Taxation Law Vol.

II
By Atty. Raegan Capuno

CHAPTER 1: ESTATE TAX Classification of Decedent:

1. Resident Citizen (RC)
Modes of Acquiring Ownership: (712, NCC) 2. Non-Resident Citizen (NRC)
1. Occupation 3. Resident Alien (RA)
2. Intellectual Creation 4. Non-Resident Alien (NRA)
3. Law
4. Donation GROSS ESTATE – pertains to the value of all properties, real or
5. Succession, whether Intestate or Testate personal, of the decedent subject to estate tax.
6. Tradition, as consequence of certain contracts, and
7. Prescription GROSS ESTATE (GE) NET ESTATE (NE)
At the time of his death, the  The value of the GE since it
Note: Succession and Donation are gratuitous transfer of property total value of all property, real, is taxed at a flat rate
from one person to another. There is no consideration involved in personal, tangible or intangible,
the transfer/acquisition of property. Subject to Transfer Taxes wherever situated (Sec 85,
NIRC)
THREE TRANSFER TAXES
Estate Tax (Sec 84, NIRC) Applies to both personal and INCLUSION TO GROSS ESTATE:
Donor’s Tax (Sec 98, NIRC) real property As a rule: All properties owned by the decedent and existing at the
Tax on transfer of real property Applies only to real property time of his death are included in the gross estate.
(Sec 135, LGC)
PROPERTIES WITHIN PH PROPERTIES
ESTATE TAX (ET) – tax on the privilege to transfer property upon DECEDENT REAL PERSONAL PROP OUTSIDE PH
one’s death (mortis causa) PROP TANGIBLE INTANGIBLE
RC included included included included
Theories of Estate Taxation: NRC included included included included
1. BENEFIT-RECEIVED THEORY – The Gov’t performed services in RA included included included included
the distribution of the properties of the decedent to the heirs. NRA with included included Not Not
 In view of these services and benefits derived both by the Reciprocity included included
estate and the heirs – the state collects the tax. NRA w/o included included included Not
Reciprocity included
2. REDISTRIBUTION OF WEALTH THEORY – The imposition of
estate tax reduces the property received by the successor RECIPROCITY RULE
bringing about a more equitable distribution of wealth in  It provides that no estate tax will be collected in respect of
society. Intangible Personal Prop (IPP) in the following instances:
 The portion of the property taken by the state in the form a. If the decedent at the time of his death was a RC of foreign
of tax is used to fund social programs and projects of the country which at the time of his death did not impose
state. estate tax, in respect of intangible personal property of PH
Citizens not residing in that foreign country, or
3. ABILITY-TO-PAY THEORY – The bigger the estate means the b. If the laws of the foreign country of which the decedent is a
higher taxes to be paid. RC at the time of his death allows a similar exemption from
 If the decedent dies without any property or if the transfer or death taxes of every character or description in
properties are sufficient to cover some of the deductions respect of IPP owned by PH Citizens no residing in that
allowed, then there is no liability to pay the tax; and foreign country.
 By nature: A form of exemption from estate tax – because if
4. STATE PARTNERSHIP THEORY – The state is viewed as a passive
NRA can avail this rule, IPP located in the PH are not included in
and silent partner in the accumulation of wealth and property
the Gross Estate. Therefore, not subject to Estate tax.
of the decedent.
 The state even grants protection to the large estate of the
IPP deemed located in the PH (Sec 104, NIRC)
decedent.
1. Franchised exercised in the PH
 The state collects its just share in such effort in the right
2. Shares, obligations, or bonds issued by
time
a. Any corporation or sociedad anonima organized or
constituted in the PH in accordance with its laws;
Taxpayer of Estate Tax and Liability of Tax: (Sec 9(g),RR 2-2003)
b. Any foreign corporation 85% of the business of which is
 ESTATE – the statutory taxpayer of estate tax. It is treated as a located in the PH
person for purposes of paying the taxes (Sec 22(a), NIRC) c. Any foreign corporation if such shares, obligations, or
 Estate Tax imposed is paid by the executor or administrator bonds have acquired a business situs in the Ph; and
(E/A) before the delivery of the distributive share in the 3. Shares or rights in any partnership, business, or industry
inheritance to any heir or beneficiary. established in the PH
 Where there are 2 or more E/A – all of them are severally
liable for the payment of tax. Note:
 E/A – has the primary obligation to pay the estate tax  Reciprocity rule applies: A decedent must be a citizen and
 Heir/Beneficiary – subsidiary liability for the payment of resident of a foreign country that does not impose estate tax or
that portion of the estate which his distributive share grants exemption.
bears to the value of the total net estate
 Reciprocity rule cannot be applied: If a decedent is a citizen of
a foreign country but a resident of another foreign country at
Determination of Estate Liability
the time of his death
 RATE: 6% (Effective Jan 1, 2018) – applies regardless of the
amount of net taxable estate.
 Taxation Law Vol. II
By Atty. Raegan Capuno

INCLUDED IN GROSS ESTATE: (Sec 85, NIRC)
(A) Decedent's Interest
o To the extent of the interest therein of the decedent at the
time of his death;
o It Includes:
i. Any interest including its fruits, having value or
capable of being valued transferred by the decedent
at his death
ii. Rental incomes from bldgs
iii. Dividends from investments
iv. Interest on bank deposits which have accrued at the
time of his death
v. Decedent’s interest in the partnerships contribution
and shares in the partnership profits and surplus
(B) Transfer in Contemplation of Death
o It is a transfer motivated by the thought of an impending
death regardless of WON death is imminent
o This takes place:
i. When the decedent has, at any time, made a transfer
in contemplation of or intended to take effect in
possession or enjoyment at or after death; or
ii. When decedent has, at any time, made a transfer
under which he has retained for his life or for a period
not ascertainable without reference to his death or any
period which does not in fact end before his death:
a. Possession, enjoyment or right to income from
the property; or
b. The right, either alone or in conjunction with any
other person, to designate the person who will
possess or enjoy the property or income
 The power to alter, amend or revoke is considered to exist on
the date of the decedent's death even though:
a. The exercise of the power is subject to a precedent giving
of notice or
b. The alteration, amendment or revocation takes effect only
on the expiration of a stated period after the exercise of
the power, whether or not on or before the date of the
decedent's death
i. notice has been given or
ii. the power has been exercised.
 In such cases, proper adjustment shall be made representing
the interests which would have been excluded from the power
if the decedent had lived, and for such purpose if the notice has
not been given or the power has not been exercised on or
before the date of his death, such notice shall be considered to
have been given, or the power exercised, on the date of death.
NOTE: Transferor can revoke the transfer any time, such person
wields tremendous amount of power such that he can revoke the
transfer as if none was actually made.
Is it necessary that the decedent should have exercised such right?
GR: No. It is sufficient that the decedent has the power to revoke,
though he did not exercise such
XPN: in case of bona fide sale for an adequate and full consideration
in money or money's worth
(D) Property Passing Under General Power of Appointment
POWER OF APPOINTMENT – It is the right to designate the person/s
who shall enjoy or possess certain property from the estate of a
prior transferor

XPN: In case of a bona fide sale for an adequate and full Two Parties Involved:
consideration in money or money’s worth. a. DONOR OF POWER – a person having property subject to
disposition who created, reserved, or granted the power to
NOTE: designate the transferees or recipients of the property.
 The concept of transfer does not constitute any transfers made
by a dying person. b. DONEE OF POWER – a person to whom the power to designate
 It is not the mere transfer that constitutes a transfer in the transferees or recipient of the property is given or
contemplation of death but the retention of some type of conferred. For estate tax purposes: He is the Decedent.
control over the property transferred.
 EFFECT: No full transfer of all interests in the property inter
vivos GPA SPA
DEFINITION It authorizes the done When the done can
(C) Revocable Transfer – involves a transfer of possession over the (Capuno, 2020) the power to appoint appoint only among a
property during the lifetime of the decedent but not transfer of nay person he pleases, restricted or designated
ownership of the said property. including: class of persons other
o Interest in the property of which the decedent has at any a. Himself than himself
time made a transfer by trust or otherwise is included in b. His estate
decedent’s gross estate c. His creditors, or
o Value of GE is determined by: including the value at the d. The creditors of
time of his death of all properties (R/P/T/IT) wherever his estate
situated to the extent of any interest, of which the NATURE Donee has the power Donee appoints
decedent has at any time made a transfer by trust – where to appoint any person successor to the
the enjoyment was subject at the date of his death to any he chooses or enjoy property within a
change through the exercise of a power by the decedent the property without limited group or class of
to alter or amend or revoke or terminate, or where any restriction persons according to
such power is relinquished in contemplation of the the will of the donor
decedent’s death. TAX Not included in the GE
IMPLICATIONS Forms part of the GE of the donee when he
Rationale: such transfer in trust at the time of death of the trustor is dies
to reach transfers which are really substitutes for testamentary EFFECTS Donee holds the Donee holds the
disposition and thus prevent evasion of estate tax appointed property appointed property in
with all the attributes trust or under the
To be exempt: The transfer inter vivos must be absolute and of ownership under concept of a trustee
outright with no strings attached whatsoever by the transferor. the concept of an
owner
 Taxation Law Vol. II
By Atty. Raegan Capuno

To be included in the GE: Example:

GR: Properties passing under a GPA forms part of decedent’s estate Scenario 1 Scenario 2 Scenario 3
through: FMV at the
a. Will time of 1,500,000 1,500,000 1,500,000
b. Deed executed n contemplation of death, or intended to take transfer of
effect in possession or enjoyment at, or after his death property
c. Deed under which he has retained for his life or for nay period Consideration
not ascertainable without reference to his death or for any received at the 1,500,000 500,000 0
period which does not in fact end before his death: time of
i. The possession, enjoyment or right to income from the transfer of
property; or property
ii. The right to designate the person who will possess or enjoy FMV at the
the property or income time of death 3,000,000 3,000,000, 3,000,000
of the transfer
XPN: in case of a bona fide sale for an adequate and full
Value to be
consideration in money or money's worth.
included in the 0 2,500,000 3,000.000
GE
(E) Proceeds of Life Insurance.
Explanation:
Forms part of the GE when the beneficiary is:
Scenario 1: FMV is equal to the consideration received. Therefore,
a. The estate of the decedent, his executor or administrator taken
the transfer is a bona fide sale and not subject to estate tax
out by the decedent upon his own life regardless of whether
the designation is revocable or irrevocable
Scenario 2: FMV is higher than the consideration received. The
b. 3rd person, other than the decedent’s estate, executor, or
transfer is insufficient consideration. Value to be included in the GE
administratior provided that the designation is not irrecovable
is the difference between Consideration received and FMV
NOTE: Presumption is that the beneficiary is revocably designated.
Scenario 3: This is a case of donation mortis causa because the
In the event the insured does not change the beneficiary during his
transfer is without any consideration. The full FMV is included in the
lifetime – Designation is deemed irrevocable
GE
Not part of the GE when:
DETERMINATION OF FAIR MARKET VALUE OF THE GE
a. Proceeds from a life insurance policy is receivable by a 3 rd
1. REAL PROPERTY
person (Not the decedent’s estate, executor or administrator)
a) Determined by the commissioner
and that the said beneficiary is designated is irrevocable
 Commissioner is authorized to divide the PH into
b. Where the life insurance was not taken by the decedent upon
different zones or areas and shall determine the FMV
his own life even though the beneficiary is the decedent’s
of real properties located in each zone or area
estate, executor or administrator
b) Shown in the schedule of the values fixed by the provincial
c. Accident insurance proceeds
and city assessor, whichever is higher
d. Proceed of Group Insurance policy
e. Proceeds of insurance policies issued by the GSIS
2. PERSONAL PROPERTY
f. Benefits accruing from SSS law
a) If recently acquired – purchase price may indicate the
g. Proceeds of life insurance payable to heirs of deceased
FMV
members of military personnel
b) If not recently acquired – there should be some
evidence of FMV (ipa-assess yung item)
(F) Prior Interests
o transfers, trusts, estates, interests, rights, powers and
3. SHARES OF STOCK
relinquishment of powers, as severally enumerated and
a) UNLISTED
described therein, whether made, created, arising,
i. COMMON SHARES – based on their book value
existing, exercised or relinquished before or after the
ii. PREFERRED SHARES – based on their par value
effectivity of this Code.
b) LISTED
Coverage of Prior Interest:
 Arithmetic between the highest and lowest quotation
a. Transfers in contemplation of death
at a date nearest of the date of death
b. Revocable Transfers
 If not available – date of the death itself
c. Life Insurance proceeds
4. UNIT OF PARTICIPATION IN ANY
(G) Transfers for Insufficient Consideration.
ASSOCIATION/RECREATION/AMUSEMENT CLUB
o When a transfer is for insufficient consideration, only the
 FMV: The Bid Price nearest the date of death
excess of the FMV of the property at the time of the published in any newspaper or publication of general
decedent’s death over the consideration received shall be circulation.
included in the GE
5. RIGHT TO USUFRUCT/USE/HABITATION
o Provided that transfer is not a bona fide sale for an  There shall be taken into account the probable life of
adequate and full consideration in money, This is the beneficiary in accordance with the latest basic
applicable to: standard mortality table
a. Transfer in contemplation of death  To be approved by SOF upon recommendation of the
b. Revocable Transfers Insurance Commissioner
c. Transfers under GPA
 Taxation Law Vol. II
By Atty. Raegan Capuno

EXCLUSION TO GROSS ESTATE

1. EXEMPT PROPERTIES (Sec 87, NIRC)
a. Merger of usufruct in the owner of the naked title;
b. Transmission or delivery of the inheritance or legacy by
the fiduciary heir or legatee to the fideicommissary;
c. Transmission form the first heir, legatee, or done in favour
of another beneficiary, in accordance with the desire of
the predecessor; and
d. All bequests, devises, legacies, or transfers to social
welfare, cultural and charitable institutions
 Provided: Not more than 30% shall be used for
administration purposes
Claims against insolvent persons:
Requisites:
a. Full amount of the receivables be included first in the GE
b. The incapacity of the DR to pay their obligation is proven not
merely alleged
Note: Judicial declaration of insolvency is not necessary. It is enough
that the DR’s liabilities exceeded his assets.
Unpaid mortgage or indebted on property

2. EXCLUDED PROPERTIES Requisites:

a. Capital of the surviving spouse of a Decedent (Sec 85(h), a. The value of the property to the extent of the decedent’s
NIRC) interest, undiminished by such mortgage or indebtedness is
b. Share in the conjugal Property (Sec 86(c), NIRC) included in the GE
b. The mortgage indebtedness was contracted in good faith and
3. Sec 104, NIRC
for an adequate and full consideration in money or money’s
o Property outside PH of NRA Decedent
worth
o Intangible personal property in the PH of NRA Decedent
provided there is reciprocity.
Note: If the loan is found to be merely an accommodation loan
where the loan proceeds went to another person – the value of the
DEDUCTIONS FROM GE:
unpaid loan, to the extent of the decedent’s interest must be
included as a receivable of the estate
GENERAL PRINCIPLES OF ESTATE DEDUCTIONS:
1. SUBSTANTIATION RULE – All items of deductions must be
If there isa legal impediment to recognize the same as receivable of
supported with documentary evidence (Receipts, invoices,
the estate – said unpaid obligation/mortgage payable shall not be
contracts, financial statements, and other proofs that they
allowed as a deduction from the GE
actually existed or occurred to establish their validity.
 Exception to this rule is Standard Deduction.
TAXES
2. MATCHING PRINCIPLE – An item of deduction must be part of
Requisites:
the gross estate to be deductible. No deduction is allowed for
a. Taxes which have accrued as of or before the death of the
those which are not part of the gross estate.
decedent
b. Unpaid as of the time of his death
3. NO DOUBLE CLASSIFICATION RULE – An item of deduction
cannot be claimed under several deduction classification. Only
TAXES NOT DEDUCTIBLE
one classification is allowable.
 Income tax on income received after death
 Property tax not accrued before death
4. DEFAULT PRESUMPTION ON ORDINARY DEDUCTION – In case
 Estate tax due from the transmission of his estate
of married decedents, ordinary deductions are presumed to be
against the common properties unless proven to be exclusive
property of either spouse.
 Rule: Properties are common properties unless proven LOSSES:
exclusive.
Requisites for deductibility:
DEDUCTIONS ALLOWED TO DEDUCTIONS ALLOWED TO 1. (RC/NRC/RA)
CITIZEN OR RESIDENT NON-RESIDENT ESTATE a. Were incurred during the settlement of estate
b. Arise from fire, storm, shipwreck or other casualties or
from robbery, theft or embezzlement
Standard Deduction Standard Deduction
c. Not compensable (no insurance)
 5M (Train Law)  500K (Train Law)
d. Not claimed as a deduction from income tax
 1M (Old Law)  No Deduction (Old Law)
e. Incurred not later than the last day or any extension for
payment of the estate tax
CLAIMS AGAINST ESTATE:
2. NRA
o Same items will be allowed as a deduction but only the
 Who can avail this deduction: RC/NRC/RA provided that:
proportion of such deduction which the value of his GE in
a. At the time of indebtedness was incurred the debt
the PH bears to the value of his entire GE, wherever
instrument was duly notarized, and
situated shall be deducted.
b. If the loan was contracted within 3 years before the death
of the decedent – the administrator or executor shall
Note:
submit a statement showing the disposition of the
Judicial Expenses:
proceeds of the loan.
o incurred not later that the last day prescribed by law or
any extension for the filing of the return.
Requisites:
o 6mos extendible to 30 days
a. Liability represents a personal obligation of the deceased
existing at the time of his death
Losses:
b. Liability was contracted in good faith and for adequate and full
o incurred up to the last day prescribed by law or any
consideration in money or money’s worth
c. Claim must be a debt or claim which is valid in law and extension for the payment of estate tax
enforceable in court o 6mos extendible to:
d. Indebtedness must not have been condoned by the creditor or - 2years – Extrajudicial Settlement
the action to collect from the decedent must not have - 5years – Judicial Settlement
prescribed.
Casualty losses can be allowed as deduction, either for income tax
 Taxation Law Vol. II
By Atty. Raegan Capuno
purposes or estate tax purposes.

Vanishing Deductions: NET SHARE OF THE SURVIVING

 Deduction allowed on the property left behind by the decedent SPOUSE (Sec 86 (C)
which was previously subject to donor’s or estate taxes  The net share of the surviving
spouse in the conjugal
Requisites: partnership property as
a. Present decedent died within 5 years from receipt of property diminished by the obligations
from a prior decedent or donor properly chargeable to such
b. Property formed part of the GE situated in PH of the prior property shall be deducted
decedent or was a taxable gift of the donor from the net estate of the
c. Estate tax on the prior succession or donor tax must have been decedent.
paid
d. Property must be identified as the one received or acquired
e. No vanishing deduction was allowed on the same property on FAMILY HOME Note: NRA not allowed to
the prior decedent’s estate  An amount equivalent to the avail family home deduction
current FMV of the decedent's because under the Consti,
Rate of Deduction: family home: 10M they are expressly prohibited
1day – 1 year = 100%  if current FMV 10M – excess from acquiring lands.
1yr and 1 day – 2 yrs = 80% shall be subject to estate tax
2yrs and 1 day – 3 yrs = 60%
3yrs and 1 day – 4 yrs = 40% Requisites for deductibility:
4yrs and 1 day – 5yrs = 20% a. The family home must be the
More than 5yrs = 0% actual residential home of the
decedent and his family at the
Transfer for Public Use time of his death, certified by
 The amount of all the bequests, legacies, devises or transfers to the Brgy Captain of the locality
or for the use of the Government of the Republic of the b. Total value of the family home
Philippines, or any political subdivision thereof, for exclusively must be included as part of the
public purposes. GE
c. Allowable deductions must be
Requisites: in the amount equivalent to:
a. Disposition is in a last will and testament i. Current FMV of the family
b. Take effect after death home declared or
c. In favour of the Govt of the PH or any political subdivision included in GE
d. For exclusive public purposes ii. Extent of the decedent’s
e. Value of the property given is included in the GE interest (whether
conjugal/community/excl
Note: In case of NRA – property transferred must be located within usive) whichever is lower
the PH and included in the GE d. Deduction does not exceed
10M

SEC 86(A)(3) SEC 87 (D)

Transfers by a citizen or resident
of the PH in favour of the Gov’t
of the PH
Transfers to social welfare, Amount Received by Heirs Under
cultural and charitable RA 4917
institution – exempted from tax
Requisites for deductibility:
a. Amounts received by heirs
from decedent’s employer
b. Received as a consequence of
death of the decedent-
employee; and
c. Amount is included in the GE
of the decedent
 Taxation Law Vol. II
By Atty. Raegan Capuno

DONOR’s TAX (DT) – tax imposed on the privilege of transferring DETERMINATION OF GIFTS
property by way of a gift intervivos
GROSS GIFT NET GIFT
Kinds of Donation: All property (R/P/T/IT) that was The net economic benefit from
given by the donor to the done the transfer that accrues to the
DONATION INTER VIVOS DONATION MORTIS CAUSA by way of gift, without the donee
 Subj to DT  Subj to ET benefit of any deduction (Sec
 A donation made between  Donation which takes effect 104, NIRC)
living persons upon the death of the
 Perfection: at the moment donor Note: If mortgaged property is transferred as a gift, but imposing
when the donor knows the upon the done the obligation to pay the mortgage liability – the net
acceptance of the done gift is measured by deducting from the FMV of the property the
amount of mortgage assumed.
 RATE: Each calendar year is 6% in excess of 250K
 Contribution for campaign election: Governed by Election Code COMPOSITION OF GROSS GIFT:

Requisites of a Valid Donation: DONOR GROSS GIFT (GG)

a. Capacity of donor to donate RC.NC and RC All real properties, tangible and
b. Donative Intent intangible personal prop,
c. Actual or constructive delivery of gift wherever located
d. Acceptance by the done NRA All real properties, tangible and
e. Form prescribed by law intangible personal prop,
i. Real Property – Donation must be In a public instrument located in PH
ii. Personal Property – may be made:
1) Orally Unless the reciprocity applies
2) If value exceed 5K – donation must be made and
accepted in writing (Art 748, NCC) VALUATION OF GIFTS MADE IN PROPERTY:

Note: DT shall not apply unless and until there is a completed gift. 1) PERSONAL PROPERTY
The transfer is perfected from the moment the donor knows of the o VALUE OF GG: FMV of the prop at the time of the gift
accepted by the done. it is completed by the delivery, either actual
or constructive. 2) REAL PROPERTY
o VALUE OF GG: FMV as determined by the CIR (Zonal Value)
Transfers which may be constituted as donation: at the time of donation or the value fixed by the assessor
a) Sale/exchange/transfer of property for insufficient (assessed value), whichever is higher (Sec 102, NIRC)
consideration
o If no zonal value – the taxable base is the FMV that
b) Condonation/remission of debt appears in the latest Tax Dec.

Rule: If the CR condones the indebtedness of the DR the
following rules apply:
i. On account of DR’s services to the CR the same is in
taxable income to the DR
ii. If no services were rendered but the CR simply condones
the debt – it is taxable gift not taxable income
o If there is an improvement – the value of improvement:
construction cost per bldg permit and or occupancy permit
plus 10% per year after year of construction. Or the market
value per latest tax dec.
EXEMPTION OF CERTAIN GIFTS (Sec 101, NIRC)

c) Transfer for less than adequate and ful consideration
Rule; (Sec 100, NIRC)
GR: Where property is transferred for less than an adequate
and full consideration in money or money's worth, then
the amount by which the FMV of the property exceeded
the value of the consideration shall be deemed a gift, and
be included in computing the amount of gifts made during
the calendar year.
XPN:
a) Sale, exchange, or other transfer of property made in the
ordinary course of business which is:
i. Bona fide,
ii. At arm’s length; and
iii. Free from any donative intent)
o will be considered as made for an adequate and full
consideration in money or money’s worth.
b) Property transferred is RP located in PH as CAPITAL ASSET –
transfer is not subject to DT but to CGT.
o Which is a final income tax of 7% of the FMV or gross
selling price, whichever is higher
o Therefore, no instance where the seller can avoid any
tax by selling his capital assets below its FMV
GIFTS MADE BY A RESIDENT GIFTS MADE BY A NON-
RESIDENT
1) 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.
2) Gifts in favor of an educational and/or charitable, religious,
cultural or social welfare corporation, institution, foundation,
trust or philanthropic organization or research institution or
organization:
Provided: not more than (30%) of said gifts shall be used by
such donee for administration purposes.
non-profit educational and/or charitable corporation, institution,
accredited nongovernment organization, trust or philanthropic
organization and/or research institution or organization'
is a school, college or university and/or charitable corporation,
accredited nongovernment organization, trust or philanthropic
organization and/or research institution or organization,
incorporated as a non-stock entity, paying no dividends, governed by
trustees who receive no compensation, and devoting all its income,
whether students' fees or gifts, donation, subsidies or other forms of
philanthropy, to the accomplishment and promotion of the purposes
enumerated in its Articles of Incorporation.

CHAPTER 3: VAT
Concept and Framework of VAT:
 VAT is a consumption tax
CONSUMPTION – use of a thing in a way that thereby exhausts it.
 As applied to services: Performance or successful completion
of a contractual duty, usually resulting in the performer’s
release from any past or future liability.
 As applied for tax purposes: Consumption arises when the
goods/properties are sold, exchanged or leased. When
goods/properties purchased are subsequently re-sold, there is
consumption. Consumption goes on until the goods/properties
reach the ultimate or final consumer. (Manufacturer –
Wholesaler – Retailer – Buyer)
DETERMINATION WHERE THE GOODS OR SERVICES ARE
CONSUMED:
 Consumption may either be:
a) DOMESTIC CONSUMPTION – Consumption or utilization of
goods or services WITHIN THE PH
b) FOREIGN CONSUMPTION – Consumption or utilization of
goods or services OUTSIDE THE PH
PRINCIPLE OF TERRITORIALITY – VAT may only be imposed on
DOMESTIC CONSUMPTION, or on goods or services destined to be
consumed in the Philippines
CROSS-BORDER DOCTRINE/DESTINATION PRINCIPLE – No VAT shall
be imposed to form part of the cost of goods destined for
consumption outside of the territorial border of the taxing authority.
GR: VAT system uses the destination principle as a basis for the
jurisdictional reach of the tax. Goods and services are
taxed only in the country where they are consumed.
Exports – are zero rated
 Exportation is either:
a) ZERO-RATED – made by a VAT Registered Person (Sec
106(A)(2)(a), NIRC)
b) VAT-EXEMPT – made by a NON-VAT Registered Person
(Sec 109(I)(O)), NIRC)
Imports – are taxed.
PERSON PAYING THE CONSUMPTION TAX:
 He who consumes must pay the tax. The buyer/purchaser/the
person who avails the service is the one who pays the
consumption tax.
 There is a difference between the person statutorily liable to
pay the tax and the person actually paying the tax. This is the
case of VAT because it is an Indirect Tax.
VAT – is an indirect tax and the amount of tax may be shifted or
passed on to the buyer/transferee/lessee of the
goods/properties/services (Sec 105, NIRC)
DIRECT TAXES – those that are exacted from the very person, to
whom it is intended or desired, and should pay them; they are
impositions for which a taxpayer is directly liable on the transaction
or business he is engaged in.
INDIRECT TAXES – 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.
 Taxes wherein the liability for the payment of the tax falls
on one person but the burden can be shifted or passed on
to another person.
Taxation Law Vol. II
By Atty. Raegan Capuno
Concept of Indirect Tax:
a) IMPACT OF TAXATION – the point on which a tax is originally
imposed.
 The taxpayer is the person who must pay the tax to the
government. He is referred to as the Statutory
Taxpayer/the one on whom the tax is formally assessed.
b) INCIDENCE OF TAXATION – the point on which the tax burden
finally rests or settles down. It takes place when shifting has
been effected from the statutory taxpayer to another.
PERSONS LIABILE
 VAT is impose on any person who, in the course of trade or
business: (Sec 105, NIRC)
a. Sells, barters, exchanges, leases goods or properties
b. Sells services; or
c. Imports goods, WON in the court of trade or business
Note: (INGLES)
 There must be a sale, barter, exchange, lease of goods or
properties, or rendering of service in the PH. If None – Not
subject to VAT
 Involuntary Sale of vessels by a taxpayer not engaged in the
sale of vessels pursuant to the government’s policy of
privatization is not subj to VAT because the sale was not in the
course of trade or business.
ELEMENTS (Transactions which is subj to VAT):
a. It must be done in the ordinary course of trade or business
b. There must be a sale, barter, exchange, lease of goods or
properties, or rendering service in the PH; and
c. It is not VAT-exempt or VAT Zero-rated
- Absence of one will not make the transaction subj to
VAT
 This rule shall likewise apply to existing contracts of sale or
lease of goods, properties or services at the time of the
effectivity of RA 7716.
NOTE: (CAPUNO, 2020)
IN THE COURSE OF TRADE OR BUSINESS – the regular conduct or
pursuit of a commercial or an economic activity, including
transactions incidental thereto, by any person regardless of WON
the person engaged therein is a non-stock, non-profit organization
(irrespective of the disposition of its net income and WON it sells
exclusively to members or their gusts, or government entity (Sec
105, NIRC)
GR: RULE OF REGULARITY – an act characterized by habituality and
repetitiveness.
 Course of business or doing business connotes regularity
of activity.
XPN:
1. IMPORTATION
 Importation of taxable goods WON made in the course of
trade or business shall be liable to VAT (Sec 105, NIRC)
2. TRANSACTIONS INCIDENTAL TO THE COURSE OF TRADE OR
BUSINESS
 In the course of trade or business includes transactions
incidental thereto or transactions accompanying or arising
from the regular course of trade or business.
Example:
a) Bakeshop – through the years accumulated empty sacks of
flours and the sold them is subject to VAT even though selling
of empty sacks of flours is not its trade or business.
 The sale of empty sacks of flours is a transaction incidental
to trade or business of a bakeshop. Similarly, a restaurant
selling empty bottles of oil is subject to VAT because the

sale of bottles of oil is incidental to the restaurant
business.
b) Sale of Nissan Patrol – Mindanao II’s business is to convert the
steam supplied to it by PNOC-EDC into electricity and to deliver
the electricity to NPC. Mindanao II bouth and eventually sold a
Nissan Patrol, Prior to the sale, the Nissan Patrol was part fo
Mindanao II’s property, plant and equipment, Therefore the
sale of the Nissan Patrol is an incidental transaction made in the
course of Mindanao II’s business which should be liable for VAT.
(Mindanao II Geothermal Partnership v CIR)
3. SERVICES PERFORMED IN THE PH by Non-Resident Person
 Non-resident persons who perform servies in the PH are
deemed to be making sales in the course of trade or
business, even if the performance of service is not regular
(Sec 195, NIRC; Sec 4,105-3 RR No 1-2005)
4. TRANSACTIONS DEEMED SALE (Sec 106(B), NIRC)
 Transactions deemed sale are:
a) Transfer, use or consumption not in the course of
business of goods or properties originally intended for
sale or for use in the course of business.
o Persons involved is a VAT Registered person
o Subj matter: Goods or properties originally
intended for sale or use in business.
o Transfer of goods or properties are not in the
course of business can take palce when a VAT
registered person withdraws good from his
business for personal use
b) Distribution or transfer to:
i. Shareholders or investors as share in the profits
of the VAT-Registered persons; or
o Property dividends which constitutes stocks in
trade or properties primarily held for ale or lease
declared out of retained earnings and distributed
by the company to its shareholders shall be subj
to VAT based on the zonal value or GMV at the
time of distribution, which is applicable
ii. Creditors in payment of debt;
o Dacion en pago is an act whereby property is
alienated to the creditor in satisfaction of a debt
in money.
o In dacion en page, The property used in payment
of debt must be
(a) Ordinary asset – subj to VAT
(b) Capital asset – not subj to VAT
c) Consignment of goofs if actual sale is not made
within 60 days following the date such goods were
consigned
o Subj Matter: Consigned Goods
o There are 2 important dates taken into
consideration before consigned goods may be
subj to VAT:
(a) If no sale is made within 60 days from the
date of consignment – The consigned goods
are deemed sold and subject to VAT
d) Retirement from or cessation of business, with
respect to inventories of taxable goods existing as of
such retirement or cessation
o The ff circumstance shall give rise to transactions
deemed sale for this purpose:
(a) Change of ownership of the business –
when a single proprietorship (SP)
incorporates or (SP) sells his entire business
(b) Dissolution of a partnership and creation of
a new partnership which takes over the
business
Taxation Law Vol. II
By Atty. Raegan Capuno
NORMAL VAT TRANSACTION or those subject to 12% are:
a. Sale of Goods and Properties
b. Sale of Services; and
c. Importation
Sec 106 VAT on Sale of Goods or Properties
(A) Rate and Base of Tax
TAX RATE: 12% of the gross selling price or gross value in money of
the goods or properties sold, bartered or exchanged
 Such tax to be paid by the seller or transferor.
TAX BASE: Gross Selling Price
(1) GOODS or PROPERTIES – means all tangible and intangible
objects which are capable of pecuniary estimation and shall include:
(a) Real properties held primarily for sale to customers or held for
lease in the ordinary course of trade or business;
(b) The right or the privilege to use patent, copyright, design or
model, plan, secret formula or process, goodwill, trademark,
trade brand or other like property or right;
(c) The right or the privilege to use in the Philippines of any
industrial, commercial or scientific equipment;
(d) The right or the privilege to use motion picture films, tapes and
discs; and
(e) Radio, television, satellite transmission and cable television
time.
Note: This is not an exclusive list.
GROSS SELLING PRICE – means the total amount of money or its
equivalent which the purchaser pays or is obligated to pay to the
seller in consideration of the sale, barter or exchange of the goods or
properties, excluding the VAT.
 The excise tax, if any, on such goods or properties shall
form part of the gross selling price.
(2) The ff sales by VAT-registered persons shall be subj to (0%) rate:
Note: For goods, a rate of 0% of the gross selling price will be
applied if:
a. Export Sale
b. Sales to persons or entities whose exemption under
special laws, or international agreements to which the PH
is a signatory (effectively-zero rated sales)
(a) EXPORT SALES:
(1) The sale and actual shipment of goods from the Philippines
to a foreign country, irrespective of any shipping
arrangement that may be agreed upon which may
influence or determine the transfer of ownership of the
goods so exported; and
Paid for in acceptable foreign currency or its equivalent in
goods or services, and accounted for in accordance with
the rules and regulations of the Bangko Sentral ng Pilipinas
(BSP);
(2) Sale and delivery of goods to:
a. Registered enterprises within a separate customs
territory as provided under special laws; and
b. Registered enterprises within tourism enterprise zones
as declared by the Tourism Infrastructure and
Enterprise Zone Authority (TIEZA) subject to the
provisions under RA 9593: The Tourism Act of 2009.
(6) The sale of goods, supplies, equipment and fuel to persons
engaged in international shipping or international air
transport operations: Provided, That the goods, supplies,
equipment and fuel shall be used for international shipping
or air transport operations.

Note:
(3) Sale of raw materials or packaging materials to a
nonresident buyer for delivery to a resident local export-
oriented enterprise to be used in manufacturing,
processing, packing or repacking in the Philippines of the
said buyer’s goods and paid for in acceptable foreign
currency and accounted for in accordance with the rules
and regulations of the (BSP);
(4) Sale of raw materials or packaging materials to export-
oriented enterprise whose export sales exceed (70%) of
total annual production;
(5) Those considered export sales under EO 226: Omnibus
Investment Code of 1987, and other special laws; and
 Par. (3), (4), and (5) Subject to the (12%) VAT and no longer be
considered export sales subject to (0%) VAT rate upon
satisfaction of the following conditions:
1. Successful establishment and implementation of an
enhanced VAT refund system that grants refunds of
creditable input tax within (90) days from the filing of the
VAT refund application with the Bureau:
- To determine the effectivity of item no. 1, all
applications filed from January 1, 2018 shall be
processed and must be decided within (90) days from
the filing of the VAT refund application; and
2. All pending VAT refund claims as of December 31, 2017
shall be fully paid in cash by December 31, 2019.
 Department of Finance shall establish a VAT refund center in
the (BIR) and (BOC) that will handle the processing and granting
of cash refunds of creditable input tax.
 An amount equivalent to (5%) of the total VAT collection of the
BIR and the BOC from the immediately preceding year shall be:
a. Automatically appropriated annually; and
b. Treated as a special account in the General Fund or as
trust receipts for the purpose of funding claims for VAT
refund:
- Any unused fund, at the end of the year shall revert
to the General Fund.
 BIR and the BOC shall be required to submit to the
Congressional Oversight Committee on the Comprehensive
Tax Reform Program (COCCTRP) a quarterly report of all
pending claims for refund and any unused fund.
(b) Sales to persons or entities whose exemption under
special laws or international agreements to which the
Philippines is a signatory effectively subjects such sales to
zero rate.
(B) Transactions Deemed Sale – SUBJ TO VAT
(1) Transfer, use or consumption not in the course of business of
goods or properties originally intended for sale or for use in
the course of business;
(2) Distribution or transfer to:
(a) Shareholders or investors as share in the profits of the
VAT-registered persons; or
(b) Creditors in payment of debt;
(3) Consignment of goods if actual sale is not made within (60)
days following the date such goods were consigned; and
(4) Retirement from or cessation of business, with respect to
inventories of taxable goods existing as of such retirement or
cessation.
Taxation Law Vol. II
By Atty. Raegan Capuno
(C) Changes in or Cessation of Status of a VAT-registered Person.
TAX RATE: 12% of the gross selling price or gross value in money of
the goods or properties sold, bartered or exchanged shall apply to:
 Goods disposed of or existing as of a certain date if under
circumstances to be prescribed in rules and regulations to be
promulgated by the Secretary of Finance, upon
recommendation of the Commissioner, the status of a person
as a VAT-registered person changes or is terminated.
(D) Determination of the Tax
(1) The tax shall be computed by multiplying the total amount
indicated in the invoice by (1/11).
(2) Sales Returns, Allowances and Sales Discounts.
 The value of goods or properties sold and subsequently
returned or for which allowances were granted by a VAT-
registered person may be deducted from the gross sales or
receipts for the quarter in which a refund is made or a
credit memorandum or refund is issued.
 Sales discount granted and indicated in the invoice at the
time of sale and the grant of which does not depend upon
the happening of a future event may be excluded from the
gross sales within the same quarter it was given.
(3) Authority of the Commissioner to Determine the
Appropriate Tax Base
 The Commissioner shall determine the appropriate tax
base in cases, by rules and regulations prescribed by the
Secretary of Finance,
(a) Where a transaction is deemed a sale, barter or
exchange of goods or properties under Subsection
(B), or
(b) Where the gross selling price is unreasonably lower
than the actual market value.
Sec. 107 Value-added Tax on Importation of Goods.
(A) In General.
TAX RATE: 12% VAT on Every importation of goods, whether for use
in business or not
TAX BASE:
a. Total value used by the BOC in determining tariff and customs
duties, plus:
I. Customs duties,
II. Excise taxes (if any); and
III. Other charges, such tax to be paid by the importer prior to
the release of such goods from customs custody:
b. Based on Landed Cost – where the customs duties are
determined on the basis of the quantity or volume of the
goods.
LANDED COST meant:
a. Invoice Cost
b. Freight Insurance
c. Custom Duties
d. Excise Tax (If any); and
e. Other charges prior to the removal of the goods from customs
custody.
(B) Transfer of Goods by Tax-exempt Persons.
 When a (Person/Entities/Agencies) who was exempt from VAT
on his importation – subsequently sells, transfers, exchanges in
the Ph such imported articles to a non-exempt person.
 The purchaser, transferee or assignee will be required to
pay the VAT.
 Taxation Law Vol. II
By Atty. Raegan Capuno
 The tax due on such importation shall constitute a lien on the
goods superior to all charges or liens on the goods, irrespective
of the possessor.

Note:
 VAT of an importation should be paid prior to the release of the
goods from customs custody – If it is subject to both excise tax
and VAT, Taxpayer has to pay both prior to the release.
 Seller of goods/services who imports stuff can claim the VAT
paid on importations, during a taxable period as input taxes
creditable against the output taxes on the sales of the same
period.
 Same rule applies to technical importation of goods
a. Sold by a person (located in a special economic zone) to a
customer (located in a customs territory)
Sec 108 VAT on Sale of Services and Use or Lease of Properties
(A) Rate and Base of Tax: (12%) of gross receipts derived from the
sale or exchange of services, including the use or lease of properties.
SALE OR EXCHANGE OF SERVICES:
 The services:
a. Should be rendered in the PH
b. Can be any and all kinds of services rendered to others
(Provided there is no EE-REL)
c. There is a fee, remuneration or consideration

Example:  It includes those performed or rendered by:

FACTS: A sold B a shirt. 1) Construction and service contractors;
A: B shoulders 12% VAT. B can recover the amount he paid to 2) Stock, real estate, commercial, customs and immigration
A by selling the shirt to C, where C will shoulder the 12% brokers;
VAT 3) Lessors of property, whether personal or real;
4) Warehousing services;
ZERO RATED TRANSACTIONS EXEMPT TRANSACTIONS 5) Lessors or distributors of cinematographic films;
6) Persons engaged in milling, processing, manufacturing or
(EXEMPT WITH CREDIT) (EXEMPT WITHOUT CREDIT) repacking goods for others;
7) Proprietors, operators or keepers of hotels, motels,
 There is a TOTAL RELIEF for  There is a PARTIAL RELIEF resthouses, pension houses, inns, resorts;
the purchaser (C) from the because Seller (B) is not 8) Proprietors or operators of restaurants, refreshment
burden of tax since he does allowed any Tax Refund or parlors, cafes and other eating places, including clubs and
not have to pay any VAT on Credit for input taxes paid caterers;
the transaction on his purchases from his 9) Dealers in securities;
supplier A 10) Lending investors;
11) Transportation contractors on their transport of goods or
 Seller (B), the input tax on
cargoes, including persons who transport goods or cargoes
his purchases from his
for hire and other domestic common carriers by land
supplier (A)
relative to their transport of goods or cargoes;
12) Common carriers by air and sea relative to their transport
 Available as a Tax of passengers, goods or cargoes from one place in the
Credit/Refund Philippines to another place in the Philippines;
13) Sales of electricity by generation companies, transmission
by any entity, and distribution companies, including
 Purpose: To exempt the electric cooperatives;
transactions completely 14) Services of franchise grantees of electric utilities,
from VAT previously telephone and telegraph, radio and television broadcasting
collected since input taxes and all other franchise grantees except those under Sec
passed to him may be 119, NIRC;
recovered as refund or 15) Non-life insurance companies (except their crop
credit insurances), including surety, fidelity, indemnity and
bonding companies; and
1) NORMAL VAT TRANSACTIONS 16) Similar services regardless of whether or not the
 VAT paid to the supplier can be recovered by selling the performance thereof calls for the exercise or use of the
product to a purchaser. physical or mental faculties.:
17) The lease or the use of or the right or privilege to use any
Example: B paid A P112 (P100 Price and P12 as VAT) then B sold C copyright, patent, design or model, plan, secret formula or
the shirt for P150. process, goodwill, trademark, trade brand or other like
 B can recover P12 VAT by selling the product to a property or right;
purchaser. Here, B sold the shirt C for P150. In his sale, he 18) The lease or the use of, or the right to use of any
received P18 which covered P12 he paid to A. industrial, commercial or scientific equipment;
19) The supply of scientific, technical industrial or commercial
2) VAT-ZERO RATED knowledge or information;
 Can apply for a refund/tax credit of P12 with the BIR. 20) The supply of any assistance that is ancillary and subsidiary
to and is furnished as a means of enabling the application
Example: B paid A P112 (P100 Price and P12 as VAT) then B sold C or enjoyment of any such property, or right as is
the shirt for P150 Price and P0 as VAT. mentioned in subparagraph (2) or any such knowledge or
 B can recover P12 VAT by applying for a refund/tax credit information as is mentioned in subparagraph (3);
with the BIR 21) The supply of services by a nonresident person or his
employee in connection with the use of property or rights
3) VAT-EXEMPT belonging to, or the installation or operation of any brand,
 Cannot apply for a refund/tax credit of P12 with the BIR. machinery or other apparatus purchased from such
nonresident person;
Example: B paid A P112 (P100 Price and P12 as VAT) then B sold C 22) The supply of technical advice, assistance or services
the shirt for P150 Price and P0 as VAT. rendered in connection with technical management or
 Unrecovered VAT in exempt transactions is considered administration of any scientific industrial or commercial
cost. undertaking, venture, projector scheme;

23) The lease of motion picture films, -films, tapes and discs;
and
24) The lease or the use of or the right to use radio, television,
satellite transmission and cable television time.
LEASE OF PROPERTIES – subject to the tax, irrespective of the place
where the contract of lease or licensing agreement was executed, if
the property is leased or used in the Philippines.
GROSS RECEIPT – means cash or its equivalent actually received or
constructively received (not including the VAT) as:
a. Payments on the Contract price, compensation, service fee,
rental or royalty,
b. Payments or materials supplied with the services and
c. Deposits and advanced payments on the contract for the
services
Note:
CONSTRUCTIVE RECEIPT – occurs when the money consideration or
its equivalent is placed in the control of the person who rendered
the service without restriction by the payor.
 Ex: Bank Deposit; Issuance by the DR of a notice to offset
any debt or obligation and acceptance by the seller as
payment for the services rendered
 Gross receipts do not include amounts earmarked for payment
to unrelated 3rd parties or received as reimbursement for
advance payment on behalf of another which do not redound
to the benefit of the payor
 It is considered payment to a 3rd party if the same is made
to settle an obligation of another person (like customer or
client) to the said 3rd party.
 It is an advance payment on behalf of another if the
payment is to a 3rd party for a present or future obligation
 UNRELATED PARTY shall not include the;
a. Taxpayer’s employees
b. Partners
c. Affiliates
d. Relatives by consanguinity or affinity within the 4th
Degree; and
e. Trust funds where the taxpayer is the trustor, trustee,
or beneficiary, even if covered by an agreement to the
contrary
(B) Transactions Subject to (0%) Rate
 The following services performed in the Philippines by VAT
registered persons shall be subject to zero percent (0%) rate:
1. Processing, manufacturing or repacking goods:
a) For other persons doing business outside the Philippines
b) Goods are subsequently exported; and
c) The services are paid for in acceptable foreign currency
and accounted for in accordance with the rules and
regulations of the (BSP);
Note:
 subject to the (12%) VAT and no longer be subject to zero
percent (0%) VAT rate upon satisfaction of the following
conditions:
a. The successful establishment and implementation of an
enhanced VAT refund system that grants refunds of
creditable input tax within (90) days from the filing of the
VAT refund application with the Bureau:
 To determine the effectivity of item no. 1, all applications
filed from January 1, 2018 shall be processed and must be
decided within (90) days from the filing of the VAT refund
application; and
b. All pending VAT refund claims as of December 31, 2017 shall
be fully paid in cash by December 31, 2019.
Taxation Law Vol. II
By Atty. Raegan Capuno
2. Services other than those mentioned in the preceding
paragraph, rendered to a:
a) Person engaged in business conducted outside the
Philippines or
b) Nonresident person not engaged in business who is
outside the Philippines when the services are performed
c) The consideration for which is paid for in acceptable
foreign currency and accounted for in accordance with the
rules and regulations of the (BSP);
3. Services rendered to persons or entities whose exemption
under special laws or international agreements to which the
Philippines is a signatory effectively subjects the supply of such
services to (0%) rate;
4. Services rendered to persons engaged in international shipping
or international air transport operations, including leases of
property for use thereof:
 These services shall be exclusive for international shipping
or air transport operations;
DESTINATION PRINCIPLE – exports are zero-rated whereas imports
are taxed.
5. 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;
Note:
 subject to the (12%) VAT and no longer be subject to zero
percent (0%) VAT rate upon satisfaction of the following
conditions:
c. The successful establishment and implementation of an
enhanced VAT refund system that grants refunds of
creditable input tax within (90) days from the filing of the
VAT refund application with the Bureau:
 To determine the effectivity of item no. 1, all applications
filed from January 1, 2018 shall be processed and must be
decided within (90) days from the filing of the VAT refund
application; and
d. All pending VAT refund claims as of December 31, 2017 shall
be fully paid in cash by December 31, 2019.
6. Transport of passengers and cargo by domestic air or sea
vessels from the Philippines to a foreign country; and
7. Sale of power or fuel generated through renewable sources of
energy such as, but not limited to, biomass, solar, wind,
hydropower, geothermal, ocean energy, and other emerging
energy sources using technologies such as fuel cells and
hydrogen fuels.
8. Services rendered to:
I. Registered enterprises within a separate customs territory
as provided under special law; and
II. Registered enterprises within tourism enterprise zones as
declared by the TIEZA subject to the provisions under RA.
9593:The Tourism Act of 2009.
 Department of Finance shall establish a VAT refund center in
the (BIR) and (BOC) that will handle the processing and granting
of cash refunds of creditable input tax.
 An amount equivalent to (5%) of the total VAT collection of the
BIR and the BOC from the immediately preceding year shall be:
a. Automatically appropriated annually; and
b. Treated as a special account in the General Fund or as
trust receipts for the purpose of funding claims for VAT
Refund
 Taxation Law Vol. II
By Atty. Raegan Capuno
- Any unused fund, at the end of the year shall revert
to the General Fund.

 BIR and the BOC shall be required to submit to the COCCTRP a
quarterly report of all pending claims for refund and any
unused fund.
Note:
ZERO RATED TRANSACTIONS EFFECTIVELY ZERO-RATED
TRANSACTIONS
DEF: Export sale of goods and DEF: Sale of goods or supply of
supply of services services to persons or entities
whose exemption under special
laws or international agreements
to which the PH is a signatory
effectively subjects such
transactions to a zero rate.
RAW CANE SUGAR – natural sugar extracted from sugarcane
through simple mechanical process.
 It only refer to raw cane sugar produced from conducting
only 1 stage of filtering and centrifuging without any other
further process applied thereto
(B) Sale or importation of fertilizers; seeds, seedlings and
fingerlings; fish, prawn, livestock and poultry feeds, including
ingredients, whether locally produced or imported used in the
manufacture of finished feeds (except specialty feeds for race
horses, fighting cocks, aquarium fish, zoo animals and other
animals generally considered as pets)
Note:
SPECIALTY FEEDS – non-agricultural feeds or foods for race
horses, fighting cocks, aquarium fish, zoo animals and other
animals generally considered as pets

(C) Importation of personal and household effects belonging to

Such Rate does not yield any tax the residents of the PH returning from abroad and non-
chargeable against the resident citizens coming to resettle in the PH
purchaser.  Such goods are exempt from customs duties under the
Tariff and Customs Code
The seller of such transactions
charges no output tax, but can
(D) Importation of professional instruments and implements,
claim a refund or a tax credit tools of trade, occupation or employment, wearing apparel,
certificate for the VAT previously domestic animals, and personal and household effects (Except
charged by suppliers vehicles, aircrafts, machineries and other similar goods for use
For the benefit of the purchaser in manufacture – subject to duties, taxes and other charges)
 Belonging to:
For the Benefit of the Seller a. Persons coming to settle in the Philippines or
b. (Overseas Filipinos) Filipinos or their families and
In both, the seller who charges zero output tax can claim a refund or descendants who are now residents or citizens of
a tax credit certificate for the VAT previously charged by suppliers. other countries
 in quantities and of the class suitable to the profession,
rank or position of the persons importing said items, for
their own use and not for barter or sale, accompanying
Sec 109 Exempt Transactions. such persons, or arriving within a reasonable time:
- BOC may, upon the production of satisfactory
VAT-EXEMPT TRANSACTIONS – the sale of goods or properties evidence that such persons are actually coming to
and/or services and the use or lease of properties that is not subject settle in the Philippines and that the goods are
to VAT (output tax) and the seller is not allowed any tax credit of brought from their former place of abode, exempt
VAT (input tax) on purchases. such goods from payment of duties and taxes:

(1) Subject to the provisions of Subsection (2) hereof (E) Services subject to percentage tax under Title V;

 the following transactions shall be exempt from the VAT:
(A) Sale of agricultural products; marine food products in their
original state, livestock and poultry of a kind generally used as,
or yielding or producing foods from human consumption; and
breeding stock and genetic materials therefor.
Products classified under this par shall be considered in their
original state even if they have undergone the simple
processes of preparation or preservation for the market such
as freezing, drying, salting, broiling, roasting, smoking or
stripping. Polished and/or husked rice, corn grits, raw cane
sugar and molasses, ordinary salt and copra shall be
considered in their original state.
Note:
LIVESTOCK – does not include fighting cocks, race horses, zoo
animals and other animals generally considered as pets.
ORIGINAL STATE – include even if the products have
undergone the simple process of preparation or preservation
for the market.
(F) Services by agricultural contract growers and milling for others
of palay into rice, corn into grits and sugar cane into raw
sugar;
(G) Medical, dental, hospital and veterinary services except those
rendered by professionals;
Note:
 Laboratory services are exempted. But if hospital or clinic
operates a pharmacy or drug store, the sale of drugs and
medicine is subject to VAT
 Health care company which merely provides and arranges
for the provision of pre-med health care services to its
members in NOT VAT-EXEMPT. It does not provide
medical services.
(H) Educational services rendered by private educational
institutions, duly accredited by the (DepEd), (CHED), (TESDA)
and those rendered by government educational institutions;
Note:
 Educational services do not include seminars, in-service
training, review classes and other similar services

rendered by persons who are not accredited by the
DEPED, CHED or TESDA
Taxation Law Vol. II
By Atty. Raegan Capuno
(U) Importation of fuel, goods and supplies by persons engaged in
international shipping or air transport operations: Provided,
That the fuel, goods, and supplies shall be used for
international shipping or air transport operations;

(I) Services rendered by individuals pursuant to an employer-

employee relationship;
(J) Services rendered by regional or area headquarters
established in the Philippines by multinational corporations
which act as supervisory, communications and coordinating
centers for their affiliates, subsidiaries or branches in the Asia-
Pacific Region and do not earn or derive income from the
Philippines;
(K) Transactions which are exempt under international
agreements to which the Philippines is a signatory or under
special laws, except those under PD 529;
(V) Services of bank, non-bank financial intermediaries performing
quasi-banking functions, and other non-bank financial
intermediaries;
(W) Sale or lease of goods and services to senior citizens and
persons with disability, as provided under RA. 9994 (Expanded
Senior Citizens Act of 2010) and 10754 (An Act Expanding the
Benefits and Privileges of Persons With Disability),
respectively;
(X) Transfer of property pursuant to Section 40(C)(2) of the NIRC,
as amended;

(L) Sales by agricultural cooperatives duly registered with the CDA (Y) Association dues, membership fees, and other assessments
to their members as well as sale of their produce, whether in and charges collected by homeowners associations and
its original state or processed form, to non-members; their condominium corporations;
importation of direct farm inputs, machineries and equipment,
including spare parts thereof, to be used directly and (Z) Sale of gold to the (BSP);
exclusively in the production and/or processing of their
produce; (AA) Sale of drugs and medicines prescribed for diabetes, high
cholesterol, and hypertension beginning January 1, 2019; and
(M) Gross receipts from lending activities by credit or multi- (BB) Sale or lease of goods or properties or the performance of
purpose cooperatives duly registered with the Cooperative services other than the transactions mentioned in the
Development Authority; preceding paragraphs, the gross annual sales and/or receipts
do not exceed the amount of (₱3,000,000).
(N) Sales by non-agricultural, non-electric and non-credit
cooperatives duly registered with the Cooperative
Development Authority: Provided, That the share capital
contribution of each member does not exceed (₱15,000) and
regardless of the aggregate capital and net surplus ratably
distributed among the members;

(O) Export sales by persons who are not VAT-registered;

(P) Sale of real properties not primarily held for sale to customers
or held for lease in the ordinary course of trade or business or
real property utilized for low-cost and socialized housing as
defined by RA 7279: Urban Development and Housing Act of
1992, and other related laws, residential lot valued at
(1,500,000) and below, house and lot, and other residential
dwellings valued at (₱2,500,000) and below: Provided, That
beginning January 1, 2021, the VAT exemption shall only apply
to sale of real properties not primarily held for sale to
customers or held for lease in the ordinary course of trade or
business, sale of real property utilized for socialized housing as
defined by RA. 7279, sale of house and lot, and other
residential dwellings with selling price of not more than
(₱2,000,000): Provided, further, That every (3) years
thereafter, the amount herein stated shall be adjusted to its
present value using the Consumer Price Index, as published by
the Philippine Statistics Authority (PSA);

(Q) Lease of a residential unit with a monthly rental not exceeding

(₱15,000);

(R) Sale, importation, printing or publication of books and any

newspaper, magazine, review or bulletin which appears at
regular intervals with fixed prices or subscription and sale and
which is not devoted principally to the publication of paid
advertisements;

(S) Transport of passengers by international carriers;

(T) Sale, importation or lease of passenger or cargo vessels and

aircraft, including engine, equipment and spare parts thereof
for domestic or international transport operations;