1
La Consolacion College Manila
Mendiola, Manila
TRANSFER & BUSINESS TAXATION
of
Erasmo Ampongan
&
Virgilio Reyes
By:
Gammad, Lyra
Girn, Gurdeep
Rubio, Em
TRANSFER & BUSINESS TAXATION: Ampongan, Erasmo; Reyes, Virgilio (Compiled by: Gammad, Girn, Rubio)
2
La Consolacion College Manila
Mendiola, Manila
TABLE OF CONTENTS
Chapter 1: Introduction to Transfer Taxes and Estate Tax.…………………………………………………. 3
Chapter 2: Basic Concept Of Succession & Will………………………………………………………………….. 6
Chapter 3: Properties Included in Decedent’s Estate………………………………………………………….. 8
Chapter 4: Gross Estate (Residence/ Citizenship)………………………………………………………………. 11
Chapter 5: Gross Estate (Property relations between spouses)…………………………………………. 13
Chapter 6: Gross Estate (Exclusions & Exemptions)…………………………………………………………… 15
Chapter 7: Deductions from Gross Estate………………………………………………………………………….. 18
Chapter 8: Estate Taxation (Net Estate, Estate Tax, Tax Credit)…………………………………………. 21
Chapter 9: Filing of Return & Payment of Estate Tax………………………………………………………….. 23
Chapter 10: Concept Of Donation And Donor‘s Tax……………………………………………………………. 28
Chapter 11: Gross Gift………………………………………………………………………………………………………… 36
Chapter 12: Exemptions or Deductions from Gross Gift…………………………………………………….. 39
Chapter 13: Computation of Donor's Tax……………………………………………………………………………. 44
Chapter 14: Filing of Return and Payment of Gift Tax…………………………………………………………. 48
Chapter 15: Introduction To Value-Added Tax…………………………………………………………………….. 50
Chapter 16: Exemptions from VAT………………………………………………………………………………………. 53
Chapter 17: Vat On Sale Of Goods Or Properties………………………………………………………………… 59
Chapter 18: Sale Of Services & Use Or Lease Of Properties………………………………………………… 65
Chapter 19: Vat On Importation Of Goods…………………………………………………………………………… 70
Chapter 20: Accounting For Value-Added Tax……………………………………………………………………… 72
Chapter 21: Vat Registration And Compliance Requirements…………………………………………….. 75
Chapter 22: Other Percentage Taxes………………………………………………………………………………….. 79
Chapter 23: Additions To Tax (Civil Penalties And Interest)…………………………………………………. 84
Chapter 24: Community Tax………………………………………………………………………………………………… 86
TRANSFER & BUSINESS TAXATION: Ampongan, Erasmo; Reyes, Virgilio (Compiled by: Gammad, Girn, Rubio)
3
La Consolacion College Manila
Mendiola, Manila
CHAPTER 1: INTRODUCTION TO TRANSFER TAXES AND ESTATE TAX
Transfer tax is a tax imposed upon the gratuitous transfer of property ownership. It is a privilege
tax which is imposed on the act of passing ownership of property and not a tax on the property itself.
The transfer of ownership may take effect during lifetime in the case of the gift tax, or upon the
death of a person in the case of the estate tax, or upon the death of a person in the case of the estate
tax
The transfer taxes defined in the National Internal Revenue Code are the following:
1. Estate Tax which is an excise tax imposed upon the right of transmitting property at the time of
death and the privilege of controlling disposition of one’s property to take effect upon death
and
2. Donor's (Gift) Tax which is a tax on the privilege of transmitting one's property to another during
his lifetime without adequate and full valuable consideration.
Estate tax distinguished from donor’s tax
1. Estate tax is a tax imposed on the privilege to transmit property upon one’s death, while donor’s
tax is a tax imposed upon one's privilege to transfer property during lifetime;
2. The rates of tax in estate tax are relatively higher than the rates in donor’s tax.
3. In estate tax, extensions for tiling and payments are allowed, while in donor’s tax the provision
on such extension has been deleted.
4. The exemption from estate tax per tax table is P200,000, while in donor’s tax the exemption per
tax table is P100,000 only.
Effect of Misnomer on the Instrument
The nature of a donation is not determined by the given title to it by the donor, but by what is
expressed therein. The donor may entitle his donation as one “mortis causa”, but if it is in reality a
donation inter vivos, its validity and revocability will be determined ”inter vivos” by the donor, but if it is
essentially a disposition mortis causa, it will be held void if not made in the form and with the
solemnities of a will(Tolentino, supra).
Introduction to Estate Tax
Estate Tax is a tax on the right of the deceased person to transmit his/her estate to his/her
lawful heirs and beneficiaries at the time of death, and on certain transfers which are made by law as
equivalent to testamentary disposition.
Estate tax is levied upon the transfer of the net estate of a decedent to his heirs (Sec. 84, NIRC).
TRANSFER & BUSINESS TAXATION: Ampongan, Erasmo; Reyes, Virgilio (Compiled by: Gammad, Girn, Rubio)
4
La Consolacion College Manila
Mendiola, Manila
It is an excise tax because it is imposed on the exercise of the right to transfer ownership over
the property.
It is not a tax on the property transferred.
The estate tax accrues at the moment of death of the decedent (Lorenzo vs. Posadas, 64 Phil.
353; Beam vs. Yatco, 28 Phil. 30).
Moreover, the law in force at death of the decedent is controlling, notwithstanding
postponement of the actual possession or enjoyment of the property by the beneficiary (supra).
Theories justifying the imposition of estate tax
Estate tax is imposed primarily to raise revenue for public purposes or for the support of the
government. Moreover, the following theories have been identified to justify the imposition of estate
tax:
1. Benefit-received theory. - A tax is collected by the state because the latter renders services in
the distribution of the decedent’s estate, either by law or in accordance with his will.
2. Privilege theory (State partnership theory) - succession to the property of a deceased in not a
fundamental right but a privilege granted by the state. Consequently, the state, as a “silent and
in the accumulation of property can collect the share which is due to it.
3. Ability to Pay Theory – receipt of inheritance which is in the nature of an unearned wealth or
windfall, place assets into the hands of the heirs and beneficiaries hereby creating ability to pay
the tax and thus contribute to government income
4. Redistribution of wealth theory. - The imposition of estate tax will result to a more equitable
distribution of wealth in the society.
Computation of estate tax
The computation of the estate tax will depend on the status of the decedent, whether
he was single or married.
1. If the decedent was single at the time of his death:
Gross estate
Less: Deductions
Ordinary
P xx
Special
xx
Net taxable estate
Multiply by the applicable rate (see tax table )
Estate tax due
P xx
xx
xx
xx
xx
2. If the decedent was married at the time of death
Real Properties
Conjugal/Community
xx
Exclusive
xx
Total
TRANSFER & BUSINESS TAXATION: Ampongan, Erasmo; Reyes, Virgilio (Compiled by: Gammad, Girn, Rubio)
5
La Consolacion College Manila
Mendiola, Manila
Personal properties
xx
Gross Estate
xx
Less: Deductions
Ordinary
xx
Special
Net Estate
Less: Share of surviving spouse in the net
Conjugal/community property
Net taxable estate
Multiply by the appropriate tax rate
Estate tax due
xx
xx
xx
xx
(xx)
(xx)
xx
(xx)
xx
xx
xx
TRANSFER & BUSINESS TAXATION: Ampongan, Erasmo; Reyes, Virgilio (Compiled by: Gammad, Girn, Rubio)
6
La Consolacion College Manila
Mendiola, Manila
CHAPTER 2: BASIC CONCEPT OF SUCCESSION & WILL
Succession is the right and transmission of the rights obligations of the deceased to his heirs.
Succession signifies also the estate, rights and charges which a person leaves after his death, whether
the property exceeds the charges, or the charges exceed the property, or whether he has left only
charges without property.
The succession not only includes the rights and obligations of the deceased, as they exist at the
time of his death, but all that has accrued thereto since the opening of the succession, as also of the
new charges to which it becomes subject.
Succession signifies also that right by which the heir can take possession of the estate of the
deceased, such as it may be.
Elements of succession
1. Decedent - The person whose property is transmitted through succession, whether or not he
left a will (Art. 775, ibid.).
2. Heir - The person called to the succession either by the provision of a will or by operation of law
(Art: 782, id. ).
3. Estate. Refers to all the property, rights and obligations of a person which are not extinguished
by his death (Art. 776, id.).
Kinds of Succession
1. Testamentary. Succession which results from the designation of an heir, made in a will executed in
the form prescribed by law (Art. 779,id)
2. Legal or intestate. Transmission of properties where there is no will or if there is a wilt, the same is
void or nobody succeeds in the will.
3. Mixed. Transmission of properties which is effected partly by will and partly by operation of law.
Kinds of successors in a testamentary succession
1. Legatee. An heir to a particular personal property given by virtue of a will
2. Devisee. An heir to a particular all property given by virtue of a will
Persons authorized to manage the estate
TRANSFER & BUSINESS TAXATION: Ampongan, Erasmo; Reyes, Virgilio (Compiled by: Gammad, Girn, Rubio)
7
La Consolacion College Manila
Mendiola, Manila
1. Executor is the person nominated by a testator to carry out the directions and requests in his will and
to dispose of his property according to his testamentary provisions after his death (21 Am. Jur. 369)
2. Administrator is a person appointed by the court, in accordance with the governing statute, to
administer and settle intestate estate and such testate estate as no competent executor designated by
the testator (ibid).
As a matter of distinction, an executor is appointed in the will while an administrator is appointed by the
court.
Time of succession
The rights to the succession are transmitted from the moment of death of the decedent (Art. 777,id).
WILL
A will is an act whereby a person is permitted with the formalities prescribed by law, to control
to a certain degree the disposition of his estate, to take effect after his death(Art. 783, ibid.).
Disqualifications to make and to witness a will
All Persons who are not expressly prohibited by law may make a will. The persons prohibited by
law to make a will are those below 18 years of age and those who are not of sound mind at the time of
its execution.
Two or more persons cannot make a will jointly, or in the same instrument, either for their
reciprocal benefit or for the benefit of a third person.
The following are disqualified from being witnesses to a will:
a. Any person not domiciled in the Philippines.
b. Those who have been convicted of falsification of a document, perjury or false testimony.
HOLOGRAPHIC WILL
A will that is entirely written, dated and signed by the testator.
CODICIL
A codicil is a schedule or annexure to an existing will, which is made to add to or to change an
existing, will. A codicil must comply with the same requirements as a valid will. A codicil does not need
to be signed by the same witnesses who signed the original will.
TRANSFER & BUSINESS TAXATION: Ampongan, Erasmo; Reyes, Virgilio (Compiled by: Gammad, Girn, Rubio)
8
La Consolacion College Manila
Mendiola, Manila
CHAPTER 3: PROPERTIES INCLUDED IN DECEDENT’S ESTATE
Properties to be included in the estate
1. Properties that are still owned by decedent at the time of his death, to the extent of his equity
or interest in such property, whether as exclusive owner, conjugal or community property
owner or common owner.
2. Assets or properties owned by decedent during his lifetime but were no longer owned by him at
the time of his death, because these properties have been transferred during his lifetime by way
of taxable transfer as follows:
a. Transfer in contemplation of death;
b. Revocable transfers;
c. Property passing under general power of appointment
d. Transfer for insufficient consideration.
Decedent’s interest
Decedent's estate includes up to the extent of the decedents interest in the properties at the
time of his death. It shall include following:
1. Dividends declared by a corporation before death of stockholder although paid after death, if
the decedent was living on the record date(34 Am. Jur. 2d, p.772)
2. Partnership profits even if paid after death of partner;
3. Proceeds of life insurance policy payable to a revocable beneficiary.
4. Right of usufruct if transferable to the heirs.
Transfer in contemplation of death
This means that it is the thought of death, as a controlling motive, which induces the disposition
of the property for the purpose of avoiding estate tax.
The main reason behind this provision is to reach ingenious schemes to evade estate tax liability,
by the use of other forms of conveyances rather than by succession or transfer mortis causa.
Where a donation was made concurrently with the execution of a will, or where the time
between the making of a gift and the death of the donor was relatively close, the transfers where held
to be In contemplation of death.
TRANSFER & BUSINESS TAXATION: Ampongan, Erasmo; Reyes, Virgilio (Compiled by: Gammad, Girn, Rubio)
9
La Consolacion College Manila
Mendiola, Manila
Thus, there is a transfer in contemplation of death when:
a. The decedent transferred the possession or enjoyment of his property to another, but this
transfer was intended to take effect only upon his death;
b. The decedent transferred title to the property but retained for his lifetime the right to possess
or enjoy the same.
This does not apply when the sale is in good faith and for adequate and full consideration.
Power of Appointment is power that is conferred upon a donee to dispose of the donor's property by
nominating and selecting one or more third-parties to receive it.
A power of appointment may be transferred only in writing, such as by deed, trust, or will.
Special Power of Appointment is one which authorizes the done or holder of the power to appoint only
among a restricted class or designated class of persons other than himself.
Transfers for insufficient consideration
If any of the above transfers, trusts, interests, rights or powers enumerated and described
(transfer in contemplation of death, revocable transfer, property passing under general power of
appointment) is made, created, exercised or relinquished for an adequate consideration in money or
money's worth, there shall be included in the gross estate only the excess of the fair market value, at
the time of death, of the property otherwise to be included on account of such transaction, over the
value of the consideration received therefor by the decedent. If an inter vivos transfer of the decedent is
proven to be fictitious, the total value of the property at the time of death shall be included in the gross
estate.
Proceeds of life insurance
This takes place when a person takes out an insurance policy in his own life and appoints somebody as
beneficiary. The proceeds of life insurance covering the life of the insured are includible in the gross
estate, except when:
1. The beneficiary appointed in the policy is not the estate of the deceased, his executor or
administrator; and
2. The Person designated as beneficiary is irrevocable.
It should be noted that there is need to expressly stipulate the irrevocability of the designation
because in the absence of any stipulation, the law provides that the designation is revocable.
Estate of an absentee
TRANSFER & BUSINESS TAXATION: Ampongan, Erasmo; Reyes, Virgilio (Compiled by: Gammad, Girn, Rubio)
10
La Consolacion College Manila
Mendiola, Manila
An absentee is a person who disappears from his domicile, his whereabouts being unknown, and
without leaving an agent to administer his property, or when the power conferred to an agent has
expired.
After an absence of seven years, it being unknown whether or not the absentee still lives, he
shall be presumed dead for all purposes, except for those of succession. The absentee shall not be
presumed dead for the purpose of opening his succession till after an absence of ten (10) years. If he
disappeared after the age of seventy-five (75) years, an absence of five years shall be sufficient in order
that his succession may be opened.
The following shall be presumed dead for all purposes, including the division of the estate
among the heirs:
1. A Person on board a vessel lost during a sea voyage, or an aeroplane which is missing, who
has not been heard of for four(4) years since the loss of the vessel or aeroplane.
2. A person in the armed forces who has taken part in war, and has missing for four (4) years;
TRANSFER & BUSINESS TAXATION: Ampongan, Erasmo; Reyes, Virgilio (Compiled by: Gammad, Girn, Rubio)
11
La Consolacion College Manila
Mendiola, Manila
CHAPTER 4: GROSS ESTATE (RESIDENCE/ CITIZENSHIP)
Two kinds of decedents:
(a) The resident or citizen of the Philippine; and
(b) The non-resident, not citizen of the Philippines.
A decedent who was a citizen of the Philippines, residing in the Philippines at the time of his
death, is decedent.(a)
A decedent who was a citizen of the Philippines, not residing in the
Philippines at the tinge of his death is decedent.(a)
A decedent who was not a citizen of the Philippines, but residing in the Philippines at the time of
his death is decedent (a).
A decedent who was not a citizen of the Philippines, and not residing in the Philippines at the
time of his death is decedent (b).
Properties in the gross estate are real properties (e.g., land and building) tangible personal
properties (e.g., car) and intangible personal properties (e.g., receivables).
The gross estate of a decedent who was a citizen or resident (Decedent [a]) shall include all
properties regardless of location.
The gross estate of a decedent who was not a citizen and not a resident (Decedent [b]) shall
include only properties located in the Philippines.
By statutory provision, the following are intangible personal properties located in the Philippines, and
shall be included in the gross estate:
a. Franchise which must be exercised in the Philippines;
b. Shares, obligations or bonds issued by a domestic corporation;
c. Shares, obligations or bonds issued by a foreign corporation eighty-five percent (85%) of
the business of which is located in the Philippines;
d. Shares, obligations or bonds issued by a foreign corporation, if such shares, obligations
or bonds have acquired a business situs in the Philippines; and
e. Shares or rights in any partnership, business or industry in the Philippines
The enumeration in the law is not exclusive; however, any other intangible property (e.g. receivables) in
the Philippines shall be included in the gross estate.
Although intangible personal properties in the Philippines shall be included in the gross estate of
a decedent who was not a citizen or resident of the Philippines (Decadent [b]) such intangible personal
properties shall not be included in the gross estate if the reciprocity clause in the estate tax law applies.
TRANSFER & BUSINESS TAXATION: Ampongan, Erasmo; Reyes, Virgilio (Compiled by: Gammad, Girn, Rubio)
12
La Consolacion College Manila
Mendiola, Manila
Under the reciprocity clause, the intangible personal property in the Philippines shall not be
included in the gross estate
a) If the country of which the decedent was a citizen and (not or) resident at the time of his death
either had no death tax at all, or,
b) If having a law imposing a death tax, totally exempts from that death tax the intangible personal
properties located there belonging to a citizen of the Philippines not residing there.
Value to include in the gross estate
(a) Mortgaged property shall be included in the gross estate at in fair market value, undiminished by the
mortgage.
(b) Receivables from persons who are insolvent shall be in the gross estate at the full amount, and not
just the amount realizable,
(c) Proceeds of life insurance taken out by me decedent on his own life shall be included in the gross
estate if the beneficiary designated is his estate, executor or administrator, whether or not the
designation is revocable, or if the beneficiary designated is a third person and the designation of
beneficiary is revocable. If the life insurance was taken out not by the decedent himself, the proceeds
shall not be included in the gross estate.
On other insurance contracts the proceeds shall be included in the gross estate if already
receivables at the time of death, because they are intangible personal properties owned at the time of
death, but if not yet receivable at the time of death, shall not be included in the gross estate.
(d) The estate shall be valued at fair market values of the properties at the time of death. In case of real
property, the value shall be the value as shown in the schedule of values fixed by the Provincial and City
Assessors, or the fair market value as determined by the Commissioner of Internal Revenue, (zonal
value) whichever is higher.
In the case of shares of stock listed and traded in a, stock exchange, the fair market value shall
be the arithmetic mean between the highest and lowest quotation of the stock on the valuation date, or
the date nearest the valuation date. lf the shares are unlisted, the value shall be the book value, if
common shares, and the par value, if preferred shares.
(e) An inventory of the gross estate shall be filed with the Bureau of Internal Revenue. When the gross
estate exceeds two million pesos (P2, 000,000), the estate tax return and inventory shall be
accompanied by a certificate of a Certified Public Accountant showing among others: registered or
register able property, motor vehicles and shares of stock.
TRANSFER & BUSINESS TAXATION: Ampongan, Erasmo; Reyes, Virgilio (Compiled by: Gammad, Girn, Rubio)
13
La Consolacion College Manila
Mendiola, Manila
CHAPTER 5: GROSS ESTATE (PROPERTY RELATIONS BETWEEN SPOUSES)
The determination of gross estate of a married decedent shall depend on the system of property
relationship governing the spouses which may be either:
a. Absolute community of property
b. Conjugal partnership of gains
c. Complete separation of property
d. Any other regime
Marriage settlement governing the spouses
The system of property relationship that shall govern the spouses will depend upon the
marriage settlements they have executed before the celebration of the marriage.
Needless to say, an unmarried decedent shall not be governed by anyone of the systems
enumerated because all of his properties are exclusively owned by him.
In the absence of a marriage settlement, or when the regime agreed upon is void, the system of
absolute community of property shall govern (Art. 75, The Family Code of the Philippines), unless the
marriage was celebrated prior to August 3 1988 (the effectivity date of the Family Code, per Executive
Order No. 227), use those celebrated before the effectivity of the Family Code, which had no prior
agreement on the system of property relationship, were governed by the conjugal partnership of gains.
Absolute Community of Property
This is one of the regimes or systems of property relations between the spouses and the default
system in the absence of a prenuptial agreement or when the agreed system is null and void. This
system commences at the precise moment that the marriage is celebrated, and any stipulation for the
commencement of the community regime at any other time is void. In a nutshell, the husband and the
wife are considered as co-owners of all properties they bring into the marriage.
Donation of community property by either spouse
Either spouse may dispose by will of his or her interest in the community property (Art. 97, id.).
Neither spouse may donate any community property without the consent of the other.
However, either spouse may, without me consent of the other, make moderate donations from the
community property for charity or on occasions of family rejoicing or family distress (Art. 98,id).
Conjugal partnership of gains
The regime of conjugal partnership shall apply only to spouses
(1) Whose marriage took place before the effectivity of the Family Code and the spouses did not
exempt a marriage settlement or, if they did, they have adopted the conjugal partnership of gains: and
TRANSFER & BUSINESS TAXATION: Ampongan, Erasmo; Reyes, Virgilio (Compiled by: Gammad, Girn, Rubio)
14
La Consolacion College Manila
Mendiola, Manila
(2) those whose marriage were celebrated under the Family Code whereby the spouses agree to the
conjugal partnership of gains; and (2) those who agree to the conjugal partnership.
All property acquired during the marriage, whether the acquisition appears to have been made,
contracted or registered in the name of one or both spouses, is presumed to be conjugal unless the
contrary is proved (Art. 116, New Family Code). Under the conjugal partnership of gains, the spouses
retain the ownership, possession, administration and enjoyment of their exclusive properties (Arr. 110,
ibid.).
Charges upon and obligations of the conjugal partnership
The conjugal partnership shall be liable for:
1. The support of the spouses, their common children, and legitimate children of either spouse;
however, the support of illegitimate children shall be governed by the provisions of the Family Code on
support;
2. All debts and obligations contracted during the marriage by the designated administrator spouse for
the benefit of the community, or by both spouses, or by one spouse with the consent of the other;
3. Debts and obligations contracted by either spouse without the consent of the other to the extent that
the family may have been benefited;
4. All taxes, liens, charges and expenses, including major or minor upon the conjugal property;
5. All taxes and expenses for mere preservation made during the marriage upon the separate property
of either spouse;
6. Expenses to enable either spouse to commence or complete a professional, vocational course, or
other activity for self-improvement;
7. Ante nuptial debts of either spouse insofar as they have redounded to the benefit of the family;
8. The value of what is donated or promised by both spouse in favor of their common legitimate
children for the exclusive purpose of commencing or completing a professional or vocational either
activity for self-improvement; and
9. Expenses of litigation between the spouses unless to be groundless.
TRANSFER & BUSINESS TAXATION: Ampongan, Erasmo; Reyes, Virgilio (Compiled by: Gammad, Girn, Rubio)
15
La Consolacion College Manila
Mendiola, Manila
CHAPTER 6: GROSS ESTATE (EXCLUSIONS & EXEMPTIONS)
Gross Estate
Exemption of certain acquisitions and transmissions
Transfers exempt from estate tax are transfers mortis causa which are not subject thereto. That
is why they are not includable in the gross estate of the decedent.
The exemptions from estate tax may be either under the provisions of the National Internal
Revenue Code or by reason of special law.
Transfers exempt from estate tax under the code
Under the code, the following shall not be taxed:
1. The merger of the usufruct in the owner of the naked title;
2. The transmission or delivery of the inheritance or legacy by the fiduciary heir or legatee to the
fldeicommissary;
3. The transmission from the first heir, legatee or donee in favor of another beneficiary, in
accordance with the desire of the predecessor; and
4. All bequests, devises, legacies or transfers to social welfare, cultural and charitable institutions,
no part of the net income of which insures to me benefit of any individual. Provided, however,
that not more than thirty percent (30%) of the said bequests devises, legacies or transfers shall
be used by such institution for administration purposes (Sec. 87, NIRC).
Common requisites to the first three exclusions
The first three (3) enumerated exclusions have common requisites. They are the following:
1. There must be two transmissions of the same property of a portion thereof;
2. The transfer from the prior decedent must be testamentary in character;
3. The first transfer is subject to estate tax, while the second transfer is the one exempt.
Merger of usufruct in the owner of the naked title
TRANSFER & BUSINESS TAXATION: Ampongan, Erasmo; Reyes, Virgilio (Compiled by: Gammad, Girn, Rubio)
16
La Consolacion College Manila
Mendiola, Manila
Usufruct is defined as a real right, of a temporary nature, which authorizes its holder to enjoy all
the benefits which results from the normal enjoyment of another’s property, with the obligation to
return, at the designated time, either the same thing or, in special cases, its equivalent.
In a usufruct there are two rightful claimants` to a thing, namely; the usufructuary, and the
owner of the naked title.
The usufructuary has the right to enjoy the property, to the same extent as the owner, but only
with respect to its use and the receipt of its fruits (2 Antokoletz 729).
The owner of the naked tide, during the usufruct, can exercise all the rights of ownership
consistent with the enjoyment of the thing by the usufructuary. But none of these acts can affect the
rights of the usufructuan; (2 Tolentino, 272).
There is merger of the usufruct. In the owner of the naked title when the naked ownership and
the usufruct come to be held by the same person.
Transmission from fiduciary heir to the fideicommissary
Fideicommissary substitution is that by virtue of which a testator institutes a first heir, and
charges him to preserve and transmit the whole or part of the inheritance later on to a second heir.
In a fideicommissary substitution, there must be a first heir and a second heir whose
relationship must be one degree such that of parent and child, vice versa.
Second transfer in accordance with the desire of predecessor
This is referring to the transmission of property from first heir, legatee or donee in favor of
another beneficiary in with the desire of the predecessor.
This exemption and in the others (merger of usufruct in owner of naked title and transfer from
fiduciary heir to the fideicommisary) is premised on the fact that there is only a single property, i.e. from
the testator - to the owner of the naked title; the fideicommissary or to the second beneficiary, as the
case may be. Hence the exemption from the tax because the transfer was subject to previously thereto
(de Leon, Transfer and Business Taxation, 1995, p.40)
Donations to social welfare, cultural and charitable institutions
This is the estate tax counterpart of the more familiar income tax charitable deduction
provision. However, this charitable deduction is unlimited in the sense that it is not subject to
percentage restrictions such as are applicable to the income tax deduction for contributions to charity.
TRANSFER & BUSINESS TAXATION: Ampongan, Erasmo; Reyes, Virgilio (Compiled by: Gammad, Girn, Rubio)
17
La Consolacion College Manila
Mendiola, Manila
It might be a charitable act to leave money to a poor person, but the statute authorizes no
deduction for such direct philanthropy, requiring instead that bequests be made to qualified recipient
organizations.
Thus, a nonprofit hospital may be a qualified recipient, even, where small charges are made for
use, except where less than the entire community (Old Colory Trust Co. v. U.S.; 684), but a nonprofit
cemetery association not charitable purposes will not qualify (Child v. U.S., 540 F2d 579).
TRANSFER & BUSINESS TAXATION: Ampongan, Erasmo; Reyes, Virgilio (Compiled by: Gammad, Girn, Rubio)
18
La Consolacion College Manila
Mendiola, Manila
CHAPTER 7: DEDUCTIONS FROM GROSS ESTATE
The deductions from the gross estate allowed by the National Internal
Revenue Cod had been categorized by a revenue regulation into:
(a) Ordinary deductions; and
(b) Special deductions.
Ordinary deductions:
(a) Expenses, losses, indebtedness, taxes, etc.:
(1) Funeral expenses;
(2) Judicial expenses of testamentary or intestate proceedings
(3) Claims against the estate;
(4) Claims against insolvent persons;
(5) Unpaid mortgage or indebtedness on property;
Taxes;
Losses;
(b) Transfer for public use;
(c) Vanishing deduction.
Special deductions;
(a) Family home;
(D) Standard deduction;
(c) Medical expenses;
(d) Amount receivable by heirs under Republic Act No. 4917;
The special deductions are not allowed to the estate of a non-resident, not citizen decedent.
The share of the surviving spouse in the net community or net conjugal estate is a deduction from the
net estate. Thus:
Net estate (after deducting ordinary and special deductions)
Less: Share of the surviving spouse in the net community
or net conjugal estate
Net taxable estate
xx
xx
xx
Funeral expenses
Funeral expenses are deductible from the gross estate at whichever is the lowest of actual
funeral expenses, five percent (5%) of the gross estate, or P200, 000.
Funeral expenses are deductible, whether paid or unpaid at the time of death.
Expenses related to the death but after interment are not anymore funeral expenses.
Judicial expenses
TRANSFER & BUSINESS TAXATION: Ampongan, Erasmo; Reyes, Virgilio (Compiled by: Gammad, Girn, Rubio)
19
La Consolacion College Manila
Mendiola, Manila
Judicial expenses in the judicial settlement of the estate are deductible if paid or incurred prior
to the last day for filing of the estate tax return and payment of the estate tax (within six months from
the date of death).
Judicial expenses would include administration expenses of the estate. If the estate is not
settled judicially, the administration expenses paid or incurred by the heirs in the extrajudicial
settlement of the estate are deductible from the gross estate as administration (judicial) expenses.
Claims against the estate
Claims against the estate are obligations contracted during the decedent’s lifetime, and
enforceable if he were alive. Obligations of the decedent that already prescribed during his lifetime, or
obligations of the decedent under contracts which must (under the Statute of Frauds), but was not,
reduced into writing, are not claims against the estate.
If the claim is out of a debt instrument, the debt instrument must be notarized (except for loans
granted by financial institutions where notarization is not part of the business practice or policy of the
institution).
If the claim was out of a loan incurred within three years prior to death, the administrator or
executor must submit a Statement showing the disposition of the proceeds of the loan.
If the monetary claim against the decedent did not arise of a debt instrument the requirement
of a notarized debt instrument does not apply.
Claim against insolvent person
When there is a claim against an insolvent person, the gross estate must include the gross of the
receivable, and the uncollectible portion of the claim shall be the deduction from the gross estate. Thus,
if a debtor had no property whatsoever, the claim against insolvent persons shall be the whole amount
of the receivable. lf, for example, the claim is P40,000, and the debtor had properties of P100,000 and
obligations of P400,000, the deduction for claim against insolvent is P300,000/P400,000 x P40,000,or
P30,000.
Mortgage or indebtedness on property
A mortgage or indebtedness on property is a deduction from the gross estate but the value of
the property, undiminished by the mortgage, must first be included in the gross estate.
Losses:
Loses are deductible from the gross estate if:
(1) Arising from tire, storm, shipwreck or other casualty, robbery, theft or embezzlement;
(2) Not compensated by insurance or otherwise;
(3) Not claimed as a deduction in the income tax return for the estate;
(4) Occurring during the settlement of the estate; and
(5) Occurring before the last day for the payment of the estate tax
TRANSFER & BUSINESS TAXATION: Ampongan, Erasmo; Reyes, Virgilio (Compiled by: Gammad, Girn, Rubio)
20
La Consolacion College Manila
Mendiola, Manila
(within six months from the date of the decedent's death).
Taxes that accrued prior to the decedent's death are deductible from the gross estate.
By statutory provision, the following taxes cannot be deducted from the gross estate:
(1) Income tax on income received after death;
(2) Property taxes not accrued before death; and
(3) Estate tax.
Taxes that accrued prior to the decedent's death are deductible from the gross estate. By statutory
provision, the following taxes cannot be deducted from the gross estate:
(1) Income tax on income received after death;
(2) Property taxes not accrued before death; and
(3) Estate tax.
VANISHING DEDUCTION
The requisites are;
(a)The present decedent died within five years from receipt of the property from a prior decedent or
donor;
(b)The property on which vanishing deduction is being claimed must be located in the Philippines;
(c)The property must have formed part of the taxable estate of the prior decedent, or of the taxable gift
of the donor;
(d)The estate tax on the prior succession, or the donor's tax on the gift, must have been finally
determined and paid;
(e)The property on which vanishing deduction is being claimed must be identified as the same one
received from the prior decedent, or from the donor, or something acquired in exchange therefore; and
(f)No vanishing deduction on the property was allowable to the estate of the prior decedent.
Medical expenses
Medical expenses are deductible from the gross estate at actual medical expenses or P500.000,
whichever is lower, if incurred within one year prior to death.
Medical expenses are deductible, whether paid or unpaid at the time of death.
Medical expenses incurred more than one year prior to the date of death, even if unpaid, are
not deductible from the gross estate.
TRANSFER & BUSINESS TAXATION: Ampongan, Erasmo; Reyes, Virgilio (Compiled by: Gammad, Girn, Rubio)
21
La Consolacion College Manila
Mendiola, Manila
CHAPTER 8: ESTATE TAXATION (NET ESTATE, ESTATE TAX, TAX CREDIT)
Schedule of Tax Rates
There shall be levied, assessed, collected and paid upon the transfer of the net estate of every
decedent, whether resident or nonresident of the Philippines, a tax based on the value of such net
estate, as computed in accordance with the following schedule(Sec.84, NIRC)
If the Net Estate is:
But not
Over
The Tax
Shall be
Plus
Of the Excess
Over
P 200,00.00
Exempt
P200,000.00
500,000.00
0
5%
P 200,000.00
500,000.00
2,000,000.00
P 15,000.00
8%
500,000.00
2,000,000.00
5,000,000.00
135,000.00
11%
2,000,000.00
5,000,000.00
10,000,000.00
465,000.00
15%
5,000,000.00
1,215,000.00
20%
10,000,000.00
Over
10,000,000.00
Concept of Tax Credit
Tax credit generally refers to an amount that is subtracted directly from one’s total tax liability,
an allowance against the tax itself, or a deduction from what is owed.
It is distinguished from tax deduction in the sense that tax deduction is a subtraction from gross
estate for tax purposes, or an amount that is allowed by law to reduce the gross estate prior to the
application of the tax rate to compute the amount of tax which is due.
A tax credit reduces the tax due, including – whenever applicable- the estate tax that is
determined after applying the corresponding tax rates to net taxable estate. A tax deduction reduces
the estate that is subject to tax in order to arrive at taxable estate (CIR vs. Central Luzon Drug
Corporation, 456 SCRA 414[2005])
Tax Credit for estate taxes paid to a foreign country
TRANSFER & BUSINESS TAXATION: Ampongan, Erasmo; Reyes, Virgilio (Compiled by: Gammad, Girn, Rubio)
22
La Consolacion College Manila
Mendiola, Manila
A tax imposed upon the decedent who was a citizen or a resident at the time of death shall be
credited with the amount of any estate tax of any character and description imposed by the authority of
a foreign country.
However, the amount of tax credit shall be subject to each of the following limitations:
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 decedents net estate situated
within such country taxable in Title III of the Tax Code bears to his entire net estate
(Sec.86[E,2,a],NIRC); and
b. The total amount of the credit shall not exceed the same proportion of the tax against which
such credit is taken, which decedent’s net estate situated outside the Philippines taxable in the
Philippines bears to his entire net estate(Sec.86[E,2,a],NIRC).
The limitations imposed on tax credits are expressed in the following formulas:
Formula 1: Single Foreign country
Net estate in foreign country
Entire net estate
x
Phil estate tax=Tax Credit
x
Phil estate tax=Tax Credit
Formula 2: Two or more foreign countries
Net estate all foreign countries
Entire net estate
TRANSFER & BUSINESS TAXATION: Ampongan, Erasmo; Reyes, Virgilio (Compiled by: Gammad, Girn, Rubio)
23
La Consolacion College Manila
Mendiola, Manila
CHAPTER 9: FILING OF RETURN & PAYMENT OF ESTATE TAX
Valuation of the estate
1. Properties. — In case of personal property, it shall be appraised at its fair market value as of the
time of death. In the case of real property, the appraised value of real property as of the time of
death shall be, whichever is the higher of :
a. The fair market value as determined by the Commissioner, or
b. The fair market value as shown in the schedule of values fixed by the Provincial and City
Assessors.
Fair market value is the price which a property will bring when it is offered for sale by one who
desires, but is not obliged to sell, and is bought by one who is under no necessity of buying it. (M.R.R. vs.
Velasquez, 32 Phil. 286)
2. Usufruct – To determine the value of the right of usufruct, use or habitation, as well as that of
annuity, there shall be taken into account the probable life of the beneficiary in accordance with
the latest Basic Standard Mortality Table, to be approved by the Secretary of Finance, upon
recommendation of the Insurance Commissioner.
3. In the case of stocks, bonds or other securities, the following rules shall apply:
a. If listed in the stock exchange, the fair market value shall be the mean between the highest
and the lowest quotation at a date nearest the date of death, if none is available on the date of
death itself.
b. If not listed in the stock exchange, the fair market value shall depend on whether the shares
are preferred or common.
Unlisted common shares are valued based on their book value while unlisted preferred
shares are valued at par value.
The book value per share is equal to assets lessliabilities divided by the outstanding shares of
stocks.
In determining the book value of common shares, appraisal surplus shall not be considered as
well as the value assigned to preferred shares, if there are any.
Notice of death
TRANSFER & BUSINESS TAXATION: Ampongan, Erasmo; Reyes, Virgilio (Compiled by: Gammad, Girn, Rubio)
24
La Consolacion College Manila
Mendiola, Manila
In all cases at transfers subject to tax, or where, though exempt from tax, the gross value of the
estate exceeds Twenty thousand pesos (P20,000.00), the executor, administrator or any Of the legal
heirs, as the case may be, within two(2) months after the decedent's death, or within a like period after
qualifying as such executor or administrator, shall give a written notice thereof to the Commissioner
(Sec. 89, NIRC).
Estate tax returns
The executor, or the administrator, or any of the legal heirs, as the case may be, shall file an
estate tax return in any of the following instances:
1. The transfer is subject to estate tax; or
2. Though exempt from tax, if the gross value of the estate exceeds P200,000; or
3. Regardless of the value of the estate, where the said estate consists of registered or registrable
properly such as real property, motor vehicle, shares of stock or other similar property for which
a clearance from the Bureau of Internal Revenue is required as a condition precedent for the
transfer thereof in the name of the transferee (Sec. 90,N1RC).
Contents of estate tax return
An estate tax return shall be filed in duplicate, setting forth the following:
1. The value of the grass estate of the decedent at the time of his death, or in case of a
nonresident alien, of that part of his gross estate situated in the Philippines;
2. The deductions allowed from gross estate in determining the estate tax;
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.
Certification by a CPA
When the estate tax return shows a gross value exceeding P2,000,000, it shall be supported with
a statement duly certified to by a Certified Public Accountant containing the following:
1. Itemized assets of the decedent with their corresponding gross value at the time of his death, or
in the case of a nonresident alien, of that part of his gross estate situated in the Philippines;
2. Itemized deductions from gross estate; and
3. The amount of tax due whether paid or still due and outstanding (Sec. 90, ibid.).
Documentary Requirements
1. Notice of Death duly received by the BIR, if gross estate exceeds P20,000 for deaths occurring on
or after Jan. 1; 1998; or if the gross estate exceeds P3,00€J for deaths occurring prior to January
1, 1998.
2. Certified true copy of the Death Certificate
3. Deed of Extra—Judicial Settlement of the Estate, if the estate is settled extra judicially
TRANSFER & BUSINESS TAXATION: Ampongan, Erasmo; Reyes, Virgilio (Compiled by: Gammad, Girn, Rubio)
25
La Consolacion College Manila
Mendiola, Manila
4. Court Orders/Decision, if the estate is settled judicially;
5. Affidavit of Self-Adjudication and Sworn Declaration of all properties of the Estate
6. A certified true copy of the schedule of partition of the estate and the order of the court
approving the same, if applicable
7. Certified true copy(ies) of the Transfer/Original/Condominium Certificate of Title(s) of real
property(ies) (front and back pages), if applicable
8. Certified true copy of the latest Tax Declaration of real properties at the time of death, if
applicable
9. "Certificate of No Improvement" issued by the Assessor's Office declared properties have no
declared improvement or Sworn Declaration/Affidavit of No Improvement by at least one (1) of
the transferees
10. Certificate of Deposit/Investment/Indebtedness owned by the decedent and the surviving
spouse, if applicable
11. Photo copy of Certificate of Registration of vehicles and other proofs showing the correct value
of the same, if applicable
12. Photo copy of certificate of stocks, if applicable
13. Proof of valuation of shares of stocks at the time of death, if applicable
● For listed stocks — newspaper clippings or certification from the Stock Exchange
● For unlisted stocks — latest audited Financial Statement of issuing corporation with
computation of book value per share
14. Proof of valuation of other types of personal property, if applicable
15. Proof of claimed tax credit, if applicable
16. CPA Statement on the itemized assets of the decedent, itemized deductions from gross estate
and the amount clue if the gross value of the estate exceeds two million pesos, if applicable
17. Certification of Barangay Captain for claimed Family Home
18. Duly notarized Promissory Note for "Claims against the Estate arising from Contract of Loan
19. Accounting of the proceeds of loan contracted within three (3) years prior to death of the
decedent
20. Proof of the claimed "Property Previously Taxed"
Filing of return
1. Time for filing. — The estate tax return shall be filed within six (6) months from the decedent’s
death.
2. Extension of time. - The Commissioner or any Revenue Officer authorized by him shall have
authority to grant, in meritorious cases, a reasonable extension not exceeding thirty (30) days
for filing the return.
3. Place of filing the return and payment of the tax:
TRANSFER & BUSINESS TAXATION: Ampongan, Erasmo; Reyes, Virgilio (Compiled by: Gammad, Girn, Rubio)
26
La Consolacion College Manila
Mendiola, Manila
a. In case of a resident decedent, the administrator or executor shall register the estate of
the decedent 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 the Accredited Agent
Bank (AAB), Revenue District Officer, municipality in which the decedent was domiciled
at the time of his death.
b. In case of a nonresident decedent, with executor or administrator in the Philippines, the
estate tax return shall be filed with the Revenue District Office where such executor or
administrator is registered. In case the executor or administrator is not registered, the
return shall be filed with the Revenue District Office having jurisdiction over the
executor or administrator's legal residence.
In case the nonresident decedent does not have an executor or administrator in the
Philippines, the estate tax return shall be filed with the Office of the Commissioner in Quezon
City.
Payment of tax
1. Time of Payment. — The estate tax shall be paid at the time the return is filed by the executor,
administrator or the heirs.
2. Extension of Time. - When the Commissioner finds that the payment on the due date of the
estate tax would impose undue hardship upon the estate of any of the heirs, he may extend the
time for payment of such tax or any part thereof not to exceed five (5) years, in case the estate
is settled judicially, or two(2) years in case the estate is settled extra-judicially.
In such case, the amount in respect of which the extension is granted shall be paid on or
before the date of the expiration of the period of the extension, and the running of the Statute
of Limitations for assessment as provided in Section 203 of the Code shall be suspended for the
period of any such extension,
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
Commissioner.
Payment of the estate tax by installment
In case the available cash of the estate is not sufficient to pay its total estate tax liability, the
estate may be allowed to pay the ‘tax by installment and a clearance shall be released only with respect
the property the corresponding computed tax on which has been paid.
There shall, therefore, be as many clearances (Certificates Authorizing Registration) as there are
as many properties released because they have been paid for by the installment payments of the estate
tax.
TRANSFER & BUSINESS TAXATION: Ampongan, Erasmo; Reyes, Virgilio (Compiled by: Gammad, Girn, Rubio)
27
La Consolacion College Manila
Mendiola, Manila
The computation of the estate tax, however, shall always be on the cumulative amount of the
net taxable estate. Any amount paid after /the statutory due date of the tax shall be imposed the
corresponding applicable penalty thereto.
However, if the payment of the tax after the due date is approved by the Commissioner or his
duly authorized representative, the imposable penalty thereon shall only be the interest.
Liability for payment
The estate tax shall be paid by the executor or administrator before the delivery of the
distributive share in the inheritance to any heir or beneficiary.
Where there are two or more executors or administrators, all of them are severally liable for the
payment of the tax. The estate tax clearance issued by the Commissioner or the Revenue District Officer
(RDO) having jurisdiction over the estate, will serve as the authority to distribute the
remaining/distributable properties/share in the inheritance to the heir or beneficiary.
The executor or administrator of an estate has the primary obligation to pay the estate tax but
the heir or beneficiary has subsidiary liability for payment of that portion of the estate which his
distributive share bears to the value of the total net estate.
The extent of his liability, however, shall in no case exceed the value of his share in the
inheritance.
Civil penalties
In addition to the tax required to be paid, the following penaities shall be imposed:
1. 25% penalty in case of failure to
a. File the return and pay the tax on time.
b. File the return with the proper person.
c. Pay on time the full amount of tax shown on any return or full amount of tax in case no
return is required to be filed. 2. 50% penalty in case of
a. Willful neglect to file the return on time.
b. False or fraudulent return is willfully filed,
TRANSFER & BUSINESS TAXATION: Ampongan, Erasmo; Reyes, Virgilio (Compiled by: Gammad, Girn, Rubio)
28
La Consolacion College Manila
Mendiola, Manila
CHAPTER 10: CONCEPT OF DONATION AND DONOR‘S TAX
A. Donation
Definition and nature of donation
Donation is an act of liberality whereby a person disposes gratuitously of a thing or right in favor
of another, who accepts it (Art.725, NCC).
The Civil Code considers donation as a contract, as shown by the fact that it requires
acceptance, and that the rules on obligations and contracts apply to it as a suppletory claw (Art. 732)]
The donation is a bilateral act, and, as such, is a contract; but it is a unilateral contract which imposes
obligations only on the donor (3 Castan 95-96).
Requisites of a valid donation
For purposes of donor‘s tax, the requisites of a donation are:
1. Capacity of the donor;
2. Donative intent;
3. Delivery of the subject matter of the gift; and
4. Acceptance of the gift by the donee.
All persons who may contract and dispose of their property may make a donation (Art. 735, ibid.).
The donor's capacity shall be determined as of the time of the making of the donation (Art. 737, id. ).
Donative intent is required only in direct gift. Thus, in transfers for insufficient consideration,
donative intent is not necessary (Perez v. CIR, CTA Case No. 1707, Feb. 10, 1969).
Delivery may be actual or constructive. There is delivery if the subject matter is within the dominion
and control of the donee.
The donation is perfected from the moment the donor knows of the acceptance by the donee (Art.
734, id.). It is completed by the delivery either actually or constructively of the donated property to the
donee.
The acceptance is necessary, because nobody is obliged to receive a gift against his will. And once
the acceptance is made known to the donor, the will of donor and donee concur, and the donation, as a
mode of transferring ownership, becomes perfect (Osorio v. Osorio, 41 Phil. 531).
TRANSFER & BUSINESS TAXATION: Ampongan, Erasmo; Reyes, Virgilio (Compiled by: Gammad, Girn, Rubio)
29
La Consolacion College Manila
Mendiola, Manila
That is why acceptance must be made during the lifetime of the donor and the donee (Art. 746, fd.).
If the donor dies before he learns of the acceptance, the donation does not take effect (3 Castan 104).
Hence, even if the acceptance is made during the lifetime of the donor, but it is not communicated to
him before his death, the donation is not perfect (Tolentino, Commentaries and Jurisprudence on the
Civil Code of the Philippines, Vol. 2[1954] p. 481 ),
The donee must accept the donation personally, or through an authorized person with a special
power for the purpose, or with a general and sufficient power. Otherwise, the donation shall be void
(Art. 745, id.).
Minors and others who cannot enter into a contract may become donees but acceptance shall be
done through their parents or legal representatives (Art. 741, id.)
Donations made to conceived and unborn children may be accepted by those persons who would
legally represent them if they were already born (Art. 742, id. )
Formalities of a donation
The formalities required in a donation will depend on whether the property is movable or
immovable, thus if it is:
1. Movable. - The donation may be made orally or in writing.
An oral donation requires the simultaneous delivery of the thing or of the document
representing the right donated.
If the value of the personal property donated exceeds P 5,000 the donation and the acceptance
shall be made in writing. Otherwise, the donation shall be void (Art. 748, id. )
2. Immovable. - In order that the donation of an immovable may be valid, it must he made in a
public document, specifying therein the property donated and the value of the charges which
the donee must satisfy.
B. Donor‘s (Gift) Tax
Definition and nature
Donor‘s tax is a tax on a donation or gift, and is imposed on the gratuitous transfer of property
between two or more persons who are living at the time of the transfer.
A donor's tax (or gift tax) is a tax levied, assessed, collected and paid upon the transfer by any
person, resident or nonresident, of the property by gift (Sec. 98, NIRC).
TRANSFER & BUSINESS TAXATION: Ampongan, Erasmo; Reyes, Virgilio (Compiled by: Gammad, Girn, Rubio)
30
La Consolacion College Manila
Mendiola, Manila
The donor's tax is not a property tax, but is a tax imposed on the transfer of property by way of
gift inter vivos (Lladoc vs. CIR, 14 SCRA 242, cited in RR 2-2003).
As in the case of the estate tax, the donor's tax is an excise. Thus, the tax is imposed on the
donor and determined with reference to all the donor‘s gifts
In donor's tax, the law imposable is the law in force at the time of the perfection/completion of
the donation.
Transfers subject to the gift tax
The gift tax is, and is intended to be, comprehensive. While limited to transfers of property (no
tax is payable on donated services), anything of value may be the subject of a taxable transfer. The tax
applies to cash gifts and to those in the form of realty or tangible or intangible personal property. Nor
need gifts be made "directly; one‘s payment of one's child mortgage or interest on the mortgage is a gift
to the child. Beyond this, any discernible gratuitous shifting of financial advantage from one to another
may constitute a gift (Stephens, Federal Estate and Gift Taxation [1 996], p. 1-19.)
That is why, everyday classes of property such as a house, a car, jewelry, furniture, books, cash
and intangibles such as stocks, bonds, patents, patent applications, and real estate are all property that
may be the subject of a taxable transfer (ibid).
But of course the scope of the term "property" is much broader. Partial interests in property are
also "property." Thus, an income interest in a trust, a right to share in future rental payments (Gait v.
Comm'r, 216 F22d-41) and an option to purchase property and all interests in property that can be the
subject of a gift, notwithstanding possible difficulties of valuation (id) are included in the term property.
Dominion and control.
A timing question can arise with respect to gifts that take the form of something less than an
outright transfer. The key to answering the question of when a gift is made is the determination
whether the donor has relinquished dominion and control over the property or property interest
transferred.
For example, a transfer of property to another may constitute a gift. However, if the donor
retains a right to revoke it, the donor has not relinquished control over the property and no gift has yet
occurred.
If the donor should later relinquish the right to revoke, the transfer would then be complete for
gift tax purposes.
TRANSFER & BUSINESS TAXATION: Ampongan, Erasmo; Reyes, Virgilio (Compiled by: Gammad, Girn, Rubio)
31
La Consolacion College Manila
Mendiola, Manila
This suggests two related thoughts. First, the time at which the gift becomes complete
determines when it must be reported and gift tax be paid. Second, valuation of the gift is to be made at
the time the gift becomes complete.
Thus, if in 2008; Arbaja donated 100 shares of BMW Resources stock to Bagana and then in 2010
relinquished the power of revocation, the gitt tax liability on the transfer would be measured not by the
lower value of the stock when it was donated, but by its much greater value when the gift became
complete.
Purposes of gift tax
The purposes for the imposition of gift tax are the following:
1. To prevent avoidance of estate tax.
With the adoption of an estate tax, it is possible that some property owners might attempt
to avoid the estate tax by transferring their property by way of donation inter vivos which, under
prior law, was exempt from death tax.
It is not unnatural that they should desire to avoid the imposition of the estate tax upon
their estates so that such estates may pass to the objects of their bounty unimpaired. It is to
forestall such an eventuality that the gift tax has been conceived (Vol. 1, Report‘ of the Tax
Commission on National Internal Revenue Laws, p. 63).
2. To prevent or compensate for the loss of the progressive rates of income tax when large estates
are split up by gifts to numerous donees (Stanford's Estate v. Com. 308 U.S. 39).
Gifts in trust
Gift 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.
A trust is an arrangement created by will or an agreement under which title to property is
passed to another for conservation or investment with the income there from and ultimately the corpus
(principal) to be distributed in accordance with the directions of the creator as expressed in the
governing instrument.
A gift in trust is a gift to the beneficiary of the trust and not to the trustee. A taxable transfer
includes not only the transfer of ownership in the fullest sense but also the transfer of any right or
interest in property, but less than title.
TRANSFER & BUSINESS TAXATION: Ampongan, Erasmo; Reyes, Virgilio (Compiled by: Gammad, Girn, Rubio)
32
La Consolacion College Manila
Mendiola, Manila
Forgiveness of indebtedness
If the creditor condones the indebtedness of the debtor, the following rules shall apply:
a. On account of debtor's services to the creditor, the same is taxable income to the debtor.
b. If no services were rendered but the creditor simply condones the debt, it is taxable gift not
taxable income.
Constitutional provision on donation
Subject to conditions prescribed by law, all grants, endowments, donations, or contributions
used actually, directly and exclusively for educational purposes shall be exempt from tax (Art. XIV, Sec.
4(4), Constitution).
This provision is not self-executory. That is why there is still a need for an enactment of a law by
the Congress to make this effective.
It should be noted, however, that donation in favor of educational institution which are declared
as n0n—profit are expressly exempt from payment of donor's tax, provided that not more than thirty
percent (30%) of said gifts shall be used by such donee for administration purposes (Sec. 101, NIRC).
Renunciation of inheritance
A renunciation of inheritance in favor of a co—heir is not a donation for the purpose of taxation,
even if the renouncing heir says "I donate to my co-heir my share."
The reason is that the effects of the repudiation or renunciation snail always retroact to the
moment of the death of the decedent (Art. 1642, Civil Code). Therefore, renounced share accrues to the
other heirs, so that any word to that effect, by the heir is mere surplus-age.
On the other hand, if a renunciation is made in favor of another person not a co-heir, there is a
donation. In other words, if the effects of the donation are the same as what the law on succession
would provide, then there is no donation. But if me effect is to change the distribution of the estate,
then there is a donation.
Donation of a life insurance
When a person gets a life insurance and names a third person as has beneficiary, and then the
insurance becomes payable by the death of the insured, there is a donation in favor of the beneficiary,
not in the aim received by the heir from the insurer, but in the total amount of premiums that have
been paid by the insured flblentino, 462) provided that:
1. The insured purchases a policy all the benefits of which are payable to beneficiaries other than
the insured's estate and the ‘insured retains no power to change the beneficiaries or other
TRANSFER & BUSINESS TAXATION: Ampongan, Erasmo; Reyes, Virgilio (Compiled by: Gammad, Girn, Rubio)
33
La Consolacion College Manila
Mendiola, Manila
proportionate benefits, or to revest the economic benefits in himself or his estate and no
reversionary interest in himself or his estate;
2. The insured relinquishes his assignment, by designation of a new beneficiary, or otherwise,
every power retained by him in a previously issued policy.
In this case, an additional gift results every time a premium is paid by the insured (34 Am. Jur. 2d, p.
849).
Void donations
Those made between persons who were guilty of adultery or concubinage at the time of
donation, or to those found guilty of the same criminal offense, in consideration thereof, or donations
made to a public officer or his wife, descendants and ascendants, by reason of his office are void
donations (Art. 739, NCC).
Consequently, the above donations are not subject to donor's tax.
Political contributions
Any contribution in cash or in kind to any candidate, political party or coalition of parties for
campaign purposes shall not be subject to the payment of any gift tax if duly reported to the
Commission on Election (Sec. 99[c], NIRC and Sec. 13, RA 7166).
Remuneratory donations
Remuneratory donations are those which remunerate past services which do not constitute
demandable debts. These donations are not in consideration of liberality, but of services performed
such as donations made to one who saved the donor's life, or to an accountant who renounced his fees
for services rendered to the donor.
Since the motivating cause in remunerative donation is gratitude, acknowledgment of a favor, or
a desire to compensate, and not the liberality of the donor, they are not subject to gilt tax. Instead, they
are income subject to income tax.
Donation of property between spouses
Every donation or grant of gratuitous advantage, direct or indirect, between the spouses during
the marriage shall be void, except moderate gifts which the spouses may give each other on the
occasion of any family rejoicing. The prohibition shall also apply to persons living together as husband
and wife without a valid marriage (Art. 87, New Family Code).
Therefore, donations of this kind are not subject to donor‘s tax.
TRANSFER & BUSINESS TAXATION: Ampongan, Erasmo; Reyes, Virgilio (Compiled by: Gammad, Girn, Rubio)
34
La Consolacion College Manila
Mendiola, Manila
Donation of property re absentee
An absentee is a person who disappears from his domicile, his whereabouts being unknown for
sufficient number of years, and without leaving an agent to administer his property or when the power
conferred to an agent has expired.
The absence of a person may be judicially declared if two (2) years have elapsed without any
news about the absentee or since the receipt of the last news, and five (5) years in case the absentee
has left a person in charge of the administration of his property.
Donation to a person who was later on declared as an absentee is not valid there being no
acceptance. However, the donation shell be valid if accepted by an authorized administrator of his
property until such time that he is later on presumed to be dead. This is so because death extinguishes
civil personality.
After an absence of seven (7) years, it being unknown whether or not the absentee still lives, he
shall be presumed dead for all purposes, except for those of succession.
The computation of the seven-year period begins not from the declaration of absence but from
the date of which last news concerning the absentee is received. Thus, death is presumed to have
occurred on the last day of the period.
In the following instances, however, a person is considered to have been extraordinarily absent hence
presumed dead for all purposes at the beginning of the period:
1. A person on board a vessel lost during a sea voyage, or an aeroplane which is missing, who has
not been heard of for four years since the loss of the vessel or aeroplane;
2. A person in the armed forces who has taken part in war, and has been missing for four years;
3. A person who has been in danger of death under other circumstances and his existence has not
been known for four years. .
In the case of extraordinary absence above, the person is considered dead at the time of the
occurrence of the incident. Donations given to an absentee and accepted by his administrator would
have a valid effect only prior to his presumption of death. Needless to say, if the absentee is presumed
dead already at the time of the donation all donations given to him are not considered valid.
On the other hand, a donation made on the property of an absentee by the administrator is
unenforceable due to the absence of a special power of attorney which is required in an act of
TRANSFER & BUSINESS TAXATION: Ampongan, Erasmo; Reyes, Virgilio (Compiled by: Gammad, Girn, Rubio)
35
La Consolacion College Manila
Mendiola, Manila
ownership..A donation of property, unless made in the ordinary course of business, cannot be
considered as an act of administration.
The wife who is appointed as an administratix of the husbands property cannot alienate or
encumber the husband's property, or that of the conjugal partnership, without judicial authority.
Splitting of gift
Splitting of gift is a tax minimization scheme which is done by spreading the gift over numerous
calendar years to avail of lower tax liability. The gift-splitting scheme is a legally permissible means to
reduce or escape totally from a possible tax liability. It is not therefore, illegal. ,
TRANSFER & BUSINESS TAXATION: Ampongan, Erasmo; Reyes, Virgilio (Compiled by: Gammad, Girn, Rubio)
36
La Consolacion College Manila
Mendiola, Manila
CHAPTER 11: GROSS GIFT
Definition of gross gift
The term "gross gifts” includes real and personal property, whether tangible or intangible, or
mixed, wherever situated (Sec. 104, NIRC).
Composition of gross gift
The composition of gross gift will depend on the citizenship and/or residence of the donor. If
resident or citizen, he is taxable on properties situated within and without the Philippines. However, if
the donor is a nonresident alien, he shall be subject to tax on properties donated which are located
within the Philippines only.
Thus, if the donor is a citizen or resident alien, the gross gift maybe composed of:
1. Real property, within and without o
2. Tangible personal property, within and without
3. Intangible personal property, within and without
In the case of a nonresident alien, the gross gift maybe composed of the following:
1. Real property within ,
2. Tangible personal property within
3. Intangible personal property within, unless there is reciprocity in which case it is not taxable.
It should be noted that the above rule is the same rule that applies in the computation of gross estate.
Matrix 1 below simplifies the rules on the determination of whether or not the property shall be
included as part of the gross gift of the donor:
Exhibit 11- 1
Classification of Resident/
Property
Citizen
NR alien
NR alien
(no
reciprocity)
(reciprocity)
Yes
Yes
REAL PROPERTY
Within
Yes
TRANSFER & BUSINESS TAXATION: Ampongan, Erasmo; Reyes, Virgilio (Compiled by: Gammad, Girn, Rubio)
37
La Consolacion College Manila
Mendiola, Manila
Without
Yes
No
No
Tangible within
Yes
Yes
Yes
Tangible without
Yes
No
No
Intangible within
Yes
Yes
No
Intangible without
Yes
No
No
PERSONAL
PROPERTY
Rule on reciprocity
The rule on reciprocity applies to donations by a nonresident alien when the properties are
intangible personal which are located within the Philippines.
No donor's tax shall be collected in respect of intangible personal property in the following
instances:
1. If the donor at the time of the donation was a citizen and resident of a foreign country which at
the time or the donation did not impose a transfer tax on intangible personal property of the
citizens of the Philippines not residing in that foreign country.
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 taxes of every character or description in
respect of intangible personal property owned by citizens of the Philippines not residing in that
foreign country (Sec. 104. NIRC].
Intangible personal property
The following intangible personal properties are considered situated within the Philippines:
1. Franchise which must be exercised within 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 eighty five per centum (85%) of
the business of which is located in the Philippines;
4. Shares, obligations or bonds issued by a foreign corporation if such shares, obligations or bonds
have acquired a business situs in the Philippines; and
5. Shares or rights in any partnership, business or industry established in the Philippines (Sec. 104,
ibid).
Valuation of gifts made in property
TRANSFER & BUSINESS TAXATION: Ampongan, Erasmo; Reyes, Virgilio (Compiled by: Gammad, Girn, Rubio)
38
La Consolacion College Manila
Mendiola, Manila
The valuation of the property donated shall be made at the time of gift which is the time of the
terminating event. If the gift is made in property, the fair market value thereof at the time of the gift
shall be considered the amount of the gift.
In case of real property, the value shall be whichever is higher between:
1. The fair market value as determined by the Commissioner, or
2. The fair market value as shown in the schedule of values fixed by the Provincial and City
Assessors
Fair market value is defined as the prices at which any seller will sell and any buyer will buy, both
willingly without any force or intimidation (Dizon v. CIR, CTA Case No 5116, June 17, 1997).
In the case of stocks, bonds or other securities, the following rules shall apply:
1. If traded in the stock exchange, the fair market value shall be the mean between the highest and
the lowest quoted selling prices of the securities on the valuation date.
2. If not traded in the stock exchange, the fair market value shall depend on whether the stocks
are preferred or common.
If the stocks are common, the market value shall be the book value of the security on the valuation
date or on the date nearest valuation date. If the stocks are preferred, the market value shall be the per
value of the security.
Donation of conjugal or community property
Neither spouse may donate any conjugal or community property without the consent of the
other. However, either spouse may without the consent of the other, make moderate donations from
the conjugal/community property from charity or on occasions of family rejoicing or distress. ,
If what was donated is a conjugal or community property end only the husband signed the deed
of donation, there is only one donor for donor's tax purposes, without prejudice to the right of the wife
to question the validity of the donation without her consent pursuant to the provision of the Civil Code
of the Philippines and the Family Code of the Philippines.
Husband and wife are considered as distinct taxpayers for donor’s tax purposes. Thus, in case
the gift is made by both spouses out of conjugal or community property, each of them can claim
separate exemption.
TRANSFER & BUSINESS TAXATION: Ampongan, Erasmo; Reyes, Virgilio (Compiled by: Gammad, Girn, Rubio)
39
La Consolacion College Manila
Mendiola, Manila
CHAPTER 12: EXEMPTIONS OR DEDUCTIONS FROM GROSS GIFT
Exemptions are donations or gifts which are not taxable because exempted by law, Constitution
or treaty. Those exempted under the law are either exempt under the code or under special laws.
Exemptions are diminutions from gross gift for purposes of computing the net gift
“Net gift“ shall mean the economic benefits from the transfer that accrues to the donee.
Deductions from gross gift
Deductible items encompass administration expenses, unpaid mortgages and indebtedness with
respect to the property, claims against the property, and accrued expenses at termination which are
assumed by the donee.
The taxable amount of a taxable distribution is the value of the property received by the
transferee reduced by any consideration provided by the transferee in accordance with the desire of the
donor or with the agreement between him and the donee that will result to the actual amount of
benefit received by the transferee.
Thus, the following are deductible from the donor's gross gift:
1. Mortgage or other encumbrances on the property donated which was assumed by the donee
2. Amount specifically provided by the donor as diminution on the property donated.
Exemptions under the code
The following gifts or donations shall be exempt from donor's tax under the code:
1. Dowries or gifts made on account of marriage and before its celebration or within one year
thereafter by parents to each of their legitimate, recognized natural, or adopted children to the
extent of the first P10,0G0 (Sec. 101, NIRC).
The following are the essential requisites for its deductibility/exemption:
a.
b.
c.
d.
The donation must be given on account of marriage;
It must be given by a parent to his/her child; '
The child must be either legitimate, recognized natural or legally adopted by the donor; and
It must be given within one year before or alter the celebration of the marriage.
TRANSFER & BUSINESS TAXATION: Ampongan, Erasmo; Reyes, Virgilio (Compiled by: Gammad, Girn, Rubio)
40
La Consolacion College Manila
Mendiola, Manila
The donation given must be a wedding gift. Thus, one given as birthday gilt, anniversary gift, etc. is
not deductible. Moreover, the gift must be given by the parent to his legitimate, recognized natural or
legally adopted child. Legitimate children are those conceived or born under the following circumstances:
(1) Those conceived or born during the marriage (Art. 154, Family Code);
(2) Children conceived as a result of artificial insemination, if the spouses authorized or ratified such
insemination before the birth of the child (Ibid.)
(3) Children conceived or born before the judgment of annulment or absolute nullity of the
marriage when one party at the time of the celebration, was psychologically incapacitated to
comply with the essential marital obligations of marriage (Art. 36 and 54, ibid.); and
(4) Children conceived or born before the judgment of annulment or absolute nullity of the
marriage has become final and executory and those children conceived or born of the
subsequent marriage after compliance with the requirements in Sec. 52 of the Family Code.
Recognized natural child is one born outside of wedlock of parents who, at the time of the
conception of the former, were legally free to marry each other and is recognized by one or both
parents (Art. 269, Civil Code). The term “recognized natural child" has been eliminated in the New
Family Code because under this law, children are classified only into either legitimate or illegitimate. ,
Illegitimate children are those conceived or born outside a valid marriage (Art. 165, ibid.). Although
the provisions of the National Internal Revenue Code uses only the term "adopted child" it should be
construed to mean as referring to legally adopted child.
Legally adopted child refers to a person adopted under a judicial decree of legal adoption. Hence,
donations to children by natural adoption do not qualify to claim the P10,000- exemption.
As previously stated, a gift of conjugal or community property would be taxable to both spouses,
that is, one—half would be taxable to the husband and the other half to the wife. Consequently, both of
them shall be entitled to the exemption. The term "each" entitles the donor-parent to the exemption,
on every donation given to each child provided the gift is given on account of marriage.
2. 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
(ibid.);
For purposes of exemption, it is necessary that a government entity must be a non-profit
functionary. A governmental agency that is exercising proprietary function and subject to income tax is
TRANSFER & BUSINESS TAXATION: Ampongan, Erasmo; Reyes, Virgilio (Compiled by: Gammad, Girn, Rubio)
41
La Consolacion College Manila
Mendiola, Manila
not a non- profit office within the contemplation of tax exemption . (Nolledo, Bar Reviewer in Taxation
[1990], p. 530).
The term “political subdivision“ refers to a barangay, municipal-iity, city and province. Gifts given to
these governmental units are tax exempt if the property donated is exclusively used for public purposes
This exemption, including the donations falling in Number 3 below, are allowed as deductions whether
they are resident citizens, nonresident citizens, resident aliens or nonresident aliens.
3. Gifts in favor of non-profit educational and/or charitable, religious, cultural or social welfare
corporation, institution, accredited nongovernment 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 (ibid.).
For purposes of this exemption, a non-profit institution is one which is:
a.
b.
c.
d.
organized as a non—stock entity;
paying no dividends;
governed by trustees who receive no compensation; and ,
devoting all its income, whether students’ fees or gifts, donations, subsidies or other form of
philanthropy, to the accomplishment and promotion of the purposes enumerated in its Articles
of Incorporation (Sec .1 01 [3], ibid.).
It is important that the donations must be given to non profit institutions because direct gratuities to
poor or otherwise worthy individuals, no matter how much they may be inspired by charitable impulses,
give rise to no deduction (supra).
In general, the exemption is measured by the amount of money given or, for gifts of property
other than cash, by the fair market value of the property given.
Accreditation of corporations, associations or NGOs
The Philippine Council for Non—Government Organization (NGO) Certification (PCNC) shall be
the authorized accrediting agency to determine the qualifications of domestic corporations or
association or NGOs organized and operated exclusively for religious, charitable, scientific, youth and
sports development, cultural or educational purposes, or for rehabilitation of veterans, or to NGOs for
accreditation as donee institutions.
TRANSFER & BUSINESS TAXATION: Ampongan, Erasmo; Reyes, Virgilio (Compiled by: Gammad, Girn, Rubio)
42
La Consolacion College Manila
Mendiola, Manila
No corporations, associations or NGOs, however shall be processed for accreditation by the
PCNC unless it has secured a valid registrati0n‘with the government agency that exercises regulatory
function over such corporation, association or NGO (E0 720).
The following departments are hereby designated Accrediting Entities to determine the
qualification of non—stock, non—profit corporations, non-governmental organizations, associations,
and foundations for accreditation as qualified donee institutions to wit:
a. Department of Social Welfare and Development (DSWD) for charitable and/or social
welfare organizations, foundations and associations including ‘but not limited to those
engaged in youth, child, women, family, disabled persons, older persons, welfare and
development;
b. Department of Science and Technology (DOST) for organizations, associations and
foundations primarily engaged in research and other Scientific activities;
c. Philippine Sports Commission (PSC) for organizations, foundations and associations
primarily engaged in sports development;
d. National Council for Culture and Arts (NCCA) for organizations, foundations and
associations primarily engaged in cultural activities;
e. Commission on Higher Education (CHEd) for organizations, foundations and association
primarily engaged in educational activities
4. Donations not exceeding P100,000 in any one year.
This exemption is provided for in the tax table. Thus, the first donation in any year with a net
gift of not exceeding P100,000 shall not be subject to gift tax. Moreover, this exemption will be
availed if only if the donee is a relative of the donor.
Prizes and awards given to athletes
Donations given in the form of prize stand awards given to athletes in international sports
tournaments and competitions, held in the Philippines or abroad, and sanctioned by their national
sports associations are exempt from the payment of donor's tax.
Other tax exempt gifts
The following gifts are exempt from donor’s tax under special laws;
1. Donation to the Aquaculture Department of the Southeast Asian Fisheries Development Center
of the Philippines.
TRANSFER & BUSINESS TAXATION: Ampongan, Erasmo; Reyes, Virgilio (Compiled by: Gammad, Girn, Rubio)
43
La Consolacion College Manila
Mendiola, Manila
2.
3.
4.
5.
6.
7.
8.
Donation to the International Rice Research Institute;
Donation to the Philippine Inventor's Commission
Donation to the Development Academy of the Philippines;
Donation to the Philippine American Cultural Foundation;
Donation to the Ramon Magsaysay Award Foundation;
Donation to the National Social Action Council '
Donation to the Task Force on Human Settlement on the donation of equipment, materials and
services
TRANSFER & BUSINESS TAXATION: Ampongan, Erasmo; Reyes, Virgilio (Compiled by: Gammad, Girn, Rubio)
44
La Consolacion College Manila
Mendiola, Manila
CHAPTER 13: COMPUTATION OF DONOR'S TAX
Cumulative system of computation
For purposes of gift tax, the computation of the base is cumulative, i.e. to arrive at the taxable
base, all the gifts previously made in the same calendar year must be added to the present gift.
However, the gift taxes paid on the previous donations are allowed as tax credits on the amount of tax
computed in accordance with the schedule of tax rates. Thus, the formulas in computing donors tax are
as follows:
a. First donation during the year:
Gross gift
Less: Deductions/Exemptions
Net gifts
Pxx
xx
xx
Donor‘s tax payable (Net gift x tax rate)
Pxx
b. Succeeding donations clurinfg the year:
Gross gift
Less: Deductions/Exemptions
Net gifts:
Add: Prior net gift
Total net gifts
Donor's tax (net gift multiplied by the rate)
Less: Tax credit (prior gift taxes paid)
Donor's tax payable
P xx
xx
xx
xx
xx
xx
xx
xx
TAX TABLE
The tax for each calendar year shall be computed on the basis of the total net gifts made during the
calendar year in accordance with the following schedule (Sec. 99{A},NIRC). If the net gift is:
TRANSFER & BUSINESS TAXATION: Ampongan, Erasmo; Reyes, Virgilio (Compiled by: Gammad, Girn, Rubio)
45
La Consolacion College Manila
Mendiola, Manila
But not
Over
The Tax
Shall be
Plus
P 100,00.00
Exempt
-
100,000.00
200,000.00
0
2%
100,000.00
200,000.00
500,000.00
P 2,000.00
4%
P 200,000.00
500,000.00
1,000,000.00
14,000.00
6%
500,000.00
1,000,000.00
3,000,000.00
44,000.00
8%
1,000,000.00
3,000,000.00
5,000,000.00
204,000.00
10%
3,000,000.00
5,000,000.00
10,000,000.00
404,000.00
12%
5,000,000.00
10,000,000.00
-
1,004,000.00
15%
10,000,000.00
Over
Of the Excess
Over
Tax payable by donor if donee is a stranger
When the donee or beneficiary is a stranger, the tax payable by the donor shall be thirty percent
(30%) of the net gifts. For the purpose of donor's tax, a stranger is a person who does not fall under any
of the following relatives of the donor:
a. Brother, sister (whether by whole or half—blood), spouse, ancestor and lineal descendant; or
b. A relative by consanguinity in the collateral line within the fourth degree of relationship (Sec.
99[B1, NIRC).
Brothers or sisters with halt blood relationship refer to persons with common mother or father,
but not both. The donor must be legally married to the donee—spouse and not just living in one root
under a common law or void marriage.
Relatives by consanguinity refer to relatives with blood relationship. Hence, donation to in—
laws are donations to strangers. With the exception of the spouse, a “non—stranger donee" must be
related by blood to the transferor.
Thus, donees who are not in any way blood relatives of the donor, and those that are not
individuals such as corporation, partnership, estate of a deceased person or some other entity are
classified as strangers. That is why, donations made between organizations and those made between an
individual and a business organization shall be considered as a donation made to a stranger.
TRANSFER & BUSINESS TAXATION: Ampongan, Erasmo; Reyes, Virgilio (Compiled by: Gammad, Girn, Rubio)
46
La Consolacion College Manila
Mendiola, Manila
A legally adopted child is entitled to all the rights and obligations provided by law to legitimate
children, and therefore, donation to him shall not be considered as donation made to stranger (Rev.
Reg. 220U3).
Exhibit 13-1. -Computation of degrees of relationship.
Rules:
1. The degree of relationship is computed only when the donor and the donee are collateral
relatives.
2. If their relationship is beyond 4th civil degree, the donor and the donee are strangers with each
other. Thus, the applicable donor's tax rate is 30%.
Needless to say, a donation to a child by natural adoption is a donation to a stranger, unless he is a
relative by consanguinity of the donor as enunciated in the definition of the term “stranger.”
Relatives in the collateral line refer to those outside of the direct line such as uncles and aunts,
nephews and nieces, etc.
Transfer for less than adequate and full consideration
Where property, other than real property (capital assets), is transferred for less than adequate
and full consideration in money or money's worth, then the amount by which the fair market value of
the property at the time of the execution of the contract exceeded the value of the agreed or actual
consideration or selling price shall be deemed a gift, and shall be included in computing the amount of
gifts made during the calendar year.
This rule applies on transfer of any property for insufficient consideration, except transfers of
real properties which are classified as capital assets. The reason is that their sales or transfers of real
property capital assets are already subject to 6% final tax based on the fair market value or gross selling
price, whichever is higher. However, when the final tax is not imposed, the rule must be applied.
Moreover, transfers for insufficient consideration are subject to donor's tax if they are made
bona fide. If the transfers are in contemplation of death; revocable or under general power of
appointment, they are subject to estate tax.
Donative intent is necessary only in cases of direct gift. If the gift is indirectly taking place by way
of sale, exchange or other transfer of property as contemplated in Section 100, donative intent is not
necessary (Perez vs. CIR, CTA Case No. 1707, Feb. 10, 1969). Therefore, in transfers for insufficient
consideration, intent is not necessary to constitute a donation.
TRANSFER & BUSINESS TAXATION: Ampongan, Erasmo; Reyes, Virgilio (Compiled by: Gammad, Girn, Rubio)
47
La Consolacion College Manila
Mendiola, Manila
Tax credit for donor's taxes paid to a foreign country
A tax imposed upon a donor .who was a citizen or a resident at the time of donation shall be
credited with the amount of any donor's tax of any character and description imposed by the authority
of a foreign country (Sec. 101[ C], NIRC). However, the amount of tax credit shall be subject to each of
the following limitations:
1. 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 net gifts situated within such
country taxable in the Philippines bears to his entire net gifts (Sec. 101[C,2,a NIRC)
2. The total amount of the credit shall not exceed the same proportion of the tax against which
such credit is bears to his entire net gifts (Sec. 101[C,2,b], NIRC).
The limitations imposed on tax credits are expressed in the following formulas:
3. taken, which the donor's net gifts situated outside the Philippines taxable in the Philippines
Formula 1:
Net gift in foreign country X Phil donor's tax = Tax credit
Entire net gifts
Formula 2:
Net gift all foreign countries X Phil donor's tax = Tax credit
Entire net gifts
It should be noted that if there is only one foreign country, the first formula shall be applied. If
there are two or more foreign countries, both formulas are applicable. The principle applied in this
subject matter is the same with the principle on estate tax credit.
TRANSFER & BUSINESS TAXATION: Ampongan, Erasmo; Reyes, Virgilio (Compiled by: Gammad, Girn, Rubio)
48
La Consolacion College Manila
Mendiola, Manila
CHAPTER 14: FILING OF RETURN AND PAYMENT OF GIFT TAX
Requirements
Any individual who makes any transfer by gift (except those exempt from donor's tax as
discussed in Chapter 10) shall, for the purpose of said tax, make a return under oath in duplicate. The
return shall set forth:
1. Each gift made during the calendar year which is to be included in computing net gifts;
2. The deductions claimed and allowable;
4. 3.Any previous net gifts made during the same calendar year;
5. The name of the donee; and
6. Such further» information as may be required by rules and regulations made pursuant to law.
Time and place of filing and payment
1. Time of filing and payment - The return shall be filed within thirty (30) days after the date the gift is
made and the tax due thereon shall be paid at the time of filing.
2. Place of filing and payment — Except in cases where the Commissioner otherwise permits, the return
shall be filed and the tax paid to an authorized agent bank, the Revenue District Officer, Revenue
Collection Officer or duly authorized Treasurer of the city or municipality where the donor was
domiciled at the time of the transfer, or if there be no legal residence in the Philippines, with the Office
of the Commissioner.
In the case of gifts made by a nonresident, the return may be filed with the Philippine Embassy
or Consulate in the country where he is domiciled at the time of the transfer, or directly with the Office
of the Commissioner.
Documentary Requirements
The following requirements must be submitted upon field or office audit of the tax case before
the Tax Clearance Certificate/Certificate Authorizing Registration can be released:
1. Deed of Donation
2. Sworn Statement of the relationship of the donor to the donee
3. Proof of tax credit, if applicable
4. Certified true copy(ies) of the Original/Transfer,/Condominium Certificate of Title (front and
back ) of lot and/or improvement donated, if applicable.
5. Certified true copy(ies) of the-latest Tax Declaration (front and back pages) of lot and/or
improvement, if applicable
TRANSFER & BUSINESS TAXATION: Ampongan, Erasmo; Reyes, Virgilio (Compiled by: Gammad, Girn, Rubio)
49
La Consolacion College Manila
Mendiola, Manila
6. “Certificate of No Improvement" issued by the Assessor's office where the properties have no
declared improvement, if applicable
7. Proof of valuation of shares of stocks at the time of donation, if applicable
a. For listed stocks - newspaper clippings or certification issued by the Stock Exchange as
to the par value per share
b. For unlisted stocks - latest audited Financial Statements of the issuing corporation with
computation of the book value per share
8. Proof of valuation of other types of personal properties, if applicable
9. Proof of claimed deductions, if applicable
10. Copy of Tax Debit Memo used as payment, if applicable
Additional requirements may be requested for presentation during audit of the tax case depending upon
existing audit procedures.
TRANSFER & BUSINESS TAXATION: Ampongan, Erasmo; Reyes, Virgilio (Compiled by: Gammad, Girn, Rubio)
50
La Consolacion College Manila
Mendiola, Manila
CHAPTER 15: INTRODUCTION TO VALUE-ADDED TAX
Background
The value—added tax became effective in the Philippines on January 1, 1988, by virtue of
Executive Order No. 273. Its imposition has replaced and eliminated certain traditional business taxes in
the Philippines.
With the approval of Republic Act Nos. 7716, 8241, 8424, 8761, 9010, 9337 and other tax laws, more
traditional business taxes were abolished and replaced by VAT.
The following taxes were abolished by the aforementioned laws:
1. Sales tax on original sales
2. Subsequent sales tax
3. Contractor's tax
1. Miller's tax
4. Broker's tax
5. Tax on cinematographic film owner, lessor or distributor
6. Advance sales tax
7. Compensating tax
8. Excise taxes on matches, solvents and video tapes.
9. Tax on hotels, motels, etc.
10. Tax on dealers in securities;
2. 12.Tax on lending investors;
3. 13. Caterers tax;
4. 14. Tax on insurance premiums of non—iife insurance companies (except cmp insurance);
5. 15. Tax on franchises, except radio and television broadcasting companies whose annual gross
receipts of the preceding year do not exceed P10,000,000 and gas and water utilities.
The passage of Republic Act No. 9337, has introduced the following transactions into the valueadded tax world. Thus, the following sales of goods and services are now subject to VAT:
1. Sale of nonfood agricultural, marine and forest products in their original state by the primary
producer or owner of the land;
2. Sale of cotton and cotton seeds in their original state;
3. Sale or importation of coal and natural gas, in whatever fem‘: or state;
4. Sale or importation of petroleum products, including raw materials for their production;
5. Sale by the artist of his works of art, literary works, musical compositions and similar creations,
or his services performed for the production of such works;
TRANSFER & BUSINESS TAXATION: Ampongan, Erasmo; Reyes, Virgilio (Compiled by: Gammad, Girn, Rubio)
51
La Consolacion College Manila
Mendiola, Manila
6. Services rendered by doctors of medicine duly registered with the Professional Regulation
Commission and by lawyers duly registered with Integrated Bar of the Philippines;
7. Common carriers by air and sea relative to their transport of passengers from one place in the
Philippines to another place in the Philippines;
8. Toll road operations;
9. Philippine Amusements and'Gaming Corporation (PAGCOR) and its licenses and franchises;
10. Sale of electricity by generation, transmission and distribution companies; and
11. Sale by electric cooperatives as well as importation of machines and equipments including spare
parts.
Reforms introduced by VAT
The imposition of value-added tax has effected the following reforms:
1. Simplification of the business tax system;
2. Improvement of equity; and
3. Enhancement of efficiency in tax administration.
Nature and characteristics of VAT
The value-added tax is a tax on consumption levied on the sale, barter, exchange or lease of
goods or properties and services in the Philippines and on importation of goods into the Philippines. The
seller is the one statutorily liable for the payment of tax but the amount of the tax may be shifted or
passed on to the buyer, transferee or lessee of the goods, properties or services.
Scope of VAT
The following transactions are subject to VAT:
1. Any sale, barter, or exchange of goods and properties (including real properties), or simiiar
transactions, in the course of trade or business;
2. Any sale of services, or similar transactions, ‘in the course of trade or business;
3. Any lease of goods and properties, or similar transactions, in the course of trade or business;
and
4. Any importation of goods, whether in the course of trade or business or not.
The phrase "in the course of trade or business" means the regular conduct or pursuit of a
commercial or an economic activity, including transactions incidental thereto, by any person regardless
of whether or not the person engaged therein is a nonstock, nonprofit private organization (in-espective
of the disposition of its net income and whether or not it sells exclusively to members or their guests), or
government entity (Sec. 105, NIRC).
TRANSFER & BUSINESS TAXATION: Ampongan, Erasmo; Reyes, Virgilio (Compiled by: Gammad, Girn, Rubio)
52
La Consolacion College Manila
Mendiola, Manila
Non-resident persons who perform services in the Philippines are deemed to be making sales in
the course of trade or business even if the performance of senrices is not regular.
Generally, the persons subject to VAT are those whose gross annual sales or receipts during any
year or in any 1 -month period exceed P1,500,(}O0, or those whose annual sales or receipts do not
exceed this amount, but registered under the value-added tax system.
A person commencing a new business becomes taxable if he expects to realize an annual gross
sales or receipts in excess of P1,500,000 from taxable transactions for the next 12 months.
Application of the threshold
For purposes of the threshold of P1,500,000 the husband and the wife shall be considered as
seearate taxpayers.
However, the aggregation rule for each taxpayer shall apply, for instance, if a professional, aside
from the practice of his professien, also derives revenue from ether lines of business which are
otherwise subject to VAT, the same shall be combined for purposes of determining whether the
threshold has been exceeded.
Thus, the VAT exempt sale shall not be included in determining the threshold (Rev Reg. 4-2007).
Government and its political subdivisions
The term government consisting of the three branches, nameiy: the executive, legislative and
judiciary which undoubtedly are performing essential governmental function are not subject to tax
because the govemment should not tax itself.
However, a government entity is taxable if it sells goods or services in the course of business.
Thus, government entities and instrumentalities, including government-owned or controlled
corporations, are subject to VAT.
TRANSFER & BUSINESS TAXATION: Ampongan, Erasmo; Reyes, Virgilio (Compiled by: Gammad, Girn, Rubio)
53
La Consolacion College Manila
Mendiola, Manila
CHAPTER 16: EXEMPTIONS FROM VAT
Exemptions from VA T
Exemptions from VAT may be broadly categorized into:
1. Exempt persons. — Persons who are not liable to VAT.
2. Exempt transactions. — Transactions on certain goods, properties or services which are sold by
VAT—registered or non-VAT registered person and regardless of the annual gross sales or
receipts derived there from. Examples are sales of books by a bookstore.
Exempt persons or entities
There is no provision in the VAT law which expressly exempts certain persons from payment of
the VAT because indirect taxes such as value-added tax are levied on objects or transactions.
Exempt transactions
While some value—added tax transactions are subject to 12% tax and others are zero rated, there are
also transactions which are not subject to VAT. They are as follows:
1. 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 there for;
Livestock shall include cows, bulls and calves, pigs, sheep, goats and rabbits. Poultry
shall include fowls, ducks, geese and turkey. Livestock and poultry do not include fighting cocks,
race horses, zoo animals and other animals generally considered as pets.
Marine food products shall include fish and crustaceans, such as but not limited to eels,
trout, lobster, shrimps, prawns, oysters, mussels and clams.
Meat, fruit, fish, vegetables and other agricultural and marine food products classified
under this paragraph shall be considered in their original state even if they have undergone the
simple processes of preparation or preservation for the market such as freezing, drying, salting,
broiling, roasting, smoking or stripping, including those using advanced technological means of
packaging, such as shrink wrapping in plastics, vacuum packing, tetra-pack, and other similar
packaging methods
Polished and/or husked rice, corn grits, raw cane sugar and molasses, ordinary salt and
copra shall be considered in their original state.
TRANSFER & BUSINESS TAXATION: Ampongan, Erasmo; Reyes, Virgilio (Compiled by: Gammad, Girn, Rubio)
54
La Consolacion College Manila
Mendiola, Manila
Sugar whose content of sucrose by weight, in the dry state, has a polarimeter reading of
99.5“ and above are presumed to be refined sugar.
Cane sugar produced from the following shall be presumed, for internal revenue
purposes to be refined sugar: i
(1) product of a refining products,
(2) products of a sugar refinery, or
(3) product of a production line of a sugar mill accredited by the BIR to be producing and/or
capable of producing sugar with polarimeter reading of 99.5“ and above, and for which
the quedan issued therefore, and verified by the Sugar Regulatory Administration,
identifies the same to be of a polarimeter reading of 99.5" and above. Bagasse is not
included in the exemption provided for under this section.
It is to be noted that sale of non-food agricultural products, marine and forest products
in their original state by the primary producer or owner of the land where the same are
produced as well as the sale of cotton and cotton seeds in their original state are subject to VAT
(RMC 53-2007).
2. 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);
Specialty feeds refers to non-agricultural fees or food for race horses, fighting cocks,
aquarium fish, zoo animals and other animals generally considered as pets.
3. Importation of personal and household effects belonging to the residents of the Philippines
returning from abroad and nonresident citizens coming to resettle in the Philippines: Provided,
That such goods are exempt from customs duties under the Tariff and Customs Code of the
Philippines;
4. Importation of professional instruments and implements, wearing apparel, domestic animals,
and personal household effects (except any vehicle, vessel, aircraft, machinery, other goods for
use in the manufacture and merchandise of any kind in commercial quantity) belonging to
persons coming to settle in the Philippines, for their own use and not for sale, barter or
exchange, accompanying such persons, or arriving within 90 days before or after their arrival,
upon the production of evidence satisfactory to the Commissioner, that such persons are
actually coming to settle in the Philippines and that the change of residence is bona fide;
TRANSFER & BUSINESS TAXATION: Ampongan, Erasmo; Reyes, Virgilio (Compiled by: Gammad, Girn, Rubio)
55
La Consolacion College Manila
Mendiola, Manila
5. Services subject to Percentage tax;
6. Services by agricultural contract growers and mining for others of palay into rice, corn into com
grits and sugar cane into raw sugar; Agricultural contract growers refer to those persons
producing for others poultry, livestock or other agricultural and (marine food products in their
original state.
7. Medical, dental, hospital and veterinary services except those rendered by professionals;
Laboratory services are exempted. If the hospital or clinic operates a pharmacy or
drugstore, the sale of drugs and medicine are subject to VAT.
8. Educational services rendered by private educational institutions duly accredited by the
Department of Education (DepEd), the Commission on Higher Education (CHED), and the
Technical Education and Skills Development Authority (TESDA) and those rendered by
government educational institutions; ,
Educational services shall refer to academic, technical, vocational education provided by
private educational institutions duly accredited by the DepED, the CHED and TESDA and those
rendered by government educational institutions and it does not include seminars, in-service
training, review classes and other similar services rendered by persons who are not accredited
by the DepEd, the CHED and/or the TESDA. 9. Services rendered by individuals pursuant to an employer-employee relationship;
10. 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;
11. 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;
12. Sales by agricultural cooperatives duly registered with the Cooperative Development Authority
to their members as well as the sale of their produce, whether in its 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;
TRANSFER & BUSINESS TAXATION: Ampongan, Erasmo; Reyes, Virgilio (Compiled by: Gammad, Girn, Rubio)
56
La Consolacion College Manila
Mendiola, Manila
Note that sales by agricultural cooperatives to non-members can only be exempted
from VAT if the producer of the agricultural products sold is the cooperative itself. If the
cooperative is not the producer (e.g. trader), then only those sales to its members shall be
exempted from VAT (Rev. Reg. 4-2007').
13. Gross receipts from lending activities by credit or muiti—purp0se cooperatives duly registered
with the Cooperative Development Authority;
14. Sales by non—agricultural, non—electric and non—credit cooperatives duly registered with and
in good standing with the Cooperative Development Authority (CDA): Provided, that the share
capital contribution of each member does not exceed Fifteen thousand pesos(P15,000) and
regardless of the aggregate capital and net surplus ratably distributed among the members;
Importation by non-agricultural, non-electric and non-credit cooperatives of
machineries and equipment, including spare parts thereof, to be used by them are subject to
VAT.
15. Export sales by persons who are not VAT—registered;
16. Sale of real properties such as:
a. Real properties not primarily held for sale to customers or held for lease in the ordinary
course of trade or business.
b. Sale of real properties utilized for low—cost housing (ceiling price per unit does not
exceed P 750,000) or socialized housing (price ceiling per unit does not exceed
P225,000).
c. Sale of residential lot valued at P1,500,000 and below, or house and lot and other
residential dwellings valued at P2,500,000 and below where the instrument of
sale/transfer/disposition was executed on or after November 1, 2005, such ceiling shall
be subject to adjustment every three (3) years thereafter.
However, even if the real property is not primarily held for sale to customers or held for
lease in the ordinary course of trade or business but the same is used in the trade or business of
the seller, the sale thereof shall be subject to VAT being a transaction incidental to the
taxpayer's main business.
17. Lease of residential unit with a monthly rental not exceeding Ten Thousand Pesos (P10,000),
regardless of the aggregate amount of rentals received by the lessor during the year: Provided,
TRANSFER & BUSINESS TAXATION: Ampongan, Erasmo; Reyes, Virgilio (Compiled by: Gammad, Girn, Rubio)
57
La Consolacion College Manila
Mendiola, Manila
that not later than January 31, 2009, the amount herein stated shall be adjusted to its present
value using the Consumer Price Index as published by the National Statistics Office (NSO).
Lease of residential units where the monthly rental per unit exceeds P10,000 but the
aggregate of such rentals of the lessor during the year do not exceed P1,500,000 shall likewise
be exempt from VAT, however, the same shall be subjected to three percent (3%) percentage
tax.
The term ‘residential units’ shall refer to apartments and houses and 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, hotel rooms, lodging
houses, inns and pension houses.
The term ‘unit’ shall mean an apartment unit in the case of apartment, house in the case
of residential houses; per person in the case of dormitories, boarding houses and bed spaces;
and per room in the case of rooms for rent.
See Chapter 17 for a comprehensive discussion.
18. 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;
19. Sale, importation or lease of passenger or cargo vessels and aircrafts, including engine,
equipment and spare parts thereof for domestic or international transport operations. Provided,
that the exemption from VAT on the importation and local purchase of passenger and/or cargo
vessels shall be limited to those of 150 tons and above, including engine and spare parts of said
vessel; and the vessel to be imported shall comply with the age limit requirement as follows:
a. Passenger and/or cargo vessels ~ 15 years old
b. Tankers — 10 years old
c. High speed passenger crafts — 5 years old
20. Importation of fuel, goods and supplies by persons engaged in ligternational shipping or air
transport operations; Provided that the:
a. Fuel, goods and supplies shall be used exclusively or shall pertain to the
transport of goods and/or passenger from a port in the Philippines directly to
a foreign port without stopping at any other port in the Philippines.
TRANSFER & BUSINESS TAXATION: Ampongan, Erasmo; Reyes, Virgilio (Compiled by: Gammad, Girn, Rubio)
58
La Consolacion College Manila
Mendiola, Manila
b. Fuel, goods or supplies is used for purposes other than that mentioned in the
preceding paragraph, such portion of fuel, goods and supplies shall be subject
to 12% VAT.
21. Services of banks, non'—bank financial intermediaries performing quasi-banking functions, and
other non—bank financial intermediaries such as money changers and pawnshops; and
22. 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 P1,500,00D. Provided, That not later than January 31, 2009 and every three (3)
years thereafter, the amount of P1,500,000 shall be adjusted to its present value using the
Consumer Price Index», as published by the National Statistics Office.
See Chapter 20 for a comprehensive discussion on the subject matter. ~
A VAT—registered person may elect that the above exemptions should not apply to its sale of goods or
properties or services: Provided, that once an election has been made, it shall be irrevocable for a period
of three (3) years counted from the quarter when the election was made except for franchise grantees
of radio and television
broadcasting companies whose annual gross receipts for the preceding year do not exceed P10,000,000
where the option become perpetually irrevocable (Rev. Reg. 4-2007).
TRANSFER & BUSINESS TAXATION: Ampongan, Erasmo; Reyes, Virgilio (Compiled by: Gammad, Girn, Rubio)
59
La Consolacion College Manila
Mendiola, Manila
CHAPTER 17: VAT ON SALE OF GOODS OR PROPERTIES
Value-added tax is imposed when there is a sale, barter or exchange of goods or properties in the
ordinary course of trade or business.
Goods or properties are to all tangible and intangible objects which are capable of pecuniary estimation
and shall include, among others:
a. Real properties held primarily for sale to customers or held for lease in the ordinary course of
trade or business;
b. The right or the privilege to use patent, copyright, design or model, plan, secret formula or
process, goodwill, trademark, trade brand or other like property or right;
c. The right or the privilege to use any industrial, commercial or scientific equipment;
d. The right or privilege to use motion picture films, films, tapes and discs; and
e. Radio, television, satellite transmission and cable television time.
The value-added tax on sale of goods is based on gross selling price. Gross selling price means:
a. The total amount of money or its equivalent which the purchaser pays or is obligated to pay to
the seller in consideration of the sale, barter or exchange, excluding the value-added tax. The
excise tax, if any, on such goods, shall form part of the gross selling price.
b. With regards to sale of real property subject to VAT, gross selling price shall mean the
consideration stated in the sales document or zonal value, whichever is higher. In the absence of
zonal value, gross selling price refers to the market value shown in the latest declaration of the
consideration, whichever is higher.
c. Downward adjustments are made for “sales returns and allowances and sales discounts granted
and indicated in the invoice at the time of sale and the grant of which does not depend upon the
happening of the event”.
Therefore, the “gross selling price” is actually the net sales and “purchases” is actually the net
purchases. If the gross selling price for purposes of the output taxes means net sales, purchases for
purposes of the input taxes shall mean net purchases.
Computation of tax base and applicable tax rates
Transaction
a. Sale of goods
Tax Base
Gross selling price
Gross sales
Less: Sales returns and allowances
Sales discount
Net sales
Add: Excise tax , if any
Tax base (excluding VAT)
Tax Rate
12% or 0%
xxx
xxx
xxx
xxx
xxx
xxx
TRANSFER & BUSINESS TAXATION: Ampongan, Erasmo; Reyes, Virgilio (Compiled by: Gammad, Girn, Rubio)
60
La Consolacion College Manila
Mendiola, Manila
b. Sale of real properties on
installment plan (initial
payments do not exceed 25%
of the gross selling price)
c. Sale of real properties on
cash basis or deferred
payment plan (initial
payments exceed 25% of
gross selling price)
Installment received
Add: Interest
Penalties
Tax base
Selling price stated in the sales
documents or fair market value,
whichever is higher
xxx
xxx
xxx
xxx
12% or 0%
12% or 0%
Computation of VAT Payable (excess Input tax)
a. Output tax exceeds input tax at the
end of any taxable quarter
b. Input tax inclusive of input tax
carried over from the previous
quarter exceeds output tax
Output tax
Less: Input Tax
VAT payable
Output tax
Less: Input Tax
Excess input tax
xxx
xxx
xxx
xxx
(xxx)
(xxx)
Output tax is the value-added tax due on the sale or lease of taxable goods or properties or
services by any person registered or required to register under the Tax Code (Sec. 110, NIRC). It is also
called Output VAT.
Input tax is the value-added tax from or paid by a VAT registered person in the course of his
trade or business on importation of goods or local purchase of goods or services including lease or use
of property, from a VAT registered person. It is also called Input VAT.
VAT payable refers to the excess of the output tax over the allowable input tax. In case of
importation, it is value-added tax due on such importation.
Transactions deemed sale
In transaction deemed sale, no actual sale of goods took place but such transactions are subject
to VAT. The rationale is to recapture the VAT that was already claimed as input tax.
Deemed sale transactions
Transfer, use or consumption not in the course of trade or business of
goods and properties originally intended for sale or use in the trade or
business
Distribution or transfer to shareholders or investors as share in the profits
of VAT-registered person
Distribution or transfer to creditors in payment of debt or obligation
Consignment of goods if not sold within 60 days following the date of
Tax base
Market Value
Market Value
Market Value
Market Value
TRANSFER & BUSINESS TAXATION: Ampongan, Erasmo; Reyes, Virgilio (Compiled by: Gammad, Girn, Rubio)
61
La Consolacion College Manila
Mendiola, Manila
consignment
Retirement from or cessation of business with respect to all goods on Lower between
hand, whether capital goods, stock-in-trade, supplies or materials as of acquisition cost
the date of such retirement or cessation, whether or not the business is or market value
continued by the new owner or successor.
Foreign Currency Denominated Sales
Foreign Currency Denominated Sales means sale to non-resident of goods, except those
mentioned in Secs. 149 (Automobiles) and 150 (Non-essential goods) of the Tax Code, assembled or
manufactured in the Philippines for delivery to a resident in the Philippines, paid for in acceptable
foreign currency and accounted for in accordance with the rules and regulations of the BSP.
Zero-Rated Sales Transactions
Zero-rated sales are still taxable transactions, but the rate has been set to zero. To subject zero
tax rates, the seller must be a VAT registered person because if he is not a VAT registered, the
transactions entered into by him are exempt from tax.
The following are the zero-rated sales by the VAT registered person:
a. Export sales
b. Foreign currency denominated sales
c. Sales to persons or entities who are tax-exempt under special laws or international agreements
to which the Philippines is signatory effectively subject such sales to zero rate.
Export Sales
a. The sale and actual shipment of goods from the Philippines to a foreign country, irrespective of
any shipping arrangement that may be agreed upon which may influence or determine the
transfer of ownership of the goods so exported;
b. Sales of raw materials or packaging materials to a nonresident buyer for a delivery to a resident
local export oriented enterprise to be used in the manufacturing, processing, packing, or
repacking in the Philippines of the said buyer’s goods;
c. Sale of raw materials or packaging materials to export-oriented enterprise whose export sales
exceed 70% of the total annual production;
d. Sale of gold to Central Bank of the Philippines;
e. Those considered export sales under the Omnibus Investment Code of 1987 (E.O. No. 226), and
other special laws;
f. The sale of goods, supplies equipment, and fuel to persons engaged in international shipping or
international air transport operations (new per R.A. 9337).
Transitional Input Tax on beginning inventories
TRANSFER & BUSINESS TAXATION: Ampongan, Erasmo; Reyes, Virgilio (Compiled by: Gammad, Girn, Rubio)
62
La Consolacion College Manila
Mendiola, Manila
Situations where a person may claim a transitional input tax on beginning inventories:
a. When he becomes liable to value added tax upon the exceeding the minimum turn-over of
P1,919,500 million in any 12-month period, or
b. When he voluntarily registers even if his turnover does not exceed P1,919,500 million (except
franchise grantees of radio and television broadcasting whose threshold is P10 million).
The following inventories shall be subject to transitional input tax:
a.
b.
c.
d.
e.
Goods purchased for resale in their present condition;
Materials purchased for further processing, but which have not yet undergone processing;
Goods which have been manufactured by the taxpayer;
Goods in process for sale or
Goods and supplies for use in the course of taxpayer’s trade or business as a VAT registered
person.
The amount of transitional input tax to be allowed as the tax credit shall be whichever is higher
between:
1. The beginning inventory of goods, materials and supplies equivalent to 2% of the value of such
inventory; or
2. The actual value added tax paid on such goods, materials, and supplies.
The value allowed for income tax purposes on inventories shall be the basis for the computation of
the 2% transitional input tax excluding goods that are exempt from VAT.
Presumptive Input Tax
Persons or firms allowed to have presumptive input tax are those engaged in the following:
1. Processing of sardines, mackerel, and milk.
2. Manufacturing of refined sugar and cooking oil.
3. Manufacturing of packed noodle-based instant meals.
Tax rate and basis of presumptive input tax are:
 4% (used to be 1 ½%) of gross value in money of purchases of primary agricultural
products which are used as inputs to their production.
Creditable Input Tax
Input tax evidenced by a VAT invoice or official receipts issued by a VAT registered person shall
be creditable against output tax in the following transactions:
TRANSFER & BUSINESS TAXATION: Ampongan, Erasmo; Reyes, Virgilio (Compiled by: Gammad, Girn, Rubio)
63
La Consolacion College Manila
Mendiola, Manila
1. Purchase or importation of goods:
a. For sale; or
b. For conversion into or intended to form part of a finished product for sale, including
packaging materials; or
c. For use as supplies in the course of trade or business;
d. For use as raw materials supplied in the sale of services;
e. For use in trade or business for which deduction for depreciation or amortization is
allowed.
2. Purchase of real properties for which a VAT has actually been paid.
3. Purchase of services in which a VAT has actually been paid.
4. Transitional input tax
5. Presumptive input tax
6. A VAT registered person who is also engaged in transactions not subject to VAT shall be allowed
input tax credit as follows:
a. All the input taxes that can be directly attributed to transactions subject to VAT may be
recognized for input tax credit; and
b. A ratable portion of any input tax which cannot be directly attributed to either activity.
Sale of Real Properties not subject to VAT
Only sale of real properties held primarily for sale to customers or held for lease in the ordinary
course of trade or business of the seller shall subject to value- added tax.
Thus, the sales of the following real properties are not subject to VAT:
a. Sale of real properties not primarily held for sale to customers or held for lease in the
ordinary course of trade or business;
b. Sale of real properties utilized for low-costing housing under R.A. 7279 (and other related
laws) otherwise known as Urban and Development Housing Act of 1992;
c. Sale of real properties utilized for socialized housing;
d. Sale of residential lot valued at P1,919,500 and below and house and lot and other
residential dwellings valued at P3,199,200 and below. Provided, every three years
thereafter, the amounts stated herein shall be adjusted to its present value using the
Consumer Price Index, as published by the National Statistics Office. Provided, further, that
such adjustment shall be published through revenue regulations’ to be issued not later than
March 31 of each year.
Appointment of Input tax on mixed transactions
Mixed transaction happens when the establishment is engaged in sales to private persons or
firms, to the government and it is also selling goods which are exempt from VAT, the total input taxes
shall be apportioned by applying the following formulas:
1. Taxable sales to private x Input tax = Creditable
Total Sales
2. Taxable sales to government x Input tax = Creditable up to 5%
TRANSFER & BUSINESS TAXATION: Ampongan, Erasmo; Reyes, Virgilio (Compiled by: Gammad, Girn, Rubio)
64
La Consolacion College Manila
Mendiola, Manila
Total Sales
3. Exempt sales x Input Tax = Expense or cost
Total Sales
Spread of VAT on Capital Goods
Capital goods refer to goods or properties with estimated useful life greater that one (1) year
and which are treated as depreciable assets, used directly or indirectly in production or sale of taxable
goods or services.
The following rules shall be applied when a VAT registered person purchases or imports capital
goods which are depreciable assets for income tax purposes:
a. Input tax on depreciable capital goods, the aggregate acquisition cost of which (net of VAT) in a
calendar month, exceeds P1,000,000 shall be spread evenly over 60 months or their useful life
whichever is shorter.
b. When the aggregate acquisition cost (exclusive of VAT) of the existing or finished capital goods
purchased or imported during any calendar month does not exceed P1,000,000, the total input
taxes will be allowable as credit against output tax in the month of acquisition.
c. If capital good is sold within five (5) years or prior to exhaustion of input VAT thereon, the entire
unamortized input tax on the capital goods sold can be claimed as input tax credit during the
month/quarter when the sale was made.
d. The option to apply for refund/tax credit certificate of capital goods has been withdrawn.
TRANSFER & BUSINESS TAXATION: Ampongan, Erasmo; Reyes, Virgilio (Compiled by: Gammad, Girn, Rubio)
65
La Consolacion College Manila
Mendiola, Manila
CHAPTER 18: SALE OF SERVICES & USE OR LEASE OF PROPERTIES
Requirements for taxability services
Following requirements must be satisfied to be subject to VAT:
a.
b.
c.
d.
The service must be performed in the course of trade or business.
It must be performed in the Philippines.
Consideration must be received actually or constructively.
The transaction is not exempt under the Code, special laws or international agreements.
Definition of Sale or Exchange of Services
Sale or exchange of services means the performance of all kinds of services in the Philippines for others
for fee, remuneration or consideration, whether in kind or in cash, including those performed or
rendered by:
a. Construction and service contractors;
b. Stock, real estate, commercial, customs and immigration brokers;
c. Lessors of property, whether personal or real;
d. Persons engaged in warehousing services;
e. Lessors or distributors of cinematographic films;
f. Persons engaged in milling, processing, manufacturing or repacking goods for others;
g. Proprietors, operators or keepers of hotels, motels, rest houses, pension houses, inns, resorts,
theaters and movie houses;
h. Proprietors, operators of restaurants, refreshment parlors, cafes and other eating places,
including clubs and caterers;
i. Dealers in securities;
j. Lending investors;
k. Transportation contractors on their transport of goods or cargoes including persons who
transport goods or cargoes for hire and other domestic common carriers by land, relative to
their transport of goods or cargoes;
l. Common carriers by air and sea relative to their transport of passengers goods or cargoes from
one place in the Philippines to another place in the Philippines;
m. Sales of electricity by generation, transmission, and/or distribution companies;
n. Franchise grantees of electric utilities, telephone and telegraph, radio and/or television
broadcasting and all other franchise grantees, except franchise grantees of radio and/or
television broadcasting whose annual gross receipts of the preceding year do not exceed
P10,000,000 and franchise grantees of gas and water utilities;
o. Non-life insurance companies (except their crop insurance), including surety, fidelity, indemnity
and bonding companies;
p. Similar services regardless of whether or not the performance thereof calls for the exercise or
use of the physical or mental facilities.
TRANSFER & BUSINESS TAXATION: Ampongan, Erasmo; Reyes, Virgilio (Compiled by: Gammad, Girn, Rubio)
66
La Consolacion College Manila
Mendiola, Manila
Broker
A broker is the one who acts as intermediary between parties. A custom broker is one who is
engaged in transporting with hired trucks for delivery of good of customers from the customs premises
to their place of establishment for a fee. A real estate broker is one who is engaged in selling of real
property of others for a fee. Commercial brokers are the following:
a. Fish brokers who sell fish and other marine fresh water products brought and shipped by
traders, producers or shippers.
b. A person who acts as a sales agent of publishing companies for a commission, but he purchases
outright the publication he sells, he is considered a merchant or an ordinary book dealer and not
a commercial dealer.
c. Agents and/or salesman acting for a domestic company in the buying and selling of securities
paid solely on commission basis.
Millers
Millers subject to VAT are those engaged in milling for others except millers of palay into rice,
corn into corn grits, and sugarcane into raw sugar.
If miller is paid in cash for his service
VAT is based on gross receipts for services
If miller receives a share of milled products VAT is based on actual market value of his
other than cash
share in milled products.
Warehousing Services
Warehousing service means rendering personal services by a warehouseman, such as:
a. Engaging in the business of receiving and storing goods for others for compensation or profit;
b. Receiving goods and merchandise to be restored in his warehouse for hire and
c. Keeping and storing goods for others, as business and for use.
Dealers in Securities and Lending Investors
Dealer in securities is a merchant of stocks or securities:
a. With an established place of business;
b. Regularly engaged in the purchase of securities and their resale to customers, that is, one who
as a merchant buys securities and sells them to customers;
c. With a view to the gains and profits that may be derived therefrom.
Lending investors include all persons other than banks, non-bank financial intermediaries, finance
companies and other financial intermediaries not performing quasi-banking functions, who make a
practice of lending money for themselves or others at interest.
VAT on Transportation Contractors
TRANSFER & BUSINESS TAXATION: Ampongan, Erasmo; Reyes, Virgilio (Compiled by: Gammad, Girn, Rubio)
67
La Consolacion College Manila
Mendiola, Manila
Transportation contractors refer to domestic common carriers by land, air and sea who
transport goods or cargoes, and to domestic air or water carriers on their transport of passengers.
Transportation contractors
Tax base/rate
Who transport passengers for hire by land Not subject to VAT
(domestic or international)
Subject to Common Carrier’s Tax of 3%
based on gross receipts.
Who transport passengers and cargoes by Subject to 0% VAT.
domestic air or sea vessels from the
Philippines to a foreign country
VAT on Franchise Grantees
The following services of franchise grantees are subject to VAT:
a. On telephone and telegraph;
b. On toll road operations;
c. On radio and television broadcasting, except franchise grantees of radio and television
broadcasting companies whose annual gross receipts of the preceding year do not exceed
P10,000,000 because they are subject to a Franchise Tax of 3%;
d. All other franchise grantees (except gas and water utilities).
*PAGCOR (franchise grantee) exempt from value-added tax.
Non- Life Insurance Companies
Non-life insurance includes:
a. Marine, fire and casualty insurance, surety, fidelity, indemnity;
b. Bonding companies and mutual benefit associations;
c. Nonresident foreign person rendering non-life insurance services in the Philippines
VAT is not imposed on gross receipts derived from the payment of premiums on life insurance, because
they are subject to five percent (5%) percentage tax based on total premiums collected.
Other sale or exchange of services
Sale or exchange of services includes:
a. The lease or the use of or the right or privilege to use any copyright, patent, design or model,
plan, secret formula or process, goodwill, trademark, tradebrand or other like property or right;
b. The lease or the use of, or the right to use of any industrial, commercial or scientific equipment;
c. The supply of scientific, technical industrial or commercial knowledge or information;
d. The supply of any assistance that is ancillary and subsidiary to and is furnished as a means of
enabling the application or enjoyment of any such property, or right as is mentioned in
subparagraph (2) or any such knowledge or information as mentioned in subparagraph (3);
TRANSFER & BUSINESS TAXATION: Ampongan, Erasmo; Reyes, Virgilio (Compiled by: Gammad, Girn, Rubio)
68
La Consolacion College Manila
Mendiola, Manila
e. The supply of services by a nonresident person or his employee in connection with the use of
property or right belonging to, or the installation or operation of any brand, machinery or other
apparatus purchased from such nonresident person;
f. The supply of technical advice, assistance or services rendered in connection with technical
management or administration of any scientific, industrial or commercial undertaking, venture,
project or scheme;
g. The lease of motion picture films, films, films, tapes and discs; and
h. The lease or the use of or the right to use radio, television, satellite transmission and cable
television time.
Tax base
Gross receipts
Tax rate
12%
Lease of Properties
In general, all forms of lease of properties held primarily for lease to customers in the ordinary
course of trade or business, whether real or personal, shall subject to VAT unless the gross annual
receipts of the lessor do not exceed P1,919,500.
Lease of property shall be subject to VAT regardless of the location where the contract of lease
was done as long as the property leased is located in the Philippines. However, following lease of
residential units shall be exempt from VAT:
a. Those with a monthly rental not exceeding P12,800 regardless of the amount of aggregate
rentals received by the lessor during the year;
b. Those whose aggregate rentals of the lessor during the year do not exceed P1,919,500, even if
the monthly rental exceeds P12,800.
Residential unit refers to the following:
a. Apartments, houses and/or lands on which another’s dwelling is located, used for residential
purposes and shall include not only building, parts or units therof used solely as motels motel
rooms, hotels, and hotel rooms
b. Apartments, houses, building, parts or units thereof used for home industries, retails stores or
other business purposes if the tenant thereof and his family actually live therein and use them
principally for dwelling purposes
Unit refers to an apartment unit in 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
room for rent.
Advance payment by the lessee
The following are the advance payment made by the lessee and the possible treatment when it
comes to VAT :
TRANSFER & BUSINESS TAXATION: Ampongan, Erasmo; Reyes, Virgilio (Compiled by: Gammad, Girn, Rubio)
69
La Consolacion College Manila
Mendiola, Manila
a. A loan to the lessor from the lessee or
Not subject to VAT, but security deposit
shall be subject to VAT
b. An option money for the property
Not subject to VAT, but security deposit
shall be subject to VAT
c. A security deposit to insure the faithful Not subject to VAT, but security deposit
performance of certain obligations of shall be subject to VAT
the lessee to the lessor, or
d. Prepaid rental.
Taxable to the lessor in the month or
quarter when received regardless of the
accounting methods used.
TRANSFER & BUSINESS TAXATION: Ampongan, Erasmo; Reyes, Virgilio (Compiled by: Gammad, Girn, Rubio)
70
La Consolacion College Manila
Mendiola, Manila
CHAPTER 19: VAT ON IMPORTATION OF GOODS
Importation refers to the act of bringing goods and merchandise into a country from a foreign
country. Importation of goods, whether or not connected with trade or business, is subject to the valueadded tax.
Tax rate and Tax base
The value-added tax (12%) is based on total value used by the Bureau of Customs in
determining tariff and customs duty (dutiable value), plus customs duties, excise tax, if any, and other
charges prior to the removal of goods form customs custody.
When the tariff and customs duties are determined on the basis of the quantity or volume of
the goods, the value-added tax is based on the landed cost. Landed cost refers to the invoice cost,
freight, insurance, customs duties, excise tax, if any, and other charges prior to the removal of the goods
from customs custody.
Charges
The typical charges prior to the removal of goods from customs custody are:
a. Insurance
b. Freight
c. Postage
d. Commission
e. Interest
f. Bank charge
g. Wharfage dues
h. Arrastre charges
i. Customs brokerage fee
j. Stamps
k. Processing fee
l. Customs duty
m. Excise tax, if any.
The VAT on an importation is payable prior to the removal of goods from customs custody. When an
importation is subject to excise tax, the importer shall pay both the excise tax and the VAT prior to the
removal of goods from customs custody. For a VAT taxpayer, the value-added tax on importation is
available as tax credit against the output tax on his sales.
Transfer of Goods by Tax-exempt persons
TRANSFER & BUSINESS TAXATION: Ampongan, Erasmo; Reyes, Virgilio (Compiled by: Gammad, Girn, Rubio)
71
La Consolacion College Manila
Mendiola, Manila
When a person who was exempt from the value-added tax on his importation subsequently
sells, transfers or exchanges in the Philippines such imported article to a non- exempt person or entity,
the purchaser, transferee or assignee shall be required to pay the value-added tax.
The tax due on such importation shall constitute a lien on the goods superior to all charges or
liens on the goods, irrespective of the possessor thereof.
TRANSFER & BUSINESS TAXATION: Ampongan, Erasmo; Reyes, Virgilio (Compiled by: Gammad, Girn, Rubio)
72
La Consolacion College Manila
Mendiola, Manila
CHAPTER 20: ACCOUNTING FOR VALUE-ADDED TAX
As discussed in previous chapter, Value-added tax is imposed when there is a sale, barter or
exchange of goods or properties in the ordinary course of trade or business. There are different account
titles that are commonly used in books of VAT-taxable person. These are the following:
a. Output tax means the value-added tax on sale or lease of taxable goods or properties or services
by any person registered or required to register. It is classified as the current liability of the
seller.
b. Input tax is the value-added tax due or paid by a VAT-registered person in the course of his
trade or business 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. It is classified as a
current asset of the buyer.
c. VAT payable is the amount payable by the VAT- registered seller to the Bureau of Internal
Revenue. It represents the excess of output tax over creditable input tax. It is classified as the
current liability of the seller.
Different transactions and their pro-forma entries
The following are the different VAT transactions and their respective pro- forma entries:
1. To record cash purchases/ sales of merchandise.
a. In the books of the buyer:
Purchases
xxx
Input tax
xxx
Cash
xxx
b. In the books of the seller:
Cash
xxx
Sales
xxx
Output tax
xxx
2. To record the VAT payable at the end of the quarter.
Output tax
xxx
Input tax
xxx
VAT payable
xxx
3. To record payment of the VAT to the BIR
VAT Payable
xxx
Cash
xxx
4. To record purchases/ sales on account. Term 2/10, n/30
a. In the books of the seller
TRANSFER & BUSINESS TAXATION: Ampongan, Erasmo; Reyes, Virgilio (Compiled by: Gammad, Girn, Rubio)
73
La Consolacion College Manila
Mendiola, Manila
Accounts receivables
Sales
Output tax
b. In the books of the buyer
Purchases
Input tax
Accounts payable
xxx
xxx
xxx
xxx
xxx
xxx
5. To record collection/ payment of sales/ purchases on account within the discount period.
a. In the books of the seller
Cash
xxx
Sales Discount
xxx
Output tax
xxx
Accounts receivable
xxx
b. In the books of the buyer
Accounts payable
xxx
Purchase discount
xxx
Input tax
xxx
Cash
xxx
6. To record in the books of the buyer the payment of freight on goods purchased on credit. Term:
F.O.B. destination, freight collect
Accounts payable
xxx
Cash
xxx
7. To record in the books of the buyer the payment of transportation cost of the goods purchased.
Term: F.O.B. shipping point, freight collect.
Freight- in
xxx
Input Tax
xxx
Cash
xxx
8. To record return of goods purchased/ sold and receipt/ payment of cash
a. In the books of the buyer
Cash
xxx
Input tax
xxx
Purchase returns & allowances xxx
b. In the books of the seller
Sales returns and allowances xxx
Output tax
xxx
Cash
xxx
9. To record transitional input tax of a new VAT- taxable establishment.
Input tax
xxx
TRANSFER & BUSINESS TAXATION: Ampongan, Erasmo; Reyes, Virgilio (Compiled by: Gammad, Girn, Rubio)
74
La Consolacion College Manila
Mendiola, Manila
Merchandise inventory
xxx
10. To record deemed sale transaction on VAT- subject goods for sale which were withdrawn by the
owner for his personal use.
John Doe, Drawing
xxx
Output tax
xxx
Inventory
xxx
11. To record presumptive input tax on the purchase of sugar cane by a sugar refinery:
Raw materials
xxx
Input tax
xxx
Cash
xxx
12. To record sales of merchandise during the day
goods.
Cash
xxx
Output tax
Sales-exempt
Sales- taxable
which consist of VAT- subject and VAT- exempt
xxx
xxx
xxx
Balance sheet presentation of the accounts
As stated above, Input Tax is classified as current asset, while Output tax and VAT Payable are
current liabilities.
At the end of the quarter, if the total Output taxes exceed total Input taxes, the balance shall be
the VAT payable, while if the result is otherwise, the debit balance of the input taxes shall be carried
over as tax credit in the following quarter as deferred input taxes.
TRANSFER & BUSINESS TAXATION: Ampongan, Erasmo; Reyes, Virgilio (Compiled by: Gammad, Girn, Rubio)
75
La Consolacion College Manila
Mendiola, Manila
CHAPTER 21: VAT REGISTRATION AND COMPLIANCE REQUIREMENTS
Registration of VAT taxpayers
Any person who engaged in the course of trade or business shall register with the appropriate
Revenue District Office (RDO) and pay an annual registration fee of P500 for every separate and distinct
establishment or place of business before the 31st day of January. Thus, any persons who maintain a
head or main office in different branches in different places shall register with the Revenue District
Office which has jurisdiction over the place wherein the main or head office or branch is located.
However, the registration fee shall be paid to any accredited bank in the Revenue District Office where
such person is registered. If there are no accredited banks, the same shall be paid to the Revenue
District Office (RDO), collection agent, or duly authorized treasurer of the municipality where each place
of business or branch is situated.
Mandatory Registration
Any person who engaged in trade or business shall be liable to register if:
a. His gross sales or receipts for the past 12-months other than those that are exempt, have
exceeded P1,919,500; or
b. There are reasons to believe that his gross sales or receipts for the next twelve (12) months,
other than those that are exempt, will exceed P1,919,500.
Optional VAT Registration of VAT Exempt Persons
Any person who is VAT exempt under the Code and is not required to register for VAT may elect
to be VAT- registered by registering with the Revenue District Office (RDO) that has jurisdiction over the
head office of that person and pay the annual registration fee of P 500 for every separate and distinct
establishment. Any person who elects to be registered shall not be allowed to cancel his registration for
the next three (3) years.
The above-stated taxpayers may apply for registration not later than ten (10) days before the
beginning of the calendar quarter and shall pay the registration fee unless they have already paid at the
beginning of the year.
Registration of Non-VAT or Exempt Taxpayers
The following are required to register as Non-VAT persons and to pay the registration fee of P
500:
a. VAT exempt persons under Section 109 of the Tax Code who did not opt to register as VAT
taxpayers;
b. Individuals engaged in business where the gross sales or receipts do not exceed P100,000 during
any 12-month period (they are required to register but will not be made to pay the registration
fee of p500)
TRANSFER & BUSINESS TAXATION: Ampongan, Erasmo; Reyes, Virgilio (Compiled by: Gammad, Girn, Rubio)
76
La Consolacion College Manila
Mendiola, Manila
c. Non-stock non-profit organizations and associations engaged in trade or business whose gross
sales or receipts do not exceed P1,919,500 for any 12-month period in an amount as adjusted
thereafter every three years depending on the annual Consumer Price Index as published by the
NSO.
d. Cooperatives other than electric cooperatives. However, they are not required to pay the
registration fee.
Application for Registration
The application shall be filed with the Revenue District Office where the principal place of
business, branch, storage place or premises is located, as the case may be, before commencement of
the business or production or qualification as a withholding agent. In the case of storage places, the
application shall be files within thirty (30) days from the date the aforesaid premises have been used for
storage.
Cancellation of the Registration
A VAT registered person may cancel his registration for VAT if:
a. He makes his written application and can demonstrate to the Commissioner of Internal Revenue
(CIR) satisfaction that his gross sales or receipts for the following 12-months, other than those
exempt under the Tax Code, will not exceed P1,500,000;
b. He has ceased to carry on his trade or business and does not expect to recommence any trade
or business within the next 12 months.
Some other instances where a VAT registered person may cancel his registration are:
a. A change of ownership, in the case of single proprietorship;
b. Dissolution of a partnership or corporation;
c. Merger or Consolidation with respect to the dissolved corporation
d. A person who has registered prior to plan business commencement, but failed to actually start
business.
Filling of Return and Payment of VAT
Twenty-five days (25) days shall be given to any person to file a quarterly return of the amount
of his gross sales or receipts.
Monthly VAT declarations of taxpayer, whether large or non-large shall be filed and the taxes
paid not later than the 20th day of the month following the end of each month. Amounts reflected in the
monthly declarations for the 1st two months of the quarter shall be included in the quarterly VAT return
which reflects the cumulative figures for the taxable quarter.
Payments in monthly VAT declarations shall, however, 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.
Place of Filing and Payment
TRANSFER & BUSINESS TAXATION: Ampongan, Erasmo; Reyes, Virgilio (Compiled by: Gammad, Girn, Rubio)
77
La Consolacion College Manila
Mendiola, Manila
Except as the Commissioner otherwise permits, the return shall be filed with and the tax paid to
an authorized agent bank, Revenue Collection Officer or duly authorized city or municipality treasurer in
the Philippines located within the revenue district where the taxpayer is registered or required to
register (Sec. 114 B).
Withholding or Creditable Value-Added Tax
The government or any of its political subdivisions, instrumentalities, etc. shall, before making
any payment on account of each purchase of goods and/or services taxed at twelve percent (12%),
deduct and withhold a Final Withholding VAT due at the rate of five percent (5%) of the gross payment
thereof. The five percent (5%) final withholding VAT shall represent the net VAT payable of the seller.
The remaining 7% effectively accounts for the standard input VAT for sales of goods or services
to government, or any of its political subdivisions, instrumentalities or agencies. If the actual input VAT
exceeds five percent (5%) of gross payments, the excess may form part of the sellers’ expense or cost.
However, if the actual input VAT is less than five percent (5%)of the gross payments the
difference must be closed to expensed or cost.
The government, etc. shall withhold 12% VAT with respect to the following payments:
a. Lease or use of property or property rights owned by nonresidents;
b. Services rendered to local insurance companies, with respect to reinsurance premiums payable
to nonresidents;
c. Other services rendered in the Philippines by nonresidents
The VAT withheld shall be remitted within ten (10) days following the end of the month the
withholding was made.
Invoicing Requirements
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 for every lease of goods or properties, and for every sale, barter or
exchange of services.
Only VAT registered persons are required to print their TIN followed by the word “VAT” in their
invoice or official receipts. Said documents shall be considered as a “VAT invoice” or VAT official Receipt.
All purchases covered by invoices/ receipt other than VAT invoice /VAT Official receipt shall not give
rise to any input tax. VAT invoice/ official receipt shall be prepared at least in duplicate, the original to
be given to the buyer and the duplicate to be retained by the seller as part of his accounting records.
Consequences of Issuing Erroneous VAT Invoice or VAT Official Receipt
TRANSFER & BUSINESS TAXATION: Ampongan, Erasmo; Reyes, Virgilio (Compiled by: Gammad, Girn, Rubio)
78
La Consolacion College Manila
Mendiola, Manila
If a person who is not VAT- registered issues an invoice or receipt show his Tax Identification
Number, followed n=by the word “VAT”, the erroneous issuance shall result to the following:
a. The non-VAT person shall be liable to:
1. The percentage taxes applicable to his transactions;
2. VAT due on the transactions without the benefit of any input tax credit; and
3. A 50% surcharge under section 248 (B) of the Tax Code.
b. VAT shall be recognized as an input tax credit to the purchaser under Sec. 110 of the Tax Code,
provided the requisite information required below is shown on the invoice or receipt.
Issuance of a VAT Receipt or VAT Invoice on Exempt Transactions by a VAT-Registered Person
The transaction shall become taxable and the issuer shall be liable to pay VAT thereon if a VATregistered person issues a VAT invoice or receipt for a VAT- exempt transaction. The purchaser shall be
entitled to claim an input tax credit on his purchase.
TRANSFER & BUSINESS TAXATION: Ampongan, Erasmo; Reyes, Virgilio (Compiled by: Gammad, Girn, Rubio)
79
La Consolacion College Manila
Mendiola, Manila
CHAPTER 22: OTHER PERCENTAGE TAXES
Percentage taxes of varying rates are imposed on the persons or activities enumerated below
and are payable within 25 days after the end of each taxable quarter, unless otherwise specified. Every
person liable to the percentage taxes may, at his option, file a separate return for each branch or place
of business or a consolidated return for all branches or places of business with the authorized agent
bank, Revenue District Officer, Collection Agent or duly authorized Treasurer of the city or municipality
where the business or principal place of business is located, as the case may be.
The percentage taxes are:
A. Tax on Persons Exempt from Value Added Tax (Vat)
On the gross quarterly sales or receipts of persons who are otherwise subject to the VAT but
whose annual sales or gross receipts do not exceed P1.5 million4 – 3%, except cooperatives.
B. Percentage Tax on Domestic Carriers and Keepers of Garage
On the quarterly gross receipts of cars for rent or hire driven by the lessee; transportation
contractors, including persons who transport passengers for hire, and other domestic carriers by
land6 for the transport of passengers, except owners of bancas, and owners of animal-drawn twowheeled vehicles and keepers of garages – 3%.
The gross receipts of common carriers derived from their incoming and outgoing freight shall
not be subject to the local taxes imposed under RA No. 7160, otherwise known as the Local Government
Code of 1991.
C. Percentage Tax on International Carriers
Percentage tax on international carriers shall be based on the gross quarterly receipts of
international air carriers and international shipping carriers doing business in the Philippines - 3%.
D. Franchise Tax
On the annual gross receipts derived by the franchise grantees of:
1. Gas and water utilities from the business covered by the law granting the franchise – 2%.
2. Radio and/or television broadcasting companies whose annual gross receipts of the preceding year do
not exceed P10 million – 3%. Said company may opt to be registered as a VAT taxpayer. The option,
once exercised, cannot be revoked.
TRANSFER & BUSINESS TAXATION: Ampongan, Erasmo; Reyes, Virgilio (Compiled by: Gammad, Girn, Rubio)
80
La Consolacion College Manila
Mendiola, Manila
3. National Grid Corporation on all its gross receipts derived from its operation covered by the law
granting the franchise – 3%.
E. Overseas Communication Tax
On the amount paid on every overseas dispatch, message or conversation transmitted from the
Philippines by telephone, telegraph, telewriter exchange, wireless and other communication equipment
services – 10%.
The tax shall be payable by the person paying for the services rendered and shall be paid to the
person rendering the services who is required to collect and pay the tax within twenty (20) days after
the end of each quarter.
The tax does not apply to the amounts paid for messages transmitted by:
1. The Government, its political subdivisions or instrumentalities;
2. Diplomatic services;
3. Public international organizations or any of their agencies based in the Philippines; and
4. News services.
F. Tax on Banks and Non-Bank Financial Intermediaries Performing Quasi-Banking Functions
On the gross receipts derived by all banks and non-bank financial intermediaries:
Kind of Income
Rates
1.On interest, commissions and discounts from lending activities as
well as income from financial leasing, on the basis of remaining
maturities of instruments from which such receipts are derived:
a. Maturity period is five (5) years or less
5%
TRANSFER & BUSINESS TAXATION: Ampongan, Erasmo; Reyes, Virgilio (Compiled by: Gammad, Girn, Rubio)
81
La Consolacion College Manila
Mendiola, Manila
b. Maturity period is more than five (5) years
1%
2.On dividends and equity shares and net income of subsidiaries
0%
3.On royalties, rentals of property, real or personal, profits from
7%
exchange and all other items treated as gross income under
Section 32 of the Tax Code.
4.On net trading gains within the taxable year on foreign currency,
7%
debt securities, derivatives and other similar financial instruments
G. Tax on Other Non-Bank Financial Intermediaries
On the gross receipts derived by other non-bank financial intermediaries doing business in the
Philippines, from interests, commissions, discounts and all other items treated as gross income under
the Tax Code – 5%.
On interest, commissions and discounts from lending activities, as well as income from financial
leasing, on the basis of remaining maturities of the instruments from which such receipts are derived,
the tax shall be:
Remaining Maturity of Instrument
Rates
1.Maturity period is five (5) years or less
5%
2.Maturity period is more than five (5) years
1%
Note: Income or revenue realized by the BSP from its transactions undertaken in pursuit of its legallymandated functions are exempt from the GRT imposed on other non-bank financial intermediaries under Sec. 122 of
the Code. [Sec. 5, RR No. 8-2008]
H. Tax on Life Insurance Premiums
1. On gross premium collected (with certain exceptions) by life insurance companies – 5%.
TRANSFER & BUSINESS TAXATION: Ampongan, Erasmo; Reyes, Virgilio (Compiled by: Gammad, Girn, Rubio)
82
La Consolacion College Manila
Mendiola, Manila
2. on gross premium collected by agents of foreign life insurance companies – 10%.
I. Tax on Amusement Activities
On gross receipts from/of:
Cockpits, cabarets, night or day clubs
18%
Boxing exhibitions
10%
Boxing exhibitions wherein World or Oriental Championships in any division is at stake shall be
exempt from amusement tax if at least one of the contenders for World or Oriental Championships is a
citizen of the Philippines and said exhibitions are promoted by a citizen/s of the Philippines or by a
corporation or association at least sixty percent of the capital of which is owned by such citizens.
J. Tax on Winnings
Every person who wins in horse races shall pay the following:
1. Winnings in horse races- 10% of the winnings or dividends.
The tax is based on actual amount paid to him for every winning ticket after deducting
the cost of the ticket.
2. Winnings from double, forecast/ quinella and trifecta bets- 4% of the winnings.
3. Owners of winning race horses- 10% of the prizes.
The tax shall be deducted from the dividends corresponding to each winning ticket or prize of each
winning race horse owner and withheld by the operator, manager or person in charge of the horse races
before paying the dividends or prizes to the persons entitled thereto.
In “daily double” the bettor selects a number in each of the two consecutive races and the selection
in each race must finish first, while in “extra double” the bettor selects a number in each of two selected
races and the selection in each race must finish first.
“Double quinella” is an event wherein the bettor selects the number in a selected race and the
selections must finish first, second and third in correct order.
K. Tax on Sale of Shares of Stocks Listed and Traded Through the Local Stock Exchange or Through
Initial Public Offerings
1. On every sale, barter or exchange of shares of stock listed and traded through the local stock
exchange (other than the sale by a dealer in securities) – ½ of 1% of the gross selling price or gross value
TRANSFER & BUSINESS TAXATION: Ampongan, Erasmo; Reyes, Virgilio (Compiled by: Gammad, Girn, Rubio)
83
La Consolacion College Manila
Mendiola, Manila
in money of the shares of stock sold, bartered, exchanged or otherwise disposed which shall be paid by
the seller or transferor.
Every stock broker who effected the sale shall collect the tax and remit the same to the Bureau
of Internal Revenue within 5 banking days from the date of collection thereof. The said stockbroker is
also required to submit on Mondays of each week to the secretary of the stock exchange, of which
he/she is a member, a true and complete return which shall contain a declaration of all the transactions
effected through him/her during the preceding week and of taxes collected by him/her, and turned over
to the Bureau of Internal Revenue.
2. On every sale, barter, exchange or other disposition through initial public offering of shares of stock
in closely-held corporations, a tax based on the gross selling price or gross value in money of the shares
of stock sold, bartered, exchanged or otherwise disposed of in accordance with the following schedule:
Proportion of shares of stock disposed of to total outstanding shares of stock after the listing in
the local stock exchange:
Rate of Tax
Up to 25%
4%
Over 25% but not over 33 1/3%
2%
Over 33 1/3%
1%
The tax shall be paid by the issuing corporation in primary offering or by the seller in secondary
offering.
Any gain derived from the disposition of shares of stock subject to the aforementioned tax shall
be exempt from the tax imposed under Sec. 24(C), Sec. 27(D)(2), Sec. 28(A)(8)(c) and Sec. 28(B)(5)(c) and
from the regular individual or corporate income tax. The tax paid shall not be deductible for income tax
purposes.
TRANSFER & BUSINESS TAXATION: Ampongan, Erasmo; Reyes, Virgilio (Compiled by: Gammad, Girn, Rubio)
84
La Consolacion College Manila
Mendiola, Manila
CHAPTER 23: ADDITIONS TO TAX (CIVIL PENALTIES AND INTEREST)
Civil Penalties
In addition to internal revenue tax required, a penalty of twenty-five percent (25%) shall be
imposed on the following cases:
a. Failure to file any return and pay the tax due thereon on the date prescribed (simple
neglect); or
b. Filing a return with an internal revenue officer other than those with whom the return is
required to be paid, unless otherwise authorized by the Commissioner;
c. Failure to pay the deficiency tax within the time prescribed for its payment in the notice of
assessment; or
d. Failure to pay the full or part of the amount of tax shown on any return required to be files,
or the full amount of tax due for which no return is required to be filed, on or before the
date prescribed for its payment.
Penalty of 50%
In case of willful neglect to file the return within the period prescribed by the code or by the
rules and regulations, or in case a fraudulent return is willfully made, the penalty to be imposed shall be
fifty percent (50%) of the tax or of the deficiency tax, in case any payment has been made on the basis
of such return before the discovery of the falsity or fraud.
Neglect of File Return
Neglect of file return is:
a. Willful neglect (50%) - in case the taxpayer files only after prior notice in writing from BIR.
b. Simple neglect (25%) - if the taxpayer voluntarily files a return after the deadline without notice
from BIR.
Prima Facie Evidence of False or Fraudulent Return
Prima facie evidence of false or fraudulent return is present when:
a. There is a substantial under declaration (more than 30%) of taxable sales, receipts or income; or
b. There is a substantial overstatement (more than 30%) of deductions.
Interests
An interest of twenty percent (20%) per annum shall be imposed, when there is a deficiency or
delinquency in payment of tax, from the date prescribed for payment until the amount is fully paid.
TRANSFER & BUSINESS TAXATION: Ampongan, Erasmo; Reyes, Virgilio (Compiled by: Gammad, Girn, Rubio)
85
La Consolacion College Manila
Mendiola, Manila
Cases when the delinquency interest shall be imposed:
a. Failure to pay the amount of tax due on any return required to be filed; or
b. Failure to pay the amount of tax due for which no return is required, or
c. A deficiency tax, or any surcharge or interest thereon on the due date appearing in the notice
and demand of the Commissioner, there shall be assessed and collected on the unpaid amount,
interest at the rate of 20% until the amount is fully paid, which interest shall form part of the
tax.
TRANSFER & BUSINESS TAXATION: Ampongan, Erasmo; Reyes, Virgilio (Compiled by: Gammad, Girn, Rubio)
86
La Consolacion College Manila
Mendiola, Manila
CHAPTER 24: COMMUNITY TAX
Community tax is a tax imposed for being an inhabitant of the Philippines and a resident of a
particular community. It is a poll tax, used to be known as a Cedula Tax and Residence tax. However,
they are essentially different from each other. The cedula tax was imposed in the Philippines during
Spanish regime and was abolished before World War II. It was restored by Commonwealth Act No. 465
in the form of Residence Tax. Later on, the Residence tax was abolished by the introduction of the
Community Tax under Republic Act 7160 otherwise known as New Local Government Code of the
Philippines. The persons liable to this tax are individuals and juridical persons.
Individuals Liable to Community Tax
a.
b.
c.
d.
Everyone in the Philippines eighteen years of age or over:
Who has been regularly employed on a wage or salary basis for at least thirty (30) consecutive
working days during any calendar year, or
Who is engaged in business or occupation or
Who owns real property with an aggregate assessed value of P1,000 or more, or
Who is required b law to file an income tax return
Juridical Persons Liable to Community Tax
Regardless of how it is created or what type of business offers, every corporation in the
Philippines shall pay the following:
a. Basic Tax – P500.00
b. Additional Tax – it shall in no case exceed P10,000 which is computed in accordance with the
following schedule:
 P2.00 for every P5,000 worth of real property in the Philippines owned by it during the
preceding year based on the valuation used for the payment of the real property tax
under existing laws, found in the assessment rolls of the city or municipality where the
real property is situated;
 P2.00 for every P5,000 of gross receipts or earnings derived by it from its business in the
Philippines during the preceding year.
The dividends received by a corporation from another corporation however shall, for the
purpose of the additional tax, be considered as part of the gross receipts or earnings of said corporation.
Exemptions from Tax
The following are exempted from community tax:
a. Diplomatic and consular representatives; and
b. Transient visitors when their stay in the Philippines does not exceed three (3) months.
TRANSFER & BUSINESS TAXATION: Ampongan, Erasmo; Reyes, Virgilio (Compiled by: Gammad, Girn, Rubio)
87
La Consolacion College Manila
Mendiola, Manila
Place and Time of Payment
a. Place-the tax shall be paid in the place of residence of the individual, or in the place where the
principal office of the juridical entity is located.
b. Time- the tax shall accrue on the 1st day of January of each year which shall be paid not later
than the last day of February of each year.
Interest on Delinquency
If the tax is not paid within the time prescribed above, there shall be added to the unpaid
amount an interest of twenty-four percent (24%) per annum from the due date until it is paid.
Community Tax Certificate
A community tax certificate shall be issued to every person or corporation upon payment of the
community tax. It may also be issued to any person or corporation not subject to community tax upon
payment of one peso (P1.00)
Presentation of Community Tax Certificate on Certain Occasions
An individual shall be required to exhibit the certificate in the following cases:
a. When he acknowledges any document before a notary republic;
b. When he takes the oath of office upon election or appointment to any position in the
government service;
c. When he receives any license, certificate, or permit from any public authority;
d. When he pays any tax or fee
e. When he receives any money for any public fund
f. When he transacts other official business
g. When he receives any salary or wage from any person or corporation.
Non-imprisonment for Non-payment of Poll Tax
A poll tax is a capitation tax; a fixed sum levied upon each person, a tax of a fixed amount upon
every person or upon every person of a certain class, resident within a specified territory, without
regard to his property or the occupation in which he may be engaged.
Section 20 of the Article on Bill of Rights in the New Philippine Constitution is explicit that “No
person shall be imprisoned for debt or non-payment of poll tax”.
TRANSFER & BUSINESS TAXATION: Ampongan, Erasmo; Reyes, Virgilio (Compiled by: Gammad, Girn, Rubio)
88
La Consolacion College Manila
Mendiola, Manila
The original valid reason for the existence if the prohibition against imprisonment for nonpayment of a poll tax “is the sense of humanity and sympathy for the plight of the poorer elements of
the population who cannot even pay their cedula or poll taxes.
TRANSFER & BUSINESS TAXATION: Ampongan, Erasmo; Reyes, Virgilio (Compiled by: Gammad, Girn, Rubio)