Professional Documents
Culture Documents
NON-RESIDENT CITIZEN 1. Who establishes to the satisfaction of the Commissioner the fact of his physical presence
abroad with intention to reside therein
2. One who works and derives income from abroad and whose employment thereat
requires him to be physically present abroad most of the time (must have been
outside the Philippines for not less than 183 days) during the taxable year.
3. One who leaves the Philippines to reside abroad as an immigrant, or for employment on
a permanent basis
RESIDENT ALIEN A resident alien is an individual whose residence is within the Philippines and who is not a citizen.
An alien will be considered a resident if the stay here is either definite and extended, or indefinite.
An alien actually present in the Philippines who is not a mere transient or sojourner is a resident of
the Philippines for purposes of the income tax.
An alien is considered a non-resident if he stays here for a definite short period of time. Once a
taxpayer is determined to be a non-resident alien, the test to determine whether the alien is a
non-resident alien engaged in trade or business is whether his total aggregate stay for a taxable
year exceeds 180 days.
MINIMUM WAGE Worker, whether in public or private sector, who is paid not more than the statutory wage. Minimum
EARNERS wage earners shall be exempt from the payment of income tax on their taxable income. Further,
their holiday pay, overtime pay, night shift differential pay, and hazard pay received by them shall
likewise be exempt from income tax
1. For agricultural labor paid entirely in products of the farm where the labor is performed
2. For domestic service in a private home. A private home is the fixed place of aboard of an
individual or family. If the home is utilized primarily for the purpose of supplying board or
lodging to the public as a business enterprise, it ceases to be a private home and
remuneration paid for services performed therein is not exempted and should be included
in compensation income.
3. For casual labor not in the course of the employer’s trade or business
4. For services by a citizen or resident of the Philippines for a foreign government or an
international organization.
BUSINESS Business income refers to gross income derived from the conduct of trade or business or the
INCOME exercise of a profession.
PROFESSION Professional income refers to fees received by a professional from the practice of his
AL profession provided that there is no employer-employee relationship between him and his
INCO clients. It includes the fees derived from engaging in an endeavor requiring special training as
ME a professional as a means of livelihood, which includes, but is not limited to, the fees of CPAs,
doctors, lawyers, engineers and the like
PASSIVE INCOME Passive income is income derived from any activity in which the taxpayer does not materially
participate.
INTEREST Interest income means the amount of compensation paid for the use of money or forbearance
INCOME from such use.
ROYALTY Royalties are any payment of any kind received as consideration for the use of or right to use
INCOME any patent, trademark, design or model, secret formula or process, industrial commercial or
scientific equipment, information concerning industrial, commercial or scientific experience.
A sale of royalty on a regular basis for a consideration is considered an active business and any
gain therefrom shall be subject to the normal corporate income tax (see RMC 77-2003). Where
a person pays royalty to another for the use of its intellectual property, such royalty is passive
income of the owner and is therefore subject to final withholding tax.
RENTAL INCOME Rental income refers to the amount or compensation paid for the use or enjoyment of a thing
or a right and implies a fixed sum or property amounting to a fixed sum to be paid at a stated
time for the use of the property. It includes all amount or property received from the lease
contract, whether used in business or not.
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Except when otherwise provided, all The term “exclusions” refers to Deductions are items or amounts
income derived from whatever items that are not included in the authorized by law to be subtracted
source. determination of gross income from the pertinent items of gross
because: income to arrive at taxable income.
The phrase “all income derived from Deductions partake of the nature of
whatever source” encompasses all 1. They represent return of capital tax exemptions. Hence, they are
accessions to wealth, clearly or are not income, gain or likewise strictly construed against
realized, and over which the profit (e.g. life insurance) the taxpayer.
taxpayers have complete dominion.
A gain constitutes taxable income 2. They are subject to another The itemized deductions in Section
when its recipient has such control kind of internal revenue tax 34(A) to (J) are available to all kinds
over it that as a practical matter, he (e.g. gifts, bequests, devices) of taxpayers engaged in trade or
derives readily realizable economic business or practice of profession in
value from it. 3. They are income, gain or profits the Philippines. This excludes
that are expressly exempt from citizens and alien residents earning
Income from whatever sources income tax under the purely compensation income.
refers to all income not expressly Constitution, tax treaty, Tax
excluded or exempted from the Code, or general or special law. General requisites before deductions
class of taxable income, (e.g. PEZA) are allowed —
irrespective of the voluntary or 1. There must be a specific
involuntary action of the taxpayer in provision of law allowing the
producing the income (GUTIERREZ deductions, since deductions
V. CIR, CTA CASE NO. 65, do not exist by implication
AUGUST 31, 1965) 2. The requirements of
deductibility must be met
Gains, money or otherwise derived 3. There must be proof of
from all other illegal source fall entitlement to the deductions
within the ambit of “income derived 4. The deductions must not have
from whatever source” and is been waived
subject to income tax. 5. The withholding and payment of
the tax required must be
shown
Including but not limited to the The following shall not be included The allowable and itemized
following: (CARD-GRIP4) in the determination of gross deductions include:
income and shall be exempt from
a. Compensation taxation: a. Business Expenses (in
b. Annuities a. Proceeds of life insurance b. connection with taxpayer’s
c. Rents Amounts received by insured trade, business or
d. Dividends as return of premium profession)
e. Gains from dealings in c. Gifts, bequests, and devises b. Interest on Indebtedness
property d. Compensation for injuries or c. Taxes in connection with
f. Royalties sickness taxpayer’s business, trade
g. Interest e. Income exempt under Treaty or profession [except
h. Prizes and winnings f. Retirement benefits, income taxes, estate and
i. Pensions pensions, gratuities, etc. donor’s taxes, special
j. Partner’s share in the net g. Miscellaneous items assessments, and foreign
income of GPP i. Income of foreign income taxes (unless the
governments taxpayer does not make
ii. Income derived by the use of the tax credit
Government or its privilege)]
political subdivisions d. Losses
iii. Prizes and awards e. Bad debts
iv. Prizes and awards in f. Depreciation
sports competition g. Depletion
v. 13th month pay and other h. Charitable and other
benefits contributions
i. Research and development
Also, under Section 33(C), NIRC, expenditures
the following fringe benefits are not j. Contributions to pension trusts
taxable:
a. Fringe benefits authorized
and exempted from tax
under special laws
b. Contributions of the employer
for the benefit of the
employee to retirement,
insurance and
hospitalization plans
c. Benefits given to rank and
file employees, whether
granted under a CBA or not
d. De minimis benefits
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What items are not deductible from gross income?
No deduction shall in any case be allowed in respect to:
1. Personal, living or family expenses
2. Any amount paid out for new buildings or for permanent improvements or betterments made to increase the
value of any property or estate. (Capital expenditures). Except intangible drilling and development costs
incurred in petroleum operations which may be deducted in full
3. Premiums paid on any life insurance policy covering the life of any officer or employee or of any person
financially interested in any trade or business carried on by the taxpayer, individual, or corporate when the
taxpayer is directly or indirectly a beneficiary under such policy
4. Losses from sales or exchanges of property directly or indirectly between related persons
a. Between members of a family
b. Between an individual and a corporation more than 50% in value of the outstanding stock of which is
owned by such individual (except in the case of distributions in liquidation)
c. Between two corporations more than 50% in value of the outstanding stock of each of which is owned
by the same individual if either one of the companies is a holding company
d. Between the grantor and a fiduciary of any trust
e. Between the fiduciary of a trust and the fiduciary of another trust if the same person is a grantor
with respect to each trust
f. Between a fiduciary of a trust and a beneficiary of such trust
5. Non-deductible interest (between related persons)
6. Bad debts between related parties
7. Fines and penalties due to late payment of tax
FRINGE BENEFITS DE MINIMIS BENEFITS
As defined by Section 33(B), the term “fringe benefit” As defined by RR 3-98 [MAY 21, 1998], de minimis
means any good, service or other benefit furnished or benefits are benefits of relatively small value offered or
granted in cash or in kind by an employer to an individual furnished by the employer to his/her employees as a
employee (except rank and file employees) means of promoting the health, goodwill, contentment,
efficiency of his/her employees.
A fringe benefit tax is a final withholding tax (at 35%)
imposed on the grossed-up monetary value of fringe
benefit furnished or granted to the employee except
rank and file employees by the employer.
Such as, but not limited to, the following: These include ONLY, pursuant to RR 5-2011, the following:
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Explain briefly whether the following items are taxable or non-taxable:
a) Income from jueteng;
b) Gains arising from expropriation of property;
c) Taxes paid and subsequently refunded;
d) Recovery of bad debts previously charged off;
e) Gain on the sale of a car used for personal purposes.
a) Taxable. The law imposes a tax on income from whatever source. [Sec. 32(A), NIRC] Gains, money or otherwise
derived from all other illegal source fall within the ambit of “income derived from whatever source” and is subject to
income tax.
b) Taxable. There is a material gain, not excluded by law, realized out of a closed and completed transaction. Gains
from dealings in property are part of gross income. [Sec. 32(A)(3), NIRC]
c) It depends. Taxes paid which are allowed as deduction from gross income are taxable when subsequently refunded
but only to the extent of the income tax benefit of said deduction. It follows that taxes paid which are not allowed as
deduction from gross income, i.e. income tax, donor’s tax, and estate tax, are not taxable when refunded.
d) Taxable under the TAX BENEFIT RULE. Recovery of bad debts previously allowed as deduction in the preceding
years shall be included as part of the gross income in the year of recovery to the extent of the income tax benefit of
said deduction. [Sec. 34(E)(1), NIRC] This is sometimes referred as the RECAPTURE RULES.
e) Taxable. Since the car is used for personal purposes, it is considered as a capital asset hence the gain is considered
income.
A and B, co-owners, bought 3 parcels of land in one transaction and bought 2 more parcels of land in another.
They decided to sell the 3 parcels to C and the 2 parcels to D. They realized a net profit gain and paid CGT. CIR
assessed them for deficiency corporate income tax. Is the co-ownership taxable as a corporation?
No. A co-ownership who own properties which produce income should not automatically be considered partners of
an unregistered partnership, or a corporation, within the purview of the income tax law. The essential elements of a
partnership are two, namely: (a) an agreement to contribute money, property or industry to a common fund; and (b) intent
to divide the profits among the contracting parties. Here, there is no evidence that petitioners entered into an agreement to
contribute money, property or industry to a common fund, and that they intended to divide the profits among themselves.
The sharing of returns does not in itself establish a partnership whether or not the persons sharing therein have a joint or
common right or interest in the property. There must be a clear intent to form a partnership, the existence of a juridical
personality different from the individual partners, and the freedom of each party to transfer or assign the whole property.
A and B inherited properties. They did not partition the same and instead invested them to a common fund and
divide the profits therefrom. Should they be classified as an unregistered partnership subject to corporate income
tax?
Yes. The income from inherited properties may be considered as individual income of the respective heirs only as
long as the inheritance or estate is not distributed, or, at least, partitioned. But the moment their respective known shares
are used as part of the common assets of heirs to be used in making profits, it is but proper that the income from such
shares should be considered as part of the taxable income of an unregistered partnership.
Note: Thus, we make a distinction. Before the partition of property, the income of the co-ownership arising from the death of a decedent
is not subject to income tax, if the activities of the co-owners are limited to the preservation of the property and the collection of the
income therefrom. However, after partition, should the co-owners invest the income of the co-ownership in any income-producing
properties, they would be constituting themselves into an unregistered partnership which is consequently subject to income tax as a
corporation. A co ownership is subject to income tax when:
a) Co-ownership is formed or established voluntarily, or upon agreement of the parties, what was likely constituted is a business
partnership
b) The income of the co-ownership is invested by the co-owners in business or other income-producing properties, the co-owners
in effect constituted themselves into a business partnership
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Domestic 30% of taxable income from all sources within and without the
Corporation
Philippines 2% of gross income if MCIT applies
International 2.5% of Gross Philippine Billing shall be paid by international carriers doing business in the
Carriers Philippines unless it is subject to a different tax rate under a tax treaty to which PH is a
signatory
Gross Philippine Billing refers to gross revenue derived from carriage of persons, excess
baggage, cargo, and mail origination from the Philippines in a continuous and uninterrupted
flight, irrespective of the place of sale or issue and the place of payment of ticket or passage
document
Non-resident Generally, NRFC is subject to a FWT of 30% based on enumerated gross income from all
Foreign Corporation sources within the Philippines. Except—
NR cinematographic film owner, lessor, or distributor 25% of GIT from all sources
within Ph
NR owner of lessor of aircrafts, machineries, and other 7.5% of gross rentals or fees
equipment
Interest on foreign loans contracted on or after August 1, 1989 20% of the amount of interest
The following organizations shall not be subject to income tax in respect to income received by them:
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10. Farmers or mutual typhoon or fire insurance company, mutual ditch or irrigation company, mutual or
cooperative telephone company or like organization of a purely local character, the income of which consists solely
of assessments, dues, and fees collected from members for the sole purpose of meeting its expenses; and
11. Farmers, fruit growers, or like association organized and operated as a sales agent for the purpose of marketing
the products of its members and turning back to them the proceeds of sales, less the necessary selling expenses
on the basis of the quantity of produce finished by them.
12. Child-caring or child-placing institution licensed and accredited by the DSWD to implement Foster Care
Program under Foster Care Act of 2012
13. Duly registered cooperative on income from transactions with members and non-members as long as the
income is related to its min business or purpose Provided, those with accumulated reserves and undivided net
savings exceeding 10 Million shall be exempt only on income from transactions with members
14. Homeowners association
15. Non-stock savings and loan association
16. Building and loan associations whose accounts are guaranteed by the Home Guaranty Corporation
17. Other organization exempt from income tax in accordance with special laws
Are all the activities of the enumerated exempt corporations exempt from tax?
No. Notwithstanding that they are exempt corporations, the income of whatever kind and character of the
organizations mentioned above from any of their properties, real or personal, or form any of their activities (unrelated)
conducted for profit regardless of the disposition made of such income shall be subject to tax imposed under the Code. The
exemption only refers to income received by these corporations from undertakings which are essential to or necessarily
connected with the purposes for which they were organized and operated.
Note: “Cost of goods sold” shall include all business expenses directly incurred to produce the merchandise to bring them to their
present location and use while “cost of services” shall mean all direct costs and expenses necessarily incurred to provide the services
required by the customs and clients.
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5. GPPs
6. Non-taxable joint ventures
7. Enterprises registered under TIEZA and PEZA
What circumstances are indicative of a purpose to avoid the income tax with respect to shareholders? The fact
that any corporation is a mere holding company or investment company shall be prima facie evidence of a purpose to
avoid the tax upon its shareholders or members. Moreover, the fact that the earnings or profits of a corporation are
permitted to accumulate beyond the reasonable needs (including reasonably anticipated needs) of the business shall be
determinative of the purpose to avoid the tax upon its shareholders or members unless the corporation, by the clear
preponderance of evidence shall prove the contrary.
Also included as indicative of a purpose to avoid income tax are:
1. Investment of substantial earnings in unrelated business or in stock or securities of an unrelated business
2. Investment in bonds and other long term securities
3. Accumulation of earnings in excess of 100% of paid up capital
Note: To simplify matters – If the distribution is in money, it is called a cash dividend. If it is in property, it is called a property dividend.
If it is in stock, it is called a stock dividend. If it results from the distribution by a corporation of all its property or assets in complete
liquidation or dissolution, it is called a liquidating dividend.
Generally, a dividend has its source in the country where the corporation paying the dividend is incorporated
(residence of the corporation paying the dividend). Thus, if the dividend is received from a domestic corporation, it is
income within the Philippines. If the dividend is from the foreign corporation, it is income without the Philippines. The
exception to the general rule that dividends paid by a foreign corporation are from sources without the Philippines is when
a foreign corporation derives 50 percent of its gross income from sources within the Philippines for a three-year period
ending with the close of its taxable year preceding the declaration of its dividends
What are the exceptions to the rule that stock dividends are not subject to income tax?
1. Change in the stockholder’s equity, right or interest in the net assets of the corporation
2. Recipient is other than the shareholder
3. Cancellation or redemption of shares of sock
4. Distribution of treasury stocks
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5. Dividends declared in the guise of treasury stock dividend to avoid the effects of income taxation
6. Different classes of stocks were issued
DEALINGS IN PROPERTY
Note: The phrase “sale, exchange, or other disposition” includes taking by the government through expropriation
What is the special rule for disposition of real property made by an individual to the government? As provided in
RR 8-98, in case of disposition of real property made by an individual to the government or to any of its political
subdivisions or agencies or to government-owned or controlled corporations, the seller may elect to: 1. compute the tax on
the gain derived from such sale under the normal income tax rates; or 2. under a final capital gains tax of 6%
What are the conditions for the exemption of capital gains tax on the sale by a natural person of his principal
residence?
1. The 6% capital gains tax due shall be deposited in an account with an authorized agent bank under an Escrow
Agreement. It can only be released upon showing that the proceeds have been fully utilized within 18 months 2. The
proceeds from the sale, exchange or disposition must be fully utilized in acquiring or constructing his new
principal residence within 18 calendar months from date of its sale. Proof must be submitted 3. The tax
exemption may be availed of only once every 10 years
4. The historical cost or adjusted basis of his old principal residence sold, exchanged disposed shall be
carried over to the cost basis of his new principal residence
5. If there is no full utilization of the proceeds of sale, exchange or disposition of his old principal residence, he shall
be liable for deficiency capital gains tax of the utilized portion.
Note: The exemption applies to resident citizens and aliens. This is logical because if they are not residents, then there is
no principal place of residence.
If a mortgagee foreclosed the mortgaged property but the mortgagor exercises his right of redemption within the
applicable period, will capital gains tax still be imposed on the foreclosure sale?
RR 4-99 [MARCH 9, 1999] provides that in case the mortgagor exercises his right of redemption within one year
from the issuance of the certificate of sale, no capital gains tax shall be imposed because no capital gains has been
derived by the mortgagor and no sale or transfer of real property was realized. If the mortgagor does not exercise his right
of redemption, capital gains tax on the foreclosure sale shall become due. In such case, the capital gains tax due will be
based on the bid price of the highest bidder.
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What are stocks classified as capital assets?
Stocks classified as capital assets mean all stocks and securities held by taxpayers other than dealers in securities.
Note: Amount realized is the sum of the money received plus the fair market value of the property (other than money received).
What is the basis for determining gain or loss from the sale or exchange of property (Sec. 40B)?
Purchase The basis is the cost of the property
Inheritance The FMV as of the date of acquisition if the same was acquired
Gift The basis shall be the same as if it would be in the hands of the donor or the last preceding
owner by whom it was not acquired by gift except if such basis is greater than FMV of the
property at the time of the gift then, for purpose of determining loss, the basis shall be such
FMV
For less than an The basis of such property is the amount paid by the transferee for the property
adequate
consideration in
money or
money’s worth
Tax-free exchanges a) Shares of stock received by transferor – original basis less the money received and
fair market value of property received, plus the amount treated as dividend of the
shareholder and the amount of any gain that was recognized on the exchange
b) Property transferred in the hands of the transferee – same as it would be in the hands
of transferor increased by the amount of the gain recognized to the transferor on the
transfer
What is the general rule in the recognition of gain or loss in an exchange of property? As a general rule, the entire
amount of the gain or loss shall be recognized upon the sale or exchange of property. In other words, if there are gains,
the gains shall be taxable. If there are losses, the losses shall be allowed as deductions.
What are the instances where no gain or loss is recognized (tax-free exchanges)?
No gain or loss shall be recognized if in pursuance of a plan of merger or consolidation:
1. A corporation which is a party to a merger or consolidation exchanges property solely for stock in a corporation,
which is a party to the merger or consolidation (property for stock)
2. A shareholder exchanges stock in a corporation, which is a party to a merger or consolidation solely for the stock of
another corporation also a party to a merger or consolidation (stock for stock)
3. A security holder of a corporation, which is a party to a merger or consolidation, exchanges his securities in such
corporation, solely for stock or securities in another corporation, a party to the merger or consolidation (security
for stock)
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4. If property is transferred to a corporation by a person in exchange for stock or unit of participation in such a
corporation of which as a result of such exchange, said person, alone or together with others, not exceeding four
(4) persons gains control of said corporation provided that stocks issued for services shall not be considered as
issued in return for property (estate planning or transfer of a controlled corporation)
Note: An exchange solely in kind is an exchange of property with property with no money involved.
What is the basic consideration in determining whether a consolidation or merger is tax-free? The basic
consideration is the purpose of the merger or consolidation. The merger or consolidation must be undertaken for a bona
fide business purpose and not for the purpose of escaping the burden of taxation.
A, B, C were majority stockholders of ABC Theatrical Co. They were also majority stockholders of XYZ Theatrical
Co which was engaged in the same business. ABC and XYZ agreed to merge. Under the agreement, all business,
property, assets and goodwill of ABC will be transferred to XYZ in exchange for XYZ stocks for each stock held in
ABC. Is the exchange subject to capital gains tax?
No. As held in CIR v. RUFINO [FEBRUARY 27, 1987], It is well established that where stocks for stocks were
exchanged, and distributed to the stockholders of the corporations, parties to the merger or consolidation, pursuant to a
plan of reorganization, such exchange is exempt from capital gains tax. The basic consideration, of course, is the purpose
of the merger, as this would determine whether the exchange of properties involved therein shall be subject or not to the
capital gains tax. The criterion laid down by the law is that the merger" must be undertaken for a bona fide business
purpose and not solely for the purpose of escaping the burden of taxation." It is clear, in fact, that the purpose of the
merger was to continue the business of the Old Corporation, whose corporate life was about to expire, through the New
Corporation to which all the assets and obligations of the former had been transferred. The exemption from the tax of the
gain derived from exchanges of stock solely for stock of another corporation was intended to encourage corporations in
pooling, combining or expanding their resources conducive to the economic development of the country. The merger in
question involved a pooling of resources aimed at the continuation and expansion of business and so came under the
letter and intendment of the NIRC exempting from the capital gains tax exchanges of property.
What are the different taxable periods provided for in the Tax Code?
a. Calendar year – is an accounting period which starts from January 1 and ends on December 31 b. Fiscal year -
is an accounting period of 12 months ending on the last day of any month other than December 31
Exceptions: Properties classified as ordinary assets for being used in business by a taxpayer engaged in business
other than real estate business are automatically converted into capital assets upon showing of proof that the same
have not been used in business for more than 2 years prior to the consummation of the taxable transactions
involving the properties. Further, if a real estate business transfers the property to an ordinary person, the nature
of the property can change in the hands of the buyer/transferee. Hence, if Pedro buys a lot from a real estate
dealer, the lot becomes a capital asset (from ordinary) in the hands of Pedro.
In case of involuntary transfer (like expropriation or foreclosure), the involuntary nature shall have NO effect on the
classification in the hands of the involuntary seller.
Can a capital asset be converted to an ordinary asset?
Yes. While RR No. 7-2003 provides a rule that once an asset is ordinary, it cannot be converted to a capital asset
(subject to the two year waiting period), jurisprudence has consistently held that a capital asset may become an ordinary
asset.
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What is the Tax Benefit Rule in relation to recovery of accounts previously written off? Under the Tax Benefit Rule
or Equitable Doctrine of Tax Benefit, the recovery of amounts deducted in previous years shall be included as part of the
gross income in the year of recovery to the extent of the income tax benefit of said deduction.
If in the year the taxpayer claimed deduction of bad debts written-off, he realized a reduction of the income tax due
from him on account of said deduction, his subsequent recovery thereof from his debtor shall be treated as a receipt of
realized taxable income. Conversely, if the said taxpayer did not benefit from the deduction if the said bad debt written-off,
then his subsequent recovery shall be treated as a mere recovery or a return of capital, hence, not treated as receipt of
realized taxable income.
Net Loss Carry Over (NELCO) vs. Net Operating Loss Carry Over (NOLCO)
a) NOLCO refers to a concept in ordinary income taxation which is applicable only to a corporate taxpayer. If a
corporate taxpayer has more deductions than gross income, the corporation sustains net operating losses which
may be carried over for three (3) years. Consequently, if during the succeeding year, the taxpayer realized taxable
net income, this may be reduced by the net operating loss carried over from the previous year;
b) NELCO refers to a concept in capital gains taxation which is applicable only to individual taxpayers. This results
from exchanges of capital assets wherein gains and losses have been recognized such that during the taxable
period, after charging all capital losses from the capital gains, the taxpayer may either realize net capital gains
(included in the gross income therefore taxable) OR net capital loss (which may be carried over for the next year
only);
c) NOLCO pertains to expenses and deductions from gross income while NELCO pertains to exchanges of capital
assets;
Differentiate final withholding tax (FWT) from creditable withholding tax (CWT)
FINAL WITHHOLDING TAX CREDITABLE WITHHOLDING TAX
The amount of income tax withheld by the withholding Taxes withheld on certain income payments are
agent is constituted as a full and final payment of the intended to equal or at least approximate the tax due of
income tax due from the payee on the said income the payee on said income.
The liability for payment of the tax rests primarily on the Payee of income is required to report the income and/or
payor as a withholding agent pay the difference between the tax withheld and the tax
due on the income. The payee also has the right to ask
for a refund if the tax withheld is more than the tax due.
The payee is not required to file an income tax return for The income recipient is still required to file an income tax
the particular income return, as prescribed in Sec. 51 and Sec. 52 of the
NIRC.
How do you distinguish “schedular treatment from “global treatment” as used in income taxation? Under the
schedular tax system, the various types of income (i.e. compensation; business/professional income) are classified
accordingly and are accorded different tax treatments, in accordance with schedules characterized by graduated tax rates.
Since these types of income are treated separately, the allowable deductions shall likewise vary for each type of income.
On the other hand, under the global tax system, all income received by the taxpayer are grouped together, without
any distinction as to type or nature of the income, and after deducting therefrom expenses and other allowable deductions,
are subjected to tax at a graduated or fixed rate.
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Definition Mass of property, rights, and obligations Arrangement whereby the trustor grants control of
left behind by the decedent upon his certain property in the person of the trustee for the
death benefit of beneficiary.
Who files the If under judicial administration, If irrevocable trust, trustee is the one who will file
ITR EXEC/AD shall file the return and pay the return and pay the tax
pertaining the tax on the net income of the estate
to the If revocable trust, income of such part of the trust
taxable If not under judicial administration, heirs shall be included in computing the taxable income
income of an shall include in their respective returns of the GRANTOR
estate their distributive shares in the net income
of the estate Revocable Trust is one where at any time the
power to revest in the grantor the title to any part
of the corpus of trust is vested:
a) In the grantor alone or in conjunction with a
person not having substantial adverse
interest on the corpus
b) In any person not having a substantial
adverse interest in the disposition of such
part of the corpus or the income thereon
Taxable Income Shall be computed in the same manner and on the same basis as in the case of
self-employed individuals
Deductible a) Can take up the same items of a) Same items of deductions authorized under
Expenses deductions authorized under Section 34
Section 34 b) Amount of income of the trust which is to be
b) Amount of income of the estate that distributed currently to the beneficiaries
is paid or credited to any legatee, c) Amount of income collected by the guardian
heir, or beneficiary of an infant which is to be held or
distributed as the court may direct
Note: cash advances given to surviving
spouse or heir not deductible Note: cash advances given to surviving spouse or
heir not deductible
Accounting Calendar Year
Period
Miscellaneo Where the property is sold after the Where two or more trusts are created by the
us Notes settlement of the estate by devisee, same trustor or grantor, and in each instance the
legatee, or heir at a price greater than the beneficiary is the same person, the taxable
appraised value placed upon it at the time income of all the trust shall be consolidated, and
he inherited the property from the the tax computed on such consolidated income.
decedent, the devisee, legatee, or heir is
taxable individually on any profit derived
13 | afcblng
TRANSFER TAXES transfer of the property takes effect during the lifetime of the
Transfer taxes are those taxes imposed upon the privilege donor. The transfer is therefore subject to donor’s tax. On the
granted by the state to the taxpayer so that he may transfer other hand, donation mortis cause are subject to estate taxes
properties, real or personal, without consideration. Transfer taxes since the transfer of the properties takes effect after the death of
are excise or privilege taxes that are imposed on the act of the decedent. However, donation inter vivos, actually constituting
passing ownership of property and not taxes on the property taxable lifetime lik transfer in contemplation of death or revocable
transferred. transfers may be taxed for estate tax purposes, the theory being
that the transferor’s control thereon extends up to the time of his
Transfer taxes are governed by the laws existing at the time the death
transfer takes place. In particular –
a) Donations inter vivos are governed by the law existing Principle of mobilia sequuntur personam
at the time of the effectivity of the donation since the Refers to the principle t6hat taxation of intangible personal
transfer takes place at that time property generally follows the residence of domicile of the owner
b) Donations mortis causa are governed by the law at the thereof
time of death because it is at that time that the property
is transferred.
Donation inter vivos are not subject to estate taxes because the
Citizen and All properties, real or personal, tangible or intangible, wherever situated, plus items includible in gross estate
Resident alien
Non-resident alien Only those properties situated in the Philippines provided that with respect to intangible personal property,
its inclusion in the gross estate is subject to the rule of reciprocity under Section 104 of the Tax Code
Decedent’s It includes any interest having value or capable of being valued, transferred by the decedent at his death. If
Interest the decedent owns only proportionate share in property, only the value of such share has to be included in the
gross estate. If he is entitled only to the use of the property, it is the value of that use that has to be included.
Examples:
i. Right of usufruct
ii. Leasehold rights
Transfer in A transfer is considered made in contemplation of death when the impelling motive or reason for the transfer is
Contemplati the thought of death, regardless of whether the transferor is near the possibility of death or not (See Section
on of Death 85(B), Tax Code)
Factors which would disprove the claim that the transfer was made in contemplation of
death 1. to see his children enjoy the property while the donor is still alive
2. to save income of property taxes
3. to settle family disputes
4. to relieve donor from burden of management
5. to reward services rendered
6. to provide independent income for dependents
7. property was donated out of love and affection
Revocable A revocable transfer is a transfer where the transferor has reserved his right to alter, amend or revoke such
Transfers transfer, regardless of whether the power is actually exercised or not during his lifetime and whether the power
(Transfer should be exercised by him alone or in conjunction with someone else. To the extent of any interest therein, it
with forms part of the gross estate of the decedent.
Retention
or Exception: in case of bona fide sale for adequate consideration and full consideration in money or money’s
Reservation worth
of Certain
Rights)
Transfer of Power of appointment refers to a right to designate the person or persons who shall enjoy or possess certain
Property property from the estate of prior decedent. It is general when donor gives the donee the power to appoint any
under person as successor to enjoy the property. Thus, shall form part of the gross estate. It is special when the
General done can appoint only among a restricted class of persons other than himself.
Power of
Appointment
14 | alynotes
Proceeds of Taxation of the proceeds of life insurance will depend on the designated beneficiary, the manner of
Life Insurance designation of such beneficiary (whether revocable or irrevocable), and the period and source of the funds in
paying the premiums on the insurance contract.
It is revocable when the beneficiary may still be changed and the decedent has still retained interest in the
policy. It is irrevocable when the beneficiary may no longer be changed as they have acquired a vested
interest. If the policy expressly stipulates that the designation of the beneficiary is irrevocable, then the
amount of the proceeds shall not be included in the gross estate.
In determining whether there was sufficient consideration, compare the FMV of the property at the time of the
transfer with the amount of consideration received at the time of the transfer. However, the amount to be
included in the estate is computed by taking the difference between the FMV of the property at the time of
death and the amount of consideration received at the time of transfer.
Example 1 Example 2
FMV at the time of transfer 100 100
FMV at the time of death 200 200
Consideration received 70 100
Amount included in estate 130 0
Example 1: Since the property was sold for 30 less than its FMV at the time of the transfer, there is insufficient
consideration. Hence, the difference between the consideration received and the FMV at time of death shall
form part of the gross estate.
Example 2: This is not a transfer for insufficient consideration, hence, it shall not form part of the gross estate.
This is a bona fide sale for an adequate and full consideration in money’s worth.
As a general rule, we apply the principle of res mobilia sequuntur personam (“chattels follow the person”). In
other words, the intangible property is taxed based on the domicile of the owner. The principle, however, is
not controlling when: a) it is inconsistent with express provision of stature; or b) justice does demand that it
should be, as when property has in fact a situs elsewhere.
However, SECTION 104 provides that certain intangibles be deemed located in the Philippines,
namely: 1) Franchises being exercised in the Philippines
2) Shares, obligations, or bonds issued by domestic corporations, or partnerships, business or industry
located, organized, or constituted in the Philippines
3) Shares, obligations or bonds issued by foreign corporations—
a. at least 85% of the business of which is located in the Philippines, or
b. if such shares, obligations, or bonds have acquired a business situs in the
Philippines 4) Shares or rights in partnerships, business, or industry established in the
Philippines 5) All intangibles owned by residents
There is reciprocity if the foreign country of which the decedent was a citizen or resident at the time of his
death: ✔ Did not impose an estate tax; or
✔ Allowed a similar exemption from estate tax with respect to intangible personal property owned by
Filipino citizens not residing in that foreign country.
In COLLECTOR OF INTERNAL REVENUE V. FISHER [JANUARY 28, 1961], at issue is whether the shares
of stock of a nonresident alien in a domestic mining company can be exempted from estate tax pursuant to
the reciprocity proviso in the Philippine Tax Code. The Supreme Court held in the negative. Reciprocity must
be total. If any of the two states collects or imposes or does not exempt any transfer, death, legacy, or
succession tax of any character, the reciprocity does not work. In this case, the Philippines imposed an
estate and an inheritance tax at the time while California imposed only inheritance tax.
15 | alynotes
COMPUTATION OF THE NET ESTATE
DETERMINATION OF FAIR MARKET VALUE
Personal Property If recently acquire, purchase price. Otherwise, evidence of fair market value at the time of death
IF LISTED:
The fair market value shall be the arithmetic mean between the highest and lowest quotation at a
date nearest the date of death, if none is available on the date of death itself.
Usufructuary, The probable life of the beneficiary in accordance with the latest basic standard mortality table shall be
use or taken into account
habitation,
annuity
b. Claims against insolvent persons Conditions for the deductibility of property previously
Subject to the condition that the full amounts of the taxed: i. Death—the present decedent died within 5 years
receivables are first included in the gross estate. The from date of death of the prior decedent
portion that cannot be collected from decedent’s debtor is ii. Identity of the property—the property with respect to
deductible from the gross estate. Incapacity of the debtors which deduction is sought can be identified as the one
to pay their obligations is proven, not merely alleged. received from the prior decedent
iii. Inclusion of the property—the property must form part of
the gross estate situated in the Philippines of the prior
c. Casualty losses decedent or was a taxable gift of the donor)
Loses are deductible from gross estate if: iv. Previous taxation of property—estate tax or donor’s tax
✔ Arising from fire, storm, shipwreck, or other due thereon must have been paid
casualty, robbery, theft, or embezzlement v. No vanishing deduction on the property was allowed to the
✔ Not compensated by insurance or otherwise ✔ estate of the prior decedent
Not claimed as a deduction in an income tax return
of the estate subject to income tax Procedure in Computing:
✔ Occurring during the settlement of estate 1. Determine the FMV of the PPT at the time of the prior
✔ Loss must occur not later than the last day for decedent’s death and the FMV at the time of the present
payment of the estate tax (generally, within 1 decedent’s death then get the lower of these two amounts
year) 2. Deduct any mortgage of lien on the PPT which was paid by
the present decedent = Net Value
d. Unpaid mortgages 3. Prorate the deductions and subtract from the net value:
Unpaid mortgage upon, or any indebtedness in
respect to, property shall be deductible from gross estate, ������ ����������
where the value of decedent’s interest therein,
���������� ������������ ×
undiminished by such mortgage of indebtedness, is ����������
included in the value of the gross estate. ��������������������
This deduction will not include: (1) income tax upon
income received after death, or (2) property taxes not Note: Total deductions do not include the special deductions and
accrued before his death, or (3) the estate tax due from vanishing deductions
the transmission of his/her estate. These shall be
accrued after the death of the decedent. 4. Apply the rate of vanishing deduction
16 | alynotes
Example: In 2000, A inherits a land valued at P500,000. In
2003, A died with the said land having a value of P600,000. His = ������, ������
gross estate amounted to P2,000,000. His allowable deductions = ������, ������ x 60% (3 years)
amounted to P400,000. = ������, ������
A. FAMILY HOME
������, ������ − ( ������, ������ The family home must be included in the gross estate and
��, ������, ������ �� ������, ������) must be the actual residential home of the decedent and his
family at the time of his death as certified by the barangay
������, ������ − ������, ������ captain.
1) Obligations contracted 1) Debts before
FMV of the family home—
during marriage which marriage that did
✔ If exclusive property of the decedent: FMV
are presumed to have not redound to
✔ If conjugal: FMV/2
benefitted the family the benefit of family
✔ Land is exclusive; home is conjugal:
FMV of land + FMV of home 2) Special deductions
✔ Land is conjugal; home is exclusive: of: a. Family
FMV of Land/2 +FMV of house home
b. Standard
B. STANDARD DEDUCTION deduction
The standard deduction shall be P5,000,000 without need of c. Receivable
substantiation. under RA 4917
3) Liabilities incurred
C. AMOUNTS RECEIVED BY HEIR UNDER RA4917 An Act by either of a crime
Providing That Retirement Benefits Of Employees Of
Private Firms Shall Not Be Subject To Attachment, Levy,
Execution, Or Any Tax Whatsoever
HOW TO GET NET ESTATE OF A MARRIED PERSON—
Amounts or benefits received by heirs from the decedent’s
employer as a consequence of his death. Such benefits 1. Determine which are community/conjugal properties and
must first be included in the gross estate before the same which are exclusive
can be deducted 2. Get the net conjugal estate
III. SHARE OF THE SURVIVING SPOUSE IN THE NET ���������� ����������������
CONJUGAL PROPERTIES ������������ − ����������������
Share of the surviving spouse is not subject to estate tax ��������������������
and must therefore be deducted from the gross estate of
the decedent 3. Get the decedent’s share
������ ����������������
PROPERTIES OF SPOUSES ������������
2
CONJUGAL PROPERTIES
1. Properties acquired by onerous title using the common 4. Get the gross estate of decedent
funds (even if property is only for one spouse) ����������������′����ℎ������ +
2. Properties obtained from the labor or work during the ������������������
marriage ��������������������
3. Properties acquired by chance such as winnings from
gambling or betting (losses shall be borne exclusively 5. Get the net estate (taxable estate)
by loser-spouse) ���� ���� ���������������� −
4. Fruits and income of the conjugal properties ������������������ ������
5. Fruits and income of the exclusive properties of each �������������� ��������������������
Exclusive—
a. Property owned before marriage EXEMPT ACQUISITIONS AND TRANSFERS
b. Property acquired during marriage by gratuitous title c.
Property acquired with the exclusive money of the spouse
1. Merger of the usufruct in the owner of the naked
d. Property designated as exclusive in marriage settlement
ABSOLUTE COMMUNITY PROPERTIES property
1. ALL properties owned by the spouses at the time of 2. Transmission or delivery of the inheritance or legacy by
marriage the fiduciary heirs or legatee to the fideicomissary 3.
2. ALL properties acquired thereafter Transmission from the first heirs, legatees or donees in
3. Fruits and income of community properties favor of another beneficiary in accordance with the desire
4. Family home constituted by the husband and wife of the testator
Exclusive—
4. All bequests, devises, legacies or transfers to social
a. Property acquired during marriage by gratuitous title
unless the donor or testator expressly provides that welfare, cultural and charitable institutions, provided
property shall form part of community property no part of the income of which inures to the benefit of
b. Fruits and income of exclusive properties any individual, provided that not more than 30% of the
c. Properties for personal or exclusive use of the spouse said bequests, devises, legacies or transfers shall be
except jewelry used for administrative purposes
d. Property acquired before marriage by the spouse who
has legitimate descendants from a previous marriage e. Note: The bequest, devises, legacies, or transfers does not
Property designated as exclusive in marriage settlement include those made to educational institutions.
DEDUCTIONS
OTHER ITEMS WHICH ARE EXCLUDED FROM THE GROSS
Conjugal/Community Exclusive ESTATE—
17 | alynotes
Note: Under Section 86(C), the share of the surviving o Proceeds of life insurance where the beneficiary is
spouse in the absolute community or conjugal irrevocably appointed
partnership is considered as a deduction o Proceeds of life insurance under a group insurance taken
by employer (not taken out upon his life)
o GSIS proceeds/benefits o War damage payments
o Accruals from SSS o Transfer by way of bona fide sales
estate of the decedent a mandatory requirement in the
collection of the estate tax?
ESTATE TAX RETURNS No. As held in MARCOS II V. CA [JUNE 5, 1997], it is
discernible that the approval of the court, sitting in probate, or as
A return need not be complete in all particulars. It is sufficient if a settlement tribunal over the deceased is not a mandatory
it complies substantially with the law. There is substantial requirement in the collection of estate taxes.
compliance when—
a. Return is made in good faith and is not false nor
Payment of Estate Tax as a pre-requisite to Distribution
fraudulent b. Covers entire period involved
The estate tax clearance (CAR) issued by the Commissioner or
c. Contains information as to various items of income the RDO having jurisdiction over the estate will serve as the
authority to distribute the remaining od distributable properties
Contents of Estate Tax Return or share in the inheritance to the heirs or beneficiaries. No judge
1. Value of the gross estate shall authorize the executor or administrator to deliver the
2. Gross estate outside the Philippines for non-resident alien distributive share to any p[arty interested in the estate unless a
decedents certification from the Commissioner that the estate tax has been
3. Deductions allowed and taken paid is shown.
4. Other supplemental data
5. For estate tax returns, showing a gross value exceeding
5Million, a statement of a certified CPA as to the assets, Payment of Estate Tax as a pre-requisite to Transfer of
deductions, and tax due Shares, Bonds, or Rights
There shall not be transferred to any new owner in the
When is an estate tax return required? books of any corporation sociedad anonima, partnership,
1. When the estate is subject to estate tax business, or industry organized or established in the Philippines
2. When, regardless of the gross value of the estate, the any share, obligation, bonds, or right by way of gift inter vivos or
gross estate includes registered or registerable property mortis causa, legacy, or inheritance, unless CAR is issued by the
such as real property, motor vehicle, shares of stock or Commissioner or his duly authorized representative
other similar property for which clearance from the BIR is
required as a condition precedent for the transfer of
ownership to the transferees/heirs can be effected Duty of a bank in case of the death of a decedent-depositor
If a bank has knowledge of the death of a person, who
When should the estate tax return be filed? maintained a bank deposit account alone, or jointly with another,
General Rule: Within 1 year from the death of decedent it shall allow any withdrawal from the said deposit account,
subject to final withholding tax of 6% (see Section 97, Tax
Exceptions: The CIR, in meritorious cases, grant an Code)
extension not exceeding 30 days for filing the return
Who is liable for the payment of the estate tax? The estate Payment by Installment
tax imposed under the Tax Code shall be paid by the executor In case of insufficiency of cash for the immediate payment of
or administrator before the delivery of the distributive share in the total estate tax due, the estate may be allowed to pay the
the inheritance to any heir or beneficiary. tax due through cash installment. Cash installment shall be
made within 2 years from the date of the filing of the estate tax
In CIR V. GONZALES [NOVEMBER 24, 1966], the Supreme return. The frequency, deadline, and amount shall be indicated in
Court held that estate taxes are satisfied from the estate and are the estate tax return, subject to the prior approval of the BIR.
to be paid by the executor or administrator. Where there are 2 or
more executors, all of them are severally liable for the payment No civil penalties or interest may be imposed on estates
of the estate tax. As an administratrix, she is liable for the entire permitted to pay the estate tax due by installment basis.
estate tax. As an heir, she is liable for the entire inheritance tax However, in case of the lapse of 2 years without the entire tax
although her liability would not exceed the amount of her share due being paid, the remaining balance thereof shall be due and
in the estate. demandable subject to the applicable penalties and interest
reckoned from the prescribed deadline for the filing of the return
Is the approval of the probate court or the court settling the and payment of the estate tax.
18 | alynotes
DONOR’S TAX
A donor’s tax is an excise tax imposed on the privilege to
transfer property by way of gift inter vivos based on pure act of
liberality without any or less than adequate consideration and
without any legal compulsion to give.
B. Between persons living together as husband and wife
In terms of rates, TRAIN has made the following changes: ✔ without a valid marriage
Increased the threshold for exempt gifts during the calendar C. Between persons guilty of concubinage or adultery at the
year to P250,000 time of donation
✔ Flat rate of 6% total gifts in excess of P250,000 ✔ D. Between persons found guilty of the same criminal
Removed the distinction between strangers and offense, in consideration thereof
non-strangers E. Those made to a public officer or his/her spouse,
descendants, and ascendants by reason of office F.
Requisites of a valid donation Donations made by persons to those who cannot inherit
1. Capacity of donor from them
2. Donative intent (intention to donate) a) Donation to the priest who heard the confession
3. Delivery, actual or constructive, of the subject gift of the donor during his last illness,
4. Acceptance by the done or the minister of the gospel who extended
5. Form prescribed by law spiritual aid to him during the same period;
b) Donation to the relatives of such priest or
Donative intent—must be present in a direct gift of property in minister of the gospel within the fourth degree,
order that the donor’s tax can be assessed and collected. Such c) Donation to the church, order, chapter,
intent followed by a donative act is essential to constitute a gift. community, organization, or institution to which
Donative intent is necessary only in case of a direct gift. If the gift such priest or minister may belong;
is indirectly taking place by way of sale, exchange or other d) Those made to a guardian with respect to
transfer of property as contemplated in cases of transfers for less donations made by a ward in his favor before
than adequate and full consideration (see Section 100, Tax the final accounts of the guardianship have
Code), donative intent is not always essential to constitute a gift. been approved, except when the guardian is
the ward’s ascendant, descendant, brother, or
Requisites for a donation of a movable sister
1. Donation may be oral or in writing e) Any physician, surgeon, nurse, health officer or
2. If oral, the donation must be accompanied with delivery druggist who took care of the donor during his
3. If value is more than Php 5,000, the donation must be in last illness
writing and accepted in writing (Art. 748, NCC)
Requisites for a donation of an immovable Creditors A, B and C condoned the debt of XYZ Corp
1. It must be in public document pursuant to a court approved restructuring. Are the
2. The property donated and the value of the charges which creditors liable for donor’s tax?
the done must satisfy must be specified No. The transaction is not subject to donor’s tax since
3. The donee must accept through a deed or similar the condonation was not implemented with a donative intent but
instrument. (Art. 749, NCC) only for business consideration. The restructuring was not a
result of the mutual agreement of the debtors and creditors. It
Considered donations for tax purposes was through court action that the debt rehabilitation plan was
1. Sales, exchanges and other transfers of property for approved and implemented. [BIR Ruling DA 028-2005 [January
less than an adequate and full consideration in money 24, 2005]
or money’s worth
Except: Transfers of real property considered as capital A died leaving as his only heirs, his surviving spouse B, and
assets which is subject to CGT. three minor children, X, Y and Z. Since B does not want to
participate in the distribution of the estate, she renounced
2. Condonation or remission of debt where the debtor her hereditary share in the estate. Is the renunciation
did not render service in favor of the creditor subject to donor’s tax?
No. The general renunciation by an heir, including the
Note: Condonation or remission of a debt would constitute a surviving spouse, as in the case of B, of her share in the
donation to the extent of the fair value of the debt condoned or hereditary estate left by the decedent is not subject to donor’s
remitted. Therefore, the creditor would be considered a donor for tax. This is so because the general renunciation by B was not
donor’s tax purposes and would be liable for the tax thereon. specifically and categorically done in favor of identified heir/s to
the exclusion or disadvantage of the other co-heirs in the
hereditary estate (Section 11, RR No. 2-2003).
VOID DONATIONS
A. Between spouses, whether direct or indirect, during the
marriage, except moderate gifts which the spouse may In the settlement of the estate of Mr. Barbera who died
give to each other on the occasion of any family intestate, his wife renounced her inheritance and her share
rejoicing of the conjugal property in favor of their children. The BIR
determined that there was a taxable gift and thus assessed
Indirect donations to a spouse are void, and include the Mrs. Barbera as a donot. Was the BIR correct?
following donations: The BIR is correct that there was taxable gift only
i. To stepchild who has no compulsory heirs other than insofar as the renunciation of the share of the wife in the
the other spouse at the time of donation conjugal property is concerned. This is a transfer if property
ii. To a common child who has no compulsory heirs other without consideration which takes effect during the lifetime of
than the other spouse at the time of donation iii. To the
parents of the other spouse transferor/wife and this qualifies as a taxable gift. (RR Mo. 2-
iv. To other spouse’s adopted child in cases when, at the 2003). But the renunciation of the wife’s share it the inheritance
time of donation, the only surviving relatives of the during the settlement of the estate is not a taxable gift
adopted is the adopter-spouse, the illegitimate considering that the property is automatically transferred to the
children of the adopted, and the surviving spouse other heirs by operation of law due to her repudiation of her
of the adopted inheritance. (BIR Ruling DA No. 333-07)
v. To common adopted child who has no surviving heirs
19 | alynotes
TRANSFER FOR INSUFFICIENT CONSIDERATION Where iii. the non-profit institution must be accredited by the
property, other than real property classified as capital asset designated accrediting government agency and
subject to final capital gains tax, is transferred for less than an registered with the BIR
adequate and full consideration in money or money’s worth, the C. Campaign contributions in cash or in kind to any candidate
amount by which the fair market value of the property exceeded which are duly reported to the COMELEC. However,
the value of the consideration shall, for purposes of donor’s tax, donations made by corporation in violation of Section 36(9)
be deemed a gift. of the Corporation Code are subject to donor’s tax
Are political contributions considered gifts and therefore
Note: Why is real property, classified as capital asset, that is liable for donor’s tax?
transferred for less than an adequate and full consideration in Under Section 13 of RA 7166, such contributions, be
money or money’s worth not deemed a gift subject to donor’s duly reported to the COMELEC, shall not be subject to the
tax? Well, it is already subject to final capital gains tax, which is payment of any gift tax. In ABELLO V. CIR [February 23, 2005],
6% of the gross selling price of fair market value of the property, the Supreme Court ruled that the contributions made by certain
whichever is higher. So what the seller avoids in the payment of partners of the ACCRA law firm to the campaign of Senator
the donor’s tax, it pays for in CGT. Edgardo Angara constitute as a donation subject to donor’s tax.
However, this was decided before RA 7166. The Court noted
Exception: When sale/exchange is bona fide, at arm’s length, that subsequent to the donations involved in the case, Congress
and free from any donative intent, the same will be considered approved RA 7166 on November 25, 1991, providing in Section
as made for an adequate and full consideration in money or in 13 thereof that political/electoral contributions, duly reported to
money’s worth. the Commission on Elections, are not subject to the payment of
donor’s tax. RA 7166 provides no retroactive effect.
Note: In contrast to estate taxes, a corporation can be subject to EXEMPTION UNDER SPECIAL LAWS
donor’s tax because it is capable of entering into a contract of A. Gifts and donations to the University of the Philippines
donation through the appropriate Board Resolution. B. Contribution to the National Book Trust Fund C.
Donations to qualified foster care agencies
D. Donations made for the operation of the Dual Training
ABC a multinational corporation doing business in the System
Philippines donated 100 shares of stock of said corporation E. Donations of cooperatives to duly accredited charitable,
to Mr. Z, its resident manager in the Philippines. What is the research, and educational institutions and socio economic
tax liability, if any, of ABC Corporation? projects within their area of operations
Foreign corporations effecting a donation are subject to F. Donations of land certified by LGU to have been donated
donor’s tax only if the property donated is located in the for socialized housing purposes
Philippines. Accordingly, donation of a foreign corporation of its G. Donation to Philippine Red Cross
own shares of stock in favor of resident employees is not subject
to donor’s tax. However, if 85% of the business of the foreign
corporation is located in the Philippines or the shares donated DONOR’S TAX RETURNS
have acquired business situs in the Philippines, the donation
may be taxed in the Philippines subject to the rule of reciprocity. When should the estate tax return be filed?
Within 30 days from the date the gift was made
Note: In sum, all assets, real or personal, tangible or intangible
given by way of gift wherever located of a citizen and resident When should the estate tax be paid?
alien is subject to donor’s tax while for nonresident aliens, At the time the return is filed
donor’s tax is imposed only on properties located in the
Philippines provided in the case of intangible personal property, Who files?
it is subject to the rule of reciprocity under Section 104 of the Tax Any individual who makes any transfer by gift
Code. Same rules as in Estate Taxation.
Contents of Estate Tax Return
EXEMPTIONS FROM GROSS GIFTS 1. Each gift made during the calendar year
A. Gifts made to or for the use of the national government or 2. Deductions allowed and taken
any entity created by any of its agencies which is not 3. Any previous net gifts made during the same calendar year
conducted for profit, or to any political subdivision of the said 4. Name of donee
government
5. Such further information as may be required
B. Gifts in favor of an education, charitable, religious,
cultural, social welfare institutions, accredited NGO and
trust, philanthropic organization, and research institution Where to file?
provided: a) If donor is a resident donor – with the Authorized Agent
i. the non-profit institution is non-stock entity that pays no Bank, RDO, collection officer or duly authorized
dividends, is governed by trustees who do not receive treasurer of the city or municipality where donor is
any compensation, and devotes all of its income to the domiciled at the time of transfer, or with Office of the
accomplishment of its purposes Commissioner if donor has no legal residence
ii. not more than 30% of said gifts will be used by such b) If donor is a non-resident donor – with the Philippine
done for administrative purposes Embassy or Consulate in the country where he is
domiciled at the time of transfer; or directly with the gifts made in the same calendar year shall be reflected in each
Office of the Commissioner return. However, only one return shall be filed for several gifts or
donations by a donor made on the same date to different
donees. If the gift or donation involves conjugal/community
Note: No return is required if the transfer is exempt from donor’s property, each spouse shall file a separate return corresponding
tax. A separate return shall be filed by each donor for gift or to his/her respective share.
donation made on different dates during the year. Any previous
20 | alynotes
VALUE-ADDED TAX
Input tax represents the On the other hand, when
actual payments, costs that person or entity sells
A Value-Added Tax is a tax assessed, levied, and collected on
and expenses incurred by his/its products or
every importation of goods, whether or not in the course of trade a VAT registered taxpayer services, the
or business, or imposed on each sale, barter, exchange or lease in connection with his VAT-registered taxpayer
of goods or properties or on each rendition of services in the purchase of goods and generally becomes liable
course of trade or business as they pass along the production services. Thus, "input for 12% of the selling price
and distribution chain, the tax being limited only to the value tax" means the value as output VAT or output
added to such goods, properties or services by the seller, added tax paid by a VAT tax. Hence, "output tax"
transferor or lessor. registered person/entity in is the value-added tax on
the course of his/its trade the sale of taxable goods
VAT-taxable transactions — are those transactions which are
or business on the or services by any person
subject to VAT either at the rate of 12% or 0% and the seller shall importation of goods or registered or required to
be entitled to tax credit for the VAT paid on purchases and leases local purchases of goods register under the Tax
of goods, properties, and services. or services from a Code.
VAT-registered person
Elements of a VAT-taxable transaction
1. There must be a sale, barter, exchange or lease in the
input tax is the VAT due output tax is the VAT due
Philippines
on or paid by a on the sale or lease or
2. The sale, barter, exchange or lease must be of taxable VAT-registered person on taxable goods, properties
goods, properties or services importation of good or or services by an
3. The sale must be made by a taxable person in the local purchases of goods VAT-registered person
course of trade or furtherance of his/its profession or services, including lease
or use of properties, in the
Note: (1) An importation is VAT-taxable whether made in the course of his trade or
course of trade or business or not. business.
21 | alynotes
ZERO-RATED TRANSACTIONS
The seller of such The seller who charges
transactions charges no zero output tax on such
A VAT zero-rated transaction are sales by VAT-registered
output tax, but can claim a transactions can also claim
persons which are subject to 0% rate, meaning the tax burden is refund of or a tax credit a refund of or a tax credit
not passed on to the purchaser. A zero-rated sale by a VAT certificate for the VAT certificate for the VAT
registered person, which is a taxable transaction for VAT previously charged by previously charged by
purposes, shall not result in any output tax. However, the input suppliers suppliers
tax on his purchases of goods, properties or services related to
such zero-rated sale shall be available as tax credit or refund.
VAT-TAXABLE ZERO-RATED Intended to be enjoyed by Intended to benefit the
the seller who is directly purchaser who, not being
In transactions taxed at a On the other hand, and legally liable for the directly and legally liable
12% rate, when at the end transactions which are VAT, making such seller for the payment of the
of any given taxable taxed at zero-rate do not internationally competitive VAT, will ultimately bear
quarter the output VAT result in any output tax. by allowing the refund or the burden of the tax
exceeds the input VAT, the Input VAT attributable to credit of input taxes that shifted by the suppliers.
excess shall be paid to the zero-rated sales could be are attributable to export
government; when the refunded or credited sales
input VAT exceeds the against other internal
output VAT, the excess revenue taxes at the option
would be carried over to of the taxpayer
VAT liabilities for the ZERO-RATED SALES OF GOODS
succeeding quarter or A. Export Sales
quarters. i. Sale and actual shipment of goods from the
Philippines to a Foreign country
ii. Sale of raw materials or packaging materials to a
Non-resident buyer for delivery to a resident local
Example: Assume that VAT-registered person purchases export-oriented enterprise
materials from his supplier at P100, P9.6 of which was passed iii. Sale of raw materials or packaging materials to
on to him by his supplier as the latter’s 12% output VAT. In a Export-oriented enterprise whose export sales
zero rated transaction, the taxpayer can recover the P9.6 from exceed 70% of total annual production
the BIR either through a refund or a tax credit. When the iv. Those that are considered export sales under the
taxpayer sells his finished product for let’s say P120, he is not Omnibus Investment Code (E.O.226) and other
required to pay the output VAT of P2.4 (12% of the P20 value he special laws
has added to the P100 material). v. Sale of goods, supplies, and equipment and fuel to
In a transaction subject to VAT, however, he may persons engaged in International shipping or
recover both the input VAT of P9.6 which he paid to the supplier international air transport operations.
and his output VAT of P2.4 by passing both these costs to the
buyer. The buyer then pays P12, the total 12% VAT. B. Foreign currency denominated sale – the sale to a non
resident of goods assembled or manufactured in the
ZERO-RATED EFFECTIVELY ZERO Philippines for delivery to a resident in the Philippines
paid in acceptable foreign currency and accounted for in
Generally refers to the Refers to the sale of goods accordance with BSP rules and regulations
export sale of goods and or supply of services to
supply of services persons or entities whose C. Effectively zero-rated transactions – Sales to persons or
exemption under special entities whose exemption under special laws and
laws or international international agreements to which the Philippines is a
agreements to which the signatory subjects such sales to 0% rate
Philippines is a signatory
effectively subjects such Note: “Considered export sales under E.O. 226” includes the
transactions to a zero sale of goods and services by a VAT-registered person in the
rate. customs territory to ecozone and Freeport enterprises so as to
make them automatically zero-rated
withdrawal or transfer of goods results in the use or consumption
of such goods by a person (the seller himself) who is effectively
TRANSACTIONS DEEMED SALE the final consumer, such withdrawal or transfer is deemed a sale
1. Transfer of goods or properties not in the course of subject to output tax.
business (originally intended for sale or for use in the As to (2), the requisites to constitute the distribution or
course of business) transfer to a shareholder or creditor a transaction deemed sale
2. Property dividends (transfer to shareholders as share in the are: (a) the VAT-registered person distributing or paying is a
profits of VAT-registered persons or to creditors in payment domestic corporation; (b) what is being declared or paid is either
of debt) real property owned by the company or shares of stocks owned
3. Consignment of goods without the sale being made within in another company; and (c) the domestic corporation is either a
60 days real estate dealer (in case of real property) or dealer in securities
4. Retirement from or cessation of business with respect to (in case of shares of stock)
inventories of taxable goods existing (see SECTION As to (3), as a general rule, a consignment of goods by
106(B), TAX CODE) the consignment-owner to the consignee is not a taxable
transaction. However, it is subject to VAT when the consigned
Notes: Before considering whether the transaction is deemed goods are: (a) not sold by the consignee; and (b) not returned by
sale, it must first be determined whether the sale was in the him to the consignor-owner within 60 days from date of
ordinary course of trade or business. Even if the transaction was consignment.
“deemed sale,” if it was note done in the ordinary course of trade As to (4), the VAT-registered taxpayer who ceases or retires
or business, still the transaction is not subject to VAT (CIR v. from business, including an unregistered joint venture
MAGSAYSAY LINES [JULY 28, 2006]) undertaking construction activity, must pay output tax on the
As to (1), the transaction is deemed sale when the gross value of his inventory of materials, goods and supplies
taxpayer-seller withdraws goods from his inventory of goods held existing at the time of cessation or retirement of business.
primarily for sale for his own personal or non-business use. The
22 | alynotes
San Roque Power entered into a purchase power agreement and operating expressways are no different from lessors of
with NAPOCOR to develop the hydroelectric potential of the property, transportation contractors, etc. Further, they also come
Lower Agno River. During the testing period, electricity was under those described as “all other franchise grantees” which is
transferred by San Roque to NAPOCOR. Can the transfer be not confined only to legislative franchise grantees since the law
considered a sale of electricity? does not distinguish. They are also not a franchise grantee under
Yes. In SAN ROQUE POWER CORP. V. CIR Section 119 of the Tax Code which would have made them
[NOVEMBER 25, 2009], the Supreme Court held that although subject to percentage tax instead. Neither are the services part
the transfer was not a commercial sale, the NIRC does not limit of the enumeration under Section 109 on VAT-exempt
the definition of “sale” to commercial transactions in the normal transactions.
course of business. Conspicuously, Section 106(B) of the NIRC,
which deals with the imposition of VAT, does not limit the term
sale to commercial sales, rather it extends the term to Are the gross receipts derived by operators or proprietors
transactions that are deemed sale. In the said case, it was of cinema/theater houses from admission tickets subject to
undisputed that San Roque transferred to NPC all the electricity VAT?
that was produced during the trial period. The fact that it was not No. The Supreme Court in CIR v. SM PRIME
transferred through a commercial sale or in the normal course of HOLDINGS [FEBRUARY 26, 2010] held that although the
business does not deflect from the fact that such transaction is enumeration of services subject to VAT under Section 108 of the
deemed as a sale. Tax Code is not exhaustive. Among those included in the
enumeration is the “lease of motion picture films, films, tapes and
Notes: Absence of profit or margin does not make the discs.” This, however, is not the same as the showing or
performance of taxable services for a fee exempt from VAT. Tax exhibition of motion pictures or films. Hence, since the showing
Code clarifies that even a non-stock, non-profit organization or or exhibition of motion pictures or films is not in the enumeration,
government entity is liable to pay VAT on the sale of goods or such is not a VAT-taxable transaction.
services. It is immaterial whether the primary purpose of a Are association dues, membership fees, and other
corporation indicates that it receives payments for services assessment and charges collected by a condominium
rendered to its affiliates on a reimbursement-of-cost basis only, corporation/ homeowners’ association subject to VAT?
without realizing profit, for purposes of determining liability for Yes because they constitute as income payment or
VAT on services rendered. As long as the entity provides service compensation for the beneficial services the condominium
for a fee, remuneration, or consideration, then service rendered corporation/ homeowners’ association provides for its tenants
is subject to VAT and members. The fact that a condominium corporation or
homeowners’ association is a non-stock, non-profit organization
is immaterial. As held in CIR V. CA & COMASERCO [MARCH
VALUE-ADDED TAX ON SALE OF SERVICES & LEASE 30, 2000], even a non-stock, non-profit organization or
OF PROPERTIES government entity is liable to pay VAT on sale of goods and
services.
A sale of exchange of services means the performance of all
REQUISITES FOR THE TAXABILITY OF THE SALE OF
kinds of services in the Philippines for others for a fee,
remuneration or consideration. (See SECTION 108(A), TAX SERVICES AND USE OR LEASE OF PROPERTIES— 1. There
CODE for an extensive enumeration of the type of services is a sale or exchange of service or lease or use of property
including in said definition) enumerated in the law or other similar services 2. The service is
performed or to be performed in the Philippines
The use or lease of properties shall be subject to VAT 3. The service is in the course of the taxpayer’s trade or
irrespective of the place where the contract of lease or licensing business or profession
agreement was executed if the property is leased or used in the 4. The service is for a valuable consideration actually or
Philippines. constructively received and
5. The service is not exempt under the Tax Code, special law
or internal agreement
Are toll fees collected by tollway operators subject to VAT?
Yes. The Supreme Court in DIAZ V. SECRETARY OF FINANCE
[JULY 10, 2011] answered this issue in the affirmative. The ZERO-RATED SALES OF SERVICES.
court held that VAT is imposed on “all kinds of services” and A. Processing, manufacturing, or repacking goods for other
tollway operations who are engaged in construction, maintaining, persons doing business outside the Philippines, which
goods are subsequently exported, where the services are
paid for in acceptable foreign currency and accounted for shipping or air transport operations, including leases of
in accordance with the rules and regulations of the BSP property for use thereof, provided that these services shall
be exclusive for international shipping or air transportation
B. Services other than those mentioned in the preceding
paragraph rendered to a person engaged in business E. Services performed by subcontractors and/or contractors in
conducted outside the Philippines or a nonresident processing, converting, or manufacturing goods for an
person not engaged in business who is outside the enterprise whose export sales exceed 70% of total annual
Philippines when the services were performed, the production
consideration for which is paid for in acceptable foreign
currency and accounted for in accordance with the rules F. Transport of passengers and cargo by domestic air or sea
and regulations of the BSP. vessels from the Philippines to a foreign country
Note: This is an exception to the destination principle. G. Sale of power generated through renewable sources of
Remember that under the destination principle, goods and energy
services are taxed only in the country where they are
consumed. Section 108(B)(2) is an exception because In CIR v. ACESITE PHILIPPINES [FEBRUARY 16, 2007], the
although the services are performed in the Philippines, the Supreme Court stated that services rendered to persons or
sales of such services are zero-rated. entities whose exemption under special laws or international
agreements to which the Philippines is a signatory effectively
C. Services rendered to person or entities whose exemption subjects the supply of such services to zero (0%) rate shall be
under special laws or international agreements effectively subject to 0%. Since the law clearly provides for PAGCOR’s
subjects the supply of such services to a 0% rate exemption, the sale of services of Acesite to PAGCOR is
(effectively zero-rated transaction) effectively zero-rated. Hence, Acesite may refund the VAT it paid
on its sale of food and beverages to PAGCOR.
D. Sale of services to persons engaged in international
23 | alynotes
In AMERICAN EXPRESS INTERNATIONAL V. CIR
[JUNE 29, 2005], the Supreme Court opined that while as a Not subject to the output tax It is a taxable transaction
general rule, the VAT system uses the destination principle as a but does not result in an
basis for the jurisdictional reach of the tax such that goods and output tax
services are taxed only in the country where they are consumed,
exceptions to the destination principle are found in Section
108(B) of the 1997 Tax Code. In this case, Amex Phils. The seller in an exempt The input VAT on the
facilitated in the transaction is not entitled purchases of a VAT
Philippines the collection and payment of receivables belonging to any input tax on his registered person with zero
to its Hong Kong-based foreign client, Amex HK, and getting purchases despite the rated sales may be
paid for it in acceptable foreign currency and accounted for in issuance of a VAT invoice allowed as tax credits or
accordance with the rules and regulations of the BSP. As such, or receipt; refunded
they are deemed exceptions because although the services are
performed in the Philippines, the sales of such services are
considered zero-rated. Registration is optional for Persons engaged in
VAT-exempt persons transactions which are
In CIR V. BURMEISTER AND WAIN SCANDINAVIAN zero rated, being subject to
CONTRACTOR MINDANAO, INC. [JANUARY 22, 2007], they VAT, are required to
are entitled to zero-rated status and to the refund but only for the register
period covered prior to the filing of the CIR’s answer in the CTA.
This is so because prior, Burmeister was able to secure a ruling
from the BIR allowing zero-rating of its sales. However, such
ruling is valid only until the time that the CIR filed its answer in (See SECTION 109, TAX CODE for an extensive enumeration of
the CTA which amounted to a revocation of the said ruling. The the exempt transactions)
revocation cannot be made retroactive. It must be noted, In CIR V. PHILIPPINE HEALTH CARE PROVIDERS,
however, that without this special circumstance, Burmeister INC. [APRIL 24, 2007], PHCPI claimed that its services were
would not have been entitled to a zero-rated status. This is exempt from VAT and sought a BIR ruling in this regard. The BIR
because the Consortium which was the recipient of the services ruled that PHCPI was exempt. The CIR, however, later assessed
rendered by Burmeister was deemed doing business within the PHCPI for deficiency VAT taxes. The CIR contended that PHCPI
Philippines. While the Consortium’s principal members are non does not actually render medical service but merely acts as a
resident foreign corporations, the Consortium itself is doing conduit between the members and PHCPI’s accredited and
business in the Philippines. Hence, the transactions of BWSC recognized hospitals and clinics. The Supreme Court opined that
the services of an entity which does not actually provide medical
Note: For VAT zero-rating of services rendered to non-resident and/or hospital services but merely arranges for the same are
foreign corporation under Section 108(B)((2) of the NIRC, it is subject to VAT. The Court, however, ruled PHCPI cannot be
not enough that the recipient of services be proven to be a faulted for its reliance on the BIR ruling as such was issued
foreign corporation, it must be proven to be a non-resident when the term “health maintenance organization” had no
foreign corporation (ACCENTURE V. CIR) significance for taxation purposes at the time. The failure of
PHCPI to describe itself as a “health maintenance organization”
subject to VAT does not amount to bad faith.
VAT-EXEMPT TRANSACTIONS
Is the sale of Andok’s chicken subject to VAT? No. The sale
VAT-exempt transactions refer to the sale of goods or of Andok’s chicken is exempt from VAT. However, should
properties and/or services and the use or lease of properties that Andok’s maintain a facility by which the roasted chicken will be
is not subject to VAT (output tax) and the seller is not allowed offered as a menu to customers who would dine in, then it will be
any tax credit of VAT (input tax) on purchases. subject to VAT on sale of service which is similarly imposed on
restaurants and other eateries (VAT Ruling No. 009-07 dated
The person making the exempt sale of goods, properties, or June 21, 2007)
services shall not bill any output tax to his customers because
the said transaction is not subject to VAT. Note: Check Section 109(A). Andok’s chicken is just as stall,
kapag nagtayo na sila ng facility for dine-ins, sale of services na
VAT-EXEMPTION ZERO-RATED sya, hence, subject to VAT. Since Andok’s only sells roasted
chicken, and according to the provision of Section 109, still
considered as original state, exempt. Kapag inadobo na ng
Andok’s yan or nag-tinola, subject to VAT. Take note of the and remitted to the BIR
“original state” proviso.
24 | alynotes
PERSONS WHO CAN AVAIL OF INPUT TAX CREDIT 1. The an indirect tax is the statutory taxpayer, not the person on whom
purchaser of the goods or properties upon consummation of it is shifted to.
the sale and on importation of goods or properties
2. The importer upon payment of VAT prior to the release of Requirements for a claim for VAT refund/credit — 1. The
goods from customs custody taxpayer is engaged in sales which are zero-rated or
effectively zero-rated
CLAIMS FOR INPUT TAX ON DEPRECIABLE GOODS — 2. The taxpayer is VAT-registered
Where a VAT-registered person purchases or imports capital 3. The claim must be filed within 2 years after the close of the
goods, which are depreciable assets for income tax purposes, taxable quarter when such sales were made
the aggregate acquisition cost of which (exclusive of VAT) in a 4. The input taxes are due or paid;
calendar month exceeds P1,000,000.00, regardless of the
5. The input taxes are not transitional input taxes 6. The
acquisition cost of each capital good, shall be claimed as credit
input taxes have not been applied against output taxes
against output tax in the following manner:
during and in the succeeding quarters
7. The input taxes claimed are attributable to zero-rated or
(a) If the estimated useful life of a capital good is 5
years or more - The input tax shall be spread evenly effectively zero-rated sales
over a period of sixty (60) months and the claim for 8. In certain types of zero-rated sales, the acceptable foreign
input tax credit will commence in the calendar month currency exchange proceeds thereof had been duly
when the capital good is acquired. accounted for in accordance with BSP rules and
(b) If the estimated useful life of a capital good is less regulations [Sections 106(A)(2)(a)(1), (2), and (b); Section
than 5 years — The input tax shall be spread over 108(B); Sections 108(B)(1) and (2)]
such a shorter period 9. Where there are both zero-rated and effectively zero-rated
sales and taxable or exempt sales, and the input taxes
Capital goods or properties refers to goods or properties with cannot be directly and entirely attributable to any of these
estimated useful life greater than one (1) year and which are sales, the input taxes shall be proportionately allocated on
treated as depreciable assets under Sec. 34(F) of the Tax Code, the basis of sales volume.
used directly or indirectly in the production or sale of taxable
goods or services The CIR shall grant a tax credit certificate/refund for creditable
input taxes within 90 days from the date of submission of
EXCESS OUTPUT OR INPUT TAX complete documents in support of the application. In cases
where the Commissioner finds that the grant of refund is not
If at the end of any taxable month or quarter: proper, the Commissioner must state in writing the legal and
factual basis for the denial (see Section 112(C), Tax Code)
Output tax = Input tax No VAT payable Remedy in case of denial
The taxpayer may appeal to the CTA within 30 days from the
Output tax > Input tax The excess shall be paid by the receipt of said denial. If no action on the claim for tax credit
VAT-registered person certificate/refund has been taken by the CIR after the 90 day
period in which he must decide, shall be punishable under
Output tax < input tax The excess shall be carried Section 269 of the Tax Code
over to the succeeding quarter
or quarters INVOICING REQUIREMENTS
25 | alynotes