Taxation Virgilio D. Reyes 2 PDF

Chapter 1
PRINCIPLES OF TAXATION
1. Taxation defined.
Taxation is a power inherent in every sovereign state to impose a charge or burden upon persons,
properties or rights, to raise revenues, for the use and support of the government, and to enable it
to discharge its appropriate functions.
2. Nature and scope of taxation.
As to nature, taxation is an inherent power of the state, and is essentially a legislative power. As
to scope, in the absence of limitations prescribed by the fundamental law or constitution, the
power of taxation is unlimited and comprehensive, and if there us any limitation at all, is the
sense of responsibility of the members of the legislature to their constituents.
3. Taxation distinguished from eminent domain.
Taxation reaches all the persons, properties, etc., covered by the tax, while eminent domain
reaches only a particular owner of property (When the government takes the land of a citizen and
pays him a fair price for it, because the government will construct a road through it, that is an
exercise of the power of eminent domain.) There is payment of money by a taxpayer in taxation,
while there is taking of property by the government in eminent domain. In taxation, the taxpayer
is presumed to receive a benefit from the government, while in eminent domain, the property
owner visibly receives a benefit by way of just compensation (theoretically, a fair price for the
property)
4. Taxation distinguished from police power.
Taxation is for purposes of raising revenues, while police power is for purposes of regulation. (A
collection of license fee for a permit to drive in a public road is an exercise of police power.) In
taxation, there is no limit on the amount of tax that may be imposed, while in police power, the
license fee must be, as a general rule, just enough to carry out regulation.
5. Limitations on the power of taxation.
a. Inherent limitations
1. The tax must be levied for a public purpose;

2. The power of taxation cannot be delegated;
3. The rule against direct double taxation. (Direct double taxation means taxing a
person, property or right twice within the same year by the same taxing authority.
This is prohibited. Indirect taxation means two taxes by different taxing authorities, as
national vs. local. This is not prohibited.);
4. Government instrumentalities and agencies through which the government exercises
sovereign powers are exempt from tax, in the absence of a clear proof of a contrary
intent in the law;
5. The power of taxation is limited to the territorial jurisdiction of the taxing state;
6. The tax laws cannot apply to the property of foreign governments (international
comity).
b. Constitutional limitations (examples):
1. No law impairing the obligations of contracts will be passed;
2. No person can be imprisoned for debt or non-payment of a poll tax;
3. The rule on taxation must be uniform and equitable;
4. Charitable institutions, churches, parsonages or convents appurtenant thereto,
mosques, and non-profit cemeteries, and all kinds of lands, buildings and
improvements actually, directly or exclusively used for religious or charitable
purposes, will be exempt from tax.
6.Basic principles of a sound tax system.
a. Fiscal adequacy. The sources of revenues, as a whole, must provide enough funds to
meet the expanding expenditures of the government.
b. Theoretical justice. Taxes must be based on the taxpayer’s ability to pay
c. Administrative feasibility. The tax must be clear on the taxpayer, not unduly
burdensome and discouraging to business, convenient as to time and manner of
payment, and capable of enforcement by competent public officials.
7. Tax defined.
A tax is a forced burden, charge, exaction, imposition or contribution assessed in
accordance with some reasonable rule of apportionment, by authority of a sovereign state,
upon the person, or property, or rights exercised, within its jurisdiction, to provide public
revenues for the support of government, the administration of the law, or the payment of
public expenses.
8. Essential characteristics of tax.

a. It is a forced contribution;
b. It is exacted pursuant to legislative authority in exercise of the taxing power;
c. It is proportionate in character;
d. It is payable in money;
e. It is imposed for the purpose of raising revenue;
f. It is to be used for a public purpose.
Query: Can there be a tax on those in the sugar industry only to improve the industry? If there is,
is this for a public purpose? Yes! Is the tax for a public purpose? Yes.
The improvement of the sugar industry is an improvement in the national economy.
Improvement of the national economy is a public purpose (Supreme Court Decision).
9. Tax extinguished from license fee.

Taxes are imposed under the taxing power of the state for purposes of revenue, while
license fees are levied under the police power of the state. Taxes are forced contributions for the
purpose of maintaining government functions, while license fees are exacted primarily to
regulate certain businesses or occupations. Taxes are generally unlimited as to amount, while
license fees must not reasonably exceed the expenses of issuing the license and of supervision,
unless the business or occupation being regulated is non-useful.
Example: The fee on a motor vehicle driver’s license is to raise funds to be used to regulate
traffic.
10. Tax distinguished from special assessment.

A special assessment is imposed because of an increase in the value of land benefitted by
a public improvement (an imposition on properties that increased in value because of a highway
thru it), while a tax is imposed regardless of public improvements. A special assessment is a
contribution of a person for the construction of a public improvement, while tax is a contribution
of a taxpayer for the support of the government. A special assessment is exceptional both as to
time and locality, while a tax may be a regular exaction on a taxpayer anywhere within the
jurisdiction of the taxing authority.
11. Classification of taxes.

a. As to subject matter:
1. Personal, capitation or poll tax. – A fixed amount upon all persons or upon all persons of
a certain class, residents within a specified territory, without regard to their property or
occupation. An example is the community tax (also known as residence tax, also known
as “cedula”)
2. Property tax. – A tax assessed against all properties, or all properties of a certain class,
located within the jurisdiction of the taxing authority, in proportion to its value, or on
some other method of apportionment.
3. Excise tax. – A charge upon the performance of an act, the enjoyment of a privilege, or
the engaging in an occupation. An excise tax is a tax which is not a personal tax or a
property tax. An example of an excise tax is the value-added tax on sales of goods.
b. As to who bears the burden:

1. Direct tax. – One which is demanded from the person whom the law intends or desires to
pay it. (Example: income tax.)
2. Indirect tax. – One which is shifted by the taxpayer to someone else. (Example: The
value-added tax imposed by law on the seller is passed on to, and actually paid by, the
buyer.)
c. As to determination of the amount:

1. Specific tax. – A tax which imposes a specific sum by the head or number, or some other
standard of weight or measurement, and which requires no assessment other than by the
listing and classification of the subjects to be taxed. (Example: the excise tax on gasoline
is on every liter of gasoline.)
2. Ad valorem tax. – A tax or duty upon the value of the article or subject of taxation. A tax
of so much per centum of the invoice or appraised value of the goods subject to the tax.
(Example: the value-added tax is twelve percent [12%] of the selling price.)
d. As to purpose:
1. General tax. – A tax levied for general purposes of government.
2. Special tax. – A tax levied for a special purpose. (Example: a road tax which is for
maintenance of public roads.)
e. As to scope:
1. National tax. – A tax levied by the National Government.
2. Local tax. – A tax levied by a local government. (Example: the community tax.)
f. As to proportionality:
1. Progressive – A tax in which the increase in the tax rate is proportionate to the increase in
the tax base.
2. Regressive – A tax in which the increase in the tax rate is not proportional to the increase
in the tax base.
3. Proportional – A tax of a fixed percentage of amount of the base (value of the property,
or the amount of gross receipts, etc.). (Example: The 3% percentage tax on the value of
services rendered.)
CLASSIFICATION OF THE PHILIPPINE INCOME TAX.

Income tax is succinctly defined as tax on income, whether gross or net (27 Am. Jur., 308). It is
an imposition by the government where the test of faculty in taxation is income. In the
Philippines, the income tax in the National Internal Revenue Code is:
A national tax. It is imposed by the National Government;
An excise tax. It is a burden not laid directly upon persons and properties. It is neither a
capitation or poll tax, nor a property tax;
A direct tax. It is demanded from the person whom the law intends to impose it (the income
earner), and cannot be shifted by the taxpayer to some other person;
A general tax. It is levied for the general purposes of the government;
An ad valorem tax. It is levied on value or amount of the income of the taxpayer.
SOURCES OF TAX JURISPRUDENCE.

1. Special laws, as they give preferential tax treatment to certain taxpayers, under certain
conditions;
2. Revenue regulations;
3. Revenue circulars;
4. Rulings of the Bureau of Internal Revenue;
5. Opinions of the Secretary of Justice;
6. Decisions of the Supreme Court of the Philippines;
7. Decisions of the Court of Appeals;
8. Decisions of the Court of Tax Appeals;
9. Decisions of inferior courts (lower than the Court of Tax Appeals)
Chapter 2
THE PHILIPPINE INCOME TAX PAYERS
A Philippine income tax payer may be:
(a) Individual:
(1) A resident citizen:
(2) A non-resident citizen:
(3) A resident alien:
(4) A non-resident alien engaged in trade or business in the Philippines:
(5) A non-resident alien not engaged in trade or business in the Philippines but with
income from within the Philippines.
(b) Corporation:
(1) A domestic corporation (organized and operated under Philippine laws);
(2) A resident corporation (a corporation organized under foreign laws but allowed by
Philippine licensing authorities to do business in the Philippines);
(3) A non-resident foreign corporation with income from within the Philippines.
(C) Partnership other than a general professional partnership (partnership organized under
Philippine laws and in trade or business) and joint ventures or consortium formed for the
purpose of undertaking construction projects or engaging in petroleum, coal, geothermal
and other energy operations under a service contract with the government.
A resident citizen is a citizen of the Philippines residing in the Philippines while a non-
resident citizen is a citizen of the Philippines residing abroad. Residence is a matter of intention.
For example: a stay outside the Philippines for more than one year from the end of a year (e.g.,
July 1, 2017 to December 31, 2018) is, according to bureau of internal revenue, indicative of
intention to reside abroad. By the end of 2017, he was still a resident. By the end of 2018, he was
already a non-resident citizen.
Taxpayer Taxed on:

Resident citizen Net income from within the Philippines;
Net income from outside the Philippines.
Non-resident citizen Net income from within the Philippines
Resident alien Net income from within the Philippines
Non-resident alien engaged in business in Net income from within the Philippines
the Philippines
Non-resident alien not engaged in
business in the Philippines but with an Gross income from within the Philippines
isolated income from within the
Philippines.
The taxable income of the citizen of the Philippines may be from employment, from self-
employment (business or profession), from both, and from other sources.
Taxpayer Taxed on:

Domestic corporation Net income from within the Philippines;
Net income from outside the Philippines.
Resident corporation Net income from within the Philippines
Non-resident corporation Gross income from within the Philippines
Taxable partnership (other than GPP and Apply the rules on corporations.
Joint ventures or consortium)
Chapter 3 RULE 1. Those whose gross annual sales or receipts and other non-
operating income do not exceed the threshold of three million
INCOME TAX ON CITIZENS OF THE pesos (P3,000,000):
PHILIPPINES With income level not over P250,000 - Exempt from income tax.
A TAX FORMULA With income level P250,000 and above.
Gross Income Pxxx At eight percent (8%) on gross sales or gross receipts in excess of
Less: Deductions xxx P250,000,
Equals: Taxable income Pxxx
_______________________ • OR
THE INCOME TAX RATES ON INDIVIDUALS Graduated tax on the taxable income
GRADUATED INCOME TAX EFFECTIVE January 2018 to December 31, 2022 RULE 2. Those whose gross sales or receipts and other non-
ON TAXABLE INCOME OF: THE TAX IS operating income exceed • the threshold of three million pesos
(P3, 000,000) —
Not P250.000 0% Graduated tax on the taxable income
over
Over P250,000 but not P400,000 20% of excess over ON MIXED INCOME (compensation income with income from
over P 250,000 self-employment.)
Over 400,000 but not 800,000 30,000 + 25% of excess
over over 400,000 (1) On the compensation income - Graduated rates
Over 800,000 but not 2,000,000 130,000 + 30% of excess PLUS:
over over 800,000 (2) On the income from business or profession: See
Over 2,000 000 but not 8,000,000 490,000 + 32% of excess
over over 2,000,000 Rules 1 and 2 in the preceding page.
Over 8,000,000 2,410,000 + 35% of excess
over 8,000,000 Income from employment
Less: GSIS, SSS, Medicare (PhilHealth) and Pag-Ibig contributions
Centavos? In the gross income and the deductions for expenses and losses, there can Other exclusions (see other exclusions in the chapter on Gross
be centavos. In the taxable income, centavos are to be dropped. In the income tax Income)
arrived at with the application of the tax rates, fifty or more centavos will be Equals: Taxable income
considered as one peso, and less than fifty centavos will be disregarded. (These
rules on centavos apply to all taxpayers, in their respective tax formulas.) After Illustration:
deducting from the income tax computed any creditable withholding Mr. A, a resident citizen, had a gross compensation income of P240, 000 in
2018, how much was the income tax? Answer: P0.
income tax, the balance is income tax still due.
Illustration:
Mr. B, a resident citizen, had a gross compensation income of P300, 000 in
2018: How much was the income tax? Answer: P10, 000, computed as
follows:
ON SELF-EMPLOYED AND/OR PROFESSIONALS On P250, 000 - Exempt
50,000 at 20% P 10,000 before deducting a withholding
tax on compensation income
Illustration:
Mr. C, a resident citizen, had a gross compensation income of P2, 100,000 Mr. E is in business with the following data in a year:
in 2018. How much was the income tax? Answer: P522, 000, computed as Gross sales P4, 000,000
follows; Business expenses 2, 900,000
On P2, 000,000 P490, 000 Net income P1, 100,000
100,000 at 32% 32,000 P522, 000 before deducting a
withholding tax on Income tax:
compensation income On P800, 000 P130, 000
Illustration: 300, 000 at 30% 90, 000
Mr. D is in business with the following data in a year: 220, 000
Gross sales P2, 000, 000
Business expenses 1, 800,000 Gross receipts exceeded the threshold of P3, 000 000. The net income is
Net income P 200,000 taxable at the graduated rates.
Income tax P 0
Gross receipts did not exceed the 'threshold of P3, 000,000 and the net MIXED INCOME
Income is below P250, 000.
Mixed income", as used here, means income from self-
employment/profession with compensation income of one taxpayer.
Illustration:
Mr. E is in business with the following data in a year: From self-employment/profession:
Gross income
Gross sales P2, 000,000 Less: Itemized deductions; or.
Business expenses 900,000 Optional Standard Deduction
Net income P1, 100,000 Taxable income
Income tax on self-employed income (graduated rates - 2)
Income tax: Taxable compensation income
Choice 1 Income tax on compensation income (graduated rates — 1)
On P250, 000 Exempt Income tax due
850,000 at 8% P68, 000
Illustration:
Or Miss F is a CEO of a corporation, with her own practice of profession by
Choice 2 the side. She had the following data in 2018:
On P800, 000 P130, 000
300, 000 at 30% 90,000 Gross receipts from profession P4, 500,000
P 220, 000 Expenses on the practice of profession 2,500,000
Gross compensation income as a CEO in a private corporation 6,000 000
Gross receipts did not exceed the threshold of 3, 000,000 and the net
income is above P250, 000.
Her income tax for the year:
Illustration:
On the practice of profession: each)
P4, 500,000 less P2, 500,000 = P2, 000,000 P490, 000 Expenses on the rental property (200,000 / (100,000)
2) each
On compensation income: Taxable income P2,150,000 P1,150,000
P2, 000,000 P 490,000 Income Tax:
4,000,000 at 32% 1,280,000 1,770,000 P2,000,000 P490,000
Total income tax for the year P2, 260,000 150,000 x 32% 48,000
TOTAL MR. A, Income Tax P538,000
MARRIED TAXPAYERS P1,150,000 – 250,000 = 900,000 x 8% P72,000
For married individuals, the husband and wife will compute *note Mr. A exceeds the threshold of 3,000,000 uses graduated rates. Mrs.
separately their individual income tax based on their respective taxable A does not exceed the threshold so she could avail the option of 8 % of
income. If any income cannot be definitely identified as income exclusively gross sales or receipts.
earned or realized by either of the spouses, the same will be divided equally
between the spouses for determining their respective taxable income. ESTIMATED INCOME TAX
Husband and wife may both be compensation income earners. Every individual who is receiving self-employment income,
Husband and wife may both be self-employed, or in the practice of whether it constitutes the sole source of his income or in combination with
profession. One spouse may claim the Optional Standard Deduction while salaries, wages, and other fixed or determinable -income, will make and file
the other may claim the Itemized Deductions. a declaration of his estimated income for the current taxable year on or
before May 15 of the same taxable year.
The amount of estimated income will be paid in four (4) installments:

Illustration:
Mr. A is in business, Mrs. A is in the practice of profession, and Mr. and First installment — At the time of declaration;
Mrs. A. had a gross rent income and expenses related to it. From the data: Second installment — On or before August 15;
Third installment — On or before November 15; and
Gross sales of Mr. A from business P4, 500, 000 Fourth installment — On or before May 15 of the following
Grass receipts of Mrs. A from practice of profession 900, 000 calendar year.
Gross rent income (gross receipts) 500, 000
Cost and expenses, business of Mr. A 2, 500, 000 Self-employed individuals and/or professionals will, at their option,
Cost and expenses, profession of Mrs. A 200, 000 be allowed to file income tax return and pay the corresponding income tax
Expenses on the rental property 200, 000 once only in a taxable year.
How much is the income taxes of Mr. and Mrs. A? Computations:
Mr. A *Mrs. A
Gross sales from business/profession P4,500,000 P900, 000
Cost and expenses, business of Mr. A (2,500,000)
Gross receipts from rent (1/2 of P500,000 250,000 250,000
THE INCOME TAX EXPENSE OF THE INDIVIDUAL Resident/ Non – Non –
Citizen Resident Resident
Illustration: ETB NETB
On net capital gain on shares of CGT 15% CGT 15% CGT
Mr. F had the following data in a calendar year: stock of domestic corporation not 15%
Gross sales from self-employment P2,000,000 listed and traded in a local stock
Interest on Philippine currency bank deposit 10,000 exchange:
Capital gain on sale of land in the Philippines On the capital gain
(Selling price of P5, 000,000) 1,000,000 On the gross selling price or fair CGT 6% CGT 6% CGT
Capital in on sale of shares of stock of a domestic corporation market value at the time of sale, of 6%
not listed and traded in a local stock exchange 110,000 real property in the Philippine held
Deductible expenses and losses from income as capital asset
from self-employment 1,100,000 On the capital gain
From within the Philippines: Final Tax Exempt Exempt
On interest on foreign currency 15%
His income tax expenses would have been: deposit under the expanded foreign *except NRC
currency deposit system
Gross sales P2, 000,000 From within the Philippines: Final Tax Final Tax Final
Income tax graduated rates (8% of P2, 000,000)* P72, 000 On royalties from books, literary 10% 10% Tax
Final tax on interest on bank deposit (P10, 000 x 20%) 2,000 works and musical compositions 25%
Capital gain tax on land (Selling price of P5, 000,000 x 6%) 300,000 From within the Philippines: Final Tax Final Tax Final
Capital gain tax on shares of stock: On dividend from domestic 10% 10% tax 25%
Capital gain of P100, 000 x 15% 15,000 corporation/ any entity taxable as
Income tax expense P389, 000 domestic corporation
From within the Philippines: Final Tax Final Tax Final
*Income does not exceed the threshold, so he can avail the option of 8% On other royalties, prizes exceeding 20% 20% Tax
P10,000 and other winnings *except all 25%
Including PCSO winnings (less PCSO
CAPITAL GAIN TAX AND FINAL TAX ON PASSIVE INCOME OF than 10,000 is exempt from final tax winnings
CITIZENS but to be subject on Ordinary
income tax)
From within the Philippines: Final Tax Final Tax Final
On interest on any currency bank 20% 20% Tax
deposit, yield or other monetary 25%
benefit from deposit substitute, trust
fund and similar arrangement
From within the Philippines: Exempt Exempt Final
Interest Income from long-term Tax
investment or deposit (BSP) more 25%
than 5 years
If pre-terminated before 5th year Final tax Final tax Final
4 years to less than 5 years 5% 5% tax
3 years to less than 4 years 12% 12% 25%
Less than 3 years 20% 20% 25%
25%
On the data for a whole year of a domestic corporation (in its second year of
Chapter 4 operations):
INCOME TAX OF CORPORATIONS AND
PARTNERSHIPS Gross income from business P5, 000,000
Business expenses 3,000.000
THE TAX ON A DOMESTIC CORPORATION Net taxable income P2, 000,000
A domestic corporation is a corporation organized under Philippine laws. How much was the income tax for the year?
It has four kinds of income taxes:
Answer: P2, 000,000 x 30% P 600,000
(a) Final tax on passive income, which is withheld by the income payor:
Example 1: Interest on Philippine currency bank deposit that has a final
tax of 20%; Illustration:
Example 2: Dividend from a domestic corporation that is exempt from tax
(unlike in the case of the individual on whom this has a final tax of On the data for a whole year of a domestic corporation in its 6 th year of operations:
10%);
Gross income from business P9, 500,000
(b) Capital gain tax on a sale at a gain of shares of stock of a domestic Business expenses 8, 900, 000
corporation not listed and traded in the local stock exchange held as investment, Net taxable income P 600,000
to be paid by the seller On the gain, 15%;
How much was the income tax for the year?
(c) Capital gain tax on sale of real property held as investment, wherever
situated, on its selling price or fair market value at the time of sale, Answer: P190, 000, computed as follows:
whichever is higher, which is withheld by the buyer, at 6% (rule for
domestic corporation: regardless of location of the property. Contra to Normal tax (NT) 30% of P600,000
this, for an individual, the real property must be in the Philippines); P180,000
and Minimum corporate, income tax (MCIT) at 2% of P9, 500,000
P190,000
(d) "Other income" which are included in the three quarterly income tax Tax due (whichever is higher)
returns and the final income tax return , with its tax thus: P190,000
(1) Normal tax (NT) of 30% on its net taxable income; or Quarterly and annual income tax returns.
(2) Beginning with the fourth year of operations, the "Minimum Corporate Within sixty (60) days after the end of each of the first three quarters of
Income Tax" (MCIT) at 2% of. its gross income, or the normal tax at 30% of its the year, a domestic corporation files an income tax return. On or before the
net taxable income, whichever is, higher. fifteenth day of the fourth month following the close of the taxable year (calendar
year or fiscal year), a final or annual income tax return is filed. All the tax returns
The net income in (d) (1) above is: are summary declarations of gross income and deductions on a cumulative basis.
Gross income In the fourth year and thereafter of operations, the normal income tax and
(Less) Itemized deductions for expenses and losses, or Optional the minimum corporate income tax are computed in the quarterly and final tax
Standard Deduction returns. Whichever is higher is paid.
(Equals) Taxable income
The tax computed on the quarterly or year-end taxable return is decreased
Illustration: by the amount of taxes paid for the preceding quarter/s. There may be an income tax
payable in a quarterly return. There cannot be a refundable amount in a quarterly 1st Q 2nd Q 3rd Q 4th Q
return. Gross income P2,000,000 P4,000,000 P5,000,000 P9,000,000
Less: OSD 800,000 1,600,000 2,000,000 3,600,000
The choice of Itemized Deduction or Optional Standard Deduction must Taxable Income P1,200,000 P2,400.000 P3,000,000 P5,400,000
be made in the income tax return for the first quarter. Once the choice is made, the
choice is irrevocable for the whole year. If the corporation did not file a return for Normal tax at 30% P360,000 P720,000 P900,000 P1,620,000
the first quarter, the taxable income in the quarterly and annual returns will be MCIT at 2% P40,000 P80,000 P100,000 P180.000
computed by the Bureau, of Internal Revenue using the Itemized Deductions.
Whichever is higher P360,000 P720,000 P900,000 P1,620,000
Less: Income tax paid —
In the final return at the end of the year: First quarter (360,000) (360,000) (360,000)
Income tax for the year P xxx Second quarter (360,000) (360,000)
Less: Total payments wider the returns for the first, second, Third quarter (180,000)
and third quarters of the year xxx Income tax due P360,000 P 360,000 P 180,000 P720,000
Equals: Income tax still due, or refundable for the year,
(or carry-forward to the next year the excess of MCIT over NT) P xxx Excess MCIT carry-forward
Illustration, Any excess of the minimum corporate income tax over the normal tax of,
The A Co., a domestic corporation, had the following data (in pesos) at the end each year will be carried forward and credited against the normal tax for the three
of the first three quarters, and at the end, of its sixth taxable fiscal year: immediately succeeding taxable years. In the year to which carried forward, the
normal tax must be higher than the minimum corporate income tax.
1st Q 2nd Q 3rd Q 4th Q
Gross income P2,000,000 P4,000,000 P5,000,000 P9,000,000 Illustration:
A domestic corporation had the following data on computations of the normal tax
Expenses 1,000,000 2,100,000 4,900,000 5,500,000
(NT) and minimum corporate income tax (MCIT) for five years:
If the corporation availed of the itemized deductions for expenses: Year 7 Year 8 Year 9 Year 10 Year l1
1st Q 2nd Q 3rd Q 4th Q MCIT P80,000 P18,000 P10,000 P35,000
Gross income P2,000,000 P4,000,000 P5,000,000 P9,000,000 NT P20,000 P20,000 P18,000
Expenses 1,000,000 2,100,000 4,900,000 5,500,000 Excess for Carry over P60,000 None None P 2,000 none
Taxable Income P1,000,000 P1,900.000 P100,000 P3,500,000
Whichever is higher
Normal tax at 30% P300,000 P570,000 P30,000 P1,050,000 MCIT P80,000 P20,000
MCIT at 2% P40,000 P80,000 P100,000 P180.000 NT P20,000 P15,000 P40,000
Less:
Whichever is higher P300,000 P570,000 P100,000 P1,050,000 Carry over for Year 8 ( 20,000)
Less: Income tax paid — Carry over for Year 9 (15,000)
First quarter (300,000) (300,000) (300,000) Carry over for Year 10 0*
Second quarter (270,000) (270,000) Carry over for Year 11 (P2,000)
Third quarter ( 0) **
Income tax due P300,000 P 270,000 P 0 P480,000 Income tax due P80,000 P 0 P 0 P20,000 P38,000
In Year 8, there can be a carry-over because the NT in that year is higher than the
If the corporation availed a deduction at 40% of its gross income (Optional MCIT;
Standard Deduction): Excess carry over balance (60,000 – 20,000 = 40,000)
Add: Earnings during the year P1,000,000
In Year 9, there can be a carry-over because the NT in that year is higher than the Accumulated earnings as at the beginning of the year 5,000,000
MCIT; Total P6,000,000
Excess carry over balance (40,000 – 15,000 = 25,000) Less: Dividends declared/paid during the year 500,000
Accumulated earnings as at the end of the year P5,500,000
*In Year 10, there can be no carry-over because the NT is not higher than the MCIT; Less: 100% of paid-in capital as at the end of the year 4,000,000
Improperly accumulated taxable income (IATI) P1,500,000
**In Year 11, since NT is higher than MCIT there can be a carry-over of 2,000 Improperly accumulated earnings tax (IAET)
from year 10, the excess carry over balance from year 7 can’t be carry over At 10% of IATI (of P1,500,000) P 150,000
because Year 11 was beyond three years from Year 7.
A corporation may not be a closely held corporation. It may also be subject to the
Income tax expense Improperly Accumulated Earnings Tax if it retains and cannot justify its retention.
What may be justifiable retention of profits? It may be (for examples):
On assumed data for a year of a domestic corporation in its third year of operations,
how much is the income tax expense? (a) Additional working capital;
(b) Expansion, improvements add repair;
Interest on Philippine currency bank deposit of P50, 000 (c) Debt retirement;
Income tax: P50, 000 x 20% P10,000 (d) Acquisition of related business, or purchase of stock of a related business where
Dividend from Domestic Corporation of P50, 000 a subsidiary relationship is established;
Income tax (exempt by provision of law) 0 (e) Reserved for compliance with any loan covenant or pre-existing obligations
Capital gain of P120, 000 on shares of stock of a domestic established under a legitimate, business agreement;
corporation held as investment, not listed and traded in a local (f) Earnings with legal prohibition against distribution.
stock exchange
Income tax: (P120, 000 a 15%) 18,000 THE TAX ON A RESIDENT CORPORATION
Selling price of P6, 000,000 of real property held as
investment in Indonesia, at a gain of P1, 000,000 A resident corporation is a foreign corporation doing business in the
Income tax: P6, 000,000 x 6% 360,000 Philippines.
Net income from business in the Philippines of P1, 000,000
P1.000,000 x 30% 300,000 The normal tax of 30% and the minimum corporate income tax of 2%
Income tax expense for the year P688,000 - --is applied on income from the Philippines only.
There is also the capital gain tax and final tax on passive income
The Improperly Accumulated Earnings Tax (IAET)
Profit remittance tax
What is a "closely-held corporation"? A closely-held corporation is a
corporation controlled by not more than twenty individuals (at lease fifty percent Any profit remitted by a branch to its head office will be subject to the
[50%] in value of the outstanding capital stock, or at least fifty percent [50%] in profit remittance tax at fifteen percent (15%), based on the total profit applied for
value of the outstanding stock entitled to vote is owned directly or indirectly by not and earmarked for remittance, without any deduction for the tax component thereof,
more than twenty individuals). except those activities which are registered with the ,Philippine Economic Zone
Authority.
A closely held corporation is subject to an improperly accumulated
earnings tax on its earnings retained beyond one hundred percent (100%) of its paid
in capital.
Illustration:
On assumed figures: A branch office of a resident corporation applied thru the Philippine banking system
for remittance to its mother company abroad of P500,000 from its profits from
Philippine operations. The profit remittance tax would have been, P500,000 Normal tax on taxable 30% 30%
multiplied by 15%, or P75,000, and the net remittance would have been P425,000. income (others) within and
outside the Philippines;
Or
THE TAX ON A NON-RESIDENT CORPORATION Minimum corporate income 2% 2%
tax on minimum corporate
A non-resident corporation is a foreign corporation not engaged in income tax gross *within *within the *within the
business in the Philippines, but which derived an income (isolated) from within the and Philippines Only Philippines Only
Philippines. outside the
A non-resident corporation is taxed at 30% of its gross income. Philippines
Interest on foreign loans FT of 20%
The other taxes
TAXES ON CORPORATIONS
DC - Domestic Corporation THE PARTNERSHIP
RC - Resident Corporation
NRC- Non-resident Corporation There are two kinds of partnerships for income tax purposes, namely:
(a) General professional partnerships; and
Items of Income DC RC NRC (b) Other partnerships (e.g., in trade).
On the selling price or fair FT of 6%
market value on the date of A general professional partnership is a partnership formed for the practice
sale, whichever is higher, of of a common' profession, no part of the income of which is derived from engaging in
land and building held as trade or business. Example: Two lawyers. Not an example: A lawyer and a Certified
capital asset , wherever Public Accountant.
located
On net capital gain on sale FT of 15% FT of FT of GENERAL PROFESSIONAL PARTNERSHIP
of shares of stock of First 100,000 -5% First 100,000 -5% A general professional partnership is not subject to income tax, but the
domestic corporation not Over 100,000 – Over 100,000 – individuals who compose it are taxable on their shares in the partnership net
listed and traded in a local 10% 10% in¬come, whether distributed or not (called "distributable" or "constructively re-
stock exchange: dived") by the partner from partnership.
Interest on foreign currency FT of 15% FT of 15% Exempt
deposit under the expanded In arriving at the net income of the general professional partnership, the rules on
foreign currency deposit gross income and deductions of corporations will apply. The partnership may deduct
system from its gross income either:
Dividend from domestic Exempt Exempt FT of 15% (a) The Itemized Deductions for expenses and losses; or
corporation (b) The Optional Standard Deduction, at 40% of its gross income.
Interest on any currency FT of 20% FT of 20%
bank deposit, yield of other A general professional partnership and the partners comprising such
monetary benefit from partnership may avail of the Optional Standard Deduction only once, either by the
deposit substitute, trust fund general professional partnership or the partners comprising the partnership.
or similar arrangement
Normal tax on taxable 30% 30% 30%
income (others)
BUT, beginning with the Not General professional partnership General partner
fourth year of operations: Applicable Case 1 Optional Standard Deduction with Itemized deductions
Case 2 Itemized Deduction with Optional Standard Deduction
Assumed: Partners share equally in the partnership net income or net loss.
Illustration: CD taxable income P400,000

Less: Income tax a 30% 120,000
From assumed data for a general professional partnership: Distributable income P280,000
Gross income of the general professional partnership P400,000

Less: Optional Standard Deduction Partner C Partner D
(40% of gross income of P400,000) 160,000 Dividend Income (280,000 / 2) P140,000 P140,000
Distributable net income (income is not subject income tax) P240,000 Final Tax of 10% P14,000 P14,000
For Partner A:
Comparative table on general professional partnerships and other partnerships
Share in partnership distributable net income at
(1/2 of P240.000) P120,000 General professional partnership
Own gross income 600,000
Less: Own expenses (Itemized deductions) 240,000 360,000 Assumed: Partners share equally in the partnership net income or net loss.
Taxable income P 480,000
AB Partnership:
Illustration:
The general professional partnership and the partners Gross income P800,000
Less: Itemized Deductions 600,000
AB Partnership (assumed data): Distributable Net income P200,000
Income tax P 0
Gross income P600,000 Partner A Partner B
Less: Optional Standard Deduction 240,000 Gross income - Share in AB net income
Distributable Net income P360,000 (1/2 of P200,000) P100,000 P100,000
Income tax of partnership P 0 Own gross income 70,000 95,000
Partner A Partner B Total P170,000 P195,000
Gross income - Share in AB net income Own: Optional Standard Deduction (28,000) (38,000)
(1/2 of P360,000) P180,000 P180,000 Taxable Income P142,000 P157,000
Own gross income 180,000 590,000
Own: Itemized deductions for expenses (80,000) (300,000)
Net income P280,000 P440,000 Other partnerships
Assumed: Partners share equally in the partnership net income or net loss.
PARTNERSHIP THAT IS NOT A GENERAL PROFESSIONAL PARTNERSHIP
1. A partnership that is not a general partnership (e.g., partnership in trade) is CD Taxable Income P500,000
taxable as a corporation. Less: Income tax of the partnership at 150,000
2. The share in the net income after tax (net income less income tax) belongs 30%
to the partners. Distributable Net income (after tax) P350,000
3. A partner will report his share in (2) as dividend income. Partner A Partner B
Illustration: Dividend income (350,000 / 2) P175,000 P175,000
Partnership that is not a general professional partnership and the partners Final tax of 10% P17,500 P17,500
Own gross income P400,000 P520,000
Less: Own Expenses (250,000) (300,000)
Own Taxable Income P150,000 P220,000
A general professional partnership files an information return at the end of

the year. A partnership, taxable as a corporation, files quarterly and annual income-
tax returns.
Chapter 5
GROSS INCOME
Gross income is gain. It is gain derived from:
(a) Capital; or
(b) Labor; or
(c) Capital and labor, combined; or
(d) Sale or conversation of asset.
Interest received is income because it is gain derived from capital. Salary is

income because it is gain derived from labor. The amount received by a building
contractor is income because it is gain derived from his capital invested, or labor
employed, or both, on the contract. On a selling price of P150, 000 received on an
asset with a cost of P100, 000, the income is only the gain of P50, 000. The
P100, 000 is a return of capital.
An item received may be undeniably income, but the item may not be subject to
income tax because it is exempted from the income tax by provision of law. An
income which is not taxable is called “exclusion from gross income.”
EXCLUSION FROM GROSS INCOME

The term “exclusions” refer to items that are not included in the determination of gross
income either because:
1. They represent return of capital
2. They are subject to another kind of internal revenue tax
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.
The following are typical exclusion from gross income (exempt from income tax):
(a) Life insurance

(b) Amount received by insured as a return of premium
(c) Gift or inheritance received
(d) Compensation for death or physical injuries
(e) Income exempt under treaties-
(f) Retirement benefits, pensions, gratuities, separation pay, etc.
1. Retirement benefits received under R.A. No. 7641 and those received by officials and
employees of private firm
• Retirement benefits under R.A. No. 7641 (In the Absence of Retirement Plan)
The retiring employee is 60 years old and must have served the company for at least 5 years in
the said establishment.
• Retirement benefits pursuant to RA 4917 (Private Retirement Benefit Plan)
If received from a reasonable funded retirement plan of his employer, if the employee was not
less than fifty (50) years of age at the time of retirement and was not less than ten (10) years of
employment with the employer (but this benefit of exclusion is available once only in the
lifetime of the employee)
2. Any amount received by an official or employee as a consequence of separation

Separation pay received by an employee on account of death, sickness, physical
disability, or any cause beyond the control of the employee.
3. Social security benefits, retirement gratuities, pensions and other similar benefits received
from foreign government agencies and other institutions, private or public
4. Benefits received or enjoyed from the Government Service Insurance System

(GSIS) or the Social Security System (SSS);
(g) Miscellaneous Income

1. Passive income derived from investments in the Philippines in loans, stocks, bonds,
or other domestic securities, or from interest on deposits in banks in the Philippines
by foreign government
2. Income derived from any public utility or from the exercise of any essential
governmental function by the Philippine Government or political subdivision
thereof
3. Prizes and awards for outstanding achievements in religious, charitable, scientific,
educational, artistic, literary or civic achievement but only if:
The winner was selected without action on his part to enter the contest or proceedings,
and the recipient is not required to render substantial future services as a condition to
receiving the prize or award
4. Prizes and awards granted to athletes in local and international competitions and
tournaments whether held in the Philippines or abroad and sanctioned by their national
sports associations
5. Thirteenth month of pay and other benefits received by employees, up to tine amount of
ninety thousand pesos (P90,000)
6. GSIS, SSS, Medicare and Pagibig contributions and union dues of individuals
7. Stock dividend
Gross income items
Gross income items that are usually reported in income tax returns are discussed
in this chapter.
TAX FORMULA:
Gross income
Less: Deductions
Equals: Taxable income
1. GROSS COMPENSATION INCOME
Gross compensation income is income arising from an employer-employee

relationship. Examples are salaries, bonuses, and benefits.
Illustration. Mr. A, had the following data:
Regular salaries P180,000

Overtime pay 20,000
Payroll deductions:
SSS contributions 3,400
Philhealth contributions 1,200
Pagibig contributions 1,500
Labor union dues 500
Payment on loan from employer 30,000
The taxable income was:
Regular salaries P180,000

Overtime pay 20,000
Total P200,000
Less: Exclusions -
SSS contributions P3,400
Philhealth contributions 1,200
Pagibig contributions 1,500
Labor union dues 500 6,600
Taxable gross compensation income P193,400
2. GROSS PROFIT FROM SALES/ BUSINESS
In the case of a trading concern:
An accounting formula (reworded), on assumed figures:

Sales P850,000
Less: Cost of sales -
Inventory (of goods to be sold, and on hand), at
the beginning of the period P 30,000
Add: Purchases (of goods to be sold) 500,000
Goods available for sale during the period P530,000
Less: Inventory (of goods to be sold, and still
on hand), at the end of the good period 20,000 510,000
Equals: Gross profit from sales (gross income) P340,000
2. A In the case of a manufacturing concern:
An accounting formula (reworded), on assumed figures:

Sales P700,000
Less: Cost of goods sold (See [b] below) 490,000
Gross profit from sales (gross income) P210,000
Cost of goods sold, explained with assumed figures -
(a) Cost of goods manufactured -
Goods newly put in process during the period (Materials

used, labor applied*, and other manufacturing overhead
or costs applied** during the period) P200,000
Add: Inventory of work already in process (still unfinished),
at the beginning of the period 400,000
Total costs of goods in process (on which work was done)
during the period P600,000
Less: Inventory of work in process (still unfinished), at the
end of the period 100,000
Costs of goods manufactured (finished) during the period P500,000
*Example: Salary of factory workers. **Example: Electricity used in the factory
(b) Costs of good sold:

Inventory of finished goods at the beginning of the period P 60,000
Add: Cost of goods manufactured during the period (See [a]) 500,000
Goods available for sale during the period P560,000
Less: Inventory of finished goods at the end of the period 70,000
Cost of goods sold P490,000
In the case of a service concern:
A formula, on assumed figures:
Gross revenues or receipts P300,000

Less: Direct costs of the services* 100,000
Equals: Gross Income P200,000
Direct costs of services are those related directly to rendering services, such as
salaries of personnel rendering the services and cost of materials and supplies
used. The salary of a bookkeeper is not a direct cost, but an indirect cost, and does
not go into the computation of gross income.
2. B Gross income from farming

• Cash basis
Cash from sales of livestock and other products in the farm

+ Value of property received from sales
+ Profits/ Gains from the sale of livestock other items purchased
+ Gross income from all other sources
TOTAL GROSS INCOME
Formula, on assumed figures:
Selling price of livestock and farm products raised and sold P200,000
Add: Profit from the sales of livestock and farm products purchased 50,000
Add: Miscellaneous income (e.g., rental received from farm equipment). 3,000
Equals: Gross Income P253, 000
(Note: For livestock and farm products raised and sold, it is the gross selling price
that is the income. For livestock and farm products purchased and sold, it is the
profit from the sale that is the income.)
• Accrual Basis
Sales XXX
Ending inventory xxx
Less beginning inventory (xxx)
Less purchases (xxx) (XXX)
Gross Income XXX
3. GROSS INCOME FROM RENT
Rent income may be in the following forms:

• Cash, at the stipulated price
• Obligations of the lessor to third persons paid or assumed by the lessee in consideration
of the contract of the lease
• Advance payment which must be prepaid rentals and not a loan to the lessor, or option
money for the property
Prepaid rent must be reported in full in the year of receipt, regardless of the accounting
method used by the lessor
• The contract of the lease may provide that the lessee may make permanent improvements
on the leased property and said improvements will belong to the lessor upon termination
of the lease
On assumed figures:
Rentals received from lessee (tenant) P500,000

Add: Any obligation of the lessor (landlord) to any third party as-
sumed or paid by the lessee (e,g., Premium on the insurance
of the lessor’s property, if the lessor is to receive the proceeds
of the insurance; Real estate tax of the lessor) 40,000
Add: Permanent improvements on the property made by the les-
see where the improvements will belong to the lessor when
the lease expires (the value of the improvements as at the
termination of lease agreement is calculated, and that value
is the measure of income).* 100,000
Gross income P640,000
*The improvements:
Cost of improvement – P250,000. Life – 25 years

________________________________________________________________________
P150,000 P100,000
Loss in value while in use by lessee Remaining value to go to the lessor
4. INTEREST INCOME
Interest income as a rule is taxable income included in the Income Tax.

Exemption:
Interest income subject to Final Tax- those that are passive income
Interest income, when not subject to final tax, is reported in the income tax
return. An example of this is interest on trade notes receivable.
For interest income with final tax, see the chapters on Income Tax on Individuals and Income
Tax on Corporations.
5. DIVIDEND INCOME
Dividend income, may be in cash, property or stock. Cash or property dividend, when not
subject to final tax, is included in the income tax return.
For dividend subject to final tax, see the chapters on Income Tax Individuals
and Income Tax on Corporations.
The measure of income on a taxable property dividend is the fair market value of the property
received as dividend.
Stock dividend:
As a general rule, a stock dividend is not taxable because it does not result in a
change in the proportionate interests of the shareholders in the net assets of the
corporation (e,g., when there was only one class of stock issued and outstanding
at the time of the dividend).
It is taxable if the payment results in a change in the proportionate interests of

the shareholders in the net assets of the corporation (e,g., when there were two or
more classes of stock issued and outstanding at the time of the dividend).
Case 1.
A co., a domestic corporation with common stock outstanding before a stock

dividend in the hands of five stockholders with one hundred shares each, dec-
lared a ten percent (10%) stock dividend payable in common shares to all. The
stock dividend is not income because, after the stock dividend, the proportionate
interests of the shareholders in the net assets of the corporation remained the
same.
Stock- Before Dividend Stock After Dividend

holder Shares % Dividend Shares %
A 100 20 10 110 20
B 100 20 10 110 20
C 100 20 10 110 20
D 100 20 10 110 20
E 100 20 10 110 20
500 100 50 550 100
Case 2.
Optional stock dividend. If the corporation, in Case 1 (A Co.), gave the stock-
holders the option of choosing property or cash instead of stock, and shareholders
B and D chose to be pain in property or cash, while shareholders A, C and E
resulted in a change in the proportionate interests of the shareholders in the net
assets of the corporation.
Stock- Before Dividend Stock After Dividend

holder Shares % Dividend Shares %
A 100 20 10 110 20.76

B 100 20 100 18.88
C 100 20 10 110 20.76
D 100 20 100 18.88
E 100 20 10 110 20.78
500 100 30 530 100.00
An optional stock dividend (stockholder may choose between receiving cash or

stock) is always taxable because the transaction will be as if the stockholder
chose to be paid in cash, then used the cash to buy shares of stock.
Kind of dividend Taxable Measure of income
Cash dividend Yes Amount of money received

Property dividend Yes Fair market value of property received
Stock dividend No None (with exception – see above)
Optional stock dividend Yes Fair market value of shares received
6. GAIN OF SALE OF ASSETS
For gain on sale of assets, see Chapters 9, 10 and 11.
7. PRIZES AND WINNINGS

Subject to Final tax: Prizes over P10,000 and winnings derived within the Philippines. And
prizes received by a NFRC within the Philippines
Subject to Income Tax:

• Prizes amounting to P10,000 or less received by the citizen or resident alien
• Prizes received by domestic corporation and RFC’s
• Prizes and winnings received by resident citizens from sources without the Philippines
Prizes and awards resulting from exerted efforts are taxable, unless covered by
the rules on exclusions from gross income.
8. INCOME FORM OTHER SOURCES
8.A INCOME FROM BAD DEBT RECOVERY AND TAX REFUND
As a general rule, there is income on bad debt recovery and tax refund. This
rule, however, is subject to qualification under the “tax benefit rule”.
Bad debt recovery. General rule and tax benefit rule.
As a general rule, recovery of accounts receivable previously written off from

the books as uncollectible, is taxable income.
Tax benefit rule:
If in year of write off for uncollectible account there was a reduction of

the taxable income, the bad debt recovery will be taxable income
Illustration.
Taxable income before write off in Year 1 P 500,000

Less: Bad debt written off (10,000)
Taxable income reported Year 1 P 490,000
Bad debt recovery in Year 2 of the account written off P 10,000
The taxable income in Year 1 (if there was no wrong write off) would have
been P500,000. The write off resulted in a tax benefit since the taxable income
was reported only at P490,000. The recovery of P10,000 in Year 2 was income.
Suppose only P5,000 was recovered, would the P5,000 be income? Yes.
Illustration.
Net loss before write off in Year 1 (P110,000)

Less: Bad debt written off ( 10,000)
Net loss after write off (P120,000)
P______0
Bad debt recovery in Year 2 of the account written off P 10,000
There was already a net loss, and no income tax to pay, even before the write
off. The write off did not result in a tax benefit in Year 1. The recovery of
P10,000 in Year 2 was not taxable income.
Illustration.

Less: Bad debt written off ( 14,000)
Taxable income reported in Year 1 P 0
Bad debt recovery in Year 2 P 6,000
If there was a correct write off in Year 1, the taxable income

would have been computed at P2,000, computed thus:

Less: Write off for bad debt at correct amount (14,000
less P6,000) 8,000
Correct taxable income Year 1 P 2,000
If there write off was at the correct amount, the taxable income for Year 1 would
have been P2,000. P2,000 is the taxable income in Year 2.
Tax refund. General rule and tax benefit rule.
If the tax when paid was allowable as a deduction from gross income, the refund
will constitute taxable income.
Tax benefit rule:
If in the year of tax payment there was a reduction of a taxable income, the tax
refund will be taxable income.
Illustration.
Net taxable income before payment of tax in 2017 P100,000

Less: Real estate tax paid (deduction is allowed) 20,000
Net taxable income reported P 80,000
The payment of the tax resulted in a reduction of the taxable income. A tax
refund in Year 2018 is taxable income.
Illustration.
Net taxable income before payment of tax, Year 2017 P100, 000
Less: Income tax payment of P20,000
Deduction claimed (income tax is not deductible -
See rules on deductions from gross income) _____0
Net taxable income reported P100,000
The payment of income tax did not result in a reduction of taxable income. A
refund of the tax in 2018 is not taxable income.
8. B CANCELLATION OF DEBT
The cancellation or forgiveness of indebtedness may have any of three possible

consequences:
(a) It may amount to a payment of income. For example, an individual per-

forms services to a creditor, and in consideration thereof, the creditor can-
cels the debt, income in that amount is realized by the debtor as compen-
sation for personal services.
The law will consider the cancellation as involving two transactions: (1)
The creditor compensated the debtor for the service rendered; (2) The debtor
paid his indebtedness out of the compensation he received.
Thus:
________________________________________________________________________
CREDITOR
(1) Payment for servi- (2) Payment of in-

ces received debtedness
DEBTOR
________________________________________________________________________
The act of the creditor of paying for the services rendered to him by the
debtor and the act of the debtor of paying his obligation to the creditor
cancel out each other. There is no need, therefore, for money to change
hands.
(b) It may amount to a gift. If a creditor wishes merely to benefit the debtor,
and without any consideration for it, cancels the debt, the amount of the
debt is a gift to the debtor, and need not be included in the latter’s report of
income – Revenue Regulation. (Author’s note: There must be a clear act of
liberality on the part of the creditor and acceptance of the liberality on the
part of the debtor, as by saying “thank you”. Related to this, there may be a
donor’s tax to be paid by the creditor).
(c) It may amount to a capital transaction. If a corporation to which a stock-

holder is indebted forgives the debt, the transaction has the effect of a
payment of a dividend. The dividend may be subject to the regular tax, or to
a final tax, or exempt from tax.
8. C DAMAGE RECOVERY
Compensatory damages, as constituting returns of capital, are not taxable.

Thus, amounts received as moral damages for personal actions, such as for alien-
action of affection, libel, slander and breach of promise to marry, are not taxable.
Illustration.
Mr. UK brought an action against Mr. AB for damages for physical injuries.
The court awarded Mr. UK damages in the amount of P100,000. The amount re-
cieved by Mr. UK is not gross income. It is a return of capital.
Illustration.
Mr. Q’s car was involved in an accident. It was heavily damaged. Because his
car was not covered by insurance Mr. Q brought an action for damages against
the person who caused the damage. He was able to recover P80,000 as damages.
The damage recovery is not income. It is a recovery of lost capital. (Under the
rules on deductions, it reduces the actual loss to the allowable deduction for loss).
Illustration.
Mr. A and Miss Z were engaged to be married. In preparing for their wedding,
Mr. A spent P1,000,000 for wedding clothes, church arrangements, reception
preparation, honeymoon accommodations and airplane tickets. The wedding did
not push through because Miss Z changed her mind. Mr. A brought an action for
damages for breach of promise to marry. The court awarded him damages for
P1,000,000 and reimbursement for court expenses and attorney’s fees of
P300,000. The amount received of P1,000,000 is not gross income. It is merely
a return of capital. The P300,000 is also not gross income. It is also a return of ca-
pital.
Recovered damages representing recoveries of lost profits, are taxable, just as

profits are taxable in the regular course of business. Thus, damages recovered in
patent infringement suits are taxable.
Illustration. Mr. DV is an author of a book that he copyrighted. For unatho-
rized printing of his book, he brought an action for infringement of copyright
against VWX Co. Mr. DV was awarded damages of P500,000. The amount re-
ceived constitute taxable income. It is recovery of lost profits.
GROSS INCOME FROM LONG-TERM CONTRACTS
The term “long-term contracts” means building, installation, or construction

contracts covering a period in excess of one year.
A person whose gross income is derived in whole or in part from long-term

contracts will report income from such contracts upon the basis of percentage of
completion.
The formula under the percentage of completion method of recognizing

income is, in effect, recognizing only the portion earned during the year from the
whole contract price.
Illustration.
Mr. A is a building contractor. On June 1, 2017, he started constructing a build-

ing which he finished in 2019. The contract price for the building was
P5,000,000. By the end of 2017, the building was forty percent (40%) com-
pleted at a cost P1,280,000. By the end of 2018, it was eighty-five percent
(85%) completed with an additional cost of P1,360,000 in the year. In each
of the years that construction was done, income under the percentage of comple-
tion method would have been reported, as follows:
2017:
Contract price – P5,000,000
(40% of P5,000,000) P2,000,000
Less: Cost to date ( December 31, 2017) 1,280,000
Income for the year P 720,000
2018:
(85% of P5,000,000) P4,250,000
Less: Cost to date
2017 P1,280,000
2018 1,360,000 2,640,000
Income from the contract, 2017 and 2018 P1,610,000
Less: Income reported in 2017 720,000

Income for the year 2018 P 890,000
2019:
(100% of P5,000,000) P5,000,000
Less: Cost to date -
2017 P1,280,000
2018 1,360,000
2019 420,000 3,060,000
Income from the contract, 2017, 2018 and 2019 P1,940,000
Less: Income already reported -
2017 P 720,000
2018 890,000 1,610,000
Income for the year 2019 P 330,000
Recognizing income under the completed contract method:
Contract price P5,000,000

Less: Total cost of the contract 3,060,000
Gross income, 2019 P1,940,000
is not allowed.
Chapter 6
DEDUCTIONS FROM GROSS INCOME – 1
OPTIONAL STANDARD DEDUCTION
A TAX FORMULA
Gross ingrome Pxxx
Less: Deductions from gross income xxx
Equals: Taxable Income Pxxx
OPTIONAL STANDARD DEDUCTION
Corporation.
In the case of a corporation, the optional standard deduction us forty percent (40%) of gross
income.
Individual.
In the case of an individual, the optional standard deduction is:
(a) Forty percent (40%) of gross sales, in the case of trading and manufacturing concern, and
(b) Forty percent (40%) of gross revenues or gross receipts, in the case of service concern.
(See next page) The language of the law for the individual on sales of goods, when it says
“gross sales” would prohibit deduction of cost of sales, and on sale of services, when the law
says “gross revenues or gross receipts” would prohibit deduction for direct cost. “cost of sales”
and “direct cost” consider certain items of expenses, and expenses are itemized deductions.
The optional standard deduction is in lieu of the itemized deductions for expenses and losses.
There is no need of vouchers and receipts to substantiate the optional standard deduction.
The following may be allowed to claim OSD:
1. Individuals
a. Resident citizen
b. Non-resident citizen
c. Resident alien
d. Taxable estates and trusts
2. Corporations
a. Domestic corporation
b. Resident foreign corporation
In the case of husband and wife, one may use the optional standard deduction while the other
the itemized deductions, or they may have the same choice on deductions of gross income.
If a general professional partnership chose the optional standard deduction, a partner reporting
his share in the partnership net income, on his own, “other income”, must choose the itemized
deductions, and vice versa. (See chapter 4).
In the case of taxpayers required to file quarterly income tax returns, the choice of the optional
standard deduction must be consistent in the quarterly and year-end income tax returns. If the
taxpayer did not file a return for the first quarter, the Bureau of internal revenue will require that
net income in all quarters use the itemized deductions.
Illustrations:
TRADING/MANUFACTURING SERVICE
Gross sales of P5,000,000 Gross revenue/gross receipts
Less: Cost of sales of 2,600,000 P5,000,000
Gross income P2,400,000 Less: Direct costs
Less: Deduction ? 3,000,000
Gross income
The optional standard deduction: P2,000,000
If corporation, is 40% of GROSS INCOME Less: Deduction ?
So that: The optional standard deduction:

Gross sales of P5,000,000 If corporation, is 40% of GROSS INCOME
Less: Cost of sales of 2,600,000
Gross income P2,400,000 So that:
Less: optional standard Gross revenue/gross receipts
Deduction (40% of P5,000,000
2,400,000) 960,000 Less: Direct costs
Taxable Income P1,440,000 3,000,000
Gross income
P2,000,000
Less: optional standard
Deduction (40% of
2,000,000)
800,000
Taxable Income
P1,200,000
If individual, is 40% of GROSS SALES If individual, is 40% of GROSS
REVENUES/RECEIPTS
So that: So that:
Gross sales of P5,000,000 Gross revenue/gross receipts P5,000,000
Less: optional standard Less: optional standard
Deduction (40% of Deduction (40% of 5,000,000 2,000,000
5,000,000) 2,000,000 Taxable Income P3,000,000
Taxable Income P3,000,000
An example of a service concern is a
beauty shop.
Direct costs:
Salary of beauticians
Costs of cosmetics used
Indirect costs:
Depreciation of equipment
Bad debts
Chapter 7
DEDUCTIONS FROM GROSS INCOME – 2
LOSS
CHARITABLE CONTRIBUTIONS
PENSION PAYMENTS
RESEARCH AND DEVELOPMENT COST
LOSS
A loss incurred in a transaction in trade or business is deductible from gross income. For
example, a loss of a business asset is deductible
A CASUALTY LOSS
A loss can be deducted from gross income even if not from a transaction, if:
(1) in the course of business;
(2) involving property used in business; and
(3) the loss was a result of a casualty.
(4) actually sustained during the taxable year
What is casualty? It is an accident, a mishap or a sudden invasion by a hostile agency, and

excludes the gradual deterioration of property arising from a steadily operating cause. Examples
are: fire, storm and lightning.
In order that a casualty loss can be deducted, there must be a Declaration of Loss filed with the
bureau of internal revenue within forty five days from the date of discovery of loss.
The actual loss will be reduced by insurance recovery or any other form of indemnity.
Illustration.
A factory building was destroyed by fire. It had a book value (depreciated value) of P2,000,000
at the time of loss. The building was insured, and the insurance company paid P1,500,000 under
the property insurance policy. The deduction for loss is P2,000,000 (less) P1,500,000 or
P500,000.
Illustration.
A company car with a book value of P1,400,000 was involved in an accident. The person
responsible for the accident paid P500,000 as his contribution for the repair of the car, and the
company absolved him from further liability. The deductible loss is P900,000.
NET OPERATING LOSS CARRY-OVER
NET OPERATING LOSS CARRY-OVER (NOLCO)
Gross income per books
Taxable Taxable Gross income only Pxxx
Non-taxable
Less:
Expenses and losses per books
Accounts
Deductible Less: deductible expenses only xxx
Non-deductible
Equals: Net loss per books Equals: NET OPERATING LOSS Pxxx
Rule: Net operating loss (not net loss per books) can be carried over to the next
three years following the year of net operating loss
Illustration.
Year 1 Year 2 Year 3 Year 4 Year 5
Net Income (loss) (200,000) 100,000 (50,000) 90,000 500,000
NOLCO from YEAR 1 (100,000) (90,000)
NOLCO from YEAR 3 (50,000)
Taxable Income 0 0 0 0 P450,000
The net operating loss of year 1 was used in year 2 because there was a net income before NOLCO in
year 2. There could not be a NOLCO i year 3 because there was already a net loss even before NOLCO.
There can be a NOLCO in year 4 from year 1 because there was a net income before NOLCO. The still
unused net operating loss of year 1 (P10,000) could not be used anymore I year 5 because year 5 was
beyond 3 years from year 1.
There was a new net operating loss I year 3. Year 3 has its own three years to which its net operating loss
can be carried over. It was used in year 5.
Each year can have its own net operating loss. Each net operating loss has its own three years to which
there may be carry-over.
CHARITABLE AND OTHER CONTRIBUTIONS
Charitable and other contributions can be deducted from gross income:

(1) if it is an expense in the conduct of trade or business;
(2) if it was given to associations with purposes mentioned in the law (those give directly to
individuals cannot be deducted);
(3) there are contributions deductible
(a) in full
(Example: A contribution to the government, for a priority activity I health); and
(b) subject to limitation on amount.
(Example: A contribution to a church in the Philippines)
DEDUCTIONS FROM GROSS INCOME FOR CHARITABLE AND OTHER

CONTRIBUTIONS
A. Deductible in Full B. Deductible, subject to limitation

1. Recipient is: 1. Recipient is:
a. Government of the Philippines a. Government of the Philippines
b. any of its agencies or political b. any of its agencies or political
subdivisions; or subdivisions
c. any fully-owned government corporation.
For priority activity in: for non-priority activity in any of the areas
a. Science; mentioned in A (1), and exclusively for a public
b. Education; purpose.
c. youth and sports development;
d. culture;
e. health; 2. recipient is an accredited non-government
f. economic development; organization/organized/operated for (purposes):
g. human settlement. a. Scientific;
b. youth and sports development;
2. recipient is an accredited non-government c. cultural;
organization/organized/operated for (purposes): d. charitable
a. Scientific; e. social welfare
b. Educational; f. religious
c. character building/youth and sports g. rehabilitationof veterans.
development; h. educational
d. cultural;
e. charitable
f. social welfare;
g. health;
h. research,
and satisfying certain conditions provided in the
law allowing full deduction.
3. Recipient is a foreign or international

organization with an agreement with the
Philippine Government on deductibility, or in
accordance with special law.
For the Individual:
The amount must not exceed ten percent (10%) of the taxable income from
business or practice of profession before deduction for contribution;
For the corporation:

The amount must not exceed five percent (5%) of the taxable income from
before deduction for contribution;
Thus:
Gross income Pxxx
Less: all deductions (except contributions) xxx
Equals: Net income before contributions Pxxx
Less: Contributions
Deductible in Full Pxxx
Deductible subject to limitation:
Actual Pxxx
The 5% or 10% limitation Pxxx
Allowed whichever is lower xxx
Total deductible contributions xxx
Net income after deduction for contributions Pxxx
Illustrations.
From assumed data:
Corporation:
All deductions not including contributions 300,000
Net income before contributions P600,000
Less: Contributions
Deductible in Full P20,000
Contribution 1 P15,000
TOTAL P31,000 (a)
or
5% of P600,000 P30,000 (b)
Allowed whichever is lower P30,000
Total deductible contributions P50,000
Taxable Income P550,000
Individual:
All deductions not including contributions 300,000
Net income before contributions P600,000
Less: Contributions
Deductible in Full P20,000
TOTAL P31,000 (a)
or
10% of P600,000 P60,000 (b)
Allowed whichever is lower P31,000
Total deductible contributions P51,000
Taxable Income P549,000
PENSION PAYMENTS TO EMPLOYEES.
For long and continuous service of employees, an employer may pay pensions. The pension
plan considers the number of years of service of the employee. The payment may be lump sum
or payments over a certain period.
Pension payments may be:

a. without a funded plan
b. with a funded plan set up by the employer, called by the law “pension trust”.
Illustration.
In 2018, an employee retired after ten years of service. For his past services, the employer
computed a retirement pay and paid him cash of P50,000 out of the general fund of the
employer. The deduction for the employer is in 2018, In the amount of P50,000.
There is no pension trust.
Illustration.
For the past five years by 2018, Mr. A had five employees. He expanded his operations and took
I twenty new employees. Before 2018, his package compensation agreement with any employee
is that he is to receive a pension after ten years of service. Mr. A decided to set up a pension plan
for employees, and the plan called for a payment for past services of the five employees and for
payment for services after the establishment of the plan for the now twenty-five employees and
other employees who may come after them. The pension of the old five employees for their
services before the plan was established is called “past service cost”. The pension of the now
twenty-five employees (five old and twenty new), beginning 2018 is called “present service
cost”.
Illustration.
A fund was established in 2018, for-
Past service cost of the original five employees of P50,000
Present service cost of the now twenty-five employees of P250,000 a year.
The deduction will be:
Past service cost Present service cost total deduction
2018 P5,000 P250,000 P255,000

2019 P5,000 P250,000 P255,000
2020 P5,000 P250,000 P255,000
2021 P5,000 P250,000 P255,000
2022 P5,000 P250,000 P255,000
2023 P5,000 P250,000 P255,000
2024 P5,000 P250,000 P255,000
2025 P5,000 P250,000 P255,000
2026 P5,000 P250,000 P255,000
2027 P5,000 P250,000 P255,000
2028 P250,000 P250,000
2029 P250,000 P250,000
2030 P250,000 P250,000
Rule: If the fund is funded, past service cost must be amortized over ten years (2018 to 2027).
Present service cost is a deduction for the year.
RESEARCH AND DEVELOPMENT COST
Research and development costs are expenses towards improvement of processes and formulas
or the development of new products. Research and development costs must be categorized, as
follows:
Kind of expenditure treatment

On acquisition or improvement of property Capitalize to the asset account and deduction
subject to depreciation or amortization: will be by depreciation or amortization.
example: research building
Other research and development costs a. full deduction in the year the cost is paid or
incurred; or
b. amortize over a period of not less than sixty
(60) months from the date of acquisition of
benefit.
If NOT chargeable to capital account
Claim as outright expense
LIMITATIONS ON DEDUCTION
The following research and development expenditures are not deductible:
1. Any expenditure for the acquisition or improvement of land, or for the
improvement of property to be used in connection with research and development of
a character which is subject to depreciation and depletion; and
2. Any expenditure paid or incurred for the purpose of ascertaining the existence,
location, extent, or quality of any deposit of one or other mineral, including oil or
gas.
Illustration.
Research and development costs on January 2, 2018 were as follows:

Research building with a useful life of twenty years, cost of
P5,000,000
Laboratory supplies and other research costs 1,200,000
Benefits were expected to give benefits beginning December 1, 2018 and for 4 years
How much is the deduction for 2018?
ALTERNATIVE 1.
Depreciation of research building P250,000

(5,000,000/20 years) – January 2 to December 31

Deduction in 2018 (250,000 + 1,200,000) P1,450,000
ALTERNATIVE 2.
Depreciation of research building P250,000
(5,000,000/20 years) – January 2 to December 31

Number of years to give benefit 4 years or 48 months
Minimum period of amortization (by law) 5 years or 60 months
Period of use 60 months
Deduction (1,200,000/60) – for December 2018

When benefits were first received 20,000
Deduction in 2018 (250,000 + 20,000) P270,000
Chapter 8
DEDUCTIONS FROM GROSS INCOME - 3
TAXES, INTEREST EXPENSE, BAD DEBTS, DEPRECIATION,
DEPLETION, ENTERTAINMENT EXPENSE, DISCOUNT TO SENIOR
CITIZEN OR PERSON WITH DISABILITY, OTHER EXPENSES, BONUS
TO PARTNER
TAXES
All taxes paid or incurred, whether national or local, are deductible from gross income,
except:
A. Philippine income tax;
B. Income tax paid to a foreign country, if such is claim as a credit against the Philippine
income tax (reduction of the Philippine income tax under a special formula in the law);
C. Estate tax (a tax on the properties of one who died);
D. Donor’s tax (a tax on a gift made);
E. Special assessment (a tax assessed against real property benefited by a public improvement.
Example: A special assessment on land thru which a national highway will be constructed -
the improvement increased the value of the land.);
F. The tax paid will be a deduction for the person on whom the tax is imposed. So that, a tax
which is an indirect tax, passed on by the seller of the property or services upon whom
imposed to the buyer of his property or services cannot be deducted by the actual payor (the
buyer). Example: The value-added tax which is imposed on the seller, but passed on and
actually paid by the buyer, is not deductible by the buyer.
G. The stock transaction tax, imposed on the seller of shares of stock who is not a dealer in
securities, of his securities sold thru a stock exchange.
H. Interest and penalty for late payment of taxes cannot be deducted from gross income as taxes.
But the interest can be deducted as interest expense. But on the penalty, the absolute rule is, it
cannot be deducted, because that is against public policy.
I. Tases deductible from gross income will include national and local taxes. (Example: real
estate tax, imposed by a city on land and improvement, is a local tax).
Illustration
Payments of the following taxes:
Income tax of 2018 P 100,000
Real property tax for the first two quarters of the year
(paid to the city) 18,000
Value added tax on purchases 40,000
Value added tax on sales 80,000
Interest on late payment of tax 20,000
Surcharge (a penalty) on late payment of income tax 50.000
Excise tax on alcoholic beverages manufactured and sold 120,000
The deductions for taxes follows:

Real property tax P 18,000
Excise tax 120,000
Total P 138,000
Income tax is not deductible. Value added tax on purchase (input taxes ) and value added tax on
sales ( output taxes ) are offset against each other and do not bring about an expense. Interest for
late payment of taxes is not deductible as tax, but as interest expense. Surcharge, a penalty, is not
deductible.
INTEREST EXPENSE
Interest expense is an amount paid for the use of money — on an indebtedness. It may be
payable at the maturity of indebtedness, or it may be paid in advance when the indebtedness is
incurred.
Illustration
On an indebtedness, money received of P100,000 on January 1, 2018, payable on
December 31, 2018, at P100,000, plus P12,000 interest, or total of P112,000 (the interest here is
payable upon maturity of the indebtedness).
Illustration
On an indebtedness of P100,000 with interest on it of P12,000, money received on
January 1,2018 was P88,000, and to be paid on December 31, 2018 is P100,000. (Interest paid in
advance — called prepaid interest).
Illustration
Interest paid upon maturity of indebtedness.
For an indebtedness, the taxpayer paid interest due at maturity in 2018 of P10,000. How
much was the deduction for 2018?
(a) If the taxpayer is an individual — P10,000;

(b) If the taxpayer is a corporation — P 10,000.
Prepaid interest (advance payment of interest )
Interest paid in 2018 - P20,000;

Period covered by the payment - 2018 and 2019 (2 year );
Principal due and paid, 2019 - P200,000;
(The interest was prepaid in 2018 )
1. If the taxpayer is on the CASH BASIS of accounting,

Deduction in 2019:
(a) If the taxpayer is an individual:
Deduction will be in the year that the principal was paid (2019).
(b) If the taxpayer is a corporation:
Deduction will be in the year that the interest was prepaid (2018).
2. If the taxpayer is on the ACCRUAL BASIS of accounting,

(a) If the taxpayer is an individual:
Deduction in 2018 - P10,000;
Deduction in 2019 - P10,000
(b) If the taxpayer is a corporation:
Deduction in 2018 - P10,000;
Deduction in 2019 - P10,000
BAD DEBTS
Accounting Practice 1 Accounting Practice 2

At the end of taxable period, the possible
uncollectible account are recognized (based on
the taxpayer’s experience, with journal entries,
on assumed figures in 2018)
no entry
(Debit) Bed debt Expense 20,000
(Credit) Allowance for bad debts
20,000
(b) On write off for a 2017 P5,000 account on
which there is no possibility of collection
anymore. Write off in 2019,
(Debit) Allowance for bad debts 5,000 (Debit) Bad debt expense 5,000
(Credit) Accounts Receivable (Credit) Accounts Receivable 5,000
5,000
There is a deduction only when an actual
Deduction will not be from a recording of account is written off from the books of
possible uncollectible accounts based on accounts.
experience (provision) in 2017 (a), but from
write off of accounts during the year from
books (b).
DEPRECIATION
The loss of useful life of an asset used in business with a useful life of more than one year
(fixed asset) is called deprecation. The usual method of depreciation is (other methods are for
higher studies in accounting):
Straight-line method of depreciation
Formula: Cost of asset (less) scrap value = Depreciation per

Number in years of useful life year
The books of accounts will record the expense and deduction as follows:
(Debit) Depreciation expense Pxxx

(Credit) Allowance for depreciation Pxxx
Illustration
Cost of fixed assets — P 1,100,000
Scrap value — P100,000
Useful life — 10 years
Annual depreciation? P100,000, computed as follows:
P1,100,000 less P100,000 divided by 10 years.
DEPLETION
Depletion is the loss of the mineral deposit of mine. The formula is:
Cost = Depletion rate per ton

Estimated mineral deposit in tons
(assumed in tons)
Minerals extracted during the year in tons x Depletion rate = Depletion for the year
ENTERTAINMENT EXPENSE
Entertainment expense, when a business expense, is deductible from gross income as follows:
(a) At not exceeding one half percent (1/2%) of net sales in the case of sale of goods; and
(b) At not exceeding one percent (1%) of net revenue, in case of sale of services.
DISCOUNT TO SENIOR CITIZEN OR PERSONS WITH DISABILITY
A senior citizen (sixty years old and above) and a person with disability is exempt from
the value added tax and is entitles to a discount of 20% on his purchase from a value added tax
registered seller. The discount to the senior citizen or person with disability is a deduction from
the gross income of the seller.
Illustration
The tag price of an article being sold by a VAT taxpayer showed P1,120, VAT included.
The computation involved are:
Tag price P1,120

Less: VAT 12/112 x P1,120 120
Selling price, VAT not included P1,000
Less: Discount (20%of P1,000) 200
Selling price, net of VAT and discount to senior citizen P 800
Journal Entries: Debit Credit

If the sale was recorded Cash P800
net of discount Sales P800
there is no deduction, because the sale was recorded net of discount.
If the sale was recorded Cash P800

with the discount also Sales discount to
recorded senior citizen 200
Sales 1,000
there is a deduction from gross income of P200.
OTHER EXPENSES
Other business expenses, as itemized deductions, for which there are no specific
provisions of the law, are deductible from gross income if satisfying the following requirements:
(a) Ordinary;
(b) Necessary;
(c) Paid or incurred during the year; and
(d) Supported by vouchers or receipts.
Examples of deductions under this category are:

(a) Advertising expense;
(b) Utilities expense (water, electricity)
(c) Rent expense;
(d) Salary expense;
(e) SSS contribution of employer
SPECIAL DEDUCTION OF BONUS TO A PARTNER
Bonus may be given to the managing partner in partnership. It is a recognition of his

expertise that brings about profitable operations. But bonus is given only if the operations of the
year resulted in net income, and is at a certain percent of the net income of the year. The partners
have to agree on the meaning of “net income” base for bonus.
The “net income base for bonus” may be:

(a) Net income before bonus (bonus is not treated as an expense of operations); or
(b) Net income after bonus (bonus is treated as an expense of operation.)
An algebraic computation is required.
Illustration
Messrs, S,T and U have capital balance of P100,000, P200,000 and P300,000. They have
agreed to provide bonus of 10% to Mr U, the managing partner. At year end, the partnership had
a net income of P80,000 before providing for the bonus:
(a) If bonus is not treated as expense:
Bonus B = 0.10 (80,000)
= P8,000
(b) If bonus is treated as expense:
Bonus B = 0.10 (80,000 - B)
B = 8,000 - 0.10B
1.10B = 8,000
B = 8,000/1.10
B = P7,272.73
Illustration
Partners A and B are sharing equally in the partnership net income or loss. In addition,
Partner A is entitled to a bonus at 10% if affordable, from net income after all expenses,
including bonus and tax expenses.
Situation:
Bonus can be determines only after deducting all expenses, including the income tax
expense,
But income tax expense can be computes only after the bonus expense is deducted.
So that, an algebraic computation is required—
Let B = Bonus be 10%

T = Income tax at corporate rate of 30%
B = 0.10 (100,000 - B - 0.30 [100,000 - B])

= 0.10 (100,000 - B - 30,000 + 0.3B)
= 0.10 (70,000 - 0.7B)
= 7,000 - 0.07B
1.07B = 7,000
B = 7,000/1.07
B = 6,542.06
Chapter 9
SALE OR EXCHANGE OF PROPERTY – 1
THE CAPITAL GAIN TAX
CAPITAL ASSET versus ORDINARY ASSET
What is a capital asset? Negatively viewed, a capital asset is an asset that is not
an ordinary asset.
What are ordinary assets? They are (as enumerated by law):
Stock in trade of the taxpayer, or other property of a kind which would properly be included in
an inventory of the taxpayer if on hand at the end of the taxable year (merchandise inventory,
which is movable property);
Property held by the taxpayer primarily for sale to customers in the ordinary course of trade or
business (real estate for sale by a realtor);
Property used in trade or business of a character which is subject to allowance for depreciation
(or amortization); and
Real property used in trade or business.
Examples of ordinary assets are:
Inventory of goods for sale;

Real estate for sale by a real estate dealer;
Machinery ("tangible asset" subject to depreciation- [expiration of cost);
Patents ("intangible asset" subject to amortization [expiration of cost]).
Examples of capital assets are:
Stocks and bonds held as investment;

Real property held as investment or residence;
Car for personal use;
Jewelry for personal use;
When an asset sold is an ordinary asset:

Selling price (net of expenses of sale) A net gain or net loss is called ordinary
Less: Cost (plus expenses of acquisition)
Equals: Gain or loss on the sale
} net gain or ordinary net loss and goes into
net taxable income.
THE CAPITAL GAIN TAX.
On a sale of real property, or

On a sale of shares of stock of a domestic corporation not listed and traded in a local stock
exchange, there is a capital gain tax, when the sale is under circumstances as will be mentioned
here.
CAPITAL GAIN TAX ON REAL PROPERTY.
See the boxed rules on page 9-2

Illustration.
The taxpayer is a resident citizen

Selling price of the real property in the Philippines P 2,000,000
Its fair market value at the time of sale 1,800,000
Its cost 900,000
The gain 1,100,000
The capital gain tax (on the higher selling price)
2,000,000 x 6% P 120,000
The tax applies to resident citizens only on real property located in the Philippines;
The tax applies to domestic corporations, whether the real property is in, or outside, the
Philippines.
(The tax applies to domestic corporations only on real property located in the Philippines.)
The tax is on the selling price or fair market value at the time of sale, whichever is higher, at 6%
The tax is computed and paid whether there is an actual gain or loss on the sale (there is a
conclusive presumption in the law that the sale resulted in a gain)
The tax is withheld at source by the buyer (Payment is the agreed price less the capital gain tax),
and the tax withheld is remitted by the buyer to the Bureau of Internal Revenue.
The tax is computed separately, in cases of sales of more than one property.
The capital gain or loss is not included in the computation of the income subject to the quarterly
and year-end income tax.
Illustration.
Its cost 900,000
The gain 1,100,000
2,600,000 x 6% P 156,000
Illustration.

Its cost 2,250,000
The loss 250,000
2,000,000 x 6% P 120,000
Illustration.

Selling price of real property abroad P 3,000,000
Its cost 1,900,000
The gain 1,100,000
Capital gain tax (because the real property is abroad) P 0
Illustration.
The taxpayer is a domestic corporation

Selling price of real property in the Philippines P5,000,000
Its cost 2,000,000
The gain 3,000,000
The capital gain tax (on the higher fair market value)
P6,500,000 x 6% P 390,000
Illustration.

Selling price of real property abroad P5,000,000
Its cost 2,000,000
The gain 2,000,000
The capital gain tax (on the higher fair market value)
P7,500,000 x 6% P 450,000
The tax applies even if the property is abroad because the taxpayer is a domestic
corporation.
Illustration.

Selling price of real property abroad P5,000,000
Its cost 2,000,000
The gain 2,000,000
Capital gain tax (because the real property is abroad) P 0
Illustration.

2.5.18 Sale of real property in the Philippines held as capital asset:
Sold at P2,000,000; Gain of P300,000
6.9.18 Sale of real property in the Philippines
held as capital asset: Sold at P1,800,000; Loss of P 200,000
Capital gain tax on the sale of 2.5.18 (P 2,000,000 x 6%) P 120,000
Capital gain tax on the sale of 6.9.18 (P 1,800,000 x 6%) P 108,000
Capital Gain Tax Exemption.
Rules:
The capital asset sold was a principal residence;

The taxpayer is a citizen of the Philippines or resident alien;
The proceeds of the sale were invested in acquiring a new principal residence;
Notice to make such utilization was given to the Bureau of Internal Revenue within thirty (30)
days from the date of the sale
Utilization of the proceeds of the sale was made within eighteen (18) months from the date of
sale;
A cash deposit is made with an accredited bank for an amount equal to the capital gain tax, and
answerable for the capital gain tax if the conditions for the exemption be not satisfied;
The exemption must be availed of once only every ten (10) years.
If the entire proceeds of the sale is invested:
The entire capital gain is exempt;
The basis of the new principal residence will be the basis of the old principal
residence.
If only a portion of the proceeds of the sale is invested:
The capital gain tax due:
Proceeds of the sale not invested

________________________________________________________________________________________________________________________
Entire proceeds of the sale gain tax x The full capital gain tax of 6%
Basis of the new principal residence:

Proceeds of the sale invested
________________________________________________________________________________________________________________________
x Basis of the old residence
Entire proceeds of the sale gain tax
Illustration.
Principal residence in the Philippines, which had a cost of P4,000,000 was sold for P 6,000,000
at the time when the fair market value was P 6,500,000. The capital gain tax at 6% of the market
value of P6,500.000 is P390,000.
Case 1.
There was no investment in a new principal residence.
Capital gain tax P 390,000
Case 2.
The entire proceeds of the sale of P6,000,000 was invested in a new principal residence.
Capital gain tax P0
Basis of the new principal residence P 4,000,000
Case 3.
Only P4,500,000 of the proceeds of the sale was invested in the new principal residence.
Capital gain tax
(P6,500,000 x 6% is P390,000)
(P1,500,000/P6,000,000 x P390,000) P 97,500
(P4,500,000/P6,000,000 x P4,000,000) P 3,000,000
Case 4.
The entire proceeds of the sale and an additional P1,000,000 were invested in the new principal
residence:
Capital gain tax P0
(P4,000,000+ P1,000,000) P 5,000,000
CAPITAL GAIN TAX ON SHARES OF STOCK
The taxpayer may be a resident citizen or a domestic corporation.
The shares of stock are those of a domestic corporation not listed and traded in local stock
exchange.
The shares of stock were held as capital assets (investments).
The sale resulted in a gain. If there is a loss, there is no tax.
On each transaction:
The tax is on the gain at 15%
At the end of the year, there will be a consolidating computation:

All capital gains (less) all the capital losses on the shares during the year (equals) a net capital
gain or a net capital loss for the year
On a net capital gain, the tax is 15%;

From the computation in (b), deduct the aggregate capital gain taxes paid within the year on a
per transaction basis;
There will be a capital gain tax refundable
The capital gain or loss is not included in the computations for the quarterly and year-end
income tax.
Illustration.
Shares of stock were those of a domestic corporation not listed and
traded in a local stock exchange, held as capital asset.
Shares of stock were sold at a gain of P 50,000

The capital gain tax at 15% is P 7,500
Illustration.
Shares of stock were sold at a gain of P150,000

The capital gain tax at 15% is:
On P 150,000 at 15% P 22,500

Illustration.
Share of stock were those of a domestic corporation not listed and

traded in a local stock exchange held as capital asset
Shares of stock were sold at loss of P (40,000)

The capital gain tax is (there is no gain) P 0
Illustration.

Shares of stock were sold, as follows:

2.3.18 Sold at a gain of P 100,000
4.5.18 Sold at a gain of 50,000
6.6.18 Sold at a loss of (60,000)
Capital gain tax paid on a per transaction basis:
2.3.18 P 100,000 at l 5% P 15,000
4.5.18 P 50,000 at 15% P 7,500
6.6.18
Year-end consolidating computation
Net capital gain for the year

(P100,000 + P50,000 - P60,000) P 90,000
Capital gain tax on P90,000 at 15% P 13,500

Less: Capital gain taxes paid within the year
(P15,000 + P7,500) 22,500
Capital gain tax refundable P (9,000)
Illustration.
Sales to buyers of shares of stock of domestic corporation not

listed and traded in a local stock exchange, held as capital asset:
Sale No. 1, capital gain of P 900,000

Sale No. 2, capital gain of 200,000
Sale No. 3, capital loss of (20,000)
Capital gain tax paid on a per transaction basis:
Sale No. 1 P 900,000 at l 5% P 135,000
Sale No. 2 P 200,000 at 15% P 30,000
Sale No. 3
Year-end consolidating computation
Net capital gain for the year:

(P900,000 + P200,000 - P20,000) P 1,080,000
Capital gain tax on net capital gain:

P 1,080,000 x 15% P 162,000
Less: Capital gain taxes paid within the year
(P135,000 + P30,000) 165,000
Capital gain tax refundable P 3,000
A COMPARISON: CAPITAL GAIN TAX ON SHARES OF STOCK AND ON REAL
PROPERTY
Capital gain tax on shares of stock Capital gain tax on real property
On a per transaction basis:
The tax applies if the sale resulted in a gain On a per transaction basis:
The tax does not apply if the sale resulted in a The tax applies if the sale resulted in a gain;
loss The tax applies even if the sale resulted in a
The tax on the capital gain at 15% loss
The tax is on the selling price, or the fair
market value at the time of sale, whichever is
higher, 6%
Year-end procedure: Year-end procedure: None

All the transactions of the year are
consolidated,
Net capital gain or net capital loss is arrived

at:
On the net capital gain of the year, the tax is
15%
The tax in (1)
Less: Capital gain taxes paid within
the year
Equals: Capital gain tax still due (or
refundable)
The capital gain will not be included in the The capital gain will not be included in the
quarterly and year end computation of income quarterly and year-end computation of income
tax. tax.
Filing of return and payment of tax: Filing of return and payment of tax:
On a per transaction with a gain: The tax is withheld by the buyer.

Within 30 days from the date of sale;
On the year-end consolidation:

On or before the 15th day of the fourth
month following the close of the
taxable year.
Chapter 10
SALE OR EXCHANGE OF PROPERTY —2
GENERAL RULES ON CAPITAL GAINS AND LOSSES
ON WHAT THE GENERAL RULES APPLY

When on a sale of a capital asset the special rules on capital gains tax (real property and shares of
stock of domestic corporation not listed and traded in a local stock exchange) do not apply, there
are rules that this book will call “General rules on capital gains and losses”.
THE GENERAL RULES:

IF:
The sale or exchange is not subject to capital gain tax; and
The taxpayer is:
A corporation; or
An individual.
A CORPORATION AN INDIVIDUAL
The capital gain or loss will be at 100% regardless The capital gain or loss will be as follows:
of the length of the holding period At 100% if the asset was held for not more than 12
months (short-term capital gain or loss)
At 50% if the asset was held for more than 12
months (long-term capital gain or loss)
Capital losses are deductible only to the extent of Capital losses are deductible only to the extent of
capital gains capital gains
Net capital loss carry-over* is not available. Net capital loss carry-over* is available
*Net capital loss carry-over. If any taxpayer, other than a corporation, sustains in any taxable year a net
capital loss, such loss, in an amount not in excess of the net income of such year (Executive Order No.
37: Net income must be understood as taxable income) will be treated in the succeeding year as a loss
from a sale or exchange of a capital asset held for not more than 12 months (at 100%)
Illustration.
Capital asset was held for 2 years. Capital gain of P300,000. Capital gain to consider:
If the taxpayer is a corporation (P300,000 x 100%) P300,000

If the taxpayer is an individual (P300,000 x 50%) P150,000
Illustration
Net income from business of the individual P230,000
Gain on sale of ordinary asset 10,000
Loss on sale of ordinary asset 14,000
Gain on sale of capital asset held for 6 months 2,000
Loss on sale of capital asset held for 13 months 3,000
The taxable income for the year is computed, as follows:
Net income from business P230,000

Gain on sale of ordinary asset P10,000
Loss on sale of ordinary asset 14,000 (4,000)
Ordinary net income P226,000
Gain on sale of capital asset held for 6 months (100% of P2,000
the gain)
Less: Loss on the sale of capital asset held for 13 months 1,500
(50% of the loss)
Net capital gain 500
Taxable income P226,500
Illustration
D Co., a domestic corporation, had the following results of operations for 2018:
Ordinary net income P52,000

and in 2017 it had a net capital loss of P1,500 and a taxable income of P60,000.
The taxable income of the corporation in 2018 is computed, as follows:
Ordinary income P52,000

Gain on sale of capital asset held for ten months (100%) P2,000
Gain on sale of capital asset held for eighteen months 2,000
(100%)
Total capital gains P4,000
Loss on sale of capital asset held for six months (100%) 1,100
Loss on sale of capital asset held for fourteen months 2,000
(100%)
Total capital losses 3,100
Net capital gain 900
The taxpayer being a corporation:
Capital gains and losses are always at 100%;

There is no net capital loss carry-over from 2017.
Illustration.
Mr. B, a citizen of the Philippines, had the following data for years 201A and 201B:
201A 201B
Net income, profession P90,000 P78,000
Interest from notes of clients 2,000 4,000
Capital gain on assets:
Painting, held for 10 months 30,000
Jewelry, held for 2 years 40,000
Capital loss on bonds, held for 3 years 70,000
The taxable income for 201A and 201B are shown below:
201A 201B
Net income, profession P90,000 P78,000
Interest income 2,000 4,000
Ordinary net income P92,000 P82,000
Capital gain (100%) P30,000
Capital gain (50%) 20,000
Capital loss (50%) (35,000)
Net capital loss (P5,000)
Net capital loss carry-over from 201A (5,000)
Net capital gain 15,000
Total 97,000
Taxable income P92,000 97,000
Maximum carry-over was P92,000
Illustration.
Mr. C, a citizen of the Philippines, had the following data for 201A and 201B:
201A 201B
Net income from business P80,000 P90,000
Interest from notes of clients 4,000 2,000
Capital gain on shares of foreign corporation held for 3 50,000
years
Capital gain on jewelry held for 10 months 90,000
Capital loss on bonds held for 4 months 120,000
The taxable income for the years 201A and 201B are shown below.
201A 201B
Net income, business P80,000 P90,000
Interest income 4,000 2,000
Ordinary net income P84,000 P92,000
Capital gain (50%) P25,000
Capital gain (100%) 90,000
Capital loss (100%) (120,000)
Net capital loss (P95,000)
Net capital loss carry-over from 201A (84,000)
Net capital gain 6,000
Taxable income P84,000 P98,000
Maximum carry-over was P84,000
Chapter 11
INSTALLMENT PAYMENT OF CAPITAL GAIN TAX
Capital gain tax on sale of real property: Capital gain tax on sale of shares of stock of a domestic corporation not listed
On the selling price or fair market value at the time of sale, and traded in a local stock exchange:
whichever is higher, 6% On the capital gain – 15%.
Property has a mortgage that does not exceed the cost Property has a mortgage that exceeds the cost of
Property has no mortgage of the seller, which is assumed by the buyer the seller, which is assumed by the buyer
All cash payments in the year of sale All cash payments in the year of sale All cash payments in the year of sale
Add: Excess of mortgage assumed

by buyer over cost of seller
Equals: Initial payments Equals: Initial payments Equals: Initial payments
Initial payments do not exceed 25% of Initial payments do not exceed 25% of the selling price Initial payments do not exceed 25% of the selling
selling price price
Selling price Selling price Selling price
Less: Mortgage assumed by buyer Less: Mortgage assumed by buyer
Add: Excess of mortgage over cost of seller
Equals: Contract price Equals: Contract price Equals: Contract price

On any payment: On any payment: On first payment:
Capital gain tax First payment +

____________________________________________________ x excess of mortgage over
Contract price
Capital gain tax cost
Capital gain tax Payment
x received ____________________________________________________ x Payment
____________________________________________________
Contract price received On any subsequent payment:

Contract price
Capital gain tax Payment

____________________________________________________ x received
Contract price
Illustration. Installment payment of the capital gain tax
Property has no mortgage Mortgage that does not exceed the cost of the Mortgage that exceeds the cost of the seller,
seller, which is assumed by the buyer which is assumed by the buyer
Selling Price of Share of Stock P 100,000 Selling Price of Share of Stock P 100,000 Selling Price of Share of Stock P 100,000
Less: Cost 60,000 Less: Cost 60,000 Less: Cost 60,000
Capital Gain P 40,000 Capital Gain P 40,000 Capital Gain P 40,000
Capital Gain Tax at 15% P 6000 Capital Gain Tax at 15% P 6000 Capital Gain Tax at 15% P 6000
Payments on the selling price: Payments on the selling price:
Payments on the selling price Assumption of mortgage by P 10,000 Assumption of mortgage by buyer P 65,000
buyer Cash Collections:
Yr. 1 Down payment (DP) P 10,000
Cash Collections: Yr. 1 Down payment (DP) P 10,000
Installment Payment (P2) 10,000
Yr. 1 Down payment (DP) P 10,000 Installment Payment (P2) 5,000
Yr. 2 Payment 1 (P1) P 40,000
Payment 2 (P2) 40,000 Yr. 2 Payment 1 (P1) P 10,000
Yr. 2 Payment 1 (P1) P 35,000
Payment 2 (P2) 10,000
Payment 2 (P2) 35,000
Step 1. Determination of initial payments
Down payment P 10,000 Down payment P 10,000 Down payment P 10,000
Add: Installment payment in Add: Installment payment in Add: Installment payment in
Year 1 (Y-1), per contract P 10,000 Year 1 (Y-1), per contract 10,000 Year 1 (Y-1) 5,000
Add: Excess of mortgage over cost 5,000
Initial payments P 20,000 Initial payments P 20,000 Initial payments P 20,000
Not exceeding 25% of P 100,000 Not exceeding 25% of P 100,000 Not exceeding 25% of P 100,000
Step 2. Determination of contract price Selling Price P 100,000 Selling Price P 100,000
Less: Mortgage assumed by Less: Mortgage assumed by buyer (65,000)
Contract price (selling price) P100,000 buyer (10,000) Cash to be received P 35,000
Contract price (selling price) P 90,000 Contract price (selling price) P 40,000
Step 3. Computation for installment tax DP + excess of mortgage over cost
Y1: Y1: Y1:
DP 6,000/100,000 x P10,000 P 600 DP 6,000/90,000 x P10,000 P 667 DP 6,000/40,000 x P15,000 P2,250
P2 6,000/100,000 x P10,000 600 P2 6,000/90,000 x P10,000 667 P2 6,000/40,000 x P5,000 750
Y2: Y2: Y2:
P1: 6,000/100,000 x P40,000 P 2,400 P1: 6,000/90,000 x P35,000 P 2,333 P1: 6,000/40,000 x P10,000 P 1500
P2: 6,000/100,000 x P40,000 2,400 P2: 6,000/90,000 x P35,000 2,333 P2: 6,000/40,000 x P10,000 1500
SALE OR EXCHANGE OF PROPERTY
INSTALLMENT CAPITAL GAIN (WITH NO CAPITAL GAIN TAX)
Capital gain of individuals: If holding period of the asset is: Capital gain of corporations:
Not more than 12 months: Capital gain is considered at 100% Capital gain is always at 100%, regardless of the length of the
More than 12 months: Capital gain is considered at 50% holding period of the asset.

selling price price

Capital gain First payment +

___________________________________________
x excess of mortgage over
Contract price
Capital gain Payment cost
Capital gain Payment __________________________________________ x
x
_________________________________________
received Contract price received On any subsequent payment:

Contract price
Capital gain Payment

__________________________________________ x
Contract price received
Illustration. Installment reporting of capital gain (when there is no capital gain tax)
Capital Gain P 40,000 Capital Gain P 40,000 Capital Gain P 40,000
Holding period of the asset : More than one year Holding period of the asset : More than one year
Holding period of the asset : More than one year
Capital gain to consider at 50% P 20,000 Capital gain to consider at 50% P 20,000
Capital gain to consider at 50% P 20,000
Payments on the selling price: Payments on the selling price:
Payments on the selling price
Assumption of mortgage by P 10,000
Yr. 1 Down payment (DP) P 10,000 Assumption of mortgage by buyer P 65,000
buyer
Installment Payment (P2) 10,000 Cash Collections: Cash Collections:
Yr. 2 Payment 1 (P1) P 40,000 Yr. 1 Down payment (DP) P 10,000 Yr. 1 Down payment (DP) P 10,000
Payment 2 (P2) 40,000 Installment Payment (P2) 10,000 Installment Payment (P2) 5,000
Yr. 2 Payment 1 (P1) P 35,000 Yr. 2 Payment 1 (P1) P 10,000
Payment 2 (P2) 35,000 Payment 2 (P2) 10,000
Y1: Y1: Y1:
DP 20,000/100,000 x P10,000 P 2,000 DP 20,000/90,000 x P10,000 P 2,222.22 DP 20,000/40,000 x P15,000 P 7,500
P2 20,000/100,000 x P10,000 2,000 P2 20,000/90,000 x P10,000 2,222.22 P2 20,000/40,000 x P5,000 2,500
Y2: Y2: Y2:
P1: 20,000/100,000 x P40,000 P 8,000 P1: 20,000/90,000 x P35,000 P 7,777.78 P1: 20,000/40,000 x P10,000 P 5,000
P2: 20,000/100,000 x P40,000 8,000 P2: 20,000/90,000 x P35,000 7,777.78 P2: 20,000/40,000 x P10,000 5,000
ON THE SALE OF AN ORDINARY ASSET:
Selling Price (less) Cost (equals) Gross Profit, or Ordinary Income
Who are taxpayers QUALIFIED A. Sale of MOVABLE or B. Casual sale of personal or movable property where: C. Sale of REAL
to report gross profit under PERSONAL PROPERTY by a 1. Selling price is over P 1,000 OR
INSTALLMENT METHOD: DEALER 2. Initial Payment not more than 25% IMMOVABLE
(allowed to recognize income on of selling price PROPERTY
installment basis regardless of ratio, 3. Property is not a kind which would be included in where initial
hence < 25% rule not applicable ) inventory if on hand at the close of the taxable year payment is not
more than 25%

selling price price

Gross profit First payment +

___________________________________________ x excess of mortgage over
Contract price
Gross profit cost
Gross profit Payment x Payment
x __________________________________________
_________________________________________
Contract price received Contract price received On any subsequent payment:
Gross profit Payment

__________________________________________ x received
Contract price
Illustration. Installment reporting of ordinary gain.
Ordinary Gain P 40,000 Ordinary Gain P 40,000 Ordinary Gain P 40,000
Payments on the selling price Payments on the selling price: Payments on the selling price:
Yr. 1 Down payment (DP) P 10,000 Assumption of mortgage by P 10,000 Assumption of mortgage by buyer P 65,000
buyer Cash Collections:
Cash Collections: Yr. 1 Down payment (DP) P 10,000
Yr. 2 Payment 1 (P1) P 40,000
Yr. 1 Down payment (DP) P 10,000 Installment Payment (P2) 5,000
Payment 2 (P2) 40,000
Yr. 2 Payment 1 (P1) P 10,000
Yr. 2 Payment 1 (P1) P 35,000
Payment 2 (P2) 10,000
Payment 2 (P2) 35,000
Y1: Y1: Y1:
DP 40,000/100,000 x P10,000 P 4,000 DP 40,000/90,000 x P10,000 P 4,444.44 DP 40,000/40,000 x P15,000 P 15,000
P2 40,000/100,000 x P10,000 4,000 P2 40,000/90,000 x P10,000 4,444.44 P2 40,000/40,000 x P5,000 5,000
Y2: Y2: Y2:
P1: 40,000/100,000 x P40,000 P 16,000 P1: 40,000/90,000 x P35,000 P 15,555.56 P1: 40,000/40,000 x P10,000 P 10,000
P2: 40,000/100,000 x P40,000 16,000 P2: 40,000/90,000 x P35,000 15,555.56 P2: 40,000/40,000 x P10,000 10,000
SALE OF EXCHANGE OF PROPERTY
DEFERRED PAYMENT METHOD OF REPORTING INCOME
Where there is a requirement that the initial payments must not

exceed twenty-five percent (25%) of the selling price in order
that the installment method of reporting capital gain or ordinary
gain may be available, when such requirement is not satisfied, 2017:
the taxpayer may report the gain or income on the deferred Cash collected P 1,000,000
payment method. Under this method, the buyer's obligation Add: Fair market value of the note received
(e.g., mortgage note) will be given its equivalent in cash. The P2,000,000 multiplied by the discount
capital gain or income will be reported over the years of rate of 85% 1,700,000
collections. Total consideration received P 2,700,000
Less: Cost 1,200,000
If the sale resulted in a loss, the loss will be reported Income P 1,500,000
once only – in the year of sale.
2018:
Cash collected on the note P 1,000,000
Illustration. Less: Income therefrom previously reported
P1,000,000 multiplied by the discount
F Co., divested itself of, and sold, shares of stock of a resident rate of 85% 850,000
corporation on December 1, 2017 for P3,000,000 which had a cost to it Income P 150,000
of P1,200,000, receiving P1,000,000 cash and a mortgage note for the
balance of P2,000,000, payable at P1,000,000 on December 1, 2018, 2019:
and P1,000,000 on December 1, 2019. The promissory note had a fair Cash collected on the note P 1,000,000
market value equal to 85% of its face value. The gain or income that Less: Income therefrom previously reported
may be reported under the deferred payment method is as follows. P1,000,000 multiplied by the discount
rate of 85% 850,000
(There is no capital gain tax because the shares of stock were not of a
domestic corporation.)
CHAPTER 12
SPECIAL PROBLEMS: SELLING PRICE AND COST OF PROPERTY SOLD, WASH SALE,
MERGER AND CONSOLIDATION, TRANSFER TO CONTROLLED CORPORATION.
FORMULA: SELLING PRICE (LESS) COST (EQUALS) GAIN OR LOSS

What is the selling price?
In case of a sale, selling price is the consideration in terms of money.
In case of an exchange, the fair market value of the property received in exchange is the selling price.
In order to recognize a gain or a loss on an exchange, the property acquired in exchange must be
essentially different from the property given in exchange.
What is the cost of the property sold?

The cost thereof, in case of property acquired on or after March 1, 1913, if such property was acquired by
purchase;
The fair market value as of the date of acquisition, is the asset was acquired by inheritance;
If the property was acquired by gift, the basis will be the same as it would be in the hands of the donor, or
the last preceding owner by whom it was not acquired by gift, except that if such basis is greater than the
fair market value at the time of the gift, then for the purpose of determining the loss, the basis will be such
fair market value (In case of loss, see the rule verbalized and illustrated by the author in terms of
“whichever is lower”);
If the property was acquired for less than full and adequate consideration in money or money’s worth, the
basis is the amount paid by the transferee for the property.
Expenses of acquisition and disposition of the asset will be treated, as follows: Selling price (less)
expenses of sale, compared with purchase price (plus) expenses of acquisition, will give the gain or loss
on the sale.
Mr. Z sold property:
Sold for P500,000;
Purchased for P300,000.
Selling price P500,000

Less: Basis 300,000
Gain on the sale P200,000
Sold for P500,000;

Purchased for P600,000

Less: Cost 600,000
Loss on the sale (P100,000)
Sold for P500,000;

Inherited, with a fair market value of P400,000 when inherited

Less: Basis 400,000
Sold for P500,000;

Inherited, with a fair market value of P600,000 when inherited

Less: Basis 600,000
Loss on the sale (P100,000)
Sold for P500,000;

Received as donation, with a fair market value of P200,000 when inherited.

Less: Basis 200,000
Sold for P500,000

Received as donation from a certain Mr. C when its fair market value was P300,000.
Received as donation by Mr. C from a certain Mr. B,
when its fair market value was P350,00
Purchased for P200,000 by Mr. A who donated it to Mr. B
Basis of the last preceding owner who did not received it as donation (purchase price of P200,000) is
lesser than the fair market value at the time received as donation (P300,000).

Less: Basis (basis to the last owner who
Did not acquire it by donation) 200,000
Gain on sale P300,000
Sold for P200,000

Received as donation by Mr. C from a certain Mr. B when its fair market value was P350,000
Purchased for P600,000 by Mr. A who donated it to Mr. B.

Less: Basis (basis to the last owner
who did not acquire it by donation) -
Purchase price 600,000
Indicated loss – 1 P400,000

Less: Fair market value when
Received as donation 300,000
Loss to recognize (whichever is lower) P100,000
Sold for P200,000

Received as donation by Mr. C from a certain Mr. B when its fair market value was P350,000.
Purchased for P600,000 by Mr. A ho donated it to Mr. B.

Less: Basis (basis to the last owner
who did not acquire it by donation) –
Purchase price 600,000

Less: Fair market value when
received as donation 700,000
Loss to recognize (whichever is lower) P400,000
Sold for P500,000.

Property was purchased for P100,000 when its fair market value at the time of purchase was P400,000.
(consideration was less than full and adequate)

Less: Basis (amount paid by the transferee) 100,000
Gain on sale P400,000
Sold for P500,000

Property was purchased for P600,000 when its fair market value at the time of purchase was P900,000.
(consideration was less than full and adequate)

Less: Basis (amount paid by the transferee) 600,000
Loss on the sale P100,000
WASH SALE
What is a wash sale?
A wash sale is a sale under the following circumstances:
There was a sale of stock or securities at a loss;
There was/were acquisitions (or option to acquire) substantially identical stock or securities;
The acquisitions were by purchase or exchange upon which gain or loss is recognized;
The acquisitions were within a period of thirty days before and/or thirty days after the sale of disposition
(known as the sixty-one-day period);
The taxpayer is not a dealer in securities. He is merely an investor and held the securities as capital assets.
When are stock or securities substantially identical?
Stocks or securities are substantially identical when they are the same in all important particulars. Thus,
the stock or securities of one corporation cannot be substantially identical with stock or securities of
another corporation. Common stock of a corporation cannot be substantially identical with preferred stock
of the same corporation.
How must the substantially identical stock or security be acquired?
It must be acquired by purchase or exchange upon which gain or loss is recognized. Hence, acquisition by
inheritance will not qualify. Acquisition by gift will not qualify.
If an option
If an option contract to purchase or exchange was entered into within the sixty-one-day period,
the condition on period will have been satisfied, even if the option was exercised outside the sixty-one-
day period.
Who is a dealer in securities?

A dealer in securities is a merchant of stock or securities, with an established place of business, regularly
engaged in the purchase of securities and the resale thereof to customers, that is, one who, as a merchant,
buys securities and resells them to customers wit a view of the gains and profits that may be derived
therefrom. (Statutory definition).
Case 1.
Mr. A, who is not a dealer in securities sold at a loss 100 shares of common stock of X Co, a resident
corporation. One day before the sale at a loss, he bought 100 shares of common stock of the same
corporation. There was an acquisition within the 61-day period (one day before the sale at a loss). The
loss is a loss on a wash sale. The loss on the sale of 100 shares is not deductible.
Case 2.
Mr. B, who is not a dealer in securities, sold at a loss 100 shares of common stock of Y Co., a resident
corporation. On the next day he bought 150 shares of common stock of the same corporation. There was
an acquisition within the 61-day period (one day after the sale). The loss is a loss on a wash sale. The loss
on the sale of 100 shares is not deductible.
Case 3.
Mr. C, who is not a dealer on securities, sold at a loss 100 shares of common stock of Y Co. a resident
corporation. One day before the sale he bought 60 shares, and one day after the sale he bought 40 shares
of common stock of the same corporation. There were acquisitions within the 61-day period (one day
before and one day after the sale). The loss on the sale is a loss on a wash sale. The loss on the sale of 100
shares is not deductible.
Why is a loss on a wash sale not deductible?
Because the sale of one hundred shares (in the illustration above) is matched by acquisition/s of one
hundred shares. On the one hundred shares sold with a covering acquisition of one hundred shares, there
was really no economic change brought about. The taxpayer, after the acquisition is, where he was before
– with one hundred shares.
Indeed, there was no need to go into the twin transactions of sale and acquisition/s. If there was an
intention to show a loss for a deduction from gross income, the loss was a fictitious loss, as there was no
economic loss.
Case 4.
Mr. D, not a dealer in securities, on December 27, 2017, sold for P90,000, 1,000 shares of common
stock of B Co., a resident corporation, that he acquired on January 20, 2017 for P110,000. On January 5,
2018, or nine days after the sale, he acquired 900 shares of common stock of the same company for
P90,000. What is the tax consequence of the several transactions?
Procedure:
Step 1:
Arrange the transactions on the shares of stock in the order of their dates, whether acquisition/s or
disposition/s:
January 20,2017 – Acquisition of 1,000 shares – P110,000
December 27, 2017 – Sale of 1,000 shares acquired on January 20, 2017 – P90,000
January 5, 2018 – Acquisition of 900 shares
Step 2:
Determine the loss on the sale on which the rules on wash sale may apply (December 27, 2013):
Less: Cost 110,000
Loss on the sale P20,000
Step 3:
With the sale at a loss as the starting point, go up and identify acquisitions within 30 before the sale,
and go down and identify the acquisitions within 30 days after the sale. Including the sale of sale at a loss,
this gives the 61-day period. Were there acquisitions?
Within thirty days before December 27, 2017, there was no acquisition. Within 30 days after
December 27, 2017 – there was the acquisition of January 5, 2018 of 900 shares.
1.20.17 Acquisition
12.27.17 Disposition
1.5.18 Acquisition
Step 4.
Match the number of shares sold at a loss with acquisition/s within the 61-day period, and determine
the loss recognized and not recognized.
On the shares sold at a loss with covering acquisitions, no loss will be recognized. There was no
economic change.
On the shares sold at a loss without covering acquisitions, capital loss will be recognized. There was
an economic change.
Number of shares sold at a loss, December 27, 2017 1,000
Number of shares acquired within the 61-day period, January 5, 2018 900
Number of shares sold at a loss with no matching acquisition,
and on which capital loss will be recognized(holding period is less than 12 months) 100
Loss on wash sale, not deductible (900/1,000 x P20,000) P18,000
Loss recognized (a capital loss because shares held as investments are capital P2,000
Step 5:
What happens to the loss not recognized on a wash sale? The loss not recognized will become part of
the basis of the shares acquired within the sixty-one-day period, with the formula:
Cost of the shares acquired within the 61-day period P90,000
Add: Loss not recognized on the wash sale 18,000
Adjusted cost of the shares acquired within the 61-day period P108,000
and if the shares acquired on January 5, 2018 were sold on December 28, 2018, the gain or loss on the
sale will be computed, with the formula:
Selling price (assumed amount) P130,000
Less: Adjusted cost 108,000
Gain or loss on the sale P22,000
The holding period of the shares with adjusted cost will be from December 27, 2017 (not January 5,
2018) to December 28, 2018 (retroacts to the date of acquisition of the shares in the matching, on which
loss was not recognized).
MERGER AND CONSOLIDATION
Merger and consolidation of corporations involves an exchange of properties. Merger or consolidation
includes not only the formal merger or consolidation, but also the acquisition by a corporation of all or
substantially all of the properties of another corporation. The story on a merger:
A Co. B Co.
Transfers its properties to B Co. (1) Receives the properties of A Co.
Receives from B Co.: (2) Gives to A Co.:

Shares of B Co.: Shares of B Co.
Cash and property, if any of B Co. Cash and property, if any
Stockholder/security holder of
A Co.:
Receives from A Co. the:
Shares of B Co. (3)
Cash and property of B Co
Gives his shares of A Co. to A Co

and becomes a stockholder of B Co.
A Co. ceased to exist B Co. alone exists.
A Co. was merged into B Co., with the authority and permission of the Securities and Exchange
Commission. A Co. will cease to exist, and only B Co. will continue to exist. (There may not be a formal
merger, but only an acquisition of all or substantially all of the properties of a corporation.) C Co. and D
Co. joined together into E Co., C Co. and D Co. ceased to exist. Only E Co. begins to exist. This is
consolidation.
NO CASH/PROPERTY IS RECEIVED CASH/PROPERTY IS RECEIVED
Fair market value of share received Fair market value of shares of received
Less: Cost of shares surrendered, or Add: Cash/property received
Cost of securities surrendered, or Equals: Total incoming value
Equals: Indicated gain or loss Less:
Gain (the gain is not recognized – not taxable), Cost of shares surrendered, or
or Cost of securities surrendered, or
Loss (the loss is not recognized – not deductible) Equals: Total outgoing value
Indicated gain or loss (a) less (b)
Gain, if any is recognized, but not exceeding the

sum of money and fair market value of the
shares, securities received
Loss (the loss is not recognized – not deductible)
(1) (2)
Fair market value of shares P100,000 P100,000 P100,000 P100,000 P100,000 P100,000
received
Add: Cash/fair market value ________ ________ 20,000 10,000 10,000 20,000
of property received
Total received P100,000 P120,000 110,000 110,000 120,000
Less: Cost of the 90,000 (120,000) 100,000 90,000 120,000 150,000
shares/securities surrendered
Indicated gain P10,000 P20,000 P20,000
Indicated loss (20,000) (10,000) (30,000)
Gain to recognize P 0 P20,000 P10,000
Loss not to recognized (P 0) P 0 P 0
Cost of shares surrendered by the shareholder

Less: Cash and/or property received on the merger
Add: Gain recognized to the shareholder on the merger
Basis of the shares or securities received on the merger
(1) (2)
Cost to the shareholder of the P90,000 P100,000 P100,000 P90,000 P100,000 P100,000
shares surrendered
Less: Cash and FMV of the 0 20,000 10,000 10,000 20,000
property received on the 0
merger
Balance P90,000 P100,000 P80,000 P80,000 P90,000 P80,000
Add: Gain recognized on the 0 20,000 20,000 0 0
merger 0
Basis of the shares received P90,000 P100,000 P100,000 P100,000 P90,000 P80,000
by the shareholder
TRANSFER TO CONTROLLED CORPORATION
Circumstances of the transfer. The transfer of property by Mr. A for stock, for a resulting
control, with four others, of Z Co. (FROM “NO CONTROL” to “CONTROL”)
On assumed data:
Mr. A, transferor taxpayer, Z Co., transferee corporation.
Fair market value of shares of Z Co. received P1,900,000
Cash received 500,000
Fair market value 600,000 1,100,000
Total consideration received P3,000,000
Less: Basis of property transferred by Mr. A 1,500,000
Indicated gain P1,500,000
Gain to recognize will not exceed P1,100,000
Basis of property transferred

Less: Cash and fair market value of property received
Balance
Add: Gain recognized
Basis of the shares received
TRANSFER TO CONTROLLED CORPORATION

Circumstance of the transfer. The transfer of property by Mr. A for stock, for a resulting
control, with four others, of Z Co. (FROM “NO CONTROL” TO “CONTROL”).
On assumed data:
Mr. A, transferor taxpayer, Z Co., transferee corporation.
Fair market value of shares of Z Co. received
P1,900,000
Fair market value of property received 600,000 1,100,000
Total consideration received P3,000,000
Less: Basis of property transferred by Mr. A 1,500,000
Indicated gain P1,500,000
The gain to recognize must not exceed the sum of money and fair market value of property
received.
Chapter 13
INCOME TAX COMPLIANCE REQUIREMENTS, FILING OF TAX
RETURNS, PAYMENT OF TAX, COMPUTATION FOR TAXABLE
INCOME, TAX CREDIT FOR FOREIGN INCOME TAX, INCOME TAX
EXPENSE AND PAYABLE IN THE FINANCIAL STATEMENTS
The results of operations in a year, whether a calendar year or a fiscal year, is determined and
reported to the Bureau of Internal Revenue. If there is a net income, and under the applicable income tax
rules there is a taxable income, the income tax is computed and paid. If there is a net loss, the BIR can
review the computations of the taxpayer to determine the existence, and how much, is really the net loss,
and the consequence of such loss.
FILING OF TAX RETURNS

Who are required to file income tax returns?
(The discussions here will be limited only to citizens of the Philippines, corporations and partnerships.)
Citizen of the Philippines residing in the Philippines;
Citizen of the Philippines residing outside the Philippines, on his income from within the Philippines;
Domestic corporation that is not exempt from income tax;
Domestic corporation that is exempt from income tax (The law has an enumeration of exempt
associations) but had not compiled with the administrative requirement on proof of exemption. (This
corporation is required to file the return, but is not required to pay the income tax).
Partnership other than general professional partnership.
Who are not required to file income tax returns?

Individual who is exempt from income tax;
Individual whose sole income had been subjected to final withholding income tax (e.g. capital gain tax in
sale of real property);
Individual, with respect to pure compensation income derived from within the Philippines, qualified
under Revenue Regulation 3-2002 for “Substituted Filing of Income Tax Returns by Employees
Receiving Purely Compensation Income”.
The conditions:
The income must be purely compensation income within the Philippines during the year;
There was one employer only in the Philippines;
The correct income tax was withheld on the income;
The spouse is also entitled to substituted filing under (e) (1), (2), and (3), above;
The employer filed BIR Form 1604CF with the BIR;
The employer issued BIR Form 2316 to the employee, with the signature of the employer and employee.
When must the income tax return be filed?

Capital gain tax return
The capital gain tax return on shares of stock not listed and traded in a local stock exchange must
be filed, as follows:
The return on a per transaction basis must be filed within thirty (30) days from the date of sale; and
The final or consolidating return must be filed on or before the fifteen (15th) day of the fourth month
following the close of the taxable year.
The capital gain tax return on real property in the Philippines is withheld by the buyer and remitted to the
Bureau of Internal Revenue by the buyer.
Income tax return on passive income with final tax
The final tax on certain passive income is withheld by the income payor, and the return and
remittance of the tax withheld are by the income payor.
Income tax returns

Quarterly and annual income tax returns of corporations and partnerships.
In the case of a corporation, quarterly and year-end income tax returns will be filed, as follows:
First quarter
Second quarter Within sixty days after the close of the particular quarter
Third quarter
Year-end On or before the fifteenth day of the fourth month following the close of the taxable year
(calendar or fiscal)
In the case of a general professional partnership, the information return will be filed on or before April 15,
covering the operations of the preceding year.
Estimated income tax of individuals with income from business or profession.
The individual shall make and file a declaration of his estimated income tax for the current taxable year
on or before May 15 of the same taxable year.
The amount of estimated income tax with respect of which a declaration is required shall be paid in four
(4) installments:
First installment - At the time of declaration

Second installment - August 15
Third installment - November 15
Fourth installment - On or before April 15 of the following calendar year when the final adjustment
income tax return is due to be filed.
Self-employed individuals and professionals, at their option, may file income tax returns and pay the
corresponding taxes thereon only once per taxable year.
Where must the return be filed?
The return must be filed with an authorized agent bank, Revenue District Officer, Collection
Agent or duly authorized Treasurer of the city or municipality in which such person has his legal
residence or principal place of business in the Philippines, or if there is no legal residence or place of
business in the Philippines, with the Office of the Commissioner of Internal Revenue. Where the taxpayer
has branches. “place of business” means the place of business where the books of accounts are kept.
PAYMENT OF TAX
When must the tax be paid?
General rule
The tax must be paid at the time the return is filed.
TAX CREDIT FO FOREIGN INCOME TAX PAID.
Who may claim tax credit?

A tax credit on account of income tax paid or incurred (not including interest and penalties) to a
foreign country or countries is allowed to:
Resident citizens of the Philippines; and

Domestic corporations.
Income tax on taxable income P xxx

Less: Tax credit for foreign income tax paid xxx
Income tax still due P xxx
13-4
Tax credit or deduction?
When the income tax of the foreign country can be taken as a tax credit, the taxpayer has the
alternative of taking such as a tax deduction from the gross income.
If qualified to take tax credit - qualified to take deduction

If not qualified to take tax credit - not qualified to take deduction
Limitation A and Limitation B

Step 1. Compute for Limitation A, per country,
(d) Net income, foreign country x Phil. Income tax P xxx
Net income, world
(e) Foreign income tax paid P xxx
(f) Allowed ([a] or [b], whichever is lower) P xxx
Step 2. Total of (c’s), if several foreign countries P xxx
Step 3. Compute for Limitation B

(a) Net income, foreign country x Phil. Income tax P xxx
Net income, world
(b) Total of foreign income taxes paid P xxx
(c) Allowed ([d] or [e], whichever is lower) P xxx
Step 4. Final tax credit.

Limitation A, or Limitation B, whichever is lower P xxx
Illustration
A domestic corporation had the following data in a year:
Net income Income tax paid
Philippines P 700,000
Country A 200,000 P 50,000
Country B 100,000 35,000
Net income, world P 1,000,000 P 85,000
Philippine income tax due if the foreign income tax is claimed as:
Tax credit?
Deduction?
FOREIGN INCOME TAX PAID: DEDUCTION OR TAX CREDIT?
A domestic corporation had the following data in 2018 (Use the 30% normal income tax)
One foreign country only:

Limitation A: Limitation A (by country):
Net income Formula Paid Allowed
Net income, foreign country x Phil.
Net income, world tax P xxx A P 200,000 200,000/1,000,000 x 300,000 = 60,000 50,000 P 50,000
Foreign income tax P xxx B 100,000 100,000/1,000,000 x 300,000 = 30,000 35,000 30,000
P 700,000
Allowed (whichever is lower) P xxx P 1,000,000 85,000 P 80,000
Two foreign countries:

Limitation A (by country) – See above formula
Limitation B (by total) Limitation B (by total)

Net income, outside the Phil x Phil. 300,000/1,000,000 x 300,000 = 90,000 85,000 P 85,000
Net income, world tax P xxx
Total of foreign income taxes P xxx
Allowed (whichever is lower) P xxx
TAX CREDIT TO APPLY (Lmitation A, TAX CREDIT TO APPLY

Or Limitation B, whichever is lower) P xxx (Lmitation A, lower than Limitation B) P 80,000
If credit is taken for the foreign income taxes paid: If deduction is taken for the foreign income taxes paid:
Net income, Philippines P 700,000 Net income, before foreign income tax P 700,000
Net income, Country A 200,000 Net income, before foreign income tax, foreign
Net income, Country B 100,000 countries (P 200,000 + P 300,000) 500,000
Net income, world P 1,000,000 Total P 1,200,000
Income tax P 300,000 Less: Foreign income taxes (P 50,000 + 35,000) 85,000
Less: Tax credit for foreign income tax paid 80,000 Taxable income, world P 1,125,000
Income tax still due P 220,000 Income tax at 30% P 337,500
INCOME TAX EXPENSE AND PAYABLE IN THE FINANCIAL STATEMENTS: THE
WORKING PAPERS
In the case of a corporation, or any entity taxable as a corporation, the income tax of 30% is computed on
what is called “net taxable income”. Net income per accounting records is usually not the same as net
taxable income. The income tax of the year, computed on the taxable income, (not on the net income per
books) is what is reflected in the financial statements of the year. An income tax working papers may be
necessary, in which the taxable income and deductible expenses and losses are analyzed from the year-
end balances in the books of accounts. On assumed data:
On income: Per books Non-taxable Taxable

Interest income
Interest on government bonds* P 10,000 P 10,000
Others 35,000 P 35,000
Dividend income
From domestic corporations* 30,000 30,000
Others 500,000 500,000
Totals P 575,000 P 40,000 P 535,000 (a)
On expenses and losses: Per books Non-deductible Deductible

Loss on sale to a controlled corp.** P 60,000 P 60,000
Others 100,000 P 100,000
Totals P 160,000 P 60,000 P 100,000 (b)
The taxable income and income tax of the year are:
Taxable gross income P 535,000 (a)

Less: Deductible expenses and losses 100,000 (b)
Taxable income P 435,000
Income tax at 30% P 130,500
*Interest on government bonds is not taxable

** Dividend received by a domestic corporation from a domestic corporation subject to income tax is not
taxable to the recipient corporation
*** Loss on sale between “related taxpayers” is not deductible.
Net income from operations P 500,000

Less:
Operating expenses 100,000
Net income from operations P 400,000
Other income (P 10,000 + 35,000 + 30,000) P 75,000

Other losses 100,000 15,000
Net income before income tax P 415,000
Less: Income tax P 130,500
Net Income for the year P 284,500
Statement of Financial Position (As at a date of the year):
ASSETS
(details omitted)
LIABILITIES
Current liabilities:
Others (assumed, details omitted) P 700,000
Income tax payable 130,500
Total current liabilities P 830,500
STOCKHOLDERS’ EQUITY
(details omitted)
Chapter 14
DISCOVERY OF UNDECLARED INCOME
Preliminary Statement.
While good faith must be assumed in the voluntary filing of income tax return and
payment of income tax by an individual, or a taxable entity, however, human frailties may result
in erroneous or fraudulent report of income tax data. The National Internal Revenue Code gives
the Bureau of Internal Revenue ample powers to discover the correct data on which to compute
the taxable income and assess a deficiency income tax.
(a) The data in the income tax return filed by the taxpayer will be checked against the data in the
accounting and other financial records of the taxpayer, and against information coming from
other taxpayers.
(b) The Bureau of Internal Revenue can use the Net Worth-Expenditures Method of
Investigation in determining undeclared income.
“LIFE-STYLE CHECK”.
The Bureau of Internal Revenue can inquire into the unexplained wealth of any official or
employee of the Government, or any income tax payer, who had amassed wealth beyond what
can be afforded by his legitimate income declared in his income tax return.
In a much published case in 2011-2012 of impeachment of a Justice of the Supreme

Court, charges were thrown around that the Statement of Assets, Liabilities and Net Worth
(SALN) of some members of the Supreme Court, some members of the Congress of the
Philippines, and some members of the Cabinet in the Executive Department did not disclose their
true net worth, either assets were not declared, or those declared were understated in value, or
liabilities were overstated or fictitious, and that the true net worth cannot be explained by their
visible or declared sources of income --- and that the SALNs were not made available to the
public. These revelations opened a “pandora’s box”, and the Bureau of Internal Revenue had a
herculean task facing it of determining the true income of certain named political personalities,
not only to discover false declaration of income, but as important as that, to clear the name of
those who might have been unjustly hinted to be evading the income tax.
NET WORTH-EXPENDITURE METHOD OF DETERMINING UNDECLARED INCOME.
(a) Statutory authority.
(1) The net income will be computed upon the basis of the taxpayer’s annual accounting period
(fiscal year or calendar year) in accordance with the method of accounting regularly employed in
keeping the books of accounts, but-
if no such method of accounting has been employed; or if the method employed does not clearly
reflect the income, the computation will be made in accordance with such method as in the
opinion of the Commissioner of Internal Revenue does clearly reflect the Income (Sec. 43,
National Internal Revenue Code).
(2) if a report required by law as basis of an assessment will not be forthcoming within the time
fixed by law or regulations, or when there is reason to believe that any such report is false,
incomplete or erroneous, the Commissioner of Internal Revenue will assess the proper tax on the
best evidence obtainable. (Sec. 6, National Internal Revenue Code)
Formula for Net Worth-Expenditure Method of determining undeclared income.

Year 1 2 3 4 5 6
Assets Xxx xxx xxx xxx xxx Xxx
Less: Liabilities Xxx xxx xxx xxx xxx Xxx
Net worth, end Xxx
Less: Net worth, beginning xxx xxx xxx xxx Xxx
Increase (decrease) in new xxx xxx xxx xxx Xxx
worth
Add: Non-deductible items xxx xxx xxx xxx Xxx
Total
Less: Non-taxable items ---- ---- ---- ---- ----
Taxable income per xxx xxx xxx xxx xxx
investigation
Income tax thereon xxx xxx xxx xxx Xxx
Less: Income tax, per return xxx xxx xxx xxx xxx
Deficiency income tax xxx xxx xxx xxx Xxx
(b) Accounting basis.

From the accounting equation: Assets minus Liabilities equals Net Worth, a year’s
increase in net worth is attributable to income. On this income, adjustments are made to
determine the taxable income by adding the expenses which are non-deductible expenses/losses,
and deducting non-taxable income/receipts. The taxable income so computed is compared with
the taxable income reflected in the income tax return to discover the underdeclaration of taxable
income. Thus, If the taxpayer cannot show that the computation is wrong, there will be a
deficiency income tax.
Illustration.
For a year, in the practice of a profession, Mr. A declared a taxable income of P2,000,000
in his income tax return. Investigation by the Bureau of Internal Revenue revealed that for that
year, he had an increase in net worth of P2,700,000, non-taxable income of P150,000, and non-
deductible expenses of P200,000. His deficiency income tax for that year is P60,000, computed
as follows:
Increase in new worth P2,700,000
Add: Non-deductible expenses 200,000
Total P2,900,000
Less: Non-taxable income 150,000
Taxable income, per investigation P2,750,000
Income Tax (P2,750,000 x 8%*) P220,000
Less: Income tax shown on the return (P2,000,000 x 8%*) 160,000
Deficiency income tax P60,000
Illustration.
The Bureau of Internal Revenue is using the Net Worth Method of Investigation on Mr.
Z, for the calendar year 19D to 19E. Discrepancies were discovered for 19E, even as there was a
payment of P120,000 income tax on the taxable income declared of P1,500,000 for that year.
The assets, liabilities and net worth at the end of 19D and 19E, were:
12.31.19D 12.31.19E
Assets P3,000,000
Liabilities 200,000 300,000
Net worth P2,800,000 P4,850,000
The following data pertain to 19E:
Family expenses P700,000
Other non-deductible expenses 300,000
Other non-taxable income 600,000
The undeclared income and the deficiency income tax are shown below:
Mr. Z 12.31.19D 12.31.19E
Assets P3,000,000 P5,150,000
Less: Liabilities 200,000 300,000
Net worth, end P2,800,000 P4,850,000
Less: Net worth, beginning 2,800,000
Increase in net worth P2,050,000
Add: Non-deductible expenses-
Family expenses 700,000
Others 300,000
Less: Non-taxable income/receipts (600,000)
Taxable income, per investigation P2,450,000
Income tax thereon (P2,450,000 x 8%) P196,000
Less: Income paid (P1,500,000 x 8*) 120,000
Illustration.
The taxpayer is a resident citizen who is self-employed. For 2018 which is under
investigation, he had the following data:
Net worth, beginning of the year P400,000
Net worth, end of the year 600,000
Interest received on government bonds 2,000
Interest on money borrowed to buy government bonds 1,000
Personal, living and family expenses 100,000
Cost of repair of residential house 30,000
Rent income per books (out of an advance rental of P60,000) 10,000
Capital gain on bonds of a domestic corporation held for 8 months 30,000
Capital loss on bonds of a domestic corporation held for 18 months 70,000
Taxable income declared in the income tax return 90,000
The deficiency income tax for 2018 would have been computed, as follows:
Net worth, end of the year P600,000
Less: Net worth, beginning of the year 400,000
Increase in net worth P200,000
Add:
Non-deductible expenses and losses:
Interest on money borrowed to buy government bonds 1,000
Personal, living and family expenses 100,000
Cost of repair of residential house 30,000
Net capital loss (P35,000 less P30,000) 5,000
Item of taxable income not recognized in books:
Advance rental 50,000 186,000
Total P386,000
Less:
Non-taxable income:
Interest on government bonds 2,000
Taxable income per investigation P384,000
Income tax at 8% of P384,000 P30,720
Less income tax in the income tax return (8% of P90,000) 7,200
Chapter 15
SOURCES OF INCOME AND ALLOCATION OF DEDUCTIONS
1. Gross income may be:
a) Entirely Philippine;
b) Entirely foreign;
c) Partly Philippine and partly foreign.
Deductions may be:
a) Entirely Philippine;
b) Entirely foreign;
c) Partly Philippine and partly foreign (unallocated).
2. A need to identify the source of income and deductions:
a) There are taxpayers taxable on world income;
b) There are taxpayers taxable only on Philippine income;
c) There is need to identify Philippine and foreign income on the computation of tax credit
for income tax/es paid to foreign country/ies
Case:
Mr. Araki, a non-resident alien stockholder, received a dividend income of P300,000 in
2019 from a foreign corporation doing business in the Philippines. The gross income of the
foreign corporation from within and outside the Philippines for three years preceding 2018 are as
follows:
Source of income 2016 2017 2018
From within the Philippines P16,000,000 P12,000,000 P14,000,000
From outside the Philippines 18,000,000 14,000,000 16,000,000
Questions: How much is the Philippine income?

Answer: P0
Gross income, within the Philippines, 2016, 2017, and 2018 P 42,000,000
Gross income without the Philippines, 2016, 2017, and 2018 48,000,000
World gross income, 2016, 2017 and 2018 P 90,000,000
Percent of Philippine income in relation to world income (42/90) 46.67%
Since the Philippine gross income is less than 51% of the world gross income, the entire
dividend income will be considered as derived from a foreign source.
SOURCES OF INCOME
General rule To be considered as from the Philippines, it is

sufficient that the activity from which derived
was activity within the Philippines (Supreme
Court of the Philippines.
Provisions in the National Internal Revenue Code and Revenue Regulations
Interest Residence of the debtor
Compensation for personal services Place of the performance (See note 1 below)
Rent and royalty Location of property or place where the
intangible asset is used.
Gain from sale of real property Location of property
Gain on sale of personal property except sale Place of Sale
of shares of stocks of a domestic corporation.
Note: Gain from the sale of shares of stock in
a domestic corporation shall be treated as
derived entirely from sources within the
Philippines regardless of where the said shares
are sold.
Gain from sale of personal property produced (See note 2 below)
Mining Place where mine is located
Farming Place where farm is located
Dividend Nationality of paying corporation (see below)
Note 1: On compensation for personal services performed in part in, and in part out pf the
Philippines:
Number of days of performance in the Philippines x Compensation = PHILIPPINE
Number of days of performance, world received INCOME Pxxx
Note 2: A. Produced in one country and sold in the country - Country where produced and sold
B. Produced in whole or in part in the Philippines and sold in another country:
(1) If the manufacturer regularly sells a part of his output to wholly independent
distributors and other selling concerns in such a way as to establish a fairly independent
price, and the selling or distributing department is located in a different country from that
in which the factory is located, the Philippine income is to be computed by an accounting
which treats the products as sold by the factory to the distributing or selling department at
the independent factory price so established.
(2) Where an independent factory price has not been established:
Step 1: Determine the net income from the activity;
Step 2: Net income from the activity x Value of the property, Philippines Pxxx
2 Value of the property, world
Add: Net income from the activity x Sales, Philippines xxx
2 Sales, world
Equals: Net Income, Philippines Pxxx
Note 3: On dividend:
(a) If the corporation paying the dividend is domestic, the source is Philippines;
(b) If the corporation paying the dividend is foreign, the source is foreign, but:
If for a three-year period preceding the declaration of dividend, the ratio of the
Philippine to the world gross income of the paying corporation was:
0% but less than 51%, the dividend is entirely foreign;
51% up to 85%, the dividend is partly Philippine and partly foreign:
Gross income, Philippines, of paying corporation x Dividend = Dividend, Philippines

Gross income, world, of paying corporation received
*more than 85%, the dividend is entirely Philippines.
3. On deductions:
a) As a general rule, the deductions must be identified with the income:
If the income is identified as from Philippine source, the deduction related to is
Philippine;
b) If the deductions cannot be definitely allocated (called unallocated deductions):
Gross income, Philippines x Unallocated
Gross income, world deductions
Case:
Gain on sale of personal property purchased in the Philippines
P400,00
and sold in Hongkong
Compensation received for personal services in the Philippines
200,000
Rent income from real property in Malaysia
300,000
Gain from sale in the Philippines of shares of a foreign corporation 100,000
Deductions identified with: Philippine income
80,000
Foreign income
120,000
Deductions unidentified with any particular income
30,000
Question: How much of the unidentified deduction is to be considered Philippines?
Answer: P9,000
Question: How much is the net income, Philippines?
Answer: P211,000
Philippines Foreign
Gain on sale of personal property P400,000
Compensation for personal service P200,000
Rent income from real property 300,000
Gain from sale of shares 100,000 _________
Totals P300,000 P700,000
Deductions clearly identified with the income P 80,000 P120,000
Allocated unidentified deductions:
P300,000/P1,000,000 x P30,000 9,000
P700,000/P1,000,000 x P30,000 ________ 21,000
Totals P 89,000 P141,000
Net income P211,000 P559,000
Chapter 16
INCOME TAX ON ESTATE, TRUST, JOINT VENTURE AND CO-OWNERSHIP
1. ESTATE.
A person died. The mass of his estate and his obligations is called "estate”. The estate earns
income. The estate is now a composite of:
(a) Corpus or principal (the mass of properties and obligations); and
(b) Income.
The corpus pays the estate tax. The income pays the income tax.
The rules:
An estate under administration (judicial settlement among the heirs) is taxable.
(a) The rules on gross income and deductions of individuals apply.
(b) However, there is a special item on deduction/income:
A distribution out of the current year's income (not out of the corpus or principal of the
estate) to an heir is a special item of deduction from the gross income of the estate for the
year, which in turn, is a special item of gross income for the year to the heir.
(c) The income distributed to the heir is subject to a withholding income tax of fifteen percent
(15%).
If an estate is not under administration, the rules on co-ownership will apply. (See pages 16-7
and 16-8).
A distribution out of the corpus or principal of the estate will not result in income to the
heir/s.
A tax formula:
Gross income of the estate

Less: Deductions:
Expenses and losses
DISTRIBUTION TO THE HEIR/S OUT CF THE CURRENT YEAR'S INCOME
Taxable income
Case 1.
Mr. A died on July 5, 2018, with several heirs.
Who is/are the taxpayers?
Mr. A died on July 5, 2018
On income from January I to July 5, the On income from July 6 to December 31

income taxpayer is Mr. A (a) If estate is under administration,
the income tax payer is the estate
(b) If estate is not under
administration, the rules on co-
ownership will apply.
The heirs are individual taxpayers.
Case 2
Mr. B died in 2017, leaving an estate from which there was income in 2017 and 2018. There
were distributions in 2018 from the corpus and income of the estate.
Question: Who are the taxpayers in 2018 on the distributions?
Answers:
The taxable year in 2018. Distributions Taxpayer in
2018
ESTATE
Corpus or Distribution in 2018 out of the

principal of the corpus of the estate None
estate
Distribution in 2018 out of the income
None
Income in 2017 of 2017
(Income tax-paid already in 2017)
Income in 2018 (a) Distribution in 2018 out of the

Heir
income of 2018
(b) Retention by the estate of the
income of 2018 Estate
Case 3.
An estate is under administration.
The year is 2018
Gross income from the properties in the estate P700,000
Expenses on the properties 150,000
Distribution out of the year's (2018) income:
To Heir No. 1 50,000
To Heir No. 2 45,000
Distribution of property in the estate to Heir No. 2 60,000
Question: Taxable income of the estate?
Answer: P455, 000,
Question: Gross income of Heirs No. 1 and No. 2?
Answers: A - P50,000; B - P45,000,
Estate Heir 1 Heir 2
Gross Income P700,000 P50,000 P45,000

Deductions:
For expenses on the properties (150,000)
For distribution of income to Heir No. 1 ( 50,000)
For distribution of income to Heir No. 2 ( 45,000)
Taxable income of the estate P455,000
2. TRUST.
(a) There are three parties to a trust: the grantor, the fiduciary and the beneficiary.
For example: A transferred property to B, so that B will hold the property in trust for C. A is
the
grantor, B is the fiduciary, and C is the beneficiary of the trust.
(b) In a trust where:
The fiduciary must accumulate the income, or
The fiduciary may accumulate or distribute the income at his discretion, the trust is taxable.
(1) The rules for individuals will apply on gross income, deductions and tax rates;
(2) A distribution of income (not the property) to the beneficiary is a special item of
deduction for the
trust, which in turn is a special item of gross income to the beneficiary.
Case.
From assumed figures: Trust Beneficiary
Gross income P900,000 P50,000
Deductions:
Expenses on the properties (250,000)
Distribution of income to beneficiary ( 50,000)
Where two or more trusts have the same grantor and the same beneficiary, each trust is a
separate taxpayer. But the Bureau of Internal Revenue will consolidate the income of all trusts.
The computed income tax will be allocated between/among the several trusts, and after credit for
the taxes paid separately, will give rise to an income tax still to be paid by each.
Case.
Data on two trusts, with a common grantor and a common beneficiary:
Trust 1 Trust 2
Taxable income (before income distribution)
from the property held in trust P150,000 P240,000
Distribution to the beneficiary 30,000 20,000
The beneficiary has his personal gross income of P100,000 from business and related expenses
of P40,000.
Question: The income tax of Trust 1 as computed by its fiduciary?
Answer: P0
Question: After consolidation by the Bureau of Internal Revenue, income tax still due from
Trust 1? Answer: P6,353
Question: After consolidation by the Bureau of Internal Revenue, income tax still due from
Trust 22 Answer: P11,647
Question: Income tax of the beneficiary?
Answer: P0
Trust 1 Trust 2
Taxable income from property before income
distribution P150,000 P240,000
Less: Deduction for income distribution 30,000 20,000
Taxable income of each trust P120,000 P220,000
Income tax:
Below P250,000 0
Below P250,000 0
The two trusts have a common grantor and a
common beneficiary.
Computations by the Bureau of Internal Revenue:
Consolidated net income 340,000
Income tax on consolidated net income 18,000
3. JOINT VENTURE.
(a) A joint venture or consortium formed for:
(1) Undertaking construction projects, or
(2) Engaging in petroleum, coal, geothermal and other energy operations- pursuant to an
operating or consortium agreement under a service contract with the Government, is
exempt from
income tax,
The parties to the joint venture are separate taxpayers, reporting income from their share
in the joint venture net income.
(b) Consortia other than the above are taxable as corporations, and the share of the participants
in the
consortia net income after the corporate income tax will be treated as dividend.
Case 1.
A Co. and B Co. are domestic corporations. They formed a consortium and contributed capital
to construct condominium buildings, agreeing to share equally in the net income or net loss.
Sales and rent resulted in a gross income of P70,000,000 and deductions of P30,000,000. A Co.
had its own net income of P2,000,000.
Question: How much is the income tax of the consortium?
Answer: None.
Question: How much is the income tax of A Co.?
Answer: P6,600,000,
Consortium:
Gross income P70,000,000
Deducúons 30.000,000
Net income P40.000,000
Income tax (exempt-construction project) P 0
A Co.
Share in consortium gross income (1/2 of P40,000,000) P20,000,000
Own net income 2,000,000
Taxable income P22,000,000
Income tax at 30% P 6,600,000
Case 2.
J Co. and K Co. are both operating interisland transport services. To have economy of scale,
they formed a joint venture, pooling their capital and personnel, on a project transporting people
and cargo from the Philippines to neighboring Asian countries. The agreed participation on the
net income or loss of the joint venture is equal. In a calendar year, the joint venture and K Co.
had the following data:
Venture КСО.
Gross Income P20,000,000 P5,000,000
Expenses 9,000,000 2,000,000
Question: Income tax of the joint venture?
Answer: P3,300,000,
The venture here is neither of the two joint ventures exempt from tax. It is taxable as a
corporation.
Question: Income tax expense of K Co.?
Answer: P900,000
Joint venture (not either of the two joint ventures exempt from income tax):
Gross income P20,000,000
Less: Expenses 9,000,000
Taxable income P11,000,000
Income tax of corporation (at 30%) 3,300,000
Net income after income tax P 7,700,000
Share of each of J Co. and K Co. (1/2 of P7,700,000) P 3,850,000
K Co.
Own gross income P 5,000,000
Less: Own expenses 2,000,000
Own taxable income P 3,000,000
Income tax at 30% P 900,000
Dividend income from the joint venture - a domestic
corporation P 3,850,000
Final tax (dividend received by a domestic corporation
from a domestic corporation) P 0
4. CO-OWNERSHIP,
Rules:
(a) A co-ownership in which the activities of the co-owners are merely the preservation of the
property and collection of the income from the property is exempt from income tax, but the
share of each co-owner in the net income of the co-ownership will be considered by the co-
owner as an item of gross income, to be consolidated with his personal income.
(b) If the activities of the co-owners go beyond mere preservation of the property and collection
of income from the property (e.g, additional investment), the co-ownership becomes taxable as a
corporation, and a co-owner becomes taxable on his share in the net income after tax (of the
corporation) as if that share is dividend income to him.
Case 1.
Messrs. A and B, brothers. inherited an income-producing property. They have their own
separate practice of their profession and their interest on the property is only to preserve the
property and collect the income from the property. Mr. A, being the older brother, was in charge
of the property. In a calendar year:
On the joint property: P500,000
Gross rent income 100,000
Expenses
Mr. B:
Gross income from profession, net of a 10%
withholding tax P522,000
Expenses on the practice of profession 150,000
Question: Income tax of the co-ownership?
Answer: P0
The activities are limited to preservation of property and collection of income from it.
Question: Taxable income of Mr. B?
Answer: P780,000,
Co-ownership:
Expenses 100,000
Net income P400.000
Income tax (exempt) P 0
Mr. B:
Gross receipts from practice of profession 22,000 90%) P580,000
Gross receipts from the co-ownership (1/2 of P400,000) 200.000
Expenses on the practice of profession 150,000
Taxable income
Chapter 17
GROSS ESTATE
The law: “There shall be paid upon the transfer of the NET ESTATE a tax the rate of six percent
based on the value of such NET ESTATE.”
Gross estate P xxx

Less: Deductions P xxx
Equals: Net estate P xxx
Estate tax at 6& of

the net estate P xxx
Illustration:
How much is the estate tax if the net estate is P 200,000?

Answer: (P 200,000 x 6%) is P 12,000.
Illustration:
How much is the estate tax if the net estate is P 2,000,000?

Answer: (P 2,000,000 x 6%) is P 120,000.
GROSS ESTATE
What is gross estate? What are included in the gross estate of a decedent who was a resident or
citizen of the Philippines at the time of death?
The gross estate of a resident or citizen of the Philippines includes all properties, regardless
of location. Thus, gross estate will include:
(a) Real property (land and building and anything attached to the soil with
permanence – what the law calls “immovable property”); and
(b) Personal property (what the law calls “movable property”);
And personal property may be:
(a) Tangible (e.g. car, jewelry); or
(b) Intangible (e.g. receivable).
If the decedent was married, the gross estate will consist of those properties exclusively owned by
the decedent and those properties jointly owned by the spouses. (In the civil law on property relationship
of the spouses, properties jointly owned may be under the system of conjugal partnership of gains, or
under the system of absolute community of property.) Deductions will be those that are against properties
exclusively owned and those against properties jointly owned. So that the net estate will be of properties
exclusively owned and properties jointly owned. This net estate will be reduced by the share of the
surviving spouse in the net properties jointly owned. What will remain will be the net estate belonging to
the decedent. This is what will be subjected to the estate tax.
The formula:
Gross estate (properties exclusively owned and jointly owned with the spouse)
Less: Deductions (those against exclusive, and those against joint properties)
Net estate (net of the exclusive and net of the joint)
Less: Share of the surviving spouse in the net of properties jointly owned
Equals: Net taxable estate of the decedent
In general,
Property acquired during the marriage is joint property; and obligation contracted
during the marriage is joint obligation.
These are exceptions to this rule, and they will be studies in the law on persons and
family relations for students of Law.
PROPERTIES NOT PHYSICALLY IN THE ESTATE BUT INCLUDIBLE IN THE ESTATE.

There may be properties which at the time of the decedent’s death are not in the estate because they were
transferred by him during his lifetime. A value from the properties will be “borrowed” and included in the
computation of the gross estate, if such properties were transferred under circumstances qualifying as:
Transfer in contemplation of death;
Revocable transfer; or
Transfer under general power of appointment.
Transfer in contemplation of death.

A transfer in contemplation of death is a transfer motivated by them thought of death, although
death may not be imminent. A donation mortis causa (made during the lifetime of the transferor but
intended to take effect at death) is a transfer in contemplation of death. In the illustrations that follow, the
circumstances surrounding the transfer of property may indicate that the transfer was in contemplation of
death.
Illustration.
Mr. A read in the newspapers the obituary (notice of death) of a friend with whom he was talking
a day before. Immediately after reading the obituary, he made a transfer of all his properties to his son, his
only heir.
Illustration.
Mr. B is in a very poor state of health. Suffering from an ailment with complications, he
transferred all his properties to his heirs under the law.
Illustration.
Mr. C, at an advanced stage of one hundred twenty years, transferred all his properties to his son,
Mr. M, his only heir under the law.
Revocable transfer.
A revocable transfer is a transfer where the terms of enjoyment of the property may be altered,
amended, revoked or terminated by the decedent. It is sufficient that the decedent had the power to
revoke, though he did not exercise the power.
A presentation
D --- transferred property --- to E to be held in trust --- for F
Without taking back the property, D can change E; or
Without taking back the property, D can change F; or
D can take back the property.
Transfer under general power of appointment
A power of appointment is the right to designate the person or persons who will succeed to the
property of a prior decedent. A power of appointment may be a general power of appointment or a limited
power of appointment. A general power of appointment is one which may be exercised in favor of
anybody. A limited power of appointment is one which must be exercised only in favor of a certain
person or persons designated by the prior decedent. In order that property passing under a power of
appointment may be included in the gross estate of the transferor, the power of appointment must be a
general power of appointment.
A presentation. General power of appointment.

G→H→I
G transferred property to H with a provision that if G transfers the property, such transfer may be
in favor of anybody. H transferred the property to I. The value of the property will be included in the gross
estate of H.
Distinguished from
Limited power of appointment.

J→K→L
J transferred property to K with a provision that if K transfers the property, such transfer may be
in favor of L. K transferred the property to L. The value of the property will not be included in the gross
estate of K.
Value of the transfers to include in the gross estate.
In a transfer in contemplation of death, revocable transfer, or transfer under a general power of

appointment, the value to include in the gross estate will be as determined under the following rules:
If the transfer was in the nature of a bona fide sale for an adequate and full consideration in money or
money’s worth, no value will be included in the gross estate;
If the consideration received at the time of transfer was less than adequate and full, the value to include in
the gross estate will be the excess of the fair market value the time of the decedent’s death over the
consideration received;
If there was no consideration received on the transfer (as in donation mortis causa), the value to include
in the gross estate will be the fair market value of the property at the time of death.
Transfer for insufficient consideration and the gross estate.

Case 1 Case 2 Case 3
Fair market value at the time of transfer P 100,000 P 100,000 P 100,000
Consideration received 100,000 60,000 0*
Fair market value at the time of death 180,000 180,000 180,000
Value to include in the gross estate none 120,000 180,000
*Donation mortis causa

Compare (a) with (b), to determine the adequacy of the consideration; If found to be not adequate;
Compare (b) with (c), to determine the value to include in the gross estate.
Proceeds of life insurance are paid by the insurance company directly to the beneficiary.
Proceeds of insurance under policies taken out by the decedent upon his life will constitute part of the
gross estate if the beneficiary is:
The estate of the decedent, his executor or administrator; or
A third person (i.e., a person other than the estate, executor or administrator), and the designation of the
beneficiary is revocable.
Under the Insurance Code of the Philippines, a designation of beneficiary is revocable, unless stated
expressly in the policy that the designation is irrevocable.
CLAIM AGAINST INSOLVENT PERSON
A decedent’s claim against an insolvent person (i.e., A person whose asstes are not sufficient to
pay his liabilities) will be included in the gross estate at the full amount of the claim. The fact that it is
uncollectible in whole or in part will be recognized as a deduction from the gross estate for the
uncollectible portion.
Illustration
Mr. Z died with a receivable from Mr. AA of P 20,000. Mr. AA has assets of P 100,000 and
obligations of P 400,000. The gross estate will include a value from the receivable of P 20,000, and there
will be a deduction of ¾ x P 20,000, or P 15,000, computed as follows:
Claims of creditors P 400,000

Assets available to creditors 100,000
Claims of creditors that will not be paid P 300,000
Ratio of claims that will not be paid
To the total claims of debtors (300,000/400,000) ¾
Deduction (3/4 of P 20,000) P 15,000
Illustration
Mr. BB died with a receivable from Mr. CC of P 30,000. Mr. AA has assets of P 550,000 and
obligations of P 50,000 to preferred creditors and P 750,000 to ordinary creditors. The gross estate of Mr.
BB will include a value from the receivable of P 30,000, and there will be a deduction of 2/3 of P 30,000,
or P 20,000, computed as follows:
Assets of Mr. CC P 550,000

Less: Assets for preferred creditors 50,000
Assets of Mr. CC available to ordinary creditors P 500,000
Claims of ordinary creditors P 750,000

Assets available to ordinary creditors 500,000
Claims of ordinary creditors that will not be paid P 250,000
Ratio of claims that will not be paid
To the total claims of debtors (250,000/750,000) 2/3
Deduction (2/3 of P 30,000) P 20,000
EXEMPT ACQUISITIONS AND TRANSMISSIONS.
Not going into the computation of gross estate, and net taxable estate are the following:
The merger of usufruct in the owner of the naked title;
The transmission or delivery of the inheritance or legacy by the fiduciary heir or legatee to the
fideicommissary;
The transmission from the first heir, legatee or donee in favor of another beneficiary, in accordance with
the will of the predecessor;
All bequests, devises, legacies or transfers to social welfare, cultural and charitable institutions no part of
the net income of which inures to the benefit of any individual: Provided, that not more than thirty percent
(30%) of the said bequests, legacies or transfers will be used by such institutions for administrative
purposes.
Illustration.
Mr. DD died leaving a piece of land to Mr. EE in usufruct (right to enjoy the fruits), and to Mr.
FF in naked ownership (without the right to the fruits). The land was subject to the estate tax in the estate
of Mr. DD. Upon the death of Mr. EE, the usufruct will be merged into the naked ownership of Mr. FF
and Mr. FF will become the absolute owner of the property. The transmission of the usufruct from Mr. EE
to Mr. FF will be exempt from the estate tax.
Illustration.
Mr. GG died leaving a piece of land to Mr. HH, a friend, but with a condition that if another
friend, Mr. II, gets maried, Mr. HH will give the property to Mr. II. Mr. II got married. The transmission
from Mr. GG to Mr. HH paid the estate tax. The transmission from Mr. HH to Mr. II will not be subject to
the estate tax.
Illustration.
Mr. GG died leaving a piece of agricultural of land to Mr. HH, a grandson, to be owned by him
for four years, with obligation to preserve it, after which, one-half will be given to Mr. II, a great
grandson, and the other one-half to be retained by him. (This is fideicommissary substitution. The
fiduciary heir, Mr. HH, is entrusted with the obligation to preserve the property and to transmit it to the
fideicommissary heir, Mr. II, with the substitution not going beyond one degree from the heir originally
instituted, both heirs being alive at the time of the testator’s death.) The transmission from Mr. GG to Mr.
HH was subject to the estate tax. The transmission from Mr, HH to Mr. II will be exempt from the estate
tax.
The value of property in exemption (a), (b) and (c) need not be included in the gross estate anymore.
With regard to the property in (d), the value of the property will be included in the gross estate, and the
same value will be deducted from the gross estate, so that the net taxable estate from it will be zero (P0).
Why? Because to be exempt, two conditions must be satisfied: (1) No part of the net income of the
institution will inure to the benefit of any individual; and (2) not more than thirty percent purposes. The
satisfaction of the conditions is subject to verification by the Bureau of Internal Revenue. If the conditions
are not satisfied, the transmission is taxable, and the value of the property will be in the net taxable estate
and will pay the estate tax.
THE GROSS ESTATE OF A NON-RESIDENT,

NOT CITIZEN OF THE PHILIPPINES.
The gross estate of a decedent who at the time of death was a non-
resident, not citizen of the Philippines, will include only:
Real estate in the Philippines;

Tangible personal properties in the Philippines; and
Intangible personal properties in the Philippines, subject to the
“reciprocity clause” on the intangible personal.
The law enumerated what are the intangible personal properties located in the Philippines, as follows:
(a) Franchise which must e exercised in the Philippines;

(b) Shares, obligations or bonds issued by a domestic corporation;
(c) Shares, obligations or bonds issued by a foreign corporation eighty-five percent (85%) of the business
of which is located in the Philippines;
(d) Shares, obligations or bonds issued by a foreign corporation, if such shares, obligations or bonds have
acquired a business situs (subject of several transaction) in the Philippines; and
(e) Shares or rights in any partnership, business or industry in the Philippines.
17-8
RECIPROCITY CLAUSE.
Under the exception known as “reciprocity clause”, intangible personal property located n the Philippines
of the non-resident, not citizen of the Philippines, will not be included in the gross estate. The law states
(art of a long provision):
(a) If the decedent at the time of this death was a citizen and resident of a foreign country which at the
time of death did not impose a transfer or death tax of any character in respect in intangible personal
property of citizens of the Philippines not residing in that foreign country, or (b) if the laws of the foreign
country similar exemption from transfer taxes or deaths taxes of every character in respect of intangible
personal property owned by citizens of the Philippines not residing in that foreign country.
A presentation on “reciprocity clause”.
Z Foreign Country Philippines
X, citizen and resident of Intangible personal property

this country, died here with here
Intangible personal property Y, citizen and resident of the

here Philippines, died here with
The intangible personal

There is no death tax here on
}so { property here of X will not be
intangible personal property
included in the gross estate
here of Y, Filipino
here
The intangible personal
The laws here exempt from
}so { property here of X will not be
death taxed here the tangible
included in the gross estate
property here of Y, Filipino
here
For a comparative composition of the gross estate of a resident and non-resident decedent, turn to
page 17-10.
Realities
“Invincible properties” of the estate.
Illustration.
A man died, survived by a daughter, leaving a piece of land with a Torrens Title in his name, a car
registered in the Land Transportation Office in his name, shares of stock of a domestic corporation in his
name in the Stock and Transfer Book of the corporation, cash on hand, jewelry and other personal
properties. In the case of the land and car registered with Government registry offices, and shares of stock
of the domestic corporation, documents showing transfer of ownership will be required before these
properties can be registered in the name of the daughter. Among the documentary requirements will be
the estate tax return and the official receipt on the payment of the estate tax. But how about the cash on
hand, jewelry and personal properties? There is a very great probability that the heir will not declare them
or declare only a small portion of them.
Unliquidated property ownership.
Illustration.
A died, a widower, with property registered in this name. He had two legitimate children by a former
marriage, C and D. A died leaving ten hectares of farmland acquired when already a widower. C got
married to E and had a child F. E died ahead of C. D got married to G and had two legitimate children, H
and I. G died ahead of D. The present generation is F, H, and I. If all successions were intestate (there was
no last will and testament), what is the interest of each in the preset generation in the undivided poverty,
that must have been reported as a gross estate of their predecessors, assuming such property had an
unchanged fair market value of P3,000,000? F, H and I must contribute to the estate tax that must be paid
on the estate of A, to the extent of one-half for F, and one-fourth each for H and I. F must pay the estate
tax on the estate of C. H and I must share to the extent of one-half each on the estate tax on the estate of
D.
Live-in relationships.
What property relationship is brought about by two people who are living together without being
married? Common-law husband-wife relationships are many and there are properties acquired by the
parties to the relationship. The rules:
Property acquire by:

(a) Exclusive effort;
(b) Or exclusive money;
(c) Or exchanged with exclusive property, will be exclusive property of the party who exerted the effort
or owned the exclusive money or property.
Property acquired by:

(a) Joint effort;
(b) Or money owned by both; or
(c) Exchanged with property owned by both, will be co-owned by the parties, one-half to belong to each,
so that the gross estate will consist of: (a) Exclusively owned property; and (b) One-half of the joint co-
owned property.
Comparative composition of gross estate of a resident or citizen decedent and a non-resident, non-
citizen, decedent.
Decedent was: Resident or Non-resident,

Citizen not citizen
1. Real property in the Philippines Included Included
2. Real property outside the Philippines Included Not included
3. Tangible personal property in the Philippines Included Included
4. Tangible personal property outside the Philippines Included Not included
5. Intangible property in the Philippines Included Included
6. Intangible personal property outside the Philippines Included Not included
7. Property subject of transfer in contemplation of death, revocable
transfer, or transfer under general power of appointment, if the
property was:
a. In the Philippines at the time of transfer but outside the Philippines Included Not included
at the time of death
b. Outside the Philippines at the time of transfer but in the Philippines Included Included
at the time of death
c. In the Philippines both at the time of transfer and at the time of Included Included
death
d. Outside the Philippines at the time of transfer and at the time of Included Not included
death
Chapter 18
DEDUCTIONS FROM THE GROSS ESTATE-1
The deductions from the gross estate are: Citizen/ Resident NRA
Standard deduction P5,000,000 P500,000
Claims against the estate Yes
Proportionate
Claims against insolvent persons Yes
Deduction for
Unpaid mortgage or indebtedness Yes LIT
Casualty losses, or from robbery, theft or embezzlement Yes
Vanishing deduction Yes Yes
Transfer for public use Yes Yes
Family home (at fair market value of family home
in the gross estate) Maximum 10,000,000 -
Amount received by heirs under Republic Act 4917 Yes -
Share of the surviving spouse in the joint property Yes Yes
Claims against the estate.
A person, at some time during his lifetime, must have contracted obligations. It is enforceable
against him when alive, the obligations shall be claims against his estate when he is dead. Thus,
an obligation that had prescribed already during the lifetime of the decedent, or that was un-
forceable against him when still alive (e.g., not in writing, in cases required by law) shall not be a
claim against his estate when he is dead.
If a claim against the estate arose out of a debt instrument, the debt instrument must be
notarized (except for loans by financial institutions where notarizations is not part of the business
practice or policy of the financial institution). if the loan was contracted within three years before
the death of the decedent, the administrator or executor must submit a statement showing the
disposition of the proceeds of the loan.
If a monetary claim against the decedent did not arise out of a debt instrument, the requirement
on a notarized debt instrument does not apply.
Illustration.
Mr. A, during his lifetime, executed a promissory note that was not notarized. He Died with the
note still unpaid. Can there be a claim against his estate arising out of the promissory note?
None.
Illustration.
Mr. B, during his lifetime, executed a promissory note, payable within sixty days from the
date of issue, and had it notarized. He died the day after he executed the promissory note. The
proceeds of the note were certified by the administrator of the estate as used for family expenses.
The obligation is a claim against the estate.
Illustration.
Mr. C, during his lifetime, was sued for damages for an act committed by him, and the court
ordered him to pay damages. He died before he could comply with the order of the court. The
judgment for the sum of money is a claim against the estate. There is no debt instrument
involved.
Illustration.
Mr. D, during his lifetime, had cash of P100,000. He borrowed P100,000 from Mr. E, a friend,
and executed a notarized promissory note for it. The aggregate of P200,000 was maintained in a
single bank account, from which expenses were paid. One year after the note was executed, and
the note still being unpaid, Mr. D died. The administrator of the estate could not trace payments
from the proceeds of the note. Can there be a deduction from the gross estate for the claim of Mr.
E? None.
Claims against insolvent persons.
A person is insolvent when his properties are not sufficient to pay his obligations. The claims
of the creditors shall be satisfied out of his available properties. There are two kinds of creditors,
namely, the preferred creditors and the ordinary creditors. As the terms imply, the preferred
creditors shall be paid first in full from the properties (e.g., the Government, for unpaid taxes),
and the balance of the properties shall be available proportionately to the ordinary creditors.
Claims against insolvent persons are deductions from the gross estate, subject to the condition
that the full amounts of the receivables are first included in the gross estate. The deduction from
the gross estate shall be the uncollectible portion. It shall be wrong to include in the computation
for the taxable estate only the realizable portion of the claims.
Illustration.
Mr. F died leaving an estate, in which receivables from debtors are included, as follows:
P10,000 from a brother who died without any property whatsoever, and P15,000 from a friend
whose properties are not sufficient to pay preferred creditors. The deduction for claims against
insolvent persons shall be P25,000.
Illustration.
Mr. G died leaving an estate, in which there is a receivable of P60,000 from a debtor who has
not enough properties to pay all his obligations. The debtor’s properties were worth P100,000
and his obligations amounted to P300,000. Only one-third (1/3) of the obligations can be
satisfied from the properties. The deductions from the gross estate of Mr. G for a claim against
an insolvent person shall be 2/3 of P60,000, or P40,000.
Unpaid mortgage or indebtedness on property.
When a person leaves property encumbered by a mortgage or indebtedness, his gross estate
shall include the fair market value of the property, undiminished by the mortgage or
indebtedness. The mortgage or indebtedness shall be claimed as a deduction from the gross
estate. It shall be wrong to include in the computation for the gross estate only the equity of the
decedent on the property.
Illustration.
Miss H died leaving real property with a fair market value of P1,000,000, but subject to a
mortgage in favor of Miss I in the amount of P600,000. While the equity of Miss H is P400,000,
the gross estate shall include the fair market value of P1,000,000, and the mortgage of P600,000
shall be claimed as a deduction from the gross estate.
If the loan is merely an accommodation loan, where the proceeds of the loan went to another
person, the value of the unpaid loan shall be included in the receivable of the estate.
Taxes.
Taxes are deductions from the gross estate if such taxes accrued prior to the decedent’s death.
Taxes that accrued after the decedent’s death are not deductible.
The National Internal Revenue Code has a negative statement on taxes as deductions from the
gross estate, as it only enumerates taxes that cannot be deducted, as follows:
(a)Income tax on income received after death;

(b) Property taxes not accrued before death; and
(c)Estate Tax.
Illustration.
Mr. I died on March 5, 2018 before he was able to file his income tax return for the calendar
year 2017. The income tax accrued before his death. The tax shall be a deduction from his gross
estate.
Illustration.
The real property tax of Mr. J for 2018 was P20,000. He died on June 30, 2018 after paying two
of four equal installments on the tax. The deduction from his gross estate shall be P10,000. The
real property tax accrues at the beginning of a calendar year, although allowed to be paid in
installment. The unpaid amount of P10,000 accrued already on January 1, 2018.
The estate tax accrues after death, hence not deductible from the gross estate. However, in the
case of a decedent who was a citizen or resident of the Philippines at the time of death, there
shall be a Philippine estate tax payment on his properties within and outside the Philippines.
How are the two estate tax payments treated?
On the estate tax paid to the foreign country, the law allows a tax credit to reduce the Philippine
estate tax. The Philippine estate tax cannot be deducted.
Losses.
Losses are deductible from the gross estate if:

(a) Arising from fire, storm, shipwreck, or other casualty, robbery, theft or embezzlement;
(b) Not compensated by insurance or otherwise;
(c) Not claimed as a deduction in an income tax return of the estate subject to income tax;
(d) Occurring during the settlement of the estate;
(e) Occurring before the last day for the payment of the estate tax (Last day to pay: 1 year after the
decedent’s death, or the allowed ex-tension)
Theft is the simple taking of property without the consent of the owner. If the taking of property is
accompanied by force or intimidation, the act is robbery. Embezzlement, is also called estafa, is the
misapplication of en-trusted property without the consent of the owner. A “casualty” is an accident, a
mishap, or a sudden invasion by a hostile agency, and excludes the gradual deterioration of property
arising from a steadily operating cause.
Illustration.
During the settlement of the estate and within one month from the date of death, a building included in
the report of properties in the gross estate was destroyed by earthquake. Is there a deduction? Yes.
Earthquake is “other casualty”.
Illustration.
It took two and a half (2 ½) years to settle of the estate of the Mr. K. On the tenth month after his death,
a house which was part of the gross estate and with a fair market value of P5,000,000 was totally
destroyed by fire. There was no insurance recovery. There shall be no deduction from the gross estate.
While the loss took place during the settlement of the estate, the loss took place after the last day for the
payment of the estate tax.
A presentation on period for occurrence of casualty loss.
Case 1: loss can be deducted

Date of
Death Loss
Settlement of the estate

1 year
Case 2: loss cannot be deducted
Date of
Death Loss
Settlement of the estate

1 year
Illustration.
If in the preceding illustration, an executor was appointed on the third month following the
date of death, and there was a building with a fair market value of P2,000,000 in the gross estate.
The fire took place on the fourth month following the date of death. There were insurance
proceeds receivable of P1,600,000. The deductible casualty loss shell be P400,000.
Illustration.
Miss L died with a Mercedes Benz car with a fair market value of P2,000,000, which is
reflected in the inventory of properties in her gross estate. The estate was in the process of extra-
judicial partition among her heirs when, at a time two months after her death, the car was stolen.
The criminal was caught, but unable to return the car, he paid a compromise amount of
P1,800,000. The deduction from the gross estate shall be P200,000. The requirement on the loss
taking place during the settlement of the estate was satisfied even if the settlement of the estate
was extrajudicial. And the loss reduces the deductible actual loss.
Illustration.
Mr. K died and his estate was the subject of judicial settlement. There were income producing
properties in the estate. On the third month after death, there was a loss of property in the estate.
In an income tax return filed for the estate (the estate is a taxable entity), the loss deducted from
the gross income of the estate. The same loss cannot be deducted from the gross estate.
Transfer for public use.

By “transfer for public use”, as deduction from the gross estate, is meant dispositions in a last will and
testament, or transfer to take effect after death, in favor of the Government of the Philippines, or any
political sub-division thereof, for exclusively public purposes.
What are the political subdivisions of the National Government? They are:
(a) Provinces;
(b) Cities;
(c) Municipalities; and
(d) Barangays.
Illustration.
In his last will and testament, Mr. L left a piece of land with a fair market value of P2, 000, 000 to the
city of Tabaco, Albay, for the city government to build on it a New City Hall. There shall be a deduction
of P2, 000, 000 from the gross estate of Mr. L.
Illustration.
During his lifetime, Mr. M made a donation mortis causa of a piece of land with a fair market value of
P800, 000 to barangay Don Manuel, Kalakal City, on which to construct the barangay hall. The value of
the property shall be included in the gross estate of Mr. M, and the same value shall be a deduction from
the gross estate.
Standard Deduction
The law: “An amount equivalent to five million pesos (P5,000,000).”
The gross estate of every decedent who was a citizen or resident of the Philippines always has a
standard deduction of P5,000,000.
Illustration.
Mr. A, a citizen and resident of the Philippines, single, died leaving a gross estate of P9,300,000.
All deductions for expenses and losses, substantiated by receipts and other documents, amounted
to P2,300,000. The net taxable estate shall be computed as follows:
Gross estate P9,300,000

Less:
Expenses and losses P2,300,000
Standard deduction 5,000,000 7,300,000
Net taxable P2,000,000
Family home.
What is a family home? A family home of a married person, or an unmarried head of family, is
the dwelling house where the person and his family reside, and the land on which it is situated.
Within the meaning of “family” are the spouse, parents, ascendants, descendants, brothers and
sisters, who are living in the family home and who depend upon the head of the family for
support.
The deduction for family home is “an amount equivalent to the current fair market value
of the decedent’s family home,” The maximum is ten million pesos (P10,000,000)”.
The deduction from the gross estate for family home shall be allowed when the family home is
certified to as such by the Barangay Captain of the locality where it is located.
For a person who was married at the time of death, and who was under the system of absolute
community of property or conjugal partnership of gains in his property relationship with the
spouse, the deduction for family home is one-half ( ½ ) of the fair market value of the family
home, but must not exceed ten million pesos (P10,000,000), if such family home was community
property, or conjugal property. There can be one family home only.
Illustration.
Mr. C, single, a head of family, a citizen and resident of the Philippines, died leaving as gross
estate a family home with a fair market value of P12,000,000, together with other properties with
a fair market value P10,500,000. Deductions (others), were P4,000,000, but not including the
standard deduction and family home. The net taxable estate should have been computed thus:
Gross estate:
Family home P12,000,000
Other properties 10,500,000
Total P22,500,000
Deductions:
Other Deductions P 4,000,000
Family home (maximum) 10,000,000
Standard deduction 5,000,000 19,000,000
Net taxable estate P3,500,000
If the decedent was a citizen of the Philippines residing abroad, and his home was abroad, can
there be a deduction for “family home” since the family home is included in his gross estate? No.
The requirement of certification by the Barangay Captain that the home was a “family home”
cannot be satisfied.
In case the decedent used as family home a part of a structure co-owned by him
with others, the value of the family home to be included in his gross estate, and the deduction for
family home, is only the value of that portion of the structure that belongs to him, the aggregate
of which is subject to the maximum of P10,000,000 deduction for family home.
If a family home is mortgaged, can there be a deduction for mortgage payable and for family
home together, the aggregate of which exceeds the value of the family home? Yes. The two
deductions are from the gross estate, not against the particular property only.
Illustration.
Mr. D died, a citizen and a resident of the Philippines. Included in his gross estate was a family
home consisting of land and a structure on it that he acquired thru a bank loan of P12,000,000.
At the time of his death the property had a P5,000,000 zonal value, and an unpaid bank loan of
P800,000. How much is the total of the deductions related to the property that can be claimed?
P10,800,000, computed as follows:
Unpaid mortgage P 800,000
Family home 10,000,000
Total P10,800,000
The two deductions are from the entire gross estate, and not from the family home only.
VANISHING DEDUCTION (See chapter 19).
SHARE OF THE SURVIVING SPOUSE IN THE NET CONJUGAL OR COMMUNITY PROPERTIES (See
chapter 20).
DEDUCTIONS FOR A NON-RESIDENT, NOT CITIZEN OF THE PHILIPPINES.

A decedent who was not a citizen or resident of the Philippines at the time of death, with
properties within and outside the Philippines, is subject to tax only on his estate within the
Philippines. Due to this, the estate in the Philippines is allowed limited deductions.
Deductions from the gross estate of a non-resident, not citizen, of the Philippines
(a) Expenses, losses, indebtedness, taxes, etc.:

Proportionate Deductions for LIT:
Gross Estate Phil. x LIT world
Gross Estate world
*Claims against the estate, claims against insolvent persons, unpaid mortgage or
indebtedness on properties, losses, indebted-ness, taxes, etc., were paid or incurred (whether
within or outside the Philippines). On the total of the items, the formula provided by the law
must be applied.
(b) Transfers for public use of property in the Philippines;
(c) Vanishing deduction on property in the Philippines.
Illustration.
Mr. E, a citizen and resident of F foreign country, single, died leaving a gross estate of
P15,000,000 in the Philippines and P3,000,000 in F foreign country. Expenses, losses,
indebtedness, taxes, etc., in the Philippines amounted to P6,000,000, while expenses, losses
indebtedness, taxes, etc., in F foreign country amounted to P1,000,000. The deductions from the
Philippine gross estate for expenses, losses, indebtedness, taxes, etc., shall be computed, as
follows;
Gross estate within the Philippines P15,000,000

Gross estate within F foreign country 3,000,000
World gross estate P18,000,000
Expenses, losses, indebtedness, taxes,
etc. within the Philippines P 6,000,000
Expenses, losses, indebtedness, taxes,
etc. within F foreign country 1,000,000
World expenses, losses, indebtedness, taxes, etc. P 7,000,000
Deduction: P15,000,000/P18,000,000 x P7,000,000 P 5,833,333
Chapter 19
DEDUCTIONS FROM THE GROSS ESTATE-2
VANISHING DEDCUTION
Property may change hands within a very short period of time by reason of the early death of the
owner who received it by inheritance or gift. This subjects the property to a very heavy burden in
taxes, because the transfer tax is imposed on each transfer. To provide a relief, vanishing deduction
is allowed to reduce the gross estate of the recipient of the inheritance or gift.
Vanishing deduction is allowed when (conditions):

(a) The present decedent died within five years from receipt of the property from a prior decedent or
donor;
(b) The property on which vanishing deduction is being claimed is located in the Philippines;
(c) The property must be part of the taxable estate of the prior decedent, or of the taxable gift of the
donor;
(d) The estate tax or the prior succession or the donor’s tax on the gift had been finally determined and
paid;
(e) The property on which vanishing deduction is being claimed can be identified as the one received
from the prior decedent, or from the donor, or something acquired in exchange for it;
(f) No vanishing deduction on the property was allowable to the estate of the prior decedent.
Must there be two deaths in order that there may be a vanishing deduction? Yes, if the property was
acquired by the present decedent by inheritance. No, if the property was acquired by the present decedent
by donation- the donor may still be alive.
Illustration.
Mr. A died leaving a piece of land to Mr. B. Two years later, Mr. B died with the same piece of land.
There can be a vanishing deduction on the piece of land from the gross estate of Mr. B. The piece of land
in the gross estate of Mr. B can be identified as the same piece of land he inherited from Mr. A.
Illustration.
Mr. C died leaving a piece of land to Mr. D exchange the piece of land for a car during his lifetime. Mr.
D still had the car at the time of his death, which was two and one-half years after the death of Mr. C.
There can be a vanishing deduction on the car in the estate of Mr. D, because the car can be identified as
property acquired in exchange of the land inherited from Mr. C.
Illustration.
Mr. P inherited real property from Mr. E. Three years after the inheritance he died, and the property was
inherited by Miss G. Four years after Miss G inherited the property, she died, and the property was
inherited by Mr. H. Two years after inheriting the property, Mr. H died, and the property was inherited by
Miss I. Six years after, Miss I died. Vanishing deduction will or will not be available to estates, as shown
in the presentation below.
Vanishing deduction in the successive estates
Property held for:
E
3 years Vanishing deduction in the estate of F.
F
G 4 years No vanishing deduction in the state of G because there was vanishing
deduction in the estate of F –even as 4 years only.
H 2 years vanishing deduction in the estate of H because there was no vanishing
deduction in the estate of G.
I 6 Years No Vanishing deduction in the estate of I because inherited more than five
years ago.
Computation for the Vanishing deduction.

Step 1. Determine the basis of the vanishing deduction:
(a) The Initial value to take as the basis of the vanishing deduction in the value of the
property in the prior estate (or value used for donor’s tax purposes), or the value of such
property in the present estate, whichever is lower. Where the property referred to consists of two
or more items, the aggregate of the item by item lower of two values will be initial basis.
(b) The value in (a) will be reduced by any payment made by the present decedent on any
mortgage or lien on the property, where such mortgage or lien was a deduction from the gross
estate of the prior decedent, or gift of the door;
(c) The value in (b) will be further reduced by:
Value as reduced in (b) x All deductions except the
Gross estate vanishing deduction.
Step 2. On the computed basis in Step (1). apply:
% If received by inheritance or gift
100% Within one year prior to the death of the decedent;
80% More than one year but not more than two years prior to the death of the decedent;
60% More than two years but not more than three years prior to the death of the decedent;
40% More than three years but not more than four years prior to the death of the decedent;
20% More than four years but not more than five years prior to the death of the decedent;
Illustration.
Mr. J died leaving two pieces of land to Miss K, one located in the Philippines and another in
Malaysia. Two years after, Mr. K died still owning the two pieces of land. There can be a
vanishing deduction on the land in the Philippines. There can be no vanishing deduction on the
land in Malaysia (not in the Philippines).
Illustration.
Mr. L inherited a car and a motorcycle from Mr. M, a citizen of the Philippines.
The properties were in the United States at the time of inheritance. The Philippine estate tax was
paid on the properties. Mr. L brought the car to the Philippines, but the motorcycle remained in
the United States. Three years after inheriting the property, Mr. L died in the Philippines. At the
time of his death the car was in the Philippines while the motorcycle was still in the United
States.
Can there be a vanishing deduction on the car? Yes.
(a) The present decedent died within five years from the receipt of the property from the prior
decedent;
(b) The property formed part of the taxable estate of the prior decedent even if abroad at that
time because the prior decedent was a citizen of the Philippines;
(c) The estate tax on the prior succession was determined and paid;
(d) The car is identified as the same car inherited;
(e) There was no vanishing deduction on the car in the prior estate;
(f) The property was in the Philippines when Mr. L died.
On the motorcycle? No.
(a) The present decedent died within five years from receipt of the property from the prior
decedent;
(b)The property formed part of the taxable estate of the prior decedent even if abroad at that time
because the prior decedent was a citizen of the Philippines and all properties regardless of
location were includible in his gross estate;
(c) The estate tax on the prior succession was determined and paid;
(d) The motorcycle is identified as the same motorcycle inherited;
(e) There was no vanishing deduction on the motorcycle in the prior estate;
(f) BUT, the property was not in the Philippines when Mr. L died.
There can be a vanishing deduction on the car because all the requirements for the vanishing
deduction are present. On the motorcycle, there can be no vanishing deduction because the
motorcycle was not in the Philippines when Mr. L died.
Illustration.
Mr. M single, inherited a piece of land from his father with a fair market value of P5,000,000
when inherited. Two and one-half years later Mr. N died still with the same piece of land, at this
time with a fair market value of P6,000,000. The gross estate, on which the land was part, was
P20,000,000. Deductions from the gross estate amounted to P5,000,000. The vanishing
deduction would have been computed as follows:
Land, initial value to take P5,000,000

Less: P5,000,000/P20,000,000 x P5,000,000 1,250,000
Basis of vanishing deduction P3,750,,000
Vanishing deduction (60% of P3,750,000) P2,250,000
Illustration.
Mr. P died, with the following data on his estate:

Property inherited from the father 2 ½ years before (with
a fair market value of P5,000,000 when inherited)
Fair market value
P4,000,000
Property received as gift within the same year than Mr.
P died (with a fair market value of P4,000,000 when
Received). Fair market 2,800,000
Cash and other properties in the estate 8,200,000
Total P15,000,000
Deductions available (not including the
vanishing deduction) P6,000,000
The vanishing deduction would have been computed as follows:
On property received as Inheritance Gift
Initial value to take P 4,000,000 P 2,800,000

Less:
P4,000,000/P15,000,000 x P6,000,000 1,600,000
P2,800,000/P15,000,000 x P6,000,000 1,120,000
Basis of vanishing deduction P 2,400,000 P 1,580,000
Percent to apply 60% 100%
Vanishing Deduction P 1,440,000 P 1,680,000
COMPUTATION FOR VANISHING DEDUCTION AND NET TAXABLE ESTATE
Step 1. Determine the initial value to take

Data: for vanishing deduction
Value in the prior estate; or P250,000 Value in the prior estate P250,000
Value in the present estate 220,000 Value to the present estate P220,000
Value to take (whichever is lower) P 220,000
Mortgage on the property when inherited P 50,000
Mortgage on the property still unpaid at Step 2. Less: Mortgage indebtedness paid 20,000
Present decedent’s death 30,000 Balance 200,000
Mortgage paid by the present decedent P 20,000 Step 3. Less:
Other data: Value after Step 2 x All deductions
Gross estate of present decedent P2,000,000 Gross estate
All Deductions P 200,000 x (P770,000 + P30,000) 80,000
Others 770,000 P 2,000,000
Unpaid mortgage 30,000
Basis of vanishing deduction P120,000
Time interval from receipt of property Step 4. Vanishing deduction is:
from prior decedent to the date of the 3 years and Apply the % applicable on the basis of
present decedent’s death 11 months vanishing deduction (40% of P120,000) P 48,000
Computation for the net taxable estate:
Gross estate P2,000,000

Les: Ordinary deductions:
Others ( 770,000)
Unpaid mortgage ( 30,000)
Vanishing deduction ( 48,000)
Chapter 20
NET TAXABLE ESTATE
DECEDENT WAS SINGLE.

Mr. Romeo Guzman, a citizen and resident of the Philippines, single, a head of family,
died leaving the following properties and charges thereon:
Land in Antipolo City, Rizal ₱5,000,000
Car 500,000
Land and Building (family home) 12,500,000
Personal Properties 2,000,000
Claims against the estate 500,000
The land and car were inherited from the mother four and one-half years before, with the
following data:
Land Car
Fair market value when inherited ₱10,000,000 ₱600,000
Payment on mortgage indebtedness (in full) 1,000,000 50,000
The net taxable estate of Mr. Romeo Guzman, and the estate tax thereon, would have
been computed as follows:
Estate of Romeo Guzman
Gross estate:
Land in Antipolo City, Rizal ₱5,000,000
Car 500,000
Family Home 12,500,000
Personal Properties 2,000,000
Total ₱20,000,000
Deductions:
Claims against the estate 500,000
Vanishing Deduction (Schedule) 1,842,750
Family Home
Actual 12,500,000
Maximum 10,000,000
Allowed 10,000,000
Standard Deduction 5,000,000 (17,342,750)
NET TAXABLE ESTATE ₱ 2,657,250
Multiply: Estate Tax Rate 6%_____
Estate Tax Due ₱ 159,435_
Vanishing Deduction, Schedule
Initial Value to take:
Land ₱10,000,000
Car 500,000
Total ₱10,500,000
Less: Mortgages paid on:
Land 1,000,000
Car 50,000 (1,050,000)
Balance ₱ 9,450,000
Less: ₱9,450,000/20,000,000 x 500,000 (236,250)
Basis of Vanishing Deduction ₱ 9,213,750
Multiply: Vanishing Deduction Rate 20%___
Vanishing Deduction ₱ 1,842,750
DECEDENT WAS MARRIED.

Under the Philippine laws, the property relationship between the spouses may be
governed by contract executed before the marriage, which may be: (a) Complete separation of
property; (b) Relative community or conjugal partnership of gains; (c) Absolute community; or
(d) Any other property relationship. If a property relationship between the spouses is by contract,
the contract must be executed before the marriage.
In the absence of such contract, or if the contract is void: (a) On marriages contracted
before August 3, 1988, the system of conjugal partnership of gains will govern; and (b) On
marriages contracted on or after August 3, 1988 (effectivity of the Family Code of the
Philippines), the system of absolute community of property will govern.
Whether the property relationship is the conjugal partnership of gains (relative
community of property), or absolute community of property, the net properties of a decedent
who was married will fall into two categories:
(a) Net property owned exclusively; and
(b) Net property owned jointly (called “community” or “conjugal”)
The surviving spouse has a one-half share in the net community or conjugal property.
On assumed figures:
Exclusive Community Total
Real Properties ₱4,000,000 ₱4,000,000
Real Property ₱3,000,000 3,000,000
Cash 500,000 500,000
Family Home 12,000,000 12,000,000
Other Properties 2,000,000 2,000,000
Gross Estate 5,500,000 16,000,000 21,500,000
Less:
Expense, Losses, and other
deductions (1,000,000) (2,000,000)_ (3,000,000)
Net exclusive/community
estate ₱4,500,000 ₱14,000,000 ₱18,500,000
Family Home
½ of 12,000,000 6,000,000
Maximum 10,000,000 (6,000,000)
Standard Deduction (5,000,000)
Share of the surviving spouse (1/2 of 14,000,000) (7,000,000)
NET TAXABLE ESTATE ₱ 500,000
Multiply: Estate Tax Rate 6%___
Estate Tax Due ₱ 30,000
PROPERTY RELATIONSHIP OF HUSBAND AND WIFE
CONJUGAL PARTNERSHIP OF GAINS ABSOLUTE COMMUNITY OF PROPERY

Exclusive Properties: Exclusive Properties:
1. That which is brought to the marriage as his or her own 1. Properties acquired by gratuitous title by either spouse, and
the fruits as well as the income thereof, if any, unless it is
expressly provided by the donor, testator, or grantor that they
will form part of the community
2. That which each acquires during the marriage by gratuitous title 2. Property for personal and exclusive use of either spouse,
(inheritance or gift) however, jewelry will form part of the community property
3. That which is acquired by right of redemption or exchange of 3. Property acquired before the marriage by either spouse who
property belonging to only one of the spouses have legitimate descendants by a former marriage, and the
fruits as well the income, if any, of such property
4. That which is purchased with exclusive money of the wife or
the husband
Conjugal Properties: Community Properties:
Property that cannot be definitely identified as exclusive property Property that cannot be definitely identified as exclusive
will be presumed to be conjugal property property will be presumed to be community property
In general, if the property is exclusive, any charge related to it is exclusive, and if the property is joint any charge related to it
is joint;
If the family home is joint, the special deduction for it is one-half (1/2) of the value included in the gross estate, but not to
exceed ₱10,000,000 (Under TRAIN Law).
Chapter 21
ESTATE TAX COMPLIANCE REQUIREMENTS
FILING OF RETURNS, PAYMENT OF TAX, TAX

CREDIT FOR FOREIGN ESTATE TAX PAID
NOTICE OF DEATH.
In all cases of transfers subject to tax, the executor, administrator or any of the legal
heirs, as the case may be, within two months after the decedent’s death, or within a like period
after qualifying as such executor or administrator, must give a written notice thereof to the
Commissioner.
FILING OF ESTATE TAX RETURN.
An estate tax return is required to be filed when the estate is:
(a) Subject to estate tax; or
(b) Where the gross estate consists of registered or registrable property, such as real
property, motor vehicle, or shares of stock, or other similar property, for which clearance
from the Bureau of Internal Revenue is required as condition precedent for the transfer of
ownership, thereof in the name of the transferee.
Estate tax returns showing a gross estate exceeding five million pesos (₱5,000,000) must
be accompanied by a statement, certified by Certified Public Accountants of:
(a) Itemized assets of the decedent, with their corresponding gross value at the time of his
death, or, in case of a non-resident, not citizen of the Philippines, of that part of his gross
estate situated in the Philippines;
(b) Itemized deductions from the gross estate;
(c) The amount of tax due, whether paid or still due and outstanding.
The estate tax return must be filed within one year after the decedent’s death.
Except in cases where the Commissioner permits, the return must be filed with an
authorized agent bank, or Revenue District Officer, Collection Officer or duly authorized
Treasurer of the municipality in which the decedent was domiciled at the time of his death, or if
there is no legal residence in the Philippines, then with the Office of the Commissioner of
Internal Revenue.
PAYMENT OF ESTATE TAX.
The estate tax must be paid at the time the return is filed by the executor, administrator or
heirs.
When the Commissioner finds that the payment on the due date of the estate tax or of any
part thereof will impose undue hardship upon the estate or any of the heirs, he may extend the
time for payment of such tax, or any part thereof, not to exceed five (5) years, in case the estate
is settled through the courts, or two (2) years in case the estate is settled extrajudicially. In such
case, the amount in respect of which extension is granted will be paid on or before the date of
expiration of the period of extension, and the running of the period of limitation for assessment
will be suspended for the period of such extension.
Payment by installment. In case the available cash of the estate is insufficient to pay the
total estate tax due, payment by installment will be allowed within two (2) years from the
statutory date for its payment without civil penalty or interest.
TAX CREDIT FOR FOREIGN ESTATE TAX PAID.
Only the estate of a resident or citizen of the Philippines can claim a credit for foreign
estate tax paid.
Formulas on foreign estate tax credit.
A. If there was one foreign country only to which an estate tax was paid, the estate
tax credit will not exceed the amount arrived at with the use of the following
formula:
𝑵𝒆𝒕 𝒆𝒔𝒕𝒂𝒕𝒆,𝒇𝒐𝒓𝒆𝒊𝒈𝒏 𝒄𝒐𝒖𝒏𝒕𝒓𝒚

x Philippine estate tax = ₱xxx
𝑵𝒆𝒕 𝒆𝒔𝒕𝒂𝒕𝒆, 𝒘𝒐𝒓𝒍𝒅
Compare with:
Foreign estate tax paid ₱xxx

Tax credit allowed, whichever is lower
(This is called Limitation A) ₱xxx
B. If there were two or more foreign countries to which foreign estate taxes were
paid, tax credit for foreign estate taxes will be computed as follows:
Step 1: Tentative tax credit, Limitation A:

Add the tax credits, Limitation A, by country ₱xxx
Step 2: Tentative tax credit, Limitation B:
𝑵𝒆𝒕 𝒆𝒔𝒕𝒂𝒕𝒆, 𝒇𝒐𝒓𝒆𝒊𝒈𝒏 𝒄𝒐𝒖𝒏𝒕𝒓𝒊𝒆𝒔

x Philippine estate tax = ₱xxx
𝑵𝒆𝒕 𝒆𝒔𝒕𝒂𝒕𝒆, 𝒘𝒐𝒓𝒍𝒅
Compare with:
Total foreign estate taxes paid ₱xxx

Tentative tax credit in Limitation B, whichever is lower ₱xxx
Step 3: Final tax credit to apply (Limitation A, or

Limitation B, whichever is lower) ₱xxx
Illustration:
Mr. A, a citizen of the Philippines, died residing in the Philippines, leaving a net taxable
estate of ₱900,000 in the Philippines and ₱600,000 in Foreign Country X. The net taxable estate
in Foreign Country X paid an estate tax of ₱40,000 to that foreign country. The Philippine estate
tax due, after credit for the estate tax paid to Foreign Country X, would have been computed as
follows:
Net taxable estate, Philippines ₱900,000

Net taxable estate, Foreign Country X 600,000
Net taxable, world ₱1,500,000
Philippine estate tax on ₱1,500,000 x 6% ₱90,000

Less: Estate tax credit –
Estate tax paid to Foreign Country X ₱40,000
Limit:
₱600,000/₱1,500,000 x 90,000 ₱36,000
Allowed 36,000
Estate tax still due ₱54,000
Illustration:
Mr. B, a citizen and resident of the Philippines, had the following data on the estate he
left:
Net taxable estate:

Philippines ₱570,000
Malaysia 2,100,000
Indonesia 1,700,000
Estate Taxes paid:
Malaysia 200,000
Indonesia 100,000
The Philippine estate tax due, after credit for the estate taxes paid to foreign countries,
would have been ₱36,200, computed as follows:
Net taxable estate, Philippines ₱570,000
Net taxable estate, Malaysia 2,100,000
Net taxable estate, Indonesia 1,700,000
Net taxable estate, world ₱4,370,000
Estate tax ₱262,200

Less: Tax Credit (Schedule) 226,000
Estate tax still due ₱ 36,200
Schedule on Tax Credit:
Malaysia:
Formula:
₱2,100,000/₱4,370,000 x 262,200 ₱126,000
Actually paid ₱200,000
Allowed ₱126,000
Indonesia:
Formula:
₱1,700,000/₱4,370,000 x 262,200 ₱102,000
Allowed ₱100,000
Total, Limitation A ₱226,000
Limitation B:
Formula:
₱3,800,000/₱4,370,000 x 262,200 ₱228,000
Total foreign estate taxes paid (₱200,000+₱100,000) ₱300,000
Allowed under Limitation B ₱228,000
Tax credit to apply (Limitation A) ₱226,000
Illustration
Mr. B, a citizen and resident of the Philippines, died leaving a net taxable estate of
₱1,050,000 in the Philippines, ₱300,000 in Foreign Country Y and ₱150,000 in Foreign Country
Z. The net taxable estate in Foreign Country Y paid an estate tax of ₱25,000 to that country. The
net taxable estate in Foreign Country Z paid an estate tax of ₱8,000 to that country. The
Philippine estate tax due, after credit for the estate taxes paid to Foreign Country Y and Foreign
Country Z, would have been ₱64,000, computed as follows:
Net taxable estate, Philippines ₱1,050,000

Net taxable estate, Foreign Country Y 300,000
Net taxable estate, Foreign Country Z 150,000
Net taxable estate, world ₱1,500,000
Estate tax ₱90,000

Less: Tax Credit (Schedule) 26,000
Estate tax still due ₱ 64,000
Schedule on Tax Credit:

Foreign Country Y:
Formula:
₱300,000/₱1,500,000 x 90,000 ₱18,000
Allowed ₱18,000
Foreign Country Z:
Formula:
₱150,000/₱1,500,000 x 90,000 ₱9,000
Allowed ₱8,000
Total, Limitation A ₱26,000
Limitation B:
Formula:
₱450,000/₱1,500,000 x 90,000 ₱27,000
Total foreign estate taxes paid (₱25,000+₱8,000) ₱33,000
Allowed under Limitation B ₱27,000
Tax credit to apply (Limitation A) ₱26,000
WHO IS LIABLE FOR THE PAYMENT OF THE ESTATE TAX?

The estate tax must be paid by the executor or administrator before delivery to any
beneficiary of his distributive share of the estate. Such beneficiary will, to the extent of his
distributive share of the estate, be subsidiarily liable for the payment of such portion of the estate
tax as his distributive share bears to the value of the total net estate.
If the executor or administrator makes a written application to the Commissioner for
determination of the amount of estate tax, the Commissioner, as soon as possible, and in any
event within one (1) year after making of such application, or if the application is made before
the return is filed, within one (1) year after the return is filed, but not after the expiration of the
period prescribed for the assessment of the tax, will notify the executor or administrator of the
amount of the tax. The executor or administrator, upon payment of the amount of which he is
notified, will be discharged from personal liability for any deficiency in the tax thereafter found
to be due and will be entitled to a receipt or writing showing such discharge.
Chapter 22
NET DISTRIBUTABLE ESTATE
The taxable estate on which the estate tax rates are applies is not the same as the net
distributable estate. The taxable estate is the result of the formula under the National Internal
Revenue Code: Gross estate less deductions equals net taxable estate. The net distributable
estate, in the other hand, is: properties physically in the estate, less actual diminutions of the
estate equals the net distributable estate.
Expense and non-expense deductions causing a difference between net taxable estate (NTE)
and net distributable estate (NDE).
1. Funeral expenses, not a deduction from the estate, but an actual domination of the NDE;
2. Medical expense, not a deduction from the estate, but an actual diminution of the NDE;
3. Judicial expenses, cannot be deducted in the computation of the NTE, but an actual
diminution of the NDE;
4. Loss;
If sustained beyond 1 year from the date if death, is not a deduction in the computation
of the NTE, but will be deducted in the computation of the NDE.
5. Claims against the estate:
(a) If arising from debt instrument, can be deducted in the computation of the NTE only
if the debt instrument is notarized, but will be deducted in the computation of the
NDE if it is to be recognized and paid from the estate, even if not notarized;
(b) Loan incurred within three years before date of death, can be deducted in the
computation of the NTE only if there is a certification by the executor or
administrator on the disposition of the proceeds of the loan, but will be deducted in
the computation of the NDE if it is to be recognized and paid from the
estate, even without such certification.
6. Vanishing deduction,
while allowable as deductions in the computation of the NTE, is not physical diminutions
of the estate, and will not be deducted in the computation of the NDE;
7. Standard Deduction which is a deduction in the computation of the NTE, but which is not a
physical diminution of the NDE;
8. Family home (maximum of P10,000,000) which is a deduction in the computation of the
NTE, but which does not physically diminish the NDE;
9. Share of the spouse in the net community estate while one-half of the net community estate
arrived at with the use of the tax formula for the computation of the NTE, is one-half of the
net physical estate in the computation of the NDE;
10. Foreign estate tax may be claimed as tax credit in the computation of the NTE, but is a
deduction in the computation of the NDE.
11. Philippine estate tax is not a deduction in the computation of the NTE, but must be deducted
in the computation of the NDE.
Illustration
Decedent was single at the time of death .

Real and personal properties in the Philippines P6,000,000
Proceeds of life insurance:
Receivable by the estate, as revocable beneficiary 1,000,000
Receivable by the spouse, as irrevocable beneficiary 500,000
Medical expenses within one year prior to death:
Paid by the time of death 300,000
Unpaid at the time of death 400,000
Funeral expenses:
Paid by the time of death 100,000
Unpaid at the time of death 150,000
Other obligations of the decedent 1,000,000
Net taxable estate?

Net distributable estate?
Taxable Distributable
Gross estate P6,000,000 P6,000,000
Receivable under life insurance, with
estate as beneficiary 1,000,000 1,000,000
Total P7,000,000 P7,000,000
Medical expenses (400,000)
Funeral expenses (150,000)
Other obligations (1,000,000) (1,000,000)
Standard deduction (5,000,000)
Total deductions P6,000,000
Estate tax at 6% ( 60,000)

Net distributable estate P5,390,000
Chapter 23
DONOR’S TAX ON TOTAL GIFTS
The law: “The tax for each calendar year…..SIX

PERCENT…..computed on the TOTAL GIFTS IN EXCESS OF
TWO HUNDRED FIFTY THOUSAND PESOS (₱250,000)
EXEMPT GIFT.
Author’s note: In the old language of the law, the donor’s tax was imposed on “NET”
gifts. The word “net” is not in the new provision of law (TRAIN).
Illustration.
Mr. A made a donation of ₱50,000 in 2018. How much was the donor’s tax?
Answer: ₱0.
Illustration.
Mr. B made a donation of ₱250,000 in 2018. How much was the donor’s tax?
Answer: ₱0.
Illustration.
Mr. C made a donation of ₱500,000 in 2018. How much was the donor’s tax?
On ₱250,000 – exempt
250,000 at 6% ₱15,000
Illustration.
Mr. D made donations in 2018 as follows:
February 14 ₱90,000
July 25 300,000
October 6 500,000
Total ₱890,000
How much were the donor’s taxes in 2018? Computed as follows:
February 14
Gift made ₱90,000
Donor’s tax ₱0
July 25:
Gifts made:
July 25 300,000
Aggregate gifts ₱390,000
Less: Exempt amount 250,000
Taxable gifts ₱140,000
Donor’s tax on ₱140,000 at 6% ₱ 8,400

Less: Donor’s tax paid, February 14 0
Donor’s tax due ₱ 8,400
October 6:
Gifts made:
July 25 300,000
October 6 500,000
Aggregate gifts ₱890,000
Less: Exempt gifts 250,000
Taxable gifts ₱640,000
Donor’s tax on ₱640,000 at 6% ₱ 38,400

Less: Payments of February and July (₱0+₱8,400) ₱ 8,400
Donor’s tax on donation of this date ₱ 30,000
Summary for 2018:

February 14 ₱0
July 25 8,400
October 6 ₱30,000
Aggregate in 2018 ₱38,400
Illustration.
Mr. E made the following donations:
February 14, 2018 to son, cash of ₱300,000;

June 12, 2019 to daughter, cash of ₱300,000.
How much were the donor’s taxes on the donations?
On the donation of February 14, 2018 of ₱300,000:
Gift made ₱300,000

Taxable gift 50,000
Donor’s tax on ₱50,000 at 6% ₱ 3,000
On the donation of June 12, 2019 of ₱300,000:
Gift made ₱300,000

Exempt amount 250,000
Taxable gift of the year ₱ 50,000
Donor’s tax on ₱50,000 at 6% ₱ 3,000
THE GROSS GIFTS
The gross gift of a resident or citizen donor will consist of

properties, real or personal, regardless of location.
Property given as gross gift will be valued at fair market value at the time of the donation.
Joint donation by husband and wife.
A joint donation by husband and wife will be considered a donation by each, of one half
of the donation. There will be separate tax returns.
Illustration:
A donation of ₱800,000 was made by husband and wife to a legitimate child. The donor’s
tax was computed, as follows:
Husband Wife
Gross gift made (for each, ½ of ₱800,000) ₱400,000 ₱400,000
Donor’s Tax:
On ₱250,000 – Exempt
150,000 at 6% ₱ 9,000 ₱ 9,000
The gross gift of a non-resident, not citizen of the Philippines donor

will consist of properties, real or personal, located in the Philippines,
subject to the rule under the reciprocity clause of the law.
See “reciprocity clause” on next page.
A presentation on the “reciprocity clause”

Z Foreign Country Philippines
X, citizen and resident of this

Intangible personal property here
country, donated
Y, citizen and resident of the

Intangible personal property here Philippines, donated
There is no donor’s tax related to the The intangible personal property

intangible personal property here so donated here by X will not be
taxable.
of Y, Filipino.
The laws here did not exempt The intangible personal property
donor’s tax related to the intangible so donated here by X will be taxable.
personal property of Y, Filipino.
Chapter 24
DONOR’S TAX COMPLIANCE REQUIREMENTS:
FILING OF RETURN, PAYMENT OF TAX, DONOR’S
TAX CREDIT FOR FOREIGN DONOR’S TAX PAID
FILING OF DONOR’S TAX RETURN ADN PAYMENT OF DONOR’S TAX
Each date on which a donation was, or donations were, made will have a donor’s tax
return. The return will report all donations made on that date.
The donor’s tax return must be filed with an authorized agent bank, the Revenue District
Officer, Collection Officer or duly authorized Treasurer of the city or municipality in which the
donor was domiciled at the time of the transfer, of if there is no legal residence in the
Philippines, then with the Office of the Commissioner of Internal Revenue, regardless of where
the property donated may be located.
The donor’s tax return must be filed within thirty days from the date of donation and the
donor’s tax must be paid at the time the return is filed.
DONOR’S TAX CREDIT FOR FOREIGN DONOR’S TAX PAID

Tax credit reduces the burden of two taxed on the net gifts outside the Philippines.
Formulas on foreign donor’s tax credit.

If there was one foreign country only to which a donor’s tax was paid, the donor’s tax credit must
not exceed the amount arrived at with the use of the following formula:
Net gift, foreign country x Philippine donor’s

Net gift world tax = Pxxx
Compare with:
Foreign donor’s tax paid Pxxx
Tax credit allowed, whichever is lower

(This is called limitation A) Pxxx
If there were two or more foreign countries to which foreign donor’s taxes were paid, tax credit
for
foreign donor’s taxes will be computed, as follows:
Step 1. Tentative tax credit, Limitation A:

Total of the tax credits, Limitation A (by country) Pxxx
Step 2. Tentative tax credit, Limitation B:
Net gift, foreign country x Philippine donor’s

Net gift world tax = Pxxx
Compare with:
Total foreign donor’s taxes paid Pxxx
Tentative tax credit in Limitation B, whichever is lower Pxxx
Step 3. Final tax credit to apply (Limitation A, or Limitation

B, whichever is lower) Pxxx
Illustration
The donor is a resident citizen, with a foreign donation and foreign donor’s tax payment
of P30,000.
From assumed data:

Gifts made, Philippines P 600,000
Gifts made , foreign country 400,000
Total P1,000,000
Gifts subject to tax P 750,000
Donor’s tax at 6% P 45,000
Less: Tax credit ( See schedule ) 18,000
Philippine donor’s tax due P 27,000
Schedule (Tax Credit)
Donor’s tax paid to foreign country P 30,000
Tax credit formula, Limitation A:
Gifts made, foreign x Philippine donor’s

Gifts made, world tax
P400,000 / P1,000,000 x P45,000 P 18,000
Allowed ( whichever is lower) P 18,000
Illustration
Mr. G, a citizen and resident of the Philippines, made the following donations on
November 10, 2018 to Miss H, a legitimate daughter.
A. Property in the Philippines, with a fait market value at the time of donation of P400,000.
B. Property in Malaysia, with a fair market value of P200,000, with payment of Malaysia’s
donor’s tax of P8,000.
C. Property in Indonesia, with fair market value of P400,000 and with a payment of Indonesia’s
donor’s tax of P22,000.
The donor’ tax due in the Philippines, after credit for foreign donor’s taxes paid, would
have been, computed as follows:
Property in the Philippines :

Gift made P 400,000
Property in Malaysia:
Gift made 200,000
Property in Indonesia:
Gift made 400,000
Taxable net gifts, world P 1,000,000
On P250,000 - Exempt
750,000 x 6% P 45,000
Less: Tax credit Limitation A ( Schedule ) 26,000
Donor’s tax due P 19,000
Schedule ( Tax Credit )
Limitation A ( by country ):
Malaysia:
Malaysia donor’s tax paid P 8,000
Limit: P200,000 / P1,000,000 x P 45,000 P 9,000
Allowed P 8,000
Indonesia:
Indonesia donor’s tax paid P 22,000
Limit: P400,000 / P 1,000,000 x P45,000 P 18,000
Allowed P 18,000
Total Limitation A P 26,000
Limitation B ( by totals)
Total of Malaysia and Indonesia donor’s taxes paid P 30,000

P600,000 / P1,000,000 x P45,000 P 27,000
Allowed P 27,000
Tax credit to apply (Limitation A)

Chapter 25
VALUE-ADDED TAX
INTRODUCTION
The value-added tax is imposed on a sale, barter or exchange of goods or properties, and on sale
of services. A sale is a giving away of title to property in consideration of money received. When the
transaction involves giving away of property in consideration of property or substitute of money received,
the transaction is a barter or exchange. The law, however, enumerates certain transactions and events
which are within the meaning of sales, barters or exchanges (See page 25-3), and enumerates sales,
barters or exchanges that are exempt from the value-added tax. There is also value-added tax on
importation of goods.
“Goods or properties” are tangible or intangible objects which are capable of pecuniary (in terms
of money) estimation. Goods are movable properties. Included in the term “properties” are real properties
(land and building). The sale, barter or exchange must take place in the Philippines, and includes exports
from the Philippines.
“Service” means the performance of all kinds of services in the Philippines for others for a
consideration. The law enumerates what are considered sales or exchanges of services, and enumerates
sales or exchanges of services that are exempt from the value-added tax. Examples of sales of services
that one sees around that are subject to the value-added tax are”
Hotels, motels, inns, pension houses and resorts;
Restaurants, cafes and other eating places;
Lessors (those who rent out) of properties, movable or immovable.
When is there importation? There is importation only when goods brought into the Philippines from a
foreign country are removed from customs’ custody.
The value-added tax is an indirect tax. It is also described as a consumption tax. Why? Because while the
law imposes the tax on the seller of goods, properties or services, the seller passes it on to the buyer, that
is, the tax is actually paid by the buyer as part of his purchase price.
Under the Price Tax Law, an article for sale must have its own price shown on the article.
One sees in a supermarket:
Case 1. The item for sale is in a shelf in the supermarket. The
price for the item is on a label on the shelf. The item itself has
a bar code. Written on the bar code is also the price, in figures.
Case 2. The item for sale is in a shelf in the supermarket.

There is no price on the shelf. The item itself has a bar code.
Written on the bar code is the price, in figures.
Case 3. The item for sale is in a shelf in the supermarket. The

item itself has a bar code only. Written on the bar code is the
price, in figures. You do not know what the bar code means.
What to do? Bring the item to the cashier, and aski him/her
what it means.
Case 4. The item for sale is in a shelf in the supermarket.

There is no bar code. On the container of the item is the price
written by pen marker.
Is the stated price value-added tax included? It must be so considered. The receipt to be issued by the
cashier must indicate the value-added tax on the items purchased.
A TAX FORMULA: OUTPUT TAXES (VAT on sales)

LESS: INPUT TAXES (VAT on purchases)
EQUALS: VALUE-ADDED TAX PAYABLE
THE CASCADING EFFECT OF THE VALUE-ADDED TAX
The value-added tax is a “passed on” tax. AS many as there are VAT taxpayers involved in a
series of transactions, there are as many increases in the price of the good or service which is the object of
the transactions because the Vat is a component of the selling price.
Illustration
VAT seller-consumer transaction
Mr. C, a value-added taxpayer, made a sale to Mr. D, a consumer. The sales invoice showed
details, as follows:
Selling Price P 2,000
Value-added Tax 240
Total P 2,240
The 240 is the tax of Mr. C, on is sale (12% of the selling price of P 2,000).
The total is the amount paid by the buyer.
Who shouldered the tax? Mr. D, the buyer.
Who will remit the amount to the government? Mr. C, reporting it as his tax on his sale of P 2,000.
It is an argument against the value-added tax that it increases the price of the goods or services
being sold? NO, All taxes are passed on by the sellers to the buyers.
Explained:
A business man is subject to the 3% national tax on his sales. He pays his local taxes to the City
Government. He pays his income tax. He pays his community tax. He pays his license fees. Naturally, he
wants to recover his operating expenses and make a profit. How does he determine the selling price of
whatever he sells? As follows:
Recovery of capital invested on the goods or services being sold

Add: Recovery of ALL TAXES* paid to the national and local governments
Recovery of operating expenses
Desired profit
(Equals) Selling Price
*Whatever that tax may be. It is only that: The law makes the value-added tax passed on to the buyer very
visible because it is require to be shown on the invoice or receipt issued to the buyer as an item separate
from the price proper.
Transactions deemed sales.
The following are considered “sales” in the course of trade or business subject to the value-added tax
(Statutory enumeration):
Transfer, use or consumption, not in the ordinary course of business, of goods or properties ordinarily
intended for sale or in the ordinary course of business;
Distribution or transfer of inventory to shareholders or investors for their shares in the profits of a VAT-
registered person;
Distribution or transfer of inventory to creditors in payment of debt;
Consignment of goods if actual sale is not made within sixty days following the date such goods were
consigned (See pages 26-1 to 26-3);
Retirement from or cessation of business, with respect to inventories of taxable goods as of such
retirement or cessation.
Chapter 26
VALUE-ADDED TAX ON SALE OF GOODS OR PROPERTIES
THE TAX BASE
The value-added tax is based on “gross-selling price.”
What is gross selling price? Gross selling price means, and includes, everything that the buyer
pays the seller in order to get the goods, except the value-added tax. The law and regulations allow
reductions (and the reduced amount is still within the meaning of “gross selling price”) for:
Sales returns;
Sales allowances; and
Sales discount agreed upon at the time of the sale, indicated on the sales invoice, and availed of by the
buyer,
but includes in the selling price the amounts paid by the buyer for packaging, freight and insurance on the
goods sold.
“Properties” include real properties, as land and building.
Sales subject to the value-added tax may be cash sales, open account sales (on credit or with credit card),
installment sales, and consignment sales.
Consignment sales is a trade practice where a manufacturer or trader (consignor) delivers goods to a
retailer (consignee) with title to the goods passing to the consignee only when actual sale is made by such
consignee. So that, while the goods are still with the consignee, the consignor had not yet made a sale.
But a peculiar value-added tax rule is: When sixty (60) or more days had elapsed from the date of
consignment, the consignor has already a taxable sale.
Illustration
Mr. A, a VAT (value-added tax) taxpayer, sold goods from his store at a selling price of P 2,000.
The trade practice is to add a value-added tax of 12% on a sale, so that the buyer had to pay P 2,240. The
gross selling price of Mr. B is P 2,000, which means, the amount paid by the buyer, but not including the
amount corresponding to the value-added tax.
Illustration
Mr. B, a VAT taxpayer, made gross sales in a month of P 300,000. However, during the same
month, there were merchandise sold which were returned by the buyers because they were not according
to the specifications of the buyers (sales returns) and there were merchandise which were not according to
the specifications of the buyers but nonetheless accepted by them but on agreed reductions of the selling
price (sale allowances). Sales returns were P 15,000, sales allowances were P 4,000. The gross selling
price for the month was:
Gross sales P 300,000

Less:
Sales returns P 15,000
Sales allowances 4,000 19,000
Gross selling price tax base P 281,000
Illustration
On sales made by Mr. C, a VAT taxpayer, to customers of long standing, a sales discount of two
percent (2%) is always indicated on the face of the invoice. In a particular sale, a discount at two percent
(2%) was indicated on invoice and the customer paid within the discount period within the same month of
sale. The sale was for P 50,000, if without discount, not including the value-added tax. The gross selling
price tax base was:
Gross sales P 50,000

Less: Discount 1,000
Gross selling price tax base P 49,000
Illustration
Mr. D, a VAT taxpayer, had the following data on a sale that involved a total payment by the
buyer of P 2,352:
Selling price P 2,000

Packaging, freight and insurance 100
Value-added tax 252
Total P 2,352
The taxable gross selling price was P 2,100, which consisted of the selling price of P 2,000 and
packaging, freight and insurance billings of P100. P 2,100 multiplied by 12% is a value added tax of
P252. The value-added tax paid by the buyer was not part of the gross selling price of Mr. D.
Illustration
Mr. E, a VAT taxpayer, a wholesaler, made the following sales:
Cash sales P 900,000

Open account sales 500,000
Installment sales 1,000,000
Consignment sales, from the date of consignment:
Sixty and more days old 2,000,000
Below sixty days old 500,000
The total of taxable sales was:
Cash sales P 900,000

Open account sales 500,000
Consignment sales, 60 and more days old 2,000,000
Total P 4,400,00
TAX RATES
The tax, applied on the gross selling price, is:
Twelve percent (12%);

Zero percent (0%), mainly in the case of export sales (There are others, by provision of law).
In case of a sale to the Government of the Philippines or any of its political subdivisions, instrumentalities
or agencies, including government owned or controlled corporations (GOCC’s), the value-added tax is a
five percent (5%) final tax, to be withheld as payment is made to the seller.
A TAX FORMULA
Output taxes
Less: Input taxes
Equals value-added tax payable
Output tax is the gross selling price
Input tax is a value-added tax paid on:
Purchase, from a VAT taxpayer, of goods for sale;

Purchase, from a VAT taxpayer, of materials for use in production;
Purchase, from a VAT taxpayer, of supplies;
Purchase, from a VAT taxpayer, of services;
Purchase, from a VAT taxpayer, of property for use in the business, that is subject to depreciation
or amortization (fixed asset) under the income tax law;
Purchase, from a VAT taxpayer, of real estate (land) for use in business;
Importation of goods for sale, or for use in business (See Chapter 29, Value-Added Tax on
Importation.)
On sales subject to the final 5% value-added tax, there is no recognition of output tax, and there is no
input tax allowed. The value-added tax paid upon purchase becomes a tax expense or part of the cost of
goods sold.
Illustration
Mr. F is a value-added trader with the following data for the taxable period:
On sale during the month P 20,000

On purchase of goods from VAT-registered supplier during the month 7,000
The value-added tax payable was P 1,560, computed thus:
Output tax (P 20,000 x 12%) P 2,400

Input tax (P 7,000 x 12%) 840
Value-added tax payable P 1,560
See and understand the entries in the books of accounts for the purchase, sale, and recognition of
value-added tax payable:
At the time of purchase (Debit) Purchases P 7,000

(Debit) Input taxes 840
(Credit) Cash P 7,840
At the time of sale (Debit) Cash 22,400

(Credit) Output taxes 2,400
(Credit) Sales 20,000
At the end of the quarter (Debit) Output taxes 2,400

(Credit) Input taxes 840
(Credit) VAT payable 1,560
After the entry in the books of accounts at the end of the quarter, the Output Taxes account was
reduced to P 0 (credit of P 2,400 less debit of P 2,400), and the Input Taxes account was reduced to P 0
(debit of P 840 less credit of P 840). What remained on the value-added tax was the VAT payable of
P1,560.
Output taxes on sales during the month, less total input taxes on purchases of the month is the
value-added tax payable for the month. The offsetting journal entry is on all transactions of a month (not
on a one-on-one, purchase-sale basis).
Illustration
Mr. G is a value-added trader with the following data:
Sales P 15,000
Purchases of goods sold from non-VAT registered suppliers 4,500

Output taxes (P 15,000 x 12%) P 1,800
Less: Input taxes 0
Illustration
Mr. H is a value-added trader with the following data:
Sales P 40,000
Purchases of goods sold:
From VAT suppliers with a VAT payment of P 1,800 15,000
From non-VAT suppliers 5,000

Output taxes (P 40,000 x 12%) P 4,800
Less: Input taxes (P 15,000 x 12%) 1,800
Illustration
I Co. is a VAT-registered manufacturer with the following data for a taxable month:
Sales P 300,000
Purchases of raw materials from VAT taxpayers 100,000
Purchases of services from VAT taxpayers 40,000
Purchases of supplies from non-VAT taxpayers 10,000
Purchases of fixed asset from a VAT taxpayer in the Philippines 30,000
Importation of a fixed asset on which there was a VAT payment of 5,000
The value-added tax payable for the period was P 15,600, computed thus:
Output taxes (P 300,000 x 12%) P 36,000
Less: Input taxes
On raw materials (P 100,000 x 12%) P 12,000
On services (P 40,000 x 12%) 4,800
On supplies 0
On purchase of fixed asset (P 30,000 x 12%) 3,600
On importation of fixed asset 5,000 25,400
SALE BY A REAL ESTATE DEALER
Who is a real estate dealer?
A real estate dealer is any person engaged in the business of buying, developing, selling, or
exchanging real property as principal and holding himself out as full or part-time dealer of real estate.
A sale of real property by a real estate dealer will be subject to the value-added tax at 12% of the
gross selling price.
What is gross selling price? Gross selling price is whichever is higher between the consideration
stated in the contract of sale and the fair market value.
What is fair market value? It is whichever is higher between the fair market value as determined
by the Commissioner of Internal Revenue (zonal value), and the fair market value as shown in the
schedule of values of the Provincial or City Assessor (real property tax declaration). In the absence of
zonal value/fair market value as determined by the Commissioner of Internal Revenue, fair market value
refers to the market value shown in the latest real property tax declaration.
Illustration
In pesos Case 1 Case 2 Case 3

Consideration stated in
the deed of sale 3,000,000 4,200,000 3,000,000
Zonal value 3,500,000 4,500,000 2,500,000
Fair market value in the
assessment rolls 2,000,000 4,700,000 2,500,000
Gross selling price 3,500,000 4,700,000 3,000,000
Value-added tax at 12% 420,000 564,000 360,000
Stated in another way,
Gross Selling price is whichever if highest of the:

(a) Consideration stated in the deed of sale;
(b) Zonal value, per Commissioner of Internal Revenue, and;
(c) Fair market value per Real Property Tax Declaration with the Provincial or City
Assessor
The deed of sale and each official receipt showing payment on the installment price must state on what
the value-added tax is based.
INSTALLMENT SALE BY A REAL ESTATE DEALER
In case of a sale by a real estate dealer in installments, can the value-added tax be computed in
installments (as output value-added tax for the real estate dealer and input value-added tax for the buyer)?
Yes, if the initial payments (payments in the year of sale) do not exceed twenty-five percent (25%) of the
selling price.
A tax formula
Installment value-added tax of a real estate dealer
When the initial payments do not exceed twenty-five percent (25%) of the selling price
(consideration in the deed of sale):
Step 1. Compute the value-added tax at twelve percent (12%) on the tax base (whichever is highest of
three values);
Step 2. Determine the value-added tax on the installment payment, as follows:
Collection on the selling price, VAT not included x Computed VAT
Illustration Selling price, VAT included in Step 1
Sale of real property in installments by a real estate dealer
Selling Price P 1,800,000

Zonal Value 2,000,000
Fair market value in the assessment rolls of the city 1,700,000
Payments on the consideration:
July 1, 2017 (date of sale) 225,000
December 1, 2017 225,000
July 1, 2018 1,350,000
Value-added tax on highest of three values

(P 2,000,000 x 12%) P 240,000
Downpayment, July 1, 2017 P 225,000

Payment, December 1, 2017 P 225,000
Initial payments (installment payments, year of sale) P 450,000
Installment value-added tax:
July 1, 2017:
P 225,000/ P 1,800,000 x P 240,000 P 30,000
December 1, 2017:
P 225,000/ P 1,800,000 x P 240,000 P 30,000
July 1, 2018:
P 1,350,000/ P 1,800,000 x P 240,000 P 180,000
When the value-added tax of 12% is computed on the zonal value, the deed of sale and each
official receipt showing payment on the installment price must state that the value-added tax is
based on the zonal value.
A Summary
(a) The value-added tax is computed on whichever is the highest of:

(1) SELLING PRICE;
(2) Zonal value; and
(3) Fair market value in the assessment rolls
(b) Installment payment on the value-added tax is allowed if the initial payments on the
contract do not exceed twenty-five percent (25%) of SELLING PRICE.
If the initial payments exceed twenty-five percent (25%) of the installment consideration (since the
revenue regulation does not provide a formula), the value-added tax must be computed, once only on the
date of the transaction.
Illustration
Selling Price P 2,000,000

Zonal Value 2,500,000
Fair market value in the assessment rolls of the city 2,100,000
Payments on the selling price:
June 25, 2017 (date of sale) 1,000,000
January 15, 2018 1,000,000
Payment June 25, 2017

(Initial payment exceeds 25% of selling price) P 1,000,000
Value-added tax on June 25, 2017

2,500,000 x 12% P 300,000
Chapter 27
VALUE-ADDED TAX ON SALE OF SERVICES
THE TAX BASE
The value-added tax is based on “gross receipts”. What is the meaning of “gross receipts”?
“Gross receipts” means cash or its equivalent actually received or constructively received, but not
including the value-added tax, as:
Payments on the contract price, compensation, service fee, rental or royalty;

Payments for materials supplied with the services;
Deposits or advance payments on the contract for services
Cash is actually received when it is already received in the hands of the seller of the services. Cash is
constructively received when, although not in the hands of the seller, it can be in his hands if he so desires
(e.g., when the seller was told that he can pick up the cash payment anytime he wants to).
“Gross receipts” allows downward adjustments for:

Returns of, allowances on, the contract price; and
Discounts in the contract price
Illustration
J. Co is a building contractor with three contracts, gross receipts on which were:

For services:
Cash received on Contract No. 1, construction completed P 20,000,000
Cash received on Contract No. 2 balance on the contract price),
construction completed 5,000,000
Cash received as advance on Contract No. 3,
construction not yet started 1,000,000
For materials billed to the building owners 15,000,000
Total P 41,000,000
The taxable gross receipts were the total of the four items, or P 41,000,000.
Illustration
Mr. K, a VAT-registered building contractor, billed a property owner an amount of P 5,000,000,
value-added tax not included. The property owner paid him so far only P 4,000,000. The taxable gross
receipts were P 4,000,000.
Illustration
Mr. L, a VAT-registered building contractor, had a contract price receivable of P 5,000,000,
value-added tax not included, from Mr. M. Mr. M paid P 4,500,000 only as he retained P 500,000 as
guaranty against defects in the building. The taxable gross receipts of Mr. L were P 4,500,000.
Illustration
Mr. N is a service provider. He was indebted to Mr. O for P 50,000. Mr. O secured the services of
Mr. N for a contract price of P 50,000. Upon completion of performance by Mr. N, the parties agreed that
Mr. O will not pay any cash for the services of Mr. N and Mr. N will not anymore pay his indebtedness to
Mr. O. the compensation or set-off resulted in a constructive receipt of P 50,000 by Mr. N, subject to the
value-added tax.
Illustration
Mr. P, a VAT-registered taxpayer, rendered services to Mr. Q on March 10, 2018 and billed Mr.
Q 100,000, value-added tax not included. On March 26, 2018, Mr. Q informed Mr. P that the check in
payment was ready and Mr. P can pick it up anytime. Mr. P picked up the check on April 15, 2018. The
gross receipts were taxable for the month of March 2018 since it was already constructively received in
that month.
Illustration
Mr. R, a building contractor, built a mansion for Mr. S for a contract price of P 6,000,000, with
Mr. R furnishing labor and materials (plumbing, electrical, including a generator, etc.). Mr. S paid Mr. R
the contracts price of P 6,000,000. In the same month, Mr. S returned the generator, which was not
working efficiently, to Mr. R, both agreeing that Mr. S will buy his own generator. Mr. R issued a
P150,000 check to Mr. S. How much was the taxable gross receipts of Mr. R for the month?
Cash received P 6,000,000
Less: Cash returned to Mr. S 150,000
Taxable gross receipts P 5,850,000
Illustration
Mr. T made repairs on the house of Mr. U for an agreed contract price of P 100,000. On June 2,
2018, Mr. T billed Mr. U, but told Mr. U that if payment is made within ten days from the date of billing,
Mr. U will be given a discount of P 20,000. Mr. U paid P 80,000 on June 8, 2018. The gross receipts of
Mr. T were:
Contract price P 100,000
Less: Discount 20,000
Gross receipts subject to tax P 80,000
THE TAX RATES

The tax, applied on the gross receipts, is:
Twelve percent (12%);
Zero percent (0%), in certain cases (Example: Transport of passengers and cargo by air and sea vessels
from the Philippines to a foreign country – There are other zero-rated sales, as enumerated in the law).
In the case of a sale to the Government of the Philippines or any of its political subdivisions,
instrumentalities or agencies, including government owned or controlled corporations (GOCC’s), the
value-added tax is a five percent (5%) final tax, to be withheld as payment is made to the seller.
On sales subject to the final 5% value-added tax, there is no recognition of output tax, and there is no
input tax allowed.
A TAX FORMULA
Output taxes
Less: Input taxes
Equals value-added tax payable
Output tax is the gross receipts multiplied by the tax rate.

Input tax is a value-added tax paid on:
Purchase, from a VAT taxpayer, of materials;

Purchase, from a VAT taxpayer, of supplies;
Purchase, from a VAT taxpayer, of services;
Purchase, from a VAT taxpayer, of property for use in the sale of services, that is subject to
depreciation or amortization (fixed asset) under the income tax law;
Purchase, from a VAT taxpayer, of real estate (land) for use in the sale of services;
Importation of goods for sale, or for use in the sale of services (See Chapter 29, Value-Added Tax
on Importation.)
Illustration
Mr. A, a service provider, had the following gross receipts in the month of February 2018:
For services rendered in January P 200,000
For services rendered in February 900,000
For services to be rendered in March (advances) 300,000
Total P 1,400,000
The taxable gross receipts for February 2018 were P 1,400,000
Illustration
Mr. B, a building contractor, was paid, VAT not included, thus:
Services P 2,000,000
Materials 3,000,000
Total P 5,000,000
Mr. B purchased materials for use in the construction, and made payment on an invoice of the
VAT supplier which showed P 3,000,000, VAT not included. He purchased services and paid for it on an
invoice of the VAT taxpayer which showed P 600,000, VAT not included. The value-added tax payable
of Mr. B was P 168,000, computed as follows:
Output tax (P 5,000,000 x 12%) P 600,000
Less: Input tax on materials purchased (P 3,000,000 x 12%) P 360,000
Input tax on services purchased (P 600,000 x 12%) 72,000 432,000
CONSTRUCTION IN PROGRESS
Construction in progress (CIP) is the cost of construction which is not yet completed. CIP is
considered a purchase of services, the value of which will be determined on the progress billings.
Input tax on construction in progress will be recognized in the month that payment was made on the
In case of a contract for the sale of service where only labor will be supplied by the contractor
progress billing.
and
In case of a contract for the sale of service where only labor will be supplied by the contractor and the
materials will be purchased by the contractee (the one for whom construction is being made) from other
suppliers, input tax on the labor will be recognized in the month that payment was made based on the
progress billing, while the input tax on the purchase of materials will be recognized at the time that the
materials were purchased.
Illustration
There was a construction in progress (CIP) of a building. In a month:
Purchases of materials by the owner (VAT not included) P 500,000
Payments on the P 600,000 progress billing of the contractor 400,000
Question: How much are the input taxes of the month? Why?
Answer: P 108,000
On the materials purchased (P 500,000 x 12%) P 60,000
On the progress billing of the contractor (400,000 x 12%) 48,000
Total input taxes P108,000
Chapter 28
COMMON RULES ON VALUE-ADDED TAX
ON SALE OF GOODS AND OF SERVICES
BILLING OF THE TAX IN THE SALES INVOICE OR RECEIPT
A person subject to the value-added tax made a sale. The law requires that the value-added tax on the sale
be shown by the seller as a separate item in the invoice.
Illustration.
Selling price P100

12% VAT 12
Total P112
Illustration.
Mr. E, a VAT trader, sold supplies to Mr. F, a VAT service provider. The selling price of Mr. E, before
considering the value-added tax factor on the sale, was P100. Mr. F used the supplies in providing
services to Mr. G at a service fee of P200, before considering the value-added tax on the sale. The sales
invoice and official receipt of Mr. E showed a value-added tax of P12, and the official receipt for the
services of Mr. F showed a value-added tax of P24. In the hands of Mr. F, the value-added tax on the
purchase is called "input tax", while the value-added tax on his sale is called "output tax".
What must Mr. F do with the two value-added taxes? He must offset them against each other to arrive at a
value-added tax payable. Thus:
Output tax (on the sale of services to Mr. G) P 24

Less: Input taxes (on the purchase from Mr. E) 12
Equals: Value-added tax payable P 12
When an item sold involves more than one VAT taxpayer, there will be more than one value-added tax in
the series of sales. The VAT of a first seller is recorded as part of the cost of the second seller, that he
recovers from his buyer plus VAT on it. There are now two value-added taxes. This is called "cascading
effect" of value-added tax.
Illustration.
A selling price of P1,000, that is VAT not included, was billed in the invoice
which showed a total only of P1,120. How much is the value-added tax on the sale?
Value-added tax is P1,120 x 12/112, or P120
What happens if the value-added tax billed in the sales invoice or official receipts was wrong? The total in
the sales invoice or official receipt will be considered as 112 %, and the value-added tax component is
12%.
Illustration.
Shown in the invoice of a VAT taxpayer:

Selling price P1,000.00
Value-added tax 140.00
Total 1,140.00
How much is the value-added tax on the sale?
Value-added tax is P1,140 x 12/112 P 122.14
INPUT TAX ON THE PURCHASE OF CAPITAL GOODS

(FIXED ASSETS)
Fixed asset means property used in business which is subject to depreciation (e,g, machinery and office
equipment) or amortization (e.g., patents and copyright), with a useful life exceeding twelve (12) months.
When the aggregate purchases from VAT suppliers during a month, not including the value-added tax,
does not exceed one million pesos (Pi,000,000), each asset acquired during the month has an input tax of
12% on the purchase price.
When the aggregate of purchases from VAT suppliers during a month, not including the value-added tax,
exceeds one million pesos, each fixed asset acquired will give an input tax of twelve percent (12%) spread
over its useful life in months, or over sixty (60) months, whichever is shorter.
Illustration.
On May 2018, Mr. P, a VAT taxpayer, purchased an office equipment with a useful life of 3 years for
P800,000, The input tax of the month from the purchase is 12% of P800,000, or P96,000.
Illustration.
On June 1, 2018, Q Co., a VAT taxpayer, purchased a machine with a useful life of six years (72 months)
for P1,200,000. The input tax of the month from the purchase is P1,200,000 x 12% , divided by 60
months, or P2,400.
Illustration.
On July 1, 2018, Mr. R, a VAT taxpayer, made purchases of fixed assets as follows:
Fixed Asset No. 1, with a useful life of 2 years P 400,000
Fixed Asset No. 2, with a useful life of 3 years 500,000
Aggregate for the month (not exceeding P 900 000
P1,000,000)
The input taxes of July from the purchases were:
From Asset No. 1 (P400,000 x 12% ) P 48,000
From Asset No. 2 (P500,000 x 12 % ) 60,000
Total P 108,000
Illustration.
On August 1, 2018, Mr. S, a VAT taxpayer, made purchases of fixed assets as follows:
Fixed Asset No.1, with a useful life of 10 years P 600,000
Fixed Asset No. 2, with a useful life of 3 years 900,000
Aggregate for the month (exceeding P1,000,000) P 1,500,000
The input taxes of the month from the purchases were:

From Asset No. 1:
P600,000 x 12% is P72,000, to be spread over 60 months
P72,000 divided by 60 months P 1,200
From Asset No. 2:
P900,000 x 12% is P108,000, to be spread over 36 months
P108,000 divided by 36 months 3,000
Total P 4,200
When an asset with an unamortized input tax is retired from business, its unamortized input tax
will be closed against the output taxes.
Illustration.
On March 1, 2016, A VAT taxpayer made a useful life of six years for P2,000,000, not including VAT.
On March 1, 2017, after use for one year, the asset was sold for P1,000,000. Sales in March 2017
amounted to P3,500,000, VAT not included, while purchases in that month from VAT suppliers
amounted to P1,800,000, VAT not included.
Question 1. How much was the unamortized input tax on the fixed asset at the time of sale? (Used for one
year only.)
Answer: P192,000
VAT paid on acquisition was P2,000,000 multiplied by 12 % is P240,000
Amortization per month was P240,000 divided by 60 months is P4,000.
Amortization from March 1, 2016 to March 1, 2017 was 12 months, or P48,000.
Unamortized as of March 1, 2017 was 48 months. P4,000 x 48, or P 192,000.
Question 2. How much was the value-added tax payable for March 2013?
Answer: (P420,000 less P192,000) P204,000.
Output tax - on March 2017 sales
(P3,500,000 x 12%) P420,000
Less: Input taxes on March 2017 purchases
(P1,800,000 x 12 %) P216,000
Unamortized input tax on retired asset (see above) 192,000 408,000
Value-added tax payable for March P 12.000
Question 3: What were the journal entries on the transactions?

Answers: March 1, 2016:
(Debit) Fixed asset P2,000,000
(Debit) Input taxes 240,000
(Credit) Cash (Payable) P2,240,000
Purchase of fixed asset
March 31, 2016:

(Debit) Deferred input taxes 236,000
(Credit) Input taxes 236,000
To adjust the input taxes on the fixed asset for the amount available of P4,000 only for use in March 31,
2016.
Question 4: How much was the available input tax every month from the fixed asset?
Answer: P4,000
Amortization of deferred input tax
Question: On March 1, 2017, before the sale of the fixed asset, how much is the debit balance on the
deferred input tax on the fixed asset?
Answer: P192,000 (total of P240,000 less P48,000 for one year).
Question 5: What will be done to the debit balance of P192,000?

Answer: Transfer to the input taxes account - for offset of any future output taxes.
(Debit) Input taxes P 192,000

(Credit) Deferred input tax P 192,000
Question: On March 31, 2017, what was the journal entry on the VAT payable?
(Debit) Output taxes (350,000 x 12% ) P420,000

(Credit) Input taxes* P408,000
(Credit) Value-added tax payable 12,000
*On month's purchase (P1,800,000 x 12 % ) P216,000

Input tax from transfer of deferred input tax (Question 5) 192,000
Total P408,000
0% RATED SALES WITH 12% RATED SALE
Purchases with VAT component for both the 12% rated sales and then 0 % rated sales (example: exports
are zero-rated sales) will be allocated between the two categories of sales based on sales.
Input value-added taxes related to zero-rated sales may be claimed by a VAT taxpayer as a
refund, or as a credit against other internal revenue taxes to which the taxpayer may be liable
(even against the output taxes on other sales subject to the 12% value-added tax).
DATA:
Value-added tax not included:
Sales of the month:
Domestic of P2,000,000 and exports of P6,000,000. P8,000,000
Purchases of the month of goods sold:
For domestic sales of P600,000 and for exports of P1,800,000 2,400,000
Altemative I: VAT refund independently of VAT payable.

Alternative 2: Offset, and net VAT refundable, or net VAT payable.
Result No. 1 One result only

VAT refundable from goods VAT refundable on goods exported
exported (P1,800,000 x 12%) P216,000 (P1,800,000 x 12%) P216,000
Less: VAT payable on domestic sales:
Output taxes
Result No. 2 (P2,000,000 x 12%) P 240,000
Less: Input taxes
Output taxes ( P2,000,000 x 12%) P240,000 (P600,000 x 12%) 72,000 168,000
Less: Input taxes (P600,000 x 12%) 72,000 Net VAT refundable P48,000
Value-added tax payable 168,000
VAT BUSINESS WITH NON-VAT BUSINESS
Purchases with VAT component, for both VAT and non-VAT business, must be allocated between the
two businesses based on sales.
Illustration.
M Co. has a vatable business and a non-vatable business, both registered with the Bureau of Internal
Revenue. In a taxable period, it had the following data:
Sales, VAT business (75%) Purchases of goods, VAT business

Sales, non-VAT business (25 %) Purchases of goods, non-VAT business
P3,000,000 600,000
1,000,000 400,000
Within twenty-five (25) days after the end of the quarter, the value-added tax payable was P288,000,
computed thus:
Output taxes (P3,00,000 x 12 % ) P 360,000

Less: Input taxes (P600,000 x 12%) 72,000
The sales of the non-VAT business had no value-added tax consequence.
Illustration.
Assuming that the preceding illustration there was, in addition, a purchase for P12,000 of supplies from a
VAT-registered supplier, used for both the VAT and non-VAT business, this would have resulted in a
value-added tax payable computed as follows:
Output taxes (see above) P360,000

Less: Input taxes-
On the purchase of goods (see above) P72,000
On the (additional) purchase of
supplies-
VAT component on the purchase
price
(P12,000 x 12% ) P1,440
Allocation to VAT business based on
sales:
Sales, VAT business P3,000,000
Sales, non-VAT business 1,000,000
Total sales 4,000,000
P3,000,000/P4,000,000 x P1,440 1,080 73,080
Value-added tax payable P286,920
MONTHLY VAT DECLARATION AND QUARTERLY VAT RETURN
All persons liable to the value-added tax must pay the tax for each of the first and second months of a
quarter, based on the transactions of the month, reflected in a Monthly VAT Declaration, within twenty
(20) days after the end of the month. If the output taxes exceed the input taxes, there will be a value-added
tax payable. If the input taxes exceed the output taxes, there will be no value-added tax payable. The
excess of input taxes over the output taxes in the first month will be carried over to the second month.
However, there is n0 carry-over of excess input taxes from the second month to the third month (end of
the quarter).
Within twenty-five (25) days after the end of the quarter, there will be a Quarterly VAT return, reflecting
the cumulative transactions of the quarter. The value-added taxes shown and paid under the first and
second months' declaration will be deducted from the output taxes in the quarterly return. The excess of
input taxes over the output taxes of the quarter will be carried over to the next quarter.
Illustration.
Mr. C, a VAT-registered person, is a trader. He purchases his merchandise from VAT suppliers. In the
months of July, August, and September of a year, he had the following data (VAT tax not included):
July August September
Sales P400,000 P300,000 P500,000
Purchases 210,000 130,000 260,000
The monthly declaration for July and for August, and the return for the quarter ending September 30,
would have shown:
On balances at the end of: July August Quarter

Output taxes P48,000 P36,000 P144,000
Less: Input taxes (25,200) (15,600) (72,000)
VAT paid, July (22,800)
VAT paid, August _______ _______ (20,400)
Value-added tax payable P22,800 P20,400 P28,800
(P400,000 + P300,000+ P500,000) multiplied by 12 % , is P144,000

(P210,000+ P130,000 P260,000) multiplied by 12%, is P72,000.
The VAT payable in the quarterly return is actually the VAT payable from the sales and purchases of
September (P500,000 less P260,000 multiplied by 12 % , is P28,800).
July 31 (Debit) Output taxes P48,000
(Credit) Input taxes P25,200
Recognition of VAT payable for July
August (Debit) Value-added tax payable 22,800
20
(Credit) Cash 22,800
Payment of VAT payable of July
August (Debit) Output taxes 36,000
31
Recognition of VAT payable of
August
Sept. 20 (Debit) Value-added tax payable 20,400
Payment of VAT payable of August
Sept. 30 (Debit) Output iaxes 60,000
Recognition of VAT payable of
September
Oct. 25 (Debit) Value-added tax payable 28,800
Payment of VAT payable, last month of
the quarter ending September 30
SPECIAL RULES ON INPUT TAXES
1. PRESUMPTIVE INPUT TAX
Persons or firms engaged in

(a) Processing
(1) Sardines;
(2) Mackerel; and
(3) Milk;
(b) Manufacturing
(1) Refined sugar;
(2) Cooking oil; and
(3) Packed noodle-based instant meals
will be allowcd a presumptive input tax, equivalent to four percent (4%) of the gross value in money of
their purchases of:
primary agricultural products
which are used as inputs to their production. Primary agricultural products are agricultural products in
their original state (exempted from the value added tax when purchased from the owner of the land where
produced)
Are original marine products within the meaning of original agricultural products? The author thinks no.
The law at times mentions "agricultural" and "marine" products separately. (But why exclude marine
products in its original state? - author's query)
The term "processing" means pasteurization, canning and activities which through physical or chemical
process alters the exterior texture or form or inner substance of a product in such a manner as to prepare it
for special use to which it could not have been put in its original form and condition (this present
definition of "processing" was the definition of "manufacturing" in the old law).
Illustration.
Mr. A purchases sardines from fishermen and processes them into canned sardines. Going to processing
in a certain taxable period were the following purchases, value-added tax not included:
Fish (from fishermen) P100,000

Tin cans 20,000
Tomato paste (in cans) 5,000
Olive oil (in plastic bottles) 2,500
Pepper (from farmers) 1,800
Paper labels (from printers) 500
Sales during the period, value-added tax not included, amounted to P400,000.
The value-added tax payable would have been:
Output taxes (P400,000 x 12 % ) P48,000

Less: Input taxes-
Actual value-added taxes on purchases
On tin cans (P20,000 x 12% ) P2,400
On tomato paste (P5,000 x 12 %) 600
On olive oil (P2,500 x 12 % ) 300
On paper label (P500 x 12 % ) 60
Presumptive input tax-
On pepper (P1,800 x 4%) 72 3,432
Presumptive input tax on other than agricultural product only. On other costs, the input taxes are only for
value-added taxes actually paid when purchased.
2. TRANSITIONAL INPUT TAX.
If:
(a) The taxpayer, in previous years, except the last year, was previously exempt from the value-added tax
because his sales did not exceed the threshold of three million pesos (P3,000,000) and his gross sales in
the immediately preceding year exceeded that amount; or
(b) The taxpayer in all previous years did not have sales exceeding three million pesos (P3,000,000), but
he opted to be under the VAT system.
(The threshold was PI,919,500 before the tax reforms of 2017/18,)
Transitional input tax is allowed on:

(a) Goods
(b) Services, and
(c) Supplies
equivalent to:
Two percent (2% ) of the value of the inventory or service,

or
the value-added tax paid on the inventory or service, whichever is higher.
There is no transitional input tax on:

(a) Capital goods or fixed assets;
(b) Goods that were VAT exempt under Section 109 of the National Internal Revenue Code.
Illustration.
Data on a taxpayer
Not subject to the value-added tax in any year prior to 2016.
Sales in 2016 P2,000,000
Sales in January 2017 120,000
Inventory, VAT not included, beginning of January 2017 5,000
Purchases, January, 2017 40,000
Question 1. The transitional input tax is?

Answer: P600. Why?
Inventory value of inventory, January 1, 2017

2% of P5,000
VAT actually paid on it (P5,000 x 12 %)
Transitional input tax (whichever is higher)
P5,000
100
600
600
Question 2. How much is the VAT payable for January 2017?
Answer: P9,000. Why?
Output taxes (P120,000 x 12% ) P14,400

Less: Input tax on purchases of the month
(40,000 x 12%) P4,800
Transitional input tax (see above) 600 5,400
ADDITIONAL NOTES 1. Amortization of input tax on fixed asset/s acquisition/s (capital goods)
within a month
Month's
Cost VAT at 12% Useful life Amortize? Monthly input VAT
acquisition
Asset (one only) P800,000 96,000 2 years No P96,000
P240,000/60
Asset (one only) P2,000,000 240,000 6 years Yes mos. P4,000
P480,000/48
Asset (one only) P4,000,000 480,000 4 years Yes mos. P10,000
Several assets
Asset 1 P200,000 24,000 2 years No P24,000
Asset 2 600,000 72,000 6 years No 72,000
Asset 3 150,000 18,000 4 years No 18,000
Total cost* P950,000 Total Input Vat P114,000
Several assets
Asset 1 P200,000 24,000 2 years Yes P24,000/24 mos. P1,000
Asset 2 600,000 72,000 6 years Yes P72,000/60 mos. 1,200
Asset 3 400,000 48,000 4 years Yes P48,000/48 mos. 1,000
Total cost* 1,200,000 Total Input Vat 3,200
* If the aggregate cost in a month does not exceed P1,000,000, the input tax on each asset will be in the
month of purchase.
** If the aggregate cost in a month exceeds P1,000,000, the input tax on each asset will be amortized over
its useful life in months, or 60 months, whichever is shorter.
ADDITIONAL NOTES 2
CONCURRENCE OF RULES ON FIXED ASSETS.

An acquistion of fixed asset in installments with a useful life of more than five
years will involve different schedules on computations for:
(a) Installment payment on the purchase price
(b) Depreciations, and
(c) Amortization of input tax
Case.
A fixed asset was acquired at a cost of P4,000,000, value-added tax not included, payable in 40 months. It
has a useful life of 10 years with a scrap value of 400,000.
The accounting records on this will involve:
(a) Installment payment on the purchase price

(b)Depreciations, and
(c) Amortization of input tax.
(a) Monthly installment payment on the purchase price

P4,000,000 divided by 40 months P100,000
(b) Monthly depreciation
Depreciation base P4,000,000 less P400,000 P3,600,000
Monthly depreciation P3,600,000/120 months P30,000
(c) Monthly amortization of input tax
Deferred input tax on the purchase
P4,000,000 multiplied by 12 % P480,000
Monthly amortization over 60 months
P420,000/60 months P8,000
Journal entries
Accounts/Notes payable P100,000
Cash P100,000
Monthly payment on the purchase
price
Depreciation expense 30,000

Allowance for depreciation 30,000
Monthly depreciation
Input tax of the month of purchase:

Alternative journal entry 1:
When purchased:
(Debit) Fixed asset 4,000,000

(Debit) Deferred input tax 480,000
(Credit) Cash or payable 480,000
At the end of the month of purchase

(Credit) Deferred input tax 8,000
Input tax used in the month of purchase was P8,000. Debit balance of deferred input tax after the month
of purchase was P472,000.
Alternative journal entry 2
On the purchase:
(Debit) Fixed asset 4,000,000

(Credit) Cash 4,480,000
At the end of the month of purchase:
(Debit) Deferred input taxes 472,000

Input tax used in the month of purchase was P8,000, Debit balance of deferred input taxes after the month
of purchase was P472,000.
Chapter 29
VALUE-ADDED TAX ON IMPORTATION
Situations.
A shipment of goods from abroad arrived in the Philippines. Is it in the premises of the
Bureau of Customs? Is there already an importation? None.
A shipment of goods from abroad arrived in the Philippines. It was removed from by the
importer from customs custody for transfer to his place of business. Is there already an
importation? Yes.
Importation is completed when the goods brought into the Philippines are removed from
customs custody. Importation is not a sale of goods or sometimes a business activity, yet is
subject to vat. This is because vat is a consumption tax levied on sales to be borne by consumers
with sellers acting simply as tax collectors.
Importer refers to a person bringing goods into the Philippines, whether or not made in
the course of trade or business.
A. TAX FORMULA
The value-added tax rate is twelve percent (12%)
The tax is applied on:
(a) Landed cost. The term “landed cost” (customs and tariff duties are based on quantity or
volume) of important means the invoice cost of gods imported, plus all the legitimate expenses
of importation prior to the release of the goods from the customs custody.
(b) When then customs and tariff duties are based on the based on the value of the importation,
the tax base (counterpart of landed cost) is the dutiable value of the importation, as determined
by the Bureau of Customs, plus all legitimate expenses of importation prior to the removal of the
goods from the customs custody.
The following are typical and legitimate expenses of importation (other charges prior
to release): insurance, freight, interest, stamps, bank charges, customs duties, customs
brokerage fee, commission, arrastre charges, postage, wharfage due, excise tax, if any,
and processing fee.
Prior to removal from customs custody, the value-added tax, the excise tax, if any, and
the customs duty must all be paid.
The value-added tax paid on an importation is an input tax of the importer which is
creditable against his output taxes.
Tax Base Tax Rate
a. Landed Cost – Custom duties are determined on the basis of the quantity or volume
of goods.
Invoice Cost xx
Add: Custom duties xx
Excise tax xx
*Other charges prior to release xx xx
TOTAL LANDED COST xx
b. Dutiable Value – The BOC uses the total value in determining tariff and customs
duties.
12%
Dutiable Value Cost xx
Add: Custom duties xx
Excise Tax xx
*Other charges prior to release of goods from custom custody xx xx
TOTAL LANDED COST xx
Note: Facilitation fee is NOT included as a charge prior to release of goods from
custom custody.
RR 16-2005: No VAT shall be collected on importation of goods which are specifically

exempted under Sec. 109 of the Tax Code.
Illustration.
A. Co. made an importation of merchandise to be sold.
The customs and duties were based on the
quantity of the imported goods
The invoice cost was P4,500,000. Freight was P400,000 and the marine insurance was
P100,000. Legitimate expenses on the importation prior to removal from customs custody is
amounted to P500,000. The value-added tax on the importation was P660,000, computed as
follows:
Invoice cost of the importation P 4,500,000

Freight 400,000
Insurance 100,000
Other expenses on the importation 500,000
Landed cost P 5,500,000
Value-added tax (P5,500,000 x 12%) P 660,000
Illustration.
B made an importation.
The customs and tariff duties were based on the value of the importation as determined by
the Bureau of Customs.
The invoice cost of the importation was P4,900. Freight and insurance was a total of P300.
The dutiable value of the importation was P5,000. All other legitimate expenses of importation
amounted to 500. The value-added tax on the importation at twelve percent (12%) was P660,
computed follows:
Dutiable value of importation P 5,000

Legitimate expenses of importation 500
Tax base for value added-tax P 5,500
Value-added tax (P5,500 x 12%) P 660
Illustration.
Mr. Y is a VAT Importer-traded. In a month:
Sales P 2,000,000
Local purchases from VAT suppliers 600,000
Importations, with a VAT Payment of 50,000
The value-added tax payable for the month was P118,000, computed thus:
Output taxes (P2,000,000 x 12%) P 240,000

Less:
Input taxes from the local purchases (P600,000x12%) P 72,000
Input taxes from importations (even if good are still unsold) 50,000 122,000
CHAPTER 30
PERCENTAGE TAXES
PERCENTAGE TAXES ARE ON SALE OF SERVICES, except:
THE 3% PERCENTAGE TAX, WHICH MAY BE ON SALE OF GOODS

OR OF SERVICES.
3% PERCENTAGE TAX
Section 109 of the National Internal Revenue Code enumerates exemptions from the value-added
tax in paragraphs (a) to (s) [tax reforms of 2017/18]. IF –
Exemption from VAT under paragraphs (a) to (r) Exempt from the value-added tax and from the
in Section 109 of the National Internal Revenue 3% percentage tax, regardless the annual gross
Code. sales or receipts.
Exemption under the paragraph in Section 109 of Subject to the 3% percentage tax.
the National Internal Revenue Code (gross annual
sales or receipts do not exceed the threshold of
P3,000,000)
Illustration.
Mr. A is printing, publishing and selling books. His gross sales in a year was P2,900,000. He is
exempt from the VAT under paragraph (n) of Section 109 of the National Internal Revenue Code. His
exemption from the VAT is not under paragraph (w) [tax reforms, so the 3% percentage tax cannot apply.
If a taxpayer has two or more lines of businesses that would otherwise be subject to the value-added
tax, the gross sales/receipts will be combined for purposes of determining if the threshold of
P3,000,000 was exceeded.
Illustration.
Mr. E has three lines of businesses, with gross sales and receipts as follows:
Business 1. VAT exempt business under P3,000,000
paragraph (a) of Section 109 of the NIRC
Business 2. Sale of goods 2,000,000
Business 3. Sale of services 2,000,000
Will the 3% percentage tax or the value-added tax apply?

Answer: The value-added tax will apply. While the gross receipts from Business 1 will not be gross
sales/receipts which is subject to the 3% percentage tax because VAT exemption is under paragraph (a) of
Section 109 of the National Internal Revenue Code, Business 2 and Business 3 gross sales and receipts
will be aggregated. There is an aggregate of P4,000,000, thus exceeding the threshold amount. Mr. E is
not subject to the 3% percentage tax on Business 2 and Business 3. He is subject to the value-added tax
on them.
In determining the threshold amount, husband and wife will be
considered as separate taxpayers.
Illustration.
In 2018, Mr. A was engaged in a sale of goods with gross sales of P2,000,000. Mrs. A was
engaged in a sale of services with gross receipts of P1,900,000. The aggregate of the gross receipts of Mr.
and Mrs. A was P3,900,000. Will the value-added tax or the 3% percentage tax apply?
Answer: The gross sales/receipts of each did not exceed the threshold amount of P3,000,000.
Optional registration.
A person subject to the three percent (3%) percentage tax under par. (y) of Section 109 of the
National Internal Revenue Code may opt to be registered under the value-added tax system.
Return and payment of the 3% percentage tax
The taxpayer may file a separate return for each branch or place of business, or a consolidated
return for all.
The return is a monthly return and must be filed within twenty (20) days after the end of each
taxable month.
AMUSEMENT TAX
Rates of amusement tax
Amusement Place Tax

Place for boxing exhibition 10%
Place for professional basketball games (which shall be in lieu of all percentage taxes of 15%
whatever name and description)
Cockpits, cabarets or night and day clubs 18%
Jai-alai and race tracks 30%
Boxing exhibitions where World or Oriental Championship in any division is at stake will be
exempt from amusement tax if one of the contenders is a citizen of the Philippines and said exhibitions
are promoted by citizens of the Philippines or by a corporation or association at least sixty percent (60%)
of the capital of which is owned by such citizens.
Illustration.
The PNBA is a professional basketball organization. In a basketball series within a month, it had
gross receipts from the gates of P1,000,000. In addition, television coverage gave it additional gross
receipts of P1,000,000. Advertisements in streamers inside the coliseum where the games were conducted
gave it additional gross receipts of P1,000,000. The amusement tax was 15% of the total of P3,000,000,
or P450,000.
Illustration.
Sports, Unlimited, a domestic corporation wholly owned by citizens of the Philippines sponsored
a world boxing event for World Championship in the lightweight division between a Korean boxer and a
Filipino boxer. Gate receipts amounted to P10,000,000, out of which the purse of the winner was
P5,000,000, and of the loser was P5,000,000. Satellite coverage gave the corporation additional gross
receipts of P1,200,000. The gross receipts of Sports, Unlimited was P11,200,000. There was no
amusement tax.
Illustration.
The Total Entertainment, a domestic corporation, had the following gross receipts from
championship events it conducted in the Philippines:
Ping-pong P 500,000
Billiard 1,000,000
Tennis 1,200,000
Volleyball 600,000
Baseball 800,000
Basketball (amateur) 900,000
Chess 400,000
There is no percentage tax mentioned in the law on these activities.
TAX ON WINNINGS
The tax is on winnings is on:
(a) A person who wins in horse races and jai-alai, based on his winnings or “dividends” (the tax to be
based on the actual amount paid to him for every winning ticket, after deducting the cost of
ticket); and
(b) Owner of winning race horses, based on the prize.
The tax is withheld from the “dividends” or “prize” by the operator, manager or person in charge of
the horse races or jai-alai.
Rates of tax on winnings
Winnings in horse races or jai-alai 10%
But if from:
Double, forecast, quinella and trifecta bets 4%
Owner of winning horse 10%
Daily double is an event wherein the bettor selects a number in each of two consecutive races and
the selection in each race must finish first. Extra double is an event wherein the bettor selects a
number in each of two selected races and the selection in each race must finish first. Forecast is an
event wherein the bettor selects two numbers in a selected race, and the selection must finish first and
second in the correct order. Double quinella is an event wherein the bettor selects the numbers in each
of two selected races, and the selection in each race must finish first and second in either order.
Trifecta is an event wherein the bettor selects three numbers in a selected race and the selections must
finish first, second and third in the correct order.
Illustration.
Mr. L is an owner of a race horse. On June 12, from a Special Independence Day Race, he won a
P5,000,000 prize. The tax on the winnings would have been withheld at 10% of P5,000,000, or
P500,000. Winnings in any other game of chance is not subject to a percentage tax.
THE PERCENTAGE TAXES
A. 3% percentage tax Gross sales/receipts 3%

B. Domestic common carrier’s tax (from passengers); Gross receipts 3%
International carrier’s tax
C. Franchise tax on:
Gas and water facilities Gross receipts 2%
Radio and/or broadcasting companies whose gross
receipts in the preceding year did not exceed
P10,000,000 Gross receipts 3%
D. Overseas communication tax Amount paid 10%
E. Tax on banks and non-bank financial Gross receipts from 1% and 5%
intermediaries performing quasi-banking functions lending/financial
leasing 7%
Gross receipts from 0%
other gross income
Dividends
F. Tax on other non-bank financial intermediaries Gross receipts from 1% and 5%
lending/financial
leasing 5%
Gross receipts from
other gross income
G. Tax on insurance companies Premiums collected 2%
H. Tax on agents of foreign insurance companies Premiums collected 4%
I. Amusement taxes on:
Boxing exhibitions Gross receipts 10%
Professional basketball games Gross receipts 15%
Cockpits, cabarets and night clubs Gross receipts 18%
Jai-alai and race tracks Gross receipts 30%
J. Tax on winnings:
On winnings or dividends of persons
In horse races or jai-alai Winnings 10%
But if from double, forecast, quinella and
trifecta bets Winnings 4%
On winnings of owners of winning horses Winnings 10%
K. Stock transaction tax (secondary offering) Selling price 6/10 of 1%
L. Initial offering resulting in public control:
Up to 25% Selling price 4%
Over 25%, but not 33-1/3% Selling price 2%
Over 33-1/3
SALE OF SERVICES: PERCENTAGE TAX OP. VALUE-ADDED TAX
Value-added tax Percentage tax
INSURANCE COMPANIES
Life insurance 3%
Value-added tax* Others
FRANCHISE HOLDERS
Radio television broadcasting
companies whose annual sales:
Did not exceed P10,000,000** 3%
Value-added tax* Exceeded P10,000,000
Gas and water facilities 2%
Value-added tax*
Others***
DOMESTIC COMMON
CARRIERS BY LAND
Transporting people 3%
Value-added tax* Transporting cargo
DOMESTIC COMMON
CARRIERS BY AIR OR SEA
From point to point in the Philippines:
Value-added tax* Transporting people
From points in the Philippines to points
abroad:
Value-added tax* Transporting people
GROSS SALES IN THE PRECEDING YEAR

Did not exceed the threshold** 3%
Value-added tax* Exceeded the threshold
*Value-added tax of 12%

**Optional VAT registration
***Franchise is a special permit to operate a public utility, like Meralco, and not including what is
commonly called “franchise” of Jollibee, McDonald, etc.
The threshold is P3,000,000
RETURN AND PAYMENT OF PERCENTAGE TAXES
The taxpayer may file a separate return for each branch or place of business, or a consolidated
return for all.
General rule:
Every person liable to pay a percentage tax must file a monthly return of the amount of his gross
receipts and pay the tax thereon, within twenty (25) days after the end of each taxable month.
Exceptions:
Overseas communication tax Within twenty (25) days after the end of the
quarter
Amusement tax Within twenty (25) days after the end of the
quarter
Tax on winnings Remitted to the Bureau of Internal Revenue
within twenty (25) days from the date withheld
Stock transaction tax of 6/10 of 1% Remitted to the Bureau of Internal Revenue
within five (5) banking days from the date
withheld by the broker
Stock transaction tax of 4%, 2% and 1% On primary offering, within 30 days from the date
of listing in the local stock exchange
Chapter 31
EXCISE TAX
An excise tax is a charge upon the performance of an act, the enjoyment of a privilege, or
the engaging in an occupation. An excise tax is a tax which is not a personal or a property tax.
A manufacturer who produces any of the “exciseable tax” articles, and removes the
article from the place of production for the purpose of domestic sale or consumption or any other
purpose, will be subject to the excise tax. One who sells exciseable services must pay the excise
tax. An importer of any of the “exciseable” articles, who removes them from customs custody,
will be subject to the excise tax.
ARTICLES AND SERVICES SUBJECT TO THE EXCISE TAX

The following articles, and services are subject to excise tax:
(a) Distilled spirits;
(b) Wines;
(c) Fermented liquors;
(d) Cigars;
(e) Cigarettes;
(f) Automobiles;
(g) Manufactures oils and other fuel;
(h) Mineral products;
(i) Non-essential goods and services;
(j) Cosmetic procedures, surgeries, and body enhancements undertaken to an aesthetic
reason; and
(k) Sweetened beverages.
Excise taxes imposed and based on weight and volume capacity or any other physical unit or
measurement is called “Specific Tax”. Excise taxes imposed and based on selling price or other
specific value of goods and services performed is called “Ad valorem” tax.
Specific tax examples:

Excise tax on wines: Per liter (liter x rate)
Excise tax on the mineral product of coal and coke: Per metric ton (metric tons x tax rate)
Ad valorem tax examples:

Excise tax on non-essential articles of: All goods are commonly or commercially known as
jewelry, whether real or imitation, pearls, precious, and semi-precious stones and imitation
thereof; goods made of ornamented, mounted or fitted with, precious metals or imitations
thereof ivory (not including surgical and dental instruments, silver plated wares, frames or
mounting of spectacles or eyeglasses, and dental gold or gold alloys and other precious metals
used in fitting, mounting or fitting of the teeth); opera glasses and lorgnettes; perfumes and
toilet waters; yachts and other vessels intended for pleasure or sports.
Distilled spirits are liquors. An example is whiskey. An example of wine is grape wine. An
example of product of tobacco is chewing tobacco. A cigar is tobacco leaf wrapped in tobacco
leaf. A cigarette is tobacco wrapped in paper. An example of manufactured oil is gasoline. An
example of mineral product is gold. An example of non-essential article is perfume.
WHO ARE SUBJECT TO THE EXCISE TAX?
The excise tax is imposed only on manufacturers and importers of

the articles mentioned above or the person who renders the
services mentioned above.
BUT, not all manufacturers and importers are subject to the excise tax. Only manufacturers,
or importers, of any of the categories of exciseable articles and persons who render the services
mentioned above are subject to the excise tax: the excise tax is in addition to the value-added
tax.
Illustration.
A manufacturer of liquor (distilled spirits) is subject to both excise tax and ad valorem
tax. The tax is per proof liter. What is proof liter? It is the percent of alcoholic contents
multiplied by 2. Thus, distilled spirit with 20 percent or 20 alcoholic content is 40 degrees proof.
Illustration.
An importer of wine is subject to excise tax.
Illustration.
A manufacturer of slippers is not subject to excise tax. Even as the taxpayer is a
manufacturer, slippers are not included in the categories of article of subject to excise taxes.
Illustration.
A dealer of cigarettes is not subject to excise tax. The taxpayer is not manufacturer or
importer.
Illustration.
A manufacturer of wines is subject to both the excise tax and the value-added tax.
PAYMENT OF THE TAX

The excise tax on locally manufactured goods must be paid prior to the removal of the
goods from the place of production.
The excise tax on imported goods must be paid before the release of the goods from the
customs custody.
“SIN TAXES”
What are the so-called “sin taxes”? They are the excise taxes on articles that state seeks to
discourage the use by the public. As of the date of writing of this book, they are the excise taxes
on liquors and cigarettes.
The rates of excise tax are often revised. The listing of articles subject to excise taxes
are also periodically revised.
Chapter 32
DOCUMENTARY STAMP TAX
DEFINITION OF DOCUMENTARY STAMP TAX

DST is a stamp tax imposed upon documents, instruments, loan agreements, and papers
evidencing the acceptances, sales and transfers of the obligation, rights, or properties.
NATURE OF DOCUMENTARY STAMP TAX

This is a tax imposed on the transaction rather than on the document itself.
DST is in nature of an excise tax levied on the exercise by person of certain privileges conferred
by law for the creation, revision, or termination of specific legal relationship through the
execution of specific instruments.
It becomes due at the same time the document or instrument evidencing the transaction is
notarized.
DSTs are levied independently of the legal status of the transactions giving rise thereto. They
must be paid upon the issuance of the instruments without regard to whether the contracts which
gave rise to them are rescissible, void, voidable, or unenforceable.
HOW IS THE DOCUMENTARY STAMP PAID?
A documentary stamp is a tax certain documents, for which the return and/ or payment is made:
(a) The return will be filled and the payment made within ten (10) days after the close of
the month when the taxable document was made, signed, issued, accepted or
transferred;
(b) In lieu of the above, by buying the required documentary stamp, affixing the stamp on the
document and cancelling the stamp with the indication of the date of cancellation, or by
imprinting amount of the required documentary stamp tax on the document with the use
of special machine.
WHO IS THE TAX PAYER?
The tax is being paid by the person making, signing, issuing, accepting or transforming
the document. Whenever one party to the taxable document enjoys an exemption from the tax,
the other party who is not exempt will be the one directly reliable for the tax.
DOCUMENTS SUBJECT TO DOCUMENTARY STAMP TAX
Examples of documents subject to the documentary stamp taxes are certificate of stocks,
checks, deeds of sale, deeds of mortgage, insurance policies, certificates, and including the
acknowledgement of notary public.
(For a list of the documents as of the date of printing of this edition of the book, see pages
32-2 and 33-3.)
DST Rates The DST rates shall be applicable on all documents not
otherwise expressly exempted from law, notwithstanding
the fact they are in electronic form.
R.A. 8792, otherwise known as Under R.A. 8792, electronic documents are the functional
the Electronic Commerce Act equivalent of a written document under existing laws, and
the issuance thereof is therefore tantamount to the issuance
of a written document, and therefore subject to DST.
EFFECT OF FAILURE TO STAMP TAXABLE DOCUMENT
An instrument, document or paper which is required by the law to be stamped and which
has been signed, issued, accepted or transferred without being dully stamped, will not be
recorded, nor will it or not any copy of it, or any record or transfer of the same be admitted or
used in evidence in any court until the requisite stamps will have been paid.
No notary public or other officer authorized to administer oaths will add his jurat or
acknowledgement to any document subject to documentary stamp tax unless the proper
documentary stamp are paid.
DOCUMENTS SUBJECT TO DOCUMENTARY TAX
1. Examples of those enumerated in the law;

2. Certificate of stocks, on original issue;
3. Sales, agreements to sell, memoranda of sales, deliveries or transfer of certificates of stock;
4. Certificates of profits or interest in the property or accumulation;
5. Bank checks, drafts, certificate of deposit not bearing interest, or order for the payment of
money at sight or on demand;
6. Original issue of debt instrument;
7. On all bills of exchange or drafts between points in the Philippines;
8. Foreign bill exchange and letter of credit drawn in but payable out of the Philippines;
9. Life insurance policies;
10. Policies of insurance upon property;
11. Fidelity bonds and other insurance property;
12. Policies of annuity;
13. Pre-needs plans;
14. Certificates (not including medical certificates and certificate of acknowledgement of notary
public);
15. Warehouse receipts covering property the value of which exceeds P200;
16. Jai-alai and horse race tickets, lotto and other authorized number game;
17. Bills of landing or receipts;
18. Proxies;
19. Powers of attorney;
20. Leases and other hiring agreements of land and tenements;
21. Mortgages, pledges and deeds of trust;
22. Deeds of sale and conveyances and donations of real property, but transfer exempt from the
donor’s tax are exempt from this documentary stamp tax;
23. Charter parties;
(If any document mentioned above is not known to the user of the book, it is not a
surprise. It becomes known only to the one who had a transaction using that document. It must
not be a reason for despair!)
For the tax bases and tax rates, the user of the book will have to read the law and have the
information before him. Then it will be a matter of mathematics.
Documents requiring Stamp Rate

Original Issue of Shares P2 on each P200 par value of shares of
stocks. No par value, based on the actual
consideration.
Bonds, Debentures, Certificate of Stock, Cost of P2 on each P200
Indebtedness issued in foreign country
Sales, Agreement to Sell, Deliveries, Transfer of P1.50 on each P200 par value. No par
Share of Stock value, 50% of the DST paid upon original
issuance of the stock.
Debt Instruments P1.50 on each P200
Certificate of profit or interest in property or P1 on each P200
accumulation
Annuities P1 on each P200
On pre-need plans: 0.40 on each P200

Bills of exchange and Acceptance of BOE P0.60 on each P200
Jail-alai, Horse race, Tickets, Lotto P0.20 and if the cost of ticket exceeds
P1,000, an additional of P0.20 on every P1
Insurance not exceeding: P 100,000 Exempt
Insurance from 100,000 – 300,000 P 20

300,000 – 500,000 50
500,000 – 750,000 100
750,000 – 1,000,000 150
1,000,000 – above 200
Bank checks, Drafts, Certificate of deposit not P3
bearing interest
Certificates P30
Warehouse Receipts P30
No tax in any one calendar month covering

the property of which value does not
exceed P200.
Proxy P30
Real Property P15 for every P1,000
Power of Attorney P10
Leases and other hiring arrangement P6 for every P2,000 or fractional part
thereof
Additional P2 for every P1,000 in excess

of P2,000
Mortgage, Pledge, Deed of Trust P40 if the amount does not exceed P5,000
Otherwise, additional P20 in excess

Charter parties and other similar instruments (a) P1,000: If the registered gross tonnage
of the ship, vessel, or streamer does not
exceed 1,000 tons and the duration of the
charter or contract does not exceed 6
months. In excess of 6 months, additional
P50 shall be paid.
(b) P2,000: If the registered gross tonnage

exceeds 1,000 tons but does not exceed
10,000 tons and the duration of the charter
or contract does not exceed 6 months. In
excess of 6 months, additional P200 shall
be paid.
(c) P3,000: If the registered gross tonnage

exceeds 10,000 tons and the duration of
the charter or contract does not exceed 6
months. In excess of 6 months, additional
P300 shall be paid.
Chapter 33
TAX REMEDIES IN THE NATIONAL
INTERNAL REVENUE CODE
1. REMEDIES OF THE STATE
No return was filed or the return filed

Return filed was not false or fraudulent was false or fraudulent
COLLECTION WITH PRIOR COLLECTION WITH PRIOR

ASSESSMENT ASSESSMENT
Assessment must be made within three Assessment must be made within ten
(3) year from the date of filing the re- (10) years from the date of discovery of
turn (or from the last day required by the failure to file return, or the falsity
law for filing, if the return was filed be- or fraud in the return.
fore such last day)
Collection must be within five (5) Collection must be made within five (5)
years from the date of assessment, by; years from the date of assessment, by:
(a) Summary proceedings: (a) Summary proceedings:

(1) Distraint of personal property; or (1) Distraint of personal property; or
(2) Levy on real property, or (2) Levy on real property; or
(b) Judicial proceedings: (b) Judicial proceedings:

(1) Civil action and/or (1) Civil action and/or
(2) Criminal action. (2) Criminal action.
COLLECTION WITHOUT PRIOR COLLECTION WITHOUT PRIOR

ASSESSMENT: ASSESSMENT:
Collection must be made within three Collection must be made within ten (10)
(3) years from the filling of the return (or ten years from the date of discovery of the
from the last day required by law for failure to file the return or fraud in the
filing the return). return.
Collection must be judicial proceed- Collection must be by judicial proceed-

ings only. ings only.
Distraint is a proceeding against the personal property of the taxpayer, the pro-
perty to be sold at public auction, and the proceeds of the sale to be applied to the
payment of the tax.
Distraint may be:
(1) Actual distraint – Actual physical taking of the property;

(2) Constructive distraint – Prohibiting the taxpayer to dispose of the personal pro-
property that will be held answerable for the tax.
Levy is a proceeding against the real property of the taxpayer, the property to be
sold at public auction and the proceeds of the sale to be applied to the payment of
the tax.
REMEDIES OF THE TAXPAYER
(a) Without paying a tax assessed:
(1) Administrative proceedings – Protest the assessment in the Bureau of

Internal Revenue within thirty days from the date of receipt of the as-
sessment, and subsequently -
(2) Judicial proceedings, with the Court of Tax Appeals within thirty (30) days
from receipt of final decision of the Commissioner of Internal Revenue,
and eventually to the Supreme Court.
(b) After a tax has been paid, erroneously or illegally:
(1) Administrative proceedings – File a claim for refund with the Bureau of
Internal Revenue, within two (2) years from the date of payment, and sub-
sequently -
(2) Judicial proceeding, with the Court of Tax Appeals, within thirty (30)
days from receipt of the decision of the Bureau of Internal Revenue, as
well as within two (2) years from the date of payment (the two periods
must both be satisfied).
On remedy against assessment.
When a tax return is being audited by an Examiner of the Bureau of Internal

Revenue and is being checked against the books of accounts and records of the
taxpayer, and verified/checked with the taxpayer, and the Examiner finds that there
is discrepancy between the tax paid and the tax which is correctly due:
(a) The Bureau of Internal Revenue will inform the taxpayer of his discrepancies
in his tax payment. This is called Notice of Informal Conference;
(b) The taxpayer must respond within fifteen (15) days from receipt of the Notice
of Informal Conference, otherwise he will be considered in default;
(c) The finding of the Examiner and the response of the taxpayer will be reviewed
by the Assessment Division of the Revenue District Office, or the Com-
missioner, or his duly authorized representative, to determine the existence of
sufficient basis for an assessment. If there is sufficient basis for an assessment,
the Bureau of Internal Revenue will issue to the taxpayer, by registered mail or
personal service, a pre-assessment notice (PAN) stating the facts, law, rules
regulations and jurisprudence on which the proposed assessment is based;
(d) The taxpayer must respond to the pre-assessment notice within fifteen (15)
days from receipt thereof, otherwise he will be considered in default, or if he
responds, but the response is not found meritorious, the Bureau will issue a
formal letter of demand and assessment. The letter of demand will state the
facts, law, rules, regulations and jurisprudence on which the deficiency as-
sessment is made, otherwise the assessment will be void;
(e) The taxpayer must file a letter of protest within thirty (30) days from the date
of receipt thereof. He must state in his protest the facts, law, rules, regulations
and jurisprudence on which the protest is made, otherwise the protest will be
considered void and without force and effect. On issues not protested, a col-
lection letter will be issued to the taxpayer calling for the payment of the de-
ficiency tax. No action will be taken on the disputed issues until the taxpayer
has paid the deficiency attributable to the said undisputed issues. On the issues
protested, the prescriptive period on assessment and collection will be sus-
pended. If the taxpayer failed to file a valid protest against the formal letter of
demand and assessment notice within the prescribed period, the assessment
will become final, executory and demandable.
(f) The taxpayer must submit the documents supporting his protest within sixty
(60) days from the filing of the letter of protest, otherwise the assessment will
become final executory, and demandable.
(g) If the protest is denied in whole or in part, the taxpayer may appeal to the
Court of Tax Appeals within thirty (30) days from the date of receipt of the
final decision;
If the decision in (g) is by a duly authorized representative of the
Commissioner only, before going to the Court of Tax Appeals, the taxpayer
may elevate the protest to the Commissioner of Internal Revenue within thirty
(30) days from the date of receipt of the final decision of the authorized re-
presentative (the latter’s decision will not be considered final, executory or
demandable), in which case the protest will be decided by the Commissioner;
(h) The decision of the Commissioner or his duly authorized representative will
state the facts, the law, rules and regulations, or jurisprudence on which such
decision is based, otherwise the decision will be void, in which case the same
will not be considered a decision on a protested assessment. The decision
must state that the decision is final;
(i) The final decision of the Commissioner or his duly authorized representative
may be appealed to the Court of Tax Appeals within thirty (30) days from
receipt of the final decision;
(j) If the Commissioner or his duly authorized representative fails to act on the
taxpayer’s protest within one hundred eighty (180) days from the date of sub-
mission of the documents supporting the protest, the taxpayer may appeal to
the Court of Tax Appeals within thirty (30) days from the lapse of the said one
hundred eighty (180) day period, otherwise the assessment becomes final,
executory and demandable.
(k) Within fifteen (15) days from receipt of the final decision of the Court of Tax
Appeals, the taxpayer may appeal to the Supreme Court.
On remedy against tax erroneously of illegally paid.
When an internal revenue tax was erroneously or illegally paid by the taxpayer,
he must:
(a) File a claim for refund with the Bureau of Internal Revenue within two (2)
years from the date of payment of the tax. A return filed showing an over-
payment will be considered a claim for refund;
(b) Within thirty (30) days from receipt of the decision of the Bureau of Internal
Revenue on the claim for refund, and within two (2) years from the date of
payment of the tax, appeal to the Court of Tax Appeals;
(c) Within fifteen (15) days from receipt of the decision of the Court of Tax
Appeals, appeal to the Supreme Court.
ASSESSMENT AND COLLECTION: Return was not false or fraudulent.
Date return was filed, or last day required

by law for filing, if filed before the last day
3 years Last day to collect (By judicial proceedings only)
Date return was filed, or last day required

by law for filing, if filed before the last day
3 years 5 years
Last day to collect either by;
Last day to assess (a) Summary proceedings; or
(b) Judicial proceedings
ASSESSMENT AND COLLECTION: Return was false or fraudulent
Date of discovery of the falsity

fraud or omission
REMEDIES OF THE STATE
10 years Last day to collect (By judicial proceedings only)
Date of discovery of the falsity

fraud or omission
10 years 5 years
Last day to access Last d ay to collect either by;
(a) Summary proceedings; or
(b) Judicial proceedings.
REMEDY AGAINST AN ASSESSMENT
R
Notice of Informal Pre-assessment Assessment
Conference (NIC) notice (PAN) and demand
Respond Respond Protest the assessment Submit supporting documents
15 days 15 days 30 days 60 days

-----------------------------------------------------------------------------------------------------------------------------------------------------
Decision Appeal Decision Appeal
of BIR to CTA of CTA to SC
30 days 15 days
Supporting docu- Appeal Appeal
ments submitted to CTA to SC
on this date Decision
of CTA
180 days, no decision by BIR 30 days 15 days
REMEDY FOR TAX ERRONEOUSLY OR ILLEGALLY COLLECTED

CASE 1. Last day to appeal to the CTA
REMEDIES OF THE TAX PAYER
Date of payment Claim for refund filed with BIR Denial received
30 days
2 years
CASE 2. Last day to appeal to the CTA
Date of payment Claim for refund filed with BIR Denial received
30 days
2 years
Chapter 34
COURT OF TAX APPEALS (Republic Act No. 9282)
1. Exclusive appellate jurisdiction to review by appeal:
(a) Decisions of the Commissioner of Internal Revenue in cases involving disputed assessments,
refunds of internal revenue taxes, fees or other charges, penalties in relation thereto, or other matters
arising under the National Internal Revenue Code or other laws administered by the Bureau of
Internal Revenue;
(b) Inaction by the Commissioner of Internal Revenue in cases involving disputed assessments,
refunds of internal revenue taxes, fees or other charges, penalties in relation thereto, or other matters
arising under the National Internal Revenue Code or other laws administered by the Bureau of
Internal Revenue, where the National Internal Revenue Code provides a specific period of action, in
which cases the inaction will be considered a denial.
2. Exclusive original jurisdiction:
(a) Over all criminal offenses arising from violations of the National Internal Revenue Code where
the principal amount of taxes and fees, exclusive of penalties claimed, is one million pesos
(P1,000,000) and above;
(b) In tax collection cases involving final and executory assessments for taxes, fees, charges and
penalties, where the principal amount of taxes and fees, exclusive of charges and penalties, is one
million pesos (P1,000,000) and above.
(c) Any party adversely affected by a decision, ruling or inaction of the Commissioner of Internal
Revenue may file an appeal by filing a petition for review with the Court of Tax Appeals within
thirty (30) days from receipt of such decision or ruling, or after the expiration of the period fixed by
the law for action. Appeal will be made by filing a petition for review;
A party adversely affected by a Division of the Court of Tax Appeals may file a motion for
reconsideration or new trial before the same Division of the Court of Tax Appeals within fifteen (15)
days from notice thereof;
No appeal taken to the Court of Tax Appeals from the decision of the Commissioner of Internal
Revenue will suspend the payment, levy, distraint, and/or sale of any property of the taxpayer for the
satisfaction of any tax liability: Provided, however, That when in the opinion of the Court the
collection by the above-mentioned government agencies may jeopardize the interest of the
Government and/or the taxpayer, the Court, at any stage of the proceeding, may suspend the said
collection and require the taxpayer either to deposit the amount claimed or to file a surety bond for
not more than double the amount with the Court;
A person adversely affected by a decision of a Division of the Court of Tax Appeals on a motion
for reconsideration or new trial may file a petition for review with the Court of Tax Appeals en banc.
A party adversely affected by a decision or ruling of the Court of Tax Appeals en banc may file
with the Supreme Court a verified petition for review on certiorari within fifteen (15) days from
notice thereof.
Chapter 35
LOCAL TAXATION AND COMMUNITY TAX
PRINCIPLES OF LOCAL TAXATION.
Nature of the power of taxation of local governments.
Each local government unit has the power to create its own sources of revenue and to
levy taxes, subject to such limitations as may be provided by law (provision of the Philippine
Constitution). Hence, the power of local governments to impose local taxes is a delegated power
from the National Government.
Local government units with power of taxation.

The following units of local governments have the power to impose local taxes:
(a) Provinces;
(b) Municipalities;
(c) Cities; and
(d) Barangays.
Basic principles of local taxation.

(a) Taxation must be uniform in each local government unit;
(b) Taxes, fees, charges and other impositions must be equitable, for a public purpose, must not
be unjust, excessive, oppressive or confiscatory, and must not be contrary to law, public policy
and national economic policy or in restraint of trade;
(c) In no case will the collection of local taxes and other impositions be let to any person,
(d) The revenues collected under the Local Government Code will inure only to the benefit of,
and subject to disposition by, the local government imposing the tax or fee, unless otherwise
specifically provided in the Local Government Code;
(e) It will be the responsibility of each local political subdivision to evolve a progressive system
of taxation.
Extent of, and limitation on, the power of taxation of local governments.
The Local Government Code.

(a) Gives the local units of government, through the Sangguniang Panlalawigan,
Panlunsod, and Barangay, respectively, the power to levy taxes,
(b) Enumerates what taxes may not be imposed by local governments
(c) Enumerate what taxes may specifically be imposed by local governments, and provides for
imposition of taxes other than those specifically delegated (letter [c] above) and not prohibited
(letter [b] above), but only after public hearing.
THE COMMUNITY TAX.
3. An individual is subject to the community tax if:

(a) An inhabitant of the Philippines;
(b) Eighteen years of age and above;
(c) Engaged in business or occupation; or
(d) Owns real property with an aggregate assessed value of one thousand pesos (P1,000.00) or
more; or
(e) Required by law to file an income tax return.
4. A corporation is subject to community tax if:
(a) A domestic corporation engaged or doing business in the Philippines;
(b) A resident foreign corporation engaged doing business in the Philippines;
(c) General professional partnership in the Philippines;
Illustration.
An individual, single, had the foilowing data in 2017:
Salaries P125,300
Sales of trading business:
Gross sales:
Cash P300,000
Open account 200,000
Sales returns 4,000
Sales allowances 2,000
Cash collections on open account sales 130,400
Cash received as income from property:
Dividend income 3,000
Interest on bank deposit 3,300
Rentals from real property:
Receivable 5,200
How much is the additional community tax for 2018?
Answer: P675 (based on data of the preceding year).
On salaries (P125,300/P1,000 is 125.3, or 125 x P1) 125

On gross receipts from business
Cash sales 300,000
Cash collections on open account sales 130,400
Total 430,400
(P430,400/P1,000 is 430.4, or 430 x P1) 430
Cash received income from real property
(P120,500/P1,000 is 120.5, or 120 x PI) 120
Additional community tax 675
Illustration.
Mr. and Mrs. A, citizens and residents of the Philippines, had the following data for
2017:
Mr. A:
On business in Manila:
Net sales (with cash receipts of P345,246) P500,000
Cost of sales 150,000
Operating expenses 600,000
Cash received on practice of profession in Pasig City 323,430
On real property in Quezon City:
Cash rentals received 120,000
Assessed value 100,000
Dividend received 20,000
Mrs. A:
On practice of profession in Makati City:
Cash received as professional fees 236,465
Professional fees receivable 56,320
On real property in Pasay City
Assessed value 48,350
How much is the additional community tax of Mr. and Mrs. A for 2018?
Answer: P1,070 (based on data of the preceding year).
On cash receipts from business, Mr. A

(P345,246/P1,000 is 345,2 or 345 x P1) P345
On cash receipts from practice of profession:
Mr. A P323,430
Mrs. A 236,465
Total P559,895
P559,895/P1,000 is 559.8 or 559 x P1 559
On cash receipts from rental properties:
Mr. A P120,000
Mrs. A 46,342
Total P166,342
P166,342/P1,000 is 166.3, or 166 x P1 166
Additional community tax P1,070
For an individual, incidental income, (except dividend, which is subject to the tax) is not subject
to the Additional Community Tax.
Illustration.
The C Co., Inc, a domestic corporation, had the following data for 2017-
On business operations:
From Philippine sources
Sales:
Cash sales P3,250,000
Open account sales 4,398,250
Cash collections from:
Account sales 3,905,678
Cash dividend received 25,400
Interest on bank savings deposits 56,320
On real property:
Income received in cash 300,000
Assessed value 3,256,000
From foreign sources:
Cash dividend received 100,000
How much is the additional community tax for 2018?

Answer: P5,480 (based on data of the preceding year).
On business:
Cash sales
Cash collections on open account sales
Cash collections on installment sales
Cash Dividend received
Total
3,905,678
3,264,328
25,240
P10,445,746
P10,445,746/P5,000 is 2089.1 or 2,089 x P2 P4,718
On real property:
Assessed value of real property
P3,256,000/P5,000 is 651.2, or 651 x P2 1,302
Additional community tax P5,480
See next page for tabular illustration of community tax of individuals and
corporations.
BASIC AND ADDITIONAL COMMUNITY TAXES

Data: (a) In the Philippines;
(b) In the preceding year:
Individual Corporation
Cash receipts from P312,800
profession, and from salary,
of spouse
Cash receipts, trading 600,200 P5,265,500
business
Real Property
Assessed value 120,300 902,000
Gross income 54,600 562,300
COMPUTATIONS
Individual Corporation
Basic, Mr. - Class A P5
Basic, Mrs. - Class A P5 Basic - Class C P500
Additional - Class B Additional - Class C-1
For every P1,000 - P1 For every P5,000 is not taxable
A fraction of P1,000 is not A fraction of P5,000 is not
taxable taxable
Cash receipts from business: Cash receipts from business:
P600,200/P1,000 = 600.2, or P600 P5,265,500/P5,000 = 1,053.1 or P2,106
600 x P1 1,053 x P2
Cash receipts from
profession:
P312,800/P1,000 = 312.8, or 312
312 x P1
From real property From real property
On Income On ASSESSED VALUE:
P54,600/P1,000 = 54.6, or 54 P902,000/P5,000 = 180.4 or 360
54 x P1 180 x P2
Additional community tax P966 Additional community tax P2,466
(Maximum - P5,005) (Maximum – ₱10,500)
Chapter 36
TAX RETURNS AND PAYMENTS
INCOME TAX:
Individuals with compensation On or before April 15 of the succeeding
income year
Individuals who are in business or Declaration and payment of estimated
practice of profession (self-employed) income tax:
First Quarter - May 15
Second Quarter - August 15
Third Quarter - November 15
Annual return - April 15 of the succeeding
year
Corporations Quarterly: Not later than 60 days after the

close of each of the first, second and
third quarters.
Annual - Not later than the 15th day of the
4th month following the close of the
taxable year (calendar or fiscal year)
General professional partnerships Not later than April 15 of the succeeding

year Information return.
Partnerships other than general professional
partnerships Same rules as those of corporations
Estates and trusts Same rules as those of corporations
ESTATE TAX Not later than 1 year after death

DONOR'S TAX Not later than 30 days after the donation
VALUE-ADDED TAX For each of the first two months quarter -
On sales subject to 12% VAT Not later than 20 days after the close of
the month
For the quarter – Not more than 25 days
after the close of the quarter
On sales subject to 5% final VAT Withheld at source by government agency
On importation Prior to the release of the goods from

customs’ custody
PERCENTAGE TAXES
Within 5 banking days from the date

of collection
On primary offering-within 30 days from
Stock transaction tax of 6/10 of 1%
Stock transaction tax of 4%, 2% and 1%
All other percentage taxes
EXCISE TAXES
On domestic sale/use Prior to removal from the place of
production
On importation Prior to removal from customs’ custody
DOCUMENTARY STAMP TAX Within 10 days after the close of the

month
COMMUNITY TAX On or before the end of February

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Chapter 1

1. The tax must be levied for a public purpose;

6.Basic principles of a sound tax system.

8. Essential characteristics of tax.

9. Tax extinguished from license fee.

10. Tax distinguished from special assessment.

11. Classification of taxes.

b. As to who bears the burden:

c. As to determination of the amount:

CLASSIFICATION OF THE PHILIPPINE INCOME TAX.

SOURCES OF TAX JURISPRUDENCE.

A Philippine income tax payer may be:

Taxpayer Taxed on:

Taxpayer Taxed on:

The amount of estimated income will be paid in four (4) installments:

How much is the income taxes of Mr. and Mrs. A? Computations:

Illustration: CD taxable income P400,000

Gross income of the general professional partnership P400,000

A general professional partnership files an information return at the end of

Gross income is gain. It is gain derived from:

Interest received is income because it is gain derived from capital. Salary is

EXCLUSION FROM GROSS INCOME

(a) Life insurance

2. Any amount received by an official or employee as a consequence of separation

4. Benefits received or enjoyed from the Government Service Insurance System

(g) Miscellaneous Income

1. GROSS COMPENSATION INCOME

Gross compensation income is income arising from an employer-employee

Illustration. Mr. A, had the following data:

Regular salaries P180,000

The taxable income was:

Regular salaries P180,000

An accounting formula (reworded), on assumed figures:

2. A In the case of a manufacturing concern:

An accounting formula (reworded), on assumed figures:

Cost of goods sold, explained with assumed figures -

(a) Cost of goods manufactured -

Goods newly put in process during the period (Materials

*Example: Salary of factory workers. **Example: Electricity used in the factory

(b) Costs of good sold:

A formula, on assumed figures:

Gross revenues or receipts P300,000

2. B Gross income from farming

Cash from sales of livestock and other products in the farm

Formula, on assumed figures:

Rent income may be in the following forms:

Rentals received from lessee (tenant) P500,000

Cost of improvement – P250,000. Life – 25 years

Interest income as a rule is taxable income included in the Income Tax.

It is taxable if the payment results in a change in the proportionate interests of

A co., a domestic corporation with common stock outstanding before a stock

Stock- Before Dividend Stock After Dividend

Stock- Before Dividend Stock After Dividend

A 100 20 10 110 20.76

An optional stock dividend (stockholder may choose between receiving cash or

Kind of dividend Taxable Measure of income

Cash dividend Yes Amount of money received

6. GAIN OF SALE OF ASSETS

For gain on sale of assets, see Chapters 9, 10 and 11.

7. PRIZES AND WINNINGS

Subject to Income Tax:

8. INCOME FORM OTHER SOURCES