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TAXATION II
AY2012-12
TRANSFER TAXES
ESTATE TAX
(Sections 84 to 97 of the Tax Code, as amended and Revenue Regulations
No. 02-03)
Course Outline
BRIEF BACKGROUND
Given that there is a transfer of property, every transaction is supposed to be
taxable unless it falls under the exclusions.
2 types of transfer taxes
1. Transfer that is imposed on a gratuitous transfer of property and
2. Transfer tax that imposed on onerous transfers of property.
Taxes involved in onerous transfers of property
1. Income tax.
2. Sales taxes
Actually, we have already discussed income tax.
We are going to discuss Value-added tax on onerous transfers of property. It
can be a sale, exchange, or barter.
What we are focusing first is the transfer taxes on gratuitous transfers.
So are you saying that it is fair for a decedent or a donor of a tax on a
transfer of property for which he did not receive any amount?
Every time you become a donor, you donate a property; you will be subject
to donor's tax as a general rule. When a person dies, the transmission of
property from the dead to the living is also subject to estate tax. Both
these assets are transfer taxes. It is just that it is (?) against a pretransfer of property.
What is the difference really between an estate tax and donor's tax?
ESTATE TAX
DONORS TAX
When
Estate tax is imposed only when
Donor's tax is imposed
Imposed
somebody dies. It is imposed on a
only
for
gratuitous
gratuitous transfer for a privilege to
transfers
during
transmit property from the dead to
lifetime.
If
youre
the living.
coming
from
an
But mind you not all estate
individual
or
a
taxes would only be imposed on
corporation,
mortis
properties transmitted during
causa - upon death,
death.
There are certain
inter vivos - during
transfers made by a person
lifetime.
during his lifetime which will still
be considered as part of his
estate
For example, Mr. A was given
a six month period to live.
Subsequently, he made a

Transferors

transfer to another person

that is considered transfer in
contemplation of death.
Even it was sold it was
donated but the concept of
making a transfer was a
transfer in contemplation of
death,
six
months
thereafter dies, it is not
only the estate that he has
left at the time of death
that will be considered for
estate taxation purposes
but also
including the
properties that he has
transferred during lifetime
which will be considered
somehow as a testamentary
disposition of property such
as transfers during lifetime
for which he retained his
right to revoke, alter and
amend wherein he has
retained any right a general
power of appointment these are transfers during
lifetime that will still be
considered for estate tax
purposes.
If your question is will
there be double taxation
if it was actually donated
during lifetime but will
still be considered for
estate tax purposes and
estate tax, will there be
double taxation?
The first payment will be
considered as (?) of tax.
That will have to be part
of tax refund or tax
credit. The correct tax
that will have to be
imposed is the estate tax
at the time of death.
In estate taxation, we only have
one general type of transferor and
these are individuals. Corporations
will not have an estate tax due,
only individuals for that.

In donor's taxation,
you have 2 general
types of transferors donor corporation or
any individual donor.
So you can be a
recipient of a gift from
a foundation for it is
considered a juridical
entity.
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Rate
Imposed

Estate taxation is imposed a higher

tax rate. It starts off with 5% and
the highest rate being 20%.

Deductions

Shall we say that if Mr. A dies

and he leaves the property
worth P1.2 M, will there be
automatically an estate tax paid
to the government?
Not necessarily. That is what
we will study in estate taxation
although it says that whatever
property that you have left at
the time that you died will be
(?) at the FMV
will be
considered as part of the gross
estate.
There are many of types of
deductions allowed to reduce
your gross estate. In fact, there
is one arbitrary amount that can
reduce your estate in the
amount of P1M.
That is the
standard deduction of P1M. If

In donor's taxation, in
order to encourage the
redistribution of wealth
during the lifetime and
make it productive to
the
younger
generations,
donor's
taxes are imposed at a
rate of 2% up to 15%.
So, it is better to
donate rather than to
wait for death.
What made it more
burdensome before
was that for every
estate tax imposed
on the estate, there
will
be
an
inheritance
tax
imposed
on
the
heirs. Well, that
actually was double
taxation
in
the
loose
sense
because it involve
the same property
but
anyway
inheritance tax and
donee's taxes of the
recipient
have
already
been
removed. We only
have one left - it's
the giver or the
transferor of taxes.
There is but very very
(?) and only the first
P100T net gift during
the year is exempt
from tax.
So can you say you
can make donations
every time for only
P100T in order to
make it as exempt?
No, because in
considering
the
P100T net gift as
exempt
from
donor's tax, it is
only
avail
one
time every year.
Because we (?)
the principle of
accumulation - all

you have property of only

gifts
that
you
P1.2M, you can expect that
made during the
even if you have no funeral
year
will
be
expenses (?) because you were
accumulated and
thrown into the water, that's
every time you
P1.2M minus the P1M standard
make a donation
deduction, you only have P200T
you will increase
net estate left and looking at the
the tax bracket
tax table, the first P200T net
(?). So you can
estate is still exempt from
only avail of the
estate tax.
P100T exempt of
So at this point probably, you
donor's tax.
would know your net worth is
In estate tax, the
whether you will be covered by
P200T exempt estate taxation or not. But then
no
principle of
again, whether you will be liable
accumulation
for estate tax or not, there are
follows because a
rules to follow whether you have
person dies only
to file a tax return or not.
once. You don't
Whether you have to notify
make
various
whether your surviving heirs will
transfers
when
have to notify the BIR or not (?)
you are dead.
Payment
When a person dies, the heirs are
In cases of donations
given six months actually to file a
made, you cannot ask
tax return, pay your tax - it is
for an extension of
extendible. That would be the (?) if
payment, every time
the payment would be extended to
you make a donation,
5 years or 2 years depending
within 30 days you pay
whether it is judicial or extrajudicial
the donor's tax.
settlement. The reason there in
fact it is not that easy to settle the
properties left by a decedent. In
fact probably you know a relative
who has died and his properties
have not been settled up to this
time. Its where the properties are
probably subject to extrajudicial
settlement with the estate. If Mr. A
dies, ten days thereafter, his
properties still under (?), it has to
be resolved by the heirs. It has to
go through extrajudicial settlement
(?).
So if we say also that by its nature, is the estate tax a property tax?
The definition of estate tax is a tax on the privilege of transmitting
property during the lifetime including properties transferred but taking
the form of a testamentary disposition. Can we consider estate tax as
property tax? Do you remember your tax principles?
There are 3 types of properties according to subject matter:
1. Personal - poll or capitation tax or the residence tax.
2. Property

There is only real property tax. Of course, it includes special levy

on lands benefitted by public improvements. Why is it a property
tax? Because it's part of real property taxation under the Local

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Government Code. So what you see as taxes on the real property

taxation will be considered as real property tax.
3. Excise.

So all others according to subject matter would be excise taxes on

the privileges. So which leaves estate taxation as part of what personal, property or excise? It is an excise tax because it's a
privilege to transfer property. That holds true with donor's
taxation as well.
Purpose
1. To raise revenues for the government.
2. To supplement the income tax collection of the government
Because 40% of the tax collections made by the government comes
from income taxation and in order to supplement that, the estate tax
is being imposed because nobody will voluntarily pay a tax when it is
transmitted from the decedent to the heirs.
It's not an income tax as well. We learned from exclusions from gross
income that gifts bequests, devices are not subject to income tax.
They are not income although it is an increase in the patrimony of the
heirs but it is not considered as an income subject to income tax.
3. To reduce social inequality.
The rich becomes richer, the poor becomes poorer. When a rich person
dies, it would never form part of his will. They will be distributed to
the indigents nor the less privileged persons. It is usually to his heirs the son, the daughter, or the surviving spouse.
So that in order to reduce social inequality or redistribute the wealth of
that person, meaning, there are many aspects that are considered
including the government partaking a portion of that property because
there are four theories which support estate taxation.
a. Benefit-received theory

The benefit you received from the government, you must pay
taxes.

The State expects to be paid or should be remunerated for

the services that it has rendered in a system of distribution or
property.
b. State-partnership theory

Supports the fact that the government is the dormant partner

of the decedent in accumulation of wealth.

Succession to the property of a deceased person is not a

fundamental right and consequently, the legislature can
constitutionally burden such succession with a tax. The State
is hailed to be the silent-passive partner of the decedent in
the accumulation or increase of his wealth.
c. Ability-to-pay theory

Self-explanatory. The individual receiving has actually the

ability to pay the taxes. The estate itself that is left by the
decedent is liable for taxes. The heirs can never be liable.

Those who have more properties to transfer to their heirs

upon death shall pay more estate taxes.
d. Redistribution-of-wealth theory

Reducing social inequality.

This is founded upon the principle of reduction of social

inequality. The taxes paid by rich people are programmed for
disbursement by Congress more for the benefit of the poor in
terms of social services, education, health, etc.
Law that governs the imposition of estate tax

Mr. X died today. Tomorrow is the effectivity of the increase 5-20%

to 10-30%. Which would govern?

Governing law at the time of death. He will be subjected to 5-20% and

the reason is that estate tax is accrued at the time of death. Whenever
he dies, it will accrue now.

The law in force at the time of death of the decedent governs.

Succession takes effect at the time of death. By operation of law,
whatever properties are left by the decedent is transmitted to the heirs
or to the successors. Therefore, taxability should be reckoned at the
time of death. Tax accrues at the point of death of the decedent
because it is at this time that his personality ceases.
When payable
Within 6 months from death of decedent and extendible.
Who are decedents?
1. Resident Citizen
2. Resident Alien
3. Non-Resident Citizen
4. Non-Resident Alien (No longer qualified into WON engaged in trade or
business)
Liability
1. RC, RA, NRC
Tax similarly.
Will be taxed with properties wherever situated will be taxable in the
Philippines for estate tax.
2. NRA
NRA will be taxed only with the properties left in the Philippines.
What value will apply
Fair market value.

If cash the amount.

How about if it is dollars?

Not the legal tender.
What is considered cash is the one issued by the Bangko Sentral.
The estate shall be appraised at its fair market value as of the time of
death since by fiction of law, property is deemed to be transferred at such
time.
Real Property.

Fair market value shall be the FMV as determined by the

Commissioner or the FMV as shown in the schedule of values fixed by
the provincial and city assessors, whichever is higher.
Personal Property.

Since there is no listing of FMV in the directories of the BIR or the LGU,
FMVs would be the FMV in the market the price at which the seller is
not compelled to sell and the buyer is not compelled to buy.
Unlisted Shares of Stock.

Unlisted common shares are valued based on their book value while
unlisted preferred shares are valued at par value.
Shares Listed in the Stock Exchange.

FMV shall be the arithmetic mean between the highest and lowest
quotation at a date nearest the date of death, if none is available on
the date of death itself.
What if married individual? Will it include estate belonging to a spouse?
We have to separate the exclusive from conjugal ones.
The conjugal properties will be fully included in the gross estate. But as
part of deduction, 1/2 of the share of the surviving spouse will be reduced.

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For example, 8m conjugal, only 4m will be deducted. Whatever is favorable

to the government, we will have to follow.
Take note for NRA, if it is an intangible personal property, can still be
subject to estate tax:
NRA having intangible personal property with a situs in the Philippines,
unless exempted on the basis of reciprocity.
Note: The rule applies only in the case of intangible personal properties
belonging to a non-resident alien. So that if reciprocity applies, these
intangible personal properties will not be included in the computation of the
net estate of the NRA.

A.

B.

Estate Tax
1. Definition
What is estate tax?
Estate tax is an excise tax imposed on the privilege of
transmitting properties at the time of death. It is also a tax on
inter-vivos transfers or transfers made by the decedent during his
lifetime that partake and is considered by the tax authorities as
taking the form of a testamentary disposition of property.

Example: When the person is transferring a property during

lifetime but the transfer is made in contemplation of death.
2. Nature
3. Purposes
What is the purpose of imposing estate tax?
The primary reason for all taxes is to raise revenues.
But estate taxation has a very special purpose of reducing the
undue accumulation of wealth in one person or in a small group of
persons. Thats why whenever someone dies; the government has
to partake into some portion of the wealth of the decedent before
the heirs will receive it.
The reason for the imposition of taxes apart from raising revenues
and apart from supplementing the needs of the government aside
from collecting income taxes is to reduce social inequality, reduce
the undue accumulation of wealth in one single person or a group
of heirs
4. Theories
a. Benefit-received theory
Such theory in imposing taxes is defended as the State being paid
or should be remunerated for the services that it has rendered in
a system of distribution of property.
b. State-partnership theory
Is supported by the claim that the State is the silent-impassive
partner of the decedent in the increase or accumulation of his
wealth. (Regalian doctrine lands belong to the State)
c. Ability-to-pay theory
The mere fact that the heirs are allowed to partake of the
properties left by the decedent gives the estate the ability to pay
the taxes due
d. Redistribution-of-wealth theory
Which is the reduction of social inequality. Spread out the wealth
and estate of the decedent to the government for the government
to render its services to the common good or community.
Imposition of Estate Tax
1. Law governing its imposition

How about the applicable law in estate taxation? What law

should apply in case a person dies?
Statute at the time of death.
Regardless of when the tax is supposed to be paid? Why do you
think the law applicable for estate taxation is the law at the
time of death and not at the time when the tax is to be paid?
Succession takes effect at the time of death. By operation of the
law, whatever properties are left by the decedent is transmitted to
the heirs or to the successors. Although, for tax purposes, it
requires some formal proceedings such as settlement and the
payment of estate tax before partition takes effect.
2. Accrual of the tax
So regardless when the tax is supposed to be paid. Regardless of
whether you have obtained an extension to pay the taxes, the
computation of the estate tax liability would have to follow which is in
effect at the date the tax accrued. And the tax accrues at the point of
death of the decedent because it is at this time that his personality
ceases.
Kinds of Decedent
How are decedents classified?
1. Resident Citizen
2. Resident Alien
3. Non-resident Citizen
4. Or non-resident alien
If you recall in income taxation class, an alien becomes a resident alien if
his intention in the Philippines is not to become a mere transient or
sojourner. He has indefinite purpose of a lengthy stay in the Philippines.
Making the Philippines his temporary home country. If he gets hired in the
Philippines for 3 years or 2 years, he may be considered a resident alien for
income tax purposes. In some cases, it is even considered, so long as an
alien stays here continuously for slightly more than a year, he may be
considered a resident alien for income tax purposes.
But for estate tax purposes, residence means the domicile.
So that if he is temporarily out of this country to stay in the
Philippines, necessarily making the Philippines as his home country,
then he may not be considered as a resident alien of the Philippines
for estate tax purposes. We dont have the same, entirely have the
same factors.
So we have Resident citizens, non-resident citizens, resident aliens and
non-resident aliens (who are not citizens nor residents at the time of their
death).
RC, NRC and RA are taxed similarly for estate tax purposes.
1. Resident Citizen
2. Non-resident Citizen
3. Resident Alien
4. Non-resident Alien
Properties Covered by Gross Estate
In General, all properties owned by the decedent at the time of his
death, excluding the excluding the exclusive properties of the surviving
spouse.
Specifically,
1. If the decedent is a resident citizen, non-resident citizen or a
resident alien
What forms part of the taxable estate?

C.

D.

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For RC, NRC and RA all properties, real properties, personal

tangible properties, and personal intangible properties, wherever
situated forms part of the taxable estate of the decedent.
Example: A Non-resident citizen, has no properties in the Philippines,
he died in his home country.
Can the Philippines collect estate tax?

Theoretically, Yes. According to the law, a non-resident is

taxable on his estate wherever situated. In this scenario, a
non-resident having no properties in the Philippines, who died
in his home country, according to the law, we can still collect
Philippine estate tax.
a. Real properties, wherever situated
b. Personal tangible properties, wherever situated
c. Personal intangible properties, wherever situated
2. If the decedent is a non-resident alien
How about a non-resident and non-citizen or a non-resident
alien, what properties forms part of their taxable estate?
These are the real properties situated in the Philippines, personal
tangible properties situated within the Philippines and personal
intangible properties situated in the Philippines, subject to the
reciprocity rule.
a. Real properties situated in the Philippines
b. Personal tangible properties situated in the Philippines
c. Personal intangible properties situated in the Philippines,
subject to the rule of reciprocity
What does the law on reciprocity provide?
The home country of the non-resident alien does not impose
any transfer tax (estate tax) against the personal intangible
property of Filipinos not residing in their home country, or it
imposes transfer taxes on personal intangible properties but it
allows a similar exemption to Filipinos not residing in their
country that we give to non-resident alien who is a citizen of
that country.
So in effect, non-resident aliens will only be subject to tax on
two types of properties, real properties and personal tangible
properties located in the Philippines.
The law on reciprocity applies regardless of whether or not
the foreign country is given an international status.
Example: Mr. X, a resident alien, owns real and personal
properties abroad, and personal intangible properties in the
Philippines (shares of stock of a domestic corporation); can he
invoke the reciprocity rule?
No, because the reciprocity rule only applies to a NONRESIDENT ALIEN.
So if the decedent falls to any of the persons falling on the first
category, (RC, NRC, RA), in all cases, the personal intangible
property having situs in the Philippines, will be included as part of
its gross estate.
Valuation of the Gross Estate
Fair market value, at the time of death
How do you value the properties?
Fair market value at the time of death.
For personal property, how do you get the fair market value? For
example a jewelry?

E.

The selling price in the market. So in jewelry, you go to the pawnshop,

have it appraised, and whatever price they are willing to pay for that
property, multiply it by 3 because usually, pawnshops will only pay
30% or 1/3 of the true value of the property.
For real property?
The fair market value as determined by the Commissioner or the fair
market value (zonal valuation) as shown in the schedule of values of
the Provincial and City Assessors, whichever is higher.
For personal intangible property? Shares of stock?
Determine if it is listed or not listed. If listed, you can look at the
quotation at the stock exchange at the date of death............
.If he died during a holiday or a weekend where there is no stock
exchange quotation, then the nearest date.
If its an unlisted share of stock, you determine it through the books of
the corporation issuing it.
Estate Tax Formula, in brief
Gross Estate, Section 85
Less:
Deductions, Section 86
Net Share of the Surviving Spouse in the CPP
Net Taxable Estate
X Tax Rate, Section 84
Estate Tax Due
Less: Tax Credit, if any, Section 86E or 110(B)
Estate Tax Due and Payable, if any
In determining the total estate tax due, we need to identify those things
that will comprise the gross estate, then we identify the deductions, then
eventually computing for the Estate tax due.
Dont confuse tax credit with something like this:
If a decedent has donated a piece of property in contemplation of
death, and has paid the corresponding donors tax, upon his death, the
property will be included in computing his gross estate. You may think
that the erroneously paid donors tax will be used to offset against the
estate tax liability of the estate. This is incorrect. This is not tax credit.
(And besides, erroneously paid donors tax will never be used to offset
against the estate tax liability.)
The existence of a Tax Credit contemplates of a situation where a decedent
has paid estate taxes both to a foreign country and to the Philippines,
thereby subjecting the estate to double taxation. To avoid double taxation,
we allow tax credits. Tax Credits, therefore, can only be claimed by
Residents and Citizens (Resident Aliens, Resident Citizens, Non-resident
Citizens), because these decedents are taxed on properties within and
withoutthereby giving rise to a situation where double taxation would
occur. An NRA is only taxed for properties within the Philippines, his
properties outside will not form part of his gross estate taxable in the
Philippines, therefore an NRA decedent cannot claim Tax Credits.
Composition of the Gross Estate
1. Decedents Interest
This Refers to rents, receivables, income etc, but income tax after
death is no longer included because it will be subjected to Estate
Income Tax.
Income earned before death = Part of Gross Estate = Subject to
Estate Tax
Income earned after death = Part of Income of the Estate = Subject to
Estate Income Tax

F.

G.

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Are dividends declared by a corporation, over which a decedent has

shares of stocks, part of the decedents interest?
You have to know if it has accrued before decedents death, if it
accrued after death it will not form part of the gross estate but will
be considered income of the estate.
Regarding declaring dividends by corp.: 3 dates:
a. Date of declaration
b. Date of record
c. Date of payment
so long as the date of record is prior to date of death then
dividends will form part of the decedents interest included in the
gross estate even if payment is made months after the death.
Transfer in Contemplation of Death
Cover those which are transfers made during the lifetime but are
considered as part of the gross estate.
Controlling motive is the thought of death which made him dispose of
his property regardless of time from the transfer until the time of
death.
Includes other modes of transfer like donation.
EXCEPTIONS: it will not form part of the gross estate.
a. To relieve the donor from the burden of management;
b. To save income or property taxes;
c. To settle family litigated and unlitigated disputes;
d. To provide independent income for dependents;
e. To see the children enjoy the property while the donor is alive;
f.
To protect the family from hazards of business operations; and
g. To reward services unrendered.
h. valid sale
Revocable Transfer
When there is a transfer of property with the transferor or decedent
retaining the rights to alter, amend, terminate or revoke the transfer
during his lifetime whether or not such rights to revoke, terminate,
amend or alter has been exercised it will still form part of the gross
estate.
But what if he died without exercising any of those reserved powers,
will the property still form part of the gross estate?
When a transfer is revocably made, even if such powers
(reserved) have not been exercised by the decedent up to the
point of death, it would still be considered as part of the gross
estate and treated as a testamentary disposition because, during
the lifetime of the decedent, he could have enjoyed or possessed
the property, received its income. He did not relinquish full
dominion over it until he died.
Property passing under General Power of Appointment
General power of appointment vs. Special power of appointment
What is a Power of Appointment?
It refers to a right to designate the person or persons who shall
enjoy or possess certain property from the estate of a prior
decedent.
It becomes general then?
When it gives to the done the power to appoint any person he
pleases, including himself, his spouse, his estate, executor, or
administrator, and his creditor, thus having as full dominion over
the property as though he owned it.

2.

3.

4.

So when the power of appointment of the decedent over a property of

a prior decedent is general in nature, will the value of the property
form part of the gross estate?
Yes, so di ba the decedent here has power to designate any
person? Now if this power of appointment is general in nature,
such as he can designate any person including himself, his
spouse, his estate, executor/administrator, his creditor, it is as if
he will not abandon possession and enjoyment of the property
because the transfer is all in his favor. The value of these
properties, involved in the power of appointment, forms part of
the gross estate.
But if the power of appointment is special in nature, such that he
cannot designate any of those mentioned above, then the value of
these properties, involved in the power of appointment, will NOT form
part of the gross estate.
Proceeds of Life Insurance
Are proceeds of Life Insurance subject to income tax?
Its exclusion.
Is it subject to estate tax?
Yes.
In all cases?
It depends as to the beneficiaries.

5.

Beneficiary:

Estate/Executor/Ad
ministrator

Always part of the Gross Estate

Beneficiary:

Other than
Estate/Executor/Ad
ministrator

If revocable: Part of the Gross Estate

If irrevocable: NOT part of the GE

Ex: Mr. X, a decedent, is the president of ABC. During the lifetime of

Mr. X, ABC took out a life insurance policy where the designated
beneficiary is a third person, but irrevocably made.
Will the proceeds of the life insurance policy form part of the
Gross Estate of Mr. X?

No. Because it was taken out by the employer, not by the

decedent himself. The life insurance must be taken out by the
employee (decedent) himself during his lifetime.
Assuming that the policy was taken by the decedent himself, during
his lifetime. You follow the diagram above.
Prior interests
Transfer for Insufficient Consideration
Problem: A motor vehicle was transferred. Date of death is today.
One year ago, a sale was made. Fair market value one year ago (of
the motor vehicle) is 1 million sold only for 100k. At the time of death,
fair market value of the motor vehicle is only 700k.
How much would form part of the gross estate?

Only 600k. We consider the fair market value at the time of

death which is 700k. It was sold for 100k, so the difference of
600k would form part of the gross estate.

6.
7.

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Illustration: Insufficient Consideration

MV

1 yr
Death

FMV

1M
100K Consideration
FMV 700K
Answer: 600k

Why not 900k?

Law says it is the fair market value at the time of death, not
at the time of the transfer. Regardless whether the property
appreciated or depreciated after the sale, is not important.
(FMV at the time of death consideration received = amount to be
added on gross estate)
8. Amount Received by Heirs under Republic Act No. 4917
What about the separation benefits received by the heirs from the
employer of the decedent? Will it form part of the gross estate? Is it
subject to estate tax?
The separation benefit is added benefits received under Republic
Act 4917. Will have to be accounted for and included as part of
the gross estate. But, it is not subject to estate tax in the sense
that it is one of those deductions fully allowed.
So if its 10million in benefits less 10million in deductions there
will, in fact, be no estate tax to be imposed.
9. Capital of the Surviving Spouse
Share of spouse in the conjugal properties?
The conjugal properties of the couples will have to be included as
part of the gross estate. Because later on, one half share of the
surviving spouse in a conjugal property will be removed.
INCLUDE THE WHOLE INTO THE GROSS ESTATE. Not just the one half
share of the decedent. Because there will be deductions against the
conjugal properties, and only whats left after the conjugal deductions
will the one half share of the surviving spouse be computed.
Acquisitions and Transmissions Not Subject to Estate Tax
The common denominator of the first three types is that there is a transfer
or there is a subsequent transfer
1. Merger or Usufruct in the Owner of the Naked Title
1st transfer: from the decedent to the usufruct
2nd transfer: was from the usufruct to the naked owner. No longer
taxable, it is just the merger of the right to enjoy the property and the
ownership of it.
2. Transmission by the Fiduciary Heir or Legatee to the
Fideicommissary
The decedent gives a property to a fiduciary; later on the decedent
tasked or obliged the fiduciary to transfer it to a fideicommissary. The
1st transfer from the decedent to the fiduciary has already been
subjected to tax as the estate of the decedent already paid the estate
tax including such property, so the 2 nd transfer to the fideicommissary
will no longer be taxed.
3. Transmission from the First Heir, Legatee or Donee in favor of
Another Beneficiary (in accordance with the desire of the
predecessor)
1st transfer: A decedent has 2 heirs; he gave one half to A and one
half to B.

H.

2nd transfer: Subsequently if A transfers what he receives or his half to

B. Then the transfer will no longer be taxed because it was already
taxed.
4. Bequests, Devises, Legacies or Transfers to Social Welfare, Cultural
and Charitable Institutions, requisites
If a property owned by the decedent is intended for a charitable
institution, will it form part of the gross estate subject to gross estate
tax?
No, because the 4th type says that Bequests, Devises, Legacies or
Transfers to Social Welfare, Cultural and Charitable Institutions
How about transfers to non-stock non-profit educational institution?
Will not form part of the gross estate because even if they are not
enumerated in the tax code, they are exempted from tax
expressly provided by the constitution.
So Gifts, Bequests, Devises, Legacies or Transfers to Social
Welfare, Cultural and Charitable Institutions are transmissions of
corporations not subject to estate tax so long as
a. Transfer to a social welfare, cultural and charitable institution.
b. They must have been organized as non-profit
c. That not more than 30% of the said bequests, devises,
legacies or transfers shall be used for administrative
purposes.
And the constitution provides that, all revenues, assets, of nonstock non-profit educational institution is exempt from taxation so
long as it is actually, directly, and exclusively used for educational
purposes.
Paragraph 2 provides that NSNP Educational Institution they are
exempt from customs duties as well as donors tax but it does not
provide exemption from estate tax. A non-stock non-profit
educational institution is not part of the enumeration is not part of
the estate tax provision, and the taxpayer liable for estate tax is
not the school, it is the estate.
An estate can come only from an individual.
5. Others
a. Life insurance proceeds where beneficiary is other than the
estate, executor, administrator and the designation is
irrevocable
b. Group insurance
c. SSS death benefits
d. GSIS
e. Retirement benefits
f. Properties held in trust by decedent
g. Separate/Exclusive properties of surviving spouse
h. Reciprocity clause
i. First Php200,000 net estate
Deductions Allowed to a Citizen or a Resident, Requisites
1. Expenses, Losses, Indebtedness and Taxes
a. Funeral Expenses
Are funeral expenses be fully deductible from the gross estate?
No, but it is deductible to the extent of actual funeral expense
or 5% of the gross estate whichever is lower, but the limit is
200K.
Problem: X, Y and Z decedent has 6M, 4M and 2M respectively
each worth of gross estates, the funeral expense is 250k, 150k

I.

Page | 7

and 170k. How much can the estate of the decedents X, Y and Z
claim as funeral expense as deductible?
For Mr. X, only 200K because the limit is 200K, 5% of 6M is
300K so we still apply 200K; For Mr. Y, 150K because the
actual is lower than the 5% of the gross estate which is 200K
and lower than the limit which is 200K; For Mr. Z, 100K only
because the actual funeral expense which is 170K is higher
than the 5% of his gross estate which is 100k.
Illustration: Funeral Expenses

G Estate
Actual FE
Deduction

2,000,000
Z
170,000
100,000
5% of
GE

What comprises Funeral Expense?

Casket, Land, Notices, Publication, etc.
Funeral expense paid or unpaid are part of the 200K limit, in order
to avoid the abuse of maximizing the amount of deductions, after
that point, any unpaid amounts will no longer be classified as
payable against the estate and no longer be deductible as claims
against the estate.
Judicial Expense
What activities are specifically covered under judicial
expenses?
Fees of executor or administrator, Attorneys fees, Court fees,
Accountants fees, Appraisers fees, Clerk hire, Costs of
preserving and distributing the estate, Costs of storing or
maintaining property of the estate, Brokerage fees for selling
property of the estate
Settlement covers from the point of death the assets and the
inventory of the properties, preservation of the properties,
collection of debts due in favor of the decedent, the administration
until the distribution of the properties so long as it will not go
beyond the last day of the filing of the estate tax return. The last
day of filing of the estate tax return is 6 mos. After the death or
the 30 days extension if the reason is meritorious
If the estate is not settled judicially, what happens to the
expenses in the extrajudicial settlement? Deductible or not?
DEDUCTIBLE so long as its in relation to the settlement of
the estate with the ultimate goal of having the property
distributed after payment of debts, expenses are recognized
as deductible expenses.
Within what time frame should the judicial expenses be
incurred in order for it to be deductible? Can such expenses
be incurred at any time?
The judicial expenses must be incurred during the settlement
of the estate but not beyond the last day prescribed by law,
or the extension thereof, for the filing of the estate tax
return.
So when should the estate tax return be filed?
GR: It must be filed within 6 months from the decedents
death.

b.

Limit = P200,000
6,000,000 4,000,000
X
Y
250,000
150,000
200,000
150,000
max
actual

E: The Commissioner shall have authority to grant, in

meritorious cases, a reasonable extension not exceeding 30
days for filing the return.
So only judicial expenses incurred within 6 months after death are
deductible? Expenses beyond 6 months would be non-deductible?
NO, because there is an exception wherein the Commissioner may
extend the deadline of filing the estate tax return, which must not
exceed 30 days. Expenses within such extension granted by the
Commissioner are still deductible as judicial expenses.
CIR vs. CA, CTA and Josefina P. Pajonar, as Administratix of the
Estate of Pedro P. Pajonar, SC GR No. 123206, March 22, 2000
DIGESTED BY: Jennifer Tinagan
FACTS:
Assailed in this petition for review on certiorari is the
December 21, 1995 Decision1 of the Court of Appeals in CAG.R. Sp. No. 34399 affirming the June 7, 1994 Resolution of
the Court of Tax Appeals in CTA Case No. 4381 granting
private respondent Josefina P. Pajonar, as administratrix of
the estate of Pedro P. Pajonar, a tax refund in the amount of
P76,502.42, representing erroneously paid estate taxes for
the year 1988.
Pedro Pajonar, a member of the Philippine Scout, Bataan
Contingent, during the second World War, was a part of the
infamous Death March by reason of which he suffered shock
and became insane. His sister Josefina Pajonar became the
guardian over his person, while his property was placed under
the guardianship of the Philippine National Bank (PNB) by the
Regional Trial Court of Dumaguete City, Branch 31, in Special
Proceedings No. 1254. He died on January 10, 1988. He was
survived by his two brothers Isidro P. Pajonar and Gregorio
Pajonar, his sister Josefina Pajonar, nephews Concordio
Jandog and Mario Jandog and niece Conchita Jandog.
The PNB filed an accounting of the decedent's property under
guardianship valued at P3,037,672.09 in Special Proceedings
No. 1254. However, the PNB did not file an estate tax return,
instead it advised Pedro Pajonar's heirs to execute an
extrajudicial settlement and to pay the taxes on his estate.
Pursuant to the assessment by the Bureau of Internal
Revenue (BIR), the estate of Pedro Pajonar paid taxes in the
amount of P2,557.
Pursuant to a second assessment by the BIR for deficiency
estate tax, the estate of Pedro Pajonar paid estate tax in the
amount of P1,527,790.98. Josefina Pajonar, in her capacity as
administratrix and heir of Pedro Pajonar's estate, filed a
protest on January 11, 1989 with the BIR praying that the
estate tax payment in the amount of P1,527,790.98, or at
least some portion of it, be returned to the heirs.
However, without waiting for her protest to be resolved by
the BIR, Josefina Pajonar filed a petition for review with the
Court of Tax Appeals (CTA), praying for the refund of
P1,527,790.98, or in the alternative, P840,202.06, as
erroneously paid estate tax.
The CTA ordered the Commissioner of Internal Revenue to
refund Josefina Pajonar the amount of P252,585.59,
representing erroneously paid estate tax for the year

Page | 8

1988. Among the deductions from the gross estate allowed by

the CTA were the amounts of P60,753 representing the
notarial fee for the Extrajudicial Settlement and the amount
of P50,000 as the attorney's fees in Special Proceedings No.
1254 for guardianship.
ISSUE: Whether the notarial fee paid for the extrajudicial
settlement in the amount of P60,753 and the attorney's fees in
the guardianship proceedings in the amount of P50,000 may be
allowed as deductions from the gross estate of decedent in order
to arrive at the value of the net estate.
HELD:
The deductions from the gross estate permitted under section
79 of the Tax Code basically reproduced the deductions
allowed under Commonwealth Act No. 466 (CA 466),
otherwise known as the National Internal Revenue Code of
1939, and which was the first codification of Philippine tax
laws. Section 89 (a) (1) (B) of CA 466 also provided for the
deduction of the "judicial expenses of the testamentary or
intestate proceedings" for purposes of determining the value
of the net estate. Philippine tax laws were, in turn, based on
the federal tax laws of the United States. In accord with
established rules of statutory construction, the decisions of
American courts construing the federal tax code are entitled
to great weight in the interpretation of our own tax laws.
Judicial
expenses
are
expenses
of
administration.
Administration expenses, as an allowable deduction from the
gross estate of the decedent for purposes of arriving at the
value of the net estate, have been construed by the federal
and state courts of the United States to include all expenses
"essential to the collection of the assets, payment of debts or
the distribution of the property to the persons entitled to
it." In other words, the expenses must be essential to the
proper settlement of the estate. Expenditures incurred for the
individual benefit of the heirs, devisees or legatees are not
deductible. This distinction has been carried over to our
jurisdiction. Thus, in Lorenzo v. Posadas the Court construed
the phrase "judicial expenses of the testamentary or intestate
proceedings" as not including the compensation paid to a
trustee of the decedent's estate when it appeared that such
trustee was appointed for the purpose of managing the
decedent's real estate for the benefit of the testamentary
heir. In another case, the Court disallowed the premiums paid
on the bond filed by the administrator as an expense of
administration since the giving of a bond is in the nature of a
qualification for the office, and not necessary in the
settlement of the estate. Neither may attorney's fees incident
to litigation incurred by the heirs in asserting their respective
rights be claimed as a deduction from the gross estate.
Coming to the case at bar, the notarial fee paid for the
extrajudicial settlement is clearly a deductible expense since
such settlement effected a distribution of Pedro Pajonar's
estate to his lawful heirs. Similarly, the attorney's fees paid to
PNB for acting as the guardian of Pedro Pajonar's property
during his lifetime should also be considered as a deductible
administration expense. PNB provided a detailed accounting

c.

of decedent's property and gave advice as to the proper

settlement of the latter's estate, acts which contributed
towards the collection of decedent's assets and the
subsequent settlement of the estate.
The decedent here was (?). His property was given to PNB for
guardianship. PNB did not settle the estate but only ask the heirs
to extrajudicially settle it. The sister of the decedent was the one
who took hold of the estate, she was the administrator and she
wanted a refund because the state asked them to pay and she
was asking for a refund for the expenses to reduce the net taxable
estate. The claims was for the expenses of guardianship and
expenses of atty.s fees for the settlement of the estate
Held: These were considered valid deductions because although
this was extrajudicially settled this was still considered as a
necessary expense for the settlement of the estate. In
guardianship it was considered as expense because this was
related to the preservation of the property.
Losses
What kind of losses?
CASUALTY LOSSES (losses which arose from fires, storms,
shipwreck or other casualties) or from ROBBERY, THEFT or
EMBEZZLEMENT)
Example: Mr. X is in Hawaii he died today. Last night robbers
broke into his house in the PH and took off his jewelries at the
time of death he was no idea that there was robbery.
Did the loss form part of the deductible estate?

NO, since the loss must occur after death.

What is the reason for requiring that the loss should occur
after death?
Because losses before death are never deductible losses.
Losses which occur before or prior to the death of the
decedent will never become a deductible casualty loss for the
simple reason that the gross estate that has been gathered at
the point of death no longer includes the property that has
been lost.
It must occur after death until the last day of the payment of
the estate which is after 6 mos. From the death of the
decedent or an extension of 30 days on meritorious cases.
It must not be compensated by any insurance because if it is
compensated by insurance then there is no loss.
If it is partly compensated by insurance then only the amount
not compensated will be allowed as deduction.
It must not been paid as a deduction from income tax of the
decedent or the estate
When we discuss estate income tax before, when a person
dies, there is already a cut off example if a person dies today,
his capacity to earn income by himself ends today, the loss
occur after death, meaning losses must not have been claim
as deduction against income tax of both the estate. Because
an estate is required to file an income tax return after death
because we presume that the estate or the properties left by
the decedent will still continue to earn income on its own after
death then those income earned will be separate from the
estate itself then it will have income, it will incur expenses
and if the losses were already deducted against the income of
Page | 9

d.

the estate then it will no longer be deducted against the

estate.
If losses were already deducted against the income of the
estate, it will no longer be deducted against the estate itself.
It will not be subject to double taxation. So we have five (5)
requisites all in all.
Claims against the estate
Sources:
i.
Contracts
ii. Torts
iii. Operation of law
Assuming that Mr. X died today and someone appeared before the
surviving spouse, she has a claim against the estate, an unfulfilled
promise to marry and shes seeking for damages.
Will you consider it as a claim against the estate and consider
it also as deductible against the gross estate?

The claim must be pecuniary in nature as to be reduced

into a simple monetary judgment, so in that case, it
cannot be considered as a claim against the estate.
In claims against the estate, who is the creditor and who is the
debtor?
The creditor is the 3rd party or person while the debtor is the
decedent, charged to his/her estate.
What are the requirements for it to be allowed as a deduction to
the gross estate?
1. It must be a personal obligation contracted by the decedent
during his lifetime.
2. It must have been incurred in good faith and for an adequate
consideration (money)
3. It must exist under the bounds of the law and enforceable in
court
4. It must not have been condoned by the creditor; otherwise
there is no debt to be paid off.
5. It must have not prescribed or else there is no obligation to
speak of.
6. It must be substantiated by receipts or invoices etc.
Why are these requisites necessary?
Because this is an area of abuse by the executors and the
administrators. Otherwise, without the documents and the
necessary papers, it is very easy to say that you have claims
against the estate and deduct the said claims to reduce the
estate tax due.
So that in coming up with the substantiation of the claims against
the estate, if the claim arose from a simple money claim, what will
be the documents needed? Like in a contract of loan (I owe you)
a. Promissory Notes are contracts of loan duly admitted by the
decedent and must have been duly notarized at the time the
loan was contracted, not thereafter (not after death of the
decedent)

Refers to the debt instrument itself

b. A certificate or a certification, duly notarized, issued by the
creditor, indicating or stating the unpaid balance and
including the interest that has accrued at the time of death
c. Proof of financial capacity of the creditor to lend the amount
at the time the loan was granted, including its latest audited

balance sheet with a detailed schedule of its receivables,

showing the unpaid balance of the decedent
d. If the loan was contracted within the three years before the
death of the decedent, a statement under oath as to how the
proceeds of the loan was used by the decedent

It appears that the last requirement is really not

necessary in all cases. So that if the loan was contracted
more than three (3) years prior to the death of the
decedent, such statement under oath is not necessary.
What does it provide? How the proceeds of the loan were
used during the last three (3) years of the life of the
decedent.
What are the substantiation requirements if the claims of the
estate arose from purchase of goods and services?
e. The official receipt or invoice of the purchase of the goods
and/or services shall suffice.
f.
You will notice that the official receipt or invoice requirement
is not present (for simple money claim) as it connotes that
payment has already been made. When you purchase, and
when you pay, eventually you will be issued a sales invoice or
a receipt. So what are required for its substantiation are sales
invoice, contracts, delivery receipts, statement of account,
billings all made by the creditor.

The certification that the creditor is financially

capacitated to engage in the trade or business
We presume here that the creditor is engaged in
trade or business

He has to submit proof of the financial statement

detailing his receivables from all his other debtor
including the decedent
If the claim against the estate is reduced in a judgment by the
court, the judgment must also be submitted.
Who would be the party to the principal obligation? Who's the
creditor? Who's the debtor?
Mr. Y - so it is Mr. Y's liability ultimately? Can Mr. X's estate claim
the amount as claims against the estate?
Mr. Y has an existing obligation - to whom?
Is it proper to claim it as a deduction against the gross estate if
you have accommodated someone?
Illustration: Claims against the estate
Mr. Z
Creditor
Mr. X
Mortgagor
decedent

Mr. Y
Debtor

As part of the gross estate, we expect the decedent Mr. X or

his estate to report the property that has been mortgaged as
part of its gross estate or assets.
Now, as to the question of whether it can claim the deduction
of liability to the creditor Mr. Z, the estate can claim it as a
deduction on the condition that Mr. X will reflect as part of the
gross estate whatever he may be receiving from Mr. Y. So it
is simply an offsetting.
Page | 10

It should have a zero effect because it is not the principal

obligation of Mr. X. It is the principal obligation of Mr. Y
although Mr. X property would properly answer for the liability
to be paid but the ultimate obligation rests with someone
else. So this can be considered - the liability of Mr. Y to Mr. Z
can be part of the claims against the estate if the receivable
from Mr. Y is reflected as part of the gross estate.
But if there is a legal impediment to recognize the receivable
from the payable of Mr. Y, which is a receivable either by the
creditor or the mortgagor, if it cannot be recognized as part of
the gross estate, then it will not be claimed as a deduction
from the gross estate.
This is a different scenario from the simple claim against the
estate wherein claims against the estate will only recognize
two parties - creditor, debtor; mortgage or without mortgage
and whatever is payable by Mr. X to Mr. Y under the loan
agreement or purchase agreement can be reflected as claim
against the estate. (?)
Illustration: Claims against the estate

X
Decedent
debtor
Mortgage /without
mortgage

So what is the difference between claims against the estate and

claims against the insolvent person? And what is that condition
that must be complied with in order for claims against the
insolvent persons can be properly recognized as a deductible
item?
Whatever is the decedent's receivable from the person that
has adjudged as insolvent should first be recognized as part
of his asset or gross estate then subsequently reduced by
whatever is not collected.
So for example if P1M is a receivable from Mr. X and Mr. X
happens to be insolvent, he cannot pay the entire amount,
P1M part of gross estate, P1M claim against the insolvent
person. But if a portion of that receivable is satisfied then
only the difference will be recognized as claim against the
insolvent person but the entire receivable is recognized as
part of the gross estate.
Claims against the insolvent
This time the decedent is the creditor.
If the decedent is the creditor, why would it be allowed to deduct
the credit?
As a requirement, the debt of the insolvent must have been
included in the gross estate of the decedent for it to be
allowed as a deduction.
Not all cases of insolvency will be declared as having zero
(assets). According to the order of the court, the remaining assets
of the insolvent will be distributed pro-rata to his creditors.
So that if the decedent-creditor is able to receive a portion of the
judgment owing to him, how much is the deductible claim against
the estate?

e.

Y
creditor

Whatever the decedent-creditors receivable or collectible

from the said debtor.
The receivable or collectible must be reflected in the gross
estate.
But if the insolvent was able to settle a portion of his debt to
the decedent, then only that portion shall be deducted.
Unpaid mortgages or indebtedness
Is it a claim against the estate or claim against insolvent person?
Although it is in a different category, the only difference is
that it is supported by a security or a collateral. It is still a
claim against the estate where the decedent is the debtor.
But the entire value of the property, it would always form part
of the gross estate of the decedent. Only the unpaid
mortgage that will be reflected as claims against the estate or
unpaid mortgage.
Unpaid taxes
Mr. X, a decedent died today.
May the estate tax - we said that estate tax accrues on the
date on his death - may the estate tax due on his estate be a
deductible on unpaid taxes? During the first part of our
discussion, we said that estate taxes accrue on the day the
decedent dies although the obligation to pay will happen later
- six months after. So that on the day of death, there is an
unpaid tax, there is an accrued tax which remains unpaid.
Can it be a deductible on estate tax against the gross estate?

Unpaid income tax upon income received after the death

of the decedent, or property taxes not accrued before his
death, or any estate tax shall not be deductible from
gross estate. The unpaid taxes must be contracted bona
fide and for an adequate and full consideration in money
or moneys worth (Sec. 86[e], NIRC).
In computing estate tax, can we deduct estate tax as well?
Never possible to deduct an unpaid estate tax to an estate
tax.
Because estate tax will accrue only on death.
So what are taxes can we deduct?
Income tax that is unpaid before the death of the decedent.
Income tax after death is not deductible against the gross
estate.
Only taxes which have accrued prior to death is deductible.
Example: Real Property Taxes, They will accrue every January 1.
Assuming Mr. X died today. There is still 48 days left for the year.
If the real property tax day is 365k.
How much is deductible?

No.
Payment of 365k during the year. Will it be fully deductible?
Pro-rata?

It will be fully deductible because it already accrued prior

to death. Real property taxes accrued already on January
1 and it is already for the entire year.

f.

g.

Page | 11

Illustration: Unpaid Taxes

RPT
= 365,000

Jan. 1
2012

2.

3.

48 days

Nov. 13

Entire
P365,000 is
deductible
Jan. 1
2013

Requisites for unpaid taxes to be deductible against the gross

estate:
a. The taxes must have accrued as of the death of the decedent
or prior to the death of the decedent.
b. They were unpaid as of the time of death.
c. This deduction shall not include income tax upon income
received after death, or property taxes not accrued before his
death, or the estate tax due from the transmission of his
estate.
Medical Expenses
Requisites for deductibility of medical expenses:
a. The expenses (cost of medicines, hospital bills, doctors fees, etc.)
were incurred within one (1) year prior to the death of the
decedent;
b. The expenses are duly substantiated with official receipts for
services rendered by the decedents attending physicians,
invoices, statements of account duly certified by the hospital, and
such other documents in support thereof;
c. Provided, that the total amount thereof, whether paid or unpaid,
does not exceed Five hundred thousand pesos (P 500,000)
Should the medical expenses be related to the cause of death
of the decedent for it to be deductible?
It is not necessary that there be a relation between the illness for
which the medical expenses were incurred with the reason for the
cause of death. No relation required so long as the expenses were
incurred within 1 year prior to his death and beyond that, it will no
longer be deductible even if it is related to the cause of death of
the decedent.
For example Mr. X was hospitalized and incurred medical expenses
amounting to 1 Million. No payment was made until death but there
was a promissory note made by the decedent in order for him to be
discharged from the hospital.
Will the entire 1 million be considered a deductible medical
expense?

It will be dedcutible to the extent of 500 thousand.

What happens to the remaining 500 thousand?

Medical expenses whether paid or unpaid are deductible if it is

incurred withing 1 year prior to the death of the decedent and
it should not exceed 500 thousand in any way.

Its either the actual medical expenses paid or 500 thousand

whichever is lower. Any unpaid amount which cannot be
accomodated in the maximum limit of 500 thousand will not
form part of the claim against the estate because it is a
different category of expenses.
Family Home, define (Articles 152 & 153 of the Family Code)
What is a family home?

It is the dwelling house, including the land on which it is situated,

where the husband and wife, or a head of the family, and
members of their family reside, as certified to by the Barangay
Captain of the locality.
It is deemed constituted on the house and lot from the time it is
actually occupied as the family residence and considered as such
for as long as any of its beneficiaries actually resides therein.
Can a person who has not been married have a family home?
A single individual who has not been married, who has dependents
may constitute a family home.
Who may be dependents of a single individual who has not
been married, in order for his house to be constituted a family
home?
A child, whether legitimate, illegitimate, legally adopted or
naturally acknowledged, not more than 21 years of age, such child
is not gainfully employed, unmarried and he can be more than 21
if he is mentally incapacitated or physically disabled.
So a single individual without any dependent cannot constitute a
family home for gross estate.
Who can claim family home?
Only those married or unmarried head of the family.
Who is the head of the family?
Is an individual whether previously married and subsequently
separated or divorced or single but with qualified dependents.
Who are qualified dependents?
a. Parents residing without any regards to age
b. Children, brothers and sisters living with him and chiefly
dependent for his support.

Children whether legitimate or illegitimate or recognized

natural child

Brothers or sisters whether of the full or half blood

Age: 0- 21 years old

not gainfully employed

not married

can be more than 21 years old if mentally incapacitated

So a single individual living in a bachelors pad cannot claim family

home as a deductible expense against gross estate.
So the family home will be constituted both on the house and lot.
How much of the value of the family home should be part of the gross
estate?
If he is an unmarried or married his maximum deduction is 1M.
But if the individual is married you have to consider whether the family
home is exclusive or conjugal
Let us say that Mr. X is unmarried head of the family
LOT
HOUSE
Deductible amount
Mr. X is unmarried 500,000
1,000,000 1,000,000
head of the family
Mr. Y married
500,000
1,500,000 Exclusive lot500,000
(exclusive) (conjugal) Conjugal house- (1.5M/2)
750,000
Total
1,250,000
Deductible only for 1,000,000
(maximum amount)
Mr. Y married
500,000
800,000
Exclusive lot500,000

Page | 12

(exclusive)

(conjugal)

Conjugal house (800,000/2)

400,000
900,000

Or

Illustration: Vanishing Deductions

Donors Tax
Estate Tax

Illustration: Family Home

500,000
1,000,000

Deductible

1,000,000

Mr. Z
Married

Mr. Y
Married
500,000
2,000,000
1M

FL
CH

E
C

500,000
800,000

500,000 900K
1,000,000
1,000,000

E
C
FL
CH

500,000
400,000
900,000

Amount deductible is the Lower between the value attributable to the

decedent (exclusive + of the value of the conjugal) and the
maximum amount of 1M.
Can a decedent constitute more than one family home?
NO
Can a non-resident citizen constitute a family home?
YES, if he is the type of NRC who is temporarily working abroad
but has left a family home in the Philippines with his dependents.
But if he is the type of NRC who has made known to the BIR of his
physical presence and residence abroad then he is the type of NRC
who cannot claim family home as a deductible expense.
If single, widowed, divorced, separated, annulled- necessary to have
dependents
If married- NOT necessary to have dependents to claim family home
as deductible expense
If the man dies while the property is being occupied by his wife whom
he is legally separated, he CANNOT claim it as a deductible expense as
family home. The requirement for head of the family is that he must
have qualified dependents living with him; therefore the head of the
family must be living in that place as well.
If there is a family home that is temporarily transferred to someone
else and he bought it back you have to determine at the time of death
whether that decedent was actually living in that place and made it his
family home. But if NOT, so not constituted as family home.
Deductions are strictly construed against taxpayers.
Property Previously Taxed (Vanishing Deductions)
It is a deduction that vanishes in percentage to the extent of its
proximity to the first transfer and second transfer
It is related to a property which is previously been taxed and in order
to avoid double taxation it may be deducted from your gross estate
We said that gross estate must comprise of all properties existing as of
the time of death under the name of the decedent and one of these
properties may have been transferred to the present decedent from a
prior decedent or from a prior donor within a period of 5 years. And we
said that every form of transfer gratuitously made whether in the form
of donation or inheritance received will have to be subjected to either
donors tax or estate tax.
Illustration: Mr. X donated a motor vehicle to Mr. Y 11/12/2012. Mr. Y
died 11/13/2012

4.

Donated a motor vehicle

Died 11/12 12 -

11/12/12 to Mr. Y
Gratuitous to heirs

1M
1M

There was a first transfer made from Mr. X to Mr. Y made

yesterday in the form of donation. Under the law the donors tax
must be paid within 30 days from the time the gift was made. The
donors tax has already accrued from the time that the gift was
perfected and completed perfected by acceptance and completed
by delivery.
So that there is a donors tax due on this first transfer.
Subsequently, the donee died and so there is a gratuitous transfer
to the heirs of the decedent Mr. Y. This is considered a transfer
subject to tax.
Is this considered subject to estate tax?

Yes because all properties that are existing as of the date of

the death. There is a one day gap but there will be two taxes
imposed on the same property. In order to avoid double
taxation, a property which has been previously taxed will be
allowed as a deduction against the gross estate. So in the
estate of Mr. Y this will be considered as part of the gross
estate but will be deducted against the gross estate.
So how much will be deducted? If the value is 1M at the time of
death is also 1M. Will the entire value be deducted?

Yes (100% will be deductible) There are vanishing deduction

rates, we call it vanishing because as the period lengthens
from the first transfer to the second transfer the rates allowed
for the deduction vanishes. If the present decedent died
Within 1 year- 100%.
Within 2 years- 80%
Within 3 years- 60%
Within 4 years- 40%
Within 5 years- 20%

That is why it is called vanishing deduction.

Purpose of vanishing deduction: to relieve an estate of the burden of
paying tax on a property that has already been taxed on the first transfer,
whether it was through a gift or through inheritance.
First transfer can either be through gift or inheritance. Second transfer
must always be a transfer mortis causa.
Requirements for vanishing deductions.
1. Prior transfer which can be either a donation or inheritance
2. Death of the present decedent within 5 years from the first transfer
3. Identifiable property (only applies to the specific property initially
transferred)
4. Inclusion of the property in the gross estate
5. It must be the first instance that vanishing deduction was claimed
6. Property must be located in the Philippines
7. Must have been previously taxed on the first transfer

Mr. X
UHF
Family Home
Lot
House

Mr. X
Mr. Y

Page | 13

Previous decedent/donor
2

7
once

w/in 5 years - DEATH 4

Present Decedent
3 Gross Estate

5 Located in the Phils.

5M GE

No
vanishing
deduction

5M GE

VD applies to both
personal and real
property

EXAMPLE: Mr. X NON-resident alien donated motor vehicle located in the

USA at the time of donation to Mr. Y Thereafter MR.X died. The property
was then transferred to the Philippines before the Donee died. Will
vanishing deductions apply?
Still the vanishing deductions will not apply because when the donation
was made the Donor as a NRA was taxed only for properties within the
Phils. Therefore the requirement that previous taxes should have been
paid was not satisfied.
If the heirs of Mr. Y transfer the properties they can still apply for
vanishing deductions because it would just be the first time.

Illustration
Mr. X - Resident alien
MV located in the U.S.

Mr. Y - Decedent
w/in 4 years
Phils.

Paid taxes

EXAMPLE: Mr. X resident alien donated motor vehicle located in the USA at
the time of donation to Mr. Y Thereafter MR. X died. Mr. Y died within 4
years after receiving the gift.
Still vanishing deductions cant be applied. The property must be in the
Philippines at the time of the donees death.
Illustration
Mr. X - Resident alien
MV
Mr. Y - Decedent
w/in 4 years

Identical property 6

EXAMPLE: Mr. X resident alien donated land located in the USA. To Mr. Y
Thereafter MR.X died. Mr. Y died within 4 years after receiving the gift.
If the value of the land is 5M at the time of death, it will form part of
his gross estate. Can we deduct the value of the parcel of land?

Resident aliens are taxed for their properties wherever it is

situated, however for purposes of vanishing deductions we cannot
deduct the value because the property is not within the
Philippines.
Illustration
Mr. X - Resident alien
land U.S.
Mr. Y - Decedent
w/in 4 years

RC/RESIDENT

What the formula? If the value of the vehicle is 1M at the time of first
transfer and 500K at the time of death of the present decedent, how
much would form part of the gross estate?

500K, which was the current FMV of the vehicle when Mr. Y died.
How much is the vanishing deduction?
For vanishing deduction purposes, you have to identify which of the
prior FMV and current FMV is lower. In that case, since 500K is lower
than 1M, so the initial basis that we will be using is 500K.
So can we deduct to full 500K?
No. It is still subject to other deductions.
Do you agree that the value that has to form part of the gross estate is
500K, and not the 1M which is higher?
Yes. Because 500K is the FMV of the vehicle at the time of death. So it
would not matter if there was higher fair market value prior to death
because, always, the foundation of our gross estate is the FMV at the
time of death.
But for purposes of determining the vanishing deduction, there is a
different basis. That is whichever is lower between the prior FMV and
the current FMV.
Can we deduct the 500K outright?
Not yet. Unpaid mortgage or lien would still have to be considered.
Why is unpaid mortgage allowed to reduce the value of the property?
Well, unpaid mortgage has to be considered because the heirs of Mr. Y
will not actually be inheriting the full amount, which is 500K; they
have to shoulder or pay the unpaid mortgages.
So the initial basis was the lower FMV, you have to reduce it by the
mortgage that was taken out by the previous transferor. So if this
motor vehicle is still unpaid and was mortgaged, that will have to
reduce the value of property in order to determine the true value how
was really received by the decedent. Because, lets say, if you received
10M in FMV but theres 9M pending liability for him to answer. Then he
is only actually receiving 1M.
But the requirements are:
a. The mortgage must have be taken out by the previous transferor,
and;
b. The mortgage will now be answered or shouldered by the present
decedent.
Let
G.E. = 5M, ELIT = 1M

Illustration

1M
500K

FMV
FMV

Not paid of
taxes

FMV (prior or present, whichever is lower)

500,000

Less: Unpaid Mortgage (taken out by prior Decedent)

-0500,000

Less: Pro rata deduction

(500K/5M) x 1,000,000 ELIT

100,000
400,000

X Vanishing Deduction Rate (Decedent Died within 4yrs), 40%

X 40%

Deductible

160,000

*ELIT Expenses, Losses, Indebtedness, and Taxes

OR
Page | 14

Illustration
Initial Basis (low of FMV)
Less: Unpaid Mortgage
Less:

500,000
5M (GE)

ELIT/TPU
1,000

P500,000
-0P500,000
100,000
P400,000
40%
P160,000

5.
6.

7.

deductible

Since this property is already part of the gross estate, it will have the
shoulder the burden of ELIT and transfers for public use. Simply says that
part of these expenses, losses, indebtedness, taxes and transfers for public
use are attributable to distortion of the gross estate, hence it should
reduce the value of the gross estate.
So if this is the given amount, 1M and 5M, 10% of 1M is 100k, then we
arrive at the amount of property previously taxed.
Now can we deduct the 400k this time against the gross estate of Mr. Y?
Not yet, we have to consider the corresponding vanishing rates based
on the time the decedent died and the time he inherited the property.
So since he died on the 4th year it will have to be 40% of 400k which
is 160k. Only 160k is deductible.
We started off with 1M which was received as a property previously taxed,
and you are promised by the law a vanishing deduction.
But how much can actually be deducted in this scenario? Only 160k.
because of the vanishing deduction formula:
First we determine the initial basis, the one lower fair market value
between the first transfer and the second transfer, reduced by any
unpaid amount left by the prior transferor that is to be shouldered by
the present decedent and reduced by the proportion of the expenses,
losses, indebtedness, and transfers for public use that is attributable to
that initial basis then ultimately you have to consider the proximity of
the first transfer and the second transfer using the vanishing rates.
Now if the first transfer and the second transfer took place within one
year, then the entire 400k will be deductible because it will be 100%
vanishing rate.
Amount received by Heirs under RA 4917
Amount received by heirs under RA 4917 is exactly the same amount
that you have reflected as part of your gross estate.
Standard Deduction
Tax code provides standard deduction is equivalent to an amount of
1M pesos.
It does not say that it has to be shared by the spouses. They only
classify deductions as to ordinary deductions which can reduce
conjugal properties and special deductions which comprise the
standard deductions, amount received by heirs under RA 4917,
medical expenses, family home etc.
Standard deduction is an arbitrary amount of 1 million without any
official receipt that you need to present.
Transfers for Public Use
Transfer for public use is when the recipient is the government or its
political subdivisions and must be exclusively for public purpose. That

J.

is different from the exemption given to social welfare, charitable and

cultural institutions.
Where the recipient is the government or its political subdivisions and
must be for a public purpose. Thats different from the exemptions
granted to educational institutions and charitable institutions.
8. Share of Surviving Spouse in Conjugal Property
Shall only be taken after the gross estate has been reduced by
Ordinary Deductions, Expenses, Losses, Indebtedness, etc., but not
reduced by special deductions, standard deductions, medical
expenses, transfers for public use, etc.
Deductions Allowed to a Non-resident Alien, Special Requisites
Non-resident aliens are allowed only 4 deductions.
Problem: NRA has a gross estate of 10M, 2M of which in the PH, 8M
outside. Expenses, Losses, Indebtedness, etc., 1M.
Is it outrightly deductible?

No. We have to get the proportion of his gross estate outside as to

his gross estate in PH. So 20M of 10M is 20%, so 20% of 1M is
200K is the amount deductible.

20%
Illustration: Deductions of a NRA
NRA
GE

2M Phils.
10,000,000

ELIT
2M
10M

- 200K = P1.8M

8 M outside

1,000,000
=

20%

1.

K.

Expenses, Losses, Indebtedness and Taxes

Formula:
Philippine Gross Estate
Worldwide Gross Estate
x ELIT
2. Property Previously Taxed (Vanishing Deductions)
3. Transfers for Public Use
4. Share of Surviving Spouse in Conjugal Property
Gross/Net Estate of a Decedent
1. Single Decedent

Page | 15

Illustration

SOLUTION:

Decedent: Mr. A
Status:
Single, 26y.o., without any dependent
Resident Alien
Date of Death: November 13, 2012
Cause of Death: Mountain Climbing Accident
Decedents Interest
Condominium Unit
Other Real Properties
Personal Properties
Vintage Motor Vehicle, inherited from his wealthy uncle, Mr. X
FMV, at the time of inheritance (November 12, 2010)
FMV, at the time of death
Others
Life Insurance Proceeds taken by Mr. A (revocable beneficiary: religious
institution)
Life Insurance Proceeds taken by Employer (revocable beneficiary: Mr. A)
Life Insurance Proceeds taken by Mr. A (revocable beneficiary: estate)
Amount received by Heirs under RA 4917
Receivable from Mr. Y, declared judicially bankrupt
Previous Transfers
Transfer of Real Property (with the right to amend or terminate)
Sale of Personal Property
Selling Price
FMV, at the time of sale (May 2, 2010)
FMV, at the time of death
Expenses
Paid Funeral Expenses
Unpaid Funeral Expenses
Judicial Expenses
Casualty Losses(robbery took place November 12, 2012)
Outstanding Indebtedness for Home Loan (collateral: condo unit)
Principal, as of date of death
Interest, as of date of death
Taxes due for January-November 2012 Income
Unpaid Medical Expenses for treatment of STI (hospitalization: Nov. 1-11,
2011)
Transfer of Property to the Barangay

3,000,000
1,100,000
1,000,000
1,200,000
1,000,000

500,000
1,000,000
500,000
500,000
300,000

FE
JE
L
I
T
TPU
CAIP

GE
ELIT&TPU
- VD
SD
4917
FH

900,000
100,000
2,000,000
1,300,000

180,000
70,000
500,000
500,000
1,500,000
200,000
200,000
600,000
100,000

ELIT
200,000
500,000
-01,700,000
200,000
100,000
300,000
3,000,000

Vanishing Deductions
1M
0
1M
1M
ELIT & TPU
x
10M
3M

3 yrs.

300K
700K
60%
420K

VD Rule

10,000,000
3,000,000
420,000
1,000,000
500,000
-05,080,000

How much is the total deductible item? (lets state it 1 by 1)

Funeral expense 200,000
Why 200,000?

We have 3 figures to choose from. Funeral expense as

deductible, which is 5% of the gross estate and the gross
estate is 10M which is 500k or the actual funeral expense
which in no case should exceed 200k
Judicial expenses it is deductible w/ out limit
Casualty losses are deductible only if it took place after death and
during settlement, should not be compensated by insurance and was
not included as deduction in income tax purposes.
How much outstanding indebtedness (?) is it deductible?
Yes it is deductible
How much is deductible and how do we classify that?

It will be classified as an unpaid mortgage

And we know that the amount of the property that was mortgage is
included as part of the gross estate. The condominium unit which is 3M
its just that it is reduce by the amount which is outstanding unpaid
mortgage which is 1.7M
Do we have a claim against the estate which is a deductible amount
other than the 3 mentioned?
Gross Estate = 10 M
Deductions (ELIT) = (as solved) 3 M
What are the other deductible amounts?
TAXES DUE for January-November 2012 Income.
Why are we allowed to deduct it?

It is still considered unpaid by the decedent. The entire

200,000 is considered as deductible.
Transfer for Public Use (as part of the political subdivisions of the
government) wherein the recipient is a barangay. The entire 100,000
is deductible.
How about the medical expenses?
No. the medical expenses were considered incurred more than one
(1) year before/prior the death of the decedent.

Page | 16

Receivable from Mr. Y, declared judicially bankrupt. It will be

considered as claims against the insolvent.
Vanishing Deductions:
How much?

The FMV (Vintage Motor Vehicle) at the time of death, 1 M,

since the said FMV is considered lower. At arriving with the
initial basis, the FMV less Pro-rated Deductions, which is 1 M
over the 10 M (the gross estate), then multiplied by the 3 M
(ELIT Expenses, Losses etc.).

ELIT plus TPU is 3 M plus. So ten percent of 3 M is 300,000.

The Vanishing deduction is 700,000 but we have to multiply it
with the vanishing deduction rate which is 60%. The
vanishing deduction is now 420,000. In arriving at the
vanishing deduction, make sure your gross estate is correct
and the ELIT and TPU is also correct.
SO how much is the Net Estate?
Gross Estate
10,000,000
Less
ELIT & TPU
3,000,000
Less
Vanishing Deductions
420,000
Less
Standard Deduction
1,000,000
_____________________________________________
5,080,000
Gross Estate is 10 M less the ELIT and TPU of 3 M less Vanishing
deduction of 420,000, is this the correct way of getting your net
estate? You shall not forget the standard deduction of 1,000,000.
For estate not exceeding 200,000 is exempt. Anything in excess of
200,000, but not over 500,000, the first 200,000 is exempt but
anything beyond 200,000 but below 500,000 is 5%. Three hundred
thousand 5%, is 15,000.
Any gross estate in excess of 500,000 but not over 1.5 million, in
between is another 1.5 million gross estate. The first 500,000 is
subject to 15,000 from the previous layer and anything in excess is
8%. What was subjected to 8% is the difference between 500k and
2M, which is 1.5M and 8% is 120k. Thats why you can see that the
next layer starts with 135k coming from 120k and 15k from the
previous layers.
The next 2 million, any net estate in excess of 2M not over 5M will
guaranty you a tax due of 135k. Plus 11% of the excess of 2M. What is
the excess of 5M over 2M? Three million and 11% is 330k or a total of
465k.
Look at Sec. 84. This is where the net estate of Mr. A belongs. His net
taxable estate is 5,080,000. The first 5M has a tax of 465k. Any excess
of 5M which is 80k and taxed at 15% or 12,000 or a total of 477,000
which is Mr. As tax due.
The point is whenever you are given a net taxable estate even in
practice you can go directly look at the table.
However, we know that the first 200k is exempt. But do not remove it
from the 5,080,000 and get the tax due afterwards because the tax
table already takes into consideration the layering of the net estate of
5,080,000.
How is it taxed? The first 200k is zero. The next layer of 300k is
15k.The next layer of 1.5M is 120k.
The next layer of 3M is 330k. And, finally, the excess of 5M. That is
how estate tax is computed. You dont automatically say that
5,080,000 is taxable at 15% after deducting the 200k tax exempt. You

have to look at the table because the components of your net estate
are taxed differently. Effectively, 477,000 over 5,080,000 is not even
15%. Its lower than that, the effective tax rate.
Illustration
0
15K
120K
330K
12K
477k

2.

200,000
300,000
1,500,000
3,000,000
80,000
5,080,000

0
200,000
500,000
2,000,000
5,000,000

200,000
500,000
2,00,000
5,000,000
80,000

EXEMPT
-015,000
135,000
465,000

+
+
+
+

5%
8%
11%
15%

=
=
=
=

15,000
120,000
330,000
12,000
477,000

Married Decedent
Rules in Property Ownership between Spouses
If an individual decedent is married, how do we treat their properties?
If the marriage took effect after the Family Codes effectivity, Aug.
3, 1998, the absolute community of property governs. Prior to
that, its conjugal ownership of gains, unless a different property
regime was agreed upon.
What is absolute community of property?
Whatever property you bring during marriage is a common
property. What are exclusive are those which you receive from
gratuitous transfers, inheritances or donations, wherein theres no
mention on who owns it unless the donor/testator mentions that
both spouses co-owns it. Another exclusive property under such
regime is when one of the spouses is a prior descendant in a
previous message then those properties will be considered as
exclusively owned.
What is the rule on conjugal partnership of gains?
All the properties they acquired before marriage will remain
exclusive and what is common are those acquired during the
marriage by onerous title, using common fund, title/profession or
any acquisition using conjugal funds will form part of conjugal
property.

Page | 17

Illustration

SOLUTION

Decedent: Mr. A
Status:
Married on April 29, 2000
Resident Alien
Date of Death: November 13, 2012
Cause of Death: Highway Accident
Decedents Interest
Family Home
Lot, Exclusive
House, Conjugal
Other Real Properties, Conjugal
Personal Properties, Conjugal
One-Storey Commercial Arcade, inherited from his father, Mr. X
FMV, at the time of inheritance (November 1, 2007)
FMV, at the time of death
Others
Life Insurance Proceeds taken by Mr. A (irrevocable beneficiary:
religious institution)
Life Insurance Proceeds taken by Employer (revocable beneficiary:
Estate)
Amount received by Heirs under RA 4917
Receivable from Mr. Y, declared judicially bankrupt
Previous Transfers
Transfer of Real Property, Conjugal (with the right to amend or
terminate)
Sale of Personal Property, Exclusive
Selling Price
FMV, at the time of sale (May 2, 2010)
FMV, at the time of death
Expenses
Paid Funeral Expenses
Unpaid Funeral Expenses
Judicial Expenses
Casualty Losses(robbery took place November 15, 2012)
Outstanding Indebtedness for Home Loan (collateral: condo unit)
Principal, as of date of death
Interest, as of date of death
th
4 Quarter Real Property Taxes
Unpaid Medical Expenses for treatment of STI (hospitalization: Nov. 1520, 2011)

800,000
1,300,000
2,000,000
1,000,000
5,000,000
4,000,000

500,000
1,000,000
500,000
300,000

900,000
100,000
2,000,000
1,300,000

180,000
70,000
500,000
500,000
1,100,000
100,000
100,000

EXCLUSIVE
800,000

F. Lot
F. House
Other Real Properties
Personal Properties
Commercial Arcade
Life Insurance Proceeds
RA 4917
Receivable from Y
Revocable Transfer
Transfer for Ins. Cons.
Gross Estate
Less:
FE
JE
CL
UM
UT
CAIP

CONJUGAL

1,200,000
6,000,000

6,000,000

TOTAL
800,000
1,300,000
2,000,000
1,000,000
4,000,000
-0500,000
300,000
900,000
1,200,000
12,000,000

-06,000,000
-06,000,000

2,800,000
3,200,000
1,600,000
1,600,000

2,800,000
9,200,000
1,600,000
7,600,000

1,300,000
2,000,000
1,000,000
4,000,000
500,000
300,000
900,000

200,000
500,000
500,000
1,200,000
100,000
300,000

Less: S of SS
Less: Special Deductions
SD
1,000,000
RA 4917
500,000
FH
1,000,000
Medical
500,000

0
15K
120K
286K
0
421k

3,000,000
4,600,000

200,000
300,000
1,500,000
2,600,000
-04,600,000

In conjugal properties, we need to get the net conjugal estate in order

to get also the share of the surviving spouse because the other half
is owned by the surviving spouse. But before the SS can share in this
property we have to deduct ordinary deductions, i.e. the ELIT.
Under conjugal we find the family house is at 1.3M, other real
properties at 2M, personal properties 1M.
Commercial arcade is exclusive because it was inherited after marriage
valued at 4M, the FMV at time of death.
The 2 insurance proceeds will not form part of the GE because the first
is an irrevocable insurance having as its beneficiary a person other
than the estate, administrator or executor while the 2 nd insurance is
not taken by the decedent but by his employer.
Benefits received under RA 4917 is conjugal for 500k because this is
an asset derived by work.
Receivable from Y, an insolvent person, 300k is conjugal.
Revocable transfer, conjugal, 900k.
Transfer for insufficient consideration, exclusive, 1.2M.
For a total of 6M for exclusive, and another 6M for conjugal. Adding
both we have total gross estate of 12M.

600,000

0
200,000
500,000
2,000,000
5,000,000

200,000
500,000
2,00,000
5,000,000
80,000

EXEMPT
-015,000
135,000
465,000

+
+
+
+

5%
8%
11%
15%

=
=
=
=

15,000
120,000
286,000
-0421,000

Page | 18

What can reduce the conjugal estate to arrive at the net conjugal
estate?
ELIT expenses.
Funeral expenses, 200k, which is the limit provided by law since it is
lesser than the actual expense and the 5% of 12M the GE.
Judicial expenses, 500k, without limit so long as it pertains to
settlement of estate.
Casualty expenses which took place after decedents death at 500k.
Unpaid mortgage, 1.2M.
Unpaid taxes, because real property taxes accrue every January 1
whether you pay it in full or in 4 quarterly installments. It has already
accrued, 100k.
Medical expenses do not form part of ELIT. It is a special deduction. It
will not reduce the conjugal estate.
Claims against insolvent persons, 300k.
Total ELIT is 2.8M ordinary deductions.
How much is the share of the surviving spouse?
of 3.2M, which is 1.6M. The estate of Mr. A is only the Gross
estate minus the conjugal deductions. 6M exclusive, while 1.6M
which is of the conjugal estate.
We proceed with the 7.6M and reduce it with the other special
deductions which comprise of family home, vanishing deduction,
standard deduction, RA 4917, medical expenses.
In the example, how much is the special deduction?
1M for the standard deduction.
500k for the amounts received under RA 4917.
1M the amount limited by law for the family home. The lot is 800k
exclusive, while only 1/2 of the 1.3M house being conjugal which
is 650k. But law sets limit at 1M.
No vanishing deductions because donation was made outside of
the 5 years from donation.
500k medical expenses made within 1 year from death, which is
the limit, though the actual expense was 600k.
So total special deductions is 3M.
So gross taxable estate is 7.6M minus 3M special deductions, which
will result to a 4.6M net taxable estate.

Its tax due would be based on the table in excess of 2M but not over
5M. 2.6M will be subjected to 11%, while the first 2M will guaranty you
a tax of 135k, for a total of 421,000 estate tax due.
No estate tax credit because though he is a resident alien, the problem
did not provide for properties outside the Philippines.
Net Estate and Estate Tax Rates
1. Estate tax rates
2. Exemption from Estate Tax
3. Estate Tax Credits
Assuming Mr. A has properties located outside the Philippines can he
claim tax credit?
RC, NRC, RA can claim tax credit because they have properties
outside which can be taxed by a foreign country and would be
subjected to double taxation.
Assuming that 1.5M foreign estate taxes have been paid and the
Philippine tax due is only 1.415M, can the estate deduct the 1.5M paid
abroad?
No, because the amount of the tax credit will be subjected to
limitations.

L.

The law provides that the amount of credit in respect to the foreign
estate tax paid in a foreign country shall be allowed but shall not
exceed the proportion from which the credit is taken, which refers to
the Philippine estate tax against whom the foreign estate tax credit will
be deducted. This proportion refers to the net estate of the decedent
on properties located in the Philippines that is subject to Philippine
estate tax to that which bears to the worldwide net estate. It is not
gross, its NET. So the amount of credit in relation to the foreign tax
paid shall never exceed the Philippine estate tax.

Illustration
Amount of Credit foreign state tax
shall not exceed
the proportion from w/c the credit is taken
Phil. Estate Tax

Net estate or prop. located in the Phils. To subj. to Phil. Estate Tax
Worldwide net estate

Ex. Decedent is a NCR. Mr. A has properties located in the Philippines,

country A, and country B. Gross estate is 25M. Net estate prior to
standard deduction is 12M.
Which of this 2 figures will be useful in determining the foreign tax
credit?

The net estate. So the 25M will not matter. But in

determining the net estate, do not consider first the standard
deduction.
Taxable amount in the Philippines is 12M.
Standard deduction will later be computed in computing Philippine
tax due.
Using the table, Mr. As Philippine estate tax due is 11M because
12M minus 1M standard deduction, so 10M and over. 1,415,000
tax due. First 10M is 1,215,000, while excess of 1M is subjected to
20%, which is 200,000. So total of 1,415,000. It is even lower
than what was paid abroad of 1.5M on 9M properties.
Lets determine the limitation.
Global limitation put together country A and country B.
Country A + Country B
---------------------or 9M/12M
Worldwide estate

It produces the global limitation of 1,061,250. It is lower than

the 1.5M estate taxes paid abroad.

So definitely this figure will not pass (actual taxes paid

abroad) because the global limitation provides for a lower
amount. But that is not the end of the story.
Why do we have to have this limitation?

Because it is 1.415M, which is tax on the entire net estate a

portion of this tax imposed by the authorities refers to the 6M
properties that had already been taxed in country A and 3M
properties already taxed in country B. It has been paid. Now
if you want to claim this, only that proportion to which the
Philippines really imposed on. If the Philippines only imposed
a maximum of 20, then we cannot deduct the entire 1.5M.
Per country limitation (Please insert proper figures)

Page | 19

Country A = 6/12 *1.415 = 707,500 vs. what is paid abroad,

1.2M, 707,500 is lower.
Country B = 3/12 * (25% of 1415 = 353,750?) vs. 300,000 paid
abroad, the latter is lower
How much is allowed as tax credit?

The per country, because it is lower for the benefit of the

government.
Illustration
NRC

NE (before
Tax Due
SD)
Country A
10M
6M
1.2M
Country B
7M
3M
.3M
Phils.
8M
3M
1.415
25M
12M
- 1M SD
11M
1st 10M = 1,215,000
20% excess of 1M =
200,000
1,415,000

2.

GE

Global
Country A& B
WW

9M
12M

Per Country
Country A
WW
Country B
WW

6M
12M
3M
12M

1.5M

1.415M

1,061,250

1.415M

707,500

707,500

1.415M

353,750

300,000
1,007,500

M. Administrative Matters
1. Notice of Death
Is notice of death necessary in all cases?
a. If the transfer is taxable. In all cases transfers subject to estate
tax will always exceed 20K.
b. If the gross estate exceeds 20K.
If the net estate is only 200K or below, you are not taxable.
Assuming that the decedent is a non-resident alien you will have to
have a gross estate of more than 200K to be taxable. For a resident
citizen to be taxable since he has standard deduction of 1M allowed
plus ELIT and first 200K exempt then he has to have more than 1.2M
to be taxable.
To whom do you give notice?
The Commissioner. But if decedent is from the province, the
executor/administrator need not go to Manila to inform the CIR
herself. Maybe the RDO which has jurisdiction over the domicile of
the decedent at the time of his death.
When notice of death is necessary does it also mean that an Estate
Tax Return has to be filed?
Not in all cases.
So when is ETR necessary?

3.

4.

Where transfer of property is (i) subject to estate tax or

amount of transfer exceeds 20K or (ii) involves registrable
property or (iii) gross estate exceeds 200K.
Bank Deposits of a Decedent
If Mr. X leaves only a bank account with 20K balance and shares of
stock
in
a
domestic
corporation
of
50K,
should
the
executor/administrator file an ETR?
Yes. Because one of the property is a share of stock, which is a
registrable property with SEC.
The concept of requiring the filing of an ETR even if gross estate does
not exceed 200K is because the registration to the transfer of the
name of properties to beneficiaries would require registration process
and these institutions required to transfer names to new owners are
mandated to look into whether taxes were paid or not. The Register of
Deeds, for example, will never transfer title to the buyer if the
seller/transferor of the property has not paid the estate tax/income
tax.
If it is not subject to estate tax, what proof can you show for the
transfer?
The filing of the ETR whether tax is due or not will produce a BIR
tax clearance. The BIR will only issue such if tax has been paid or
return has been filed.
As far as shares of stocks are concerned, corporate secretaries cannot
record the name of the transferee in the stocks and transfer book
without a tax clearance accompanying the assignment of shares.
In that case, even if it only has a gross estate of 70K, there has to be
a corresponding tax return.
Whenever a decedent dies, what happens to his bank account?
It must be frozen upon their knowledge of the death of the
decedent, in the form of formal notice or obituaries. Bank then
has to freeze and no withdrawals, as a general rule. Except when
the heirs are allowed to withdraw an amount of 20K after securing
an authorization from the BIR for the purpose of facilitating the
settlement of the estate.
When will the bank allow the release of the entire fund?
After the certification from the CIR is issued that the estate tax
has already been paid.
What if the bank account is a joint bank account? May the surviving
depositor withdraw the other half?
No. Same rules apply as above.
Filing of Estate Tax Return
In the filing of an ETR whenever the gross estate exceeds 2M, what is
the additional requirement?
There has to be a certification from a CPA stating the itemized
assets, itemized deductions, and the tax due.
When should the ETR be filed?
Within 6 mo. from death extendible for 30 days for meritorious
grounds.
Can extension be ground if the reason for the late assessment is
due to fraud, negligence or intentional disregard of law?

No.
Payment of the Estate Tax Due
When should the ETR be paid?
Pay as you file. Unless the filing is also extended then you can pay
the ET together with the extended filing.
Page | 20

a.

b.

Person primarily liable to pay the estate tax

Who is primarily liable to pay the tax of the estate?
The estate through the administrator/executor. The heirs are
only liable secondarily and only up to the extent of their
shares in the estate. But if the government does not collect
from the estate wherein it has to file a government action it
may happen that it can be collected from one visible heir but
at all times the government can never collect beyond his
distributive share. If the heir will receive 1 million in estate
and the tax is only 100K the govt will only be liable for 100K.
But if only one heir is visible the government can collect from
that heir only 100k but also the taxes of the other heirs but in
no case will exceed 1M received by that heir. Afterwards, that
heir will collect from the other heirs.
Who's the person primarily liable to pay the estate tax?
The person primarily liable to pay the estate taxes would be
the executor or the administrator - primarily liable. There are
the ones who can ask for a discharge from the personal
liability for the estate tax.
I think you have come across this one in succession wherein the
estate administrator will have to ask for discharge from personal
liability otherwise they would be still be liable for estate taxes
once it is found out later that there is a deficiency tax payment.
How about the heirs, are they not liable to pay the estate taxes?
Are the heirs liable to pay the estate tax? What is the remedy of
the government if the executor or administrator is not able to pay
the estate tax? There has to be person who will pay the tax. The
estate (?) properties left by the decedent. There has to be a
person who would be personally liable for the tax. Yes, we know
that the liability of the executor or administrator insofar as estate
tax payment is concerned is that they are primarily personally
liable. How about the heirs, are they at all liable for the tax? Are
the heirs liable or not liable?
They are still liable but only subsidiarily and they can only be
liable to the extent of their proportionate share in the estate.
Supposedly they shall only be liable to the extent of the tax
due on their distributive share.
But in cases where the government has to file a tax collection
case or impose the lien and there is only one identifiable heir
while the others may be found, that heir can be liable to the
extent of their entire distributive share. He can actually seek
reimbursement later on from the other heirs.
Extension of time to pay estate tax
Is there a longer extension for the payment?
CIR may extend it for a period not to exceed 5 years in case
of judicial settlement or a period not to exceed 2 years in
case of extrajudicial settlement when the payment of tax
would impose undue financial hardships on the part of the
heirs, executors/administrators.
So look into first if the request for extension was made before
the expiration of the statutory period for filing. You can never
request for an extension if the date has already expired.
Youre required to file on the 6 th month or no extension for
filing is made you can only request for extension to pay
earlier than the statutory due date of 6 mo. Whenever a

request for extension is granted it is usually accompanied by

a requirement to post a bond by the BIR not more than twice
the value of the estate tax.
If due date is Nov. 15, 2012 and it is extended 2 years, Nov. 15,
2014, basic tax of 2M, do you need to pay interest on the 2M?
It does not mean that you only have to pay the basic tax at
the time of the extended due date. This is still forbearance of
money because you deprive the government of amounts due.
So you have to pay basic tax plus 20% per annum interest.
But if payment is still not made on the extended due date, you
pay the basic tax plus interest of 20% per annum, plus 25%
surcharge plus compromise penalties. This will only surface after
the extended date.
Illustration

Nov. 15, 2012

Basic Tax
2M + 20% interest

BT + 20% interest
+ 25% surcharge
+ compromise penalty
Nov. 15, 2014

Extension
Would the extension that has been granted to the estate or
executor/administrator suspend the running of the period to
assess the estate for any deficiency taxes?
The government as provided by law is given as a general rule
3 years from the time of the filing of the return to look into
and verify whether the tax return that you have filed or paid
the tax is correct.
So if you ask for an extension of 2 years or 30 days, will that
period be extended as well to give the government an
extended time to make an assessment? Example today, Nov.
15, is the statutory due date, supposedly the 3 year period
will start to run today and 3 years end so they might audit.
But you asked for extension. Does that mean that after 2
years the government will be left with only 1 year to audit?
Will it suspend the running of the period to audit?

Always think in favor of the government.

Requests for extension to pay or file will suspend the

running of prescriptive period to audit. It will commence
to run after the expiration of the extended due date.
... Death unless extended for another 30 days and (?) of filing or
the granting of (?) for the estate administrator or executor to
validly ask for the extension for the filing for payment, it must be
claimed prior to the expiration of the (?) due date - prior to the
expiration of the 6 month period to file and pay the estate tax.
Motion filed with Probate Court
When to pay the estate tax
When should estate taxes be paid - within 6 months from the date
of death unless extended for another 5 years for judicial
settlement and 2 years for extrajudicial settlement when the
payment of taxes would impose undue hardship to the estate
administrator or executor.
And the effects of having extension for the filing and payment
would be that during the period of extension the estate is still

c.
d.

Page | 21

e.

liable to pay interest on the basic tax that has been belatedly
period. And during the same period, the statute of limitations for
the government to assess the estate taxes would be suspended.
Can the estate tax be paid on installment?
The estate tax return can be filed belatedly if there is
extension granted.
It can be paid as well later if an extension is given. Insofar as
paying the estate tax on installment is concerned, payment
on installment is allowed but the distribution of the properties
will be dependent on the proportion of the tax that has
already been paid - so to the extent that only this portion was
paid of taxes, then only that portion of property can be given
of clearance for distribution.
Because payment of estate tax will result to the issuance of
the estate tax clearance coming from the BIR which actually
is a GO signal for the distribution of properties and for the
transfer of the name to the new owners.
Where should the estate tax be paid?
So you have options where to pay the estate tax.
Where to pay the estate tax
Options where to pay estate tax:
a. Authorized Agent Bank, which is covered by the revenue
district office which has jurisdiction over the domicile of the
decedent at the time of his death. This will refer not only to
the last item district but to all authorized agent bank within
the same jurisdiction.
b. Duly authorized Treasurers of the city or municipality in which
the decedent was domiciled at the time of his death.
c. Collection officers or directed by the district revenue , it
cannot be any other office but only those that have
jurisdiction over the domicile of the decedent at the time of
his death.
This will only apply if decedent is a resident citizen or resident
alien because we will know that he has a domicile somewhere in
the Philippines.
What if the decedent is a non-resident citizen or a non-resident
alien? Paid where?
Office of the Commissioner.
The rule says if the decedent is a resident citizen or alien, it has to
be filed with the revenue district office and paid with the
authorized agent bank, etc. having jurisdiction over the domicile
of the decedent at the time of his death.
If non-resident, then you consider the registration of the executor
or administrator, RDO or admin district officer having jurisdiction
over the executor or administrator.
If that executor/administrator is not a registered taxpayer, then it
must be where his legal residence is located.
If there is no executor/administrator in the Philippines, then the
estate tax return and estate taxes will have to be filed and paid
with the Commissioner. The Commissioner is not be represented
by the National office but rather by the revenue office 39 in
Quezon City which accepts payments from non-residents.
Safeguards given by the law in order to collect or promote the
collection of taxes.

Lawyers are required to inform the Bureau to about the extrajudicial settlement of the properties.
The register of deeds is also required to inform the Bureau of
any attempted transfer of any real properties of which taxes
are paid. The bank has to freeze the account.
The judge will also inform if it ventures into judicial
settlement.
So there are various agencies tasked to inform the bureau of
internal revenue in order for it to monitor the collection of
taxes.

Page | 22

DONORS TAX
(Sections 98 to 104 of the Tax Code, as amended and Revenue Regulations
No. 02-03)
Course Outline
A.

B.

Donors Tax
1. Definition
What is donor's tax?
Donors tax is imposed on gratuitous transfers of rights and
property that shall take effect during the LIFETIME of the donor.
Donor's tax is taxed only on the liberality of a person of transmitting
properties during his lifetime. Gratuitously!
Donor's tax can be imposed on direct or donative intent and it can also
be imposed on an indirect gifts or donations without any donative
intent.
2. Nature
Is donor's tax a property tax?
NO! It's an excise tax!
3. Purposes
Purposes of donor's tax?
a. To raise revenues (lifeblood doctrine)
b. To supplement estate tax
This is to safeguard the right of internal revenue to collect
taxes on gratuitous transfers because in the absence of
donor's tax, individuals will just transfer properties prior to
death in order to avoid estate tax. So it is a supplement to
estate taxation.
c. To prevent avoidance of income tax through the device of splitting
income among numerous donees
Not only supplements but it also minimizes or avoids tax
evasion, wherein huge income earners by donating properties
without paying any donor's tax, no taxed will be imposed on
the transfer and reducing the income tax. Remember income
tax, one of the deductible items is donations and
contributions.
Now, if that mode of decreasing the income tax is followed by
the taxpayer, without any correlative donors taxation, then
income tax will have to die down without any additional
collection from the government. Income tax is allowed to go
down by the deducting the donations as an expense, but
there is a collection of donors tax from the donation made.
Imposition of Estate Tax
1. Law governing its imposition
What law would govern the imposition of donors tax?
The statute at the time of perfection and completion of the
donation.
2. Accrual of the tax
If I give this table to Mr. X, no donors tax has yet accrued. It will only
accrue at the time it is delivered. So that if there be a different law at
the time of identifying the gift, and a different law at the time it was
delivered after it had been accepted, the latter law at the time of
acceptance and delivery would govern in the computation of the
donors tax.
When would donors tax accrue?
When the donation has been perfected and completed.

C.

D.

Perfection means the gift has been accepted by the donee

and was made known to the donor during both their lifetime

Completion means the gift is delivered either actually or

constructively. Constructive delivery is for gifts that are real
properties. You can deliver either the key or the document.
Can you require the donee to pay the donors tax instead?
YES, based on the amount of gift.
Can the basis of the 30% be the net of the tax?
NO
Cant this not be considered as a diminution of the gift?
NO
There is such as diminution of the gift which actually reduces the
tax base for donors taxation but this is NOT one instance.
Whenever there is an agreement between a donor and a donee that it
will be the donee who will be paying the donors tax is allowed. It is
allowed as an agreement or contract between the two parties. But in
case payment is NOT made by the donee, the government can only go
after the statutory taxpayer which is the donor. So the donor should
be expecting not only relinquishing not only 100% of the value of the
gift plus 30% of the value of the gift as tax. The government is
expecting 30% of the gift, not 30% of the net gift.
Kinds of Donors
1. Individual Persons
a. Resident Citizen
b. Non-resident citizen
c. Resident Alien
d. Non-resident Alien
2. Juridical Persons
a. Corporation
b. Partnership
Kinds of Donees, as to relationship to Donor
In sofar as th relationship between the donor and the donee, how
do we identify their relationship?
1. Stranger
Stranger Relationship
Stranger is not a brother, sister (whether by whole or half-blood),
spouse, ancestor and lineal descendants; or a relative by
consanguinity in the collateral line within the 4 th degree of
relationship
2. Non-Stranger
Example: If your great-great-grandfather (GGF) makes a donation to
you, can you consider your relationship to your GGF as a stranger or
non-stranger relationship?
NON-STRANGER relationship because GGF is an ancestor
regardless of the number of degrees.
Take note that juridical person can never be a non-stranger.
The concept of a non-stranger is someone related by blood.
Non-stranger Relationship
Brother, sister (whether by whole or half-blood), spouse, ancestor
and lineal descendants; or a relative by consanguinity (not
affinity) in the collateral line within the 4 th degree of relationship
All are related by blood except the spouse and the legally adopted
child.
SO which is the more preferable relationship?
The more favorable is when the donee is a non-stranger
Page | 23

If the donor to the donee has a relationship of a stranger

relationship, the taxability is at a flat rate of 30% (for example
a friend or a juridical entity). So thats high. If the relationship
between the donor and the donee is that of a non-stranger, it will
be covered by the first 100K-exempt and to the first rate of
2% up to the maximum rate of 15%. So as much as possible,
you are probably encouraged to donate only to non-stranger.
However, not all of our co-non-strangers are capacitated to receive a
donation from us such as spouse to spouse.
Requisites of a Taxable Gift
1. Irrevocable
GR: Revocable transfers are inter vivos transfers but taking the form
of testamentary disposition and it will form part of gross estate subject
to estate tax.
XPN: Revocable transfer during the lifetime of the transferor will be
subject to DONORs tax if:
a. Donor has relinquished his reserved powers over it making it an
irrevocable transfer.
b. when the revocability of the transfer is based on a condition that
has been complied with other than by death
In either of the two conditions, the transfer will be regarded as an
irrevocable transfer that may be subject to donors tax
Why other than by death?
Because if the fulfillment of the condition to the reservation of
powers has been through death then it will be considered as
testamentary disposition. That the reserved powers are only
relinquished at the time of death, it will be subject to estate tax
not donors tax.
2. Donative Intent, in general
Donative intent will only be required for a gift directly made or with
the intent really to donate or to increase the patrimony of the donee.
Instances where donative intent is NOT necessary but still subject to
Donors tax:
a. Transfer for insufficient consideration
Can one transfer for insufficient consideration be both subject
to donors tax and estate tax?

NO
If a person makes a transfer for less than full consideration
and it is found out during his lifetime he will have to pay
donors tax based on the difference between the FMV at the
date of the execution of the contract to sell or deed or sale if
there is no contract to sell and the value of the consideration.
But if the transfer for less than an adequate and full
consideration is NOT discovered during the lifetime of the
transferor but only discovered at the time of settlement of the
properties when he dies or in the inventory taking of his
properties it will be subjected to estate tax.
b. Condonation of debt not based on a service that has been
rendered or will be rendered in the future
Rules in the renunciation of the share in the estate:
If the renunciation is general (did not specify to whom the
renunciation would be in favour of), then it would not be subject
to donors tax because it will simply be considered as accretion
under our laws on succession. In effect, what has been renounced
will accrue back to the estate and will be redistributed among the

E.

remaining heirs. The properties renounced never formed part of

the properties of the renouncing heir therefore, no donation took
place. The renounced share becomes part of the estate, subject to
estate tax.
If renunciation is special (heir specified to whom the renunciation
is in favour of), it would be subject to donors tax. Important part
here is that renouncing heir is already the owner of the share, so
when it is renounced in favour of specific persons, it is considered
as a donation, subject to donors tax.
Estate of Fidel F. Reyes and Estate of Teresita R. Reyes vs. CIR, CTA
Case No. 6747, January 16, 2006
DIGESTED BY: Jasper Pelayo
FACTS:
Petitioners are the estates of the late spouses Fidel F. Reyes and
Teresita R. Reyes.
On January 23, 1997 and August 24, 1998, Spouses Fidel F. and
Teresita R. Reyes died respectively, leaving various conjugal and
paraphernal, personal and real properties to their legal heirs.
On December 29, 1997 and February 24, 1999, estate tax returns
were filed for the estates of Fidel F. Reyes and Teresita R. Reyes
(petitioners") respectively, pursuant to the Voluntary Assessment
Program C'VAP") of the Bureau of Internal Revenue C'BIR''). On
June 29, 1998, an amended estate tax return was filed for the
estate of Fidel F. Reyes. On October 17, 2001, the estate of
Teresita Reyes paid additional estate tax in the amount of
P53,675.52.
By virtue of a Letter of Authority, Regional Director Oscar L Sevilla
directed BIR Regional Officer Romualdo I. Plocios and Group
Supervisor Consuela C. Sy to examine the books of accounts and
other accounting records in ascertaining the tax liability of the
estate of Teresita R. Reyes.
On the basis of the said investigation, respondent issued a
Preliminary Assessment Notice (PAN'') finding petitioners
accountable in the aggregate amount of P7,837,512.01
representing deficiency estate taxes and donor's tax.
Dissatisfied with petitioners' counsel explanation in reply to the
PAN, the respondent sent a Formal Letter of Demand dated
November 29, 2002 together with the Details of Discrepancies
with the corresponding Final Assessment Notices C'FANs'')
demanding payment of petitioners' tax obligations in the amount
of P8,776,279.00.
Respondent ratiocinated that deficiency estate tax in the amount
of P6,766,193.05 for the estate of Fidel F. Reyes was assessed on
the basis of the failure to declare actual exclusive/capital and
conjugal properties of the decedent. The delinquency estate tax
assessment in the amount of P1,793,453.58 for the estate of
Teresita R. Reyes was attributed to the inclusion of some conjugal
properties which actually belong to her spouse Fidel Reyes and an
overstatement of vanishing deductions claimed. The delinquency
donor's tax was assessed as a result of the partition of the
estates per extra-judicial settlement concurred by all the
legal heirs of the decedents.
A demand to pay compromise penalty for late filing/payment of
estate tax and donor's in the sum of P37,900.00 was likewise
made by the respondent.
Page | 24

On February 4, 2003, petitioners protested the assessments.

According to petitioners, the FANs are void for having been issued
by the respondent beyond the three (3)-year period to assess and
collect taxes. Respondent belatedly issued the FANs more than
three (3) years from the time of the filing of the tax returns of the
estates of Fidel and Teresita Reyes on June 29, 1998 and February
24, 1999, respectively. The ten (10)-year period to assess estate
tax returns does not apply because the returns are devoid of any
falsity or fraudulent intention to evade taxes. At the very least,
petitioners committed a mistake in using the market values in the
tax declaration, instead of the zonal values as a basis for valuation
of the properties of the late Fidel Reyes. Also, there was an
erroneous classification of the properties as conjugal and/or
capital/ paraphernal. Finally, the computation of vanishing
deductions was miscalculated in the estate return of Teresita R.
Reyes. The other errors have proven to be beneficial to the
government because the properties subject of the assessment are
no longer owned by the estates or they have no more market
value. The estate tax return of the estate of Teresita R. Reyes
shows that the accountant even failed to deduct the standard
deduction of P1,000,000.00 and family home, also in the amount
of P1,000,000.00 from the gross estate. The additional payment
of taxes under the VAP was not even credited to the estate of the
decedents.
On the other hand, the assessment of donor's tax against
the heirs of the decedents is bereft of any legal and factual
bases. The conveyance of the properties takes place after a
clearance is issued by the respondent. Thus, the nature of
the transfers is one of mortis causa and not inter vivos
because the disposition of the properties occurs after the
death of the transferors. The heirs could not have donated
the decedents' properties which they did not own in the
first place. A repudiation of their share in the inheritance
by the mere act of relinquishing their aliquot part in any of
the properties of the estate in favor of the co-heir is
tantamount to a waiver on their part of their ownership
thereto. Moreover, the assessment is defective in form
because respondent failed to identify the donees, the
properties donated and how the assessment of delinquency
donor's tax was computed.
ISSUE: Whether or not petitioners liable to pay deficiency/delinquency
donor's tax.
HELD:
Petitioners are not liable to pay any deficiency/delinquency
donor's tax.
Petitioners are contesting the said deficiency donor's tax
assessment on the grounds that (1) the transfer of ownership that
took place was in the nature of transfers mortis causa, thus,
donor's tax, which contemplates transfers inter vivos, is not
applicable, and (2) the legal requirements of a valid assessment
under Section 228 of the NIRC of 1997 were not complied with.
Assuming that the assessment was valid in form, petitioners claim
that it is devoid of legal basis because the heirs could not donate
something that they did not own. A repudiation of the share in the
inheritance by the mere act of relinquishing their aliquot part in

3.

4.

any of the properties of the estate in favor of a co-heir is

tantamount to a waiver on their part of their ownership thereto.
The Court agrees with the petitioners.
The act of some of the legal heirs of the Spouses Reyes in waiving
their rights to part of the estate in the extrajudicial settlement is
considered as an act of repudiation and is purely voluntary and
free. The effect of the heirs' repudiation retroacted to the moment
of death of the decedents. This militates the concept of a donation
which is in the nature of transfer inter vivos meaning, that the
conveyance of ownership from the giver to the receiver transpires
during the lifetime of the former. Here, the legal heirs could not
have transferred ownership over the properties which do not
belong to them because they have renounced their rights over the
estates. The legal heirs act of repudiation took away their right to
inherit, thus, any part of the estate was never theirs. Such
repudiation, therefore, could not be considered as a donation.
Moreover, in legal succession, the share of the person who
repudiates the inheritance shall always accrue to his co-heirs.
Accretion is a right by virtue of which, when two or more persons
are called to the same inheritance, the part assigned to the one
who renounces is added or incorporated to that of his co-heirs.
A number of BIR Rulings have supported the above view. In BIR
Ruling [DA-143-01], dated August 30, 2001, the BIR ruled that in
cases when the children renounced their respective share in the
inheritance, they did not donate the property, which had never
become theirs. Such being the case/ the renunciation is not
subject to donor's tax imposed under Section 98 of the 1997 Tax
Code.
Based on the foregoing, respondent has no legal basis in
assessing petitioners of deficiency donor's tax in the amount of
P216,632.54.
Capacity of the Donor
Donor must be capacitated to enter into contracts at the point when
the donation is perfected.
Donations between husbands and wives are void, except moderate
gifts in times of family rejoicing. Prohibition applies to spouses under
absolute separation of property to protect third persons. The
moderate-ness of gifts depends on the earning capacity of the
husband and wife.
What about donations to children?
Capacity of the Donee
The donee need not be capacitated to receive the gift. It can be
received by his guardian or legal representative.
Exception Incapacitated donees:
a. Those under civil interdiction
b. Spouses and man and woman living together without the benefit
of marriage (to avoid undue influence)
c. Lawyers who notarized the will is incapacitated to receive donation
or inherit
d. Gifts to public officers or their spouses or relatives by reason of
public office
e. Those incapacitated to receive in succession due to undue
influence (i.e. priests, doctors, nurse, lawyer, one who accuses
the donor on an attempt on his life etc)

Page | 25

Void donations are not liable to donors tax but still subject to income
tax because there is a gain or profit on the part of the done
Acceptance by donee is necessary
Acceptance must generally be made personally or can be made
through another as long as authorized to accept such SPECIFIC
donation (authorized person with a special power for that purpose or
with a general and sufficient power)
Reduction in the Patrimony of the Donor
Actual or Constructive Delivery of the Gift
Should the property be actually delivered for donors tax purposes?
No. May either actual or constructive delivery. Not necessarily an
actual delivery at all times.
Review:
Again, acceptance by the donee must be made during the lifetime.
Meaning both parties should be alive at the time of acceptance of
the gift. The notice of acceptance should have reached the donor,
and the property mush have been delivered (maybe actual or
constructive), for there to have a perfected gift.
And, in this case, there will be an increase in the patrimony of the
donee after acceptance and delivery but NOT subject to income
tax because it is already subjected to donors tax. Remember
exclusion from gross income?! Remember dayon! In cases of gifts,
it will not be subjected to income tax. It means that valid gifts
subjected to donors tax are no longer subject to income tax.
Acceptance by the Donee during Lifetime
Is it necessary that the donee accept the gift?
Yes. Acceptance is necessary for the perfection of the donation.
Can somebody accept in behalf of the donee (or for the donee)?
Yes. Especially when the donee is a minor (or unborn child). It will
be accepted by the one who will legally represent the child.
What if the donee is a person who is already emancipated, can
acceptance be made by somebody else? Ex. Ms. Biscayda will give gift
to Mr. Bone-T. Can you accept the gift in behalf of Mr. Bone-T? You
want to join the picture ba. LOL =)
Yes, if authorized with SPA.
GR: Acceptance must generally be made personally, or
EXC: It can be made through another as long as authorized to accept
such SPECIFIC donation (authorized person with a SPA or Special
Power of Attorney for that purpose or with a general and sufficient
power)
For example: The Acceptance was made by the donee. But prior to the
acceptance being transmitted, the donor has died. Is there a perfected
gift?
No. Acceptance must be made known to donor during his lifetime.
Increase in the Patrimony of the Donee
Forms to Effect Donation
Is there a necessary documentation to be observed for a donation to
be perfected?
GR: In writing or orally
EXC: (1) Personal property exceeding P5,000 which should be in
writing, and (2) Real property regardless of amount which should
be in public instrument.
Rules:
a. Oral donation with simultaneous delivery personal property
amounting to P5,000 or less; acceptance is also done orally.

b.

5.
6.

7.

8.
9.

F.

In writing (whether public or private) personal property

exceeding P5,000; acceptance also done in writing whether made
on the same instrument or not.
c. Public document (otherwise void ab initio) real property
regardless of the amount; acceptance may be made in the same
instrument or in a separate public instrument or in a separate
public document, however, if on a separate document, the donor
shall be notified of such acceptance in authentic form and noted in
both instruments.
Properties Covered as Gifts, in general
What are the properties that can be considered as gifts of the donors? How
do we classify the properties?
1. Real Property
2. Personal Tangible Property
3. Personal Intangible Property
How will these be valued?
General Rule: all real properties, personal tangible properties and
personal intangible properties, wherever situated, are valued at fair
market value at the time of making the donation. (note: same as
estate taxation)
What is meant by Gross Gift?
Whether the transfer is in trust or otherwise
For example, Mr. A would like to give a gift to a minor. Since the child is a
minor, the gift was given through a trustee - let's say trustee bank - is the
gift or delivery of the gift to the trustee bank subject to donor's tax?
If revocable donation: it is not subject to donor's tax, because in a
revocable transfer, the donor has not relinquished the control,
possession or ownership over the property.
If irrevocable transfer: it will be subject to donor's tax because the
donor has already relinquished control or ownership over the property.
Let's just say that the transfer made by the grantor-donor to the trustee in
favor of the beneficiary who was a minor is irrevocable but the trustee will
give the gift to the beneficiary-minor when the latter reaches majority age.
Will the transfer from the grantor to the trustee be subject to donor's tax
or will the donor's tax apply only upon the transfer from the trustee to the
beneficiary?
The first transfer from the grantor to the trustee will be subjected
to donors tax and not on the second transfer, which is from the
trustee to the beneficiary even if the gift has not reached the
beneficiary-minor.
The law on donor's taxation provides that donor's tax will apply in
transfers made in trust or otherwise. Otherwise is the general rule
while if the transfer is still in trust and in favor of a beneficiary, even if
the property has not reached the beneficiary-donee, the first transfer
is already subjected to donor's tax. So the layer of transferring from
the grantor to the trustee is already subjected to donors tax.
When the trustee eventually transfers the property to the beneficiary upon
reaching majority age, will the subsequent transfer be subjected to donor's
tax?
No, it will not be subjected to donor's tax because it has already been
subjected to a previous tax on the first transfer. It is like an
exemption of estate taxation wherein the transfer is from this person
to another person, the second transfers are no longer subject to estate
tax. In the same manner, this situation, the subsequent transfer is not
subject to donor's tax.
Page | 26

When you say that the gift is subject to donor's tax, it means all real,
personal tangible or personal intangible wherever situated in whatever
capacity it is held, it is already subject to donor's tax except in the case
when the donor is a non-resident alien, he will only be subject to donors
tax on what type of properties?
Subject to donor's tax on:
1. Real property situated in the Philippines.
2. Personal tangible properties situated in the Philippines.
3. Personal intangible properties situated in the Philippines, subject
to the rule of reciprocity.
Rule of reciprocity: that when the country or domicile of that
non-resident alien allows the same exemption or does not
impose the same tax on intangible personal properties of
Filipinos residing in their country, we also will not subject the
non-resident alien's personal intangible properties situated in
the Philippines to donors tax.

1.

Illustration
DONOR
RC
NRC
RA
NRA
1.
2.
3.

G.

REAL
w/in w/o

w/in

T-PERSONAL
w/in w/o

w/in

I-PERSONAL
w/in w/o

w/in

Real Property
Personal Tangible Property
Personal Intangible Property
G.R. as long as it is located within the Philippines, or situs in the PH, it
shall be subjected to donors tax.
Exemptions to Non-resident Aliens, when available
Exemptions to Non-resident Aliens, when the country or domicile of a
resident alien, allows it as an exemption or does not impose donors
tax, all intangible personal property of Filipinos not residing in their
country, then we also do not subject their Personal Intangibles to
donors tax.
So when you look into the location of the property for purposes of
donors taxation, the situs of the property is determined at the time of
the donation. That means completion of the contract of donation. So
from the time when the acceptance of the donee is communicated and
made known to the donor.
Transfers for Less than an Adequate Consideration
G.R. All transfers of assets for less than an adequate consideration is
subject to donors tax if discovered during the lifetime of the donor.
Q: Are all types of assets transferred for less than an adequate
consideration be subject to donors tax, the transfer discovered during the
lifetime of the donor?
Where property, other than real property referred to in Section 24(D),
is transferred for less than an adequate and full consideration in
money or money's worth, then the amount by which the fair market
value of the property exceeded the value of the consideration shall, for
the purpose of the tax imposed by this Chapter, be deemed a gift, and
shall be included in computing the amount of gifts made during the
calendar year.

2.

All properties transferred for inadequate consideration shall be subject to

donors tax, except if the property is already subject to capital gains tax.
Only real properties which are classified as capital assets can be subjected
to capital gains tax.
Ordinary Asset
Fair market value at the time of the execution of the Contract to Sell or
execution of the Deed of Sale (not preceded by a Contract to Sell) vs.
value of consideration
Ex: Mr. Ocupe has a capital asset located in China valued at 10M which
he donated to Mr. Labasan for consideration of P1.00, is it subject to
donors tax? (Ms. Tiu did not answer directly, but he quoted yet again
the answer that as long as it is not under Sec. 24(d) or not a capital
asset, it will be subjected to capital gains tax.)
You sold your property not located in the Phil. to Mr. Labasan for 1
peso, is it subject to donors tax or not? You sold it for 1 peso a real
property and it is a capital asset because you are not into business and
the real property is worth 10M. is it subject to donors tax?
The law provides that assets except those that are covered under
Sec. 24(d) if transferred with less than or adequate consideration
are considered as a gift subject to donors tax base on the
difference of the fair market value at the time of the donation and
the consideration.
Capital Asset
Exempt assets- these are assets covered under Section 24(d). These
are real properties that are classified as capital assets but for it to be
subject under Sec. 24(d) these real properties that are classified as
capital assets must be located in the Philippines because if not located
in the Phil. Its not subject to 6% capital gains tax therefore in the
example even if the property belong to a resident citizen who is
taxable on properties within and without and that property is a capital
asset to him but since the property is not located in the Philippines
then that property is not covered by Sec. 24(d). Then not being
covered by Section 24 (d) then it is covered under the general rule
that the transfer of property with inadequate consideration is covered
by gift tax or donors tax. So the answer is it is still covered by donors
tax.
You have to be careful because when it refers to Sec. 24 (d) it does
not simply say capital asset there are requisites and the reason why
this is excluded is because capital assets located in the Phil. That are
real properties are already subject to 6% capital gains tax without
regard to the difference of the income. It is base on the gross selling
price or the fair market value. So it is important for you to know what
the ordinary assets are and what the capital assets are so that you will
know if it is subject to donors tax or capital gains tax. But the point of
distinguishing here is only as far as real property is concern because if
what has been transferred is a personal property then it is always
subject to donors tax.
The basis of the donors tax would be the difference between the fair
market value and the consideration or the money receive.
On what day do we reckon the value? Is it the day of execution of the
deed of sale, all the time?
The fair market value shall be reckoned when the deed of sale is
executed or the contract to sell, whichever comes first. Now if the
sale was evidence only with a deed of absolute sale then it is the

Page | 27

H.

I.

date when the deed was executed. But when there is a contract to
sell then the contract to sell fair market value
Exemptions of Certain Gifts vs. Deductions from Gross Gift
What is the difference between exempt gifts from deductions?
Exempt gifts are gifts that are not subject to donors tax while
deductions are those which diminishes the value of the gifts given; it
will be treated first as part of the gifts subject to tax then as a
deduction.
Exemptions are gifts that are not subject to donors tax, while deductions
are those items which diminish the value of the gift.
In income tax, exemptions are income that is not subject to income tax,
therefore, they need not be declared as part of the income tax return
(ITR). Deductions, on the other hand, will always form part of the ITR
because it will diminish the value of the gross income subject to income
tax. In donors tax, however, something is different. Exemption, although
exempt from donors tax, it has still to be reflected as part of gross gift. If
you look at the form of the donors tax return (DTR) you will notice that all
gifts will comprise the gross gifts whether it is taxable or not. What will
reduce the gross gift in order to arrive at the net gift is not only the
deductions but also the exemptions, simply wiping off the exempt gifts.
Talking of exempt gifts and taxable gifts, are donations for election
campaign either to an individual or to a political party or political
machinery subject to donors tax? Are donations for election campaigns, for
an individual or a party, subject to donors tax? Does the Tax Code provide
for its taxability?
It shall be under the Election Code. Section 13 of RA 7166 provides
that contributions for electoral or political campaigns are exempt from
donors tax.
Recently, the BIR issued a regulation, 7-11 (2011), reiterated that it is
not subject to the donors tax but as weve said there must be a
proper accounting or report as to how the proceeds of the donation
were spent because normally, when a donor gives a contribution for
the election campaign, it gives or increases patrimony/assets of the
politician, so will it be now subject to income tax because it is not
subject to donors tax.
What is really the purpose of the donation?

It is for the election campaign of these individuals or parties. IT IS

NOT SUBJECT TO INCOME TAX EITHER since it is not intended to
increase the patrimony/assets of these politicians but rather it
shall go to their electoral campaigns provided that as a
requirement, there must be a proper accounting as to how it will
be spend. If not complied with, it will be subject to DONORS or
INCOME TAX.
Exemptions of Certain Gifts Allowed to a Citizen or Resident
What are those things that are exempted for Citizens, NRC and RA?
a. Dowries or Gifts on account of marriage of a child
b. Gifts made to or for the use of the National Government, its agencies
or political subdivisions, not conducted for profit
c. Gifts in favour of an education and/or charitable, religious, cultural or
social welfare corporation, etc.,
There are 3 main categories that are considered as exempted gifts allowed
to a Citizen or Resident.
Under the rulings or opinions, the exemptions neither revolves around
these categories
1. Dowries or Gifts on account of marriage of a child

Who should be the donor?

The parent since the recipient is of course his or her child.
Must the child be legitimate?
No. It can be illegitimate, legitimate, legally adopted can be a
recipient
Mr. X gives a gift to his child worth 1 M in cash, 2 years prior to the
marriage of the child.
Is it taxable? Can the gift be given prior or after the marriage?

YES. There is no time frame to consider if the gift is given

prior to the marriage of the child but after the celebration of
marriage, it must be given within 1 year after its celebration.
We can say that there is partial payment by the donor to the
done.
Is the entire dowry exempt from donors tax? To what extent is it
exempt?

The first 10,000 only

REQUISITES:
a. Given by the parent
b. Given to the child
c. For account of the marriage of the child
d. Prior to the marriage of the child or within 1 year after the
celebration of marriage
e. Exemption shall not exceed P 10,000
If the 1M is given by both the parents, since we have this presumption
that the money is conjugal, up to what extent is the dowry exempt?
To the extent of P 10,000 for each. Since the husband and wife
(parents) are considered as separate donors. So that the 1M
donations, is considered, half (500,000) and half (500,000)
donated by them, so 20,000 will be exempt from donors tax from
the 1M.
Dowries or gifts given by the parent to a child (legitimate, recognized
natural or legally adopted) on account of marriage.
The gift has to be given before the celebration of the marriage or 1
year after the celebration of marriage.
Up to the amount of 10k only. Even if you have 12 children, give each
child a dowry or a gift it wouldnt really matter to the BIR the
accumulation of 10k of the 12 children to the total of 120k gift.
What if the marriage did not push through? If a parent gives gift on
account of marriage, within 30 days that 1M has to be paid of taxes.
Just that the tax paid was less than the tax on the 10K dowry. Can you
say that they will have to file for a refund because the marriage did
not take place and the child return the gift?
There has to be a refund because the gift was returned.
What if marriage took place and dowry was claimed as an exempt
gift but the couple separated after a month. Can the BIR claim the
tax on the 10k dowry?

No. Because the marriage has actually taken place.

Parents give son dowry of 500k, how much tax will be due?
Two separate DTRs will be filed.
Parent A to child 10k exempt, so only 240k; Parent B to child
10k exempt, so only 240k. And gifts given to a non-stranger, the
1st 100k of net gift is exempt from tax.

Page | 28

Illustration
(Son)
Gross Gift
Les Exempt
NET GIFT

Net Gift-115,000
Taxable Gift -15K

3.

Mrs. X
250,000
10,000
240.000

4
5

What if gift given were intended for the son and wife?
Gift of Parent A to child is 125k; to daughter-in-law 125k. Parent
B to child is 125k; to daughter-in-law 125.
Parent A to child 10k exempt; Parent A to spouse of child no
exemption (stranger donee); Parent B to child 10k exempt;
Parent B to spouse of child no exemption (stranger donee).
The dowry that is exempt is only to the child.
What is the tax liability on the dowry?
First 100k is exempt then first 15k is taxable to 2%, second layer
of the tax rates. (just refer to donors tax table)
If the question is how much is the net gift to the son the answer is
115K. If the question is how much is the taxable gift to the son from
the father, the answer is 15k because first 100k is exempt as
donations to non-strangers.
Illustration

Gross Gift
Less: Exemption
Net Gift

2.

500,000
Mr. X
250,000
10,000
240.000

Illustration
2

Mr. X
S
DnL
125,000 125,000
10,000
-0115,000 125,000
2-15%
30%

Mrs. X
S
DnL
125,000 125,000
10,000
-0115,000 125,000
2-15%
30%

Gifts made to or for the use of the National Government, its

agencies or political subdivisions, not conducted for profit
If made to entity created by the agency of the government must not
be for profit.
Gifts in favor of an education and/or charitable, religious, cultural
or social welfare corporation, etc., requisites [Section 101(A)(3) of the
Tax Code]
Those given to educational, charitable, religious, cultural, social
welfare, philanthropic, accredited NGOs, research institutions only up
to 30% of which can be used for administrative purposes.
It must be non-stock and non-profit
Trustees must not be compensated
Income and gift must be entirely devoted to the achievement of the
institutions purpose as stated in the articles of incorporation.
It is also fully deductible as an expense from gross income.

Non-stock
Non-profit
-not paying div.
BOT
Income
devoted to
accomplishment
of the purpose
AOI

E
C
R
C
SW
A NGO
T&P
RI

w/in 30%
admin

Are donations to politicians or political parties for election campaign

subject to donors tax?
No. Because the election code provides it is neither subject to
donors tax nor to income tax because it is not for the purpose of
increasing the net worth of an individual. If what has been
donated is more than what has been spent then its already
subject to income tax. For the gift to be exempt there has to be a
proper accounting and a submission to the COMELEC on how it is
spent.
Is a gift to an athlete who has won in a local or international event
exempt from donors tax?
Exempt. So long as it is sanctioned by the Philippine Sports
Association and the Philippine Olympic Commission. We call it
prizes and awards.
Exemptions of Certain Gifts Allowed to a Non-resident Alien
What donations are exempt for non-resident donor?
Same as residents except dowries to children on account of marriage.
Difference also is that if given to an NGO, accreditation is not
necessary.
1. Gifts made to or for the use of the National Government, its
agencies or political subdivisions, not conducted for profit
2. Gifts in favour of an education and/or charitable, religious, cultural
or social welfare corporation, etc., requisites [Section 101(B)(2) of the
Tax Code]
If the donor is a resident or citizen and gives a gift to a NGO that is
not accredited the donation is taxable. But if you look at the
enumeration of the recipients if the donor is a non-resident
accreditation is not necessary.
Another requirement is that the requisites applicable for a gift to be
exempted under resident or citizen donor does not apply to nonresident donors so long as 30% of the gift is not used for
administrative purposes. If donor is non-resident, the requirements
are not strict for exemption to apply.

J.

K.

Deductions from Gross Gift

1. Encumbrances
Charges, claims, or liabilities of donor that attaches to the property
and is required to be assumed by the donee. It reduces the value of
gift due to assumption of liability.
2. Diminutions
These are not existing liabilities but contributing part of the gift to
someone else according to the desire of the donor. It reduces the
value of the gift because the net economic benefit is lesser than what
is actually received
Page | 29

L.

Net Gift and Donors Tax Rates

What do you mean by net gift?
The gross gift minus the exempt gifts, diminutions and encumbrances.
1. Donors tax rates
Formula for Donors Tax
Gross Gift (Real, personal, exempt or taxable)
Less: Exempt gifts
Deductions
------------------------Net gift x (30% or 2-15%, depends if stranger or non-stranger)
Less: Tax Credits (residents, non-resident citizens are subject to
donors tax for donations within and without that which has been
paid abroad; also taxes paid on previous net gifts accumulated)
Illustration

Formula:
Net gift foreign country
-------------------------------- X Phil. Donors Tax
Net gift worldwide
What it seeks to achieve as a limitation is that the credit you are
allowed shall not exceed the proportion of the Philippine donors tax
due which refers to the properties located outside that were donated.
So if 30% of your donation worldwide is located outside of the country
then of the Phil. tax due will be allowed as credit but it should
always be the lower of the three amounts: the actual foreign tax paid,
the per country limitation, the global limitation.

GROSS GIFT
Less: Exempt Gifts
Deductions
NET GIFTS
X Tax Rates
DT Due
Less: Tax Credits
DT Due & Payable
2nd type of tax credit taxes paid on previous net gifts accumulated
because donor can make many donations in a year and every time a
gift is made it will be accumulated.
Principle of Accumulation
What is the principle of accumulation?
Donations given to non-strangers within a calendar period of 12months shall be accumulated for the purpose of computing the
donors tax. Calendar year always starts at January 1 regardless
of juridical or natural donors.
For purposes of accumulation there will be no fiscal year because
juridical donors can never be non-strangers hence cannot apply
the 2-15%, always 30%. Purpose is to avoid donors evading
taxes. Otherwise, all you have to do to avoid tax is to give
donations a maximum of 100k every time because it is exempt.
Also, since rates to non-strangers are lower than the 30% flat rate
to strangers is in order to determine the actual net gift for entire
year and determine which tax bracket you belong. Every time it is
accumulated you are allowed to deduct the previous tax which you
have paid already so there will be no double taxation.
Exemption from Donors Tax
Donors Tax Credits
What is the rule on tax credits?
Every RC, NRC, and RA donor who pays taxes outside of the
Philippines shall be allowed as tax credits against Philippines
donors tax but subject to limitations provided by law.
What are the limitations?
The tax credit should not exceed the proportion of tax to which
the credit is taken. That proportion means that net gift of
properties located in foreign country taxable in the Philippines
against the worldwide net gift.

2.

3.
4.

Page | 30

M. Manner of Computing the Donors Tax

Illustration
Mr. A Single, RC (2012)
Jan. 1
Sister
Feb. 1
Rec. Natural Child on
acct. of marriage
Mar. 1
Proprietary Educ. Inst.
Apr. 1
Church
May 1
Bro-in law
Jan. 1
Parent
July 1
Brother

100,000 cash
20,000 cash

Tax Due & Payable

Exempt -0200 *

500,000 lot
500,000 lot
100,000 cash
1M Motor Vehicle
100,000 cash

150,000
-030,000
52,600 **
8,000 ***

Current
+ Prior Gift
Gross Gift
Less: Exempt
NET GIFT

**

Current
+ Prior Gift
Gross Gift
Less: Exempt
NET GIFT
DT Due
TC

20,000
100,000
120,000
10,000
110,000

1,000,000
120,00
120,000
10,000
110,000
52,800
(200)
52,600

1st 100K - Exempt

1,000,000 = 44,000

100,000
1,120,00
1,220,000
10,000
1,210,000
60,800
(52,800)
8,000

110K @ 8% = 8,800
52,800

100,000
100,000 @ 2%
300,000 @ 4%
500,000 @ 6%
1,000,000
***
Current
+ Prior Gift
Gross Gift
Less: Exempt
NET GIFT
DT Due
TC

10,000 @ 2% = 200

OR
=
=
=
=

Exempt
2,000
12,000
30,000
44,000

1,000,000 = 44,000
210K @ 8% = 16,000

Ex. Mr. A resident citizen made donations

Jan. 1 sister 100K cash.
Should DTR be filed?
Yes.
Is there a tax due?
Exempt.

60,800

Feb. 1 recognized natural child on account of marriage 20K cash.

Is there a tax due?

Yes.

Current gift is 20K, you add prior gift of 100K. Total of 120K gross
gifts.

Deduct exemptions 10K exempt on account of dowry. So net gift

would be 110K.

First 100K is exempt, so 10K is left which would be subject to 2%

or 200.
Do we have tax credit?

No because first donation is zero tax. What you pay after the 2 nd
donation is P200.
Mar. 1 Proprietary educational institution 500K.
Taxes due?

Not exempt because it is not a non-stock, non-profit.

Further it is a stranger so flat rate of 30% or 150K. No need to

accumulate the 150K with the previous figures because it is to a
stranger.
Apr. 1 Church 500K.
Exempt, because religious institution.
Not accumulate because to stranger.
Note: If you want to transfer parcel of land in name of donee you
cannot do it without clearance from BIR which is only issued upon
filing of DTR.
May 1 Brother-in-law 100K cash.
30% because stranger; do not accumulate.
June 1 Parents 1M motor vehicle.
How much is the gross gift?

1M current gift, add the 100k donated to sister, 20K dowry to

recognized child. Minus 10K from dowry for a total of
1,110,000.

According to tax table first 1M is 44,000 and any amount in

excess of 1M, 110K x 8%, 8,800, for a total of 52,800.
How much will you pay?

Because you have a tax credit of 200k.

What is accumulated are gift to non-strangers and every time you give
donations to non-strangers just add up the current gift and the prior
gifts minus all of your deductions arrive at the tax due and deduct
prior taxes paid.
Will we not deduct the 100k prior to computing the tax due?

No. Because you are directly using the tax table.

Example the 1,110,000. The first 100,000 is exempt. Any amount

in excess of 100, 000 but not over 200k is 100k again is subject
to 2%, or 2,000. Any amount in excess of 200k but not in excess
of 500k is subject to 4% or 12,000. Any amount in excess of 500k
but not over 1M is 500k and 6%, which is 30k. This explains why
its 44,000. Any amount in excess of 1,110,000 is taxed at 8%. If
you try to compute this using the tax table minus 100k youll
arrive at wrong answer. Youll only have 44,000 plus 8% of
10,000. Youve lost the 100,000.
What if I add another donation here, July 1 to brother another 100k cash.
How much will the tax be?

It will be accumulated to donations to non-strangers.

Total gross gift will now be 1,220,000.

Net gift is 1,210,000.

Page | 31

N.

Tax due is 8% of 210,000 or 16,800 or a total of 60,800.

We will deduct the tax credit 52,800. So 8,000 will be your tax
due for the last donation.
1. Capital Property
2. Conjugal or Community Property
How will you treat husbands and wives tax liabilities?
They will not be treated as one donor. They will be separate
donors insofar as their conjugal property is concerned. But if the
property donated is exclusive then you dont have to include the
other spouse as a donor.
What will happen if there is a conjugal property donated by one
spouse without consent of the other?
There will only be one donor. It remains to be valid without
prejudice to the other spouse questioning the validity of the
donation.
Administrative Matters
1. Notice of donation
Is notice of donation a necessary requirement similar to notice of
death?
The filing of DTR is sufficient notice to notify BIR that a donation
was made.
a. Purpose
Purpose really is to allow certain types of donors to claim certain
donations as a full deduction from income tax and exempt from
donors tax.
If he can properly comply with all requirements of notice of
donation it will be fully deductible from gross income.
b. By whom given
Only donors who are engaged in trade, business or profession are
required to make a notice of donation.
The donor who gives a donation to an accredited donee
institution; (2) That donor is engaged in trade or business
whether individual or juridical; (3) The donation value; (4) Make
notice to RDO who has jurisdiction over the place of business.
Notice has to be made within 30 days from the receipt of the
certificate of donation from the donee qualified institution stating
that the donee qualified institution shall not spend more than 30%
of the gift for administrative purposes.
If you are not engaged in trade, business or profession it is
useless to notify because you do not achieve the purpose for
notification, exemption from tax from gross income.
c. Coverage
d. To whom given
e. When given
DTR should be filed within 30 days from the perfection or
completion of donation. It is not extendible unlike the ETR. The
complications for computing estate tax is not present in computing
donors tax.
2. Filing of Donors Tax Return
3. Payment of Donors Tax
a. When to pay the donors tax
It should be paid as it is filed.
Penalties payment of surcharge 25%, interest 20% per annum and
compromise penalties.
b. Where to pay the donors tax

So again 30 days from perfection or completion of donation with either

an authorized agent bank or revenue district officer having jurisdiction
over the domicile of donor.

If non-resident citizen or alien it should be made directly with the CIR

or with the Philippine embassy located in the country where he is
domiciled.
4. Penalties for Non-compliance
Penalties payment of surcharge 25%, interest 20% per annum and
compromise penalties.
Distinction between Donors Tax and Estate Tax
1. Same transfer tax, not property tax
2. Tax rate higher in ET, but DT is higher if donor and donee are strangers.
3. Tax payer in ET is the estate itself which must secure a TIN number duly
represented by executor/administrator while in DT there are individual and
juridical donors.
4. All real, personal tangible and intangible wherever situated except for NRA
which include only in the Philippines.
5. Filing and payment shorter time for DT within 30 days non-extendible. ET
filed within 6 months and paid the same unless extended for filing for
another 30 days or extended time for payment 5 or 2 years.

O.

Page | 32

TAXATION II
AY2012-12
Value-Added Tax
(Section 105 to 115 of the Tax Code, as amended)
Refer also to IRR (Rev. Reg. 16-5)
A.

Value-Added Tax
1. Definition
A 12% tax on the gross sales or receipts on sellers of goods, property
or service in the course of trade or business.
The concept on VAT is a tax on the seller who is statutory taxpayer
who has every right to pass it on the chain of distribution.
There are some transactions not in the course of trade or business but
subject to VAT. This is one of the most complicated taxes.
The Constitution provides that Congress should evolve a progressive
system of taxation. Does VAT violate such provision?
VAT is not unconstitutional. Its effect is regressive because the
higher income you earn the lower proportion of your money goes
to tax, while lower income higher proportion goes to tax.
The effects of VAT will be off-setted by:
a. Exemptions granted by law, i.e. sale of marine, agricultural
products;
b. Gross estate does not exceed certain amount;
c. Certain sales which are granted zero-rated VAT
So we said last time that the Value-Added Tax generally has been
defined under Section 105 of your Tax Code is a 12% tax on the sale
of goods, properties or services in the course of trade or business or
on your importations.
It has been mentioned by Mr. Limquiaco as well that it is a tax on the
value-added.
The effect of the tax or the burden of the tax when every seller of
goods would only be a tax on the difference in the selling price and the
cost with which to acquire the property that he has (?).
If you do not understand it as yet, it is because Value-added tax is (?).
In case you were a Value-Added registered taxpayer, you're liable for
12% VAT but you can recognize as credit against the 12% VAT with
any VAT that you have paid to your supplier. So it is an offsetting
thing.
Normally, if you purchase a property and you are in the course of
trade or business in selling it, you sell it at a higher price. The
difference there is your income or rather your margin. Although you
would be required to pay your 12% VAT on the selling price, you are
allowed to deduct the 12% VAT on the purchase of property,
generally. So offsetting, that's the difference with the 12% VAT that
you actually shouldered because it is the tax on the value that you
have added to the property, service that you have sold. Anyway, we
will discuss that once we reach input and output tax of Value-Added
taxation.
2. Nature and Characteristics
It is a tax on consumption.
If there is a property that I have manufactured how many times will
VAT apply?
Every time it is transferred. It applies to every chain of production
or distribution so long as it is not exempt.

The applicable law on VAT is Tax Code and Revenue Regulation 16-05.
Who is the statutory taxpayer in VAT?
The seller.
All sellers, as a general rule, is required to register for VAT purpose.
Unless engaged in exempt transactions or annual gross sales do not
exceed 1,919,500 pesos.
Once you are registered you are considered as VAT-registered
taxpayer and must recognize VAT in sales and purchases.
Its nature is that it is an indirect tax.
The reason why Value-Added tax has been chosen to cover the
many other percentages or sales taxes that we have or in some
other country is because Value-Added tax provides a control
mechanism for the government in a sense that this type of tax
relies heavily on documentation.
If you are a purchaser of a property and the property that you
have purchased is something that you would use in your trade or
business or you would later on sell, in order for you to be able to
recognize the VAT that you have paid to your supplier, you would
actually be required by the government to show proof of invoicing
or official receipts.
That is why if the purchaser is mandated by the government to
have the documentation on every purchase of properties subject
to Value-Added tax, then the seller would actually be compelled to
issue an official receipt or invoice. In that way, by the seller
issuing the official receipt or invoice, it means to say that the
seller will also be compelled to declare properly his income for
income tax purposes.
Value-Added tax is an indirect tax, it means to say that it is a tax
for whom the burden actually is shifted to someone else.
It is a tax on every consumption.
It means to say that Value-Added tax is favorable to the
government because in every level of consumption in the course
of trade or business, save the case for ultimate consumer, a tax is
actually collected by the government. It promotes the fiscal
adequacy of the government insofar as taxes are concerned.
It is a consumption tax as discussed in the case of CIR vs. Magsaysay
Line.
Every level of consumption that is in the course of trade or
business, value-added tax shall be imposed. So if there are 10
layers of transactions before the property reaches the ultimate
consumer, then there will be 10 layers of value-added tax that will
be added on every type of sale that is made. So in every layer,
there will be VAT collected by the government.
And indirect taxes are favorable also in the sense that in every
transaction, VAT is due or tax is due. Unlike in income taxation, it
is a direct tax. The government has to actually wait for the
normal or the regular interval of having the income tax paid every
quarter and at the end of the year.
CIR vs. Magsaysay Lines, Inc., et. al., SC GR No. 145984, July 28,
2006
DIGESTED BY: Jennifer Tinagan
FACTS:
Pursuant to a government program of privatization, NDC, a VATregistered entity created for the purpose of selling real property,
decided to sell to private enterprise all of its shares in its wholly

Page | 33

owned subsidiary the National Marine Corporation (NMC). The

NDC decided to sell in one lot its NMC shares and five (5) of its
ships, which are 3,700 DWT Tween-Decker, Kloeckner type
vessels. The vessels were constructed for the NDC between 1981
and 1984, then initially leased to Luzon Stevedoring Company,
also its wholly-owned subsidiary. Subsequently, the vessels were
transferred and leased, on a bareboat basis, to the NMC. The NMC
shares and the vessels were offered for public bidding. Among the
stipulated terms and conditions for the public auction was that the
winning bidder was to pay "a value added tax of 10% on the value
of the vessels." Magsaysay Lines, Inc., offered to buy the shares
and the vessels for P168,000,000.00. The bid was made
by Magsaysay Lines, purportedly for a new company still to be
formed composed of itself, Baliwag Navigation, Inc., and FIM
Limited of the Marden Group based in Hongkong. The bid
was approved by the Committee on Privatization, and a Notice
of Award was issued to Magsaysay Lines.
ISSUE: Whether the sale by the National Development Company
(NDC) of five (5) of its vessels to the private respondents is subject to
value-added tax (VAT) under the National Internal Revenue Code of
1986 (Tax Code) then prevailing at the time of the sale.
HELD:
A brief reiteration of the basic principles governing VAT is in order.
VAT is ultimately a tax on consumption, even though it is
assessed on many levels of transactions on the basis of a fixed
percentage. It is the end user of consumer goods or services
which ultimately shoulders the tax, as the liability therefrom is
passed on to the end users by the providers of these goods or
services who in turn may credit their own VAT liability (or input
VAT) from the VAT payments they receive from the final consumer
(or output VAT). The final purchase by the end consumer
represents the final link in a production chain that itself involves
several transactions and several acts of consumption. The VAT
system assures fiscal adequacy through the collection of taxes on
every level of consumption, yet assuages the manufacturers or
providers of goods and services by enabling them to pass on their
respective VAT liabilities to the next link of the chain until finally
the end consumer shoulders the entire tax liability.
Yet VAT is not a singular-minded tax on every transactional level.
Its assessment bears direct relevance to the taxpayers role or link
in the production chain. Hence, as affirmed by Section 99 of the
Tax Code and its subsequent incarnations, the tax is levied only
on the sale, barter or exchange of goods or services by persons
who engage in such activities, in the course of trade or
business. These transactions outside the course of trade or
business may invariably contribute to the production chain, but
they do so only as a matter of accident or incident. As the sales of
goods or services do not occur within the course of trade or
business, the providers of such goods or services would hardly, if
at all, have the opportunity to appropriately credit any VAT
liability as against their own accumulated VAT collections since the
accumulation of output VAT arises in the first place only through
the ordinary course of trade or business.
That the sale of the vessels was not in the ordinary course of
trade or business of NDC was appreciated by both the CTA and

the Court of Appeals, the latter doing so even in its first decision
which it eventually reconsidered. We cite with approval the CTAs
explanation on this point:

In Imperial v. Collector of Internal Revenue, G.R. No. L7924, September 30, 1955 (97 Phil. 992), the term "carrying
on business" does not mean the performance of a single
disconnected act, but means conducting, prosecuting and
continuing business by performing progressively all the acts
normally incident thereof; while "doing business" conveys
the idea of business being done, not from time to time, but all
the time. [J. Aranas, UPDATED NATIONAL INTERNAL
REVENUE CODE (WITH ANNOTATIONS), p. 608-9 (1988)].
"Course of business" is what is usually done in the
management of trade or business. [Idmi v. Weeks &
Russel, 99 So. 761, 764, 135 Miss. 65, cited in Words &
Phrases, Vol. 10, (1984)].

What is clear therefore, based on the aforecited

jurisprudence, is that "course of business" or "doing business"
connotes regularity of activity. In the instant case, the sale
was an isolated transaction. The sale which was involuntary
and made pursuant to the declared policy of Government for
privatization could no longer be repeated or carried on with
regularity. It should be emphasized that the normal VATregistered activity of NDC is leasing personal property.
This finding is confirmed by the Revised Charter of the NDC which
bears no indication that the NDC was created for the primary
purpose of selling real property.
The conclusion that the sale was not in the course of trade or
business, which the CIR does not dispute before this Court, should
have definitively settled the matter. Any sale, barter or exchange
of goods or services not in the course of trade or business is
not subject to VAT.
Section 100 of the Tax Code, which is implemented by Section
4(E)(i) of R.R. No. 5-87 now relied upon by the CIR, is captioned
"Value-added tax on sale of goods," and it expressly states that
"[t]here shall be levied, assessed and collected on every sale,
barter or exchange of goods, a value added tax x x x." Section
100 should be read in light of Section 99, which lays down the
general rule on which persons are liable for VAT in the first place
and on what transaction if at all. It may even be noted that
Section 99 is the very first provision in Title IV of the Tax Code,
the Title that covers VAT in the law. Before any portion of Section
100, or the rest of the law for that matter, may be applied in
order to subject a transaction to VAT, it must first be satisfied that
the taxpayer and transaction involved is liable for VAT in the first
place under Section 99.
Accordingly, the Court rules that given the undisputed finding that
the transaction in question was not made in the course of trade or
business of the seller, NDC that is, the sale is not subject to VAT
pursuant to Section 99 of the Tax Code, no matter how the said
sale may hew to those transactions deemed sale as defined under
Section 100.
In any event, even if Section 100 or Section 4 of R.R. No. 5-87
were to find application in this case, the Court finds the
discussions offered on this point by the CTA and the Court of
Page | 34

B.

Appeals (in its subsequent Resolution) essentially correct. Section

4 (E)(i) of R.R. No. 5-87 does classify as among the transactions
deemed sale those involving "change of ownership of business."
However, Section 4(E) of R.R. No. 5-87, reflecting Section 100 of
the Tax Code, clarifies that such "change of ownership" is only an
attending circumstance to "retirement from or cessation of
business[, ] with respect to all goods on hand [as] of the date of
such retirement or cessation." Indeed, Section 4(E) of R.R. No. 587 expressly characterizes the "change of ownership of business"
as only a "circumstance" that attends those transactions "deemed
sale," which are otherwise stated in the same section.
Applicable Laws
Value-added tax, it came about in 1988, amended by Republic Act 7716 in
1996, and further amended in 1997 by 8241 and currently what we have is
8424 - the Tax Code that we have now.
The major amendment in Republic Act 8424 in value-added tax is Republic
Act 9337 which took effect in November 1, 2005. So in studying valueadded tax, we not only rely on Republic Act 8424 - Tax Code of 1997 but
you have also to refer it to what changes there are in Republic Act 9337.
Anyway, consolidated VAT regulations - these have already been issued
last 2005 and that is what I mentioned in the outline Revenue Regulations
16-2005 explain some of the technical concepts of value-added taxes
found on the Tax Code.
And the amendments to the revenue regulations are but quite a few. I
think that is also mentioned in your outline - Revenue Regulation 2-2007
and what happened in 2007 - the BIR actually removed the cap on
recognizing income taxes.
In 2005, in Republic Act 9337 amended the Tax Code of 1997, the
government wishing to collect more the value-added tax and not allow
business establishments to offset entirely whatever they have input taxes
on purchases that are subject to VAT, that is VAT on sales minus VAT on
your purchases. If you have more purchases this year, you can actually
offset it entirely against your VAT on sales.
Let me give you an example. If a corporation establishes a building for
lease during the first few years/first part of its life, the corporation is
still an accumulation of input taxes, accumulation of VAT paid on the
purchase of construction materials, supplies, etc. That it have any
Output VAT liability on sales during construction phase - not as yet.
When will there be VAT on the sale of service - when it starts leasing
and that will probably come 2 years or 3 years after. When it starts
leasing, the first year of leasing is not entire recovery of the cost of
construction. It would take a number of years. There is already an
accumulated VAT on the purchase which can be offsetted on the VAT
on sale of service or leasing.
There is already accumulated VAT on the purchase which can be offsetted
against the ones on sale.
The government did not want business establishments to pay zero. What
they did in 2005, RA 9337, put a cap of 70%. In all cases, all
establishments will have to pay 30% of VAT. Meaning, VAT purchases can
only be offsetted at the limit of 70% but it will take a very long time for a
company to exhaust all its VAT on the purchases. Effective from 2005 until
end of 2006. On 2007, it was already removed.
Another amendment in 2008, introduction of 12% VAT from 10%. This did
not violate the non-delegation power of Congress. RR 007-008, mentioned
in your outline, sale of gold from BSP is not subject to VAT. In addition,

C.

2011, RR 16-2011, adjustment in the price index, the threshold amount of

1.5m is increased to 1,919,500.
Finally the latest, RR 13-2012, It actually tightened the rule on purchase of
residential lot and residential building. If law previously provided, at this
amount is not subject to VAT. What people did was to purchase lots with
smaller cuts in order to avoid payment. The BIR clarified that this will not
apply, splitting will not apply if the property adjacent. By buying two
townhouses, separately they are not VATable but altogether they are will
be VATable if they will have the same seller and buyer. We will discuss
more on this later.
1. Sections 105-115 of Republic Act 8424, amended by Republic Act
9337
2. Revenue Regulations No. 16-05 (Consolidated VAT Regulations)
3. Revenue Regulations amending RR No. 16-05 (RR Nos. 02-07, 0407, 07-08)
Status in Relation to VAT
If related to VAT, person exempt or transaction exempt, are they the same
or similar?
NO!
Under VAT, we can only categorize it as VATable (subject to VAT) or not
subject to VAT. But those subject to VAT there are persons subject to VAT
and there are transactions subject to VAT without regard to each other.
Insofar as exempt transactions are concerned, it does not necessarily mean
that the parties are exempt.
Generally, is importation subject to value added tax?
Yes!
Whether or not the importer is engaged in trade or business?

Yes!
You are not engaged in trade or business, will you be subject to VAT?
Yes.
Even if you are not VAT registered but you entered in to transaction,
importation is subject to VAT as a general rule. Transaction is VATable
but person is not subject to VAT.
If a person locates within the economic zone and is registered under VAT
registered or zero-rated system and under the tax holiday period. But
because of holiday incentives is that they will be able to import duty free
products. The person is VATable but the transaction is exempt because of a
special law under RA 1756.
When you say that a person is VATable? Do you need to register under the
VAT system?
As a general rule, when a person is subject to VAT, when he engages
in activity subject to VAT, will he be required to register under the VAT
system?
So, if you open up a sari-sari store, thats engage in trade or business,
right? Can we say that you are automatically required to register
under the VAT system?

Well, as a general rule, persons, whether juridical or individual

who are engaged in sale of goods, properties or services and who
are engaged in trade or business are required to register under
the VAT system unless the properties, goods or services are
exempt from VAT or they do not expect that their income will
reach 1.9195 M during the 12 month period of the operation. This
is under a new revenue regulation which took effect just this
2012. So, if you are engaged in selling goods, properties or
services, like a sari-sari store and youre expected gross receipts/
Page | 35

D.

income in a 12 month period will not reach 1.9195M, then you are
not required to register under the VAT system.

But its a different thing if you opt to register under the VAT
system because of the benefits if there are any.
1. Persons or transactions are subject to VAT at 12% or 0%
Register for VAT purposes
2. Persons or transactions are exempt from VAT
Distinguish VAT exempt transactions from VAT exempt
persons.
When you say a VAT exempt person, the exemption goes directly
into the person, regardless of what activity he is engaged in, he
will not be subject to VAT which is by virtue of a special law or an
international agreement. So for example, there are international
organizations which are VAT exempt even if the transaction should
have been subject to VAT.
In exempt transactions, the exemption goes not to the status of
the seller, but rather, because the activity itself is exempt. So for
example, isolated transactions are VAT exempt transactions.

This means to say that regardless of the status of the seller,

the transaction would still be exempt.

So if a seller, that has been registered for VAT purposes,

engages in both exempt and not exempt transactions like
having isolated transactions or selling marine and agricultural
products in its original state, these goods or products will
never be subject to VAT because they are covered by the
exemption, unless of course you opt for registration for both
exempt and non-exempt transactions.
Persons Liable to VAT
Who are the persons liable to VAT?
1. Seller of goods, properties or services
2. Importer
3. A non-resident who performs services in the Philippines
So, for example, if you engage in selling laptops to you classmates, you
have no registration because that is a personal transaction, will you be a
person subject to VAT?
Since, this is just an isolated transaction; it will not be subject to VAT.
But how about if you sell 5?

So we have first to look into whether the person is liable to VAT or

not. So, a person who is engaged in selling goods, services or
properties shall be liable to VAT unless what he is selling is
exempt or that his gross receipts for the 12 month period does
not exceed the threshold amount.
1. Seller or Transferor
Including non-stock, non-profit entities engaged in the course of trade or
business
What is in the course of trade or business?
Regular conduct or pursuit of an economic or commercial activity
including transactions which are incidental thereto by any person
including non-stock non-profit entities or government entities. And
in cases of non-stock non-profit entities regardless if they are
actually selling to members only or of how the proceeds of the
sale are disposed of.
Non-stock non-profit, so even USC may be liable for VAT if it engages
in commercial or profitable activity. As a rule USC as a non-stock nonprofit institution is not subject to VAT because VAT law provides for an

exemption from VAT on educational tuition fees, so long as the school

is accredited by DECS, CHED or TESDA.
A governmental entity could also be liable for VAT if it engages in
commercial activity.
CIR vs. Magsaysay Lines, Inc., et. al., SC GR No. 145984, July 28,
2006
Facts: The NDC, who owns parcels of land and five ships. Due to the
policy of the government in the privatization of the operating of those
properties, NDC sold these properties to a private entity and the
government assessed for tax on that transaction.
SC: Although the government entity is subject to tax, however, the
transaction entered is not considered as engaging in trade or business.
The actual business of NDC is not selling, but leasing of those vessels.
They sold these vessels not for economic purposes but to address the
policy of privatization, which means to say that it will not happen
again. Hence not subject to VAT.
NDC is not selling, but leasing of those vessels. They sold these
vessels not for economic purposes but to address the policy of
privatization, which means to say that it will not happen again.
Hence not subject to VAT.
Unlike if you are engaged in the leasing of motor vehicles, every now
and then you have to dispose these vehicles and sell it if it is no longer
useful, then that will be regular in the course of the operations of your
business.
a. Of goods or properties
When you say the seller of goods or properties are liable for VAT,
does it include seller of real properties?
As a general rule, yes. But it depends on the value of the
property.
But since its inception, VAT is never imposed on the sale real
properties. But it was introduced later on to include not only
VAT on the sale of goods and services, but also properties
whether real or personal. So practically, VAT is imposed on
the sale of any properties, real or personal, tangible or
intangible, if it is sold in the course of trade or business.
But if the property is sold in installment basis, can VAT be paid in
installment basis as well?
Yes.
When can we say that the sale is made in installments?
If the initial payment during the year of sale does not exceed
25%.
So if it exceeds 25%, the sale will be recognized as a cash
basis sale. The seller, even if he has not received the entire
value of what was sold will have to recognize the entire
selling price in his books
A sale of property becomes a sale on installment basis if the initial
payment during the year of sale do not exceed 25% of the total
price.
Situation 1: Sale of a motor vehicle made on January. The
payments for the entire year including the first amortization
are nowhere near 25% of the entire price of the vehicle. Then
the sale is on an installment basis.
Situation 2: Sale of a motor vehicle on January. Payments
made during the year exceed 25% of the entire selling price.
This means that the sale is recognized to be on a cash basis,
Page | 36

b.

and the seller will have to recognize the entire value of the
sale, even though he has not yet received the entire selling
price.
VAT applies to both cases:

Situation 1 = VAT is paid in installment basis.

Situation 2 = VAT is paid for the entire selling price of the

vehicle.
Of services
Theres an enumeration of services under the Tax code but the list
is not exclusive.
Define sale or exchange of services
Renato V. Diaz and Aurora Ma. F. Timbol vs. The Secretary of
Finance and the CIR, SC GR No. 193007, July 19, 2011
DIGESTED BY: Jan Patindol
May toll fees collected by tollway operators be subjected to valueadded tax?
FACTS:
Petitioners Renato V. Diaz and Aurora Ma. F. Timbol filed this
petition for declaratory relief assailing the validity of the
impending imposition of value-added tax (VAT) by the Bureau
of Internal Revenue (BIR) on the collections of tollway
operators.
Petitioners allege that the BIR attempted during the
administration of President Gloria Macapagal-Arroyo to
impose VAT on toll fees. The imposition was deferred,
however, in view of the consistent opposition of Diaz and
other sectors to such move. But, upon President Benigno C.
Aquino IIIs assumption of office in 2010, the BIR revived the
idea and would impose the challenged tax on toll fees
beginning August 16, 2010 unless judicially enjoined.
Petitioners hold the view that Congress did not, when it
enacted the NIRC, intend to include toll fees within the
meaning of "sale of services" that are subject to VAT; that a
toll fee is a "users tax," not a sale of services; that to impose
VAT on toll fees would amount to a tax on public service; and
that, since VAT was never factored into the formula for
computing toll fees, its imposition would violate the nonimpairment clause of the constitution.
On August 23, 2010 the Office of the Solicitor General filed
the governments comment. The government avers that the
NIRC imposes VAT on all kinds of services of franchise
grantees, including tollway operations, except where the law
provides otherwise; that the Court should seek the meaning
and intent of the law from the words used in the statute; and
that the imposition of VAT on tollway operations has been the
subject as early as 2003 of several BIR rulings and circulars.
In their reply to the governments comment, petitioners point
out that tollway operators cannot be regarded as franchise
grantees under the NIRC since they do not hold legislative
franchises.
ISSUES:
1. Whether or not the government is unlawfully expanding VAT
coverage by including tollway operators and tollway
operations in the terms "franchise grantees" and "sale of
services" under Section 108 of the Code; and

2.

Whether or not the imposition of VAT on tollway operators a)

amounts to a tax on tax and not a tax on services; b) will
impair the tollway operators right to a reasonable return of
investment under their TOAs; and c) is not administratively
feasible and cannot be implemented.
HELD:
TOLL FEES MAY BE SUBJECT TO VAT.
The relevant law in this case is Section 108 of the NIRC, as
amended. VAT is levied, assessed, and collected, according to
Section 108, on the gross receipts derived from the sale or
exchange of services as well as from the use or lease of
properties. The third paragraph of Section 108 defines "sale
or exchange of services" as follows:
The phrase sale or exchange of services means the
performance of all kinds of services in the Philippines for
others for a fee, remuneration or consideration, including
those performed or rendered by construction and service
contractors; stock, XXXXXXXXXX services of franchise
grantees of electric utilities, telephone and telegraph, radio
and television broadcasting and all other franchise
grantees except those under Section 119 of this Code and
non-life insurance companies (except their crop insurances),
including surety, fidelity, indemnity and bonding companies;
and similar services regardless of whether or not the
performance thereof calls for the exercise or use of the
physical or mental faculties. (Underscoring supplied)
It is plain from the above that the law imposes VAT on "all
kinds of services" rendered in the Philippines for a fee,
including those specified in the list. The enumeration of
affected services is not exclusive. By qualifying "services"
with the words "all kinds," Congress has given the term
"services" an all-encompassing meaning. The listing of
specific services are intended to illustrate how pervasive and
broad is the VATs reach rather than establish concrete limits
to its application. Thus, every activity that can be imagined as
a form of "service" rendered for a fee should be deemed
included unless some provision of law especially excludes it.
It does not help petitioners cause that Section 108 subjects
to VAT "all kinds of services" rendered for a fee "regardless of
whether or not the performance thereof calls for the exercise
or use of the physical or mental faculties." This means that
"services" to be subject to VAT need not fall under the
traditional concept of services, the personal or professional
kinds that require the use of human knowledge and skills.
And not only do tollway operators come under the broad term
"all kinds of services," they also come under the specific class
described in Section 108 as "all other franchise grantees" who
are subject to VAT, "except those under Section 119 of this
Code."
Tollway operators are franchise grantees and they do
not belong to exceptions. The word "franchise" broadly
covers government grants of a special right to do an act or
series of acts of public concern.
Tollway operators are, owing to the nature and object
of their business, "franchise grantees." The construction,
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operation, and maintenance of toll facilities on public

improvements are activities of public consequence that
necessarily require a special grant of authority from the state.
Petitioners argue that a toll fee is a "users tax" and to impose
VAT on toll fees is tantamount to taxing a tax.
Fees paid by the public to tollway operators for use of the
tollways, are not taxes in any sense. A tax is imposed under
the taxing power of the government principally for the
purpose of raising revenues to fund public expenditures. Toll
fees, on the other hand, are collected by private tollway
operators as reimbursement for the costs and expenses
incurred in the construction, maintenance and
operation of the tollways, as well as to assure them a
reasonable margin of income. Although toll fees are
charged for the use of public facilities, therefore, they are not
government exactions that can be properly treated as a tax.
Taxes may be imposed only by the government under its
sovereign authority, toll fees may be demanded by either the
government or private individuals or entities, as an attribute
of ownership.
Parenthetically, VAT on tollway operations cannot be deemed
a tax on tax due to the nature of VAT as an indirect tax. In
indirect taxation, a distinction is made between the liability
for the tax and burden of the tax. The seller who is liable for
the VAT may shift or pass on the amount of VAT it paid on
goods, properties or services to the buyer. In such a case,
what is transferred is not the sellers liability but merely the
burden of the VAT.
Case of Diaz: In this case, the question came from the toll way
operators or the toll way users? USERS. And the question is
whether they are to be burdened with VAT.
Actually their first contention is that toll fees for them are
exactions or burdens coming from the government or somehow
takes the form of taxes which we have already addressed when
we were discussing the difference between toll fees and tax.
Toll fee is an exaction either of sovereignty or proprietorship and
its purpose really is only to cover the cost of construction and to
generate a certain margin for those who have spent for the
infrastructure. This is not a tax to be paid by the toll way user.
If VAT is imposed on toll fees and the service of these toll way
operators actually would come in the form of services, and if VAT
shall be imposed, since there is no prohibition on the imposition of
VAT on it, VAT shall not be the liability of the toll way user. It is
the liability of the toll way operator, because VAT as weve said is
based on the gross receipts from the toll fees. So who has the
gross receipts? Its not the toll way users, but the toll way
operators.
Although, as we know, this VAT is actually shifted, passed on to
the toll way user. But in so far as the toll way user is concerned,
the VAT that has been shifted to them no longer will be recognized
as VAT, but rather, as part of the cost (or gross?) of the toll fees.
Because the one whos passing through those bridges, etc. are not
supposedly they would not recognize themselves as being
engaged in trade or business.

CIR vs. SM Prime Holdings, Inc. and First Asia Realty

Development Corporation, SC GR No. 183505, February 26,
2010
DIGESTED BY: Felice Soria
FACTS:
Respondents SM Prime Holdings, Inc. (SM Prime) and First
Asia Realty Development Corporation (First Asia) are
domestic corporations duly organized and existing under the
laws of the Republic of the Philippines. Both are engaged in
the business of operating cinema houses.
Bureau of Internal Revenue (BIR) sent SM Prime and First
Asia a Preliminary Assessment Notice (PAN) for value added
tax (VAT) deficiency on cinema ticket sales, which both
companies protested.
ISSUE: Are the gross receipts derived by operators or proprietors
of cinema/theater houses from admission tickets subject to VAT?
HELD:
NO. While (1) the enumeration under Section 108 on the
VAT-taxable services is not exhaustive and (2) the said list
includes the lease of motion picture films, films, tapes and
discs, the said activity however is not the same as showing
or exhibition of motion pictures or films. Thus, since the
showing or exhibition of motion pictures or films is not in the
enumeration, the CIR must show that it falls under the phrase
similar services.
The following facts can be established:
1. Historically, the activity of showing motion pictures, films
or movies by cinema/theater operators or proprietors has
always been considered as a form of entertainment
subject to amusement tax.
2. Prior to the Local Tax Code, all forms of amusement tax
were imposed by the national government.
3. When the Local Tax Code was enacted, amusement tax
on admission tickets from theaters, cinematographs,
concert halls, circuses and other places of amusements
were transferred to the local government.
4. Under the NIRC of 1977, the national government
imposed amusement tax only on proprietors, lessees or
operators of cabarets, day and night clubs, Jai-Alai and
race tracks.
5. The VAT law was enacted to replace the tax on original
and subsequent sales tax and percentage tax on certain
services.
6. When the VAT law was implemented, it exempted
persons subject to amusement tax under the NIRC from
the coverage of VAT.
7. When the Local Tax Code was repealed by the LGC of
1991, the local government continued to impose
amusement tax on admission tickets from theaters,
cinematographs, concert halls, circuses and other places
of amusements.
8. Amendments to the VAT law have been consistent in
exempting persons subject to amusement tax under the
NIRC from the coverage of VAT.

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9.

2.

Only lessors or distributors of cinematographic films are

included in the coverage of VAT.
These reveal the legislative intent not to impose VAT on
persons already covered by the amusement tax.
The repeal of the Local Tax Code by the LGC of 1991 is not a
legal basis for the imposition of VAT on the gross receipts of
cinema/theater operators or proprietors derived from
admission tickets. The removal of the prohibition (on the
national government to tax certain activities) under the Local
Tax Code did not grant nor restore to the national
government the power to impose amusement tax on
cinema/theater operators or proprietors. Neither did it expand
the coverage of VAT.
The activity that was part of sale or exchange of services covered
under VAT is the leasing of motion picture films while the activity
that was conducted by SM was the showing or exhibition of
motion picture films which is already covered under amusement
tax. VAT and amusement taxes are both percentage taxes and in
no way can both be simultaneously imposed.
Importer
The next person liable for VAT are the IMPORTERS.
We said that importers need not engage in trade or business for them
to be liable for VAT, but not all importations are liable for VAT; there
are certain types of importations.
Example: Personal household effects of returning residents coming
from abroad; they bring personal effects one of a kind, not more
than 10,000 in value it is not subject to customs duties and
VAT.

But you know that this is being violated. Balikbayan boxes

would contain more than 1 type of personal household
effects, one of a kind, more than 10,000 in value. Even TV
sets that are brand new, they just come in to us in old and
worn-out boxes but the content is very new. Its no longer
subject to VAT, because of its appearance outside.
But supposedly if you bring in more than one of a kind, more than
10,000 in value, thats already VAT-able and subject to customs
duties.
Motor vehicle, even if its only 1, even if its personal, it will always be
subject to VAT; including aircraft machinery and vessels, because they
are no longer the value is so big.
When we said that generally VAT is a tax on the value-added every
time a transaction is made, does this apply to importations is the
VAT also based on the value-added?
Earlier we said, the tax is on the value-added. As I said, the seller
although statutorily liable to pay the 12% VAT on the selling price,
he is also allowed to deduct the VAT that he has paid on his
purchase on those goods. So meaning to say, he only pays the
difference; and that difference is actually the VAT on the income
or mark-up that he has made. Thats why its called valueadded.
But for importation, if we say that a product is imported from outside
and we pay the VAT, is it also based on the value-added, or not?
Lets say you imported a motor vehicle, and the declared value is
2M. How much VAT do you pay?

E.

Importation is different, because in importation it is not the

tax on the value-added. It is a tax on the LANDED COST,
which is actually the acquisition cost plus freight, plus
commission, plus insurance, etc. Its the entire value thats
being subjected to VAT, including excise taxes subject to VAT.
So if the property that you have brought coming from outside
into the Philippines is already subject to excise tax, VAT will
be imposed also on the excised tax. So its called a tax on a
tax. So the basis of importation for tax purposes is different.
3. Non-resident Persons who perform services in the Philippines
How about non-resident persons performing services in the Philippines,
are they subject to VAT? In all cases? Even if they perform such
activity on an isolated case only? Does it mean alien and juridical
persons, when you say non-residents performing services in the
Philippines, would it include both individual and juridical persons?
How about if these non-resident persons engage in the sale of goods
or services, will it be subject to VAT in the Philippines?
For sale of service by non-resident of persons, both juridical or
individual, so long as the service is performed in the Philippines,
isolated or regularly done, it will be subjected to VAT because the
TAX Code provides that we do not consider the regularity of the
transaction but every time the non-resident person performs
service in the Philippines, it will always be considered as made in
the ordinary course of trade or business. So, it will always be
subject to VAT.
In so far as these non-resident persons are selling goods or
properties, it will not be covered by this exception. It will require
regularity and it will require where the goods was transferred etc.
At this point, you will notice that VAT is based on some principle. It
can be considered as the destination principle - where the goods are
consumed, it is where it will be taxable; or where the service is
rendered, it is where it will be taxable.
In the Philippines, if it is importation, wherein it is the bringing of
goods from the outside to the Philippines, the concept is the goods will
be consumed in the Philippines, therefore, subject to VAT. Thus, for
services rendered by non-resident in the Philippines, it is subject to
VAT.
In the number 1 item that we have discussed on seller of goods or
services, it only pertains on sale of goods, properties or service in the
Philippines. If it is made outside of the Philippines, then, it is not
subject to VAT.
Transactions Subject to VAT
1. Transactions made in the Course of Trade or Business
Rule of Regularity, exceptions
The transactions made in the course of trade or business except for
non-resident persons who can perform once but will still be considered
in the ordinary course of trade or business.
2. Transactions incidental to the Principal Business
Example:
main business - manufacturing business
incidental (subject to VAT) - delivery charges of goods
Mandaue foam engaged in the selling of foam, mattresses etc. and if
you purchase and have it delivered to your home, they will have
delivery charges which will be subject to VAT.
Selling of old computers or equipments in any type of business will
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3.
4.
5.

also be subject to VAT because these types of transaction can recur

although not so often unlike the privatization policy in the case of sarisari??(talking gibberish here, i cannot get it)
Importations are subject to VAT. How about exportations, are they
subject to VAT?
As a general rule, only importations are subject to VAT.
As an exception, exports are subject to 0% preferred rate because
of the destination principle and cross border doctrine and because
we encourage exporters as they bring in foreign currency into the
Philippines. We don't add 12% on whatever they are selling
because they are export sales.
When we say VATable, it means, it involves either 12% or 0% VAT.
But when you're exempt, you are not VATable. Therefore, we have
THREE STATUSES:
a.
Vatable at 12%
b. Vatable at 0%
c.
Exempt from VAT
Services performed in the Philippines by non-resident persons
Importations, exceptions
Subsequent Sale of tax-Free Importations
This is a previously VAT-exempt transaction that was subsequently
sold.
This involves two situations or transactions:
a. The person is VAT-exempt then subsequently sells it to another
The transfer is generally taxable unless the transferee is also
exempt.
b. The product/transaction itself is VAT-exempt
Subsequent sale thereof to other persons, tax-exempt or not,
will not be subject to VAT.
If the item is in itself exempt from VAT, its subsequent sale would still
be exempt?
Because the exemption goes to the product itself. And if the
exemption is on the person, the subsequent sale will now be
subject to VAT.
Ex. The companies under the PEZA Law are exempt from customs
duties and VAT, if someone purchases machineries from the port
authorities and it is totally exempt, then the purchase is exempt.
However, if they sold it to residents or any citizens of the Philippines
then it will now be subject to VAT.
What were talking about are those transactions or importations that
were exempt from value added tax, either because the importation
involved were goods that were already exempt from VAT (such as we
said personal and household effects) or the importation was exempt
from VAT because the person is exempt from VAT under special laws
(such as corporations within the economic zone).
If the goods purchased, under this scenario, are subsequently sold to
those outside the economic zone (which we call the customs territory)
will it be subject to VAT?
We said earlier that if the exemption goes directly into the goods
itself, its subsequent sale even if outside the economic zone will
still be exempt from VAT, why? Because that item wherever it will
be sold is recognized as exempt from VAT. But if the exemption of
the importation from VAT was because the person who imported it
was exempt from VAT, his subsequent sale to another NONexempt person will already be VATABLE.

Illustration
Importation

F.

VAT Exempt
Goods
VATable (x)

VAT exempt
person
VATable ()

Subsequent Sale w/in

custom Territory
Ex. That corporation within the economic zone, imported materials and
equipment free from VAT, subsequently sells it to another corporation
outside of the economic zone: VAT has to be paid.
But if it sells within the economic zone, still exemption will apply
because the buyer is still exempt from VAT.
Now the question in this case, who will be required to pay the VAT?
If the buyer is not an exempt person, the current buyer has to pay
the VAT because he is now the technical importer. Its not
actually an importation na, its called a technical importation
under the law for purposes of imputing the VAT.
You have to take note why the importation was exempt in the first
place before you can proceed to answer whether the subsequent
sale will be VATable or not.
But it will always be the subsequent purchaser or buyer who will
be liable for VAT, as if he was the first one who imported.
Otherwise, if this is not applied it will be so easy to avoid the
paying of taxes. You can simply request your ambassador friend
to ship in a luxurious motor vehicle, free from VAT and customs
duties, and purchase it with the same cost from him free from VAT
and customs duties if this will not be applied. In order to avoid
evasion of taxes, technical importations or subsequent sales of tax
free importations will be subject to VAT if the transaction so
warrants.
6. Transactions Deemed Sale
As a general rule, in transactions deemed sale is there really a sale
that took place? No. There are certain transactions even if no actual
sale has taken place but because it can be considered as already sold
in the eyes of the law because VAT has not been paid to the
government, the government will still be able to collect the VAT on
these transactions.
Transactions Deemed Sale
Transactions Deemed Sale are not actual sales but subjected to the 12%
VAT because it deprived the Government actually of tax collection to
certain inventories if it will be sold will generate taxes for the government
or properties that are used in business and will generate tax for the
government if (?) be sold as an incidental transaction.
1. Transfer, Use or Consumption of goods or properties not in the
Ordinary Course of Trade or Business
If the owner of the business holds in his possession goods or
properties which are ordinarily held for sale to the public but decides
to use it for his own consumption.
Here it is not only transfer but also use of goods or properties, which
are ordinarily intended for sale or used in the ordinary course of trade
or business but are subsequently disposed off not in the ordinary
course of business.
You have something that is ordinarily used for trade or business and
then you took it, transferred, used or consumed it not in the ordinary
course of business. It is not forgiven that you withdraw any item from
your store and use it for your own use.
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If he had not used the goods for his own consumption, he could have
been liable to the government for VAT. Thus, it is considered a
transaction deemed sale in order for the government to collect VAT.
I have read an opinion from the BIR wherein International Labor
Organization daw donated a used motor vehicle to DOLE. The
questions were: is it exempt from donor's tax? is it exempt from VAT?
What was interesting is that the BIR said, it is still subject to VAT
because had it been sold(?), it could have been incidental daw,
therefore, subject to value added tax. Here, it was transferred not
in the ordinary course of trade or business. (Ma'am Tiu: very far
out but anyway that was what BIR said. It is contestable.)
Any transfer in use or consumption of goods or properties not in the
ordinary course of trade or business will be subject to value-added tax
of 12%. And what are these goods or properties consumed not in the
ordinary course of trade or business? It is not only limited to
inventories that are intended for sale but also to properties that are
used in the course of trade or business. As to what the VAT base
would be for the basis for computing the 12% VAT, it would be the
actual market value/fair market value at the time of the occurrence of
the disposition, use, consumption, etc.
Distribution
or
Transfer
of
goods
or
properties
to
Shareholders/Investors or Creditors
When properties that are originally intended for sale or use in trade or
business are transferred to shareholders or creditors.
Why would a property be transferred to shareholders?
Shareholders are entitled to share in the profits of the corporation.
The purpose really of transferring goods or properties to
shareholders is for profits. If the company cannot distribute
dividends in cash, it can always distribute properties as dividends.
Is it always subject to VAT?
No. There are properties that are not subjected to VAT.
What you to consider here is that the distribution or properties
transferred to stockholders are in the form of dividends as a
distribution of profits. We know that there are many types of dividends
(e.g. cash and stock dividends).
Cash dividends are not subject to VAT because when cash is
transferred, it is not intended for sale but it is actually intended
for use in the ordinary trade or business; however, it is not a good
nor property. Therefore, cash dividends as a distribution to
shareholders are not subject to VAT.
Stock dividends are not subject to VAT because stocks of the
corporation issuing the dividends are not originally intended for
sale or for use of the business. Although, it may be subsequently
sold to the public under Initial Public Offering (IPO).
What you have to focus on is property dividends. Property
dividends will come from the properties of the corporation.
Example:

Real properties of a corporation engaged in real estate

business. If the properties are distributed to its stockholders,
it is subject to VAT because it is a transaction deemed sale
because had this goods been sold, the company would have
been liable for VAT.
So, if what is transferred as property dividend is an item which is
not held for sale or use in the ordinary trade or business, it does
not generate any output tax or VAT in favor of the government.

2.

We can say now that not all property dividends distributed to

stockholders are subject to VAT. You have to know whether the
property is intended for sale or for use.
Not all property dividends distributed to stockholders are subject to
VAT. You have to know if the property is intended for sale or for use. If
its a property dividend involving shares of stock of another
corporation which the company is holding on as an investment and
subsequently distributed to its stockholders in order to make its own
stockholders the stockholder of the investing corporation, that is not
subject to VAT because what was distributed are stocks which are
shares held for investment, not for sale and not for use in the ordinary
course of trade and business.
The transfer or consumption of goods or properties originally
intended for sale or for use and dispose it not in the ordinary
course of trade or business is a transaction deemed sale.
The same way as the distribution of goods and properties to
stockholders is subject to VAT if it involves properties held for sale
or for use in business. We are saying that they are subject to VAT
then what is our basis on the value added tax when there was no
actual sale that took place.
Since we have no gross selling price as basis for our value added
tax since there was no actual sale that took place, but we can
already compute the VAT base on the current market value at the
time of the occurrence of the transaction deemed sale. So its the
market value
So if it is a real property that is being sold theres the zonal value
or the fair market value whichever is higher.
There are movements in your business w/c are not necessarily
made in the ordinary course of trade or business. You consume a
particular product of your business, you use, you transfer,
although the consumption, transfer or use is personal and not in
the course of trade or business, it maybe considered a transaction
subject to VAT being a transaction deemed sale if what you are
transferring, consuming or using is a good or property that is
originally intended for sale or for use in the course of trade or
business.
Why? Because you are depriving the government of collecting
value added tax had that property been sold to a third party or a
consumer, so in order to cover up for that deprivation of taxes
that could have been collected or due, the government will collect
from you VAT based on the market value of the product or
inventories.
Another type of transaction deemed sale identified also is the
distribution of goods or properties to shareholders as their share in the
properties of the corporation.
Take note that not all property dividends will automatically be
subject to 12% VAT if distributed to the stockholders. Only those
goods or properties that are distributed to stockholders that are
originally intended for sale, or for use in the ordinary course of
trade or business are subject to VAT.
So if what is distributed to the stockholders are in the form of
shares of stocks not owned by the corporation but rather held by
the corporation as an investment in another corporation, we (?)
them as property dividends but not subject to VAT because those

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3.

shares of stock don't form part of the inventories or used in trade

or business.
In the same way that if what is distributed as property dividends
are receivables of the company if the company would like the
stockholders to collect themselves as their share in the profits in
the corporation, accounts receivables of corporations will not
constitute as an ordinary asset. It's not an inventory.

It's not used in trade or business and in fact, we identified this

last semester that accounts receivable if eventually sold or this
time given to stockholders are actually capital assets that are not
subject to VAT. When it is a capital asset, it is not subject to VAT.
It only applies to goods that are ordinary.
Distribution of goods or properties to creditors
What would be the purpose of the company to distribute goods or
properties?

Instead of paying money the company will use the goods or

properties as payment for debts. It is something like dation
en pago. So if the company can no longer pay in cash then it
can dispose of its properties and will take form as payments
to its creditor.
What would be the basis of the value added tax?

The basis of the value added tax would still be the fair market
value at the time of the transfer or the transaction deemed
sale. So if it so happen that the fair market value of the goods
and the indebtedness is equal then there would be no
problem. But if there is a difference what would prevail as the
basis for Vat would still be the value of the goods that were
dispose of in order to cover the indebtedness and not the
indebtedness
Why? Because VAT is base on the sale of the goods or services so
we always go back to what has been dispose of by the company in
order to address the situation.
And when there are distribution of goods or properties to creditors as
payment of the indebtedness, it is subject to VAT as a transaction
deemed sale.
Yes, if the goods or properties that are distributed are stock in
trade or that is normally used in the same trade or business.
What did we say as the basis for computing the VAT in cases of
distributions to creditors - it is the value of the indebtedness or
the value of the goods or properties distributed?

The goods. So if there is a difference in the indebtedness and

the value-added goods paid or distributed as payment, that is
another issue. That will be subject to either to donor's tax or
income tax as condonation or forgiveness of indebtedness.
Consignment of Goods, requisites
Even if there was no actual transfer of goods but after the lapse of 60
days that the goods were consigned it will already be subject to VAT
but in order to avoid payment of Vat you should withdraw your goods
before the 60 day period lapse.
What would be the basis of VAT in cases that the consign good were
already subject to value added tax because it was not withdrawn in a
period of 60 days?
Still the market value of the goods
In consignment, if goods are consigned, it's not subject to VAT as yet
because consignment is not actual sale. But if the consignor allows

4.

the goods or properties to stay with the consignee for more than 60
days, it will be considered as a transaction deemed sale and that will
have to be paid by whom, consignor or consignee - the consignor
because the goods actually came from the consignor.
What if the goods have been paid by a consignor of VAT as a
transaction deemed sale and eventually sold by the consignee, will
it still be subject to VAT?

Yes. If you have certain goods and you would want to sell it
through SM. You put the goods through SM. You did not
withdraw it. You have to pay now the value-added tax.
When SM eventually sells it eventually to a third party buyer,
anyone of your classmates or schoolmate, are you saying that
it will not be subject to VAT? It is an actual sale. It is
another party, it will still be subject to VAT. This time paid by
the consignee.
Retirement From or Cessation of Business, with respect to inventories
of taxable goods
When a business retires or ceases business operations will
there be VAT payable to government?
Yes there will be VAT payable even if there will be change on the
type of business still there will be VAT payable.
Example: if a single proprietorship will change into a corporation
having a separate juridical personality will it be subject to VAT? Yes it
will be subject to VAT, the items left and the existing inventories will
be subjected to value added tax.
Retirement from or Cessation of Business
What will be the basis of the VAT if that is the case (retirement
from or cessation of business)?

The acquisition cost of the items of inventory (capital goods,

stock in trade, materials and equipments) or its fair market
value, whichever is LOWER under 1605.

When a corporation ceases its existence or when a

corporation incorporates into another corporation, of course,
there will be change of ownership because for example, a
single proprietorship is owned by an individual while a
corporation
is
owned
by
a
minimum
of
5
individuals/incorporators.

What about if the corporation is dissolved, will there be VAT?

The VAT which the government expect to collect whenever a

corporation ceases from its business or operation will be on
stocks in trade, capital goods used in trade or business etc.,
because when a corporation ceases from its operation, the
government will not be able to collect taxes, even if there are
existing inventories, if there are no transactions deemed as
sale. If there is then it can and will collect VAT on the last VAT
on its properties.
There are two types of cessation from business or operations
1. Cessation from B/O totally due to change of ownership or
dissolution
2. Cessation of the VAT registration of the corporation and its
transition to becoming a VAT exempt corporation
a. If the threshold level is not met (1.5 M in 2011 and in
2012 it is now 1.9 M)

Page | 42

i.

a.

If you were between these two figures, lets say that if

you are operating 1.7 M in 2011, so you were collected
with VAT. So in 2012, you can opt to be VAT exempt.
ii.
Or you have it cancelled and changed it into a new type
of business; you change it from selling of shoes to selling
of life insurance, which is now VAT exempt. Is the
transition VAT-able? YES, same rule for the cessation of
business. the government will collect VAT from the goods
that you ought to sell if you did not change your
business.
Mergers and Consolidations
Under transactions deemed sale, not subject to VAT as a general
rule.
Change in business activity from VAT taxable status to VATexempt status
And no. 4, retirement or cessation from business, the type of
which there is a stoppage of operation or there is a transition from
VATable to VAT-Exempt status.
If the retirement or cessation is of the business itself or such as
when single proprietorship or partnership becomes a corporation,
the existing assets of the single proprietorship or partnership prior
being converted to a corporation will be considered as VATable as
a transaction deemed sale.
So what will be the existing assets? Will only the inventories
be the one subject to VAT or all types of properties?

In retirement or cessation of business operations, not

only will the inventories or stock in trade subject to VAT
existing as of the date of retirement or cessation but
including capital goods, supplies and equipment together
with the inventories, of course.

And the basis for the value-added tax is the acquisition

cost or fair market value whichever is lower this time.
What if, instead of paying the value-added tax under
transaction deemed sale, that single proprietorship prior to
conversion into a corporation sold the properties to the
corporation at a very low price in order for VAT to apply as
12% - what did we learn as definition of VAT - is 12% passed
on the gross selling price or gross receipts of the sale of
goods, properties or service.

So can it be a tax avoidance scheme if the single

proprietorship instead of paying VAT of transactions
deemed sale sells the properties to a corporation at book
value so that it will be liable for the 12% VAT on the book
value and it can offset whatever VAT it has paid on the
purchase of that closed books prior - possible or not?
Possible but the regulations provide that at anytime the
Bureau of Internal Revenue can determine the
appropriate tax base for VAT if the gross selling price is
(?) lower than the actual market value and it will impose
VAT not on the (?) lower gross selling price but rather on
the actual market value.
The regulations provide that at anytime the BIR can
determine the appropriate tax base for the VAT if the gross
selling price is reasonably lower than the actual market value

b.

c.

and it will impose VAT not on the gross selling price but on
the actual market value.
If you do that, just make sure that your gross selling price is
closer to the actual market value. When will the BIR say that
your gross selling price is reasonably lower than your actual
market value? When the GSP is lower than 30% of the actual
market value. SO you can probably sell that for 25% less.
Approval of a request for cancellation of registration, instances
i.
Reversion to exempt status
The other type of retirement or cessation is not that of the
entire business but only that of the VATable registration or
transaction of the business.
So when will transaction deemed sale occur?
In a corporation, who likes to cancel its registration
because its activity is already VAT-exempt. It has already
abandoned the VATable transactions or activities.
ii. Desire to revert to exempt status, after the lapse of 3 years
of voluntary VAT registration
Another instance is when a corporation opted to register
under the VAT-system voluntarily rather than the 3%
percentage tax and realized later that VAT is not beneficial; it
can be earned VAT-exempt status.
iii. Failed expectation to reach Php1.9195M
At the time of registration there was expectation that the
gross receipts will exceed the threshold but eventually the
corporation realized later that it will never exceed the
threshold level, it can be revert to the VAT-exempt status.
And when it reverts to VAT-exempt status, we did say that
capital goods, inventories, supplies and equipment, as of the
time of transition from VATable to VAT-exempt status will be
subject to 12% tax. But the other way around we have work
for VAT.

Meaning to say if you are exempt and would like to

register under the VAT system, during transition there
will never be transition deemed sale because at the time
of transition all your goods are still exempt from VAT, no
need to pay the VAT.
Change of ownership of the business
There are retirements or cessation as well that are not subject to
VAT:
a. Change in corporate name.
Will it produce a VAT?

No! Not even if changing of corporate will let you

seek approval from government agencies. It is just a
change of name, all others like status, ownership,
etc remain the same. So it will not be a transaction
deemed sale.
b. Mergers and consolidation are not subject to VAT at the time
of merger.
Why?
If there are many corporations who want to
consolidate, it's a retirement of an individual business in
order to create a surviving entity. Normally, it will be
considered as a transaction deemed sale. But because of
the tax free exchange that we have studied in income
tax. Do you remember tax free transfers or exchange?
Page | 43

Illustration

RE subject to
VAT

Finally, if there is a change of corporate control, will it be

considered as retirement or cessation from business and subject
to value added tax as a transaction deemed sale? Everything has
been a recap until this one.
What is then a change in corporate control?
Do you remember our discussion that if a person, whether
natural, or juridical, alone or together with others or not
exceeding four (4) exchanges his property for stock in a
corporation and this person or persons, after this exchange,
acquires a controlling interest over that corporation. This
means that they acquired at least 51% of the shares of stock
of such corporation. There is an introduction of new sets of
shareholders who acquire controlling interest over the
corporation.
Is there a change entirely of the ownership of the
corporation?
Not necessarily, not all mergers will result to a VAT taxable
transaction. These transactions are not only exempt from
income tax but also from VAT. So this is not one of those
transactions deemed sale if one introduces properties and
acquires controlling interest over the corporation.
Review: Page 45 of Tax 1 Finals.

X
VAT
Property

X
VAT
RE
Existing
Prop.
VAT (x)

G.
Stocks
NOTE:
RE
RE
NOT VATable
NRE RE
NOT VATable
RE
NRE
VATable
NRE NRE
NOT VATable
Illustration: This is one person along with others not exceeding 4
and transfers property in exchange for stocks. Now the issue of
VAT, there are two fold issues of VAT: the existing properties
including the inventories, capital goods and office equipment
subject to VAT.

When somebody acquires control over that corporation, is the

transfer of properties from the transferor to the transferee
corporation subject to VAT?

When there is a change in corporate control, it does not

necessarily mean the cessation of business operation.
Therefore, at the time of change in control, the existing
properties including the inventories, stock in trade, and
office equipment will not be considered as sold, not a
transaction deemed sale, and not subject to VAT.
But insofar as the transferor is concerned, if that person is an
individual not engaged in real estate business, there will be
no VAT. Of course, because it is a capital asset. But if the
person transferring it is a real estate business owner, it will
be subjected to VAT because the property forms part of the
inventory of that person unless the transferee is also engaged
in real estate business, in which case, the transfer will not be
subjected to VAT.
To reiterate, if the property transferred belongs to the
inventory of the transferor, you know that here is VAT
because its transfer, use or consumption is not in the ordinary
course of the business of the property that belongs to the
inventory. If the transferor is engaged in real property
business, it will be subjected to VAT because there is a
transfer of property but if the transferor is any one of you,
and this is your personal capital asset, you do not impute any
VAT to that. If you sell, transfer, exchange, barter a capital
asset which is subject to CGT, VAT and CGT will never go
together. It will exclude each other.
Now lets go back to a real estate business transferor, we said
that it is VATable because it belongs to its inventory, the
exception lang is when the transferee is also into real estate
business.
d. Dissolution of a partnership and creation of a new partnership
which takes over the business
When a corporation or partnership dissolves and a new
partnership is organized, it can be considered retirement from or
cessation of business. There will be imposition of VAT on existing
assets inclusive of stock and trade inventories, capital goods,
based on acquisition cost or actual market value whichever is
lower.
VAT Rates
How many VAT rates do we have?
1. 12%
2. 0% (Zero-rating)
Illustration

12%
VAT on Sale
- VAT on Purchase
+/-

0%
0%
- VAT on Purchase

Refund

EXEMPT
0
-0
0

So if we say that a corporation is VATable, they are either subject to

12% VAT or 0% VAT. Why do we have a zero rating of VAT, why not
just 12% and exempt?
Page | 44

1.
2.

H.

12%
0%
What are the principles in the zero rating of VAT?
Cross Border Doctrine or Destination Principle
a. Cross Border Doctrine
What is cross-border doctrine?
No VAT shall be imposed to form part of the cost of goods
destined for consumption outside the territorial borders of the
Philippines. IF it is intended for consumption abroad, no VAT
shall be imposed on that item that you are selling for abroad.
An actual export of item will be considered free from VAT. Because
if it physically exported outside, it is deemed that consumption is
also outside. But if you look into the enumeration of these
transactions, you will notice that there are sale delivered in the
Philippine territory but subject to zero-rate. But there are
requisites to follow.
b. Destination Principle
Is cross-border doctrine same as destination principle?

The essence of both are the same. One underlying principle.

Where it is destined for consumption will the VAT be
collected. If the consumption is destined for abroad, no VAT
will be imposed but if destined for consumption here in the
Philippines, then it will be subject to VAT. That is why
services rendered by non-residents even in an isolated case
will be subject to VAT because the consumption of the one
who hired the non-resident, consumption will be in the
Philippines.

Slight difference is that in cross-border doctrine it mentions

of territorial borders, beyond the territorial borders of the
taxing jurisdiction of the Philippines. In destination principle,
so long as goods and services are destined for consumption
in another country, then it not be subject to VAT.

As a general rule, our jurisdiction uses the destination

principle or cross-border doctrine as a basis for the
jurisdictional reach of the tax. We can only tax wherein it is
consumed in the Philippines.
Transactions Subject to 12% VAT
Majority if transactions are subject to 12% VAT (eating at a restaurant,
buying stuffs, rentals, etc.), so it is easier if we will identify those subject
to 0% VAT and VAT exempt transactions and deem all others subject to
12% VAT.
Sale of real properties not primarily held for sale is always subject to VAT if
you are engaged in a real estate business. If not then determine whether it
is incidental to your business (subject to VAT). If not, then not subject to
VAT.
Examples of transactions subject to 12% VAT:
domestic common carrier by air or sea
carriage of cargo or goods whether by land, air, sea
sale of electricity
Non-life insurance (fire, property, etc.)
Services rendered by transportation contractors, subject to VAT?
Yes, transport of cargoes or goods are subject to VAT whether by land,
air, or sea.
But transport of passengers by land is not subject to VAT because it is
a necessity. It is difficult to apply VAT in land transport of passengers

I.

in a sense that it is difficult to remit or collect, because VAT relies

heavily on documentation. Such that in order for a person to claim as
an offset incentives VAT on sales, it has to be documented by official
receipts and invoices.
Transport of passengers by air or sea is subject to VAT if it is
domestic.
If you are VAT registered and your transaction is subject to VAT, you
dont necessarily have to pay the entire 12% to the government
because you are allowed to deduct the VAT in your purchases. You can
only apply this if the law allows, ex. in transactions involving export
sales.
Transactions Subject to Zero-Rate, Sections 106 (A) (2) & 105 (B) of the
Tax Code & RRs
Ex: A domestic corporation engaged in export of tuna, will it be considered
as a VAT zero rated transaction?
Sale of tuna is exempt. Therefore you need not register under the tax
system; any sale is exempted and cannot be zero rated.
Export of tuna in its original state is exempt from VAT and not subject
to 0%-rate because to be covered under 0%-rate system, one must
first be registered. Sale of tuna in its original state is an exempt
activity; therefore it need not register under the VAT system. Since it
need not be registered, it cannot therefore be under the 0%-rate
system which requires registration.
Take note that for 0%-rating to apply, the exporter must be a VATregistered seller. Even if a seller is registered under the VAT system and
pays 12% VAT on his sales in the Philippines, if he exports his goods, he
will be covered under the 0%-rate system because he is a VAT-registered
seller.
1. Zero-rated sale of goods
a. Export Sales
Exportation of goods does not necessarily mean that there is an
actual shipment of goods outside the Philippines.
i.
The sale and actual shipment of goods from the Philippines
to a foreign country irrespective of any shipping agreement
that may be agreed upon which may influence or determine
the transfer of ownership of the goods so exported, paid
for in acceptable foreign currency or its equivalent in goods
or services, and accounted for in accordance with the rules
and regulations of the Bangko Sentral ng Pilipinas (BSP);
Actual export sale
Requisites:
Actual shipment of goods
Shipment is from the Philippines to a foreign country,
regardless of the shipping arrangement which dictates
the transfer of ownership
Paid for and acceptable in foreign currency
Accounted for in the rules and regulations of BSP

What does accounted for in the rules of BSP and

Paid for and acceptable in foreign currency?

Example: A buyer pays you but you only have a peso

account in the Philippines.
If a buyer forwards payment and you only have
a peso account in the Philippines, its still
considered as paid in foreign currencyeven if
the bank is constrained to convert the payment
Page | 45

into pesos. The payment has to be determined

from its source .The payment also enters into
the Philippine banking system, therefore it is
considered accounted for under the rules of BSP.
ii. The sale of raw materials or packaging materials to a nonresident buyer for delivery to a resident local exportoriented to be used in manufacturing, processing, packing
or repacking in the Philippines of the said buyers goods,
paid for in acceptable foreign currency, and accounted for
in accordance with the rules and regulations of the Bangko
Sentral ng Pilipinas (BSP);
So the second type of export sale is not a direct shipment
from the Philippines to a foreign country. And lets spot the
DIFFERENCE:
1. In the first class of export sale, it is the sale of goods, in
general. But in the second type of export sale, it is the
sale of RAW MATERIALS AND PACKAGING MATERIALS.
Theres a reason behind that.
2. If in the first, we are selling it directly for shipment
abroad, we assume that its a non-resident buyer. In the
second type of export sale, were still selling it to a nonresident buyer, BUT, it is FOR DELIVERY TO A LOCAL
EXPORT ENTERPRISE for purposes of having those raw
materials
and
packaging
materials
to
undergo
manufacturing processing or packaging for and in behalf
of the non-resident buyer.
Its as if the goods prior to being actually shipped abroad
have to undergo some process. And its possible. It can
happen because there are foreign purchasers who purchase
raw materials from the Philippines still having Filipinos do the
processing and only afterwards that its converted to goods
will it be actually shipped abroad. Theres cheaper labor here.
The SIMILARITY lies in the fact that you have a non-resident
buyer. Being non-resident buyers in both types of export
sales, it has to be paid in acceptable foreign currency and
accounted for in accordance with the rules of the BSP.
So in this case, there is NO ACTUAL SHIPMENT, but its still
considered an export sale.
iii. The sale of raw material or packaging materials to export
oriented enterprise whose export sales exceed 70% of
total annual production; Any enterprise whose export sales
exceed 70% of the total annual production of the preceding
taxable year shall be considered an export-oriented
enterprise;
The definition of export-oriented enterprise is when the total
export sales would exceed 70% of its annual production.
So what year do we compute the more than 70% export
sales: during the year of sale to an export-oriented
enterprise, or is it the preceding taxable year?
So, determine the preceding taxable years export sales.
If it exceeds 70% of the total annual production, then the
current years sales to an export-oriented enterprise will
be considered as zero-rated.
Another reason why these are raw materials and packaging
materials is that these export-oriented enterprises would

actually still process the raw materials and packaging

materials before actual shipment abroad.
And why is it still considered zero-rating?
Because in export-oriented enterprise, majority of their
transactions are considered export sales.
Does it have to be paid in acceptable foreign currency? Since
the buyer is a resident of the Philippines, there is NO NEED to
pay in acceptable foreign currency for zero-rating to apply.
iv. Sale of gold to BSP;
Sale of gold to the BSP; no other precious metal: only gold,
even if its platinum, which is more expensive. BSP only
collects gold to support the issuance of Philippine money.
v. Transactions considered export sales under Executive
Order No. 226, otherwise known as the Omnibus
Investment Code of 1987, and other special laws.
Those that are considered as export sales under Executive
Order 226 or the Omnibus Investment Code. This covers
actual and constructive exportation.
Constructive exports
Not actual export. Goods sold to someone who would
eventually export.
What are covered under constructive exports under E.O. 226?
(1) sales to bonded manufacturing warehouses of exportoriented manufacturers
(2) sales to export processing zones
(3) sales to registered export traders operating bonded
trading warehouses supplying raw materials used in the
manufacture of export products under guidelines to be
set by the Board in consultation with the Bureau of
Internal Revenue and the Bureau of Customs
(4) sales to foreign military bases, diplomatic missions and
other agencies and/or instrumentalities granted tax
immunities, of locally manufactured, assembled or
repacked products whether paid for in foreign currency or
not.
Whenever a law grants exemption from tax it is generally only
refers to direct taxes. So VAT is not something that can easily
be granted to the exemption or zero rating unless it is
specifically provided by the law. So for sales to diplomatic
missions, agencies and instrumentalities there is a certain
special law which grant them the immunity not only from
direct taxes but also from value added taxes. Export
processing zones as well are granted exemption from VAT as
specifically provided by law that they are only liable for 5% of
tax in lieu of all national and local taxes including VAT.
How about actual exportation?
There are 3 types of actual exportation
(1) When there is an actual export sale made by a
registered export producer or manufacturer.
(2) When there is an actual export sale made by a
registered export producer or manufacturer to
another registered export producer or manufacturer.
(3) A sale by a registered export producer to a
registered export trader, but it has to be actually and
eventually exported in order for it be called an actual
Page | 46

b.

export sales subject to 0 rate, if not then it would be

subject to the 12%.
Next type of export sale??
Sales made by a VAT registered person to a BOI (board
of investment) registered manufacturers or producers.
vi. The sale of goods, supplies, equipment and fuel to persons
engaged in international shipping or international air
transport operations.
Sales of goods supplies or fuel to an international shipping
and in air transportation
If the entity engaged in international shipping makes a
stopover in a Philippine port before proceeding to its foreign
destination, will the zero rating apply? i.e. Davao to Manila,
Manila to the foreign country, will the zero rating apply on all
sales of fuel to that air transport operation?
Only the supplies, equipment, fuel and goods pertaining
to the last flight in the Philippines directly to the foreign
country. The flight from Davao to Manila will not be zero
rated but subject to 12% VAT. The concept here is that
there must be no stopover or docking in different
Philippine ports. It has to be from the Philippines directly
to the foreign port.
The concept here is that there must be no stop-over, docking,
in different Philippine ports. It has to be an uninterrupted
flight or trip from the Philippines to a foreign port. So when it
says sales of goods, supplies, fuel, and equipment to entities
engaged in international shipping and air transport operations
is being subject to 0% VAT, it pertains only to those items
that cater to a direct flight from a Philippine port to a foreign
part, or vice-versa.
Of course, these carriage of goods refer to those from a
Philippine port to a foreign port or vice-versa without docking
or stopping.
But it goes on to say that stop-over or docking would still be
allowed if the purpose of the stop-over or of the docking in a
Philippine port would be for the purpose of unloading goods or
cargoes that came directly from abroad or from loading goods
or cargoes that are intended for abroad.
So for example there is a flight that is intended for Manila,
but made a stop-over first in Cebu, going to Manila, if the
purpose for docking in Cebu or for stopping in Cebu is simply
for unloading passengers or cargoes direct from abroad, it is
allowed, it is zero-rated.
Foreign Currency Denominated Sale
The second type of zero-rated goods or properties after Export
Sales would be the: Foreign Currency Denominated Sale.
For example, you have this domestic corporation, you would like
to enter into transactions with a corporation of Mr. X, you agreed
and its written in the contract that the payment shall be made in
an acceptable foreign currency. Will it be already called a foreign
currency denominated sale and subject to 0% VAT? Youre both
domestic corporations.

Do not be misled by the term foreign currency denominated

sale because it doesnt mean that all sales denominated in
foreign currency are subject to 0% VAT. Otherwise, it will be

so easy to evade the payment of VAT by simply agreeing with

the other party that payment shall be made in an acceptable
foreign currency.
There are other requirements to make a foreign currency
denominated sale as such:
1. Sale of goods which are locally manufactured or assembled
2. Sold to a non-resident
3. Delivered to a Philippine resident
4. paid for in acceptable foreign currency
5. Accounted for under the rules of the BSP
Would all types of goods locally manufactured and assembled be
covered by the zero-rating under foreign currency denominated
sale?
NO. There are exceptions.
So what cannot and can never be zero-rated under FCDS?
The law provides that there are certain types of goods that
cannot be covered by foreign currency denominated sales
and these goods are those found under Sec. 149 and Sec.
150 of your tax code, specifically automobiles and nonessential goods.

When you say automobile, what do we mean by

automobile? 4-wheeled vehicles.
Jeepneys are 4wheeled vehicles.
So if we export jeepneys locally
assembled and manufactured units to a non-resident
buyer, for deliver to a local or a resident, this is not
covered by the zero-rating? 4 wheels lang? So what if
we have more than 4, like 5? What about trucks? What
about jeepneys? Bicycles, motorcycles, 2 only? Not
included in the exception? So if you assemble and
manufacture motorcycles in the Phils., Skygo, and you
had it sold to a non-resident for delivery to a resident,
paid for in acceptable foreign currency, zero-rated or
not? ZERO-RATED.
What is excluded from foreign currency denominated
sales are automobiles. Automobiles are 4-or morewheel vehicles that are propelled by gasoline, diesel,
or electric power.
So if its not 4-wheel, meaning 1-, 2-, or 3-wheel, it
can be covered by the zero-rating. But, if it has 4 or
more wheels its considered automobile, then it will
not be zero-rated even if it is sold to a non-resident
buyer.
How about trucks? Are they covered by zero-rating?
NO. How about cargo vans? No. they are not covered
by automobiles. So if they are sold, it may still be
subject to zero rating. So if its not an automobile,
then they can be zero-rated.
So what is excluded in the definition of automobile
(RA 9224) such as trucks, cargo vans, jeepneys,
delivery trucks, yachts are not among the
automobiles therefore they are guaranteed zero-rate
if the other requisites are present. And non-essential
goods would constitute?

Jewelries. If its an imitation jewelry or an imitation pearl

and exported? Is it zero rated or not?
Page | 47

2.

Jewelry as defined in the law includes real or

imitation. So if it sold to a non-resident buyer,
assembled and manufactured in the Philippines, it is
excluded from zero rating because it is a nonessential good.

Section 150. Non-essential Goods.

(a) All goods commonly or commercially known as
jewelry, whether real or imitation, pearls, precious
and semi-precious stones and imitations thereof;
goods made of, or ornamented, mounted or fitted
with, precious metals or imitations thereof or ivory
(not including surgical and dental instruments,
silver-plated wares, frames or mountings for
spectacles or eyeglasses, and dental gold or gold
alloys and other precious metals used in filling,
mounting or fitting the teeth); opera glasses and
lorgnettes. The term 'precious metals' shall include
platinum, gold, silver and other metals of similar or
greater value. The term 'imitations thereof shall
include platings and alloys of such metals;
(b) Perfumes and toilet waters;
(c) Yachts and other vessels intended for pleasure or
sports.
c. Sales to persons or entities whose exemption under special
laws or international agreements to which the Philippines is a
signatory effectively subjects such sales to zero rate.
Companies granted exemption under special laws or
international agreements
Example: sales to export processing zones, International Rice
Research Institute, Asian Development Bank- sales to a member
of the Asian Development Bank is zero rated. So if there is a
vehicle sold to a member of the Asian Development Bank, no VAT
will be collected.
Zero-rated sale of services
Sale of service. If you look into the enumeration of the sale of service,
it is just like sale of goods only that what is sold is service. SO it is
very easy to memorize this once you have memorized the sale of zerorated goods.
(1) Processing, manufacturing, repacking of goods for someone
who is doing business outside the Philippines and such goods
are subsequently exported, paid in acceptable foreign currency
and accounted for under BSP rules.
Requisites:
a. Processing, manufacturing, repacking of goods for someone
doing business outside the Philippines
b. Paid in acceptable foreign currency
c. Under the BSP rules
(2) Services other than those mentioned in the preceding
paragraph rendered to a person engaged in the business
conducted outside the Philippine or to a non-resident person
not engaged in business who is outside the Philippines when
the services are performed, the consideration for which is paid
for in acceptable foreign currency and accounted for in
accordance with the rules and regulations of the Bangko
Sentral ng Pilipinas (BSP)

Requisites:
a. Services other than processing, manufacturing or repacking of
goods
b. For other persons doing business outside the Phils. OR nonresident not engaged in business outside the Phils.
c. Paid for in acceptable foreign currency
d. Accounted for in accordance with the Rules and Regulations of
BSP
If the service is rendered to a person who is not in business, does
it mean to say that it is zero-rated? There are two other
requisites. He must be someone engaged in a business outside
the Phils or if he is not then, that person must not be engaged in
business, a non-resident who is outside the Phils. It is for the
purpose of ensuring that the services will be rendered outside the
Phils. either because the other person is outside the Phils. but
engaged in business outside the Phils. or the person is a nonresident not engaged in business who is also outside the Phils. It
must be paid for in acceptable foreign currency and accounted for
in accordance with the Rules and Regulations of the BSP. Why?
Because both type of buyers are outside the Phils., they have
access to foreign currency.
(3) Services rendered to persons or entities whose exemption
under special laws or international agreements to which the
Philippines is a signatory effectively subjects the supply of such
services to zero percent (0%) rate;
Talks about services rendered to entities whose exempted under
special laws or international agreements to which the Phils. is a
signatory which effectively subjects the supply of the said services
to zero percent rate.
(4) Services rendered to persons engaged in international shipping
or international air transport operations, including leases of
property for use thereof;
(5) Services performed by subcontractors and/or contractors in
processing, converting, or manufacturing goods for an
enterprise whose export sales exceed seventy percent (70%)
of total annual production;
(6) Transport of passengers and cargo by air or sea vessels from
the Philippines to a foreign country;
(7) Sale of power or fuel generated through renewable source of
energy such as but not limited to biomass, solar, wind,
hydropower, geothermal, ocean energy, and other emerging
energy sources using technologies such as fuel cells and
hydrogen fuels.
EXCEPT the sale of services for the maintenance or repair of the
machineries or equipment generating the renewable sources of
energy
exemption will only apply if what is sold is power AND fuel
CIR vs. Burmeister and Wain Scandinavian Contractor Mindanao,
Inc. SC GR No. 153205, January 22, 2007
DIGESTED BY: Jared Limquiaco
FACTS:
A foreign consortium, parent company of Burmeister, entered into
an Operation and Maintenance contract (O&M) with NAPOCOR.
The foreign entity then subcontracted the actual O&M to
Burmeister. NAPOCOR paid the foreign consortium a mixture of

Page | 48

currencies while the consortium, in turn, paid Burmeister foreign

currency inwardly remitted into the Philippines. BIR did not want
to grant a refund since the services are not destined for
consumption abroad (or the destination principle).
ISSUE: Are the receipts of Burmeister entitled to VAT zero-rated
status? (Should they have been refunded?)
HELD:
Burmeister and Wain Scandinavian Contractor Mindano is entitled
to the refund prayed for BUT ONLY for the period covered
prior to the filing of CIRs Answer in the CTA.
The claim for refund has no merit since the consortium, which was
the recipient of services rendered by Burmeister, was deemed
doing business within the Philippines since its 15-year Operation
and Maintenance with NAPOCOR cannot be interpreted as an
isolated transaction.
The recipient of the services must be a person doing business
outside the Philippines to qualify for zero rate. It painstakingly
explained that the fact that the law stipulates payment in
acceptable foreign currency under BSP rules means that the
legislature clearly envisions export sales.
Under BSP rules, the proceeds of export sales must be reported to
the BSP. If the provider and the recipient of the services are both
doing business in the Philippines, the transaction is not considered
an export sale even if payment is denominated in foreign
currency. In such a case, reporting to the BSP is an unnecessary
act.
The Supreme Court further rationalized that it does not make
sense for allowing zero-rated VAT for services where the recipient
is doing business in the Philippines. If it were so, those subject to
the regular VAT can avoid paying the VAT by simply stipulating
payment in foreign currency inwardly remitted by the recipient of
services.
The refund was partially allowed since Burmeister secured
a ruling from the BIR allowing zero-rating of its sales to
foreign consortium. However, the ruling is only valid until the
time that CIR filed its Answer in the CTA which is deemed
revocation of the previously-issued ruling. The Court said the
revocation cannot retroact since none of the instances in Section
246 (bad faith, omission of facts, etc.) are present.
NAPOCOR is a 3rd party. BWSCM is not paying to NAPOCOR.
There is a contract or agreement entered. Foreign corporation is
rendering services to NAPOCOR under this contract or agreement, the
operation of two power barges. It is a group of non-resident foreign
corporations but they came to an agreement that they want to do
business in the Philippines. They would like to render the services of
operating the two power barges. But in order to make the actual
operation, through the consortium, they made a domestic corporation,
Burmeister, who would actually perform the services required by the
Napocor from the consortium. The consortium has to pay Burmeister.
Whatever is paid by Napocor to the consortium will be paid to
Burmeister. So what is the issue here?
Whose service are we talking about subjected to zero percent rated
VAT? In this case was the recipient doing business outside the Phils.?
Whos applying for the refund?
Its Burmeister.

Were all requisites present for it to be subject to zero-percent rated

VAT?
Destination Principles is applied.
Burmeister was able to get partial refund because of a previous ruling.
Illustration: CIR vs. Burmeister
Issue
Relationship

Consortium

NAPOCOR

Pay

Burmeister

J.

3. Foreign Currency Denominated Sale

Transactions Exempt from VAT
VAT Exempt Transactions: exemption itself goes into the nature of the
goods, services or properties from VAT w/o regard to the status of the
seller (VAT-exempt, VATable, VAT-registered)
VAT Exempt Persons: VAT-exempt whatever he is selling because the
party himself is exempt
1. Section 109 of the Tax Code (RA No. 8424, as amended by RA No.
9337)
(A) Sale or importation of agricultural and marine food products in
their original state, livestock and poultry of a kind generally used
as, or yielding or producing foods for human consumption; and
breeding stock and genetic materials therefor.
"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.
Polished and/or husked rice, corn grits, raw cane sugar and
molasses, ordinary salt, and copra shall be considered in their
original state;
What is covered is the sale or importation of agricultural, marine food
products in their original state, livestock and poultry
Original state: did not go through chemical process or any process that
alters its external or interior form or content
Tax Code provides for simple processes that do not alter the original
state of the products; (RR 16-05 includes those using advanced
technological means of packaging, such as shrink wrapping in plastics,
vacuum packing, tetra pack, and other similar packaging method)
Tetra-packed marine product, smoked fish, lechon (roasting) are VATexempt
LECHON in parkmall example. If you look at the receipt, besides the
TIN number if there is the word VAT it is VATable, if it is NV or
non-VAT it is not VATable
So what would be the reason that its non-VAT, because roasting does
not alter the original form of the livestock?
The reason probablywhen you say roasting, its still in its original
statethe process of preservationits still exempt from VAT, but
Page | 49

since the sale of the lechon is already part of the services by that
cebu lechon belly stall, then it should have been subjected to
VAT, if youre eating it for here.
I have read an opinion by the BIR that when a manok daw is
roasted, its still in its original state. It is exempt from VAT if its
ordered take-out, but if its dine-in, it is subject to VAT.
But what would be the reason that the cebu lechon belly is
treating it as non-VAT?

Its not because of the process of roasting, but because it

believes, siguro, that for the entire year its sales will not
exceed 1.9M, thats probably the reason. Its not because its
lechon. Because usually, whats being purchased is dine-in,
di ba? But if you take-out one full belly, thats exempt.
Barbara Super Question (Nganong walay VAT ang resibo sa
lechonan iya napalitan):

Purchases from Andoks Lechon Manok (for example), is

VATable when you order for dine-in and is VAT exempt when
you order for take-out. This is because roasting does not alter
the original state of the chicken (so VAT exempt) but when
you order for dine-in, there is already a sale of services
included.

They do not charge VAT maybe because they havent

registered for VAT, i.e. their annual gross sales do not reach
1.9195 million.

maybe they cant reach the threshold for the next

12months
How about salt, exempt from VAT or not? All types of salt?
Rock salt, exempt. Iodized salt, not exempt.
Sugar?
Refined sugar, VATable. Whats exempt are the raw cane sugar
lang. If it undergoes the process of refining, etc. different form,
its already VAT-able.
How about rice?
All forms are exempt.
Coffee beans?
Exempt.
Copra?
Exempt.
How about salted eggs?
Exempt.
Sunny-side up?
VAT-able. The original form is already altered.
Salting of an egg is still in its original state.
Di ba buwad (dried fish) is full of salt? Its still in its original state.
Its VAT-exempt.
In any case, when you do some grocery shopping, you can still
determine which items are subject to VAT and which ones are not
because at the bottom of the receipt, theres goods subject to VAT
and goods that are VAT-exempt.
(B) Sale or importation of fertilizers; seeds, seedlings and
fingerlings; fish prawn, livestock and poultry feeds, including
ingredients, whether locally produced or imported, used in the
manufacture of finished feeds (except specialty feeds for race
horses, fighting cocks, aquarium fish, zoo animals and other
animals generally considered as pets);

Are feeds subject to VAT? The sale and importation of feeds?

The sale or importation of feeds, generally, it is for livestock,
poultry, prawns, fishes these are actually for human
consumption not the feeds itself - but the ones consuming the
feeds are for human consumption, then the sale or importation of
the feeds are exempt from VAT.
But if the type of feeds is that of specialty feeds, wherein the
consumers are fighting cocks, racehorses, zoo animals, aquarium
fishes, etc. - those considered as domestic pets - the sale and
importation of these feeds are subject to VAT.
Not only feeds are exempt to VAT, as a general rule, but also
(C) 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;
Who?
Resident citizens and non-resident citizens!
So planning to resettle in the Philippines will only apply to non-resident
citizens. While resident citizens, returning from abroad such as travel
as tourist etc, what is to be imported and exempt are personal and
household effects. When you say personal, it is not for commercial use
and it is not in commercial numbers. And ones importing these items
are those residents returning from abroad or non-resident citizens
coming to resettle in the Philippines.
Another requirement in that for VAT exemption to apply is that goods
are exempt from customs duties under the Tariff and Customs Code.
So in this item as an exempt from VAT item, we dont cater to not
Filipinos. It will always be resident citizen or non-resident citizen.
If the ones importing personal and household effects are not
Filipinos, will it still be exempt?

Yes! (Paragraph D, Sec. 109)

(D) 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 ninety (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;
Personal or household effects imported by a non-Filipino, whose
intention is to settle in the Philippines as a resident and the products
accompanied by such person or arrives within 90 days prior to his
arrival or the good arrives after 90 days upon coming to the
Philippines, it will still be exempt from VAT upon showing proof from
the Commissioner of the documentary requirements etc, that he
intends to settle in the Philippines.
If for example you're a non-resident individual, you were hired and
your assignment is in the Philippines. When you rent in the Philippines
you had all your books in your mini-library shipped in the Philippines.
It arrived in 90 days from your personal arrival in the Philippines.
Will it be exempt from VAT?

Page | 50


No!
That example class is a non-Filipino. A non-Filipino whose assignment
is only temporary basis. The shipment of the books will not be exempt
from VAT even if arrived within 90 days from arrival.
What are other items that a non-Filipino may be imported and will not
be subject to VAT?
Professional instruments and implements,
Wearing apparel,
Domestic animals,
Personal household effects
How about importation of a motor vehicle for personal use by a Filipino
or non-Filipino?
As a general rule, Filipinos or non-Filipinos importing vehicles to
the Philippines even if they intend to make Philippines their home
country, they will not be granted exemption from VAT. But the
importation of vehicle, vessel, aircraft, machinery, other goods for
use in the manufacture and merchandise. These are non-VAT
exempt items, even if all requisites are present. It can only be
exempt if there is a special international agreement.
It can only be exempt if there is a special international agreement
giving such exemptions such as your ambassadors or consuls coming
in to the Philippines.
(E) Services subject to percentage tax under Title V;
TRANSACTIONS ALREADY SUBJECT TO PERCENTAGE TAX
As a general rule, are services rendered by franchise grantees subject
to VAT?
Yes.
How about gross receipts generated by banks, subject to VAT?
No, because they are already subject to percentage tax.
Services that are already subject to percentage taxes are already
exempt of VAT. Both taxes do not co-exist with each other.
Services of banks, non-bank financial intermediaries performing quasibanking functions, and other non-bank financial intermediaries are
already subject to gross receipts tax.
Services rendered by amusement and recreation places are subject to
amusement taxes and therefore not subject to VAT.
Common carriers. If its by air or by sea, whether it is for transport of
goods or of passengers, it will be subject to VAT. If it is by land, you
have to differentiate whether the transport is that of passengers or of
cargoes. If its for transportation of cargoes, it is always subject to
VAT. If it is for transport of passengers, it is subject to percentage tax
in the specific form of common carriers tax. So what is different from
the transport of passengers and cargoes is that transport of
passengers by land is subject to common carriers tax, all others is
already subject to VAT.
Life insurance premiums are not subject to VAT.
Franchise grantees. We will have to distinguish the different franchise
grantees. If the franchise grantee is operating for gas and other
utilities, it is subject to percentage tax regardless of the gross receipts.
If the franchise is that of radio or television broadcasting, it is subject
to franchise tax in the form of percentage tax if gross receipts do not
exceed 10 million in the preceding calendar year. If it exceeds 10
million, then it is now subject to VAT.
For gas and water utilities franchise are subject to franchise tax, not
VAT. It enumerated in the revenue regulation 16-05.

Q: If after passing the bar exam, you get hired by USC as a professor,
will you be subject to VAT?
If the services are rendered under an employer-employee
relationship, no VAT or percentage tax shall be due. Instead
because you are not engaged in any type of business, but rather
only as an employee earning purely compensation income, you
will be subject to the 5-32% tax rate under income taxation.
But a consultant, wherein you are not an employee, you may be
subject to VAT. Do you agree? A consultant is subject to VAT. But it
also depends on the income. If income would not exceed 1.9M, then
you will be exempted from VAT. But if it exceeds 1.9M, you will be
subject to percentage tax of 3%.
As a legal professional, are you generally subject to VAT?
Yes, except if income does not exceed 1.9M. In which case, you
would be subject to the 3% percentage tax.
Is it provided under the law that lawyers are subject to VAT? Is there
no provision on VAT exemption of professionals? How about those
services rendered by doctors, subject to VAT?
Yes.
Hospital and laboratory services, subject to VAT?
No.
Whats the difference between hospital services and the doctors
service?
So the exemption only extends to medical, dental, veterinary, and
hospital services including laboratory services. But if what you are
paying for is already intended for the professional service of these
professionals, they are already subject to VAT. Though there is no
provision in the exception which provides that legal services are
exempt, in fact all professional services are subject to VAT, what
are exempt are only those for hospital services which caters to the
operating room services, laboratory services, e.r. services, etc.
but not for professions.
(G) Medical, dental, hospital and veterinary services except those
rendered by professionals;
The exemption only extends to medical, dental, veterinary and hospital
servicesincluding laboratory services. However, if what youre paying
is intended for the professional services of these professionals (Docs,
dentists, vets), then that specific amount will be subject to VAT.
There is no provision in the exemptions which says that legal services
are exempt. In fact, all professional services are subject to VAT are
exempt. What is exempt are those hospital services which cater to the
operating room services, the laboratory services, emergency room
services etc.but never for professional services.
CIR vs. Professional Services, Inc. CTA EB No. 409, January 8, 2009
DIGESTED BY: Jennifer Tinagan
FACTS:
Respondent owns and operates the New Medical City hospital; a
licensed tertiary hospital located at the The Medical City Complex,
Ortigas Avenue, Pasig City.
Petitioner informed respondent of its deficiency value-added tax in
the amount of P34,284,412.33 arising from its sales of pharmacy
medicines under RR No. 10-94.
Petitioner filed its Formal Protest to the Final Demand Letter, with
supporting documents, to strengthen its claim that it is not liable
for any deficiency tax assessment.

Page | 51

ISSUE: WON the sale of pharmacy drugs/medicine to in-patients is

covered by the exemption from VAT under Section 109(L) of the NIRC
of 1997.
HELD:
Argument of Petitioner: Petitioner is adamant that the sale of
drugs and medicines to in-patients is not exempt from VAT
because said transaction does not fall under the phrase hospital
services.
Relying on Section 106(A) (1) of the NIRC, petitioner argues that
drugs are considered goods and not services, as they are tangible
items subject to pecuniary estimation. For this reason, the sale of
pharmacy drugs/medicines to in-patients should not be included in
the exemption provided for in Section 109(I) of the NIRC as this
pertains to hospital services only.
Argument of Respondent: Respondent cites BIR Ruling dated April
6, 2005, the dispositive portion of which reads:

WHEREFORE, in view of the foregoing, the Office

holds that the pharmacy sales by PSI to in-patients
are exempt from VAT pursuant to Section 109(I) of
the Tax Code of 1997. Accordingly, being a VAT
exempt transaction, PSI need not reflect in its VAT
return the aforesaid sales to in-patients. But the
same should nevertheless be properly accounted for
and declared as part of patients services income in
computing the income tax of PSI and in the
preparation of its audited financial statements.
The said ruling cited in the decision of the Court of Appeals in St.
Lukes Medical Center v. Court of Tax Appeals and Commissioner
of Internal Revenue. In that case, the Court of Appeals ruled that
the item hospital services in Section 103(I) should include the
sale of drugs to in-patients of the hospital because the
maintenance and operation of a pharmacy or drugstore by a
hospital is a necessary and essential service or facility rendered by
any hospital for its patients.
The Court of Appeals further
explained that, a person who resorts to the hospital for medical
treatment can reasonably expect that the hospital would make
available its patients immediate and prompt access not only to the
services of doctors, nurses and allied medical personnel, but also
to necessary laboratory services as well as medicines, drugs and
pharmaceutical items which are dispensable aids in practically any
form of medical treatment and care of patients. It went on to
say that, the sale of drugs or pharmaceutical items to in-patients
of the hospital should be exempted from VAT because unlike the
sale of retailing of drugs or medicines by drugstores in general,
the procurement of medicines and pharmaceutical items from the
hospital drugstore or pharmacy amounts to the availment of
service rendered or made available by the for its in-patients and
not simply the buying of such goods.
Based on the foregoing disquisition, the sale of pharmacy
drugs/medicines to in-patients is included in the phrase hospital
service, and thus, exempt from VAT pursuant to Section 109(I) of
the NIRC as amended.
Sale of medicines or drugs within the hospital:
Sale of medicines or drugs to outpatients: is considered sale and
subject to VAT

Sale of medicines or drugs to inpatients: is considered part and

parcel of hospital services which are exempt from VAT. So
essentially an inpatient pays for VAT only for professional fees of
the doctor; all other expenses are not subject to VAT.
(H) Educational services rendered by private educational
institutions, duly accredited by the Department of Education
(DEPED), the Commission on Higher Education (CHED), the
Technical Education and Skills Development Authority (TESDA) and
those rendered by government educational institutions;
Practically all educational services are exempt from VAT if it is a
private school, it must be accredited; if it is a public school, no other
requirement.
Must be educational services rendered by:
a. PRIVATE educational institutions (needs accreditation from CHED
or DECS)
b. Government educational institutions
(no need for accreditation)
Does not need to be non-stock and non-profit
Not all services are exempt from VAT..if the school is renting out
commercial spaces it may be subject to VAT if its gross receipts
exceed the threshold level.
(J) Services rendered by regional or area headquarters established
in the Philippines by multi-national 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
SERVICES RENDERED BY RAHQ
Not includes selling of goods
Regional OPERATING HQs if already generating income however are
subject to 10%
income tax and 12% VAT while its employees are subject to
15% compensation tax.
(K) Transactions which are exempt under international agreements
to which the Philippines is a signatory or under special laws, except
those under Presidential Decree No. 529;
In sales from VAT registered persons to a person exempt under
international agreements or special laws, from the point of view of the
seller he should treat the sale as zero rated meaning zero for your
output tax (on your sales) but you can claim input tax from your other
purchases, but from the point of view of the buyer he should treat it as
exempt meaning you dont recognize any input tax.
(O) Export sales by persons who are not VAT-registered;
If made by VAT-registered entities should be treated as zero rated
if made by persons not VAT-registered; these transactions are VAT
exempt.
only difference is that if zero rated you can claim input taxes from your
other purchases.
(L) Sales by agricultural cooperatives duly registered with the
Cooperative Development Authority to their members as well as
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;

Page | 52

(M) Gross receipts from lending activities by credit or multipurpose cooperatives duly registered with the Cooperative
Development Authority;
(N) Sales by non-agricultural, non-electric, and non-credit
cooperatives duly registered with the Cooperative Development
Authority: Provided, That the share capital contribution of member
does not exceed Fifteen thousand pesos (P15,000) and regardless
of the aggregate capital and net surplus ratably distributed among
the members;
Are services or sales of goods by cooperatives exempt from VAT?
To its members, yes. As to non-members, yes, as long as the
coop is duly registered with the CDA.
Lets have it here:
Agricultural
All agricultural cooperatives are VAT exempt as long as duly
registered with the Cooperative Development and its sales to its
members. Also, sales to non-members are exempt only if the
producer of the agricultural products sold is the cooperative itself.
How about the importation of direct farm inputs, machineries,
supplies and spare parts, would it still exempt from VAT?

Yes. As long as they are directly and exclusively used for the
production of the agricultural cooperative goods/produce. So
practically everything with the agricultural cooperative are
exempt from VAT
Credit/Multipurpose
How about gross receipts from lending activities from
credit/multipurpose cooperatives, are they exempt from VAT?

Yes. As long as they are registered with CDA, in good

standing.
So its gross receipts from its lending activities will be exempt from
VAT. And the requirement is only they have to be duly registered
with the Cooperative Development Authority in good standing.
If not from lending activities, thats already another matter.
Non-Agricultural, Non-Electric, Non-Credit
So practically all other coops (except Electric) are VAT exempt as
long as:

Duly registered with the CDA

Share capital contribution of each member does not exceed

P15,000 (regardless of the aggregate capital and net surplus
ratably distributed among the members)
Which leaves out that only electric cooperatives, generally, are subject
to VAT.
Are the importation of non-agricultural, non-electric, non-credit
cooperatives of machineries and equipment, including spare parts
thereof subject to VAT?
Yes, theyre subject to VAT. The exemption of the importation
applies only to agricultural cooperatives.

Illustration
Agri
Credit/Multi-purpose
ALL
OTHER
COOPS
except

Non-Agri
Non-Electric
Non-Credit
ELECTRIC

Exemptions are strictly construed; you have to look into the

compliance with all the requirements of the law.
(P) Sale of real properties as follows:
i. Sale of real properties not primarily held for sale to customers
or held for lease in the ordinary course of trade or business
ii. Sale of real properties utilized for low-cost housing as defined
by RA No. 7279, otherwise known as the Urban and
Development Housing Act of 1992 and other related laws,
such as RA No. 8763.
iii. Sale of real properties utilized for socialized housing as defined
under RA No. 7279, and other related laws, such as RA No.
7835 and RA No. 8763, wherein the price ceiling per unit is
P225,0000 or as may from time to time be determined by the
HUDCC and the NEDA and other related laws.
iv. Sale of residential lot valued at One Million Nine Hundred
Nineteen Thousand Five Hundred Pesos (P1,919,500.00) and
below, or house an lot and other residential dwellings valued at
Three Million One Hundred Ninety-Nine Thousand Two Hundred
Pesos (P3,199,200.00) and below where the instrument of
sale/transfer/disposition was executed and notarized on or
after January 1, 2012; However, for instruments executed and
notaried on or after Nov. 1, 2005 but prior to January 1, 2012,
the threshold amounts should appropriately be P1,500,000 and
P2,500,000 respectively. Provided, That every three(3) 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 (NSO); Provided, further, that
such adjustment shall be published through revenue
regulations to be issued not later than March 31 of each year.
If two or more adjacent residential lots, house and lots or other
residential dwellings are sold or disposed in favor of one buyer
from the same seller, for the purpose of utilizing the lots, house
and lots or other residential dwellings as one residential area,
the sale shall be exempt from VAT only if the aggregate value
of the said properties do not exceed P1,919,500.00 for
residential lots, and P3,199,200.00 for residential house and
lots or other residential dwellings. Adjacent residential lots,
house and lots or other residential dwellings although covered
by separate titles and/or separate tax declarations, when sold
or disposed to one and the same buyer, whether covered by
one or separate Deed/s of Conveyance, shall be presumed as a
sale of one residential lot, house and lot or residential dwelling.
This however, does not include the sale of parking lot which
may or may not be included in the sale of condominium units.

Page | 53

The sale of parking lots in a condominium is a separate and

distinct transaction and is not covered by the rules on
threshold amount not being a residential lot, house & lot or a
residential dwelling, thus, should be subject to VAT regardless
of amount of selling price.
General rule: Sale of real property are VATable.
Exceptions:
1. Those utilized for low-cost housing, which does not exceed 700k
2. Those utilized for commercialized housing, not exceeding 225k
3. Sale of residential lots, selling price does not exceed 1.9195M
If price is exactly 1.9195M, no VAT, if 1.9196, there is VAT.
Ask for one peso discount.
Situation: two adjacent lots, worth 1M each, sold by the same seller,
bought by the same buyer.
The purchase of two or more adjacent lots from the same seller
paid by the same buyer, even if covered by a separate title and a
separate deed of sale, will be considered as one purchase if its
intent is to make it one residential place. So in this case the total
is 2M. That is beyond the 1.9195M exception, thus, VATable.
Situation: Mr. A bought this lot first from the subdivision developer.
Mr. B bought the other lot, also from the developer. They bought this
together as friends. Eventually Mr. B decided to migrate. He offered
to Mr. A the lot, which he bought from the developer for 1M and sells it
to him for 1M, and it is an adjacent lot. Will the sale of Mr. A to Mr. B
be subject to VAT?
Not subject to VAT. There are different sellers. Not only that, Mr.
B is a seller of property which is not engaged in real estate
business, therefore he cannot be subjected to VAT. He will have to
pay Capital Gains Tax based on the gross selling price or fair
market value whichever is higher.
Situation: two lots valued 1M each. One is owned by Mr. A and the
other by Mr. B. they offered to sell you this property at cost. You
bought it at the same time, and it is covered by different deeds of
sale. Subject to VAT or not?
No. different sellers and they are not engaged in real estate
business. Same as above. Even if it exceeds 1.9195M, if the seller
is not engaged in real estate business, or not selling an ordinary
asset, it is not subject to VAT because it will be subject to capital
gains tax.

Illustration

1M

1M

Subdivision
Developer

Mr. Pelayo

1M

1M

Mr. Pelayo

Mr. Lim

1M

1M

Mr. Pelayo

Mr. Pelayo

NOT VATable
different seller, not
engaged in trade or
business

NOT VATable
different seller, not
engaged in trade or
business even if
exceeded threshold

NOT VATable Mr.

Pelayo is NOT
engaged in trade or
business

Isolated Transactions
Q: Bought subdivision lots on different dates or from one seller,
the same buyer

A (student): Still VAT-able, because if it would not be allowed

to be subjected to VAT, it will circumvent the law.

Sale of lot not exceeding Php 1,915,500 (Orig: 1.5M) If the

seller is not engaged in the trade or business, and he sells the
lots not in the course of the ordinary business, then he will
not be subject to VAT but to Capital Gains Tax.

Sale of residential house and lot and other residential

dwellings such as condominium units valued at not more than
3,199,200 are not subject to VAT. (Originally 2.5M)
Parking lot purchased together with the condominium
unit is not included in the computation of the price of
purchase, because the value of the condominium unit
itself is the only thing to be considered whether we apply
VAT or not subject to Php3,199,200 (2.5M) threshold.
In instances, where same buyer purchase 2 adjacent
condominium units, on different deeds of sale from the
same seller, the 2 purchases are still both considered,
and the total value of it may be subjected to the VAT
exempt threshold of Php3,199,200 (2.5M)
So long as it not an ordinary asset, then it is not subject
to VAT
Illustration
2,500,000 M
700,000 PL
3,200,000
Sale of real properties that are not primarily intended for sale
or for lease in the course of trade and business so long as it is
not an ordinary asset then it will not be subject to VAT.
+

Page | 54

So theres a rule, in the sale of real properties are VATable in case of

ordinary course of trade and business unless it falls under the five
exemptions.
As a general rule, all sale of real properties and lease of real properties
are subject to VAT because of the provision that VAT shall be imposed
not only on the sale of goods and services, but also on the sale of
properties made in the course of trade or business. So long as we say
that sale or lease of real property is made in the course of trade or
business, it is subject to VAT.
There are 5 exemptions as we said:
1. The sale of real property that is not ordinarily held for sale nor for
lease in the course of trade or business;
2. If it involves low-cost housing. The ceiling per unit of low-cost
housing exempt from VAT is P750,000. Has this been increased
by R.R. 13-2012? It is not covered by that regulation, therefore
we stick to the ceiling per unit of low-cost housing of P750,000;
3. Socialized housing, where the ceiling per unit is P225,000 still;
4. When a residential lot (lot only) is sold for a value not exceeding
P1,919,500; and finally
5. When a residential house and lot or any type of residential unit or
dwelling is sold for a unit price not more than P3,199,200.
In Revenue Regulations 13-2012, it says there, when a residential lot
or residential house & lot or any other residential dwelling is sold,
when 2 properties adjacent to each other is sold to one and the same
buyer, it will be subject to VAT.
When 2 or more adjacent lots or house & lots are sold to one and the
same buyer by one and the same person, regardless of whether or not
a deed of sale is separately made or when the property is separately
titled, it will be presumed, there will be a presumption, that it is
actually made in order to avoid the payment of VAT to lower the
value in order for it not to be covered by the ceiling of VAT application.
But that presumption will only apply if that sale, separately made, will
be done within a 12-month period. So if its more than a 12-month
period, the presumption will not apply.
Note also that parking lots are NOT covered by the definitions
residential lots or residential house & lots. Regardless of the price
of the parking lot, it is subject to VAT.
(Q) Lease of residential units with a monthly rental per unit not
exceeding P12,800.00, regardless of the amount of aggregate
rentals received by the lessor during the year;
The foregoing notwithstanding, lease of residential units where the
monthly rental per unit exceeds P12,800.00 but the aggregate of
such rentals of the lessor during the year do not exceed
P1,919,500.00 shall likewise be exempt from VAT, however, the
same shall be subjected to 3% Percentage Tax.
In cases where a lessor has several residential units for lease,
some are leased out for a monthly rental per unit of not exceeding
P12,800.00 while others are lease out for more than P12,800.00
per unit, his tax liability will be as follows:
i.) The gross receipts from rentals not exceeding P12,800.00 per
month per unit shall be exempt from VAT regardless of the
aggregate annual gross receipts.
ii.) The gross receipts from rentals exceeding P12,800.00 per
month per unit shall be subject to VAT if the aggregate annual
gross receipts from said units only (not including the gross

Illustration

receipts from units leased for not more than P12,800.00)

exceeds P1,919,500.00. Otherwise, the gross receipts will be
subject to the 3% tax imposed under Section 116 of the Tax
Code
Lease of a residential unit with a monthly rental not exceeding
P12, 800
So if you are an owner of a residential building and you have big
rooms each is rented for 12,800 will you be subject to VAT?
No, it is exempt because it did not exceed 12,800
If the monthly rental is more than P 12,800:
The lease is subject to VAT if the aggregate annual gross receipts
from said rentals (not including gross receipts from units leased
for P 12,800 or less) exceed P 1,919,500.
It is subject to 3% percentage tax, if the aggregate annual gross
receipts do not exceed P 1,919,500.
What if the total or aggregate of your total rent will exceed 1.9195M?
Will it still be exempt from VAT or will it be subject to VAT already?
Still exempt from VAT because as long as the monthly rental shall
not exceed 12,800 per unit regardless of the total aggregate
annual rental it will still be exempt from VAT.

A
Unit
Annual

12,800/mo.
2,000,000
VAT-Exempt

B
15,000/mo.
1,500,000
Subj. to
percentage tax

C
15,000/mo.
5,000/mo.
1,000,000

Residential
Commercial
Residential

200,000 Commercial
1,200,000
no need to register
if
1,000,000 Residential
1,000,000 Commercial
2,000,000
Register
So here is A and B. A owns a residential units where it leases for
12,800 per month while B 15,000 per month the annual proceeds of
rent is 2M for A while for B is 1.5M. Who among A and B is liable for
VAT? Or who should be registered for VAT purposes?
None, because first looking into the monthly rental of A since it
will not exceed 12,800 even if the annual receipts will exceed
1.9195M it is sill exempted
Will A be liable for percentage tax?
No A is not liable for percentage tax but it will be B who will be
liable for percentage tax because the monthly rental exceeds
12,800 however but the total gross rental for the 12 month period
does not exceed 1.9195M therefore not liable for VAT but is liable
for percentage tax.
So in the case of B the per unit rent is higher than the threshold limit
so generally it should have been subjected to value added tax but
because he has not reached the other threshold limit which is
1.9195M, he is not liable for VAT he is still exempt unless of course if
he opts to be registered under the VAT system which is allowed. So
regardless of the value of the rent if the threshold is still not met the
value added tax will still not apply.
Page | 55

If Mr. C has a rent of 15k per month for a residential unit and 5k per
month for a commercial unit, should C register in the VAT system?
W/o the detail of how much the annual gross receipts would be, should
C register for VAT system?
Yes, because C is into leasing commercial units so he must be
registered as a lessor of a commercial unit.
What if the gross receipts from residential is only 1M and for the
commercial is only 200k? Is it mandatory to register in the VAT system
or not?
No, not mandatory because he was not able to reached the annual
gross receipts threshold limit which is 1.9195M
We do not consider the gross earnings from the residential lease. If we
consider the said factor because he is into commercial leasing,
however, it does not qualify for mandatory VAT registration. For one to
be under the mandatory VAT registration, one must have exceeded the
gross receipts of 1,919,500 for VAT-able transactions.
Do you agree? Both of these transactions are VAT-able supposedly.
(REFER FIRST TWO EXAMPLES)
But if the total does not exceed 1,919,500 then, you do not need to
register, even if your transactions are VAT-able.
But if I say this is 1,000,000 as well, then it is the time that you need
to register. Looking at this and your annual gross receipts are VATable, not covered by exemption, then of course, you need to register.
The exception lang is if it is residential and exceeding the limit, then
diba it is VAT-able. Now, you have this and it does not exceed the
limit, then do not register.
In this case, even if it is within the threshold limit but the transaction
is exempt from VAT or if it is more than the limit, but because the
transaction is exempt from VAT then it will be exempt, regardless of
much it generated.
The complications will only arise if you have rooms valued at 12,500
(or 12,800, not sure magchange2 siya) each (fixed rating for rent). If
you have that, you have to separate the gross receipts for each unit.
The units which are less than 12,500, regardless of the aggregate
amount in the 12-month period will always be exempt. Ang diri sa
more than 12,500 (or 12,800), you have to consider whether it
exceeded the threshold limit and the other factors (VAT-able
transactions), then it becomes VAT-able.
On mandatory registration:
WHETHER you are exempt or not then look into whether you
exceeded the threshold or not? (Felices Question)

The simplest thing to look into is look into the transaction

first. If the transactions are all exempt, then it is exempt from
VAT, you are not required to register, because it is not
mandatorily required but you have an option.

But if the transactions are both exempt and VAT-able, forget

about the exempt, focus on the VAT-able. If it exceeded the
threshold limit (referring to the VAT-able transaction) then
you shall register it. If it has not exceeded, together with the
exempt, then you do not have to register it.
Clarification on the 12-month period rule: Calendar year. When you
registered it.
We move on to the next exemption. Whenever a residential unit is
leased out, residential, not commercial, for a value of P12,800 monthly
rent, it is not covered by VAT. No VAT shall be passed on to the

lessee, and the lessor is not required if its the only type of business
activity the lessor has the lessor is not required to register for VAT
purposes.
The lessor is not required to register for VAT purposes.

Illustration
A
R- 12,800/mo.

Register

B
R=13,000/mo

C
R-13,000/mo.

D
R-13,000/mo.

12mos.

3M annual

1.5 m annual

R-12,000/mo

12 mo.

Register

Register

1.5m
3.0

NOT
VATable
3% PTx
NOT
VATable
NO need to
register

3% PTx

Just a recap...
1st situation
If Mr. X leases residential units
monthly rent of 12,800
aggregate annual value is 3m.
Is he required to register under the VAT system?

No!
2nd situation
If Mr. X leases out residential units including apartments (does not
include hotels, etc. - does not serve the same purpose),
Residential - 13,000 per month
Aggregate annual value - 3m
Required to register under the VAT system?

Yes!
3rd situation
Mr. X leases
apartment units 13,000 per month
aggregate annual rent - 1.5m
Required to register under the VAT system?

No!
Do they need to register under scenario C?

They are not subject to VAT because the annual gross

receipts do not exceed 1.9195 M.
Are you liable for the 3% percentage tax?

Yes, if it does not exceed the threshold, you will not be liable
for percentage tax.
If you notice the last item in Section 109 of the Tax Code, sale of
goods, properties and services, not exceeding 1.9195 Million
during the 12 month period, you are not required to register
under the VAT system but you will be liable for 3% percentage
tax. It means to say that this last item only applies to transactions
which should have been subjected to VAT but because it did not
reach the 1.9195M threshold limit, it will not be subject to VAT.

So since the 30,000 monthly rent is more than 12, 800, is it

covered by the exemption in the first place?
It is not exempt but because the threshold limit has not
been met, it is exempt. But that transaction is subject to
the 3% percentage tax in lieu of 12% VAT. It is different
if it is 12, 800 per month and the annual gross receipts is
1.5 M, it is not subject to VAT, it is not subject to
Page | 56

percentage tax because number 1, the monthly rent is

already exempt from VAT, and number 2, when a
taxpayer is subject to 3% percentage tax, the transaction
should have been subjected to VAT had it met the
threshold limit.
Another example:
If you are a fisherman selling marine products in its original state,
is it exempt or not?

Exempt.
If your threshold limit is more than 1.9195M, will it be subjected to
VAT?
No, so whether or not your sales of marine products exceed the
threshold limit, it will not be subject to VAT, it will not be subject
to percentage tax.
Percentage tax would only come in those items that would have been
subject to VAT had it reached the threshold limit. In selling marine
products, whether or not you reached the threshold limits, you will not
be subjected to VAT nor percentage tax.
It wouldnt matter how many units the landlord or the lessor has what
you have to look into is how much he charges per unit. If he charges
different rates per unit then you have to combine those which have
exceeded threshold limit and those that have not. To get the
aggregate gross rentals it is 12,800 x number of rooms/ units x
months in a year.
Case D
R- 13,000/ month- 1.5M- not VATable; pay 3% percentage tax
R- 12,000/month- 3M- not VATable
Should D be registered under the VAT system?

No need to mandatorily register.

So even if your total aggregate collection from all your units for the
entire year is 4.5 million, because those units exceeding 12,800 have
not reached the threshold of 1.9195 million, its not VATable but still
subject to 3% percentage tax.
For those below the limit of 12,800, even if it reaches 20 million
annually, it will never be subject to VAT because these are inherently
exempt from VAT
The 3% percentage tax would only be collected for those transactions
which would have been subject to VAT had they reached the threshold
limit.
Importations are not subject to the threshold of 1.9195 million as
Importations, as a general rule, are subject to VAT unless it is exempt
from customs duties. The value of the importation is not material. The
same goes for VAT on services; the 1.9195 million threshold also does
not apply.
(R) Sale, importation, printing or publication of books and any
newspaper, magazine, review or bulletin which appears at regular
intervals with fixed prices for subscription and sale and which is
not devoted principally to the publication of paid advertisements;
Is PHILIPPINE DAILY INQUIRER SUBJECT TO VAT?
The phrase, at regular intervals only refers to newspapers and
magazines sold. Hence, law books are not covered by the VAT
exemption.
For books to be VAT-exempt, they should be for educational and
religious purposes (i.e., bible)

The exemption not only covers the sale of books. The exemption is
extended to four acts importation, printing, publication and sale.
In the case of magazines, bulletins, review and newspapers, there are
a further requirements:
a. that they must appear at regular intervals (i.e., newspaper on a
daily basis; it DOESNT INCLUDE TEXTBOOKS
b. it has fixed prices either for sale or subscription; and
c. not principally devoted for profit
Newspapers are not really devoted for profit.
There are magazines, however, which are principally devoted
for advertisement
(S) Sale, importation or lease of passenger or cargo vessels and
aircraft, 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 vessels;
Provided, further, that the vessels to be imported shall comply with
the age limit requirement, at the time of acquisition counted from
the date of the vessels original commissioning, as follows: (i) for
passenger and/or cargo vessels, the age limit is fifteen(15) years
old, (ii) for tankers, the age limit is ten (10) years old, and (iii) for
high-speed passenger crafts, the age limit is five (5) years old;
Provided, finally, that exemption shall be subject to the provisions
of Section 4 of Republic Act No. 9295, otherwise known as The
Domestic Shipping Development Act of 2004;
How about the sale, importation or lease of passenger or cargo
vessels...?
Theyre exempt. Sale, importation or lease of passenger or cargo
vessels, including aircraft, machineries, spare parts, etc. are
exempt from VAT based on the following requirements:
1. That the passenger/cargo vessels would have the weight of
150 tons or more, and
2. That it complied with the age limit requirement:
a. For passenger and/or cargo vessels, the age limit is 15
years old;
b. For tanker, the age limit is 10 years old;
c. For high speed passenger crafts, the age limit is 5 years
old.
Note: Reckon it from the date of acquisition going back to when it was
commissioned.
If you sell it again, reckon it from the current acquisition date/current
actual commissioning date.
Beyond those age limits, they are already subject to VAT.
(T) Importation of fuel, goods and supplies by persons engaged in
international shipping or air 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; Provided further, that
if any portion of such fuel, goods or supplies is used for purposes
other than that mentioned in this paragraph, such portion of fuel,
goods and supplies shall be subject to 12% VAT;
Is that zero-rated- the sale of goods, fuel, and supplies by entities that
are engaged in international shipping or air transport operations?
Exempt or zero-rated?

Page | 57

Remember class when we had our discussion on the sale of goods,

fuel, supplies to entities engaged in international shipping or air
transport operations as zero-rated.
What was zero-rated was the sale of a domestic corporation that
is VAT-registered to these entities which are engaged in
international shipping.
So whether the domestic seller is a fuel (?) so long as it is VATregistered, selling to an international (?), indeed, the transaction
is zero-rated and there is no need pay Value-Added tax to the
government. This instance is an exempt transaction.
It's not the same. One is exempt is the importation itself.
So if an entity that is engaged in international shipping and air
transport operations, imports, fuel, good and supplies from
outside of the country and uses it in the Philippines through a
direct flight from the Philippines to a foreign port, it will not be
passed on Value-Added Tax. We cannot consider that as zerorated. In importation, there is no such thing as zero-rated. It is
always either VATable subject to 12% or exempt from VAT
because the seller is not from the Philippines and the seller not
from the Philippines can never be treated as VAT-registered. Not
VAT-registered - there's no way we can treat its transactions as
zero-rated.
So are you saying all importations of fuel, goods, and supplies by
these entities are always exempt from VAT? Exempt always? Do you
agree that all importations from these entities are treated as VATexempt transactions without exemption?
The answer is no because exemption from VAT would only be
applied if the fuel, goods, and supplies are used for flights or trips
that are from the Philippine port direct to a foreign port without
any stop (?). Again pro-rata application of Value-Added Tax may
apply if it is from the Philippines to another Philippine port before
going directly to a foreign port.
(U) Services of banks, non-bank financial intermediaries
performing quasi-banking functions, and other non-bank financial
intermediaries subject to percentage tax under Secs. 121 and 122
of the Tax Code, such as money changers and pawnshops; and
Are pawnshops and money changers subject to Value-Added Tax?
Have you tried pawning your (?)? Chicken? What will be exempt from
VAT? How about bank, are they liable for VAT? Have you tried getting
a loan from a bank? Who has an outstanding debt? Your credit cards?
Are you charged with Value-Added tax?
Banks, non-banks, non-bank financial intermediaries performing
quasi-banking
functions
and
other
non-bank
financial
intermediaries including money changers and pawnshops are
liable for VAT because they are subject to gross receipts tax which
is 0, 1, 3, and 5 percent depending on the bank.
So there was only one time in 2005, was not even a complete
year that it was experimented value-added tax shall be imposed
on banks. Had it continued, it means to say that whatever you pay
as interest to the bank for a loan you have obtained, it will be
passed on a value-added tax if VAT was not removed.
(V) 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 One Million Nine Hundred Nineteen Thousand Five

Hundred Pesos (P1,919,500);
And finally the last item is? And in lieu thereof there are? For example
you become a lawyer, will you be liable for VAT in your law practice?
You will not be liable for VAT when you become a lawyer? Will you be
subject to VAT or not? For example you become a lawyer, are you
liable for VAT or not?
It depends, in the exemption it is not provided that legal
profession is exempt therefore the only way for lawyers to be
exempt from VAT is to refuse to receive legal fees. Because if
youre gross receipts will not exceed 1.9195M in a given year then
you will not be covered under the value added tax system but of
course you will be liable for 3% percentage tax. This is under the
last item of exemption which is you are exempt because you are
not able to reach the threshold limit but you are liable to pay
percentage tax.
Who will take the burden of paying the VAT?

If your legal fee is 100k what you will collect is 112k. If you
practice as an individual you will be withheld by your client.

So if your client is a corporation for example your fee is 100k,

corporation who wish to avail of services or goods to their
suppliers are required to withhold and that is creditable.

In cases of professional this company should withhold somewhere

between 10 and 15%. So if your client corporation will withhold
15%.

So will only receive 85k plus the 12% Vat, in order to avoid being
withheld of tax and the 15%, you organize yourself into a general
professional partnership.

Remember when a corporation or a partnership is not to be

withheld of tax is if it is exempt of income tax. And GPP are
exempt from income tax therefore there is no reason to withhold
for income tax because there is nothing to be offset in the end of
the year.
Illustration

Fee
VAT
(WT)

2.

3.

I
100,000
12,000
(15,000)

GPP
100,000
12,0000
-0-

not liable of IT

Revenue Regulations No. 13-2012, October 12, 2012

Revenue Regulations No. 03-2012, January 1, 2012
Transactions incidental to VAT-Exempt Activities
Whenever you are engaged in an exempt activity, does it mean to say
that incidental activities are also exempt from VAT?
Yes.
Incidental activity to the main activity actually follows the taxability of
the transaction. If the main transaction is exempt from VAT, then the
incidental activity is exempt from VAT. If its VATable, then its
incidental activity is VATable.
Isolated Transactions
How about isolated transactions?
Exempt.
Give examples of isolated transactions.
a. Case of Magsaysay

Page | 58

b. Sale of goodwill
c. Sale of trademark
Sale of intangible asset - accounts receivable? Is that VATable?
It is not subject to VAT as a general rule.
But there is an exemption - if you are into quasi-banking or when
it is your credit business. When it is a regular activity, it becomes
VATable.
As a general rule, the sale of trade or non-trade accounts
receivables by a corporation not engaged in business is not
subject to Value-Added tax because it is an isolated transaction.
How about the sale of rights to a contract is not subject to ValueAdded Tax?
It is an isolated transaction.
To continue the sale of goodwill and trademark, sale of any
manufacturing know-how or any marketing know-how that a company
has over a product is also exempt from VAT because it is an isolated
transaction. They are into business giving out ideas.
Isolated transactions are not VATable because they are made not in
the course of trade or business nor are they incidental to the main
activity of the taxpayer.
4. Other Transactions
e.g. merger, consolidation, change in trade name, change in corporate
control, etc.
The other items, we have already discussed that - change in corporate
control, change in trade name, etc. not subject to Value-Added tax.
K. Persons Exempt from VAT
Philippine Amusement and Gaming Corporation (PAGCOR) vs. BIR, SC
GR No. 172087, March 15, 2011
1. Those
engaged
in
Transactions
Exempt
from
VAT
Those who entered into Transactions incidental to VAT exempt
Activities
2. Those who entered into Isolated Transactions
L. Optional Registration of Persons Exempt from VAT, its irrevocability
1. Gross Receipts Not Exceeding Php1.9195M
2. Mixed Transactions
3. Franchise Grantees of Radio and/or TV broadcasting, annual gross
receipts of the previous year do not exceed Php10M
M. Withholding VAT
1. 12% Creditable Withholding VAT (on payments to non-residents)
2. 5% Final Withholding VAT (on payments by the Government)
N. VAT Base, defined
1. Gross Selling Price, Section 106 Tax Code
2. Gross Receipts, Section 108 Tax Code
3. Landed Cost
O. Output Tax
1. 12% of sales of goods/services less sales returns, allowances,
discounts
2. 12% of total value plus customs duties, excises taxes, other
charges (if imported)
P. Input Tax
1. Definition
2. Sources of Input Tax
a. 12% Actual Input Tax from
i.
Local purchase
ii. Importation

Q.

R.

S.

T.

b. Transitional Input Tax

c. Presumptive Input Tax
d. Creditable Withholding VAT
e. Transactions Deemed Sale
VAT liability of the Seller
1. Output Tax less Input Tax
2. Input Tax Credit Method, who can avail
a. Purchaser of domestic goods/properties
b. Purchaser of services
c. Importer
Apportionment of input tax on mixed transactions
Substantiation Requirements
1. Tax inclusive basis rule
2. Consequences of issuing erroneous VAT Invoice/OR
a. Issuance of VAT invoice/OR by a non-VAT person
b. Issuance of VAT invoice/OR on an exempt transaction by a VAT
person
3. Documentary Supports
Western Mindanao Power Corporation vs. CIR, SC GR No. 181136,
June 13, 2012
4. Proper Time for
a. Declaring input tax
b. Claiming input tax
Treatment of Excess Input Tax
1. Carry-over to Succeeding Quarters
2. Claim for VAT Refund or VAT Credit, requisites
CIR vs. Aichi Forging Company of Asia, SC GR No. 184823, October
6, 2010
CIR vs. Mirant Pagbilao Corporation (formerly Southern Energy
Quezon, Inc. SC GR No. 172129, September 12, 2008
Microsoft Philippines, Inc. vs. CIR, SC GR No. 180173, April 6, 2011
Atlas Consolidated Mining and Development Corporation vs. CIR, SC
GR No. 159471, January 26, 2011
Administrative Matters
1. Filing of VAT Return
2. Payment of VAT
3. Penalties for Non-compliance
4. Suspension of Business Operations, violations
a. Of a VAT-registered person
i.
Failure to issue receipts or invoices
ii. Failure to file a VAT return
iii. Understatement of taxable sales or receipts by 30% or
more of his correct taxable sales or receipts for the taxable
quarter
b. Failure to register under Section 230 of the Tax Code, as
amended

Page | 59