Submitted by:

Dungog, Yasie

Ecarma, Kim

Egos, Czar

Elesterio, Dessa

Elnar, Melinda

Nation
Esparagoza, Keneth

Eyas, Ave

Estorba, Ivy

Figues, Ma. Helen

al Fontanosa, Alan

Fuentes, Piccola

Taxatio Coach:
Atty. Katrina

Surabilla
Table of Contents
WITHHOLDING TAX 1
ESTATE TAX 17
A. Basic Principles, Concept and Definition 17
B. Classification of Decedent and Composition of Gross Estate 20
C. Allowable Deductions and Exclusions from Estate 27
D. Estate Tax Return 34
DONOR’S TAX 36
Definition 37
Nature and Purpose of Taxation 38
Requisites of Taxable Gift 39
(A) Acceptance 39
(B) Delivery whether Actual or Constructive 40
(C) Donative Intent or Intent to Donate 40
(D) Capacity of the Donor 43
(E) Decrease in the Patrimony of the Donor 44
(F) Increase in the Patrimony of the Donee 44
Properties Covered as Gifts 45
Valuation of Gifts Made in Property 45
Exemptions 46
Deductible from Gross Gifts 47
(A) Encumbrances 47
(B) Diminution 47
Net Gift and Donor’s Tax Rates 47
(A) Principle of Accumulation 47
(B) Donor’s Tax Credit 48
Administrative Matters 49
Filing of Donor’s Tax Return 49
VALUE-ADDED TAX 50
PERCENTAGE TAXES 69
CONCEPT 69
EXCISE TAX 78
DOCUMENTARY STAMP TAX 81
CONCEPT AND NATURE 81
 WITHHOLDING TAX
Question: What is the importance of the
withholding tax system?
Answer: It is considered as an effective
tool in the collection of taxes for the
following reasons:
1. It encourages voluntary compliance;
2. It reduces cost of collection effort;
3. It prevents delinquencies and revenue
loss; and
4. It prevents dry spell in the fiscal
conditions of the government by
providing revenues throughout the
taxable year.
Question: Who are the persons required
to withhold taxes?
Answer: The persons required to withhold
taxes are the following:
1. Individuals engaged in business or
practiced of profession
2. Non-individuals (corporations,
associations, partnerships,
cooperatives) whether engaged in
business or not
3. Government agencies and its
instrumentalities (National Government
Agencies (NGAs), Government-owned
or Controlled Corporations (GOCCs),
Local Government Units including
Barangays (LGUs)
2011 Bar Question: The payor of passive
income subject to final tax is required to
withhold the tax from the payment due the
recipient. The withholding of the tax has
the effect of _________.
(A) a final settlement of the tax liability on
the income.
(B) a credit from the recipient’s income
tax liability.
1
(C) consummating the transaction
resulting in an income.
(D) a deduction in the recipient’s income
tax return.
Suggested Answer:
(A) a final settlement of the tax liability on
the income.
Question: Who is a withholding agent?
Answer: A withholding agent is any person
or entity who is in control of the payment
subject to withholding tax and, therefore, is
required to deduct and remit taxes withheld
to the government.
Question: What are the different
classifications of withholding taxes?
Answer: The classifications of creditable
withholding tax are the following:
a. Compensation, the tax withheld from
income payments to individuals arising
from an employer-employee
relationship.
b. Expanded, a kind of withholding tax
which is prescribed on certain income
payments and is creditable against the
income tax due of the payee for the
taxable quarter/year in which the
particular income was earned.
c. Withholding Tax on GMP - Value Added
Taxes (GVAT), the tax withheld by
National Government Agencies (NGAs)
and instrumentalities, including
government-owned and controlled
corporations (GOCCs) and local
government units (LGUs), before
making any payments to VAT registered
taxpayers/suppliers/payees on account
of their purchases of goods and
services.
d. Withholding Tax on Government Money
Payments (GMP) - Percentage Taxes,
the tax withheld by National
 Government Agencies (NGAs) and
instrumentalities, including government-
owned and controlled corporations
(GOCCs) and local government units
(LGUs), before making any payments to
non-VAT registered
taxpayers/suppliers/payees
e. Final Withholding Tax, a kind of
withholding tax which is prescribed on
certain income payments and is not
creditable against the income tax due of
the payee on other income subject to
regular rates of tax for the taxable year.
Income Tax withheld constitutes the full
and final payment of the Income Tax
due from the payee on the particular
income subjected to final withholding
tax.
2015 Bar Question: BBB, Inc., a domestic
corporation, enjoyed a particularly profitable
year in 2014. In June 2015, its Board of
Directors approved the distribution of cash
dividends to its stockholders. BBB, Inc.
has individual and corporate stockholders.
What is the tax treatment of the cash
dividends received from BBB, Inc. by the
following stockholders?
a) A resident citizen
b) Non-resident alien engaged in trade or
business
c) Non-resident alien not engaged in trade
or business
d) Domestic corporation Non-resident
foreign corporation
Suggested Answer:
a. A final withholding tax of ten percent
(10%) shall be imposed upon the cash
dividends actually or constructively
received by a resident citizen from BBB,
Inc.
b. A final withholding tax of twenty percent
(20%) shall be imposed upon the cash
dividends actually or constructively
received by a nonresident alien
engaged in trade or business from BBB,
Inc.
c. A final withholding tax equal to twenty-
five percent (25%) of the entire income
2
received from all sources within the
Philippines, including the cash
dividends received from BBB, Inc.
d. Dividends received by a domestic
corporation from another corporation,
such as BBB, Inc., shall not be subject
to tax.
e. A final withholding tax of fifteen percent
(15%) is imposed on the amount of
cash dividends received from BBB, Inc.,
subject to the tax sparing credit
provision (Section 28(B)(5)(b), NIRC).
The application of the tax sparing credit
is that the country-domicile of the
recipient corporation allows a credit
against the tax due from the non-
resident foreign corporation. Otherwise,
the applicable tax rate is thirty percent
(30%) of the gross income received
during each taxable year from all
sources within the Philippines.
Question: For purposes of withholding tax
on compensation, what comprises
compensation or wages?
Answer: Compensation or Wages refers to
all remuneration for services performed by
an employee for his employer under an
employee-employer relationship unless
exempted by the NIRC and pertinent laws.
They include the cash value of all
remuneration paid in any medium other
than cash, except that such term shall not
include remuneration paid:
1. For agricultural labor paid entirely in
products of the farm where the labor is
performed, or
2. For domestic service in a private home;
or
3. For casual labor not in the course of the
employer’s trade or business; or
4. For services by a citizen or resident of
the Philippines for a foreign government
or an international organization. (Sec.
78, NIRC)
Question: When shall remuneration be
deemed to be wages for purposes of
determining withholding tax?
Answer: If the remuneration paid by an
employer to an employee for services
performed during one-half (½) or more of
any payroll period of not more than thirty-on
(31) consecutive days constitutes wages,
all the remuneration paid by such employer
to such employee for such period shall be
deemed to be wages (Sec. 78, NIRC).
Question: What are the kinds of
compensation subject to withholding tax?
Answer: The kinds of compensation
subject to withholding tax are the following:
1. Regular:
● Basic Salary
● Fixed allowances; and
2. Supplementary:
● Commission
● Overtime pay
● Fees, including director’s fees
● Profit sharing
● Monetized vacation leaves
excess of ten (10) days
● Sick leave
● Fringe benefits received by rank
and file employees
● Hazard pay
● Taxable 13th month pay and other
benefits
● Other remuneration received from
employee-employer relationships
Question: What are the responsibilities of
the employer in withholding tax?
Answer: The responsibilities of an
employer in withholding tax are the
following:
1. Submit the duly accomplished BIR
Form Nos. 1902 and/or 1905 to the
RDO within thirty (30) days from receipt;
2. Withhold the tax due from the
employees following the prescribed
manner;
3. Remit the amount of tax withheld from
the employee within the prescribed due
dates;
4. Do the year-end adjustment;
5. Submit Annual Information return (BIR
Form 1604-C, 1604-F and 1604-E),
including the required alphabetical list of
employees/payees on or before
January 31 following the close of the
calendar year;
6. Issue the Certificate of Compensation
Payment/Tax Withheld (BIR Form No.
2316) to the employees; and
7. Refund excess tax withheld.
Question: What is the liability of an
employer who fails to withhold and remit
the correct amount of tax from the wage of
his employee? What happens to the excess
tax withheld made by him?
in
Answer: If the employer fails to withhold
and remit the correct amount of tax as
required to be withheld under the provisions
of Chapter XIII of the NIRC, such tax shall
be collected from the employer together
with the penalties or additions to the tax
otherwise applicable in respect to such
failure to withhold and remit.
Excess taxes withheld made by the
employer due to:
1. failure or refusal to file the withholding
exemption certificate; or
2. false and inaccurate information shall
not be refunded to the employee but
shall be forfeited in favor of the
Government (Sec. 80 [A], NIRC).
3

Question: What is the liability of an
employee if he fails to comply with the
provisions under Withholding of Wages in
the NIRC?
Answer: Where an employee fails or
refuses to file the withholding exemption
certificate or willfully supplies false or
inaccurate information thereunder, the tax
otherwise required to be withheld by the
employer shall be collected from him
including penalties or additions to the tax
from the due date of remittance until the
date of payment (Sec. 80 [B], NIRC).
Question: For purposes of withholding tax
on wages, what are the rules in the filing of
return and payment of the said taxes?
Answer: Except as the Commissioner
otherwise permits, taxes deducted and
withheld by the employer on wages of
employees shall be covered by a return and
paid to an authorized agent bank;
Collection Agent, or the duly authorized
Treasurer of the city or municipality where
the employer has his legal residence or
principal place of business, or in case the
employer is a corporation, where the
principal office is located.
The return shall be filed and the payment
made within twenty-five (25) days from the
close of each calendar quarter: Provided,
however, That the Commissioner may, with
the approval of the Secretary of Finance,
require the employers to pay or deposit the
taxes deducted and withheld at more
frequent intervals, in cases where such
requirement is deemed necessary to
protect the interest of the Government.
The taxes deducted and withheld by
employers shall be held in a special fund in
trust for the Government until the same are
paid to the said collecting officers (Sec. 81,
NIRC).
4
Question: Are minimum wage earners
subject to withholding tax?
Answer: NO, they are not. No withholding
tax shall be required on the Statutory
Minimum Wage (SMW) of the Minimum
Wage earner in the private/public sectors
as defined in RR 2-98, as amended by RR
11-2018, including:
● Holiday pay
● Overtime pay
● Night shift differential
● Hazard pay
of Minimum Wage earners in the
private/public sectors as defined by the
Regulations.
Question: What are the de minimis
benefits NOT subject to withholding tax?
Answer: The de minimis benefits which are
not subject to withholding tax are the
following:
a. Monetized unused vacation leave
credits to employees not exceeding ten
(10) days during the year;
b. Monetized value of vacation and sick
leave credits paid to government
officials and employees;
c. Medical cash allowance to dependents
of employees, not exceeding P1,500
per employee per semester of P250 per
month;
d. Rice subsidy of P2,000 or one sack of
50kg rice per month amounting to not
more than P2,000;
e. Uniform and clothing allowance not
exceeding P6,000 per annum;
f. Actual medical assistance, e.g. medical
allowance to cover medical and
healthcare needs, annual
medical/executive check-up, maternity
assistance, and routine consultations,
not exceeding P10,000.00 per annum;
g. Laundry allowance not exceeding P300
per month;
h. Employees achievement awards, e.g.
for length of service or safety
achievement, which in the form of a
tangible personal property other than
cash or gift certificate, with an annual
monetary value not exceeding P10,000
received by the employee under an
established written plan which does not
discriminate in favor of highly paid
employees;
i. Gifts given during Christmas and major
anniversary celebrations not exceeding
P5,000 per employee per annum;
j. Daily meal allowance for overtime work
not exceeding twenty-five percent
(25%) of the basic minimum wage;
k. Benefits received by an employee by
virtue of a collective bargaining
agreement (CBA) and productivity
incentive schemes provided that the
total annual monetary value received
from both CBA and productivity
incentive schemes combined do not
exceed ten thousand pesos (Php
10,000.00) per employee per taxable
year
Question: What is the year-end-adjustment
principle?
Answer: The Year-end-adjustment
principle states that on or before the
calendar year and prior to the payment of
the compensation for last payroll period, the
employer shall determine the sum of the
taxable regular and supplementary
compensation paid to each employee for
the whole year and must ensure that the
tax due is equal to tax withheld.
Collectible: Tax Due > tax withheld - collect
before payment of last salary
Refund: Tax Due < tax withheld - refund
on or before January 25th of the year/ last
payment of salary
5
Breakeven: Tax due = tax withheld - no
more withholding for December salary
Question: What does substituted filing
mean? What are the requisites for
individuals qualified and not qualified for
substituted filing of BIR Form No. 1700?
Answer: Substituted filing means that an
individual taxpayer will no longer have to
personally file his own Income Tax Return
(BIR Form 1700) but instead the employer's
Annual Information Return on Income
Taxes Withheld (BIR Form No. 1604-C)
filed will be considered as the "substitute"
ITR of the employee.
Requisites For Individuals Qualified For
Substituted Filing of BIR Form No. 1700
1. Receives purely compensation income
regardless of amount;
2. Compensation from only one employer
in the Philippines for the calendar year;
3. Income tax has been withheld correctly
by the employer (tax due equals tax
withheld);
4. the employee's spouse also complies
with all the three conditions stated
above;
5. Employer files the BIR Form No. 1604-
C; and
6. The employer issues each employee
BIR Form No. 2316 (latest version).
All the above requisites must be present.
The employer is required to submit the
duplicate original copy of BIR Form No.
2316 to the Revenue District Office where
they are registered on or before February
28.
Requisites For Individuals Not Qualified
For Substituted Filing of BIR Form No.
1700
1. Individuals with two or more employers
concurrently and/or successively at any
time during the taxable year.
2. Employees whose income tax have not
been withheld correctly resulting to
collectible or refundable return.
3. Individuals deriving other non-business,
non-profession-related income in
addition to compensation income not
otherwise subject to final tax.
4. Individuals receiving purely
compensation income from a single
employer whose income tax has been
correctly withheld but whose spouse
does not qualify tor substituted filing.
5. Non-resident aliens engaged in trade or
business in the Philippines deriving
purely compensation income or
compensation income and other non-
related business, non-profession-
related income.
2015 Bar Question: Indicate whether each
of the following individuals is required or not
required to file an income tax return:
a) Filipino citizen residing outside the
Philippines on his income from sources
outside the Philippines.
b) Resident alien on income derived from
sources within the Philippines.
c) Resident citizen earning purely
compensation income from two
employers within the Philippines, whose
income taxes have been correctly
withheld.
d) Resident citizen who falls under the
classification of minimum wage earners.
e) An individual whose sole income has
been subjected to final withholding tax.
Suggested Answer:
a. No, because a non-resident Filipino
citizen is taxable only in income
sourced within the Philippines.
6
b. Yes, because a resident alien is taxable
for income derived from sources within
the Philippines.
c. Yes. A resident citizen who is earning
purely compensation income from two
employers should file income tax return
for not being qualified for substituted
filing.
d. No. Under the law, all minimum wage
earners in the private and public sector
shall be exempt from payment of
income tax.
e. No. Under the law, an individual whose
sole income has been subjected to final
withholding tax pursuant to Section
57(A) of the NIRC need not file a return.
Question: What is the concept of
Expanded Withholding Tax all about?
Answer: The Withholding of Creditable Tax
at Source or simply called Expanded
Withholding Tax is a tax imposed and
prescribed on the items of income payable
to natural or juridical persons, residing in
the Philippines, by a
payor-corporation/person which shall be
credited against the income tax liability of
the taxpayer for the taxable year.
2012 Bar Question: During the audit
conducted by the BIR official, it was found
that the rental income claimed by the
corporation was not subjected to expanded
withholding tax. Accordingly, the claimed
rental expense:
a) Is deductible from the gross income of
the corporation, despite non-withholding of
income tax by the corporation;
b) Is deductible from the gross income of
the corporation, provided that the 5%
expanded withholding tax is paid by the
corporation during the audit;
c) Is not deductible from gross income of
the corporation due to non-withholding of
tax;
d) Is deductible, if it can be shown that the
lessor has correctly reported the rental
income in his tax return.
Suggested Answer:
c) Is not deductible from gross income of
the corporation due to non-withholding of
tax (Section 34(K), NIRC.)
2001 Bar Question: What is meant by
“income subject to final tax?”
Suggested Answer: Income subject to
final tax refers to an income wherein the tax
due is fully collected through the
withholding tax system. Under this
procedure, the payor of the income
withholds the tax and remits it to the
government as a final settlement of the
income tax due on said income. The
recipient is no longer required to include the
item of income subjected to “final tax” as
part of his gross income in his income tax
returns.
Example: Interest income from bank
deposits. The bank (payor) deducts and/or
withholds the final withholding tax from the
interest income. The bank is required to
remit the tax to the government. On the
other hand, the taxpayer need not declare
the interest income in his/her income tax
return.
Question: Respondent La Flor dela
Isabela, Inc. (La Flor) is a domestic
corporation duly organized and existing
under Philippine Law. It filed monthly
returns for the Expanded Withholding Tax
(EWT) and Withholding Tax on
Compensation (WTC) for calendar year
2005.
On September 3, 2008, La Flor, through its
President, executed a Waiver of the Statute
of Limitations (Waiver) in connection with
its internal revenue liabilities for the
calendar year ending December 31, 2005.
On February 16,2009, it executed another
7
Waiver to extend the period of assessment
until December 31, 2009.
On November 20, 2009, La Flor received a
copy of the Preliminary Assessment Notice
for deficiency taxes for the taxable year
2005. Meanwhile, on December 2, 2009, it
executed another Waiver.
On January 7, 2010, La Flor received the
following Formal Letter of Demand and
Final Assessment Notices (FANs):(1)
LTEADI-II CP-05- 00007 for penalties for
late filing and payment of WTC; (2) LTADI-
II CP 05-00008 for penalties for late filing
and payment of EWT; (3) LTADI-II WE-05-
00062 for deficiency assessment for EWT;
and (4) LTEADI-IIWC- 05-00038 for
deficiency assessment for WTC. The
above-mentioned assessment notices were
all dated December 17, 2009 and covered
the deficiency taxes for the taxable year
2005.
On January 15, 2010, La Flor filed its Letter
of Protest contesting the assessment
notices. On July 20, 2010, petitioner
Commissioner of Internal Revenue (CIR)
issued the Final Decision on Disputed
Assessment (FDDA)involving the alleged
deficiency withholding taxes in the
aggregate amount of ₱6,835,994.76.
Aggrieved, it filed a petition for review
before the CTA Division.
1. Whether the prescriptive period under
section 203 of the NIRC applies to EWT
and WTC assessments; and
2. Whether La Flor's EWT and WTC
assessments for 2005 were barred by
prescription.
Suggested Answer:
1. Yes.
The law provides that withholding tax
assessments such as EWT and WTC
clearly contemplate deficiency internal
revenue taxes. Their aim is to collect
unpaid income taxes and not merely to
impose a penalty on the withholding agent
for its failure to comply with its statutory
duty.
Further, a holistic reading of the Tax Code
reveals that the CIR's interpretation of
Section 203 is erroneous. Provisions of the collect deficiency taxes on a certain date.
NIRC itself recognize that the tax Logically, there can be no agreement if the
assessment for withholding tax deficiency is kind and amount of the taxes to be
different and independent from possible assessed or collected were not indicated.
penalties that may be imposed for the
Corollary, the September 3, 2008, February
failure of withholding agents to withhold and
16, 2009 and December 2, 2009 Waivers
remit taxes.
failed to indicate the specific tax involved
On the other hand, Section 251 of the Tax and the exact amount of the tax to be
Code provides that: assessed or collected. As above-
mentioned, these details are material as
Failure of a Withholding Agent to Collect
there can be no true and valid agreement
and Remit Tax.
between the taxpayer and the CIR absent
— Any person required to withhold, this information.
account for and remit any tax imposed by
Clearly, the Waivers did not effectively
this Code or who willfully fails to withhold
extend the prescriptive period under
such tax, or account for and remit such
Section 203 on account of their invalidity.
tax, or aids or abets in any manner to
The issue on whether the CTA was correct
evade any such tax or the payment
in not admitting them as evidence becomes
thereof, shall, in addition to other
immaterial since even if they were properly
penalties provided for under this Chapter,
offered or considered by the CTA, the same
be liable upon conviction to a penalty
conclusion would be reached — the
equal to the total amount of the tax not
assessments had prescribed as there was
withheld, or not accounted for and
no valid waiver.
remitted.
(G.R. No. 211289; Commissioner of
Based on the above-cited provisions, it is
Internal Revenue vs. La Flor Dela Isabela,
clear to see that the "penalties" are
Inc.)
amounts collected on top of the deficiency
tax assessments including deficiency
withholding tax assessments. Thus, it was
wrong for the CIR to restrict the EWT and
WTC assessments against La Floras only Question: In several transactions including
for the purpose of imposing penalties and but not limited to the sale of real properties,
not for the collection of internal revenue lease and commissions, respondent
taxes. allegedly earned income and paid the
corresponding income taxes due which
Thus, the prescription will apply under
were collected and remitted by various
section 203.
payors as withholding agents to the Bureau
of Internal Revenue ("BIR") during the
taxable year 2000.
2. Yes.
On April 18, 2001, [respondent] filed its
In Commissioner of Internal Revenue vs.
tentative income tax return for taxable year
Systems Technology Institute, Inc.,26 the
2000 which it subsequently amended on
Court had ruled that waivers extending the
July 25, 2001.
prescriptive period of tax assessments
must be compliant with RMO No. 20-90 and [Respondent] filed again an amended
must indicate the nature and amount of the income tax return for taxable year 2000 on
tax due. These requirements are June 20, 2002, declaring no income tax
mandatory and must strictly be followed. liability as it incurred a net loss in the
amount of ₱11,318,957,602.00 and a gross
In the case at bar, the waivers did not
loss of ₱745,713,454.00 from its Regular
specify the kind of tax and the amount of
Banking Unit ("RBU") transactions.
tax due. It is established that a waiver of
However, respondent had a 10% final
the statute of limitations is a bilateral
income tax liability of ₱210,364,280.00 on
agreement between the taxpayer and the
taxable income of ₱1,959,931,182.00
BIR to extend the period to assess or
8
earned from its Foreign Currency Deposit
Unit ("FCDU") transactions for the same
year. Likewise, in the same return,
respondent reported a total amount of
₱245,888,507.00 final and creditable
withholding taxes which was applied
against the final income tax due of
₱210,364,280.00leaving an overpayment of
₱35,524,227.00.
In its second amended return, respondent’s
income tax overpayment of ₱35,524,227.00
consisted of the balance of the prior year's
(1999) excess credits of ₱9,057,492.00 to
be carried-over as tax credit to the
succeeding quarter/year and excess
creditable withholding taxes for taxable
year 2000 in the amount of ₱26,466,735.00
which respondent opted to be refunded. On
November 11, 2002, respondent filed a
claim for refund or the issuance of a tax
credit certificate in the amount
of₱26,466,735.40 for the taxable year 2000
with the BIR.
Whether or not Respondent failed to prove
that the creditable withholding taxes
amounting to ₱23,762,347.83 are duly
supported by valid certificates of creditable
tax withheld at source?
Suggested Answer: No.
Jurisprudence provides that the certificate
of creditable tax withheld at source is the
competent proof to establish the fact that
taxes are withheld.
It is not necessary for the person who
executed and prepared the certificate of
creditable tax withheld at source to be
presented and to testify personally to prove
the authenticity of the certificates.
Moreover, Petitioner's posture that
respondent is required to establish actual
remittance to the Bureau of Internal
Revenue deserves scant consideration.
Proof of actual remittance is not a condition
to claim for a refund of unutilized tax
credits.
Under Sections 57 and 58 of the 1997
National Internal Revenue Code, as
amended, it is the payor-withholding agent,
and not the payee-refund claimant such as
respondent, who is vested with the
9
responsibility of withholding and remitting
income taxes.
Infine, petitioner’s allegation that the
submission of the certificates of withholding
taxes before the Court of Tax Appeals was
late is untenable. The samples of the
withholding tax certificates attached to
respondent’s comment bore the receiving
stamp of the Bureau of Internal Revenue’s
Large Taxpayers Document Processing
and Quality Assurance Division.
As observed by the Court of Tax Appeals
En Banc, "[t]he Commissioner is in no
position to assail the authenticity of the
CWT certificates due to PNB’s alleged
failure to submit the same before the
administrative level since he could have
easily directed the claimant to furnish
copies of these documents, if their fund
applied for casts him any doubt.
Indeed, petitioner’s inaction prompted
respondent to elevate its claim for refund to
the tax court.
More importantly, the Court of Tax Appeals
is not precluded from accepting
respondent’s evidence assuming these
were not presented at the administrative
level. Cases filed in the Court of Tax
Appeals are litigated de novo.
Thus, respondent "should prove every
minute aspect of its case by presenting,
formally offering and submitting to the Court
of Tax Appeals all evidence required for the
successful prosecution of its administrative
claim."
(G.R. No. 180290 September 29, 2014
Commissioner of Internal Revenue,
Petitioner, vs. Philippine National Bank,
Respondent.)
Principle:
The right of a withholding agent to claim a
refund of erroneously or illegally withheld
taxes comes with the responsibility to return
the same to the principal taxpayer.
Question:
Respondent Smart Communications, Inc. is
a corporation organized and existing under
Philippine law. It is an enterprise duly
registered with the Board of Investments.
On May 25, 2001, respondent entered into
three Agreements for Programming and
Consultancy Services3 with Prism
Transactive (M) Sdn. Bhd. (Prism), a non-
resident corporation duly organized and
existing under the laws of Malaysia. Under
the agreements, Prism was to provide
programming and consultancy services for
the installation of the Service Download
Manager (SDM) and the Channel Manager
(CM), and for the installation and
implementation of Smart Money and Mobile
Banking Service SIM Applications (SIM
Applications) and Private Text Platform
(SIM Application).
On June 25, 2001, Prism billed respondent
in the amount of US$547,822.45, broken
down as follows:
SDM Agreement
US$236,000.00
CM Agreement
296,000.00
SIM Application Agreement
15,822.45
Total
US$547,822.45
Thinking that these payments constitute
royalties, respondent withheld the amount
of US$136,955.61 or₱7,008,840.43,5
representing the 25% royalty tax under the
RP-Malaysia Tax Treaty. On September
25, 2001, respondent filed its Monthly
Remittance Return of Final Income Taxes
Withheld (BIR Form No. 1601-F)7 for the
month of August 2001.
On September 24, 2003, or within the two-
year period to claim a refund, respondent
filed with the Bureau of Internal Revenue
(BIR), through the International Tax Affairs
Division (ITAD), an administrative claim for
refund of the amount of ₱7,008,840.43.
Whether or not respondent has the right to
file the claim for refund?
Suggested Answer: Yes. The respondent
has the right to file the claim for refund.
10
Jurisprudence provides that a withholding
agent has a legal right to file a claim for
refund for two reasons.
First, he is considered a "taxpayer" under
the NIRC as he is personally liable for the
withholding tax as well as for deficiency
assessments, surcharges, and penalties,
should the amount of the tax withheld be
finally found to be less than the amount that
should have been withheld under law.
Second, as an agent of the taxpayer, his
authority to file the necessary income tax
return and to remit the tax withheld to the
government impliedly includes the authority
to file a claim for refund and to bring an
action for recovery of such claim.
In this connection, it is however significant
to add that while the withholding agent has
the right to recover the taxes erroneously or
illegally collected, he nevertheless has the
obligation to remit the same to the principal
taxpayer.
As an agent of the taxpayer, it is his duty to
return what he has recovered; otherwise,
he would be unjustly enriching himself at
the expense of the principal taxpayer from
whom the taxes were withheld, and from
whom he derives his legal right to file a
claim for refund.
In view of the foregoing, we find no error on
the part of the CTA in upholding
respondent’s right as a withholding agent to
file a claim for refund.
(G.R. Nos. 179045-46; August 25, 2010
Commissioner of Internal Revenue,
Petitioner, vs. Smart Communication, Inc.,
Respondent.)
Principle:
Qualified taxpayers with pending tax cases
may still avail themselves of the tax
amnesty program under Republic Act No.
9480, or otherwise known as the 2007 Tax
Amnesty Act. Thus, the provision in BIR
Revenue Memorandum Circular No. 19-
2008 excepting issues and cases which
were ruled by any court (even without
finality) in favor of the BIR prior to amnesty
availment of the taxpayer" from the benefits
of the law is illegal, invalid, and null and
void.
The duty to withhold the tax on succeeding years of their accrual (i.e., in
compensation arises upon its accrual. 1997 and1998) when the amounts were
finally determined?

Suggested Answer: No.

Question: ING Bank, "the Philippine
branch of Internationale Nederlanden Bank The law provides that the provision of
N.V., a foreign banking corporation Section 72 of the 1977 National Internal
incorporated in the Netherlands is duly Revenue Code (Section 79 of the 1997
authorized by the Bangko Sentral ng National Internal Revenue Code) regarding
Pilipinas to operate as a branch with full withholding on wages must be read and
banking authority in the Philippines.” construed in harmony with Section 29(j) of
the 1977 National Internal Revenue Code
On January 3, 2000, ING Bank received a
(Section 34(K) of the 1997 National Internal
Final Assessment Notice dated December
Revenue Code) on deductions from gross
3, 1999. The Final Assessment Notice also
income.
contained the Details of Assessment and
Assessment Notices "issued by the Reading together the two provisions, we
Enforcement Service of the Bureau of hold that the obligation of the
Internal Revenue through its Assistant payor/employer to deduct and withhold the
Commissioner Percival T. Salazar.” related withholding tax arises at the time
the income was paid or accrued or
The Final Assessment Notice covered the
recorded as an expense in the
following deficiency tax assessments for
payor’s/employer’s books, whichever
taxable years 1996 and 1997:
comes first.
On February 2, 2000, ING Bank "paid the
In the case at bar, Petitioner ING Bank
deficiency assessments for the1996
accrued or recorded the bonuses as
compromise penalty, 1997deficiency
deductible expense in its books. Therefore,
documentary stamp tax and 1997
its obligation to withhold the related
deficiency final tax in the respective
withholding tax due from the deductions for
amounts of ₱1,000.00, ₱1,000.00and
accrued bonuses arose at the time of
₱75,013.25 [the original amount of
accrual and not at the time of actual
₱73,752.47 plus additional interest].”
payment.
ING Bank, however, "protested on the
Hence, the bonus accruals in 1996 and
same day the remaining ten (10) deficiency
1997 are subject to withholding tax.
tax assessments in the total amount of
₱672,576,939.18." (ING Bank N.V., Engaged in Banking
Operations in the Philippines as ING Bank
ING Bank filed a Petition for Review before
N.V. Manila Branch vs. Commissioner of
the Court of Tax Appeals on October 26,
Internal Revenue, G.R. No. 167679, July
2000. This case was docketed as C.T.A.
22, 2015)
Case No. 6187.
The Petition was filed to seek "the
cancellation and withdrawal of the
deficiency tax assessments for the years
Question: These consolidated cases stem
1996 and 1997, including the alleged
from a refund claim by Philippine Airlines,
deficiency documentary stamp tax on
Inc. (PAL) for final taxes withheld on its
special savings accounts, deficiency
interest income from its peso and dollar
onshore tax, and deficiency withholding tax
deposits with China Banking Corporation
on compensation mentioned above.
(China bank), JP Morgan Chase Bank
Whether or not the bonus accruals in 1996 (JPMorgan), Philippine Bank of
and 1997 were not yet subject to Communications (PBCom), and Standard
withholding tax because these bonuses Chartered Bank (Standard Chartered)
were actually distributed only in the (collectively, Agent Banks).

11
GR. Nos. 206079-80 involves the Petition The payee is not required to file an income
filed by PAL questioning the denial of its tax return/or the particular income.
claim for refund of ₱510,233.16and
The finality of the withholding tax is limited
US$65,877.07, representing the final
only to the payee's income tax liability on
income tax withheld by China bank,
the particular income. It does not extend to
PBCom, and Standard Chartered.
the payee's other tax liability on said
Meanwhile, GR. No. 206309 involves the income, such as when the said income is
Petition filed by the Commissioner of further subject to a percentage tax.
Internal Revenue (Commissioner)assailing
Certificates of Final Taxes Withheld issued
the grant to PAL of the tax refund of
by the Agent Banks are sufficient evidence
₱1,237,646.43, representing the final
to establish the withholding of the taxes.
income tax withheld and remitted by
JPMorgan. In the case at bar, the Court of Tax Appeals
Special First Division noted that PAL
PAL asserts that it is entitled to a refund of
offered in evidence the following
the withheld taxes because it is exempted
Certificates of Final Tax Withheld at Source
from paying the tax on interest income
from the Agent Banks to prove the earned
under its franchise, Presidential Decree No.
interest income on its bank deposits and
1590.
the taxes withheld.
However, the Commissioner refused to
PAL also presented bank-issued
grant the claim, arguing that PAL failed to
Certificates of Final Tax Withheld at Source
prove the remittance of the withheld taxes
showing that the amounts it is seeking to
to the Bureau of Internal Revenue.
refund were withheld.
Whether or not PAL is required to prove the
Considering that PAL presented sufficient
remittance to the Bureau of Internal
proof that: (i) it is exempted from paying
Revenue of the final withholding tax on its
withholding taxes; (ii) amounts were
interest from currency bank deposits to be
withheld and deducted from its accounts;
entitled to tax refund?
(iii) and the Commissioner did not contest
the withholding of these amounts and only
raises that they were not proven to be
remitted, this Court finds that PAL
Suggested Answer: No. sufficiently proved that itis entitled to its
The law provides that to claim a refund, this claim for refund.
Court rules that PAL needs only to prove (Philippine Airlines, Inc. (Pal) vs.
that taxes were withheld. Commissioner of Internal Revenue, G.R.
Moreover, taxes withheld by the withholding No. 206079)
agent are deemed to be the full and final
payment of the income tax due from the
income earner or payee.
Question: What is meant by income
Section 2.57. Withholding of Tax at Source
subject to “final tax”? Give at least two
(A) Final Withholding Tax. - Under the final
examples of income of resident individuals
withholding tax system the amount of
that is subject to the final tax.
income tax withheld by the withholding
agent is constituted as a full and final
payment of the income tax due from the
Suggested Answer: Income subject to
payee on the said income.
final tax refers to an income wherein the tax
The liability for payment of the tax rests due is fully collected through the
primarily on the payor as a withholding withholding tax system. Under this
agent. Thus, in case of his failure to procedure, the payor of the income
withhold the tax or in case of under withholds the tax and remits it to the
withholding, the deficiency tax shall be government as a final settlement of the
collected from the payor/withholding agent. income tax due on said income. The

12
recipient is no longer required to include the
item of income subjected to “final tax” as
part of his gross income in his income tax
returns. Examples of income subject to final
tax are dividend income, interest from bank
deposits, royalties, etc.
Question: Who are persons exempt from
withholding tax?
Suggested Answer: The withholding of
creditable withholding tax shall not apply to
income payments made to the following:
1. National Government and its
instrumentalities, including provincial,
city, or municipal governments and
barangays, except government – owned
or – controlled corporations;
2. Persons enjoying exemption from
payment of income taxes pursuant to
the provisions of any law, general or
special, such as but not limited to the
following:
a. Sales of real property by a
corporation which is registered with
and certified by HLURB or HUDCC
as engaged in socialized housing
project where the selling price of the
house and lot or only the lot does
not exceed Php 450, 0000.00:
b. Corporations registered with the
BOI, PEZA, and SBMA, enjoying
exemption from income tax under
E.O. 226, R.A. 7916, and R.A.
7227, respectively;
c. Corporations which are exempt from
income tax under Section 27 (C) of
the Tax Code, such as GSIS, SSS,
PHIC, and local water districts;
d. General Professional Partnerships;
e. Joint ventures or consortium formed
for the purpose of undertaking
construction projects or engaging in
petroleum, coal, geothermal, and
other energy operations pursuant to
an operating or consortium
agreement under a service contract
with the government; and
13
f. Revenues derived from carriage of
persons, cargo or mail originating
from the Philippine up to the final
destination, paid to international
shipping line or through its shipping
agent in the Philippines, subject to
the 2.5% final on Gross Philippines
Billings (BIR Ruling No. DA – 204 –
2006 and 321 – 2008, December
12, 2008).
Question: From the pleadings and
supporting papers on hand, it can be
gathered that Citibank N.A. Philippine
Branch (CITIBANK) is a foreign corporation
doing business in the Philippines. In 1979
and 1980, its tenants withheld and paid to
the Bureau of Internal Revenue the
following taxes on rents due to Citibank,
pursuant to Section 1(c) of the Expanded
Withholding Tax Regulations (BIR Revenue
Regulations No. 13-78, as amended), to
wit:
1979
First quarter P60,690.97
Second quarter 69,897.08
Third quarter 69,160.89
Fourth quarter 70,160.56
—————
P270,160.56
1980
First quarter P78,370.22
Second quarter 69,049.37
Third quarter 79,139.60
Fourth quarter 72,270.10
—————
P298,829.29
On April 15, 1980, Citibank filed its
corporate income tax returns for the year
ended December 31,1979 (Exh. "E:),
showing a net loss of P74,854,916.00 and
its tax credits totalled P6,257,780.00, even
without including the amounts withheld on
rental income under the Expanded
Withholding Tax System, the same not
having been utilized or applied for the
reason that the year's operation resulted in
a loss. (Exh. & "E-1 & E-2"). The taxes thus
withheld by the tenants from rentals paid to
Citibank in 1979 were not included as tax
credits although a rental income amounting
to P7,796,811.00 was included in its
income declared for the year ended
December 31, 1979 (Exhs. "E-3" & "E-4").
For the year ended December 31, 1980,
Citibank's corporate income tax returns
(Exh. "EC"), filed on April 15, 1981, showed
a net loss of P77,071,790.00 for income tax
purposes. Its available tax
credit(refundable) at the end of 1980
amounting to P11,532,855.00 (Exh. "BC-1"
& "BC-2") was not utilized or applied. The
said available tax credits did not include the
amounts withheld by Citibank's tenants
from rental payments in 1980 but the rental
payments for that year were declared as
part of its gross income included in its
annual income tax returns (Exh. "BC-3").
On October 31, 1981, Citibank submitted its
claim for refund of the aforesaid amounts of
P270,160.56and P298,829, respectively, or
a total of P568,989.85; and on October 12,
1981 filed a petition for review with the
Court of Tax Appeals concerning subject
claim for tax refund, docketed as CTA Case
No. 3378.
On August 30, 1981, the Court of Tax
Appeals adjudged Citibank's entitlement to
the tax refund sought for, representing the
5% tax withheld and paid on Citibank's
rental income for 1979 and 1980.
In its decision granting a refund to
petitioner, the Court of Tax Appeals
rejected Respondent Commissioner's
argument that the claim was not
seasonably filed: WHEREFORE,
respondent is hereby ordered to grant the
refund of the amount sought by the
petitioner.
Not satisfied, the Commissioner appealed
to the Court of Appeals. In due course,
Respondent Court issued the assailed
Decision and Resolution, ruling that the five
percent tax withheld by tenants from the
rental income of Citibank for the years 1979
and 1980 was in accordance with Section
1(c) of the Expanded Withholding Tax
Regulations (BIR Revenue Regulation No.
14
13-78, as amended) and did not involve
illegally or erroneously collected taxes.
Is the lessor entitled to a refund of such
withheld amount after it is determined that
the lessor was not, in fact, liable for any
income tax at all because its annual
operation resulted in a net loss as shown in
its income tax return filed at the end of the
taxable year?
Suggested Answer: Yes.
Prior to Rev. Reg. 12-94, the requisites for
a refund were: (1) the income tax return for
the previous year must show that income
payment (rental in this case) was reported
as part of the gross income; and (2) the
withholding tax statement of the withholding
tax agent must show that payment of the
creditable withholding tax was made.
However, even without this regulation, the
commissioner may inspect the books of the
taxpayer and reassess a taxpayer for
deficiency tax payments under Sections 7,
NICR.
We stress that what was required under
Rev. Reg.12-94 was only a submission of
records but the verification of the tax return
remained the function of the commissioner.
Worth emphasizing are these uncontested
facts: (1) the amounts withheld were
actually remitted to the BIR and (2) the final
adjusted returns — which the BIR did not
question — showed that, for 1979 and
1980, no income taxes from petitioner were
due.
Hence, under the principle of solutio indebiti
provided in Art. 2154, Civil Code, the BIR
received something when "there [was] no
right to demand it," and thus "the obligation
to return arises."
Heavily militating against Respondent
Commissioner is the ancient principle that
no one, not even the state, shall enrich
oneself at the expense of another.
Indeed, simple justice requires the speedy
refund of the wrongly held taxes.
(G.R. No. 107434; October 10, 1997;
CITIBANK, N.A., petitioner, vs. Court of
Appeals and Commissioner of Internal
Revenue, Respondents.)

Question: Malayan Insurance Company,
Inc. (hereafter referred to as MALAYAN), a
domestic corporation which has
reinsurance contract with Orion Insurance
Company, Ltd. of London (hereafter
referred to as ORION) a non-resident
foreign corporation, without previous
authorization, filed the latter's income tax
return for 1958 and paid the tax due
thereon, in the sum of P958.00. Finding
later that ORION had commissioned
another domestic entity, Filipinas Compañia
de Seguros (to be referred hereafter as
FILIPINAS) to file the income tax return on
its behalf, and that the said agent paid the
sum of P778.00 as corresponding income
tax for the same year (1958), MALAYAN
requested the Commissioner of Internal
Revenue for the refund of the P958.00 it
had paid. When no action was taken
thereon,
MALAYAN filed a petition in the Court of
Tax Appeals for the same purpose.
In his amended answer to the petition, the
Commissioner of Internal Revenue alleged,
inter alia, that in 1958, petitioner had ceded
to ORION reinsurance premiums covering
risks located in the Philippines amounting
to P64,327.36; that this amount is subject
to withholding tax in the sum of P15,416.96;
that demand for payment of the withholding
tax was made upon petitioner on February
16, 1962; and that even if petitioner is to be
credited with the sum of P958.00 there
would still be due from the latter the sum of
P14,458.96. Respondent, therefore, asked
the Court that the petition be dismissed and
petitioner be ordered to pay P14,458.96,
with the penalties incident to late payment.
The parties submitted the case for decision
on the pleadings. On July 16, 1963, the Tax
Court decided for therein petitioner and
ordered the refund of the sum of P958.00 it
had erroneously paid as income tax of
ORION for 1958. And for the reason that
FILIPINAS is the duly authorized
representative of ORION, respondent's
counterclaim for P15,416.96 was dismissed
without prejudice. The Commissioner of
Internal Revenue interposed this appeal.
15
In the present proceeding, petitioner
Commissioner of Internal Revenue
reiterates the allegation that in 1958,
MALAYAN had ceded to ORION
reinsurance premiums1 amounting to
P64,327.36, on which amount MALAYAN
should have paid withholding tax of
P15,416.96.
Whether or not the payment by FILIPINAS
of the supposed tax on the incomes derived
by ORION from Philippine sources relieve
MALAYAN of its obligation to withhold and
pay the withholding tax on their insurance
premiums it had ceded to ORION?
Suggested Answer: No.
We have to rule that the payment by
FILIPINAS of the alleged tax on the
incomes of ORION did not relieve the
withholding agent of its legal duty. Firstly,
the filing of the tax return and payment of
the amount of P778.00 as income tax
cannot be considered in this case as final.
Not only is there no proof that the return
made by FlLIPINAS for ORION included
the reinsurance premiums ceded by
MALAYAN, but the great difference
between the amount paid and that which
should have been withheld and transmitted
to the Philippine Government, to take care
of the taxes that may be due on that
income (P15,416.96), is sufficient to put
one in expectancy of further proceedings
on that return.
In fact, an investigation of the tax return
filed by FILIPINAS was already conducted,
and in April, 1962, the examiners
recommended the assessment against the
taxpayer of deficiency income tax in the
sum of P6,442.00
In the second place, this is as appropriate
an instance as any for the operation of the
provision of Section 53 (b).
Because, in the event the taxpayer is finally
found liable for deficiency tax on its
incomes from the Philippines in 1958, the
Government would have no way of
collecting what is still due from said
taxpayer, which is a foreign corporation not
engaged in trade or business and without
office or place of business in the
Philippines. FILIPINAS cannot be
considered the authorized agent through
which any deficiency tax against ORION
may be collectible. As specified from the
letter of appointment of FILIPINAS,
hereinbefore quoted, the filing of the tax
return by the agent, which was therein
authorized, would not even bind the
principal to pay the tax based thereon. The
right to appeal or claim for refund is also
withheld from the agent.
In the circumstances, the importance of the
withholding under Section 53 is clearly
underscored.
(Commissioner of Internal Revenue vs.
Malayan Insurance Company, Inc., G.R.
No. L-21913, November 18, 1967)

16
 ESTATE TAX
A. Basic Principles, Concept and
Definition
Question: What are “Transfer Taxes”?
Answer: “Transfer taxes” are taxes
imposed upon the gratuitous disposition of
private property. Under the Tax Code,
transfer taxes refer to estate tax and
donor’s tax.
Question: What is estate tax?
Answer: It is a tax levied on the
transmission of properties from a decedent
to his heirs. (Donation Mortis causa)
It is the tax on the privilege to transmit
property at the death and on certain
transfers which are made the equivalent of
testamentary dispositions by the statute.
Question: What is donor’s tax?
Answer: It is a tax levied on the
transmission of properties from a living
person (donor) to another living person
(donee). (Donation Inter vivos)
Question: What are the distinctions
between Donation inter vivos and Donation
mortis causa?
Answer: The following distinctions are, to
wit:
A donation mortis causa is made in
consideration of death, without the donor’s
intention to lose the thing conveyed or its
free disposal in case of survival, while a
donation inter vivos is made without such
consideration but out of donor’s generosity.
17
A transfer mortis causa, being testamentary
in nature, should be embodied in a last will
and testament. It is not a contract; it is a
legacy. If not embodied in a valid will, the
donation is void.
In donation mortis causa, the transfer
conveys no title or ownership to the
transferee before the death of the
transferor, or the transferor retains the
ownership, it is the donor’s death that
determines the acquisition of or the right to
the property. In donation inter vivos, its
effect is produced while the donor is still
alive.
Donations, being in the form of a will, are
never accepted by the donees during the
donor’s lifetime while acceptance is a
requirement for donation inter vivos.
Question: Are donations inter vivos and
donations mortis causa subject to estate
taxes?
Answer: Donations inter vivos are subject
to donor’s gift tax while donations mortis
causa are subject to estate tax. However,
donations inter vivos constituted lifetime
like transfers in contemplation of death or
revocable transfers (Sec. 85 (b) and (c),
Tax Code) may be taxed for estate tax
purposes, the theory being that the
transferor’s control thereon extends up to
the time of his death.
Question: What is the nature, purpose and
object of Estate Tax?
Answer:
Nature:
It is a transfer tax (an excise tax on the right
of transmitting property), not a property tax.
Unlike the old inheritance tax, estate tax is
a tax on the right to transfer and not the
right to inherit property.
Purpose:
To tax the shift of economic benefits and
enjoyment of property from the dead to the
living.
Taxable objects/subjects:
1. Right/privilege of the deceased person
to transmit his/her estate to his/her
lawful heirs and beneficiaries at the time
of death;
2. Certain transfers, during his lifetime,
which are made by law as equivalent to
testamentary disposition.
Question: When does estate tax accrue?
Answer: The estate tax accrues as of the
death of the decedent and the accrual of
the tax is distinct from the obligation to pay
the same. Upon the death of the decedent,
succession takes place and the right of the
State to tax the privilege to transmit the
estate vests instantly upon death. Further,
estate taxation is governed by the statute in
force at the time of death of the decedent.
Question: B died, leaving a will and
considerable amount of real and personal
properties. His will provides that his money
will be given to his nephew, as well as the
real estate owned by him.
The RTC for the best interests of the estate
appointed a trustee to administer the real
properties which, under the will, were to
pass to nephew ten years after.
X, Collector of Internal Revenue, assessed
inheritance tax against the estate which
includes penalty and surcharge. He filed a
motion in the testamentary proceedings so
that the trustee will be ordered to pay the
amount due. The trustee paid the amount in
protest after RTC granted the motion.
The trustee claimed that the inheritance tax
should have been assessed after 10
Years and asked for a refund but it was
declined.
When should the tax be assessed?
18
Answer: The Supreme Court ruled that
transmission by inheritance is taxable at the
time of the predecessor's death,
notwithstanding the postponement of the
actual possession or enjoyment of the
estate by the beneficiary, and the tax
measured by the value of the property
transmitted at that time regardless of its
appreciation or depreciation. (Lorenzo vs.
Posadas Jr. G.R. No. L-43082, June 18,
1937)
Question: What is the valuation of Gross
Estate for purposes of estate tax?
Answer:
General Rule: The Gross Estate is the Fair
Market Value at the time of the decedent’s
death [Sec. 5, RR 12-2018]
Real Property
1. Appraised value, whichever is higher
between:
a. Fair Market Value, as determined by
the Commissioner of Internal
Revenue (zonal value) or
b. FMV, as shown in the schedule of
values fixed by the Provincial or City
Assessor.
2. If there is an improvement, the value of
improvement is the construction cost
per building permit or the FMV per
latest tax declaration. [Sec. 5, RR 12-
2018]
Personal Property
1. Fair Market Value at the time of death.
2. Shares of stocks
a. If listed = FMV is the mean between the
highest and lowest quotation at a date
nearest the date of death, if none is
available on the date of death
b. If unlisted = book value at the time of
death (common shares) or par value
(preferred shares) [Sec. 5, RR 12-2018]

Note: In determining the book value,
appraisal surplus and the value assigned to
preferred shares, if any, shall not be
considered. The valuation of unlisted
shares shall be exempt from the provisions
of RR 6-2013, which prescribes the use of
the Adjusted Net Asset Method. [Sec. 5,
RR 12-2018]
Question: Juan, a Filipino citizen, married
to Maria, died in a car accident in 2007.
The spouses owned among others a 50-
hectare agricultural land with current fair
market value of 10 million pesos, which
was subject matter of a Joint Venture
Agreement about to be implemented with a
real estate development company. It is said
that the land he bought 50 years ago for 2
million pesos. However, because of the
conversion of this agricultural land into first
class residential and commercial centers,
the prices of real properties have doubled
after the administrator of the estate of Juan
and the real estate developer announced
the plan in 2008.
The administrator of the Estate of Juan filed
the tax return by including in the gross
estate the real property at 2 million pesos.
However, the BIR issued a deficiency
estate tax assessment, by valuing the real
property at 20 million pesos.
a. Is the BIR correct in valuing the real
property at 20 million pesos?
b. What is the correct value to be used for
estate tax purposes?
Answer:
a. No, the BIR is wrong in valuing the real
property at 20 million pesos.
The value of the gross estate of the
decedent shall be determined by
including the value at the time of the
death of all property, real or personal,
tangible or intangible, wherever
situated. (Sec. 85, NIRC).
In the instant case, the 20 million pesos
represent the value of the real property
in 2008, after the announcement by the
19
joint venture partners that development
plans would be pursued in the area.
b. The value that should be used for
estate tax purpose is 10 million pesos.
Since the fair market value of the real
property at the time of death of Juan in
2007 is 10 million pesos, that should be
the one used for purposes of
determining the gross estate. (2008 Bar
Question) (Lorenzo v. Posadas, 64 Phil.
353)
Question: What is the current rate of the
estate tax pursuant to TRAIN Law?
Answer: The net estate of every decedent,
whether resident or non-resident of the
Philippines, as determined in accordance
with the NIRC, shall be subject to an estate
tax at the rate of six percent. (Sec. 84,
NIRC, as amended by R.A. 10963 [TRAIN],
effective January 1, 2018).
Question: What are the kinds of
Justification Theories for the imposition of
Estate Tax? Define each.
Answer:
1. Benefits-received theory – The State
collects the tax because of the services
it renders in the distribution of the estate
of the decedent, either by law or in
accordance with his will.
2. Privilege theory or state partnership
theory – Succession to the property of a
deceased person is not a right but a
privilege granted by the State and
consequently, the legislature can
constitutionally burden such succession
with a tax.
3. Ability-to-pay theory – Receipt of
inheritance is in the nature of unearned
wealth which creates an ability to pay
the tax and thus contributes to
government income.
4. Redistribution of wealth theory – The
imposition of estate tax reduces the
property received by the successor,
 which helps promote a more equitable
distribution of wealth in society.
B. Classification of Decedent
Composition of Gross Estate
Question: What are the classifications of
decedent for estate tax purposes?
Answer: The decedent may be classified
into:
1. Citizen (Resident and Non-resident)
and resident alien decedent
2. Non-resident alien decedent.
Question: What is the concept
“Residence” for estate tax purposes?
Answer: “Residence” refers to the
permanent home(domicile), the place to
which whenever absent, for business or
pleasure, one intends to return (animus
revertendi), and depends on facts and
circumstances, in the sense that disclose
intent. It is not necessarily the actual place
of residence.
Question: What are the properties
includible in the gross estate of the
decedent?
Suggested Answer: The properties
includible in the gross estate of the
decedent would depend on whether or not
the decedent is a citizen or alien and
whether or not the alien decedent is a
resident of the Philippines at the time of his
death. Thus,
Citizen and resident alien decedent:
a. Real property wherever situated;
b. Tangible personal property wherever
situated;
c. Intangible personal property wherever
situated.
and
Non-resident alien decedent:
a. Real property situated in the
Philippines;
b. Tangible personal property situated in
the Philippines;
c. Intangible personal property with a situs
in the Philippines, unless exempted on
the basis of reciprocity.
Question: What is the principle of mobilia
sequuntur personam?
Suggested Answer: The principle of
of
mobilia sequuntur personam refers to the
principle that taxation of intangible personal
property generally follows the residence or
domicile of the owner thereof.
Exception: When it is inconsistent with
express provisions of law.
Exception to the exception: Rule of
Reciprocity with respect to an NRA.
Question: What are those intangible
properties which are considered situated in
the Philippines in which the principle of
mobilia sequuntur personam is not
applicable notwithstanding?
Suggested Answer:
1. Franchise which must be exercised in
the Philippines.
2. Shares, obligations or bonds issued by
any corporation or sociedad anonima
organized or constituted in the
Philippines in accordance with its laws.
3. Shares, obligations or bonds issued by
any foreign corporation 85% of the
business of which is located in the
Philippines.
4. Shares, obligations or bonds issued by
any foreign corporation if such shares,
20
 obligations or bonds have acquired a
business situs in the Philippines.
5. Shares or rights in any partnership,
business or industry established in the
Philippines.
Question: What is the Rule of Reciprocity
of intangible properties for estate tax
purposes?
Suggested Answer: There is reciprocity if
the foreign country of which the decedent
was a citizen and resident at the time of his
death:
1. Did not impose a transfer tax of any
character, in respect of intangible
personal property of citizens of the
Philippines not residing in that foreign
country; OR
2. Allowed a similar exemption from
transfer tax in respect of intangible
personal property owned by citizens of
the Philippines not residing in that
country.
If there is reciprocity, the intangible
personal property of an NRA shall not be
included in his gross estate. If there is no
reciprocity, such intangible personal
property will be included. [Sec. 104, NIRC]
Question: X is the only son of Y who was a
resident in Hong Kong. Y died in Hong
Kong leaving to X 1 million shares of stock
in a corporation organized and existing
under the laws of the Republic of the
Philippines. The said shares were held in
trust for Y by the corporate secretary of the
corporation and the latter can vote the
shares and receive dividends for Janina.
The government of Hong Kong taxed the
shares on the ground that Y was domiciled
in Hong Kong at the time of her death.
Can the CIR of the Philippines also tax the
same shares?
Suggested Answer: Yes.
Under Sec. 85, NIRC, the property being a
property located in the Philippines, it is
21
subject to the Philippine estate tax
irrespective of the citizenship or residence
of the decedent.
Moreover, shares, obligations or bonds
issued by any corporation or sociedad
anonima organized or constituted in the
Philippines in accordance with its laws are
intangible properties which are considered
situated in the Philippines [Sec 104, NIRC]
However, if Y is a non-resident alien at the
time of his death, the transmission of the
shares of stock can only be taxed applying
the principle of reciprocity. (Sec. 104,
NIRC) (2016 Bar Question) CIR vs Fisher,
G.R. No. L-11668, January 28, 1961.
Question: Cholo, a Filipino residing in
Texas, USA died after undergoing a
surgery. He left to his wife and daughters
several properties, to wit:
1. Familiy Home in Quezon City;
2. Condominium unit in Makati City;
3.Proceeds of health insurance from an
insurance company in the Philippines;
4. Land in Texas, USA.
What are the items that must be considered
as part of the gross estate income of
Cholo?
(2014 Bar Question)
Suggested Answer: All items of properties
enumerated in the problem shall form part
of the gross estate of Cholo.
The composition of the gross estate of a
decedent who is a Filipino citizen shall
include all of his properties, real or
personal, tangible or intangible, wherever
situated. (Sec. 85, NIRC)
Question: What are the items includible in
the Gross Estate?
Suggested Answer: Items to be included
in the Gross Estate [Sec. 85, NIRC]:
1. Decedent’s interest [Sec. 85(A), NIRC]
– This includes property owned by the
decedent actually and physically
present in his estate at the time of his
death.
2. Properties not physically in the estate,
such as:
a. Transfers in contemplation of death
[Sec. 85(B), NIRC];
b. Revocable transfers [Sec. 85(C),
NIRC];
c. Property passing under general
power of appointment [Sec. 85(D),
NIRC];
d. Proceeds of life insurance [Sec.
85(E), NIRC];
e. Prior interest [Sec. 85(F), NIRC]
f. Transfers for insufficient
consideration [Sec. 85(G), NIRC].
Question: What are the kinds of property
embraced under decedent’s interest?
Suggested Answer: All property owned by
the decedent to the extent of his interest
therein at the time of his death. This
includes any interest, having value or
capable of being valued or transferred, in
property owned or possessed by the
decedent at the time of his death., This also
includes those transferred by the decedent
at the time of his death.
Examples:
a. dividend declared on or before death,
but is received by the estate after death
b. partnership profits which have accrued
before his death, but received after
death
c. proceeds of a life insurance policy
payable to a designated revocable
beneficiary
d. right of usufruct
Question: What are transfers
contemplation of death?
Suggested Answer: It is a transfer in
contemplation of death if the decedent
either has retained for his life or for any
period which does not in fact end before his
death:
a. the possession or enjoyment of, or the
right to the income from the property, or
b. the right, either alone or in conjunction
with any person, to designate the
person who shall possess or enjoy the
property or the income therefrom.
Exception: In case of a bona fide sale for
an adequate and full consideration in
money or money's worth.
Note: The term “in contemplation of death”
does not refer to the general expectation of
death. The words mean that it is the
thought of death, as a controlling motive,
which induces the disposition of the
property for the purpose of avoiding the tax.
The decedent’s motive is a question of fact.
Thus, the imminence of death may afford
convincing evidence of the impelling cause
of transfer.
Question: What are those motives
associated with life that precludes the
category of transfer in contemplation of
death?
Suggested Answer:
1. To relieve the donor from the burden of
management;
2. To save income or property tax;
3. To settle family litigated and non-
litigated disputes;
4. To provide independent income for
dependents;
5. To see the children enjoy the property
while the donor is alive;
6. To protect family from hazards of
business operations; and
7. To reward services rendered.
in
22
Question: Mr. Tan, 80 years old and
suffering from a chronic disease, decide to
sell for value and sufficient consideration, a
house and lot to his daughter. He died one
year after. In the settlement of Mr. Tan’s
estate, the BIR argued that the house and
lot should therefore form part of the gross
estate for tax purposes. Is the BIR correct?
(2013 Bar Question).
Suggested Answer: No.
Under Sec. 85 [B], NIRC, to qualify as a
transfer in contemplation of death, the
transfer must be either without
consideration or for insufficient
consideration.
Since the house and lot were sold for
valuable and sufficient consideration, there
is no transfer in contemplation of death for
estate tax purposes.
Question: Mr. Facundo, 85 years old and
has chronic cardiac disease wrote a will
and on the same day, made several inter
vivos gifts to his children. 5 days later, his
eyes rolled up, toes pointing away from his
legs, hands in the air and died.
Are the inter vivos gifts considered
transfers in contemplation of death for
purposes of determining properties to be
included in his gross estate?
Suggested Answer: Yes.
Under the law, when the donor makes his
will within a short time of, or simultaneously
with the making of gifts, the gifts are
considered as having been made in
contemplation of death. (De Roces vs.
Posadas, 58 phils. 108 [1933].
In the instant case, the intention of the
donor in making the inter vivos gifts is to
avoid the imposition of the estate tax and
since the donees are likewise his foced
heirs who are called upon to inherit, it will
create a presumption juris tantum that said
donations were made mortis causa.
23
Hence, the properties donated shall be
included as part of Mr. Facundo’s estate.
(2001 Bar Question)
Question: What is a revocable transfer for
purposes of determining gross estate of the
decedent?
Suggested Answer:
General Rule: It is a revocable transfer
where:
1. There is a transfer by trust or otherwise
Exception: In case of a bona fide sale
for an adequate and full consideration in
money or money’s worth
2. The enjoyment thereof was subject at
the date of his death to any change
through the exercise of a power (in
whatever capacity exercisable) by:
a. The decedent alone;
b. The decedent in conjunction with
any other person (without regard to
when or from what source the
decedent acquired such power), to
alter, amend, revoke, or terminate;
or
c. Where any such power is
relinquished in contemplation of the
decedent death.
Note: The power to alter, amend or revoke
shall be considered to exist on the date of
the decedent’s death even though:
a) The exercise of the power is subject to
a precedent giving of notice, or
b) The alteration, amendment or
revocation takes effect only on the
expiration of a stated period after the
exercise of the power, whether or not
on or before the date of the decedent’s
death notice has been given or the
power has been exercised.
c) If notice has not been given or the
power has not been exercised before
the date of his death, such notice shall
be considered to have been given, or
the power exercised, on the date of his
death.
Question: What is the meaning of “power
of appointment” for purposes of determining
the decedent’s gross estate?
Answer: Under Sec. 85 (D) of the NIRC, a
power of appointment in its general sense
is the power to designate the person or
property who shall enjoy and possess
certain property from a donor or a prior
decedent.
Question: Distinguish General Power of
Appointment (GPA) from Special Power of
Appointment (SPA).
Answer: It is general when it gives to the
done/holder the power to appoint any
person he pleases including himself, thus
having as full dominion over the property as
though he owned it. Hence, property
subject to general power of appointment at
the time of death will be included in the
holder’s estate.
While it is special when the decedent can
appoint only among a designated class of
persons other than himself, his estate, the
creditors of his estate. Property subject to a
special power of appointment is not
included in the holder’s estate.
Question: Is the transfer of property under
general power of appointment includible in
the gross estate of the decedent for
purposes of estate tax?
Answer: Yes.
Sec. 85 (D) of NIRC provides that any
property passing under a GPA is includible
as part of a decedent’s gross estate if the
property arises under a GPA exercised by
the decedent:
1. By will; or
2. By deed executed in contemplation of,
or intended to take effect in possession
or enjoyment at or after his death; or
24
3. By deed under which he has retained
for his life or any period not
ascertainable without reference to his
death or for any period which does not
in fact end before his death –
a. The possession or enjoyment of, or
the right to the income from the
property; or
b. The right, either alone or in
conjunction with any person, to
designate the persons who shall
enjoy or possess the property or the
income therefrom.
Exception:
Where the transfer is a bona fide sale or for
an adequate and full consideration in
money or money’s worth.
Question: Mr. Mendoza owns a 15-door
apartment which is being rented out at
150,000 pesos monthly. It is valued at
25,000,000 pesos. Mr. Mendoza
transferred the property to Mr. Dela Cruz
under a general power of appointment for a
consideration of 25,000,000 pesos subject
to the condition that the latter cannot
dispose of the property during the former’s
lifetime.
Is the transfer of property includible as part
of Mr. Mendoza’s gross estate for estate
tax purpose?
Answer: No, the property should not be
included as part of the gross estate
because there was a bona fide sale for
adequate and full consideration in money.
(For illustration on property passing under
GPA when NOT includible as part of
decedent’s gross estate where transfer is a
bona fide sale) (Taxation Volume III by
Domondon).
Question: In 1999, X purchased from his
friend, Y, a painting for 500,000 pesos. The
fair market value of the painting at the time
of purchase was 1 million pesos.
In 2001, X died. In his last will and
testament, bequeathed the painting,
already worth 1.5 million pesos, to his only
son, Z. The will also granted Z the power to
appoint only his wife W, as successor to the
painting in the event of Z’s death.
Z died in 2007, and W his wife, succeeded
to the property.
a. Should the painting be included in the
gross estate of X in 2001 and thus be
subject to estate tax?
b. Should the painting be included in the
gross estate of Z in 2007, and thus, be
subject to estate tax? (2009 Bar
Question)
Answer:
a. Yes.
Sec. 85 (D) of NIRC provides that any
property passing under a GPA is
includible as part of a decedent’s gross
estate if the property arises under a
GPA exercised by the decedent:
1. By will; or
2. By deed executed in contemplation
of, or intended to take effect in
possession or enjoyment at or after
his death; or
3. By deed under which he has
retained for his life or any period not
ascertainable without reference to
his death or for any period which
does not in fact end before his
death –
a. The possession or enjoyment of,
or the right to the income from
the property; or
b. The right, either alone or in
conjunction with any person, to
designate the persons who shall
enjoy or possess the property or
the income therefrom.
b. No.
Only property passing under a general
power of appointment is includible as
part of the gross estate of the decedent.
In this case, the painting has to be
transferred by Z to W, his wife based on
the will of his father X. The power of
appointment granted by X to Z is
specific power of appointment.
25
Question: What are the factors to be
considered to determine whether or not the
proceeds of the insurance includible in the
gross estate of the decedent?
Answer: Inclusion of proceeds of life
insurance to the gross estate depends on
the following, to wit:
1. the designated beneficiary;
2. the revocability of the insurance; and
3. the period and source of funds used in
premiums.
Question: When is the proceeds of a life
insurance includible in the gross estate of
the decedent for estate tax purposes?
Answer: Proceeds of life insurance taken
out by the decedent on his own life shall be
included in the gross estate when the
beneficiary is:
1. The estate of the deceased, his
executor or administrator, irrespective
of whether or not the insured retained
the power of revocation; or
2. Any beneficiary designated in the
policy, except when designation is
irrevocable.
Question: When is the proceeds of a life
insurance NOT includible in the gross
estate of the decedent for estate tax
purposes?
Answer:
1. Irrevocably designated; how done
a. By expressly stating it in the policy
(if not stated, the designation is
PRESUMED to be REVOCABLE);
b. By not changing the beneficiary
during the lifetime of the insured, it
is deemed irrevocable. [Sec. 11, RA
10607 (2013)]
2. Accident insurance proceeds as the Tax
Code specifically mentions only life
insurance policies.
3. Proceeds of a group insurance policy
taken out by a company for its
employees.
4. Amount receivable by any beneficiary
irrevocably designated in the policy of
insurance by the insured. The transfer
is absolute and the insured did not
retain any legal interest in the
insurance.
5. Proceeds of insurance policies issued
by the GSIS are exempt from all taxes;
[PD 1146]
6. Benefits accruing under the SSS Law
[RA 1161]
7. Proceeds of life insurance payable to
heirs of deceased members of military
personnel [RA 360]
Question: In May 2017, X took out a life
insurance policy on his own life in the
amount of 3 million pesos. He designated
his son, S, as his beneficiary with respect to
1.5 million pesos, reserving his right to
substitute him for another. While the other
1.5 million, he designated his friend Y as
beneficiary expressly stipulated in the
insurance policy. X died in September
2020. Are the proceeds of life insurance to
form part of the gross estate of X? Explain.
(2003 Bar Question)
Answer: Only the proceed of 1.5 million
given to son S, shall form part of the gross
estate of X.
Under the Tax Code, proceeds of life
insurance shall form part of the gross
estate of the decedent to the extent of the
amount receivable by the beneficiary
designated in the policy of insurance except
when it is expressly stipulated that the
designation of the beneficiary is
irrevocable.
In the instant case, only the designation of
Y is irrevocable, and the decedent reserved
the right to substitute S as beneficiary for
another person. Accordingly, the proceeds
received by S shall be included in the gross
estate of X. (Sec. 85 [E] of NIRC.
26
Question: The widow and children of a
passenger who died in an airplane crash
were paid 350,000 pesos by the airline.
This figure was released after negotiation
between the heirs of the deceased and the
insurer of the airlines, the latter having
received indubitable evidence that the
deceased had a net income of 35,000
pesos at the time of his death and that ten
years productive years would have insured
financial stability for his family. Should the
heirs declare this amount in the estate tax
returns? State your reason. (Bar Question
adopted- illustration, Taxation vol. III,
Domondon).
Answer: No. The heirs should not declare
the 350,000 in the estate tax returns.
The 350,000 is not part of the gross estate
of the passenger decedent because the
proceeds are not from an insurance policy
taken by the decedent on his own life. (Art.
85 of the NIRC)
Question: X Corporation took a Keyman
insurance on the life of its President, Mr.
Cruz, designating Mr. Cruz’s wife as its
revocable beneficiary. In the event of death
of Mr. Cruz, will the insurance proceeds
form part of the gross estate of Mr. Cruz?
(Bar Question- adopted- illustration,
Taxation vol. III, Domondon)
Answer: No. The insurance proceeds do
not form part of the gross estate of Mr.
Cruz.
The insurance proceeds are not part of the
property of Mr. Cruz at the time of his death
because he was not the one who procured
the insurance on his own life and are not
receivable by his estate.
Question: How do you determine whether Question: What are the two consideration
the insurance proceeds are to be included that allowable deductions may be made
or excluded from the decedent married from the gross estate of the decedent?
person’s gross estate?

Answer: The allowable deductions may be

Answer: To determine the conjugal or made depending on:
separate character of proceeds, the
1. Whether or not the decedent is a citizen
following factors are considered:
or alien.
1. Policy was taken before marriage –
2. Whether or not the alien decedent is a
source of funds determines ownership
of the proceeds of life insurance resident of the Philippines at the time of his
death.
2. Policy was taken during marriage:
a. Beneficiary is estate of the insured –
proceeds are presumed conjugal;
hence, one-half share of the
surviving spouse is not taxable Question: What are the allowable
deductions to the estate of Citizen
b. Beneficiary is third person –
(Resident Citizen or Non-Resident Citizen)
proceeds are payable to beneficiary
even if premiums were paid out of and Resident Alien decedent? RC/NRC/RA
the conjugal interest.

Answer:
1. Ordinary deductions:
Question: What is the rule on transfers for a. Losses, indebtedness, taxes (LIT)
insufficient consideration for estate tax
purposes?
− Claims against the estate

Answer: Any (1) transfer in contemplation − Claims against insolvent

of death, (2) revocable transfer or (3) persons
property passing under GPA that is made, − Unpaid mortgages
created, exercised or relinquished for a
− Taxes
consideration in money or money’s worth,
but is NOT a bona fide sale for an adequate − Casualty losses
and full consideration in money or money’s
b. Vanishing deductions (property
worth.
previously taxed)
The value to be included in the gross estate
c. Transfers for public use
is the excess of the FMV of the property at
the time of the decedent’s death over the
consideration received. 2. Special deductions
The transfer is subject to estate tax if the 3 a. Family home (max of P10Million)
instances mentioned are present.
b. Standard deduction (fixed at
Otherwise, it is subject to donor’s tax.
P5Million)
c. Amounts received under R.A. 4917

C. Allowable Deductions and

3. Net share of the surviving spouse [Sec.
Exclusions from Estate
6, RR 12-2018]

27
Question: What are the allowable
deductions to the estate of Non-Resident
Alien decedent (NRA)?
Question: Mr. X, a Filipino residing in
Alabama, USA, died on January 2, 2020
Answer: after undergoing a major heart surgery. He
left behind to his wife and two kids several
1. Ordinary deductions:
properties, to wit:
a. Proportionate deductions for LIT
1. Family Home in Makati City;
− Claims against the estate
2. Condominium unit in Las Pinas City;
− Claims against insolvent
3. Proceeds of health insurance from Take
persons
Care, a health maintenance organization in
− Unpaid mortgages the Philippines;
− Taxes 4. Land in Alabama, USA
− Casualty losses The following expenses were paid:
b. Vanishing deductions (property 1. Funeral expenses;
previously taxed)
2. Medical Expenses;
c. Transfers for public use
3. Judicial Expenses in the estate
proceedings.
2. Special deduction What are the items that may be considered
Standard Deduction of P500,000 as deductions from the gross estate? (2014
Bar Question and applying amendments by
R.A. 10963 TRAIN, effective January 1,
3. Net share of the surviving spouse 2018).

Answer: Being a non-resident citizen, the

items deductible are the following, to wit:
N.B: No deduction for Family home and
Amounts received under R.A. 4917 [Sec. 7, As a special deduction, family home,
RR 12-2018] allowable deduction must be in an amount
equivalent to whichever is lowest of:
a. the current FMV of the family home as
declared or included in the gross estate, or
Question: What is the allowable amount of
b. the extent of the decedent’s interest
funeral expenses, medical expenses and
(whether conjugal/community or exclusive
judicial expense in the estate proceedings
property), or
that can be deducted from the gross estate
of a decedent? c. P10,000,000. [AMPONGAN, 2017 and
TABAG, 2019].
Another special deduction is standard
Answer: There is no allowable amount of
deduction, an amount equivalent to
funeral expenses, medical expenses and
P5,000,000 shall be deducted from the
judicial expense that can be deducted from
gross estate without need of substantiation.
the decedent’s gross estate.
Moreover, under TRAIN Law, funeral,
Under the Tax Code (R.A. 10963) or TRAIN
medical and judicial expenses in the estate
LAW, funeral expenses, medical expenses
proceedings are no longer deductible from
and judicial expense (in the estate
the gross estate of the decedent.
proceeding) deduction has been removed
from the allowable deduction of the gross
estate of a decedent.

28
Question: What is the general meaning of
“claims” in claims against the estate for
estate tax purposes?
Answer: “Claims” generally mean debts or
demands of a pecuniary nature which could
have been enforced against the deceased
in his lifetime and could have been reduced
to simple money judgments. Claims against
the estate or indebtedness in respect of
property may arise out of contract, tort, or
operation of law.
Question: What are the requirements for
the deductibility of claims against the
estate?
Answer:
a. The liability represents a personal
obligation of the deceased existing at
the time of his death;
b. The liability was contracted in good faith
and for adequate and full consideration
in money or money’s worth;
c. The claim must be a debt or claim
which is valid in law and enforceable in
court;
d. The indebtedness must not have been
condoned by the creditor or the action
to collect from the decedent must not
have prescribed; and
e. They must be reasonably certain in
amount, and substantiated.
Question: What are the requisites for
substantiation of claims against the estate?
Answer:
In case of simple loan (including advances):
a. The debt instrument must be duly
notarized at the time the indebtedness
was incurred, except for loans granted
by financial institutions where
29
notarization is not part of the business
practice/policy.
b. Duly notarized Certification from the
creditor as to the unpaid balance of the
debt, including interest as of the time of
death.
c. Proof of financial capacity of the creditor
to lend the amount at the time the loan
was granted, as well as its latest
audited balance sheet showing the
unpaid balance of the decedent-debtor.
d. A statement under oath executed by the
administrator or executor of the estate
reflecting the disposition of the
proceeds of the loan if it was contracted
within 3 years prior to the death of the
decedent.
If the unpaid obligation arose from
purchase of goods or services:
a. Documents evidencing the purchase of
goods or service (e.g., sales
invoice/delivery receipt or contract for
services), and statement of account
given by the creditor
b. Duly notarized certification from the
creditor as to the unpaid balance of the
debt, including interest as of the time of
death.
c. Certified true copy of the latest audited
balance sheet of the creditor with a
detailed schedule of its receivable
showing the unpaid balance of the
decedent-debtor. A certified true copy of
the updated latest subsidiary
ledger/records of the debtor- decedent,
should likewise be submitted.
Note: Where the settlement is made
through the Court in a testate or intestate
proceeding, pertinent documents filed with
the Court evidencing the claims against the
estate, and the Court Order approving the
said claims, if already issued, in addition to
the documents mentioned in the preceding
paragraphs.
Question: State the conditions for allowing
“claims against the estate” as deductions
from the gross estate of a citizen or
resident alien for the purpose of imposing
estate tax.
Answer: In order that claims against the
estate may be allowed as deductions from
the gross estate of a citizen or resident
alien for purposes of imposing the estate
tax, the law requires that at the time the
indebtedness was incurred, the debt
instrument was duly notarized.
In addition, if the loan was contracted within
three years before the death of the
decedent, the executor or administrator
shall submit a statement showing the
disposition of the proceeds of the loan.
[ Sec. 86 (a) (1) c of the NIRC].
Question: What are the requirements in
order that claims against insolvent persons
be deductible from the gross estate for
purposes of estate tax?
Answer: Under Sec. 86 (d), NIRC, for
claims against insolvent persons to be
deductible from the gross estate, it is
important to show that:
1. The full amount owed by the insolvent
must first be included in the decedent’s
gross estate; and
2. The incapacity of the debtor to pay his
obligation should be proven, although a
judicial declaration of insolvency is not
required. [Monserrat v. Collector of Internal
Revenue, CTA Case No. 11 (1955)]
Note: If the insolvent could only pay a
partial amount, the full amount owed shall
be included in the gross estate, and the
amount uncollectible shall be allowed as a
deduction.
30
Question: What are the requisites for
unpaid mortgages to be deductible from
gross estate for purposes of estate tax?
Answer:
a. The value of the decedent’s interest
therein, undiminished by such mortgage or
indebtedness, is included in the value of the
gross estates.
b. The mortgages were contracted bona
fide and for an adequate and full
consideration in money or money’s worth.
Note: In case the loan of the decedent is
only an accommodation loan where the
loan proceeds went to another person, the
value of the unpaid loan must be included
as a receivable of the estate. If there is a
legal impediment to recognize the same as
a receivable of the estate, said unpaid
obligation shall not be allowed as a
deduction. In all instances, the mortgaged
property, to the extent of the decedent’s
interest therein, should always form part of
the gross taxable estate.
Question: What are the requirements for
unpaid taxes to be deductible from gross
estate for estate tax purposes?
Answer:
a. Taxes which have accrued as of or
before the death of the decedent, and
b. Unpaid as of the time of his death,
regardless of whether or not it was
incurred in connection with trade or
business.
Question: What are the requirements for
casualty losses to be deductible from gross
estate for estate tax purposes?
Answer:
a. Incurred during the settlement of the
estate
b. Arising from fires, storms, shipwreck, or
other casualties, or from robbery, theft,
or embezzlement.
c. Not compensated for by insurance or
otherwise
d. At the filing of the estate tax return,
such losses have NOT been claimed as
a deduction for income tax purposes in
an income tax return.
e. Incurred not later than the last day for
the payment of the estate tax (i.e., 1
YEAR from decedent’s death).
Therefore, all casualty losses after the
prescribed period from the payment of
tax are not deductible.
Value to deduct: The difference of the FMV
before and after incurring the loss.
NB: Casualty loss can be allowed as
deduction in one instance only, either for
income tax or estate tax purposes.
Question: Define vanishing deduction.
Answer: This is an amount allowed to
reduce the gross estate where the property
was previously subjected to transfer taxes,
either donor’s tax or estate tax.
Question: What are the requirements for
property previously taxed to be deductible
from gross estate for purposes of estate
tax?
Answer
1. Death – The present decedent died
within 5 YEARS from the date of death
of the prior decedent OR the date of gift
2. Identity of the property – The property
can be identified as the one received
from prior decedent or donor.
31
3. Inclusion of the property – The property
must have formed part of the gross
estate situated in the Philippines of the
prior decedent, or have been included
in the total amount of the gifts of the
donor.
4. Previous taxation of property – The
estate tax on the prior succession, or
the donor’s tax on the gift must have
been finally determined and paid by the
prior decedent or by the donor.
5. No previous vanishing deduction on the
property – No such deduction on the
property was allowed in determining the
value of the net estate of the prior
decedent. This is intended to preclude
the application of vanishing deduction
on the same property more than once.
Question: What are the steps in computing
the amount of vanishing deduction?
Answer:
1. Lower value – Identify the property and
its proper value (i.e., the value at the
time previously taxed or the value of the
property in the present estate,
whichever is lower)
2. Initial Basis - Deduct any mortgage or
lien paid by the present decedent to
arrive at the initial basis.
3. Actual or Final Basis - From the initial
basis, deduct the proportionate amount
for:
a) claims against the estate,
b) claims against insolvent persons,
c) unpaid mortgages, taxes and
casualty losses, and
d) transfers for public use [pars. 2, 3, 4
and 6 of Sec. 86(A) of the NIRC]
based on the ratio of the initial basis
over the gross estate. Thus,
deductions are only Losses
Indebtedness and Taxes (LIT) and
Transfer for Public Use (TPU).
4. Rate - Multiply the actual basis by the 5. The value of the property given is
applicable rate based on the length of included in the gross estate.
time the property has been acquired:
More than Not more than Rate
- 1 year 100%
Question: What is family home for
1 year 2 years 80% purposes of estate tax?
2 years 3 years 60%
3 years 4 years 40% Answer: The dwelling house, including the
land on which it is situated, where the
4 years 5 years 20%
husband and wife, or a head of the family,
and members of their family reside, as
certified to by the Barangay Captain of the
locality. It is deemed constituted on the
Question: What is the formula vanishing house and lot from the time it is actually
deduction? occupied as the family residence and
considered as such for as long as any of its
beneficiaries actually resides therein.
Answer:
Temporary absence from the constituted
FORMULA:
family home due to travel or studies or work
Value Taken of Property (Lower) abroad, etc. does not interrupt actual
Less: Mortgage debt paid, if any occupancy. The family home is generally
characterized by permanency, that is, the
= Initial Basis place to which one still intends to return.
Less: Proportionate Deduction It must be part of the ACP/CPG/exclusive
= Actual or Final Basis property of the decedent. It may also be
constituted by an unmarried head of a
Multiplied by Applicable Rate
family on his or her own property.
= VANISHING DEDUCTION

Note: Amount of Vanishing Deduction is

Question: What are the requirements for
deducted from the exclusive property of the
family home to be deductible from gross
decedent, NOT from the conjugal property.
estate for purposes of estate tax?

Question: What are the requisites for
transfers for public use to be deducted from
gross estate for estate tax purposes?
Answer:
1. The disposition is in a last will and
testament
2. To take effect after death.
3. In favor of the Government of the
Republic of the Philippines, or any
political subdivision thereof
4. Exclusively for public purposes.
Answer:
1. The decedent was married (or if single,
was the head of the family).
2. Along with the decedent, any of the
beneficiaries must be dwelling in the
family home.
3. The family home as well as the land on
which it stands must be owned by the
decedent.
4. The family home must be the actual
residential home of the decedent and
his family at the time of his death, as
certified by the Barangay Captain of the
locality where the same is situated.

32
5. The total value of the family home must
be included as part of the gross estate.
6. Allowable deduction must be in an
amount equivalent to whichever is
lowest of:
a. the current FMV of the family home
as declared or included in the gross
estate, or
b. the extent of the decedent’s interest
(whether conjugal/community or
exclusive property), or
c. P10,000,000.
Question: Who are considered
beneficiaries of family home?
This includes retirement benefits given by
private firms with a reasonable private
benefit plan, if the employee is not less
than 50 years old and has been with the
same employer for at least 10 years. Such
benefit may be availed of only once.
Question: What is the treatment for the net
share of the surviving spouse in the gross
estate of the decedent for estate taxation?
Answer: The amount deductible from the
net estate of the decedent is the net share
of the surviving spouse in the conjugal
property. The net share is equivalent to 1⁄2
of the conjugal property after deducting the
obligations chargeable to such property.

Answer:
1. The husband and wife, or an unmarried
person who is the head of a family; and Question: What is Estate Tax Credit?
2. Their parents, ascendants,
descendants, brothers and sisters,
Answer: Estate Tax Credit is a remedy
whether the relationship be legitimate or
against international double taxation to
illegitimate, who are living in the family
minimize the onerous effect of taxing the
home and who depend upon the head
same property twice.
of the family for legal support.

General Rule: The estate tax imposed by

the NIRC shall be credited with the
Question: What is the amount of standard amounts of any estate tax imposed by the
deduction that is deductible from gross authority of a foreign country. [Sec. 86(E),
estate for estate taxation? NIRC]

Answer: An amount equivalent to Who may claim: RC/NRC/RA

P5,000,000 shall be deducted from the
gross estate without need of substantiation.
Only the estate of a decedent who was a
For NRAs, the Standard Deduction is
citizen or a resident of the Philippines at the
P500,000 [Sec. 86 (B)(1)].
time of his death can claim tax credit for
Amounts Received by Heirs Under RA any estate tax paid to a foreign country.
49171 [Sec. 86(A)(8), NIRC]:
Any amount received by the heirs from the
decedent’s employer as a consequence of
the death of the decedent-employee in Question: What are the limitations on
accordance with RA 4917, provided that Estate Tax Credit?
such amount is included in the gross estate
of the decedent.
Answer:

33
1. Specific Country Limitation; Limit A
The amount of the credit in respect to
the tax paid to any country shall not
exceed the same proportion of the tax
against which such credit is taken,
which the decedent's net estate situated
within such country taxable under the
tax code bears to his entire net estate.
[Sec. 86(E)(2)(a), NIRC].
2. Global Limitation; Limit B
The total amount of the credit shall not
exceed the same proportion of the tax
against which such credit is taken,
which the decedent's net estate situated
outside the Philippines taxable under
the tax code bears to his entire net
estate. [Sec. 86(E)(2)(b), NIRC]
D. Estate Tax Return
Question: When is the filing of Estate Tax
Return required?
Answer: When Required (Copies in
duplicate) [Sec. 90 (A), NIRC]
1. In all cases of transfers subject to
estate tax, or
2. Regardless of the gross value of the
estate, when the said estate consists of
registered or registrable property such
as real property, motor vehicle, shares
of stock or other similar property for
which a clearance from the BIR is
required as a condition precedent for
the transfer of ownership thereof in the
name of the transferee.
Note: Estate tax returns showing a gross
value exceeding 5 million pesos shall be
supported with a statement duly certified by
a Certified Public Accountant.
Question: What are the contents of the
Estate Tax Return?
34
Answer: The return shall be filed in
duplicate, setting forth:
1. The value of the gross estate of the
decedent at the time of his death, or in
case of a NRA, of that part of his gross
estate situated in the Philippines;
2. The deductions allowed from gross
estate in determining the net taxable
estate; and
3. Such part of such information as may at
the time be ascertainable and such
supplemental data as may be
necessary to establish the correct
taxes.
4. For estate tax returns showing a gross
value exceeding P5,000,000, there
must be a statement duly certified to by
a CPA containing the following:
a. Itemized assets of the decedent
with their corresponding gross value
at the time of his death, or in the
case of a NRA, of that part of his
gross estate situated in the
Philippines;
b. Itemized deductions from gross
estate allowed in Sec. 86; and
c. The amount of tax due whether paid
or still due and outstanding.
Question: What is the period of filing
Estate Tax Return?
Answer:
Period for Filing [Sec. 90 (B), NIRC]
General Rule: Must be filed within 1 year
from the decedent's death.
Exception [Sec. 90 (C), NIRC]
The CIR shall have authority to grant, in
meritorious cases, a reasonable extension
not exceeding 30 days for filing the return.
Question: Who will file the Estate Tax
Return?
Answer: The executor, administrator, or
any of the legal heirs, as the case may be,
under oath. If there is no executor or
administrator appointed, qualified, and
acting within the Philippines, any person in
actual or constructive possession of any
property of the decedent may file this
return.
Question: Where is the filing of Estate Tax
Return and payment of the tax due shall be
made?
Answer:
1. Resident Citizen (RC and RA)
The executor or administrator shall
register the estate of the decedent and
secure a new TIN from the RDO where
the decedent was domiciled at the time
of his death and shall file the estate tax
return and pay the corresponding estate
tax with:
a. An authorized agent bank (AAB), or
b. Revenue District Officer (RDO), or
c. Collection Officer, or
d. Duly authorized Treasurer of the city
or municipality in which the
decedent was domiciled at the time
of his death.
2. Non-resident decedent (NRA/NRC)
a. With executor or administrator in the
Philippines
The estate tax return shall be filed
with and the TIN for the estate shall
be secured from the RDO where
such executor or administrator is
registered.
If the executor or administrator is
not registered, it shall be filed with
and the TIN for the estate shall be
secured from the RDO having
35
jurisdiction over the executor or
administrator’s legal residence.
b. Without an executor or administrator
in the Philippines
The estate tax return shall be filed
with and the TIN for the estate shall
be secured from the Office of the
Commissioner through RDO 39 QC.
Question: When shall the payment of
estate tax be made?
Answer: Generally, the estate tax shall be
paid at the time the return is filed by the
executor, administrator, or their heirs. The
payment of the estate tax may be extended
to not more than five (5) years, for estates
settled through the courts, or not more than
two (2) years, for estates settled
extrajudicially, when the Commissioner
finds that the payment of the estate tax or
of any part thereof would impose undue
hardship upon the estate or any of the
heirs.
If extension is granted, the CIR may require
the executor, or administrator, or
beneficiary, as the case may be, to furnish
a bond in such amount, not exceedingly
double the amount of the tax and with such
sureties as the CIR deems necessary,
conditioned upon the payment of the said
tax in accordance with the terms of the
extension.
Note:
Where the taxes are assessed by reason of
negligence, intentional disregard of rules
and regulations, or fraud on the part of the
taxpayer, no extension will be granted by
the CIR.
Question: What are the effects of granting
an extension?
Answer:
1. Payment of the amount in respect of
which the extension is granted on or
before the date of the expiration of the
period of the extension.
2. Suspension of the running of the statute
of limitations for deficiency assessment
for the period of any extension.
3. Any amount paid after the statutory due
date of the tax, but within the extension
period, shall be subject to interest but
not to surcharge.

Question: Is payment by installment

allowed in paying estate tax due?

Answer: Yes. In case the available cash of

the estate is insufficient to pay the total
estate tax due, payment by installment shall
be made within 2 years from the statutory
date of filing, without civil penalty and
interest.

Question: What is the rule of withdrawal

from bank account of decedent for estate
tax purposes?

Answer:
General rule: If a bank has knowledge of
the death of a person, who maintained a
bank deposit account alone, or jointly with
another, it shall allow withdrawal from the
said deposit account, subject to a final
withholding tax of 6%. [Sec. 97, NIRC]

Exception: No withholding tax shall be

imposed where the bank deposit accounts
have been duly included in the gross estate
of the decedent and the estate tax due
thereon has been paid provided that an
eCAR (Certificate Authorizing Registration)
is presented prior to withdrawing. DONOR’S TAX

Question: When is donor’s tax imposed?

36
Answer: The donor’s tax is imposed on
donations inter vivos or those made
between living persons to take effect during
the lifetime of the donor.
The donor’s tax supplements the estate tax
by preventing the avoidance of the latter
through the device of donating the property
during the lifetime of the deceased.
Definition
It is levied, assessed, collected and paid
upon the transfer by any person, resident or
nonresident, of the property by gift (Sec.
98(A), NIRC, as amended). It shall apply
whether the transfer is in trust or otherwise,
whether the gift is direct or indirect, and
whether the property is real or personal,
tangible or intangible. (Sec. 98 (B), NIRC,
as amended)
Question: Partners in the A law firm each
contributed some P800,000 to the
campaign funds of G for his senatorial bid
in 1987. The collector assessed each of
them donor’s tax of about P200,000. The
CIR denied their claim for exemption. Are
the campaign contributions subject to
donor’s tax?
Answer: Yes.
The National Internal Revenue Code, as
amended, provides:
Sec. 91. Imposition of Tax. (a) There shall
be levied, assessed, collected, and paid
upon the transfer by any person, resident,
or non-resident, of the property by gift, a
tax, computed as provided in Section 92.
(b) The tax shall apply whether the transfer
is in trust or otherwise, whether the gift is
direct or indirect, and whether the property
is real or personal, tangible or intangible.
The NIRC doesn’t define transfer of
property by gift; but the civil code, which
applies suppletorily, defines donation, in
Article 725, as an act of liberality whereby a
person disposes gratuitously of a thing or
right in favor of another, who accepts it.
37
(Abello, Et Al Vs. Cir, Gr 120721, Feb 23,
2005)
However, this case was ruled before the
TRAIN law.
Alternative Answer: No.
Any contribution in cash or in kind to any
candidate, political party or coalition parties
for campaign purposes shall be governed
by the Election Code, as amended. (Sec.
99 (B), NIRC as amended)
Only those donations/contributions that
have been utilized/spent during the
campaign period as set by the COMELEC
are exempt from donor’s tax. Donations
utilized before or after the campaign period
are subject to donor’s tax and not
deductible as political contribution on the
part of the donor (Revenue Memorandum
Circular 31-2019)
There must be a completed gift
Donor’s tax shall not apply unless and until
there is a completed gift.
(a) Perfected – from the moment the donor
knows of the acceptance by the donee
(b) Completed – by delivery, either actually
or constructively of the donated
property
Question: A wants to donate a property to
B. B communicated to A his acceptance of
the said property. However, before the
communication of acceptance reached to
A, the latter died before knowledge of the
acceptance, is there a completed donation?
Answer: No. There is no complete
donation. B cannot compel that the property
be given to him.
The donor’s tax shall not apply unless and
until there is a completed gift. The transfer
of property gift is perfected from the
moment the donor knows of the acceptance
by the donee; It is completed by the
delivery, either actually or constructively, of
the donated property to the donee. Thus,
the law in force at the time of the perfection
or completion of the donation shall govern
the imposition of the donor’s tax. (RR No.
12-2018)
Nature and Purpose of Taxation
Question: What is the nature of Donor’s
Tax?
Answer:
(a) Donor’s tax is not a property tax, but a
tax imposed on the privilege to transfer
of property by way of gift inter vivos. It is
thus a privilege tax/excise tax.
(b) Donor’s tax is an annual tax. The tax is
applicable for one taxable year
(Calendar year [Jan to Dec]).
(c) Donor’s tax is ad valorem because it is
based on the value of the property
being donated.
(d) Donor’s tax is a national tax because it
is collected by the BIR and imposed
under the NIRC.
(e) Donor’s tax is a revenue or fiscal tax
because its primary purpose is to raise
revenue and not more of regulation.
(f) Donor’s tax is not a progressive tax
because the tax rate is fixed at 6% in
excess of the Php 250,000 exempt gift
made during the calendar year.
Progressive tax means that as the tax
base increases, the tax rate will also
increase.
Question: What is the purpose in imposing
Donor’s Tax?
Answer:
(1) To control tax evasion of the estate tax;
(2) To control tax evasion of income tax;
38
(3) To recoup future loss of income tax
revenue.
Question: MB Estate donated cash to Rev.
R, parish priest of a Catholic Church. The
total amount was actually spent for the
purpose intended. CIR issued assessment
for donee’s gift tax against the Catholic
Church of which Rev. L is the new priest.
Rev. L protested to assessment and
requested the withdrawal thereof. He
claimed that he was not the parish yet
when the donation was made and,
therefore, he shouldn’t be liable for donee’s
gift tax, even against the Catholic Church, it
wouldn’t be valid, for such would be a
violation of the Constitution. Is Rev. L liable
for the assessed donee’s gift tax?
Answer: Yes.
Sec 28 (3) Article VI of the Constitution
exempts from taxation cemeteries,
churches and parsonages or convents,
appurtenant thereto, and all lands,
buildings, and improvements used
exclusively for religious purposes. The
exemption is only from payment of taxes
assessed on such properties, as property
taxes, as distinguished from excise taxes.
In the present case, what Collector
assessed was donee's gift tax; the
assessment was not on the properties
themselves. It didn’t rest upon general
ownership; it was an excise upon use made
of the properties, upon exercise of privilege
of receiving properties. Gift tax isn’t w/in
exempting provisions of the section.
A gift tax isn’t a property tax, but an
excise tax imposed on transfer of
property by way of gift inter vivos, the
imposition of which on property used
exclusively for religious purposes, does not
constitute an impairment of the
Constitution.
The phrase “exempt from taxation,” should
not be interpreted to mean exemption from
all kinds of taxes. And there being no clear,
positive or express grant of such privilege
by law, in favor of petitioner, exemption
must be denied. (Lladoc Vs. Commissioner,
G.R. L-19201, June 16, 1965)
Question: When is Donor’s tax applicable?
Answer: Donor’s tax is applicable to the
law in force at the time of the completion (or
perfection, if delivery and acceptance is
done at the same time) of the donation
shall govern the imposition of donor’s tax.
The transfer of property by gift is perfected
from the moment the donor knows of the
acceptance by the donee; it is completed
by the delivery, either actually or
constructively, or the donated property to
the donee.
Question: Who are the persons liable for
Donor’s tax?
Answer: Every person, whether natural or
juridical, resident or non-resident, who
transfers or causes to transfer property by
gift, whether in trust or otherwise, whether
the gift is direct or indirect and whether the
property is real or personal, tangible or
intangible.
Requisites of Taxable Gift
Question: What are the requisites of
taxable gift?
Answer:
(a) Acceptance by the donee
(b) Delivery or Donative Act
(c) Intent to donate or Donative Intent
(d) Capacity of the Donor
(e) Decrease in the patrimony of the donor
(f) Increase in the patrimony of the donee
39
(A) Acceptance
Acceptance by the Donee
The acceptance must be made known to
the donor during the donor’s lifetime, this
will perfect the donation
This is an essential requirement because
no one can be compelled to accept the
generosity of another person.
Form of acceptance
This depends on the form of the donation
itself. Usually, the formalities of making a
donation will go hand in hand with
acceptance.
If the donation must be in writing then the
acceptance must also be in writing. If the
donation can be done orally then the
acceptance can also be done orally.
Although the delivery is usually done
simultaneously.
Question: What are the formalities for
donations?
Answer:
(a) Tangible personal property (P5,000 and
below) – orally/verbally
(b) Tangible personal property (exceeds
P5,000) – in writing
(c) Real property – public instrument
(d) Intangible personal property – the
acceptance must also be in a public
instrument or it can be on a separate
instrument. But in any case, it must be
made known to the donor.
Question: What is the effect if there is non-
conformity of the legal formalities?
Answer: The donation is not valid.
However, even if the donation is void and
unenforceable, there will still be tax
implication, such as it will form part of the
donee’s taxable income.
(B) Delivery whether Actual or
Constructive
- This completes the donation
- If the acceptance and delivery are made
simultaneously, then the donation is
deemed perfected and completed at the
same time
- If the acceptance and delivery are made
on different dates, it is the acceptance
(that is made known to the donor during
his lifetime) that perfects the donation
Constructive Delivery
(a) Tradition Brevi Manu – delivery by short
hand
(b) Traditio Symbolica – symbolic delivery
of a thing or part of the thing to be
delivered
(c) Traditio Longa Manu – delivery though
long hand
(d) Constitutum possessorium – the
change of status of the receiver from
that of a lessee to an owner.
Question: What are the rules on
renunciation of inheritance by an heir?
Answer:
(a) General Renunciation
Not subject to Donor’s tax because
there is no renunciation
(b) Specific Renunciation
There is renunciation in favor of other
heirs, subject to Donor’s tax
40
(C) Donative Intent or Intent to Donate
As a rule, there is an intent to donate when
there is an observance of all the requisites
and elements of a valid donation. There is
perfection of donation when it follows the
formalities of delivering the donation.
When it comes to donation or gift giving,
and insofar as NIRC is concerned, it covers
both direct and indirect donation.
Question: What is indirect donation?
Answer: It is not really donation, rather it
may be a contract of sale, but it is called as
indirect gift because it is implied upon the
circumstantial acts of the parties.
Kinds of Indirect Gift/Donation
Question: What are the kinds of Indirect
gift or donation?
Answer:
(a) Transfer for Insufficient Consideration
Where property, other than real
property under Sec. 24(d) is transferred
for less than an adequate and full
consideration in money or money’s
worth, then the amount by which the fair
market value of the property exceeded
the value of the consideration shall be
deemed a gift, and shall be included in
computing the amount of gifts made
during the calendar year.
General Rule: Properties transferred for
inadequate consideration is subject to
donor’s tax to the extent of the
difference between the FMV and the
value of the consideration.
Exception:
 (1) Transfers for inadequate
consideration involving real
properties because they are subject
to capital gains tax.
(2) The sale, exchange, or other
transfer of property made in the
ordinary course of business (a
transaction which is bona fide, at
arm’s length, and free from any
donative intent) will be considered
as made for an adequate and full
consideration.
RULES:
(1) Ascertain what type of property sold
➢ If ordinary asset – subject to
graduated income tax rate
➢ If capital asset – subject to
capital gains tax
(2) If ordinary asset, determine if there
is profit or loss
➢ If profit – subject to
graduated income tax rate
➢ If loss – not subject to
income tax
(3) Check is there is transfer for
insufficient consideration
- Compare the FMV and the
value of the consideration, if
FMV exceeded the selling
price, then it is transfer for
insufficient consideration
(4) If there is insufficient consideration,
subject the difference between the
FMV and the SP to 6% donor’s tax
in excess of P250,000
Question: M sold to C 2,597,197 common
shares in BLC. Further, M, requested C for
confirmation that the sale of BLC shares of
stocks owned by MPC to C is not subject to
donor's tax as provided in Section 100 of
the Internal Revenue Code as it is an
ordinary business transaction negotiated in
good faith by unrelated parties for
legitimate business purposes. M, filed CGT
Return with the BIR LTS Regular and the
41
DST. The said CGT return showed that
there was no tax due or paid for the
transaction. The CIR confirmed that the
sales transaction over the BLC shares
between M as seller and C as buyer is not
subject to donor's tax because it is an
ordinary commercial transaction negotiated
in good faith between unrelated parties and
motivated by legitimate business reasons.
Is M liable for the deficiency donor’s tax
assessment?
Answer: Yes. M liable for the deficiency
donor’s tax assessment. M’s claim for
donor’s tax exemption has no legal basis.
Section 100 of the 1997 NIRC, as
amended:
Transfer for Less Than Adequate and Full
Consideration. - Where property, other than
real property adequate and full
consideration in money or money's worth,
then the amount by which the fair market
value of the property exceeded the value of
the consideration shall, for the purpose of
the tax imposed by this Chapter, be
deemed a gift, and shall be included in
computing the amount of gifts made during
the gifts made during the calendar year.
It is thus, important to determine the "fair
market value" (FMV) of the property sold or
transferred, and whether it exceeded the
value of the consideration. M alleges, on
the assumption that the subject shares
were sold for less than their "fair market
value", that the subject transaction was an
ordinary business transaction negotiated in
good faith by unrelated parties for
legitimate purposes operate to exclude the
subject transaction from the coverage of
Section 100 of the NIRC, the same being a
transfer which is bona fide, at arm's length.
(METRO PACIFIC CORP. vs CIR CTA
Case No. 8318, June 11, 2014)
Take note that this case was ruled prior to
the effectivity of the TRAIN Law.
ALTERNATIVE ANSWER: (under the
TRAIN Law): M shall not be liable for
deficiency’s donor’s tax assessment.
Under the TRAIN Law, a sale, exchange, or
other transfer of property made in the
Instance where gift already delivered
ordinary course of business, that is a
but not yet completed
transaction which is bona fide, at arm’s
length, and free from any donative intent, These are deemed incomplete because
will be considered as made for an adequate the donee or the recipient of the
and full consideration in money or money’s property cannot exercise full dominion
worth. or ownership over the property.
Ownership of the property will transfer
Here, even if the selling price of the shares
only upon the happening of a future
were less than the fair market value, the
event as specified by the donor.
transaction was made under an ordinary
commercial transaction, negotiated in good ➢ Conditional Donations
faith between unrelated parties, and ➢ Revocable Transfers
motivated by legitimate business reasons.
Thus, M is not liable for the deficiency’s
donor’s tax assessment.
Question: When does incomplete gift
(b) Condonation of Debt become complete?

Forgiveness of the debt, will only be

subjected to donor’s tax if the Answer: Incomplete gift becomes complete
condonation is done out of generosity when either:
But if the condonation was done (i) The donor renounces the power,
because there was service rendered by or
the debtor (past service or future
(ii) His right to exercise the reserved
service), then that is considered as a
power ceases because of the
condonation with consideration. In that
happening of some event or
case, it will not be subject to donor’s
contingency or the fulfilment of some
tax, but rather to income tax.
condition, other than because of the
If the creditor condones the donor’s death.
indebtedness of the debtor the following
rules apply:
1. On account of debtor’s services to
the creditor the same is in taxable (b) Quasi-Transfer
income to the debtor. More like a temporary transfer, but
2. If no services were rendered but the there is really no transfer of ownership
creditor simply condones the debt, it is from one party to another so the
taxable gift and not a taxable income. delivery of a property to another does
not result to transfer of ownership.

Incomplete Gifts
(a) Donation with reserved powers
G.R.: Donor’s tax will only apply when
there is already a completed gift. There
is a completed gift if the gift has been
delivered and the ownership has been
transferred to the Donee or to the
receiver without any condition.
Question: What are the instances of quasi-
transfer?
Answer:
(i) Merger or the usufruct in the owner of
the naked title during the lifetime of the
usufructuary

42
(ii) Transmission or delivery of inheritance
or legacy by the fiduciary heir or legatee
to the fideicommissary during the
lifetime of the fiduciary heir
(iii) Transfer from the first heir, legatee, or
donee during the lifetime in favor of
another beneficiary in accordance with
the desire of the predecessor
Question: What is the consequence of void
donations?
Answer: For void donations, the obvious
consequence is for it not to be subject with
donor’s tax. But if the property has been
donated to the donee then in such case, it
may be subjected to income tax.
Question: What are examples of void
donations?
Answer:
(1) Donation between spouses except
minor gifts;
(2) Donations between persons guilty of
adultery or concubinage;
(3) Donation between persons found guilty
of the same criminal offense for the
same consideration;
(4) Donation to a public officer, his wife,
ascendants, descendants, by reason of
his office;
(5) Donation made by incapacitated
persons;
(6) Donation of future property
(D) Capacity of the Donor
Refers to the condition and legal capacity of
the donor to enter into a valid contract
Question: Who are incapacitated donors?
43
Answer:
(1) Insane persons, except if donation is
made during a lucid interval;
(2) Minors;
(3) Those under civil interdiction;
(4) Spouses to each other – covers also
common law spouses, mistresses, and
paramours
General Rule: Every donation or grant of
gratuitous advantage, direct or indirect,
between the spouses during the marriage
shall be void.
Exception: (a) moderate gifts which the
spouses may give each other on the
occasion of any family rejoicing; (b)
transfers mortis causa (last will and
testament disposing of the free portion to
take effect after the death of the spouse)
Moderate gifts depend on the financial
capacity of the donor. If donation was void
because it is not a moderate gift, then such
transfer will be considered as income tax
(all income from whatever source is subject
to income tax) on part of the donee.
CAPACITY OF DONEE
General Rule: It is not required for the
donee to have a legal capacity to accept
the donation because a donee can have a
guardian, who can accept the gift on behalf
of the donee.
Exception:
(a) Those found guilty and included in the
penalty is civil interdiction;
(b) If the donee is the spouse;
(c) Lawyers who notarized the will;
(d) Public officers or their spouses if the gift
was given by reason of their public
office;
(e) Those incapacitated to receive in
succession due to undue influence

(E) Decrease in the Patrimony of the
Donor
(F) Increase in the Patrimony of the
Donee
Kinds of Donors
I. Resident or Citizen
Taxable on their properties donated within
and outside the country. Covers resident
citizens, resident alien, domestic
corporation and resident foreign
corporation. All properties located not only
within the Philippines but also in foreign
countries.
II. Non-Resident Alien or Corporation
All real and tangible properties within the
Philippines, and intangible personal
property, unless there is reciprocity, in
which case it is not taxable.
General Rule: Taxable on their donations
within the country
Exception: Intangible property, which is
subject to reciprocity rule
Reciprocity Rule
Question: What is the Reciprocity Rule?
Answer: Intangible properties will be
exempted from the donor’s tax if the
country of origin of the NRA or NRFC will
also exempt from donor’s tax the intangible
properties donated by Filipinos who are not
considered resident in their country.
If without reciprocity, then only those
properties located in the country will be
44
subjected to donor’s tax. Those properties
located and donated out of the country is
not subject to our donor’s tax.
There is reciprocity if the foreign country of
which the decedent was a citizen and
resident at the time of his death:
(1) Did not impose a transfer of any
character, in respect of intangible
personal property; or
(2) Allowed a similar exemption from
transfer tax in respect of intangible
personal property.
This rule applies to the transmission by gift
of intangible personal property local or with
a situs within the Philippines of a non-
resident alien.
However, no tax shall be collected with
respect to donation of intangible personal
property (Reciprocity Rule):
1. If the donor at the time of the donation
was a citizen and resident of a foreign
country which at the time of the
donation did not impose a transfer tax
of any character in respect of intangible
personal property of a citizen of the
Philippines not residing in that foreign
country; or
2. If the laws of the foreign country of
which the donor was a citizen and
resident at the time of the donation
allows a similar exemption from transfer
of every character or description in
respect of intangible personal property
owned by citizens of the Philippines not
residing in that foreign country.
Personal intangible properties deemed to
have situs in the Philippines
Sec. 104, NIRC
(1) Franchise which must be exercised in
the Philippines;
(2) Shares, obligations, or bonds issued by
any corporation or sociedad anonima
organized or constituted in the
Philippines in accordance with its laws;
(3) Shares, obligations, or bonds issued by
any foreign corporation 85% of the
business of which is located in the
Philippines;
(4) Shares, obligations, or bonds issued by - Tangible
any foreign corporation is such shares, personal Taxable Taxable
obligations or bonds have acquired property
business situs (i.e., they are used in
furtherance of its business in the - Intangible
Philippines by the foreign corporation) personal Taxable Taxable
in the Philippines; property
(5) Shares or rights in partnership,
business or industry established in the b. Non-resident
Philippines. Alien Taxable None
- Real property

- Tangible
Question: What are the kinds of donees? personal Taxable None
property

Answer: No distinction anymore pursuant - Intangible

to TRAIN LAW because of the uniform rate personal
of 6%. property
Taxable None
*subject to the
Properties Covered as Gifts rule of
reciprocity

I. Gross Gifts
Includes real and personal, whether
tangible or intangible, wherever situated.
Provided, however, that where the donor
was a non-resident alien at the time of the
donation, his real and personal property so
transferred but which are situated outside
the Philippines shall not be included.
Gifts of real property and personal property
wherever situated belonging to the donor
who either a resident or citizen at the time
of the donation; and
Gifts of real and tangible personal property
situated in the Philippines, and intangible
personal property with a situs in the
Philippines unless exempted on the basis
of reciprocity, belonging to the donor who is
a non-resident alien at the time of the
donation.
DONOR WITHIN THE OUTSIDE
PHILIPPINES THE
PHILIPPINES
a. Citizen or
Taxable Taxable
Resident
Valuation of Gifts Made in Property
Question: What is the valuation of gifts
made in property?
Answer:
1) Personal property - the fair market
value of the property given at the time
of the gift shall be the value of the gross
gift.
2) Real property - the fair market value as
determined by the CIR (zonal value) at
the time of donation or the value fixed
by the assessor (assessed value),
whichever is higher (Sec. 102).
If there is no zonal value, the taxable base
is the fair market value that appears in the
latest tax declaration. If there is an
improvement, the value of the improvement
is the construction cost per building permit
and or occupancy permit plus 10% per year
after year of construction, or the market
value per latest tax declaration.

45
 enumerated in the articles of
incorporation.
Exemptions

RESIDENT OR CITIZEN
i.
(i) Gifts made to or for the use of the
National Government, its agencies or
political subdivisions;
(ii) Gifts in favor of (ERC-SCARP) and
educational and/or charitable, religious,
cultural or social welfare corporation,
ii.
institution, accredited non-government
organization, trust or philanthropic
organization, or research institution or
organization: Provided, however, that
not more than thirty percent (30%) of
said gifts shall be used by such donee
for administration purposes.
GIFTS IN FAVOR OF (ERC-SCARP)
(a) Educational
(b) Religious
(c) Charitable
(d) Social Welfare
(e) Cultural
(f) Accredited NGO – must be accredited,
otherwise, not exempt
(g) Research institution
(h) Philanthropic organization or institution
NON-RESIDENT ALIEN
Gifts made to or for the use of the
National Government or any entity
created by any of its agencies which is
not conducted for profit, or to any
political subdivision of the said
Government.
Gifts in favor of an education and/or
charitable, religious, cultural or social
welfare corporation, institution,
foundation, trust and philanthropic
organization or research institution or
organization: Provided, however, that
not more than thirty percent (30%) of
said gifts shall be used by such donee
for administration purposes.
GIFTS IN FAVOR OF (ERC-SCARP)
(a) Educational
(b) Religious
(c) Charitable
(d) Social Welfare
(e) Cultural
(f) Research
(g) Philanthropic organization or institution

Question: What are the requisites for the

Question: What are the conditions for the exemption?
exemptions to apply?

Answer: Not more than 30% of said gifts

Answer: shall be used by donee for administration
(1) Not more than 30% is used for purpose – at least 70% will be used for its
administration purposes; operation (primary purpose), not as
compensation for its officers.
(2) Must not be non-stock entity (no
shareholders, no BOD);
(3) Paying no dividends;
(4) Trustees must receive no compensation Deductible from Gross Gifts
(this distinguishes a stock corporation
from a non-stock corporation);
Question: What are deductible from gross
(5) Devoting all its income to the gifts?
accomplishment of the purpose

46
Answer: These are items to be subtracted Question: What is the Donor’s Tax rate?
from the gross value of the property
donated to arrive at the value of net taxable
gift. The net taxable gift is the basis in the Answer: The donor’s tax for each calendar
computation of the donor’s tax. year shall be six percent (6%) on the basis
of the total gifts in excess of P250,000
(a) Encumbrance assumed by the donee
exempt gift made during the calendar year.
(b) Diminution of gift provided by the donor
(c) Donations to the national government
and the like
(A) Principle of Accumulation
(d) Donation to non-profit organizations
The computation of the donor’s tax is on a
cumulative basis over a period of one
calendar year (January to December). Each
gift made during the calendar year must be
(A) Encumbrances
included in the return which is added every
Claims or liabilities attached to a property time there is a new donation made. The
which the law allows as a deduction from donor’s tax already paid is deducted in
the gross gift if assumed by the donee, i.e., computing the donor’s tax due on the latest
mortgage, security, interest, costs of rights, donation.
accrued and unpaid taxes.
The encumbrance will only be deductible if
the donee assumes the payment thereof. In
an examination, if the examiner did not Question: What is the Rationale of the
specify that the donee assumed the Principle of Accumulation?
obligation, do not immediately assume that
the obligation should be automatically
deducted from the value of the property. Answer: To avail of the P250,000
exemption because according to the law,
All charges against the donee shall not be
the P250,000 is only applicable to a
included in the taxable donation since it
particular calendar year. There is no fiscal
does not in any way increase the patrimony
year in donation, even if the donor is a
of the donee.
juridical person whose accounting year is a
fiscal year.
(B) Diminution
Conditions or amounts that need to be
shouldered by the donee in order to effect
Question: What are the rules when it
the donation. This is the decrease in the
comes to donation by spouses?
value of property donated as a result of a
condition made by the donor to the donee.
Answer:
1) The donor’s tax will have to be
computed separately between the
Net Gift and Donor’s Tax Rates
spouses;
2) The spouses will have to file the donor’s
Net Gift tax return separately;
The net economic benefit from the transfer 3) The P250,000 exemption will have to be
that accrues to the donee. applied separately (P250,00 for the Mr.,
and P250,000 for the Mrs.);

47
4) If they contributed a imitation when there is only one for the
conjugal/community property, the worldwide net gifts.
property should be divided into two
between the spouses.
1) Per country limitation – This is
The relationship to the donee does not
applicable if two or more foreign
matter anymore under the train law or if
countries are involved. The amount of
donation was made on January 1, 2018.
the credit in respect to the tax paid to
any country shall not exceed the same
proportion of the tax against which such
credit is taken, which the net gifts
(B) Donor’s Tax Credit situated within such country taxable
A situation may arise when you are a under the NIRC bears to his entire gifts.
resident/citizen and the property given as a
gift is located in a foreign country and the
Net Gifts Per Country x PH donor’s tax
donor may be subject to donor’s tax twice
payable
on the same property: first, by the
Philippine government and second, by the Global Net Gifts
foreign government where the property is
situated.
Here, the computation is per country.
One country, one computation. Unlike
in global limitation where there is only
one computation.
Question: What is the purpose of tax
credit?
2) Global Limitation – This is applicable if
there is only one foreign country
Answer: The remedy of claiming a tax
involved. The total amount of the credit
credit is aimed at minimizing the
shall not exceed the same proportion of
burdensome effect of double taxation by
the tax against which such credit is
allowing the taxpayer to deduct his foreign
taken, which the donor’s tax net gifts
tax from his Philippine tax, subject to the
situated outside the Philippines taxable
limitations provided by law.
under the NIRC bears to his entire net
gifts.

Question: Who may claim Tax Credit? Total Foreign Net Gifts x PH donor’s
tax payable

Answer: Only a Resident or Citizen (RC, Global Net Gifts

NRC and RA) [In other words, anyone
except Non-Resident Aliens]

Question: What is the amount of tax

credit?
Tax Credit Limitation
For donor’s tax credits, you cannot Answer: Whichever is lower between:
automatically deduct the actual donor’s
(1) Actual donor’s tax paid abroad
taxes paid abroad. We have to observe
whichever is lower between the actual (2) Per Country Limitation
foreign donor’s tax paid as against the
(3) Global Limitation
limitation per country when there are two or
more countries and as against the global

48

Question: The BIR found that X had an
investment in shares issued to them from
their family corporation. The CIR regarded
these transfers as undeclared gifts made in
the respective years, and assessed against
X. After paying the basic tax, X asked for
the reassessment stating that each of them
received by way of gift inter vivos, that
those who got married were given
additional money as propter nuptias and
those who did not received it by inter vivos.
X also contend that the cash donated came
from conjugal funds, claiming for
exemption. Are the donations made by
petitioner X to his children from the
conjugal property should be taxed against
the husband alone, or against husband and
wife?
joins in making the donation, it shall be
deemed to have been made by the
husband alone.
In this case, X are therefore in error when
they contend that it is enough that the
property donated should belong to the
conjugal partnership in order that the
donation be considered and taxed as a
donation of both husband and wife, even if
the husband should appear as the sole
donor. There is no blinking the fact that,
under the old Civil Code, to be a donation
by both spouses, taxable to both, the wife
must expressly join the husband in making
the gift; her participation therein cannot be
implied. (TANG HO V. BOARD OF TAX
APPEALS GR No. L-5949 November 19,
1955)

Administrative Matters
Answer: Donations made by X to his
children from the conjugal property should
be taxed against the husband alone. Filing of Donor’s Tax Return

This pretension should be viewed in the

light of the provisions of the Spanish Civil TIME OF FILING AND PAYMENT
Code of 1889, which was the governing law
in the years herein involved, 1939 to 1950.
The determinative rule is that of Arts. 1409 Question: When is the time of filing and
and 1415, reading as follows: payment of Donor’s Tax Return?
"Art. 1409. The conjugal partnership shall
also be chargeable with anything which
Answer: It must be filed within thirty (30)
may have been given or promised by the
days after the gift is made or completed.
husband to the children born of the
marriage solely in order to obtain
employment for them or give them a Pay as you file system: tax due shall be
profession, or by both spouses by common paid at the same time that the return is
consent, should they not have stipulated filed.
that such expenditures should be borne in
whole or in part by the separate property of
one of them."
"Art. 1415, p. 1. The husband may dispose
of the property of the conjugal partnership
for the purposes mentioned in Art. 1409.”
Spouses are co-owners of conjugal
property. A gift made by the spouses of
conjugal property shall be deemed
separate donations by the husband and the
wife in proportion to their respective
interests. Hence, 1⁄2 shall be considered
donation of the husband and the other half
of the donation of his wife. Unless the wife

49

VALUE-ADDED TAX
Question: How is Value-Added Tax (VAT)
defined?
Answer: Value Added Tax (VAT) is a
business tax imposed and collected on
every (a) sale, barter, or exchange of goods
or properties (real or personal), (b) lease of
goods or properties (real or personal) or (c)
rendition of services, all in the course of
trade or business, and (d) importation of
goods (whether or not in the course of trade
or business). It is an indirect tax, thus, it
can be shifted or passed on to the buyer,
transferee or lessee of goods, properties or
services (Sec. 105, NIRC).
Question: What is the current VAT rate?
Answer: The current VAT rate is 12%
(effective January 1, 2006, VAT rate was
increased from 10 to 12%)
Question: Is the imposition of VAT
constitutional?
Answer: Yes, the Supreme Court upheld
the validity of raising the VAT rate from
10% to 12% based on the following
reasons: (1) The VAT law is uniform: it
50
provides a standard rate of 10% (now 12%)
on all goods or services and 0% rate on
certain sales and transactions; (2) It is
equitable: The law is equipped with a
threshold margin where VAT does not
apply to sales of goods or services with
gross annual sales or receipts not
exceeding P3 million; (3) VAT , by its very
nature, is regressive, but the Constitution
does not prohibit the imposition of indirect
taxes. What it simply provides is that
Congress shall “evolve a progressive
system of taxation”. (ABAKADA Guro v.
Ermita, G.R. No. 168056, September 1,
2005).
Question: Who is liable to pay the VAT?
Answer: Generally, the seller is the one
statutorily liable for the payment of the tax
but the amount of the tax may be shifted or
passed on to the buyer, transferee or
lessee of goods, properties or services.
Question: Who paid the tax in a tax-free
importation?
Answer: In the case of tax-free importation
of goods into the Philippines by persons,
entities or agencies exempt from tax, where
such goods are subsequently sold,
transferred or exchanged in the Philippines
to non-exempt persons or entities, the
purchaser, transferees or recipients, who
shall be considered as the importers
thereof, who shall be liable for any internal
revenue tax on such importation (NIRC,
Sec. 107(B) as amended by TRAIN LAW).
Question: Is it considered a tax when the
VAT is shifted already to the buyer or
customer as an addition to the cost of
goods or services sold?
Answer: No, once the VAT is shifted to the
buyer or customer as an addition to the
cost of goods or services sold, it is no
longer a tax but an additional cost which
the buyer or customer has to pay in order to
obtain the goods or services. The buyer
cannot be held directly liable to pay tax or
invoke an exemption privilege to avoid
paying the output tax passed on to them by
the vendor, in the form of higher selling
price. (BIR Ruling No. 639-12, December 4,
2012)
Question: Enumerate the Characteristics
of VAT and explain briefly.
Answer:
1. Value added - It is a tax on value added
of a taxpayer arising from the sales of
goods, properties or services during the
quarter. “Value added” is the difference
between the total sales of the taxpayer
for the taxable quarter subject to VAT
and his total purchases for the same
period subject also to value added tax.
2. Tax credit or Invoice method - It is
collected through the tax credit method
or invoice method. The input taxes
shifted by the sellers to the buyer are
credited against the buyer’s output
taxes when he in turn sells the taxable
goods, properties or services (Sec. 105
and 110 [A], NIRC).
3. Sales tax – VAT is a tax on the taxable
sale, barter or exchange of goods,
properties or services. A barter or
exchange has the same tax
consequence as a sale. A sale may be
an actual or deemed sale, or an export
sale or local sale. The buyer is informed
that the price includes VAT and the
computation is shown in the official
receipt or sales invoice.
4. Broad-based tax on consumption in the
Philippines – It is broad-based because
every sale of goods, properties or
services at the levels of manufacturers
or producers and distributors is subject
to VAT. However, the tax burden rests
on the final consumers.
51
5. Excise tax based on consumption – It is
a tax on the privilege of engaging in the
business of selling goods or services, or
the importation of goods.
6. Indirect tax - Tax shifting is always
presumed. It may be shifted or passed
on to the buyers, transferee, or lessee
of the goods, properties or services as
part of the purchase price.
7. Ad valorem tax - The amount is based
on the gross selling price or gross value
in money of the goods or properties
sold, bartered or exchanged or on the
gross receipts derived from the sale or
exchange of services, including the use
or lease of properties
8. Not a cascading tax - Tax cascading
means that an item is taxed more than
once as it makes its way from
production to final retail sale. VAT is not
a cascading tax because it is merely
added as part of the purchase price and
not as a tax because the burden is
merely shifted. Thus, there can be no
tax on the tax itself.
9. National tax - Imposed by the national
government.
10. Regressive tax – By its very nature,
VAT is regressive tax.
Question: Does the principle of
progressive taxation relate to VAT system?
Answer: No, it has no relation with the VAT
system inasmuch as the VAT paid by the
consumer or business for every goods
bought or services enjoyed is the same
regardless of income. In other words, the
VAT paid eats the same portion of an
income, whether big or small. The disparity
lies in the income earned by a person or
profit margin marked by a business, such
that the higher the income or profit margin,
the smaller the portion of the income or
profit that is eaten by VAT. A converso, the
lower the income or profit margin, the
bigger the part that the VAT eats away. At
the end of the day, it is really the lower
income group or businesses with low-profit
margins that is always hardest hit in the Philippines; and (c) It is not VAT-
(ABAKADA Guro v. Ermita, G.R. No. exempt or VAT zero-rated.
168056, September 1, 2005).

Question: What does “In the course of

Question: Does the Constitution prohibit trade or business (Rule of Regularity)”
regressive taxes? mean?

Answer: It means the regular conduct or

Answer: No, what the Constitution simply
pursuit of a commercial or an economic
provides is that Congress shall evolve a
activity, including transactions incidental
progressive system of taxation. The
thereto, by any person regardless of
constitutional provision has been
whether or not the person engaged therein
interpreted to mean simply that "direct
is a non-stock, non-profit private
taxes are to be preferred and as much as
organization (irrespective of the disposition
possible, indirect taxes should be
of its net income and whether or not it sells
minimized.” The mandate of Congress is
exclusively to members or their guests), or
not to prescribe but to evolve a progressive
government entity (Sec. 105, NIRC).
tax system. This is a mere directive upon
Congress, not a justiciable right or a legally
enforceable one. We cannot avoid
regressive taxes but only minimize them
(Tolentino et.al. v. Secretary of Finance, Question: Mindanao II’s business is to
G.R. No. 115455, Oct. 30, 1995). convert the steam supplied to it by PNOC-
EDC into electricity and to deliver the
electricity to NPC. In the course of its
business, Mindanao II bought and
eventually sold a Nissan Patrol. Prior to the
Question: How is the regressive effect of
sale, the Nissan Patrol was part of
VAT minimized?
Mindanao II’s property, plant, and
equipment. Is the sale of the Nissan Patrol
Answer: The law minimizes the regressive considered an incidental transaction made
effects of this imposition by providing for in the course of Mindanao II’s business
zero rating of certain transactions while which should be liable for VAT?
granting exemptions to other transactions.
The transactions which are subject to VAT
Answer: Yes, Mindanao II’s sale of the
are those which involve goods and services
Nissan Patrol is said to be an isolated
which are used or availed of mainly by
transaction. However, it does not follow that
higher income groups.
an isolated transaction cannot be an
incidental transaction for purposes of VAT
liability. Indeed, a reading of Section 105 of
the 1997 Tax Code would show that a
Question: What are the elements of VAT- transaction “in the course of trade or
taxable transactions? business” includes “transactions incidental
thereto. (Mindanao II Geothermal
Partnership v. CIR, G.R. No. 193301,
Answer: The following elements must be
March 11, 2013).
present in order for a transaction to be
subjected to 12% VAT: (a) It must be done
in the ordinary course of trade or business;
(b) There must be a sale, barter, exchange,
lease of properties, or rendering of service

52
Question: What are the elements of VAT-
taxable sale of goods and personal
properties?
Answer: The following elements must be
present in order for the sale of goods and
personal properties be subjected to VAT:
(a) There is an actual or deemed sale,
barter or exchange of goods or personal
properties for valuable consideration; (b)
Undertaken in the course of trade or
business; (c) For use or consumption in the
Philippines; and (d) Not exempt from VAT
under Section 109 of NIRC, special law or
international agreement binding upon the
government of the Philippines.
Question: What are the elements of VAT-
taxable sale or exchange of real
properties?
Answer: The following elements must be
present in order for the sale or exchange of
real properties be subjected to VAT: (a)
The seller executes a deed of sale,
including dacion en pago, barter or
exchange, assignment, transfer, or
conveyance, or merely contracts to sell
involving real property; (b) The real
property is located within the Philippines;
(c) The seller or transferor is engaged in
real estate business either as a real estate
dealer, developer, or lessor; (d) The real
property is an ordinary asset held primarily
for sale or for lease in the ordinary course
of business; (e) The sale is not exempt
from VAT under Section 109 of NIRC,
special law, or international agreement
binding upon the government of the
Philippines; and (f) The threshold amount
set by law should be met.
Question: State the rationale why VAT is
imposed on goods brought into the
Philippines, whether for use in business or
not, except those specifically exempted
under Section 109(1) of the NIRC?
53
Answer: The reason VAT is imposed on
goods brought into the Philippines is to
protect our local or domestic goods or
articles and to regulate the entry or
introduction of foreign articles to our local
market.
Question: Who is responsible for the
payment of tax on imported goods?
Answer: The VAT on importation shall be
paid by the importer prior to the release of
such goods from customs custody.
Question: What are the requisites for the
taxability of sale or exchange of services or
lease or use of property?
Answer: The requisites for the taxability of
sale or exchange of services or lease or
use of property are as follows: (a) There is
a sale or exchange of service or lease or
use of property enumerated in the law or
other similar services; (b) The service is
performed or to be performed in the
Philippines; (c) The service is in the course
of trade of taxpayer’s trade or business or
profession; (d) The service is for a valuable
consideration actually or constructively
received; and (d) The service is not exempt
under the NIRC, special law or international
agreement.
Question: Is it necessary to determine the
nature of the sale prior determining that a
transaction is “Deemed Sale”?
Answer: Yes, before considering whether
the transaction is “deemed sale”, it must
first be determined whether the sale was in
the ordinary course of trade or business or
not. Even if the transaction was “deemed
sale” if it was not done in the ordinary
course of trade or business or was not
originally intended for sale in the ordinary
course of business, the transaction is not
subject to VAT (CIR v. Magsaysay Lines
Inc., G.R. No. 146984, July 28, 2006).
Question: Is there an instance when the
Commissioner will determine the
appropriate tax base in transactions
deemed sale?
Answer: Yes, in cases where a transaction
is a deemed sale, barter or exchange of
goods or where the selling price is
unreasonably lower than the actual market
value, the Commissioner shall determine
the appropriate tax base.
Question: When does a change in or
cessation of status of a VAT registered
person subject to VAT?
Answer: The following change in or
cessation of status of a VAT registered
person are subject to VAT: (a) 1. Change of
business activity from VAT taxable status;
(b) Approval of a request for cancellation of
registration due to reversion to exempt
status due to reversion to exempt status or
a desire to revert to exempt status after the
lapse of 3 consecutive years from the time
of registration by a person who voluntarily
registered despite being exempt under Sec
109 (2) of the NIRC or failure to meet the
specific threshold of P3,000,000.00 by one
who commenced business with the
expectation of reaching the gross sales or
receipt during the first 12 months of
operations. (R.R. No. 16-2005, R.R. No.
13-2018) CESSATION OF STATUS AS
VAT-REGIST
ERED
Question: What is the concept of Zero-
rated sales of goods or properties and
services?
Answer: A zero-rated sale of goods,
properties, or services by a VAT-registered
54
person is a taxable transaction for VAT
purposes but shall not result in any output
tax. However, the input tax on purchases of
a. goods, properties or services, related to
such zero-rated sale, shall be available as
tax credit or refund.
Question: What are the transactions
subject to VAT at 0%?
Answer: The following are transactions
subject to VAT at 0%: (1) Export sales; (2)
Sales of goods or property to persons or
entities who are tax-exempt (Effectively
Zero-Rated Sales); and (3) Zero-rated sale
of services.
Question: What does Effectively Zero-
Rated Sale Mean?
Answer: This refers to ((a) the local sale of
goods and properties (b) by a VAT-
registered person (c) to a person or entity
who was granted direct and indirect tax
exemption under special laws or
international agreement (e.g., PEZA, Asian
Development Bank, International Rice
Research Institute). [Sec. 106(A)(2)(b)
NIRC]
Question: Enumerate the services
performed in the Philippines by a VAT-
registered person which shall be subject to
0% VAT.
Answer: The following services performed
in the Philippines by a VAT-registered
person shall be subject to 0% VAT:
1. Processing, manufacturing or repacking
goods for other persons doing business
outside the Philippines which goods are
subsequently exported, where the
services are paid for in acceptable
foreign currency and accounted for in
 accordance with the rules and Answer: Items (1) and (5) above shall be
regulations of the BSP; subject to the 12% VAT and no longer be
considered export sales subject to 0% VAT
2. Services other than those mentioned in
rate upon satisfaction of the following
the preceding paragraph, rendered to a
conditions: (a)The successful establishment
person engaged in business conducted
and implementation of an enhanced VAT
outside the Philippines or to a
refund system that grants refunds of
nonresident person not engaged in
creditable input tax within 90 days from the
business who is outside the Philippines
filing of the VAT refund application with the
when the services are performed, the
Bureau; and (b) All pending VAT refund
consideration for which is paid for in
claims as of December 31, 2017 shall be
acceptable foreign currency and
fully paid in cash by December 31, 2019.
accounted for in accordance with the
(Sec. 108(B), NIRC)
rules and regulations of the BSP;
3. Services rendered to persons or entities
whose exemption under special laws or
international agreements to which the
Question: Does 0% VAT on services
Philippines is a signatory effectively
performed in the Philippines violative to the
subjects the supply of such services to
destination principle?
0% rate;
4. Services rendered to persons engaged
in international shipping or international Answer: No, the 0% VAT on services
air transport operations, including performed in the Philippines is an exception
leases of property for use thereof: to the destination principle, which states
Provided, That these services shall be that goods and services are taxed only in
exclusively for international shipping or the country where they are consumed. [CIR
air transport operations; v. American Express International, G.R. No.
152609 (2005)
5. Services performed by subcontractors
and/or contractors in processing,
converting, or manufacturing goods for Value-added tax-Exempt Transactions
an enterprise whose export sales
exceed 70% of total annual production; Question: What are VAT exempt
6. Transport of passengers and cargo by transactions?
domestic air or sea vessels from the
Philippines to a foreign country; and Answer: It refers to the sale of goods or
properties and/or services and the use or
7. Sale of power or fuel generated through
lease of properties that is not subject to
renewable sources of energy such as,
VAT(output tax) and the person making the
but not limited to, biomass, solar, wind,
exempt sale of goods, properties or
hydropower, geothermal, ocean energy,
services (seller) shall not bill or pass on any
and other emerging energy sources
output tax to his customers.
using technologies such as fuel cells
and hydrogen fuels.
Note: The VAT-registered person may elect
that the exemption not apply to its sale of
goods or properties or services; provided
that the election made shall be irrevocable
Question: In relation to the preceding for a period of three (3) years from the
enumerations, when do items (1) and (5) be quarter the election was made [Sec. 4.109-
subject to the 12% VAT and no longer be 2, RR 16-2005 as amended by RR 13-
considered export sales subject to 0% 2018].
VAT?
Question: Enumerate the VAT Exempt
Transactions.

55

Answer: The following transactions are
exempt from VAT: [Sec. 109, NIRC]
a. Sale or importation of agricultural and
marine food products in their original state,
livestock and poultry of a kind generally
used as, or yielding or producing foods for
human consumption, and breeding stock
and genetic materials therefor;
1. Products in their original state
remain as such even if they have
undergone the simple processes of
preparation or preservation for the
market, such as freezing, drying,
salting, broiling, roasting, smoking
or stripping, including those using
advanced technological means of
packaging, such as shrink wrapping
in plastics, vacuum packing, tetra-
pack, and other similar packaging
methods.
2. Polished and/or husked rice, corn
grits, raw cane sugar and molasses,
ordinary salt, AND COPRA shall be
considered in their original state
3. Livestock or poultry do not include
fighting cocks, race horses, zoo
animals and other animals generally
considered as pets. [Sec. 4.109-
1(B)(1)(a), RR 16-2005]
b. Sale or importation of fertilizers, seeds,
seedlings and fingerlings, fish, prawn,
livestock and poultry feeds including
ingredients, whether locally produced or
imported, used in the manufacture of
finished feeds (except specialty feeds for
race horses, fighting cocks, aquarium fish,
zoo animals, and other animals generally
considered as pets);
c. Importation of personal and household
effects belonging to (i) Philippine residents
returning from abroad and (ii) non-resident
citizens coming to resettle in the
Philippines; provided, that such goods are
also exempt from customs duties under the
Tariff and Customs Code of the Philippines;
d. Importation of professional instruments
and implements, tools of trade, occupation
or employment, wearing apparel, domestic
animals, and personal household effects:
56
1. belonging to persons coming to
settle in the Philippines, or Filipinos
or their families and descendants
who are now residents or citizens of
other countries (i.e., overseas
Filipinos
2. in quantities and of the class
suitable to the profession, rank or
position of the persons importing
said items
3. for their own use and not for barter
or sale,
4. accompanying such persons, or
arriving within a reasonable time [as
amended by TRAIN Law]
Note: The Bureau of Customs may, upon
production of satisfactory evidence that
such persons are actually coming to settle
in the Philippines and that the goods are
brought from their former place of abode,
exempt such goods from payment of duties
and taxes [as amended by TRAIN Law];
Exception: Vehicles, vessels, aircrafts,
machineries, and other goods for use in
manufacturing shall be subject to
duties, taxes and other charges.
e. Services subject to percentage tax; (see
Percentage Tax, infra)
f. Services by agricultural contract growers
and milling for others of palay into rice, corn
into grits, and sugar cane into raw sugar;
1. Agricultural contract growers refer to
those producing for others poultry,
livestock or other agricultural and
marine food products in their
original state. [Sec. 4.109-1(B)(1)(f),
RR 16-2005]
g. Medical, dental, hospital and veterinary
services, except those rendered by
professionals;
1. Laboratory services are exempted.
If the hospital or clinic operates a
pharmacy or drugstore, the sale of
drugs and medicine is subject to
VAT. [Sec. 4.109-1(B)(1)(g), RR 16-
2005]
2. Note: R.A. 9337 removed the
VATexemption previously granted to
doctors and lawyers.
h. Educational services (i) rendered by
private educational institutions, duly
accredited by DepEd, CHED, TESDA, and
(ii) those rendered by government
educational institutions;
i. Services rendered by individuals pursuant
to an employer-employee relationship;
j. Services rendered by regional or area
headquarters established in the Philippines
by multinational corporations which act as
supervisory, communications and
coordinating centers for their affiliates,
subsidiaries or branches in the Asia-Pacific
Region and do not earn or derive income
from the Philippines;
k. Transactions which are exempt under
international agreements to which the
Philippines is a signatory or under special
laws, except those under PD No. 529
(Petroleum Exploration Concessionaires
under the Petroleum Act of 1949);
l. Sales by agricultural cooperatives duly
registered with the Cooperative
Development Authority (CDA) to their
members, as well as sale of their produce,
whether it is original state or processed
form, to non-members; their importation of
direct farm inputs, machineries and
equipment, including spare parts thereof, to
be used directly and exclusively in the
production and/or processing of their
produce;
1. Sale by agricultural cooperatives to
non-members are exempted from
VAT if the producer is the
cooperative itself. If not (e.g.,
trader), then only those sales to its
members shall be exempted from
VAT. [RR 4-2007]
m. Gross receipts from lending activities by
credit or multi-purpose cooperatives duly
registered with the CDA;
n. Sales by non-agricultural, non-electric
and non-credit cooperatives duly registered
and in good standing with the CDA;
Provided, that the share capital contribution
of each member does not exceed P15,000
57
and regardless of the aggregate capital and
net surplus ratably
distributed among the members;
1. However, their importation of
machineries and equipment,
including spare parts thereof, to be
used by them are subject to VAT.
[Sec. 4.109-1(B)(1)(n), RR 16-
2005]
o. Export sales by persons who are not
VATregistered;
p. Sale of real properties as follows:
i. Sale of real properties NOT
primarily held for sale to customers or held
for lease in the ordinary course of trade or
business.
ii. Sale of real properties utilized for
low-cost housing as defined by R.A. 7279
(Urban Development and Housing Act of
1992) and other related laws (e.g., R.A.
7835, R.A. 8763;
1. Low-cost housing" refers to housing
projects intended for homeless low-
income family beneficiaries,
undertaken by the Government or
private developers, which may
either be a subdivision or a
condominium registered and
licensed by the Housing and Land
Use Regulatory Board / Housing
(HLURB) under BP 220, PD 957 or
any other similar law, wherein the
unit selling price is within the selling
price ceiling per unit as set by the
Housing and Urban Development
Coordinating Council (HUDCC). [RR
13- 2018]
iii. Sale of real properties utilized for
socialized housing as defined under RA
7279, and other related laws, such as RA
7835 and RA 8763, wherein the price
ceiling per unit is P480,000 for a horizontal
socialized housing with a minimum floor
area of 24sq.m, and P700,000 (if within
NCR and nearby areas) or P600,000 (in
other areas) for socialized
vertical/condominium projects with a
minimum floor area of 22sq.m. [HUDCC
Resolution Nos. 1 and 2, series of 2018]
2. "Socialized housing" refers to
housing programs and projects
 covering houses and lots or home
lots only undertaken by the
Government or the private sector for
the underprivileged and homeless
citizens which shall include sites
and services development, long-
term financing, liberated terms on
interest payments, and such other
benefits. [RR 13-2018]
iv. Sale of residential lot valued at
P1.5M and below, or house & lot and other
residential dwellings valued at P2.5M and
below, as adjusted in 2011 using the 2010
Consumer Price Index values.
1. If two or more adjacent residential
lots are sold or disposed of in favor
of one buyer (even if covered by
separate titles or tax declarations or
separate deeds of conveyance), for
the purpose of utilizing the lots as
one residential lot, the sale shall be
exempt from VAT only if the
aggregate value of the lots does not
exceed P1.5M. [RR 13-2018]
2. Sale of parking lots shall not be
considered a sale of residential lot.
Hence, it shall be subject to VAT
regardless of its selling price. [RR
13-2012]
Note: Beginning January 1, 2021, the VAT
exemption shall only apply to (i) sale of real
properties not primarily held for sale to
customers or held for lease in the ordinary
course of trade or business, (ii) sale of real
property utilized for socialized housing as
defined by RA No. 7279, (iii) sale of house
and lot, and other residential dwellings with
selling price of not more than P2,000,000
[Sec. 109(1)(P), NIRC, as amended by
TRAIN Law]
q. Lease of residential units with a monthly
rental per unit not exceeding P15,000;
1. If more than P15,000 but the
aggregate rentals of the lessor
during the year do not exceed P3M,
the lease shall be exempt from VAT,
but subject to 3% percentage tax.
2. Where a lessor has several
residential units for lease, his tax
liability will be as follows:
58
○ Gross receipts from rentals not
exceeding P15,000 shall be exempt
from VAT and percentage tax
regardless of the aggregate annual
gross receipts.
○ Gross receipts from rentals
exceeding P15,000 shall be subject
to VAT IF the aggregate annual
gross receipts from said units only
exceed P3M.
Otherwise, the gross receipts will be
subject to the 3% tax imposed under Sec.
116 of the NIRC.
3. Residential units' refers to
apartments and houses & lots used
for residential purposes, and
buildings or parts or units thereof
used solely as dwelling places (e.g.,
dormitories, rooms and bed spaces)
except motels, motel rooms, hotels
and hotel rooms, lodging houses,
inns and pension houses.
4. ‘Unit' means an apartment unit in
the case of apartments, house in
the case of residential houses; per
person in the case of dormitories,
boarding houses and bed spaces;
and per room in case of rooms for
rent. [RR 13-2018]
r. Sale, importation, printing or publication
of books and any newspaper, magazine,
review or bulletin which appears at regular
intervals with fixed prices for subscription
and sale and which is not devoted
principally to the publication of paid
advertisements;
s. Transport of passengers by international
carriers; [added by TRAIN Law]
Note: Transport of cargoes by international
carriers doing business in the Philippines is
likewise exempt from VAT, but subject to
3% percentage tax under Sec. 118 of the
NIRC.
t. Sale, importation or lease of passenger or
cargo vessels and aircraft, including
engine, equipment and spare parts thereof
for domestic or international transport
operations;
The exemption from VAT on the importation
and local purchase of passenger and/or
cargo vessels shall be subject to the
requirements on restriction on vessel
importation and mandatory vessel
retirement program of the Maritime Industry
Authority (MARINA). [RR 13-2018]
u. Importation of fuel, goods, and supplies
by persons engaged in international
shipping or air transport operations:
Provided, That the fuel, goods, and
supplies shall be used for international
shipping or air transport operations [as
amended by TRAIN Law];
1. The said fuel, goods and supplies
shall be used exclusively or shall
pertain to the transport of goods
and/or passengers from a port in the
Philippines directly to a foreign port
without stopping at any other port in
the Philippines, except to unload
passengers and/or cargoes from
abroad or load the same bound for
abroad.
2. If any portion of such fuel, goods or
supplies is used for any other
purpose, such portion of fuel, goods
and supplies shall be subject to
VAT. [RR 13-2018]
v. Services of banks, non-bank financial
intermediaries performing quasi-banking
functions and other non-bank financial
intermediaries (such as money changers
and pawnshops) subject to percentage tax;
[RR 13-2018]
w. Sale or lease of goods and services to
senior citizens and persons with disability,
as provided under RA No. 9994 (Expanded
Senior Citizens Act of 2010) and 10754 (An
Act Expanding the Benefits and Privileges
of Persons with Disability), respectively
[added by TRAIN Law];
x. Transfer of property pursuant to Section
40(C)(2) of the NIRC, as amended [added
by TRAIN Law];
y. Association dues, membership fees, and
other assessment and charges collected by
homeowners association and condominium
corporations [added by TRAIN Law];
59
z. Sale of gold to BSP [added by TRAIN
Law];
aa. Sale of drugs and medicines prescribed
for diabetes, high cholesterol, and
hypertension beginning January 1, 2019
[added by TRAIN Law];
bb. Sale or lease of goods or properties or
the performance of services other than the
transactions mentioned in the preceding
paragraphs, the gross annual sales and/or
receipts do not exceed the amount of P3M;
For purposes of the threshold of P3M, the
husband and the wife shall be considered
separate taxpayers. However, the
aggregation rule (e.g., combining income
from business and profession) for each
taxpayer shall apply.
The VAT-exempt sales shall NOT be
included in determining the threshold. [Sec.
4.109-1(B), RR 16- 2005]
cc. Self-employed individuals and
professionals availing of the 8% tax on
gross sales and/or receipts and other non
operating income, under Sections 24(A)(2)
(b) and 24(A)(2)(c)(2)(a) of the NIRC [RR
13-2018].
Question: What are the features of VAT
exempt transactions:
Answer:
1. The seller is NOT allowed to credit
the VAT (input tax) passed to him
on his purchases of taxable goods,
properties or services, because he
has no output tax to deduct it from;
2. VAT-exempt transactions shall not
be liable for VAT or the 3%
percentage tax;
3. VAT-exempt transactions shall not
be included in determining the
general threshold prescribed by law,
the amount of which is P 3,000,000.
(Revenue Regulation No. 13-18)
Question: Distinguish exempt
transaction from exempt party.
Answer: An exempt transaction involves
goods or services which, by their nature,
are specially listed in and expressly
exempted from the VAT under the NIRC,
without regard to the tax status (VAT-
exempt or not) or the party to the
transaction. Indeed, such a transaction is
not subject to the VAT and the seller is not
allowed any tax refund of or credit for any
input taon its registration as xes paid.
An exempt party, on the other hand, is a
person or entity granted VAT exemption
under the NIRC, a special law or an
international agreement to which the
Philippines is a signatory, and by virtue of
which its taxable transactions become
exempt from the VAT. Such party is also
not subject to the VAT but may be allowed
a tax refund of or credit for input taxes paid
depending on its registration as VAT or
non-VAT taxpayer (Commissioner of
internal Revenue vs. Seagate technology
(PHL) G.R. No. 153866, February 11,2005)
Input and output tax
Question: Define Input and Output tax.
Input tax – the VAT due from or paid by a
VATregistered person on importation of
goods or local purchase of goods,
properties, or services, including lease or
use of properties, in the course of his trade
or business [Sec. 110(A)(3), NIRC]
It includes the transitional input tax and the
presumptive input tax. It likewise includes
input taxes, which can be directly attributed
to transactions subject to VAT plus a
ratable portion of any input tax, which
cannot be directly attributed to either the
taxable transaction or exempt activity (R.R.
No. 16-05. Sec. 4. 110-1)
Output tax – the VAT due on the sale or
lease of taxable goods or properties or
services by any person registered or
required to register under Section 236 of
the NIRC [Sec. 110(A)(3), NIRC]
Question: What are the Sources of Input
Tax?
Answer: The following are the sources of
Input tax:
60
(a) Purchase or Importation of Goods
(evidenced by VAT invoice/receipt)
(i) For sale; or (ii) For conversion into or
intended to form part of a finished product
for sale including packaging materials; or
(iii) For use as supplies in the course of
business; or (iv) For use as materials
supplied in the sale of service; or (v) For
use in trade or business for which
deduction for depreciation or amortization is
allowed under the NIRC.
(b) Purchase of real properties for which
VAT has actually been paid
(c) Purchase of services in which VAT has
actually been paid
(d) Transactions deemed sale
(e) Transitional Input Tax [Sec 111(A),
NIRC]
(f) Presumptive Input Tax [Sec. 111(B),
NIRC]
Question: Who may avail of transitional
input tax.
Answer:
1. A person who becomes VAT-liable for
the first time upon exceeding P3M in any
12-month period, or
2. any person who voluntarily registers
even if their turnover does not exceed P3M
(except franchise grantees of radio and
television broadcasting whose threshold is
P10M) [Sec. 4.111-1(a), RR 16- 2005]
The transitional input tax credit mitigates
this initial diminution of the taxpayer’s
income by affording the opportunity to
offset the losses incurred through the
remittance of the output VAT at a stage
when the person is yet unable to credit
input VAT payments (Fort Bonifacio
Development Corporation v. CIR, G.R. No.
158885, October 2, 2009).
Question: How do you determine the
Transitional Input VAT credit:
Answer: Whichever is higher of:
1. two percent (2%) of the value of the
beginning inventory on hand, OR
2. actual VAT paid on such goods,
materials and supplies.
Note: A real estate dealer is entitled to
claim transitional input VAT on its beginning
inventory based on the value of the entire
real property, including the improvements
thereon, regardless of whether there was
prior payment of VAT on the purchase of
such real property. [Fort Bonifacio
Development Corp. v. CIR, G.R. Nos.
158885 and 170680 (2009)]
Question: Who may avail:
Answer: Persons or firms engaged in the:
1. processing of (i) sardines, (ii)
mackerel and (iii) milk, and
2. manufacturing (i) refined sugar, (ii)
cooking oil and (iii) packed noodle
based instant meals
“Processing” means pasteurization,
canning and activities which through
physical or chemical process alter the
exterior texture or form or inner substance
of a product in such manner as to prepare it
for special use to which it could not have
been put in its original form or condition.
[Sec. 111(B), NIRC]
Question: What is the allowed
presumptive input tax credit.
Answer:
VAT-registered persons are entitled to
presumptive input taxes equivalent to 4% of
the gross value in money of their purchases
of primary agricultural food products which
are used as inputs in their production.
(NIRC, Sec. 111(b)).
Question: Who are the Persons Who
Can Avail of Input Tax Credit
Answer: Input tax on domestic purchase or
importation of goods or properties shall be
creditable:
a. To the importer upon payment of the
VAT prior to the release of the goods from
customs custody;
b. To the purchaser of domestic goods or
properties upon consummation of sale; or
c. To the purchaser of services or the
lessee or licensee upon payment of the
compensation, rental, royalty or fee.
[Sec. 4.110-2, RR 16-2005]
Question: Input Tax on Depreciable
Goods Capital goods or properties
61
Answer:
1. Goods or properties with estimated
useful life greater than one (1) year;
2. Treated as depreciable assets
under Sec. 34(F) of the NIRC; and
3. Used directly or indirectly in the
production or sale of taxable goods
or services. [Sec. 16, RR 4-2007]
Claims for input tax on depreciable goods
Where a VAT-registered person purchases
or imports capital goods, which are
depreciable assets for income tax
purposes, the aggregate acquisition cost of
which (excluding VAT) in a calendar month
exceeds P1,000,000, regardless of the
acquisition cost of each capital good:
1. If the estimated useful life is 5 years
or more – the input tax shall be
spread evenly over the month of
acquisition and the 59 succeeding
months (i.e., 60 months) and the
claim for input tax credit will start in
the month of acquisition
2. If the estimated useful life is less
than 5 years – the input tax shall be
spread over such a shorter period
by dividing the input tax by the
actual number of months comprising
the estimated useful life [Sec.
4.110-3, RR 16-2005]
Notes:
If the aggregate acquisition cost does not
exceed P1,000,000, the total input taxes
will be allowable as credit against output
tax in the month of acquisition.
If the depreciable capital good is
sold/transferred within 5 years or prior to
the exhaustion of the amortizable input tax,
the entire unamortized input tax can be
claimed as input tax credit during the
month/quarter when the sale or transfer
was made. [Sec. 4.110-3, RR 16-2005]
The amortization of the input VAT shall only
be allowed until December 31, 2021 after
which taxpayers with unutilized input VAT
on capital goods purchased or imported
shall be allowed to apply the same as
scheduled until fully utilized
Question: What are the conditions in
Claiming of input tax on motor vehicles:

Answer:
a. Purchase of vehicle must be
substantiated with official receipts or other
adequate records;
b. Taxpayer has to prove the direct
connection of the motor vehicle to the
business;
c. Only one vehicle for land transport is
allowed for the use of an official/employee
with value not exceeding P2.4 million;
d. No depreciation shall be allowed for
yachts, helicopters, airplanes [Sec. 3, RR
12-2012]
Refund or tax credit of excess input tax;
procedure
Output VAT – Input VAT = VAT Payable
or Excess input VAT
Question: How is the output tax
determined? [Sec. 4.110-6, RR 16-2005]
Answer:
a. Output VAT in a sale of goods/properties
shall be computed by multiplying the total
amount indicated in the invoice or receipt
by 12%.
𝑶𝒖𝒕𝒑𝒖𝒕 𝑽𝑨𝑻 = 𝑮𝒓𝒐𝒔𝒔 𝑺𝒆𝒍𝒍𝒊𝒏𝒈 𝑷𝒓𝒊𝒄𝒆 ×
𝑽𝑨𝑻 𝑹𝒂𝒕𝒆
b. Output VAT in a sale of services shall be
computed by multiplying the total amount
indicated in the invoice or receipt by 12%.
𝑶𝒖𝒕𝒑𝒖𝒕 𝑽𝑨𝑻 = 𝑮𝒓𝒐𝒔𝒔 𝑹𝒆𝒄𝒆𝒊𝒑𝒕𝒔 × 𝑽𝑨𝑻
𝑹𝒂𝒕𝒆
c. Where VAT is erroneously billed in the
invoice, the total invoice amount shall be
presumed to be comprised of the gross
selling price or gross receipts plus the
correct amount of VAT. Hence, the output
tax is computed as follows:
𝑶𝒖𝒕𝒑𝒖𝒕 𝑽𝑨𝑻 = 𝑻𝒐𝒕𝒂𝒍 𝒊𝒏𝒗𝒐𝒊𝒄𝒆 𝒂𝒎𝒐𝒖𝒏𝒕 ×
𝟏𝟐%/𝟏𝟏𝟐%
Question: How do you determine input
tax creditable:
Answer:
a. Add all input tax creditable to a
VATregistered person during the taxable
month or quarter and any excess input tax
62
carried over from the preceding month or
quarter.
b. The sum shall be reduced by the amount
of claim for VAT refund or
credit (whether filed with the BIR, the
Department of Finance, the BOI or the
BOC) and other adjustments, such as
purchase returns or allowances and input
tax attributable to exempt sale. [Sec. 4.110-
5, RR 16-2005]
Question: How do you allocated input
tax on mixed transactions
Answer:
A VAT-registered person who is also
engaged in transactions not subject to VAT
shall be allowed tax credit as follows:
a. All input taxes directly attributable to
transactions subject to VAT may be
recognized for input tax credit. Input taxes
directly attributable to VAT taxable sales to
the Government, including GOCCs, shall
not be credited against output taxes arising
from sales to non-government entities.
b. If any input tax cannot be directly
attributed to either a VAT taxable or VAT-
exempt transaction, the input tax shall be
pro-rated to the VAT taxable and VAT-
exempt transactions and ONLY the ratable
portion pertaining to transactions subject to
VAT may be recognized for input tax credit.
[Sec. 4.110-4, RR 16-2005]
Question: How do you determine the
VAT payable or excess tax credits
Answer: If at the end of any taxable month
or quarter:
a. The output tax exceeds the input tax,
the excess shall be paid by the
VATregistered
person
b. The input tax exceeds the output tax,
the excess shall be carried over to the
succeeding quarter or quarters.
However, any input tax attributable to zero-
rated sales may be refunded or credited.
[Sec. 110(B), NIRC]
Illustration:
For a given taxable quarter ABC Corp. has
output VAT of 100 and input VAT of 80.
Since output tax exceeds the input tax for
such taxable quarter, all of the input tax
may be utilized to offset against the output
tax. Thus, the VAT payable is 20.
Questio: How do you substantiate Input
Tax Credits?
Answer:
Input taxes must be substantiated and
supported by the following documents, and
must be reported in the information returns
required to be submitted to the BIR:
a. Importation of goods – import entry or
other equivalent document showing actual
payment of VAT on the imported goods
b. Domestic purchase of goods and
properties – invoice showing the
information required under Secs. 113
(Invoicing Requirements) and 237
(Issuance of Receipts or Invoices) of the
NIRC
c. Purchase of real property – public
instrument, i.e., deed of absolute sale, deed
of conditional sale, contract/agreement to
sell, etc., together with VAT invoice issued
by the seller
d. Purchase of services – official receipt
showing the information required under
Secs. 113 and 237 of the NIRC
e. Transitional input tax – inventory of
goods as shown in a detailed list to be
submitted to the BIR
f. Input tax on "deemed sale" transactions –
required invoice
g. Input tax from payments made to non-
residents (such as for services, rentals and
royalties) – copy of the Monthly Remittance
Return of VAT Withheld (BIR Form 1600)
filed by the resident payor in behalf of the
nonresident evidencing remittance of VAT
due which was withheld by the payor
h. Advance VAT on sugar – Payment Order
showing payment of the advance VAT Who
May Claim for Refund/Apply for Issuance of
Tax Credit Certificate
Question: How do you claim refund or
tax credit for Zero-Rated Sales [Sec.
112(A), NIRC]
Answer:
63
A claim for refund or tax credit for unutilized
input VAT may be allowed only if the
following requisites concur, namely:
1. the taxpayer is VAT-registered;
2. the taxpayer is engaged in zero-rated
or effectively zero-rated sales;
3. the input taxes are due or paid;
4. the input taxes are not transitional input
taxes;
5. the input taxes have not been applied
against output taxes during and in the
succeeding quarters;
6. the input taxes claimed are attributable
to zero-rated or effectively zero-rated
Sales;
7. for zero-rated sales under Section
106(A)(2)(a)(1) and (3) and 108(B)(1)
and (2), the acceptable foreign
currency exchange proceeds have
been duly accounted for in accordance
with the rules and regulations of the
BSP;
8. where there are both zero-rated or
effectively zero-rated sales and taxable or
exempt sales, and the input taxes cannot
be directly and entirely attributable to any of
these sales, the input taxes shall be
proportionately allocated on the basis of
sales volume; and
9. the claim is filed within two (2) years
after the close of the taxable quarter
when such sales were made. [Luzon
Hydro Corporation v. CIR, G.R. No.
188260 (2013); Sec. 4.112-1, RR 16-
2005]
Question: How do you claim tax refund
or credit in case of Cancelled VAT
Registration [Sec. 112(B), NIRC]
Answer:
1. A VAT-registered person whose
registration has been cancelled due to (i)
retirement from or cessation of business, or
due to changes in or (ii) cessation of status
under Section 106(C) of the NIRC may,
within two (2) years from the date of
cancellation, apply for the issuance of a tax
credit certificate for any unused input tax
which may be used in payment of his other
internal revenue taxes.
2. The taxpayer shall be entitled to a
refund if he has no internal revenue tax
liabilities against which the tax credit
certificate may be utilized.
3. The date of cancellation shall be the
date of issuance of tax clearance by the
BIR, after full settlement of all tax
liabilities.
4. The filing of the claim shall be made
only after completion of the mandatory
audit of all internal revenue tax
liabilities covering the immediately
preceding year and the short period
return and the issuance of the
applicable tax clearance/s. [RR 13-
2018]
Question: What is the Period to File
Claim/Apply for Issuance of Tax Credit
Certificate Administrative Claim? [Sec
112(C), par. 1, NIRC]
Answer:
a. The claim must be filed within 2 years
after the close of the taxable quarter
when the sales were made (or 2 years
from the date of cancellation of
registration). [Sec. 112(A) and (B), NIRC]
Note: It is only the administrative claim that
must be filed within the two-year period,
which must be reckoned from the close of
the taxable quarter when the relevant sales
were made. [CIR v. San Roque Power
Corporation, G.R. 187485 (2013)]
Note: In tax refunds of erroneous tax
payments under Sec. 229 of the NIRC, the
administrative and judicial claims may be
made simultaneously, and the reckoning
point of the 2-year period is from the date
of payment.
b. The CIR shall grant the refund within 90
days from the date of submission of the
official receipts or invoices and other
documents in support of the
application.
Note: Prior to January 1, 2018, all claims
for refund or tax credit will be governed by
the 120-day processing period.
c. Should the CIR find that the grant of
refund is not proper, the CIR must state
64
in writing the legal and factual basis for
the denial.
Question: How can you file a tax refund
or Credit through a Judicial Claim? [Sec
112 (C), par. 2, NIRC]
Answer:
a. In case of full or partial denial of the
claim or tax refund, the taxpayer may
appeal to the CTA within 30 days from the
receipt of decision.
b. The 30-day period to appeal is both
mandatory and jurisdictional.
Exception: Premature filing is allowed
only if filed between 10 December 2003
and 5 October 2010, when BIR Ruling
No. DA- 489-03 was still in force. [CIR v.
San Roque Power Corporation, G.R.
187485 (2013)]
Question: What is the Effect of inaction
by the CIR?
Answer:
Failure on the part of any official, agent, or
employee of the BIR to act on the
application within the 90-day period shall be
punishable under Section 269 of the NIRC
(Violations Committed by Government
Enforcement Officers). [Sec. 112(C), NIRC]
Note: The provision on the appeal of the
CIR’s failure to act on the application for
refund or tax credit was removed by the
TRAIN Law.
Question: What happened in the San
Roque case and what is San Roque
Doctrine
Answer:
Crucial facts: San Roque did not wait for
the 120-day period to lapse before filing its
judicial claim and it filed its judicial claim
more than 4 years before the Atlas doctrine
(i.e., the 2-year prescriptive period should
be counted from the date of payment of the
output VAT, not from the close of the
taxable quarter when the sales involving
the input VAT were made).
The 120-day (now 90-day) waiting period is
mandatory and jurisdictional.
Failure to comply with the 120-day period
violates a mandatory provision of law. It
violates the doctrine of exhaustion of
administrative remedies and renders the
petition premature and thus without a cause
of action, with the effect that the CTA does
not acquire jurisdiction over the taxpayer’s
petition.
The mere fact that a taxpayer has
undisputed excess input VAT, or that the
tax was admittedly illegally, erroneously or
excessively collected from him, does not
entitle him as a matter of right to a tax
refund or credit. Strict compliance with the
mandatory and jurisdictional conditions
prescribed by law to claim such tax refund
or credit is essential and necessary for
such claim to prosper. Well-settled is the
rule that tax refunds or credits, just like tax
exemptions, are strictly construed against
the taxpayer. The burden is on the taxpayer
to show that he has strictly complied with
the conditions for the grant of the tax refund
or credit.
Question: What is the period to file a
judicial claim in case of inaction of BIR
to refund?
Answer:
In case of full or partial denial of the claim
for tax refund, the taxpayer affected may
within thirty (30) days from the receipt of
the decision denying the claim, appeal the
decision with the Court of Tax Appeals
(NIRC, Section 112(C)).
Note:
1. Prior to TRAIN law, Section 112(C)
states that “in case of full or partial
denial for tax refund or tax credit, or
the failure on the part of the
Commissioner to act on the
application within the period
prescribed above, the taxpayer
may, within thirty (30) days from the
receipt of the decision denying the
claim or after the expiration of the
one hundred twenty-day (120)
period appeal the decision or the
unacted claim with the Court of Tax
Appeals”.
65
2. However, the TRAIN’s omission of
the CIR’s inaction does not bar the
filing of the judicial claim. The CTA
charter provides the CTA shall
exercise an exclusive appellate
jurisdiction to renew by appeal
inaction by the Commissioner of
Internal Revenue in cases involving
disputed assessments, refunds of
internal revenue taxes, fees or other
charges, penalties in relation
thereto, or other matters arising
under the National Internal Revenue
Code or other laws administered by
the Bureau of Internal Revenue
where the National Internal
Revenue Code Provides a specific
period of action, in which case the
inaction shall be deemed denial.
(R.A. No. 9282, Sec. 7(a)(2)).
3. The Commissioner’s inaction on the
claim during the 120-day period is
“deemed a denial,” pursuant to
Section 7(a)(2) of Republic Act No.
1125, as amended by Section 7 of
Republic Act No. 9282. Team
Energy had 30 days from the
expiration of the 120-day period to
file its judicial claim with the Court of
Tax Appeals, Its failure to do so
rendered the Commissioner’s
“deemed a denial” decision as final
and unappealable (Team Energy
Corporation v. Commissioner of
Internal Revenue, G.R. No. 197663
& G.R. No. 197770, March 14,2018)
Question: State the Exclusive appellate
jurisdiction of CTA
Answer:
The CTA has exclusive appellate
jurisdiction to review by appeal the inaction
by the CIR in cases involving disputed
assessments, refunds of internal revenue
taxes, fees or other charges, penalties in
relations thereto, or other matters arising
under the NIRC or other laws administered
by the BIR, where the NIRC provides a
specific period of action, in which case the
inaction shall be deemed a denial.
[Sec. 7(a)(2), R.A. 1125 as amended by
R.A. 9282]
Question: What is the Manner of
Refund?
Answer:
Refunds shall be made upon warrants
drawn by the CIR or by his duly authorized
representative without the necessity of
being countersigned by the Chairman of the
Commission on Audit (COA), provided that
refunds shall be subject to post audit by
COA.
[Sec. 112(D), NIRC]
Question: Define the Enhanced VAT
Refund System.
Answer:
VAT refund system that grants and pays
refunds of creditable input tax within ninety
(90) days from the filing of the VAT refund
application with the Bureau (R.R. No. 13-
18, Sec. 2).
Question: What is the effect of
successful establishment and
implementation of the Enhanced VAT
Refund System?
Answer:
The following sales subject to 0% VAT shall
be subject to 12% VAT:
1. Zero Rated Sale of Goods or
Properties:
a. The sale of Raw materials or
packaging material to a non-
resident buyer for delivery to
a resident local export-
oriented enterprise to be
used in manufacturing,
processing, packing or
repacking in the Philippines
of the said buyer’s goods,
paid for in acceptable foreign
currency, and accounted for
in accordance with the rules
and regulations of the BSP;
b. The sale of Raw materials or
packaging materials to an
export-oriented enterprise
who export sales exceed
seve
c. Transactions considered
export sales under E.O. No.
226, otherwise known as the
66
Omnibus Investments Code
of 1987, and other special
laws.
2. Zero-Rated Sale of Service:
a. Processing manufacturing or
repacking of goods for other
persons doing business outside the
Philippines, which goods are
subsequently exported and paid for
in acceptable foreign currency and
accounted for in accordance with
the rules and regulations of the
BSP; and
b. Services performed by
Subcontractors and/or contractors in
processing, converting, or
manufacturing goods for an
enterprise whose export sales
exceed 70% of the total annual
production (R.R. No. 13-18 Sec. 2)
Note: In addition to the establishment of
Enhance VAT Refund System to subject to
12% VAT, all pending VAT refund claims as
of December 31, 2017 shall be fully paid in
cash by December 31,2019 (R.R. No. 13-
18. Sec. 2).
8. Compliance Requirements
Question: What are the Invoicing
Requirements?
Answer: In General
A VAT-registered person shall issue:
a. A VAT invoice for every sale, barter or
exchange of goods or properties; and
b. A VAT official receipt (OR) for every
lease of goods or properties, and for every
sale, barter or exchange of services [Sec.
113(A), NIRC]
Only VAT-registered persons are required
to print their TIN followed by the word
“VAT” in their invoice or ORs, which shall
be considered as a “VAT Invoice” or “VAT
OR”. All purchases covered by
invoices/receipts other than VAT
Invoice/VAT OR shall not give rise to any
input tax. [Sec. 4.113-1(A), RR 16-2005]
Question: What are the Information
Contained in the VAT Invoice or VAT
Official Receipt?
Answer:
1. A statement that the seller is a
VATregistered person, followed by his
taxpayer's identification number (TIN);
2. The total amount which the purchaser
pays or is obligated to pay to the seller with
the indication that such amount includes
the VAT:
a. The amount of the tax shall be shown as
a separate item in the invoice/receipt;
b. If the sale is exempt from VAT, the term
"VAT-exempt sale" shall be written or
printed prominently on the invoice or
receipt;
c. If the sale is subject to 0% VAT, the term
"zero-rated sale" shall be written or printed
prominently on the invoice or receipt;
d. If the sale involves goods, properties or
services some of which are subject to and
some of which are VAT zero-rated or VAT-
exempt, the invoice or receipt shall clearly
indicate the breakdown of the sale price
between its taxable, exempt and zero-rated
components, and the calculation of the VAT
on each portion of the sale shall be shown
on the invoice or receipt. The seller may
issue separate invoices or receipts for the
taxable, exempt, and zero-rated
components of the sale.
3. The date of transaction, quantity, unit
cost
and description of the goods or properties
or nature of the service; and
4. In the case of sales in the amount of
P1,000 or more where the sale or transfer
is made to a VAT-registered person, the
name, business style, if any, address and
TIN of the purchaser, customer or client.
[Sec. 113(B), NIRC]
Follow-up Question: In Deemed Sale
Transactions?
a. Transfer, use or consumption not in the
course of business of goods or properties
originally intended for sale or for use in the
course of business –
Memorandum entry in the subsidiary sales
journal to record withdrawal of goods for
personal use
b. Distribution or transfer to shareholders,
investors or creditors; and consignment of
goods if actual sale is not made within 60
days – Invoice, at the time of the
transaction, which should include all the
67
information required in a VAT invoice; data
in the invoice shall be duly recorded in the
subsidiary sales journal
c. Retirement from or cessation of business
with respect to all goods on hand – An
inventory shall be prepared and submitted
to the RDO with jurisdiction over the
taxpayer’s principal place of business not
later than 30 days after retirement or
cessation from business. An invoice shall
be prepared for the entire inventory, which
shall be the basis of the entry into the
subsidiary sales journal. If the business is
to be continued by the new owners or
successors, the entire amount of output tax
on the amount deemed sold shall be
allowed as input taxes. [Sec. 4.113-2, RR
16-2005]
Question: What are the Issuance of a
VAT Invoice or VAT Receipt by a non-
VAT person?
Answer:
If a person who is not a VAT-registered
person issues an invoice or receipt showing
his TIN, followed by the word "VAT", the
erroneous issuance shall result to the
following:
a. The issuer shall be liable to:
1. percentage taxes applicable to his
transactions;
2. VAT due on transactions under Section
106 or 108 of the NIRC, without the benefit
of any input tax credit; and
3. a 50% surcharge under Section 248(B)
of the NIRC.
b. The VAT shall be recognized as an input
tax credit to the purchaser, if the other
requisite information is shown on the
invoice/receipt. [Sec. 113(D), NIRC]
Question: What are the Issuance of a
VAT Invoice or VAT Receipt on an
Exempt Transaction by a VAT registered
Person?
Answer:
If a VAT-registered person issues a VAT
invoice or VAT OR for a VAT-exempt
transaction, but fails to display prominently
on the invoice or receipt the term "VAT-
exempt Sale”:
a. the transaction shall become taxable;
b. the issuer shall be liable to pay VAT
thereon; and
c. the purchaser shall be entitled to claim
an input tax credit on his purchase.
[Sec. 4.113-4(B), RR 16-05]
Question: State the procedure in Filing
of Returns and Payment
Answer:
1. Every person liable to pay VAT shall file
a gross payments. [Sec. 114(C), NIRC]
quarterly return of the amount of his gross
sales or receipts within 25 days after the
close of each taxable quarter prescribed for
each taxpayer.
2. The monthly VAT Declarations of
taxpayers whether large or non-large shall
be filed and the taxes paid not later than
the 20th day following the end of each
month.
3. Beginning January 1, 2023, the filing of
return and payment of VAT shall be done
within 25 days following the close of each
taxable quarter. [Sec. 114(A), NIRC as
amended by TRAIN Law; Sec. 4.114-1(A),
RR 16-2005]
Note: VAT is paid on a monthly basis.
Payments in the monthly VAT declarations
shall be credited in the quarterly VAT return
to arrive at the net VAT payable or excess
input tax/overpayment as of the end of a
quarter.
[Sec. 4.114-1(A), RR 16-2005]
d. Withholding of Final Value-added
Question: What are the exceptions to
the general rule that the VAT cannot be
collected by way of withholding?
Answer:
General Rule: VAT cannot be collected by
way of withholding.
Exceptions:
1. Gross payments by the government
shall be subject to the 5% final
withholding VAT;
2. Gross payments by resident
VATtaxpayers to non-residents shall be
subject to 12% withholding VAT. [Sec.
4.114-2, RR 16-2005]
68
Note: The payor or person in control of the
payment is considered as the withholding
Agent.
Question: How do you treat taxes on
Sales to Government
Answer:
The government or any of its political
subdivisions, instrumentalities or agencies,
including GOCCs shall, before making
payment for purchases of goods and
services which are subject to the VAT,
deduct and withhold a 5% final VAT on the
Note: Beginning January 1, 2021, the VAT
withholding system under this Subsection
shall shift from final to a creditable system.
[Sec. 114(C), NIRC]
The 5% final VAT shall represent the net
VAT payable of the seller. The remaining
7% effectively accounts for the standard
input VAT, in lieu of the actual input VAT
directly attributable or ratably apportioned
to such sales. [Sec. 4.114-2, RR 16-2005]
Should actual input VAT attributable to
sales to the government exceed 7% of the
gross payments, the excess may form part
of the sellers’ expense or cost. On the other
hand, if actual input VAT is less than 7% of
gross payment, the difference must be
closed to expense or cost. [Sec. 4.114-2,
RR 16-2005]
Question: How do you treat Payments to
non-residents?
Answer:
The government, as well as private
corporations, individuals, estates and
trusts, whether large or non-large
taxpayers, shall withhold 12% VAT with
respect to the following:
1. Lease or use of properties or property
rights owned by non-residents; and
2. Other services rendered in the
Philippines by non-residents. [Sec. 22,
RR 4-2007]
Note: Payments for purchases of goods
and services arising from projects funded
by Official Development Assistance (ODA)
as defined under RA No. 8182, or the ‘ODA
Act of 1996’, as amended, shall NOT be
subject to the final/creditable withholding
tax system as imposed in this Subsection.
[Sec. 2, RR 13- 2018]

Question: What are the Administrative

and Penal Sanctions provided for under
NIRC in case of non-payment of VAT?

Answer:
1. Surcharge, interest and other
penalties –
The interest on unpaid amount of tax, civil
penalties and criminal penalties imposed in
Title XI of the NIRC shall also apply to
violations of the VAT provisions of the
NIRC.
[Sec. 115, NIRC; Sec. 4.115-1, RR 16-
2005]

2. Suspension of business operations

–
In addition to other administrative and penal
sanctions provided for in the NIRC and
implementing regulations, the CIR or his
duly authorized representative may order
the suspension or closure of a business
establishment for a period of not less than 5
days for any of the following violations:
(1) Failure to issue receipts and invoices
(2) Failure to file VAT return as required
under Sec. 114 of the NIRC
(3) Understatement of taxable sales or
receipts by 30% or more of his correct
taxable sales or receipt for the taxable
quarter
(4) Failure of any person to register as
required under Sec. 236 of the NIRC

69
 PERCENTAGE TAXES
CONCEPT
Question: What is percentage tax?
Answer: Percentage tax is a tax imposed
on sale, barter, exchange or importation of
goods, or sale of services based upon
gross sales, value in money of receipts
derived by the manufacturer, producer,
importer or seller measured by certain
percentage of the gross selling price or
receipts. If the transaction is subject to
other percentage tax (“OPT”), it is no longer
subject to VAT. Nonetheless, OPT as well
as VAT may be imposed together with
excise taxes (Tabag, 2015).
Question: What are subject to other
percentage taxes?
Answer: The following are subject to other
percentage taxes:
(1) Persons Exempt from VAT (3%) -
sale or lease of goods or properties or
performance of services, where the
annual sales and/or receipts do not
exceed the amount of Php3,000,
000.00 (Sec. 116)
(2) Domestic Carriers; Keepers of
Garages (3%) – includes cars for rent
or hire driven by the lessee,
transportation contractors, other
domestic carriers by land for the
transport of passengers and keepers
of garages (Sec. 117)
(3) International Carriers (3%) –
international air/shipping carriers
doing business in the Philippines
(Sec. 118)
(4) Franchises (Sec. 119)
o Radio and/or television
broadcasting companies with
annual gross receipts not
exceeding P10M – 3% on gross
receipts derived from the business
70
covered by the law granting the
franchise
o Gas and water utilities – 2% on
gross receipts derived from the
business covered by the law
granting the franchise
(5) Overseas Dispatch, Message or
Conversation Originating in the
Philippines – 10% on the amount paid
for such services (Sec. 120)
(6) Banks and Non-bank Financial
Intermediaries (Sec. 121)
(7) Other Non-bank Financial
Intermediaries (Sec. 122)
(8) Life Insurance Premiums (Sec. 123)
(9) Agents of Foreign Insurance
Companies (Sec. 124)
(10) Proprietors, Lessee or Operator of
Amusement Places (Sec. 125
(11) Winnings (Sec. 126)
(12) Sale, Barter or Exchange of Shares of
Stock Listed and Traded through the
Local Stock Exchange or through
Initial Public Offering (Sec. 127)
Question: Differentiate percentage tax
from income tax.
Answer: A percentage tax is a national tax
measured by a certain percentage of the
gross selling price or gross value in money
of goods sold, bartered or imported; or of
the gross receipts or earnings derived by
any person engaged in the sale of services.
It is not subject to withholding.
An income tax, on the other hand, is a
national tax imposed on the net or the
gross income realized in a taxable year. It
is subject to withholding. [CIR v. Solidbank
Corp., G.R. No. 148191 (2003)]
Question: May franchisees opt to register
as VAT taxpayer?
Answer: Yes. Under Section 119 of the
NIRC, franchisees shall have an option to
be registered as a value-added taxpayer
and pay the tax due thereon. Provided,
however, that once the option is exercised,
said option shall be irrevocable.
Question: Who are exempted from
payment of ten percent (10%) tax on
overseas dispatch, message or
conversation originating from the
Philippines?
Answer: The tax imposed on overseas
dispatch, message or conversation
originating from the Philippines shall not
apply to the following persons/entities:
(1) Government;
(2) Diplomatic Services;
(3) International Organizations; and
(4) News Services. [Sec. 120 (B), NIRC]
Question: Are pawnshops considered
“other non-bank financial intermediaries”?
Answer: Yes. Pawnshops are considered
other non-bank financial intermediaries.
In First Planters Pawnshop, Inc. v.
Commissioner of Internal Revenue, the
Supreme Court held:
In fine, prior to the [passage of the] EVAT
Law [in 1994], pawnshops were treated as
lending investors subject to lending
investor's tax. Subsequently, under Section
108 (A) of the Tax Code of 1997, as
amended. R.A. No. 9238 [which was
passed in 2004] finally classified
pawnshops as Other Non-bank Financial
Intermediaries.
With the enactment of R.A. No. 9238 in
2004, the services of banks, non-bank
financial intermediaries, finance companies,
and other financial intermediaries not
performing quasi-banking functions were
specifically exempted from VAT, and the
71
0% to 5% percentage tax on gross receipts
on other non-bank financial intermediaries
was re-imposed under Section 122 of the
Tax Code of 1997.
Question: How much is the tax on life
insurance premiums?
Answer: The tax for life insurance
premiums is 2% of the total premium
collected, whether such premiums are paid
in money, notes, credits or any substitute
for money. (Sec. 123)
Question: Is the tax applicable to all
corporations doing life insurance business?
If not, what are these companies?
Answer: No, the tax is not applicable to all
corporations doing life insurance business.
It does not include purely cooperative
companies or associations. Cooperative
companies or associations are such as are
conducted by the members thereof with the
money collected from among themselves
and solely for their own protection and not
for profit. (Sec. 123)
Question: Is the tax applicable on all life
insurance premiums?
Answer: No, not all life insurance
premiums are subject to tax. The following
are the premiums that are not included:
(a) Premiums refunded within six (6)
months after payment on account of
rejection of risk or returned for other
reason to a person insured shall not be
included in the taxable receipts;
(b) Premiums paid upon reinsurance by a
company that has already paid the tax;
(c) Premiums collected or received by any
branch of a domestic corporation, firm
or association doing business outside
 the Philippines on account of any life
insurance of the insured who is a
Answer: They refer to fire, marine or
nonresident, if any tax on such premium
miscellaneous insurance agents authorized
is imposed by the foreign country where
under the Insurance Code to procure
the branch is established;
policies of insurance as they may have
(d) Premiums collected or received on previously been legally authorized to
account of any reinsurance, if the transact on risks located in the Philippines
insured, in case of personal insurance, for companies not authorized to transact
resides outside the Philippines, if any business in the Philippines. (Sec. 124)
tax on such premiums is imposed by
the foreign country where the original
insurance has been issued or perfected;
and Question: How much tax should agents of
(e) Premiums collected or received by the foreign insurance companies pay?
insurance companies on variable
contracts, in excess of the amounts
necessary. to insure the lives of the Answer: The tax that the agents of foreign
variable contract owners. (Sec. 123) insurance companies is required to pay is
10% of the total premiums collected. (Sec.
124)

Question: Are premium taxes deductible

from costs of services?
Answer: No, premium taxes are NOT
deductible costs of services.
One of the express requirements for
deductibility — that the claimed deduction
should be a direct cost or expense. A cost
or expense is deemed "direct" when it is
readily attributable to the production of the
goods or for the rendition of the service.
In this case, premium taxes are not direct
costs within the contemplation of the
phrase "cost of services," incurred as they
are after the sale of service had already
transpired. This cannot therefore be
considered as the equivalent of raw
materials, labor, and manufacturing cost of
deductible "cost of sales" in the sale of
goods.
(Manila Bankers' Life Insurance Corp. v.
Commissioner of Internal Revenue, G.R.
Nos. 199729-30 & 199732-33, [February
27, 2019])
Question: Does the tax on agents of
foreign insurance companies apply to
reinsurance?
Answer: No, the tax on agents of foreign
insurance companies does not apply to
reinsurance. (Sec. 124)
Question: Are the property owners
prohibited from obtaining policies from
foreign companies?
Answer: No, property owners are not
prohibited from obtaining policies from
foreign companies. Section 124 states that
the provisions of this Section shall not
affect the right of an owner of property to
apply for and obtain for himself policies in
foreign companies in cases where said
owner does not make use of the services of
any agent, company or corporation residing
or doing business in the Philippines.

Question: Who are agents of foreign

insurance companies as referred under
Sec. 124?

72
Question: What should the property
owners do when they obtain insurance
directly from foreign companies?
Answer: The property owners should
report to the Insurance Commissioner and
to the Commissioner each case where
insurance has been so effected, and shall
pay the tax of five percent (5%) on
premiums paid. (Sec. 124)
Question: What are amusement taxes?
Answer: Amusement taxes are taxes
collected from the proprietor, lessee or
operator of cockpits, cabarets, night or day
clubs, boxing exhibitions, professional
basketball games, Jai-Alai and racetracks.
(Sec. 125)
Question: How much are the amusement
taxes?
Answer: The amusement taxes are as
follows:
(a) 18% for cockpits;
(b) 18% in the case of cabarets, night or
day clubs;
(c) 10% in the case of boxing exhibitions
(d) 15% in the case of professional
basketball games as envisioned in
Presidential Decree No. 871; and
(e) Thirty percent (30%) in the case of Jai-
Alai and racetracks of their gross
receipts, irrespective, of whether or not
any amount is charged for admission.
(Sec. 125)
Question: What boxing exhibitions are
exempt from amusement tax?
73
Answer: Boxing exhibitions wherein: (1)
World or Oriental Championships in any
division is at stake; (2) at least one of the
contenders for World or Oriental
Championship is a citizen of the
Philippines; and (2) said exhibitions are
promoted by a citizen/s of the Philippines or
by a corporation or association at least sixty
percent (60%) of the capital of which is
owned by such citizens are exempt from
amusement tax. (Sec. 125)
Question: For purposes of amusement tax,
what does “gross receipts” mean?
Answer: For the purpose of the
amusement tax, the term 'gross receipts'
embraces all the receipts of the proprietor,
lessee or operator of the amusement place.
Said gross receipts also include income
from television, radio and motion picture
rights, if any. (Sec. 125)
Question: When are amusement taxes
due?
Answer: Amusement taxes shall be
payable at the end of each quarter and it
shall be the duty of the proprietor, lessee or
operator concerned, as well as any party
liable, within twenty (20) days after the end
of each quarter, to make a true and
complete return of the amount of the gross
receipts derived during the preceding
quarter and pay the tax due thereon. (Sec.
125)
Question: What is the difference between
the amusement tax under the National
Internal Revenue Code, as amended and
under the Local Government Code?
Answer: The amusement tax under the
National Internal Revenue Code, as
amended, is collected by the national
government, while the amusement tax
under the Local Government Code is
collected by the local government unit,
specifically by the province.
The amusement tax under the National
Internal Revenue Code, as amended, is
collected from the proprietor, lessee or
operator of cockpits, cabarets, night or day
clubs, boxing exhibitions, professional
basketball games, Jai-Alai and racetracks.
On the other hand, the amusement tax
under the Local Government Code is
collected from proprietors, lessees, or
operators of theaters, cinemas, concert
halls, circuses, boxing stadia, and other
places of amusement.
Question: A and B are engaged in the
business of operating cinema houses,
among others. The BIR sent A and B a
Preliminary Assessment Notice (PAN) for
value added tax (VAT) deficiency on
cinema ticket sales. They protested the
assessment, arguing that gross receipts
from cinema/theater admission tickets are
exempted from VAT. Are A and B correct?
Answer: Yes, A and B are correct in that
gross receipts from cinema/theater
admission tickets are exempted from VAT.
Under the NIRC of 1939 the national
government imposed amusement tax on
proprietors, lessees, or operators of
theaters, cinematographs, concert halls,
circuses, boxing exhibitions, and other
places of amusement, including cockpits,
race tracks, and cabaret. This provision
was however amended by transferring the
power to impose amusement tax on
admission from theaters, cinematographs,
concert halls, circuses and other places of
amusements exclusively to the local
government. Thus, when the NIRC of 1977
was enacted, the national government
imposed amusement tax only on
proprietors, lessees or operators of
cabarets, day and night clubs, Jai-Alai and
race tracks. When the VAT law was
implemented, it exempted persons subject
to amusement tax under the NIRC from the
74
coverage of VAT. Furthermore, when the
Local Tax Code was repealed by the LGC
of 1991, the local government continued to
impose amusement tax on admission
tickets from theaters, cinematographs,
concert halls, circuses and other places of
amusements. Amendments to the VAT law
have been consistent in exempting persons
subject to amusement tax under the NIRC
from the coverage of VAT.
These reveal the legislative intent not to
impose VAT on persons already covered by
the amusement tax. This holds true even in
the case of cinema/theater operators taxed
under the LGC of 1991 precisely because
the VAT law was intended to replace the
percentage tax on certain services. The
mere fact that they are taxed by the local
government unit and not by the national
government is immaterial. The Local Tax
Code, in transferring the power to tax gross
receipts derived by cinema/theater
operators or proprietor from admission
tickets to the local government, did not
intend to treat cinema/theater houses as a
separate class. No distinction must,
therefore, be made between the places of
amusement taxed by the national
government and those taxed by the local
government.
To hold otherwise would impose an
unreasonable burden on cinema/theater
houses operators or proprietors, who would
be paying an additional 10% VAT on top of
the 30% amusement tax imposed by
Section 140 of the LGC of 1991, or a total
of 40% tax. Such imposition would result in
injustice, as persons taxed under the NIRC
of 1997 would be in a better position than
those taxed under the LGC of 1991. We
need not belabor that a literal application of
a law must be rejected if it will operate
unjustly or lead to absurd results. Thus, we
are convinced that the legislature never
intended to include cinema/theater
operators or proprietors in the coverage of
VAT.
(Commissioner of Internal Revenue v. SM
Prime Holdings, Inc., G.R. No. 183505,
[February 26, 2010], 627 PHIL 581-605)
Question: How much is the tax on gross value in money of the shares of stock
winnings? sold, bartered, exchanged or otherwise
disposed. (Sec. 127)

Answer: The tax on winnings is 10% based

on the actual amount paid to him for every
winning ticket after deducting the cost of
Question: Who shall pay the Tax on Sale,
the ticket. In the case of winnings from
Barter or Exchange of Shares of Stock
double, forecast/quinella and trifecta bets,
Listed and Traded through the Local Stock
the tax shall be 4%. In the case of owners
Exchange?
of winning race horses, the tax shall be ten
percent (10%) of the prizes. (Sec. 126)
Answer: It is the seller or transferor who
shall pay the Tax on Sale, Barter or
Exchange of Shares of Stock Listed and
Question: How is the tax on winnings Traded through the Local Stock Exchange.
collected? (Sec. 127)

Answer: The tax on winnings is collected

by deducting from the 'dividends'
Question: On what transaction is the Tax
corresponding to each winning ticket or the
on Shares of Stock Sold or Exchanged
'prize' of each winning race horse owner
Through Initial Public Offering imposed
and withheld by the operator, manager or
upon?
person in charge of the horse races before
paying the dividends or prizes to the
persons entitled thereto. (Sec. 126) Answer: The Tax on Shares of Stock Sold
or Exchanged Through Initial Public
Offering is imposed upon every sale, barter,
exchange or other disposition through initial
Question: When should the tax on public offering of shares of stock in closely
winnings be paid? held corporations. (Sec. 127)

Answer: The tax on winnings should be

paid by the operator, manager or person in
charge of horse races within 20 days from
the date the tax was deducted and
withheld, together with the filing of a true
and correct return with the Commissioner.
(Sec. 126)
Question: How much is the Tax on Sale,
Barter or Exchange of Shares of Stock
Listed and Traded through the Local Stock
Exchange?
Question: What are closely held
corporations?
Answer: Closely held corporations refer to
any corporation at least fifty percent (50%)
in value of outstanding capital stock or at
least fifty percent (50%) of the total
combined voting power of all classes of
stock entitled to vote is owned directly or
indirectly by or for not more than twenty
(20) individuals. (Sec. 127)

Answer: The Tax on Sale, Barter or

Question: How much is the Tax on Shares
Exchange of Shares of Stock Listed and
of Stock Sold or Exchanged Through Initial
Traded through the Local Stock Exchange
Public Offering? What is the basis of the
is 6⁄10 of 1% of the gross selling price or
tax?

75

Answer: The Tax on Shares of Stock Sold
or Exchanged Through Initial Public
Offering is as follows:
(a) Up to twenty-five percent (25%) – 4%
(b) Over twenty-five percent (25%) but not
over thirty-three and one third percent
(33 1/3%) – 2%
(c) Over thirty-three and one third percent
(33 1/3%) – 1%
The tax is based on the gross selling price
or gross value in money of the shares of
stock sold, bartered, exchanged or
otherwise disposed in accordance with the
proportion of shares of stock sold, bartered,
exchanged or otherwise disposed to the
total outstanding shares of stock after the
listing in the local stock exchange. (Sec.
127)
Question: Who should pay the Tax on
Shares of Stock Sold or Exchanged
Through Initial Public Offering?
Answer: The Tax on Shares of Stock Sold
or Exchanged Through Initial Public
Offering is paid by the issuing corporation
in primary offering or by the seller in
secondary offering. (Sec. 127)
Question: What is the duty of every stock
broker who effected the sale of Shares of
Stock Listed and Traded in the Local Stock
Exchange?
Answer: The duty of every stock broker
who effected the sale of Shares of Stock
Listed and Traded in the Local Stock
Exchange is to collect the tax and remit the
same to the Bureau of Internal Revenue
within five (5) banking days from the date of
collection thereof and to submit on
Mondays of each week to the secretary of
the stock exchange, of which he is a
member, a true and complete return which
shall contain a declaration of all the
76
transactions effected through him during
the preceding week and of taxes collected
by him and turned over to the Bureau Of
Internal Revenue. (Sec. 127)
Question: What is the duty of the corporate
issuer or the seller in case of the sale of
Shares of Stock Sold or Exchanged
Through Initial Public Offering?
Answer: In case of primary offering, the
corporate issuer shall file the return and
pay the corresponding tax within thirty (30)
days from the date of listing of the shares of
stock in the local stock exchange. In the
case of secondary offering, the time and
manner of the payment of the tax shall be
the same with that of the sale of Shares of
Stock Listed and Traded in the Local Stock
Exchange. (Sec. 127)
Question: From what taxes is gain derived
from the sale, barter, exchange or other
disposition of shares of stocks Listed and
Traded through the Local Stock Exchange
or through Initial Public Offering exempt
from?
Answer: The gain derived from the sale,
barter, exchange or other disposition of
shares of stocks Listed and Traded through
the Local Stock Exchange or through Initial
Public Offering is exempt from the
following:
(1) The tax imposed on capital gains from
sale of shares of stock not traded in the
stock exchange imposed on individuals,
domestic corporations, and foreign
corporations [Sections 24(C), 27(D)(2),
28(A)(8)(c), and 28(B)(5)(c)]; and
(2) The regular individual or corporate
income tax. (Sec. 127)
Question: Can the Tax on Sale, Barter or
Exchange of Shares of Stock Listed and
Traded through the Local Stock Exchange
or through Initial Public Offering be
deducted for income tax purposes?
Answer: No, the Tax on Sale, Barter or
Exchange of Shares of Stock Listed and
Traded through the Local Stock Exchange
or through Initial Public Offering shall not be
deductible for income tax purposes. (Sec.
127)
Question: X Company offered to the public
100,000,000 shares by way of an initial
public offering at the offer price of P4.68
each share. Of these shares, 800,000
shares were offered in primary offering by X
Company as the issuing corporation, and
200,000 shares were offered in secondary
offering by AB Corp. as selling shareholder
of X Company.
By virtue of Section 127 (B) of the National
Internal Revenue Code, as amended, X
Company paid the tax based on the total
amount of shares sold to the public in both
primary and secondary offerings.
Four months after, X Company filed a claim
for refund for excess payment. The Court of
Tax Appeals denied his claim, saying that
the tax on sale of shares in primary offering
should be separately computed from the
tax on sale of shares in secondary offering.
Is the tax on sale of shares of stock sold or
exchanged through initial public offering
under Section 127 (B) for shares in primary
and secondary offerings computed
separately?
Answer: Yes, the tax on sale of shares of
stock sold or exchanged through initial
public offering under Section 127 (B) for
shares in primary and secondary offerings
should be computed separately.
A plain reading of Section 127 (B) shows
that tax is imposed on "every sale, barter,
exchange or other disposition through initial
public offering of shares of stock in closely
held corporations.” The word "every"
precedes the word "sale." The use of such
word is clear and leaves no room for
77
interpretation. Each sale of shares of stock
in closely held corporations through initial
public offering is taxed under Section 127
(B).
Since tax is imposed on every sale of
shares of stock, there is a need to
determine which sales are covered in the
sale of shares through initial public offering.
On this score, the second paragraph of
Section 127 (B) precisely provides for the
types of sales involved: sale by the issuing
corporation in primary offering, and sale by
each of the corporation's shareholders in
secondary offering. Thus, every sale in
Section 127 (B) is referenced to the seller,
i.e., the issuing corporation in case of
primary offering, and each of the selling
shareholders of the corporation in case of
secondary offering. The sale contemplated
is not a lone, lump sum sale, as suggested
by the petitioner, since more than one sale
may transpire under Section 127 (B).
Further, the distinction is readily apparent
from a reading of Section 127 (C) of the
NIRC, which expressly provides for a
separate time and manner of payment of
tax in primary and secondary offerings as
well as the party liable to pay the
corresponding tax.
It cannot be any clearer from the foregoing
that the sale of shares in primary offering is
treated separately from the sale in
secondary offering. Necessarily, the
corresponding tax for every sale is likewise
computed separately.
(I-Remit, Inc. v. Commissioner of Internal
Revenue, G.R. No. 209755, [November 9,
2020])
Question: What is the duty of Persons
Liable to Pay Percentage Taxes?
Answer: The duty of Persons Liable to Pay
Percentage Taxes is to file a quarterly
return of the amount of his gross sales,
receipts or earnings separately for each
branch or place of business or a
consolidated return for all branches or
places of business. Such return shall be
filed with the authorized agent bank,
Revenue District Officer, Collection Agent (2) When no return is filed, or
or duly authorized Treasurer of the city or
(3) When there is reason to believe that the
municipality where said business or
books of accounts or other records do
principal place of business is located, as
not correctly reflect the declarations
the case may be. Moreover, it is the duty of
made or to be made in a return required
such person to pay the tax due thereon.
to be filed under the provisions of this
These should be done within twenty-five
Code. (Sec. 128)
(25) days after the end of each taxable
quarter. (Sec. 128)

Question: In relation to the previous

question, what is the basis of such
Question: When should percentage taxes
minimum amount prescribed by the
be paid?
Commissioner?

Answer: Percentage taxes should be paid

Answer: The Commissioner shall base the
within twenty-five (25) days after the end of
minimum prescribed amount from the
each taxable quarter. However, in the case
sales, receipts or other taxable base of
of a person whose VAT registration is
other persons engaged in similar
cancelled and who becomes liable to the
businesses under similar situations or
tax imposed in Section 116 of this Code,
circumstances, or after considering other
the tax shall accrue from the date of
relevant information. (Sec. 128)
cancellation and shall be paid in
accordance with the provisions of Section
128. (Sec. 128)

Question: In relation to the question before

the previous question, what is the nature of
the amount prescribed by the
Question: What is the duty of a Person
Commissioner?
Retiring from Business?

Answer: The amount prescribed by the

Answer: It is the duty of a person retiring
Commissioner shall be prima facie correct
from business to notify the nearest internal
for purposes of determining the internal
revenue officer, file his return and pay the
revenue tax liabilities of such person. (Sec.
tax due thereon within twenty (20) days
128)
after closing his business. (Sec. 128)

Question: What are the instances when

the Commissioner may prescribe a
minimum amount of gross receipts, sales
and taxable base?

Answer: The following are the instances

when the Commissioner may prescribe a
minimum amount of gross receipts, sales
and taxable base:
(1) When it is found that a person has
failed to issue receipts or invoices, or

78
 EXCISE TAX 3. Petroleum Products (Sec. 148)
4. Miscellaneous Articles (Secs. 149-150)
Question: What is the concept of excise 5. Mineral Products (Secs. 151)
tax?

Answer: Excise tax is applied to the

manufactured or produced goods in the
Philippines for domestic sales or
consumption or for any other disposition
and to things imported as well as services
performed in the Philippines (Sec. 129,
NIRC)
Kinds of Excise Taxes
1. Specific Tax – imposed and based on
weight or volume capacity or any other
physical unit of measurement
2. Ad Valorem Tax – imposed and based
on selling price or other specified value
of the good (Sec. 129, NIRC)
Question: What is the nature of Excise
Tax?
Answer: It is an indirect tax imposed on
certain types or classes of goods, whether
locally manufactured or imported and in
reality is passed on to the end consumer as
part of the transfer value or selling price of
the goods sold. These taxes are imposed in
addition to the value-added tax.
Question: Who are the persons liable for
excise taxes?

Answer:

Question: What are the goods subject to 1. For Domestic or Local Articles –
Excise Tax? manufacturer, producer, owner or
person having possession of articles
removed from the place of production
Answer: The enumeration given by the without the payment of the tax
NIRC for the specific goods and services
2. For Imported Articles – importer, owner,
that are subject to Excise Tax are: distilled
person who is found in possession of
spirits, wines, fermented liquors, tobacco
articles which are exempt from excise
products, cigars and cigarettes,
taxes other than those legally entitled to
manufactured oils and other fuels,
exemption
automobiles, non-essential goods, non-
essential services, sweetened beverages,
mineral products (Secs. 141-145; 148-
150A, 150B, 151)
Question: When is the time of payment on
Moreover, the sweetened beverages using domestic products?
(i) high fructose corn syrup, (ii) purely
coconut sap sugar and (iii) purely steviol
glycosides shall be exempt from this tax Answer: Generally, before removal from
(Sec. 105-B, as amended) the place of production.

Major Classifications of Excisable Question: How about the time of payment

Goods/Services: on imported products?
1. Alcohol Products (Secs. 141-143)
2. Tobacco Products (Secs. 144-146)

79
Answer: Before release from the customs’
custody.
Purpose of Excise Tax
1. To curtail the consumption of certain
commodities in its excessive usage
which is considered harmful to the
individual or community
2. To protect a domestic industry in
competition with imported articles
3. To distribute the tax burden in
proportion to the benefit derived from a
government service
4. To raise revenue
Question: Do LGUs have taxing powers
with regard to excise taxes?
Answer: Yes, but they are limited by Sec.
133(h) of the LGC which prohibits LGUs
from levying:
Excise taxes on articles enumerated under
the National Internal Revenue Code, as
amended, and taxes, fees or charges on
petroleum products.
Question: How much is the rate to be
imposed on Tobacco Products as provided
under Republic Act No. 11346?
Answer: Section 144 of the National
Internal Revenue Code as amended
provides that the rate of tax imposed shall
be increased by 5% every year effective on
Janaury 1, 2021 through revenue
regulations issued by the Secretary of
Finance (RA No. 11346)
Question: Is there a uniform excise tax
imposed on vapor products regardless of
volume?
80
Answer: No, difference in quantity or
volume means an increase in the excise tax
imposed and collected (Sec. 2 (C), RA no.
11346)
Question: What is the extent of
Supervision over establishments producing
taxable output?
Answer: The BIR has the authority to
supervise establishments where articles
subject to excise tax are made or kept. The
Secretary of Finance shall prescribe rules
and regulations in which the process of
production shall be conducted insofar as
may be necessary (Sec. 6, RA no. 11346))
Question: What is the nature of specific
taxes?
Answer: The current definition of an excise
tax is that of a tax levied on a specific
article. They are imposed directly on certain
specified goods, and are, therefore,
property taxes. A tax is not excise where it
does not subject directly the product or
goods to tax but indirectly as an incident to,
or in connection with, the business to be
taxed.
Specific taxes are truly excise taxes for the
fact that the value of the property taxed is
taken into account will not change the
nature of the tax. Specific taxes are taxes
on the privilege to import, manufacture and
remove from storage certain articles
specified by law (Commissioner of Internal
Revenue v. Pilipinas Shell Petroleum Corp.,
G.R. No. 188497 (Resolution), February 19,
2014).
Question: Is the manufacturer or producer
of petroleum products exempt from the
payment of excise tax on such petroleum
products it sold to international carriers?

Answer: No. The specific tax on petroleum
products locally manufactured or produced
in the Philippines shall be paid by the
manufacturer, producer, owner or person
having possession of the same, and such
tax shall be paid within fifteen (15) days
from date of removal from the place of
production.
An excise tax is a tax on the manufacturer
and not on the purchaser, and there being
no express grant under the NIRC of
exemption from payment of excise tax to
local manufacturers of petroleum products
sold to international carriers, and absent
any provision in the Code authorizing the
refund or crediting of such excise taxes
paid, Sec. 135 (a) of the NIRC should be
construed as prohibiting the shifting of the
burden of the excise tax to the international
carriers who buys petroleum products from
the local manufacturers.
The provision merely allows the
international carriers to purchase petroleum
products without the excise tax component
as an added cost in the price fixed by the
manufacturers or distributors/sellers.
Consequently, the oil companies which sold
such petroleum products to international
carriers are not entitled to a refund of
excise taxes previously paid on the goods.
Note that excise taxes levied on locally
manufactured petroleum products and
indigenous petroleum are required to be
paid prior to their removal from the place of
production. (Ibid.)
Question: Is denatured alcohol subject to
excise taxes?
Answer: No. They are exempt from excise
taxes under Sec. 134 of the NIRC, unless:
1) the denatured alcohol is less than 180º
proof, or 90% absolute alcohol, when
suitably denatured and rendered unfit
for oral intake; or
2) when the denatured alcohol previously
unfit for oral intake underwent
fermentation, dilution, purification, or
81
other similar process. (Avon Products
Manufacturing, Inc. v. Commissioner of
Internal Revenue, G.R. No. 222480,
November 7, 2018).
Question: Who may seek a refund on the
payment of excise taxes?
Answer: The statutory taxpayer. An excise
tax is an indirect tax where the tax burden
can be shifted to the consumer, but the tax
liability remains with the manufacturer or
producer. Hence, the proper party to
question, or seek a refund of an indirect tax
is the statutory taxpayer, the person on
whom the tax is imposed by law and who
paid the same even if he shifts the burden
thereof to another.
This means that when the statutory
taxpayer removes articles subject to excise
tax from its place of production, it must pay
the excise tax due on the items thus
removed.
Even if the consumers or purchasers
ultimately pay for the tax, they are not
considered the taxpayers. The fact that the
statutory taxpayer, on whom the excise tax
is imposed, can shift the tax burden to its
purchasers does not make the latter the
taxpayers and the former the withholding
agent. (Silkair (Singapore) Pte. Ltd. v.
Commissioner of Internal Revenue, G.R.
Nos. 171383 & 172379, November 14,
2008).
Question: How should the second part of
Sec. 133(5) of the LGC, that LGUs cannot
levy taxes, fees or charges on petroleum
products, be construed?
Answer: It is an absolute prohibition. The
absence of any qualification leads to the
conclusion that all sorts of taxes on
petroleum products, including business
taxes, are prohibited by Section 133 (h).
Where the law does not distinguish, we
should not distinguish. While local
government units are authorized to burden
all such other class of goods with “taxes,
fees and charges,” excepting excise taxes,
a specific prohibition is imposed barring the
levying of any other type of taxes with
respect to petroleum products. (Petron
Corp. v. Tiangco, G.R. No. 158881, April
16, 2008).
Question: What is the nature and
treatment of franchise taxes imposed by
LGUs?
Answer: They are excise taxes. Section
137 of the LGC provides that franchise
taxes shall be based on gross receipts
precisely because it is a tax on business,
rather than on persons or property. Hence,
the situs of taxation is the place where the
privilege is exercised.
In this case it is where the corporation has
its principal office and from where it
operates, regardless of the place where its
services or products are delivered. (City of
Iriga v. Camarines Sur III Electric
Cooperative, Inc., G.R. No. 192945,
September 5, 2012)
82
DOCUMENTARY STAMP TAX
CONCEPT AND NATURE
Question: What is Documentary stamp
Tax?
Answer: Documentary stamp tax is a tax
on documents, instruments, and papers
evidencing the acceptance, assignment,
sale or transfer of an obligation, rights, or
property incident thereto (See Sec. 173,
NIRC).
Documentary stamp tax is an excise tax on
the exercise of a right or privilege to
transfer obligations, rights or properties
incident thereto. (Tambunting Pawnshop,
Inc. v. CIR, G.R. No. 179085, January 21,
2010, citing Michel J. Lhuillier Pawnshop,
Inc. v. CIR, G.R. No. 166786, May 3, 2006) 
Note: Although the documentary stamp tax
is affixed on the document, it is the
transaction that is being taxed and not the
document.
Question: What is the nature of
Documentary Stamp Tax?
Answer: Documentary Stamp Tax is an
excise or privilege tax because it is
imposed on the privilege to enter into a
transaction rather than on document.
Question: What is the purpose of imposing
documentary stamp tax?
Answer: The purpose of imposing
documentary stamp tax is to raise revenue.
Question: What is the accounting
treatment for Documentary Stamp Tax?
Answer:
The accounting treatments of Documentary
stamp tax (DST) are:
1. If considered as ordinary and necessary
in the conduct of business, the DST
could be included as part of itemized
deduction from business income.
2. In case of capital asset transactions, the
amount could be offset against the
selling price used in determining gain or
loss upon sale.
Question: What are documents subject to
Documentary Stamp Tax and its
corresponding rates under TRAIN Law?
Answer:
The following are subject to Documentary
Stamp Tax (DST) and the corresponding
DST rates are as follows:
1. Original issue of shares of stock
₱2.00 on each ₱200.00 or fractional
part thereof of the par value (Sec. 174)
2. Sale or transfer of shares or certificates
of stock
₱1.50 on each ₱200 or fractional part
thereof of the par value
For no par value stock: 50% of the DST
paid upon original issue (Sec. 175)
3. Certificates of Profits or Interest in
Property or Accumulations
₱1.00 on each ₱200 or fractional part
thereof of the face value of the
certificate or memorandum (Sec. 177)
83
4. Bank Checks, Drafts, Certificates of
Deposits not bearing interest, and other
instruments
₱3.00 on every document (Sec. 178)
5. All Debt Instruments
₱1.50 on each ₱200.00 or fractional
part thereof of the issue price of debt
instrument (Sec. 179)
6. All Bills of Exchange or Drafts
₱0.60 on each ₱200 or fractional part
thereof of the face value (Sec. 180)
7. Acceptance of bills of exchange and
others
₱0.60 on each ₱200 or fractional part
thereof of the face value (Sec. 181)
8. Foreign bills of exchange and letters of
credit
₱0.60 on each ₱200 or fractional part
thereof of the face value (Sec. 182)
9. Life Insurance Policies
Not over ₱100,000 Exempt
Over ₱100,000 but not ₱20.00
over ₱300,000
Over ₱300,000 but not ₱50.00
over ₱500,000
Over ₱500,000 but not ₱100.00
over ₱750,000
Over ₱750,000 but not ₱150.00
over ₱1,000,000
Over ₱1,000,000 ₱200.00
10. Policies of Annuities and Pre-need
plans-
For policies of annuities – ₱1.00 on
each ₱200 or a fractional part thereof of
the premium or installment payment on
contract price collected
For pre-need plans – ₱0.40 on each
₱200 or fractional part thereof of the
premium or contribution collected (Sec.
186)
11. Certificates
₱30.00 on each certificate (Sec. 188)
12. Warehouse receipts
 ₱30.00 on each (Sec. 188)
13. Jai-alai, Horse Race tickets, lotto, or
other authorized number games
₱0.20 on each ticket + ₱0.20 on every
₱1.00 or a fractional part thereof of the
cost of the ticket in excess of ₱1.00
(Sec.190)
14. Bills of Lading or receipts
Goods: over ₱100 but not ₱2.00
over ₱1,000
Goods: over ₱1,000 ₱20.00
15. Proxies
₱30.00 on each proxy (Sec. 192)
16. Powers of Attorney
₱10.00 on each power of attorney (Sec.
193)
17. Leases and other Hiring Agreements-
₱6.00 for the first ₱2,000 or fractional
part thereof, + ₱2.00 every additional
₱1,000, for each year of the term of
said contract (Sec. 194)
18. Mortgages, Pledges and Deeds of Trust
Amount secured:
Not over ₱5,000 ₱40.00
On each ₱5,000 or ₱20.00
fractional part thereof in
excess of ₱5,000
19. Deeds Donation of Real Property
₱15.00 for the first ₱1,000, plus ₱15.00
for every additional ₱1,000 or fraction
thereof of the consideration to be paid
or FMV, whichever is higher
Transfers exempt from donor’s tax:
Exempt from DST (Sec. 196)
20. Charter parties and similar instruments-
₱1,000 if the registered gross tonnage
is not over 1,000 tons plus ₱100 for
every additional month or a fraction
thereof in excess of 6 months
₱2,000 if the registered gross tonnage
is over 1,000 tons but not over 10,000
tons plus ₱200 for every additional
84
month or a fraction thereof in excess of
6 months
₱3,000 if the registered gross tonnage
exceeds 10,000 tons plus ₱300 for
every additional month or a fraction
thereof in excess of 6 months (Sec 197,
NIRC)
Question: Who is liable to pay
documentary stamp tax?
Answer: Documentary stamp tax is paid by
the person making, signing, issuing,
accepting or transferring the documents.
However, whenever one party to the
taxable document enjoys exemption from
the tax, the other thereto who is not exempt
shall be the one directly liable for the tax
(Sec. 173, NIRC).
Question: When shall the return be filed
and documentary stamp tax be paid?
Answer: Except as provided by rules and
regulations promulgated by the Secretary of
Finance, upon recommendation of the
Commissioner, the tax return shall be filed
within ten (10) days after the close of the
month when the taxable document was
made, signed, issued, accepted, or
transferred, and the tax thereon shall be
paid at the same time the return is filed.
(Sec. 200, NIRC)
Question: Where shall the return be filed?
Answer: Except in cases where the
Commissioner otherwise permits, the return
shall be filed with and the tax due shall be
paid through the authorized agent bank
within the territorial jurisdiction of the
Revenue District Office which has
jurisdiction over the residence or principal
place of business of the taxpayer.
In places where there is no authorized
agent bank, the return shall be filed with the
Revenue District Officer, collection agent,
or duly authorized Treasurer of the city or
municipality in which the taxpayer has his
legal residence or principal place of
business.
Question: What is the effect of failure to
stamp taxable document?
Answer: The failure to stamp does not
render the document invalid or void. But in
such case, the following shall be the
effects:
(1) The document, instrument, or paper
shall not be recorded in the government
registry;
(2) Such document, instrument, or paper or
any record or transfer of the same shall
not be admitted or used in evidence in
any court until the requisite stamp or
stamps shall have been affixed thereon
and cancelled (See par. 1, Sec 201,
NIRC)
(3) No notary public or other officer
authorized to administer oaths shall add
his jurat or acknowledgement until the
document is properly stamped (see par.
2); and
(4) In case of failure to affix the proper
documentary stamps to a document or
instrument, there shall, for every
violation, be imposed, in addition to the
amount of tax required to be paid, an
amount equivalent to 25% of such
unpaid amount as surcharge (Sec
248[A]) and interest at the rate of
double the legal interest rate for loans
or forbearance of any money in the
absence of an express stipulation as set
by Bangko Sentral ng Pilipinas from the
date prescribed for payment until the
amount is fully paid (Sec. 249 [A]).
Question: ING bank was assessed for
deficiency in documentary stamp taxes on
85
its special savings accounts and deficiency
tax on onshore interest income. ING Bank
averred that it availed of the government's
tax amnesty program under RA No. 9480.
Subsequently, ING Bank paid the
deficiency assessments in documentary
stamp tax under protest.
CIR contends that ING Bank is not qualified
to avail itself of the tax amnesty granted
under RA No. 9480 because both the Court
of Tax Appeals En Banc and Second
Division ruled in its favor that confirmed the
liability of petitioner ING Bank for deficiency
documentary stamp taxes, onshore taxes,
and withholding taxes.  CIR asserts
that BIR Revenue Memorandum Circular
No. 19-2008 specifically excludes "cases
which were ruled by any court (even
without finality) in favor of the BIR prior to
amnesty availment of the taxpayer" from
the coverage of the tax amnesty
under Republic Act No. 9480.
Are documentary stamp taxes excluded
from the tax amnesty granted by Republic
Act No. 9480?
Answer: No. The documentary stamp tax
is one of the taxes covered by
the Tax Amnesty Program under RA No.
9480." The law expressly covers "all
national internal revenue taxes for the
taxable year 2005 and prior years . . . that
have remained unpaid as of December 31,
2005[.]" The documentary stamp tax is
considered a national internal
revenue tax under Section 21of Republic
Act No. 8424, otherwise known as
the National Internal Revenue Code of
1997.
Republic Act No. 9480 provides a general
grant of tax amnesty subject only to the
cases specifically excepted by it. Thus,
excluded from the tax amnesty are only
those cases enumerated under Section 8:
SEC. 8. Exceptions. —
The tax amnesty provided in Section 5
hereof shall not extend to the following
persons or cases existing as of the
effectivity of this Act:
a. Withholding agents with respect to
their withholding tax liabilities;
 b. Those with pending cases falling Respondent paid DST to the BIR but filed
under the jurisdiction of the Presidential an administrative claim for tax refund
Commission on Good Government; representing the DST it allegedly
erroneously paid on the occasion of the
c. Those with pending cases involving
merger.  The CTA Division found
unexplained or unlawfully acquired
respondent entitled to its claim
wealth or under the Anti-Graft and
for tax refund or tax credit. Unfazed,
Corrupt Practices Act;
petitioner elevated the matter to the
d. Those with pending cases filed in CTA En Banc. The CTA En Banc affirmed
court involving violation of the Anti- CTA Division’s decision. Is respondent
Money Laundering Law; exempt from payment of DST?
e. Those with pending criminal cases
for tax evasion and other criminal
Answer: Yes, in Commissioner of
offenses under Chapter II of Title X of
Internal Revenue v. Pilipinas Shell
the National Internal Revenue Code of
Petroleum Corporation,  the Supreme
1997, as amended, and the felonies of
Court already ruled that:
frauds, illegal exactions and
transactions, and malversation of public We do not find merit in petitioner's
funds and property under Chapters III contention that Section 196 covers all
and IV of Title VII of the Revised Penal transfers and conveyances of real
Code; and property for a valuable consideration. A
perusal of the subject provision would
f. Tax cases subject of final and
clearly show it pertains only to sale
executory judgment by the courts.
transactions where real property is
(ING Bank N.V. v. Commissioner of Internal conveyed to a purchaser for a
Revenue, G.R. No. 167679, July 22, 2015, consideration. The phrase "granted,
764 PHIL 418-455) assigned, transferred or otherwise
conveyed" is qualified by the word
"sold" which means
that documentary stamp tax under
Question: Respondent La Tondeña Section 196 is imposed on the transfer
Distillers, Inc. entered into a Plan of of realty by way of sale and does not
Merger with Sugarland Beverage apply to all conveyances of real
Corporation (SBC), SMC Juice, Inc. property.
(SMCJI), and Metro Bottled Water xxx xxx xxx
Corporation (MBWC). As a result of the
merger, the assets and liabilities of the Pertinently, a merger of two
absorbed corporations were transferred to corporations produces the following
respondent, the surviving corporation. effects, among others:
Respondent later changed its corporate Sec. 80. Effects of merger or
name to Ginebra San Miguel, Inc. (GSMI).  consolidation. — . . .xxx xxx xxx
Respondent requested for a confirmation of
3. The surviving or the consolidated
the tax-free nature of the said merger from
corporation shall thereupon and
the Bureau of Internal Revenue (BIR). The
thereafter possess all the rights,
BIR issued a ruling stating that pursuant to
privileges, immunities and
Section 40 (C) (2) and (6) (b) of the
franchises of each of the constituent
1997 National Internal Revenue
corporations; and all property, real
Code (NIRC), no gain or loss shall be
or personal, and all receivables due
recognized by the absorbed corporations
on whatever account, including
as transferors of all assets and
subscriptions to shares and other
liabilities.  However, the transfer of assets,
chosen in action, and all and every
such as real properties, shall be subject to
other interest of, or belonging to, or
DST imposed under Section 196 of
due to each constituent
the NIRC. 

86
 corporations, shall be taken and
deemed to be transferred to and
vested in such surviving
consolidated corporation without
further act or deed;
In a merger, the real properties are not
deemed "sold" to the surviving
corporation and the latter could not be
considered as "purchaser" of realty since
the real properties subject of the merger
were merely absorbed by the surviving
corporation by operation of law and these
properties are deemed automatically
transferred to and vested in the surviving
corporation without further act or deed.
Therefore, the transfer of real properties
to the surviving corporation in pursuance
of a merger is not subject
to documentary stamp tax. As stated at
the outset, documentary stamp tax is
imposed only on all conveyances, deeds,
instruments or writing where realty sold
shall be conveyed to a purchaser or
purchasers. The transfer of SPPC's real
property to respondent was neither a sale
nor was it a conveyance of real property
for a consideration contracted to be paid
as contemplated under Section 196 of
the Tax Code. Hence, Section 196 of
the Tax Code is inapplicable and
respondent is not liable
for documentary stamp tax.
(Commissioner of Internal Revenue v. La
Tondeña Distillers, Inc., G.R. No. 175188,
July 15, 2015, 764 PHIL 42-53)
Question: CIR issued a Letter of Authority
to PNB which authorized the examination
of latters books of accounts and other
accounting records in relation to its internal
revenue taxes on its interbank call loans.
PNB received the preliminary assessment
notice with details of discrepancies which
indicated that PNB had deficiency
payments of documentary stamp taxes
(DST), withholding taxes on
compensation, and expanded withholding
taxes. CIR issued a formal assessment
notice, together with a formal letter of
demand and details of discrepancies,
requiring PNB to pay deficiency taxes.
87
PNB paid the assessment under protest.
PNB filed its petition for review in the CTA.
The CTA (First Division) ruled that the
interbank call loans were subject to DST. Is
the ruling correct?
Answer: No.
PNB's interbank call loans are not taxable
under Section 180 of the 1977 NIRC, as
amended by R.A. No. 7660, which states:
Sec. 180.  On all loan agreements signed
abroad wherein the object of the contract
is located or used in the Philippines; bills
of exchange (between points within the
Philippines), drafts, instruments and
securities issued by the Government or
any of its instrumentalities or certificates
of deposits drawing interest, or orders for
the payment of any sum of money
otherwise than at sight or on demand, or
on all promissory notes, whether
negotiable or non-negotiable, except
bank notes issued for circulation, and on
each renewal of any such note, there
shall be collected
a documentary stamp tax of Thirty
centavos (P0.30) on each two hundred
pesos, or fractional part thereof, of the
face value of any such agreement, bill of
exchange, draft, certificate of deposit, or
note: Provided, That only
one documentary stamp tax shall be
imposed on either loan agreement, or
promissory notes issued to secure such
loan, whichever will yield a higher tax:
Provided, however, That loan agreements
or promissory notes the aggregate of
which does not exceed Two hundred fifty
thousand pesos (P250,000) executed by
an individual for his purchase on
installment for his personal use or that of
his family and not for business, resale,
barter or hire of a house, lot, motor
vehicle, appliance or furniture shall be
exempt from the payment of
the documentary stamp tax provided
under this section."
Simply put, an interbank call loan is
considered as a deposit substitute
transaction by a bank performing quasi-
banking functions to cover reserve
deficiencies. It does not fall under the
definition of a loan agreement. Even if it
does, the DST liability under Section
180, supra, will only attach if the loan
agreement was signed abroad but the
object of the contract is located or used in
the Philippines, which was not the case in
regard to PNB's interbank call loans.
We note, however, that
for taxation purposes interbank call loans
are not considered as deposit substitutes
by express provision of Section 20 (y) of
the 1977 NIRC, as amended by P.D. No.
1959, viz.:
Sec. 1. A new subsection (y) is inserted in
Sec. 2 of the National Internal Revenue
Code to read as follows:
xxx xxx xxx
(y) 'Deposit substitutes' shall mean an
alternative form of obtaining funds from
the public, other than deposit, through the
issuance, endorsement, or acceptance of
debt instruments for the borrower's own
account, for the purpose of relending or
purchasing of receivables and other
obligations, or financing their own needs
or the needs of their agent or dealer.
These instruments may include but need
not be limited to banker's acceptances,
promissory notes, repurchase
agreements, certificates of assignment or
participation and similar instruments with
recourse as may be authorized by the
Central Bank of the Philippines, for banks
and non-bank financial intermediaries or
by the Securities and Exchange
Commission of the Philippines for
commercial, industrial, finance companies
and other non-financial
companies: Provided, however, that only
debt instruments issued for inter-bank call
loans to cover deficiency in reserves
against deposit liabilities including those
between or among banks and quasi-
banks shall not be considered as deposit
substitute debt instruments. 
Interbank call loans, although not
considered as deposit substitutes, are not
expressly included among the taxable
instruments listed in Section 180; hence,
they may not be held as taxable.

88