time between the transfer and the time of death
3. Making a will shortly after transfer
Transfer in 4. Type of heir
Contemplation
of Death Factors which would disprove the claim that the transfer was made in contemplation of death
1. to see his children enjoy the property while the donor is still alive
2. to save income of property taxes
3. to settle family disputes
4. to relieve donor from burden of management
5. to reward services rendered
6. to provide independent income for dependents
7. property was donated out of love and affection

Revocable A revocable transfer is a transfer where the transferor has reserved his right to alter, amend or revoke such
Transfers transfer, regardless of whether the power is actually exercised or not during his lifetime and whether the power
(Transfer with should be exercised by him alone or in conjunction with someone else. To the extent of any interest therein, it
Retention or forms part of the gross estate of the decedent.
Reservation of
Certain Rights) Exception: in case of bona fide sale for adequate consideration and full consideration in money or money’s worth

Transfer of Power of appointment refers to a right to designate the person or persons who shall enjoy or possess certain
Property under property from the estate of prior decedent. It is general when donor gives the donee the power to appoint any
General Power person as successor to enjoy the property. Thus, shall form part of the gross estate. It is special when the done
of Appointment can appoint only among a restricted class of persons other than himself.

14 | alynotes
 Taxation of the proceeds of life insurance will depend on the designated beneficiary, the manner of designation of
such beneficiary (whether revocable or irrevocable), and the period and source of the funds in paying the
premiums on the insurance contract.

They shall form part of the gross estate if (taxable if):

1. The beneficiary is the estate of the deceased, his executor or administrator, irrespective of whether
the insured retained the power of revocation
2. The beneficiary is other than the decedent’s estate, executor or administrator. Any beneficiary (third
person) designated in the policy as revocable

Proceeds of It is revocable when the beneficiary may still be changed and the decedent has still retained interest in the policy.
Life Insurance It is irrevocable when the beneficiary may no longer be changed as they have acquired a vested interest. If the
policy expressly stipulates that the designation of the beneficiary is irrevocable, then the amount of the proceeds
shall not be included in the gross estate.

Determine the conjugal or separate character of proceeds—

a) Policy taken before marriage: source of funds determines ownership of the proceeds
b) Policy taken during marriage
i. Beneficiary is estate of the insured—proceeds are presumed conjugal; hence, one-half share
of surviving spouse is not taxable
ii. Beneficiary is third person—proceeds are payable to the beneficiary even if premiums were paid
out of the conjugal partnership

Transfers for insufficient consideration are those transfers that are not bona fide sales of property for an adequate
and full consideration in money or money’s worth. The excess of the fair market value at the time of the death over
the value of the consideration received by the decedent shall form part of his gross estate.

In determining whether there was sufficient consideration, compare the FMV of the property at the time of the
transfer with the amount of consideration received at the time of the transfer. However, the amount to be included
in the estate is computed by taking the difference between the FMV of the property at the time of death and the
amount of consideration received at the time of transfer.

Transfer for Example 1 Example 2

Insufficient FMV at the time of transfer 100 100
Consideration FMV at the time of death 200 200
Consideration received 70 100
Amount included in estate 130 0

Example 1: Since the property was sold for 30 less than its FMV at the time of the transfer, there is insufficient
consideration. Hence, the difference between the consideration received and the FMV at time of death shall form
part of the gross estate.

Example 2: This is not a transfer for insufficient consideration, hence, it shall not form part of the gross estate.
This is a bona fide sale for an adequate and full consideration in money’s worth.

EXEMPT IF:
intangible properties located in the Philippines of a non-resident alien decedent under the principle of reciprocity
(see Section 104, Tax Code)

As a general rule, we apply the principle of res mobilia sequuntur personam (“chattels follow the person”). In other
words, the intangible property is taxed based on the domicile of the owner. The principle, however, is not
controlling when: a) it is inconsistent with express provision of stature; or b) justice does demand that it should be,
as when property has in fact a situs elsewhere.

However, SECTION 104 provides that certain intangibles be deemed located in the Philippines, namely:
1) Franchises being exercised in the Philippines
2) Shares, obligations, or bonds issued by domestic corporations, or partnerships, business or industry
located, organized, or constituted in the Philippines
3) Shares, obligations or bonds issued by foreign corporations—
a. at least 85% of the business of which is located in the Philippines, or
Intangible b. if such shares, obligations, or bonds have acquired a business situs in the Philippines
Properties 4) Shares or rights in partnerships, business, or industry established in the Philippines
5) All intangibles owned by residents

There is reciprocity if the foreign country of which the decedent was a citizen or resident at the time of his death:
 Did not impose an estate tax; or
 Allowed a similar exemption from estate tax with respect to intangible personal property owned by Filipino
citizens not residing in that foreign country.

In COLLECTOR OF INTERNAL REVENUE V. FISHER [JANUARY 28, 1961], at issue is whether the shares of
stock of a nonresident alien in a domestic mining company can be exempted from estate tax pursuant to the
reciprocity proviso in the Philippine Tax Code. The Supreme Court held in the negative. Reciprocity must be
total. If any of the two states collects or imposes or does not exempt any transfer, death, legacy, or
succession tax of any character, the reciprocity does not work. In this case, the Philippines imposed an estate
and an inheritance tax at the time while California imposed only inheritance tax.

15 | alynotes
COMPUTATION OF THE NET ESTATE

DETERMINATION OF FAIR MARKET VALUE

Fair market value determined by:

Real Property 1. the CIR (zonal value) or
2. that shown in the schedule of values fixed by Provincial and City Assessors, whichever is higher

Personal Property If recently acquire, purchase price. Otherwise, evidence of fair market value at the time of death

IF UNLISTED:
1. Unlisted common shares are valued based on their book value
2. Unlisted preferred shares are valued at par value.
Shares of Stock
IF LISTED:
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 date of death itself.

Usufructuary, use
The probable life of the beneficiary in accordance with the latest basic standard mortality table shall be taken
or habitation,
into account
annuity

chargeable against the income of the estate because it

I. ORDINARY DEDUCTIONS accrued after the death of the decedent.

A. C-L-U-T
a. Claims against the Estate
These are debts or demands of pecuniary nature which
could have been enforced against the deceased in his
lifetime and could have been reduced to simple money
judgments. It may arise out contract, tort, or by operation
of law.
Requisites for deductibility of claims against the
estate—
1. Must be a personal obligation of the deceased
existing at the time of his death
2. Liability must have been contracted in good faith
3. The claim must be a debt or claim which is valid in law
and enforceable in court
4. Indebtedness not condoned by the creditor or the
action to collect from the decedent must not have
prescribed
b. Claims against insolvent persons
Subject to the condition that the full amounts of the
receivables are first included in the gross estate. The
portion that cannot be collected from decedent’s debtor is
deductible from the gross estate. Incapacity of the debtors
to pay their obligations is proven, not merely alleged.
c. Casualty losses
Loses are deductible from gross estate if:
 Arising from fire, storm, shipwreck, or other
casualty, robbery, theft, or embezzlement
 Not compensated by insurance or otherwise
 Not claimed as a deduction in an income tax
return of the estate subject to income tax
 Occurring during the settlement of estate
 Loss must occur not later than the last day for
payment of the estate tax (generally, within 1
year)
d. Unpaid mortgages
Unpaid mortgage upon, or any indebtedness in respect
to, property shall be deductible from gross estate, where
the value of decedent’s interest therein, undiminished by
such mortgage of indebtedness, is included in the value of
the gross estate.
This deduction will not include: (1) income tax upon
income received after death, or (2) property taxes not
accrued before his death, or (3) the estate tax due from
the transmission of his/her estate. These shall be
e. Taxes
Taxes are deductions from the gross estate if such
taxes accrued prior to the decedent’s death. Those
accrued after are not deductions from gross estate.
B. TRANSFER FOR PUBLIC USE
Means disposition in a last will and testament, or transfer to
take effect after death, in favor of the Government of the
Philippines, or any political subdivision, for exclusively public
purpose. Transfer to social welfare, cultural, and charitable
institutions are deductible provided:
 No part of its net income inures to the benefit of any
individual
 <30% of the bequest, devise, or legacy is used for
administrative purposes
C. VANISHING DEDUCTIONS
A vanishing deduction is a deduction allowed on the property
left behind by the decedent which he had acquired previously by
inheritance or donation.
Conditions for the deductibility of property previously taxed:
i. Death—the present decedent died within 5 years from date
of death of the prior decedent
ii. Identity of the property—the property with respect to
which deduction is sought can be identified as the one
received from the prior decedent
iii. Inclusion of the property—the property must form part of
the gross estate situated in the Philippines of the prior
decedent or was a taxable gift of the donor)
iv. Previous taxation of property—estate tax or donor’s tax
due thereon must have been paid
v. No vanishing deduction on the property was allowed to the
estate of the prior decedent
Procedure in Computing:
1. Determine the FMV of the PPT at the time of the prior
decedent’s death and the FMV at the time of the present
decedent’s death then get the lower of these two amounts
2. Deduct any mortgage of lien on the PPT which was paid by
the present decedent = Net Value
3. Prorate the deductions and subtract from the net value:
𝑁𝑒𝑡 𝑉𝑎𝑙𝑢𝑒
× 𝑇𝑜𝑡𝑎𝑙 𝐷𝑒𝑑𝑢𝑐𝑡𝑖𝑜𝑛𝑠
𝐺𝑟𝑜𝑠𝑠 𝐸𝑠𝑡𝑎𝑡𝑒
Note: Total deductions do not include the special deductions and
vanishing deductions
4. Apply the rate of vanishing deduction
16 | alynotes
Example: In 2000, A inherits a land valued at P500,000. In 2003, ABSOLUTE COMMUNITY PROPERTIES
A died with the said land having a value of P600,000. His gross 1. ALL properties owned by the spouses at the time of
estate amounted to P2,000,000. His allowable deductions marriage
amounted to P400,000. 2. ALL properties acquired thereafter
3. Fruits and income of community properties
Step 1: 500,000 is the lower amount 4. Family home constituted by the husband and wife
Step 2: No mortgages paid Exclusive—
Step 3: Prorate the deductions then subtract from the net value a. Property acquired during marriage by gratuitous title
Step 4: Apply rate unless the donor or testator expressly provides that
property shall form part of community property
𝟓𝟎𝟎, 𝟎𝟎𝟎 b. Fruits and income of exclusive properties
𝟓𝟎𝟎, 𝟎𝟎𝟎 − ( 𝒙 𝟒𝟎𝟎, 𝟎𝟎𝟎)
𝟐, 𝟎𝟎𝟎, 𝟎𝟎𝟎 c. Properties for personal or exclusive use of the spouse
except jewelry
𝟓𝟎𝟎, 𝟎𝟎𝟎 − 𝟏𝟎𝟎, 𝟎𝟎𝟎 d. Property acquired before marriage by the spouse who
has legitimate descendants from a previous marriage
= 𝟒𝟎𝟎, 𝟎𝟎𝟎 e. Property designated as exclusive in marriage settlement
= 𝟒𝟎𝟎, 𝟎𝟎𝟎 x 60% (3 years)
= 𝟐𝟒𝟎, 𝟎𝟎𝟎 DEDUCTIONS
Conjugal/Community Exclusive

II. SPECIAL DEDUCTIONS 1) Obligations contracted 1) Debts before marriage

Non-resident alien decedent cannot avail of special during marriage which are that did not redound to
deductions. presumed to have the benefit of family
benefitted the family 2) Special deductions of:
A. FAMILY HOME a. Family home
The family home must be included in the gross estate and b. Standard
must be the actual residential home of the decedent and his deduction
family at the time of his death as certified by the barangay c. Receivable
captain. under RA 4917
3) Liabilities incurred by
FMV of the family home— either of a crime
 If exclusive property of the decedent: FMV
 If conjugal: FMV/2
 Land is exclusive; home is conjugal: HOW TO GET NET ESTATE OF A MARRIED PERSON—
FMV of land + FMV of home
 Land is conjugal; home is exclusive: 1. Determine which are community/conjugal properties
FMV of Land/2 +FMV of house and which are exclusive
2. Get the net conjugal estate
B. STANDARD DEDUCTION 𝑔𝑟𝑜𝑠𝑠 𝑐𝑜𝑛𝑗𝑢𝑔𝑎𝑙 𝑒𝑠𝑡𝑎𝑡𝑒 − 𝑐𝑜𝑛𝑗𝑢𝑔𝑎𝑙 𝑑𝑒𝑑𝑢𝑐𝑡𝑖𝑜𝑛𝑠
The standard deduction shall be P5,000,000 without need of
substantiation. 3. Get the decedent’s share
𝑛𝑒𝑡 𝑐𝑜𝑛𝑗𝑢𝑔𝑎𝑙 𝑒𝑠𝑡𝑎𝑡𝑒
C. AMOUNTS RECEIVED BY HEIR UNDER RA4917 2
An Act Providing That Retirement Benefits Of Employees Of
Private Firms Shall Not Be Subject To Attachment, Levy, 4. Get the gross estate of decedent
Execution, Or Any Tax Whatsoever 𝑑𝑒𝑐𝑒𝑑𝑒𝑛𝑡 ′ 𝑠𝑠ℎ𝑎𝑟𝑒 + 𝑒𝑥𝑐𝑙𝑢𝑠𝑖𝑣𝑒 𝑝𝑟𝑜𝑝𝑒𝑟𝑡𝑖𝑒𝑠

Amounts or benefits received by heirs from the decedent’s
employer as a consequence of his death. Such benefits must
first be included in the gross estate before the same can be
deducted
III. SHARE OF THE SURVIVING SPOUSE IN THE NET
CONJUGAL PROPERTIES
Share of the surviving spouse is not subject to estate tax and
must therefore be deducted from the gross estate of the
decedent
PROPERTIES OF SPOUSES
CONJUGAL PROPERTIES
1. Properties acquired by onerous title using the common
funds (even if property is only for one spouse)
2. Properties obtained from the labor or work during the
marriage
3. Properties acquired by chance such as winnings from
gambling or betting (losses shall be borne exclusively by
loser-spouse)
4. Fruits and income of the conjugal properties
5. Fruits and income of the exclusive properties of each
Exclusive—
a. Property owned before marriage
b. Property acquired during marriage by gratuitous title
c. Property acquired with the exclusive money of the
spouse
d. Property designated as exclusive in marriage settlement
5. Get the net estate (taxable estate)
𝐺𝐸 𝑜𝑓 𝑑𝑒𝑐𝑒𝑑𝑒𝑛𝑡 − 𝑒𝑥𝑐𝑙𝑢𝑠𝑖𝑣𝑒 𝑎𝑛𝑑 𝑠𝑝𝑒𝑐𝑖𝑎𝑙 𝑑𝑒𝑑𝑢𝑐𝑡𝑖𝑜𝑛𝑠
EXEMPT ACQUISITIONS AND TRANSFERS
1. Merger of the usufruct in the owner of the naked
property
2. Transmission or delivery of the inheritance or legacy by
the fiduciary heirs or legatee to the fideicomissary
3. Transmission from the first heirs, legatees or donees in
favor of another beneficiary in accordance with the
desire of the testator
4. All bequests, devises, legacies or transfers to social
welfare, cultural and charitable institutions, provided
no part of the income of which inures to the benefit of
any individual, provided that not more than 30% of the
said bequests, devises, legacies or transfers shall be
used for administrative purposes
Note: The bequest, devises, legacies, or transfers does not
include those made to educational institutions.
OTHER ITEMS WHICH ARE EXCLUDED FROM THE GROSS
ESTATE—
o The capital (exclusive property) of he surviving spouse is
considered as an exclusion in the gross estate (see Section
85(H), Tax Code)

17 | alynotes
 Note: Under Section 86(C), the share of the surviving spouse
in the absolute community or conjugal partnership is
considered as a deduction
o GSIS proceeds/benefits
o Accruals from SSS
o Proceeds of life insurance where the beneficiary is
irrevocably appointed
o Proceeds of life insurance under a group insurance taken by
employer (not taken out upon his life)
o War damage payments
o Transfer by way of bona fide sales
ESTATE TAX RETURNS
A return need not be complete in all particulars. It is sufficient if
it complies substantially with the law. There is substantial
compliance when—
a. Return is made in good faith and is not false nor fraudulent
b. Covers entire period involved
c. Contains information as to various items of income
Contents of Estate Tax Return
1. Value of the gross estate
2. Gross estate outside the Philippines for non-resident alien
decedents
3. Deductions allowed and taken
4. Other supplemental data
5. For estate tax returns, showing a gross value exceeding
5Million, a statement of a certified CPA as to the assets,
deductions, and tax due
When is an estate tax return required?
1. When the estate is subject to estate tax
2. When, regardless of the gross value of the estate, the
gross estate includes registered or registerable property
such as real property, motor vehicle, shares of stock or
other similar property for which clearance from the BIR is
required as a condition precedent for the transfer of
ownership to the transferees/heirs can be effected
When should the estate tax return be filed?
General Rule: Within 1 year from the death of decedent
Exceptions: The CIR, in meritorious cases, grant an
extension not exceeding 30 days for filing the return
When should the estate tax be paid?
General Rule: At the time the return is filed by the executor,
administrator or the heirs
Exception: The CIR, if he finds that the payment on the due
date would impose undue hardship, may grant an extension
of:
1. Not to exceed 5 years in case the estate is settled
judicially
2. Not to exceed 2 years in case the estate is settled
extrajudicially
Where taxes are assessed by reason of negligence,
intentional disregard of the rules and regulations, or fraud,
no extension will be granted
Who is liable for the payment of the estate tax?
The estate tax imposed under the Tax Code shall be
paid by the executor or administrator before the delivery of the
distributive share in the inheritance to any heir or beneficiary.
In CIR V. GONZALES [NOVEMBER 24, 1966], the Supreme
Court held that estate taxes are satisfied from the estate and are
to be paid by the executor or administrator. Where there are 2 or
more executors, all of them are severally liable for the payment
of the estate tax. As an administratrix, she is liable for the entire
estate tax. As an heir, she is liable for the entire inheritance tax
although her liability would not exceed the amount of her share in
the estate.
Is the approval of the probate court or the court settling the
estate of the decedent a mandatory requirement in the
collection of the estate tax?
No. As held in MARCOS II V. CA [JUNE 5, 1997], it is
discernible that the approval of the court, sitting in probate, or as
a settlement tribunal over the deceased is not a mandatory
requirement in the collection of estate taxes.
Payment of Estate Tax as a pre-requisite to Distribution
The estate tax clearance (CAR) issued by the
Commissioner or the RDO having jurisdiction over the estate will
serve as the authority to distribute the remaining od distributable
properties or share in the inheritance to the heirs or beneficiaries.
No judge shall authorize the executor or administrator to deliver
the distributive share to any p[arty interested in the estate unless
a certification from the Commissioner that the estate tax has been
paid is shown.
Payment of Estate Tax as a pre-requisite to Transfer of
Shares, Bonds, or Rights
There shall not be transferred to any new owner in the
books of any corporation sociedad anonima, partnership,
business, or industry organized or established in the Philippines
any share, obligation, bonds, or right by way of gift inter vivos or
mortis causa, legacy, or inheritance, unless CAR is issued by the
Commissioner or his duly authorized representative
Duty of a bank in case of the death of a decedent-depositor
If a bank has knowledge of the death of a person, who
maintained a bank deposit account alone, or jointly with another,
it shall allow any withdrawal from the said deposit account,
subject to final withholding tax of 6% (see Section 97, Tax Code)
Duties of Certain Officers and Debtors
Register 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 gift inter vivos or mortis causa,
legacy, or inheritance, unless CAR is issued by the
Commissioner that the tax has been paid
Lawyers, Notary Public, Government Officer: has the duty of
furnishing the Commissioner, Regional Director, or RDO,
copies of documents and any information or whatsoever which
may facilitate the collection of tax
Debtor: Neither shall a debtor of the decease pay his debts to the
heirs, legatee, executor or administrator of his creditor, unless
CAR is issued by the Commissioner that the tax fixed has been
paid
Payment by Installment
In case of insufficiency of cash for the immediate
payment of the total estate tax due, the estate may be allowed to
pay the tax due through cash installment. Cash installment shall
be made within 2 years from the date of the filing of the estate tax
return. The frequency, deadline, and amount shall be indicated in
the estate tax return, subject to the prior approval of the BIR.
No civil penalties or interest may be imposed on estates
permitted to pay the estate tax due by installment basis. However,
in case of the lapse of 2 years without the entire tax due being
paid, the remaining balance thereof shall be due and demandable
subject to the applicable penalties and interest reckoned from the
prescribed deadline for the filing of the return and payment of the
estate tax.
18 | alynotes
DONOR’S TAX
A donor’s tax is an excise tax imposed on the privilege to transfer
property by way of gift inter vivos based on pure act of liberality
without any or less than adequate consideration and without any
legal compulsion to give.
In terms of rates, TRAIN has made the following changes:
 Increased the threshold for exempt gifts during the
calendar year to P250,000
 Flat rate of 6% total gifts in excess of P250,000
 Removed the distinction between strangers and
non-strangers
Requisites of a valid donation
1. Capacity of donor
2. Donative intent (intention to donate)
3. Delivery, actual or constructive, of the subject gift
4. Acceptance by the done
5. Form prescribed by law
Donative intent—must be present in a direct gift of property in
order that the donor’s tax can be assessed and collected. Such
intent followed by a donative act is essential to constitute a gift.
Donative intent is necessary only in case of a direct gift. If the gift
is indirectly taking place by way of sale, exchange or other
transfer of property as contemplated in cases of transfers for less
than adequate and full consideration (see Section 100, Tax
Code), donative intent is not always essential to constitute a gift.
Requisites for a donation of a movable
1. Donation may be oral or in writing
2. If oral, the donation must be accompanied with delivery
3. If value is more than Php 5,000, the donation must be in
writing and accepted in writing (Art. 748, NCC)
Requisites for a donation of an immovable
1. It must be in public document
2. The property donated and the value of the charges
which the done must satisfy must be specified
3. The donee must accept through a deed or similar
instrument. (Art. 749, NCC)
Considered donations for tax purposes
1. Sales, exchanges and other transfers of property for
less than an adequate and full consideration in money
or money’s worth
Except: Transfers of real property considered as capital
assets which is subject to CGT.
2. Condonation or remission of debt where the debtor
did not render service in favor of the creditor
Note: Condonation or remission of a debt would constitute a
donation to the extent of the fair value of the debt condoned or
remitted. Therefore, the creditor would be considered a donor for
donor’s tax purposes and would be liable for the tax thereon.
VOID DONATIONS
A. Between spouses, whether direct or indirect, during the
marriage, except moderate gifts which the spouse may
give to each other on the occasion of any family rejoicing
Indirect donations to a spouse are void, and include the
following donations:
i. To stepchild who has no compulsory heirs other
than the other spouse at the time of donation
ii. To a common child who has no compulsory heirs
other than the other spouse at the time of donation
iii. To parents of the other spouse
iv. To other spouse’s adopted child in cases when, at
the time of donation, the only surviving relatives of
the adopted is the adopter-spouse, the illegitimate
children of the adopted, and the surviving spouse of
the adopted
v. To common adopted child who has no surviving
heirs
B. Between persons living together as husband and wife
without a valid marriage
C. Between persons guilty of concubinage or adultery at
the time of donation
D. Between persons found guilty of the same criminal
offense, in consideration thereof
E. Those made to a public officer or his/her spouse,
descendants, and ascendants by reason of office
F. Donations made by persons to those who cannot inherit
from them
a) Donation to the priest who heard the
confession of the donor during his last illness,
or the minister of the gospel who extended
spiritual aid to him during the same period;
b) Donation to the relatives of such priest or
minister of the gospel within the fourth degree,
c) Donation to the church, order, chapter,
community, organization, or institution to which
such priest or minister may belong;
d) Those made to a guardian with respect to
donations made by a ward in his favor before
the final accounts of the guardianship have
been approved, except when the guardian is
the ward’s ascendant, descendant, brother, or
sister
e) Any physician, surgeon, nurse, health officer or
druggist who took care of the donor during his
last illness
Creditors A, B and C condoned the debt of XYZ Corp
pursuant to a court approved restructuring. Are the creditors
liable for donor’s tax?
No. The transaction is not subject to donor’s tax since
the condonation was not implemented with a donative intent but
only for business consideration. The restructuring was not a result
of the mutual agreement of the debtors and creditors. It was
through court action that the debt rehabilitation plan was
approved and implemented. [BIR Ruling DA 028-2005 [January
24, 2005]
A died leaving as his only heirs, his surviving spouse B, and
three minor children, X, Y and Z. Since B does not want to
participate in the distribution of the estate, she renounced
her hereditary share in the estate. Is the renunciation subject
to donor’s tax?
No. The general renunciation by an heir, including the
surviving spouse, as in the case of B, of her share in the
hereditary estate left by the decedent is not subject to donor’s tax.
This is so because the general renunciation by B was not
specifically and categorically done in favor of identified heir/s to
the exclusion or disadvantage of the other co-heirs in the
hereditary estate (Section 11, RR No. 2-2003).
In the settlement of the estate of Mr. Barbera who died
intestate, his wife renounced her inheritance and her share
of the conjugal property in favor of their children. The BIR
determined that there was a taxable gift and thus assessed
Mrs. Barbera as a donot. Was the BIR correct?
The BIR is correct that there was taxable gift only insofar
as the renunciation of the share of the wife in the conjugal
property is concerned. This is a transfer if property without
consideration which takes effect during the lifetime of the
transferor/wife and this qualifies as a taxable gift. (RR Mo. 2-
2003). But the renunciation of the wife’s share it the inheritance
during the settlement of the estate is not a taxable gift considering
that the property is automatically transferred to the other heirs by
operation of law due to her repudiation of her inheritance. (BIR
Ruling DA No. 333-07)
19 | alynotes
TRANSFER FOR INSUFFICIENT CONSIDERATION
Where property, other than real property classified as capital
asset subject to final capital gains tax, is transferred for less than
an adequate and full consideration in money or money’s worth,
the amount by which the fair market value of the property
exceeded the value of the consideration shall, for purposes of
donor’s tax, be deemed a gift.
Note: Why is real property, classified as capital asset, that is
transferred for less than an adequate and full consideration in
money or money’s worth not deemed a gift subject to donor’s tax?
Well, it is already subject to final capital gains tax, which is 6% of
the gross selling price of fair market value of the property,
whichever is higher. So what the seller avoids in the payment of
the donor’s tax, it pays for in CGT.
Exception: When sale/exchange is bona fide, at arm’s length,
and free from any donative intent, the same will be considered as
made for an adequate and full consideration in money or in
money’s worth.
Who are liable to pay donor’s tax?
1. Resident citizen
2. Non-Resident Citizen
3. Resident Alien
4. Non-Resident Alien
5. Domestic Corporation
6. Foreign Corporation
Note: In contrast to estate taxes, a corporation can be subject to
donor’s tax because it is capable of entering into a contract of
donation through the appropriate Board Resolution.
ABC a multinational corporation doing business in the
Philippines donated 100 shares of stock of said corporation
to Mr. Z, its resident manager in the Philippines. What is the
tax liability, if any, of ABC Corporation?
Foreign corporations effecting a donation are subject to
donor’s tax only if the property donated is located in the
Philippines. Accordingly, donation of a foreign corporation of its
own shares of stock in favor of resident employees is not subject
to donor’s tax. However, if 85% of the business of the foreign
corporation is located in the Philippines or the shares donated
have acquired business situs in the Philippines, the donation may
be taxed in the Philippines subject to the rule of reciprocity.
Note: In sum, all assets, real or personal, tangible or intangible
given by way of gift wherever located of a citizen and resident
alien is subject to donor’s tax while for nonresident aliens,
donor’s tax is imposed only on properties located in the
Philippines provided in the case of intangible personal property,
it is subject to the rule of reciprocity under Section 104 of the Tax
Code. Same rules as in Estate Taxation.
EXEMPTIONS FROM GROSS GIFTS
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 education, charitable, religious,
cultural, social welfare institutions, accredited NGO and
trust, philanthropic organization, and research institution
provided:
i. the non-profit institution is non-stock entity that pays no
dividends, is governed by trustees who do not receive
any compensation, and devotes all of its income to the
accomplishment of its purposes
ii. not more than 30% of said gifts will be used by such
done for administrative purposes
iii. the non-profit institution must be accredited by the
designated accrediting government agency and
registered with the BIR
C. Campaign contributions in cash or in kind to any candidate
which are duly reported to the COMELEC. However,
donations made by corporation in violation of Section 36(9)
of the Corporation Code are subject to donor’s tax
Are political contributions considered gifts and therefore
liable for donor’s tax?
Under Section 13 of RA 7166, such contributions, be
duly reported to the COMELEC, shall not be subject to the
payment of any gift tax. In ABELLO V. CIR [February 23, 2005],
the Supreme Court ruled that the contributions made by certain
partners of the ACCRA law firm to the campaign of Senator
Edgardo Angara constitute as a donation subject to donor’s tax.
However, this was decided before RA 7166. The Court noted that
subsequent to the donations involved in the case, Congress
approved RA 7166 on November 25, 1991, providing in Section
13 thereof that political/electoral contributions, duly reported to
the Commission on Elections, are not subject to the payment of
donor’s tax. RA 7166 provides no retroactive effect.
OTHER EXEMPTIONS ALLOWED ON GROSS GIFT
A. Encumbrance on the property donated, if assumed by
the donee
B. Those specifically provided by the donor as diminution
of the property donated
EXEMPTION UNDER SPECIAL LAWS
A. Gifts and donations to the University of the Philippines
B. Contribution to the National Book Trust Fund
C. Donations to qualified foster care agencies
D. Donations made for the operation of the Dual Training
System
E. Donations of cooperatives to duly accredited charitable,
research, and educational institutions and socio-
economic projects within their area of operations
F. Donations of land certified by LGU to have been
donated for socialized housing purposes
G. Donation to Philippine Red Cross
DONOR’S TAX RETURNS
When should the estate tax return be filed?
Within 30 days from the date the gift was made
When should the estate tax be paid?
At the time the return is filed
Who files?
Any individual who makes any transfer by gift
Contents of Estate Tax Return
1. Each gift made during the calendar year
2. Deductions allowed and taken
3. Any previous net gifts made during the same calendar year
4. Name of donee
5. Such further information as may be required
Where to file?
a) If donor is a resident donor – with the Authorized Agent
Bank, RDO, collection officer or duly authorized
treasurer of the city or municipality where donor is
domiciled at the time of transfer, or with Office of the
Commissioner if donor has no legal residence
b) If donor is a non-resident donor – with the Philippine
Embassy or Consulate in the country where he is
domiciled at the time of transfer; or directly with the
Office of the Commissioner
Note: No return is required if the transfer is exempt from donor’s
tax. A separate return shall be filed by each donor for gift or
donation made on different dates during the year. Any previous
gifts made in the same calendar year shall be reflected in each
return. However, only one return shall be filed for several gifts or
donations by a donor made on the same date to different donees.
If the gift or donation involves conjugal/community property, each
spouse shall file a separate return corresponding to his/her
respective share.
20 | alynotes
VALUE-ADDED TAX

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.
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.
DESTINATION PRINCIPLE — as a general rule, the value-
added tax (VAT) system uses the destination principle. It means
that the destination of the goods determines the taxation or
exemption from VAT. Goods and services are taxed only in the
country where they are consumed/performed. Some rulings
referred to the destination principle as cross-border doctrine.
Note: This is the reason why export sales of goods are subject
0% while importations of goods are subject to 12%. Exported
goods will be consumed in wherever country it is exported so it is
zero-rated. On the other hand, we consume imported goods here
in the Philippines that is why it is subject to 12% VAT.

Elements of a VAT-taxable transaction PERSONS LIABLE

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
Note: (1) An importation is VAT-taxable whether made in the
course of trade or business or not.
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.
In CIR V. MAGSAYSAY LINES [JULY 28, 2006], the Supreme
Court found that any sale, barter or exchange of goods or
services not in the course of trade or business is not subject to
VAT. In this case, the sale of the vessels was an isolated
transaction, not done in the ordinary course of NDC’s business
and is thus not subject to VAT.
In CIR V. CA AND COMASERCO [MARCH 30, 2000] , the
Supreme Court opined that VAT is a tax on transactions imposed
at every stage of the distribution process on the sale, barter,
exchange of goods or property, and on the performance of
services, even in the absence of profit attributable thereto. The
definition of the term “in the course of trade or business” applies
to all transactions. Even a non-stock, non-profit corporation or
government entity is liable to pay VAT for the sale of goods and
services. In this case, even if the services rendered for a fee were
on a reimbursement-on-cost arrangement and without realizing
profit, the payments are still subject to VAT.
1. Any person who, in the course of trade or business, sells,
barters, exchanges or leases goods or properties, or renders
services Except: A person, whether or not VAT-registered,
whose annual gross sales or receipts does not exceed
P3,000,000
2. Any person who imports goods, whether in the course of
trade or business or not.
3. Those who are VAT-registered and who have VAT-exempt
business which they choose to register under the VAT-
system regardless of level of sales
4. Franchise grantees of radio and/or TV broadcasting whose
gross annual receipts do not exceed P10Million, but are
registered
GOODS OR PROPERTIES SUBJECT TO VAT
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
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.

INPUT TAX OUTPUT TAX

Input tax represents the
actual payments, costs and
expenses incurred by a VAT-
registered taxpayer in
connection with his purchase
of goods and services. Thus,
"input tax" means the value-
added tax paid by a VAT-
registered person/entity in the
course of his/its trade or
business on the importation
of goods or local purchases of
goods or services from a
VAT-registered person
input tax is the VAT due on
or paid by a VAT-registered
person on importation of good
or local purchases of goods
or services, including lease or
use of properties, in the
course of his trade or
business.
On the other hand, when that
person or entity sells his/its
products or services, the
VAT-registered taxpayer
generally becomes liable for
12% of the selling price as
output VAT or output tax.
Hence, "output tax" is the
value-added tax on the sale
of taxable goods or services
by any person registered or
required to register under the
Tax Code.
output tax is the VAT due on
the sale or lease or taxable
goods, properties or services
by an VAT-registered person
TAX BASE OF VAT ON IMPORTATION OF GOODS — the tax
base is the total value used by the BOC in determining tariff and
customs duties plus customs duties, excise taxes, if any, and
other charges. Where the customs duties are determined on the
basis of the quantity or volume of the goods, the VAT shall be
based on the landed cost plus excise taxes, if any.
The VAT shall be imposed on every importation of goods,
whether or not in the course of trade or business. This is unlike
VAT on sale of goods or properties which must be in the course
of trade or business. Otherwise, the person/transaction shall not
be liable to pay VAT. (see CIR V. SEAGATE TECHNOLOGY
[FEBRUARY 11, 2005]).
Technical Importation
Refers to the subsequent sale, transfer or exchange of imported
goods by VAT-exempt persons to non-exempt persons or
entities. The non-exempt buyers, transferees, or recipients shall
be deemed the importers of the taxable goods and shall be liable
for the VAT due on such importation. (see SECTION 107(B), TAX
CODE)

21 | alynotes
ZERO-RATED TRANSACTIONS ZERO-RATED SALES OF GOODS
A. Export Sales
A VAT zero-rated transaction are sales by VAT-registered i. Sale and actual shipment of goods from the
persons which are subject to 0% rate, meaning the tax burden is Philippines to a Foreign country
not passed on to the purchaser. A zero-rated sale by a VAT- ii. Sale of raw materials or packaging materials to a
registered person, which is a taxable transaction for VAT Non-resident buyer for delivery to a resident local
purposes, shall not result in any output tax. However, the input export-oriented enterprise
tax on his purchases of goods, properties or services related to iii. Sale of raw materials or packaging materials to
such zero-rated sale shall be available as tax credit or refund. Export-oriented enterprise whose export sales
exceed 70% of total annual production
VAT-TAXABLE ZERO-RATED iv. Those that are considered export sales under the
Omnibus Investment Code (E.O.226) and other
In transactions taxed at a special laws
12% rate, when at the end of On the other hand, v. Sale of goods, supplies, and equipment and fuel to
any given taxable quarter the transactions which are taxed persons engaged in International shipping or
output VAT exceeds the input at zero-rate do not result in international air transport operations.
VAT, the excess shall be paid any output tax. Input VAT
to the government; when the attributable to zero-rated B. Foreign currency denominated sale – the sale to a non-
input VAT exceeds the output sales could be refunded or resident of goods assembled or manufactured in the
VAT, the excess would be credited against other internal Philippines for delivery to a resident in the Philippines paid
carried over to VAT liabilities revenue taxes at the option of in acceptable foreign currency and accounted for in
for the succeeding quarter or the taxpayer accordance with BSP rules and regulations
quarters.
C. Effectively zero-rated transactions – Sales to persons
or entities whose exemption under special laws and
international agreements to which the Philippines is a
Example: Assume that VAT-registered person purchases signatory subjects such sales to 0% rate
materials from his supplier at P100, P9.6 of which was passed on
to him by his supplier as the latter’s 12% output VAT. In a zero- Note: “Considered export sales under E.O. 226” includes the sale
rated transaction, the taxpayer can recover the P9.6 from the BIR of goods and services by a VAT-registered person in the customs
either through a refund or a tax credit. When the taxpayer sells territory to ecozone and Freeport enterprises so as to make them
his finished product for let’s say P120, he is not required to pay automatically zero-rated
the output VAT of P2.4 (12% of the P20 value he has added to
the P100 material).
In a transaction subject to VAT, however, he may TRANSACTIONS DEEMED SALE
recover both the input VAT of P9.6 which he paid to the supplier 1. Transfer of goods or properties not in the course of
and his output VAT of P2.4 by passing both these costs to the business (originally intended for sale or for use in the course
buyer. The buyer then pays P12, the total 12% VAT. of business)
2. Property dividends (transfer to shareholders as share in the
profits of VAT-registered persons or to creditors in payment
ZERO-RATED EFFECTIVELY ZERO of debt)
3. Consignment of goods without the sale being made within
Refers to the sale of goods or 60 days
supply of services to persons 4. Retirement from or cessation of business with respect to
or entities whose exemption inventories of taxable goods existing (see SECTION
Generally refers to the export 106(B), TAX CODE)
under special laws or
sale of goods and supply of
international agreements to
services
which the Philippines is a Notes: Before considering whether the transaction is deemed
signatory effectively subjects sale, it must first be determined whether the sale was in the
such transactions to a zero ordinary course of trade or business. Even if the transaction was
rate. “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])
The seller who charges zero
The seller of such As to (1), the transaction is deemed sale when the
output tax on such
transactions charges no taxpayer-seller withdraws goods from his inventory of goods held
transactions can also claim a
output tax, but can claim a primarily for sale for his own personal or non-business use. The
refund of or a tax credit
refund of or a tax credit withdrawal or transfer of goods results in the use or consumption
certificate for the VAT
certificate for the VAT of such goods by a person (the seller himself) who is effectively
previously charged by
previously charged by the final consumer, such withdrawal or transfer is deemed a sale
suppliers
suppliers subject to output tax.
As to (2), the requisites to constitute the distribution or
transfer to a shareholder or creditor a transaction deemed sale
Intended to be enjoyed by the Intended to benefit the are: (a) the VAT-registered person distributing or paying is a
seller who is directly and purchaser who, not being domestic corporation; (b) what is being declared or paid is either
legally liable for the VAT, directly and legally liable for real property owned by the company or shares of stocks owned
making such seller the payment of the VAT, will in another company; and (c) the domestic corporation is either a
internationally competitive by ultimately bear the burden of real estate dealer (in case of real property) or dealer in securities
allowing the refund or credit the tax shifted by the (in case of shares of stock)
of input taxes that are suppliers. As to (3), as a general rule, a consignment of goods by
attributable to export sales 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.
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.

22 | alynotes
San Roque Power entered into a purchase power agreement
with NAPOCOR to develop the hydroelectric potential of the
Lower Agno River. During the testing period, electricity was
transferred by San Roque to NAPOCOR. Can the transfer be
considered a sale of electricity?
Yes. In SAN ROQUE POWER CORP. V. CIR
[NOVEMBER 25, 2009], the Supreme Court held that although
the transfer was not a commercial sale, 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 VAT, does not limit the term
sale to commercial sales, rather it extends the term to
transactions that are deemed sale. In the said case, it was
undisputed that San Roque transferred to NPC all the electricity
that was produced during the trial period. The fact that it was not
transferred through a commercial sale or in the normal course of
business does not deflect from the fact that such transaction is
deemed as a sale.
Notes: Absence of profit or margin does not make the
performance of taxable services for a fee exempt from VAT. Tax
Code clarifies that even a non-stock, non-profit organization or
government entity is liable to pay VAT on the sale of goods or
services. 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 service rendered
is subject to VAT
VALUE-ADDED TAX ON SALE OF SERVICES & LEASE
OF PROPERTIES
A sale of exchange of services means the performance of all
kinds of services in the Philippines for others for a fee,
remuneration or consideration. (See SECTION 108(A), TAX
CODE for an extensive enumeration of the type of services
including in said definition)
The use or lease of properties shall be subject to VAT irrespective
of the place where the contract of lease or licensing agreement
was executed if the property is leased or used in the Philippines.
Are toll fees collected by tollway operators subject to VAT?
Yes. The Supreme Court in DIAZ V. SECRETARY OF
FINANCE [JULY 10, 2011] answered this issue in the affirmative.
The court held that VAT is imposed on “all kinds of services” and
tollway operations who are engaged in construction, maintaining,
and operating expressways are no different from lessors of
property, transportation contractors, etc. Further, they also come
under those described as “all other franchise grantees” which is
not confined only to legislative franchise grantees since the law
does not distinguish. They are also not a franchise grantee under
Section 119 of the Tax Code which would have made them
subject to percentage tax instead. Neither are the services part of
the enumeration under Section 109 on VAT-exempt transactions.
Are the gross receipts derived by operators or proprietors of
cinema/theater houses from admission tickets subject to
VAT?
No. The Supreme Court in CIR v. SM PRIME
HOLDINGS [FEBRUARY 26, 2010] held that although the
enumeration of services subject to VAT under Section 108 of the
Tax Code is not exhaustive. Among those included in the
enumeration is the “lease of motion picture films, films, tapes and
discs.” This, however, is not the same as the showing or
exhibition of motion pictures or films. Hence, since the showing
or exhibition of motion pictures or films is not in the enumeration,
such is not a VAT-taxable transaction.
Are association dues, membership fees, and other
assessment and charges collected by a condominium
corporation/ homeowners’ association subject to VAT?
Yes because they constitute as income payment or
compensation for the beneficial services the condominium
corporation/ homeowners’ association provides for its tenants
and members. The fact that a condominium corporation or
homeowners’ association is a non-stock, non-profit organization
is immaterial. As held in CIR V. CA & COMASERCO [MARCH
30, 2000], even a non-stock, non-profit organization or
government entity is liable to pay VAT on sale of goods and
services.
REQUISITES FOR THE TAXABILITY OF THE SALE OF
SERVICES AND USE OR LEASE OF PROPERTIES—
1. There is a sale or exchange of service or lease or use of
property enumerated in the law or other similar services
2. The service is performed or to be performed in the
Philippines
3. The service is in the course of the taxpayer’s trade or
business or profession
4. The service is for a valuable consideration actually or
constructively received and
5. The service is not exempt under the Tax Code, special law
or internal agreement
ZERO-RATED SALES OF SERVICES.
A. 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 BSP
B. Services other than those mentioned in the preceding
paragraph rendered to a person engaged in business
conducted outside the Philippines or a nonresident
person not engaged in business who is outside the
Philippines when the services were performed, the
consideration for which is paid for in acceptable foreign
currency and accounted for in accordance with the rules
and regulations of the BSP.
Note: This is an exception to the destination principle.
Remember that under the destination principle, goods and
services are taxed only in the country where they are
consumed. Section 108(B)(2) is an exception because
although the services are performed in the Philippines, the
sales of such services are zero-rated.
C. Services rendered to person or entities whose exemption
under special laws or international agreements effectively
subjects the supply of such services to a 0% rate (effectively
zero-rated transaction)
D. Sale of services to persons engaged in international
shipping or air transport operations, including leases of
property for use thereof, provided that these services shall
be exclusive for international shipping or air transportation
E. Services performed by subcontractors and/or contractors in
processing, converting, or manufacturing goods for an
enterprise whose export sales exceed 70% of total annual
production
F. Transport of passengers and cargo by domestic air or sea
vessels from the Philippines to a foreign country
G. Sale of power generated through renewable sources of
energy
In CIR v. ACESITE PHILIPPINES [FEBRUARY 16, 2007], the
Supreme Court stated that 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 (0%) rate shall be
subject to 0%. Since the law clearly provides for PAGCOR’s
exemption, the sale of services of Acesite to PAGCOR is
effectively zero-rated. Hence, Acesite may refund the VAT it paid
on its sale of food and beverages to PAGCOR.
23 | alynotes
 In AMERICAN EXPRESS INTERNATIONAL V. CIR
[JUNE 29, 2005], the Supreme Court opined that while as a
general rule, the VAT system uses the destination principle as a
basis for the jurisdictional reach of the tax such that goods and
services are taxed only in the country where they are consumed,
exceptions to the destination principle are found in Section 108(B)
of the 1997 Tax Code. In this case, Amex Phils. facilitated in the
Philippines the collection and payment of receivables belonging
to its Hong Kong-based foreign client, Amex HK, and getting paid
for it in acceptable foreign currency and accounted for in
accordance with the rules and regulations of the BSP. As such,
they are deemed exceptions because although the services are
performed in the Philippines, the sales of such services are
considered zero-rated.
In CIR V. BURMEISTER AND WAIN SCANDINAVIAN
CONTRACTOR MINDANAO, INC. [JANUARY 22, 2007], they
are entitled to zero-rated status and to the refund but only for the
period covered prior to the filing of the CIR’s answer in the CTA.
This is so because prior, Burmeister was able to secure a ruling
from the BIR allowing zero-rating of its sales. However, such
ruling is valid only until the time that the CIR filed its answer in the
CTA which amounted to a revocation of the said ruling. The
revocation cannot be made retroactive. It must be noted,
however, that without this special circumstance, Burmeister
would not have been entitled to a zero-rated status. This is
because the Consortium which was the recipient of the services
rendered by Burmeister was deemed doing business within the
Philippines. While the Consortium’s principal members are non-
resident foreign corporations, the Consortium itself is doing
business in the Philippines. Hence, the transactions of BWSC
Note: For VAT zero-rating of services rendered to non-resident
foreign corporation under Section 108(B)((2) of the NIRC, it is not
enough that the recipient of services be proven to be a foreign
corporation, it must be proven to be a non-resident foreign
corporation (ACCENTURE V. CIR)
VAT-EXEMPT TRANSACTIONS
VAT-exempt transactions refer to the sale of goods or
properties and/or services and the use or lease of properties that
is not subject to VAT (output tax) and the seller is not allowed any
tax credit of VAT (input tax) on purchases.
The person making the exempt sale of goods, properties, or
services shall not bill any output tax to his customers because the
said transaction is not subject to VAT.
VAT-EXEMPTION ZERO-RATED
It is a taxable transaction but
Not subject to the output tax
does not result in an output
tax
The seller in an exempt The input VAT on the
transaction is not entitled to purchases of a VAT-
any input tax on his registered person with zero-
purchases despite the rated sales may be allowed
issuance of a VAT invoice or as tax credits or refunded
receipt;
Persons engaged in
Registration is optional for
transactions which are zero-
VAT-exempt persons
rated, being subject to VAT,
are required to register
(See SECTION 109, TAX CODE for an extensive enumeration of
the exempt transactions)
In CIR V. PHILIPPINE HEALTH CARE PROVIDERS,
INC. [APRIL 24, 2007], PHCPI claimed that its services were
exempt from VAT and sought a BIR ruling in this regard. The BIR
ruled that PHCPI was exempt. The CIR, however, later assessed
PHCPI for deficiency VAT taxes. The CIR contended that PHCPI
does not actually render medical service but merely acts as a
conduit between the members and PHCPI’s accredited and
recognized hospitals and clinics. The Supreme Court opined that
the services of an entity which does not actually provide medical
and/or hospital services but merely arranges for the same are
subject to VAT. The Court, however, ruled PHCPI cannot be
faulted for its reliance on the BIR ruling as such was issued when
the term “health maintenance organization” had no significance
for taxation purposes at the time. The failure of PHCPI to describe
itself as a “health maintenance organization” subject to VAT does
not amount to bad faith.
Is the sale of Andok’s chicken subject to VAT?
No. The sale of Andok’s chicken is exempt from VAT.
However, should Andok’s maintain a facility by which the roasted
chicken will be offered as a menu to customers who would dine-
in, then it will be subject to VAT on sale of service which is
similarly imposed on restaurants and other eateries (VAT Ruling
No. 009-07 dated June 21, 2007)
Note: Check Section 109(A). Andok’s chicken is just as stall,
kapag nagtayo na sila ng facility for dine-ins, sale of services na
sya, hence, subject to VAT. Since Andok’s only sells roasted
chicken, and according to the provision of Section 109, still
considered as original state, exempt. Kapag inadobo na ng
Andok’s yan or nag-tinola, subject to VAT. Take note of the
“original state” proviso.
INPUT TAX CREDITS
Input tax credits arises from purchase of goods,
properties, and services. Transitional input tax credit may be
claimed by persons who become liable to VAT for the first time;
they represent input tax on inventories goods, materials, and
supplies existing on the date of commencement of a person’s
status as a taxable person. Presumptive input tax may be claimed
by persons or firms engaged in the processing of sardines,
mackerel and milk, and in the manufacturing or refined sugar,
cooking oil and packed noodle-based instant meals, shall be
allowed a presumptive input tax, creditable against the output tax,
equivalent to 4% of the gross value in money of their purchases
of primary agricultural products which are used as inputs to their
production. Final withholding tax credit is based on the amount
paid to the supplier of goods or services by the government and
is required to be withheld by the government and remitted to the
BIR
SOURCES OF INPUT 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;
iv. For use as materials supplied in the sale
of service;
v. For use in trade or business for which
deduction for depreciation or amortization
is allowed under the Tax Code except
automobiles, aircraft and yachts.
B. Purchase of services in which VAT has actually
been
24 | alynotes
PERSONS WHO CAN AVAIL OF INPUT TAX CREDIT
1. The purchaser of the goods or properties upon
consummation of the sale and on importation of goods or
properties
2. The importer upon payment of VAT prior to the release of
goods from customs custody
CLAIMS FOR INPUT TAX ON DEPRECIABLE GOODS —
Where a VAT-registered person purchases or imports capital
goods, which are depreciable assets for income tax purposes, the
aggregate acquisition cost of which (exclusive of VAT) in a
calendar month exceeds P1,000,000.00, regardless of the
acquisition cost of each capital good, shall be claimed as credit
against output tax in the following manner:
(a) If the estimated useful life of a capital good is 5
years or more - The input tax shall be spread evenly
over a period of sixty (60) months and the claim for input
tax credit will commence in the calendar month when
the capital good is acquired.
(b) If the estimated useful life of a capital good is less
than 5 years — The input tax shall be spread over such
a shorter period
Capital goods or properties refers to goods or properties with
estimated useful life greater than one (1) year and which are
treated as depreciable assets under Sec. 34(F) of the Tax Code,
used directly or indirectly in the production or sale of taxable
goods or services
EXCESS OUTPUT OR INPUT TAX
If at the end of any taxable month or quarter:
Output tax = Input tax No VAT payable
The excess shall be paid by the
Output tax > Input tax
VAT-registered person
The excess shall be carried over to
Output tax < input tax
the succeeding quarter or quarters
TAX REFUND OR TAX CREDITS OF INPUT TAX
A VAT-registered person whose sales of goods, properties or
services are zero-rated or effectively zero-rated may apply for the
issuance of a Tax Credit Certificate (TCC) or refund of input tax
attributable to such sales. The proper party to seek refund of an
indirect tax is the statutory taxpayer, not the person on whom it is
shifted to.
Requirements for a claim for VAT refund/credit —
1. The taxpayer is engaged in sales which are zero-rated or
effectively zero-rated
2. The taxpayer is VAT-registered
3. The claim must be filed within 2 years after the close of the
taxable quarter when such sales were made
4. The input taxes are due or paid;
5. The input taxes are not transitional input taxes
6. The input taxes have not been applied against output
taxes during and in the succeeding quarters
7. The input taxes claimed are attributable to zero-rated or
effectively zero-rated sales
8. In certain types of zero-rated sales, the acceptable foreign
currency exchange proceeds thereof had been duly
accounted for in accordance with BSP rules and
regulations [Sections 106(A)(2)(a)(1), (2), and (b); Section
108(B); Sections 108(B)(1) and (2)]
9. Where there are both zero-rated and 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.
The CIR shall grant a tax credit certificate/refund for creditable
input taxes within 90 days from the date of submission of
complete documents in support of the application. In cases where
the Commissioner finds that the grant of refund is not proper, the
Commissioner must state in writing the legal and factual basis for
the denial (see Section 112(C), Tax Code)
Remedy in case of denial
The taxpayer may appeal to the CTA within 30 days from the
receipt of said denial. If no action on the claim for tax credit
certificate/refund has been taken by the CIR after the 90 day
period in which he must decide, shall be punishable under
Section 269 of the Tax Code
INVOICING REQUIREMENTS
VAT invoice for every sale, barter or exchange of goods or
properties; and VAT official receipt for every lease of goods or
properties and for every sale, barter or exchange of services.
Information should be contained in the VAT invoice or VAT
official receipt —
1. A statement that the seller is a VAT-registered person,
followed by his taxpayer's identification number (TIN);
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 are 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 shall 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.
CONSEQUENCES OF ISSUING ERRONEOUS VAT INVOICES
OR VAT OFFICIAL RECEIPTS
1. If a person who is not VAT-registered issues an invoice or
receipt showing his TIN, followed by the word “VAT”, the
erroneous issuance shall result to the following:
a. The issuer shall be liable to the:
i. percentage taxes applicable
ii. tax imposed in Section 106 or 108 without
the benefit of any input tax credit
iii. 50% surcharge as penalty
b. The VAT shall, if the other requisite information
required is shown on the invoice or receipt, be
recognized as an input tax credit to the purchaser.
2. If a VAT-registered person issues a VAT invoice or VAT
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 in Section 106 or 108 as if Section 109 did not
apply.
25 | alynotes