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Taxation 2 Reviewer

Meaning of Repudiation of Interest


The refusal of an heir to accept an inheritance is called repudiation of
inheritance. The refusal to accept an inheritance may be effected through a
notarized document or by means of petition to the court having jurisdiction
over the testamentary proceedings.

Module 1
Lesson 1: Basic Concepts of Succession
Nature of Succession
Estate tax is a form of transfer tax; a tax imposed upon a gratuitous or without
adequate and full valuable consideration transfer of property ownership. It is
likewise an excise tax imposed upon the right to transfer property at the time
of death.
The transfer of ownership may either be during lifetime or upon the death of a
person. The transfer of ownership during lifetime is donation inter vivos
which is subject to donors tax, while the transfer of ownership upon death of
a person is donation mortis causa which is subject to estate tax.
Succession takes effect from the moment of death of the decedent.
Difference from Estate Tax and Donors Tax
Estate Tax
Tax imposed on the privilege to
transfer property upon ones death
Known as inheritance tax
Secure funds for the use of
government in order to pay its
actvities
Arrest inequities in the distribution
of wealth among citizens
Rates of this tax is higher than the
rate in donors tax

Donors Tax
Tax imposed upon ones privilege to
transfer property during lifetime
Known as gift tax

Terminologies
Succession is a mode of transferring ownership of property, rights and
obligations by a person upon his death to another or others either by a will or
by operation of law.
Will refers to the control of a person to a certain degree of the disposition of
his estate, with the formalities prescribed by law, which takes effect upon his
death.
Testator is the person who executed the will.
Gross estate is the total amount of properties owned by the decedent at the
time of death.
Net estate is gross estate diminished by the allowable deductions.
Insolvent person is one who has no ability to pay his liabilities.
Testate refers to the death of a testator with the will having been executed.
Deductions are amounts or items allowable by the law to be deducted from the
gross estate to arrive at the net estate. The burden of proof for the deductions
being claimed shall be on the taxpayer.
Elements of Succession
1) Decedent. The person who died and whose property is transmitted through
succession, either by will or by operation of law.
2) Heir. The person who will receive the property which is the subject of
succession, either by provision of the will or by operation of law.
3) Estate. The property, rights and obligations of a person which are not
extinguished by his death and which are to be transferred to the heir.
Kinds of Succession
1) Testamentary. Succession resulting from a will which designates an heir
and his entitlement to the estate, executed in the form prescribed by law.
a) Legatee is a successor or heir to a particular personal property by virtue of a
will.
b) Devisee is a successor or heir to a particular real property by virtue of a
will.
2) Legal or intestate. Succession resulting from the operation of law since
there is no will, or if there is a will, the same is considered void.
3) Mixed. Succession which is partly by will and partly by operation of law.

For instance, Atty. Albert Fenzy left a last will and testament providing for the
equal disposition of his cash of 3,000,000 to Vina, Ivy, and Nathalie. If
Nathalie, because she is already financially well off, repudiated her
inheritance in favor of Vina, then Vina and Ivy would each receive
1,000,000 but Vina would receive 1,000,000 more which is considered a
donation from Nathalie.
Persons Authorized to Manage the Estate
1) Executor. The person indicated by a testator to carry out the provisions in
his will upon his death.
2) Administrator. The person designated by the court to administer and settle
the properties of the decedent in accordance with the governing statute since
no competent executor was designated by the testator.
Lesson 2: Gross Estate- Inclusions
Classifications of Decedent
1) resident or citizen:
a) citizen of the Philippines residing in the Philippines
b) citizen of the Philippines residing abroad
c) citizen of a foreign country residing in the Philippines, i.e., a resident alien
who is not a Filipino citizen but whose residence is in the Philippines
2) non-resident, non- citizen
a) citizen of a foreign country residing abroad, or an individual who is a
resident in the Philippines but is not a Filipino citizen. He may be engaged in
business in the Philippines or he may not be engaged in business in the
Philippines but comes to the Philippines for a definite purpose which can be
accomplished promptly. An example of the latter may be someone who comes
to the Philippines for a 3-day concert, after which, he returns to his domicile
abroad.
The gross estate of the above decedent may include:
1) properties physically in the estate; and
2) properties not physically in the estate, depending on some conditions
Properties Physically in the Estate
The properties physically in the estate are properties still owned by the
decedent at the time of his death, to the extent of his equity or interest in such
property, whether he is the exclusive owner, or it is by conjugal, community,
or common ownership.
Properties Not Physically in the Estate
The properties not physically in the estate refer to assets or properties owned
by the decedent during his lifetime but were no longer owned by him at the
time of his death because these properties were transferred by him while he
was still alive. These are the:
1) transfer in contemplation of death;
2) revocable transfers;
3) property transfer under the general power of appointment
4) transfer for an insufficient consideration.
The transfer in contemplation of death is motivated by the thought of death
which prompted the disposition of the property so that estate tax may be
avoided. If the transfer was made where the time interval from the moment of
making the said transfer was relatively close, then this is construed as a
transfer in contemplation of death. However, if the transfer was made for a
sufficient consideration or payment, this does not fall under the transfer in
contemplation of death because there was a valid sale.
In revocable transfers, the decedent before his death transfers the enjoyment
of his property to another person but subject to his right to revoke or cancel
the transfer at his will, with or without notice to the transferee.
A power of appointment is a right to designate the person or persons who are
to receive certain property from the estate of a prior decedent. A power of

appointment may either be a general power of appointment or a limited


(specific or special) power of appointment. A general power of appointment is
one which may be exercised in favor of any beneficiary, while a limited power
of appointment designates a specific beneficiary. Under the general power of
appointment, the decedent is deemed the owner of the property and therefore
it shall form part of his gross estate. On the other hand, under the special
power of appointment, the decedent is only a trustee to the property and
therefore it should not be part of his gross estate.
If ownership to the property was transferred in contemplation of death,
through revocable transfer, and by general power of appointment for an
adequate consideration in moneys worth, the difference between the fair
market value over the consideration received shall be included in the gross
estate of the decedent. Also, if by clear indications, the inter vivos transfer
(during life time) was fictitiously made, the entire fair market value at the time
of death shall be included in the gross estate.
Proceeds of Life Insurance
The proceeds of life insurance taken out by the decedent shall be part of the
gross estate if the beneficiary is:
a) the estate of the decedent, his executor or administrator; or
b) a person other than the estate, executor or administrator, and the
designation of the beneficiary is revocable.
The Insurance Code of the Philippines takes the designation of the beneficiary
as revocable unless expressly stated by the insured and indicated in the policy
that it is irrevocable. The proceeds of life insurance where the beneficiary is
irrevocable is not part of the gross estate.
Illustrations in the book
Claim Against Insolvent Person
The claim of a decedent against an insolvent person shall be part of the gross
estate at the full amount of the claim. A deduction from the gross estate for the
uncollectible portion shall be made.
For instance, Mr. Egay died with a 100,000 receivable from Mr. Bong. Mr.
Bong has assets of 30,000 and liabilities of 50,000. The gross estate shall
include the 100,000 receivable and there shall be a deduction from the said
gross estate of 40,000 (20,000/50,000 X 100,000)
Valuation of the Gross Estate
The gross estate shall be valued at the fair market value at the time of the
decedents death.
In the case of personal property acquired by the decent just recently, the
acquisition or purchase price shall be taken as the fair market value. However,
where the personal property was not acquired recently, the evidence of its fair
market value shall be considered.
In the case of real property, the values shall be the current and fair market
values as fixed by the Provincial and City Assessors, or the fair market value
as determined by the Commissioner of Internal Revenue, whichever is higher.
Illustrations in book
Lesson 3: Gross Estates- Exclusions
Transfers Exempt from Estate Tax under the Code
a) merger of usufruct in the owner of the naked title;
b) Transmission or delivery of the inheritance or legacy by the fiduciary heir
or legatee to the fidei commissary;
c) The transmission from the first heir, legatee or donee in favor of another
beneficiary, in accordance with the will of the predecessor;
d) all bequests, devises, legacies or transfers to social welfare, cultural and
charitable institutions no part of the net income of which insures to the benefit
of any individual; provided, that not more than thirty percent (30%) of the
said bequests, legacies or transfers shall be used by such institutions for
administrative purposes.
Usufruct refers to the right of temporary nature which authorizes its holder to
enjoy the use and benefits resulting from the enjoyment of somebody elses
property with the obligation to return on some designated time, either the
same property or its equivalent. In usufruct, the two (2) claimants are the
usufructuary and the owner of the naked title. The usufructuary enjoys the use
and fruits of the property, while the owner exercises all the rights of
ownership to the property. The merger of the usufruct in the owner of the

naked title takes effect when the naked ownership and the usufruct come to be
held by the same person. The exemption is premised on the fact that there is
only one transfer, i.e., from the testator to the owner of the naked title. The
transfer shall only be taxed once, hence, the exemption.
Fidei-commissary substitution arises when the testator designates a first heir
and makes him responsible to preserve and transmit, in whole or in part, the
inheritance to a second heir. Likewise, there shall be a first heir and a second
heir where the relationship shall be one degree, for example, parent and child,
and vice versa.
There may be transfer of property from the first heir, legatee or donor in favor
of another beneficiary according to the desire or will of the predecessor. This
exemption again is premised on the fact that there is only one transfer or
single transfer, i.e., from the testator to the second beneficiary.
To be exempt from estate tax, the statute requires that bequests, legacy or
devise be made to qualified recipient organizations. It shall be given to an
institution which is duly accredited by an accrediting entity known as the
Philippine Council for NGO Certification (PCNC). Note further that donations
are exempt from estate tax only if not more than thirty percent (30%) of the
said bequests, legacies or devises shall be used by such institutions for
administration purposes.
Transfers Exempt Under Special Laws
The following are exempt from estate tax under special laws:
a) Benefits received from the Government Service Insurance System (GSIS);
b) Benefits received from the Social Security Services (SSS);
c) Amounts received from the Philippine and the United States of America
governments as war damages;
d) Amounts received from the United States Veterans Administration.
Lesson 4
Deductions Allowable for Residents or Citizens
a) expenses, losses, indebtedness and taxes;
b) transfers for public use;
c) vanishing deductions;
d) medical expenses;
e) amount received by heirs under RA 4917
f) family home;
g) standard deduction of 1,000,000.
Expenses, Losses, Indebtedness and Taxes
The amount deductible as funeral expenses shall conform with the following
rule: the actual amount of funeral expenses or in an amount equal to five
percent (5%) of the gross estate, whichever is lower, but in no case to exceed
two hundred thousand pesos (200,000). For instance, if the actual funeral
expenses is 210,000 and the gross estate is 5,000,000, its 5% is
250,000 versus actual expenses of 210,000 and the limit of 200,000,
the allowable deductible funeral expenses is 200,000 which is the lower
amount. Any of the said costs incurred by the relatives and friends is not
allowed for the reason that they do not diminish the estate of the decedent.
Further, expenses although related to the death of the decedent but incurred
after the burial such as expenses related to the 1st death anniversary are not
allowed as deductions.
The judicial expenses include costs incurred in the settlement of the estate as
follows: fees of the executor or administrator of the estate; accountants and
appraisers fees; costs to preserve, store, maintain and distribute the property
or the estate; and the costs incurred in testamentary and intestate proceedings.
In other words, they are deductible items incurred in the settlement of the
estate. The claims against the estate are debts which are properly deductible
from the estate. To be deductible, the following requisites shall be met: that
the claims are incurred in good faith and for an adequate consideration of
money or moneys worth received by the decedent; the debt instrument was
duly notarized and if the loan was contracted within three (3) years before the
death of the decedent, the administrator or executor shall submit a statement
showing the disposition of the proceeds of the loan.
The claims against insolvent persons, otherwise known as bad debts, are equal
to the indebtedness which cannot be collected anymore because of the
insolvency of the debtor. The claims against insolvent persons shall be part of
the gross estate to be deductible from it.

Unpaid mortgage indebtedness are deductible if the following requisites are


complied with, to wit:
a) the value of the mortgage indebtedness is included in the value of the gross
estate;
b) the unpaid mortgage indebtedness was for an adequate and full
consideration in money or moneys worth.
The following are unpaid taxes which are allowed as deductible items from
the gross estate of the decedent:
a) income taxes on income received before the death;
b) gift taxes on donations inter vivos that are unpaid until death;
c) property taxes that accrued prior to the death of the decedent.

20% more than four years but not more than five years prior to the death of
the decedent.
Don Zobel, single, inherited a house and lot from his mother with a fair
market value of 5,000,000. The said land at the time of inheritance was
subject to a mortgage of 1,000,000. During his lifetime, he paid 500,000
on the mortgage indebtedness. Three (3) years after, Don Zobel died with the
same property valued with a fair market value of 6,500,000. The gross
estate on which the previously mentioned property was part of totalled
10,000,000 while the deductions therefrom amounted to 3,000,000. The
vanishing deduction is computed as follows:

The taxes that already accrued after death are not deductible from the gross
estate but they are proper charges against the income of the estate.
Losses are deductible if the following requisites were complied with:
a) the value of the lost property are included in the gross estate;
b) such losses occurred within six (6) months after the death of the decedent;
c) such losses must be due to fires, storms, shipwreck or other casualties,
including loss from robbery, theft or embezzlement;
d) such losses are not compensated by insurance, in part or in whole;
e) such losses are not claimed as deduction in an income tax return.
Transfers for Public Use
The entire value of personal or real property transferred to or for the use of the
Government of the Republic of the Philippines, or any political subdivision
thereof, and for exclusive public use is allowed as deduction from the gross
estate of the decedent.
Vanishing Deductions
Vanishing deduction is intended to provide relief to such heavy transfer taxes.
The vanishing deduction is allowed to reduce the gross estate upon
compliance with the following requisites:
a) the property on which the vanishing deduction is being claimed shall be
located in the Philippines;
b) the donors or estate tax imposed on the first transfer was finally
determined and paid;
c) the present decedent died within five (5) years from receipt of the property
from a prior decedent or donor;
d) the property must be part of the taxable estate of the prior decedent, or of
the taxable gift of the donor;
e) no vanishing deduction on the property was allowed in the estate of the
prior decedent;
f) the property can be identified as the one received from prior decedent, or
from the donor.
The procedures in computing the vanishing deduction are as follows:
1) determine the basis of the vanishing deduction:
a) find the initial value that will be the basis of the vanishing deduction as the
value of the property in the prior estate (or value used in filing and paying the
donors tax) or the value of the same property in the present estate, whichever
is lower;
b) deduct from the value in item a) above the mortgage or lien paid by the
present decedent on the property. The resulting figure is called the initial
basis.
c) from the initial basis, deduct the amount equal to the result of the following
formula:
Initial Basis / Gross Estate X Deductions
d) multiply the actual basis computed in item c) above by the appropriate rate,
based on the length of time the property has been acquired by the present
decedent, as follows:
100% within one year prior to the death of the decedent
80% more than one year but not more than two years prior to the death of the
decedent;
60% more than two years but nor more than three years prior to the death of
the decedent;
40% more than three years but not more than four years prior to the death of
the decedent;

Medical Expenses
The actual amount of medical expenses, supported with official receipts, or
500,000, whichever is lower, incurred by the decedent within one year prior
to his death can be claimed as deduction from the gross estate. The medical
expenses include doctors professional fees, medicines, laboratory tests
charges, hospital room and equipment.
Republic Act No. 4917
relates to benefits granted and received by the heirs of the decedent
from his employer as a result of separation from service due to
death of the decedent-employee which can be deducted from the
gross estate.
Family Home
- refers to the land and the dwelling house on it where the spouses and their
family, and even an unmarried head of a family, reside. The basis shall include
the current fair market value or zonal value of the family home, whichever is
higher. Further, the following conditions for allowance of family home as
deduction shall be complied with:
a) the decedent died on or after July 28, 1992;
b) the gross estate shall include the value of the family home;
c) the property must be the actual residential home of the decedent and his
family at the time of death, certified by the Barangay Captain who has
jurisdiction over the locality where the family home is situated; and
d) the deductible amount shall be the actual value as declared and included in
the gross estate, but not exceeding 1,000,000.
Standard Deduction
The code provides an amount equivalent to one million (1,000,000) pesos
as automatic deduction and not subject to any proofs of substantiation of
receipts, independent of all other deductions. For example, Mr. Filar died
leaving a gross estate of 7,000,000. Deductions for expenses and losses,
supported by receipts amounted to 2,000,000. Other allowable deductions
totalled 1,500,000. The total allowable deductions shall be 4,500,000
accounted as follows:

Deductions Allowable for Non Resident Aliens


The allowable deductions for non resident aliens are the same items of
allowable deductions from the gross estate of residents or citizens, except
medical expenses, RA 4917, family home, and standard deduction.
Specifically, the expenses, losses, indebtedness, taxes, vanishing deduction,
and transfer for public purpose are allowed as deductions from the gross estate
of non resident aliens.

formula:

For example, Mr. Jason Armstrong, an American residing in California, USA


died leaving the following properties and other information related thereto:

The allowable deduction from the gross estate of Mr. Armstrong is


141,147.50 , computed as follows:

Take note of the following:


a) medical expenses are not allowed as deduction;
b) funeral expenses are limited by the actual expenses versus 5% of the gross
estate located in the Philippines, whichever is lower;
c) claims against insolvent person shall be included in the gross estate to be
allowed as deduction; and
d) ordinary expenses are allowed only to the extent of the amount applied with
the above stated formula.
Net Taxable Estate
The net taxable estate is computed as gross estate less allowable deductions.
Example on page 50
Take note of the following:
a) funeral expenses are limited to 5% of the gross estate or actual, whichever
is lower, but not to exceed 200,000;
b) claims against insolvent person was deducted and likewise included in the
gross estate;
c) family home was limited to zonal value versus fair market value, whichever
is lower, but not to exceed 1,000,000.
SCHEDULE OF TAX RATES Example on page 52

Module 2
Lesson 1: The Fundamental Concept of Donors Tax

4. Non-resident alien donor the donor is considered as a non-resident alien


of the Philippines at the time of donation.

Definition of Donation
- An act of a person (the donor) who gives a gift gratuitously to another person
(the donee) who accepts such gift from the donor. Thus, the elements of a
donation or gift are:
1. Donor the person who gives the gift

Civil status of the donor:


1. Married
2. Single
3. Married legally separated
4. Married but not legally separated
5. Widow/widower
6. Divorcee

2. Donee the person who receives the gift


3. Gift the property gratuitously transferred from donor to donee
Our definition is very specific about the acceptance of the gift from the donor
because without the acceptance of the donee, there can be no gift or donation.
Therefore, donors tax arises upon acceptance of the gift by the donee.
these will give rise to the following taxes:
1. Donors tax for that portion wherein the donee has not paid nor render
services, and
2. Income tax for that portion wherein the donee has paid or rendered services
in consideration of the gifts accepted.
Purposes of Donors Tax
1. To compliment the estate tax, in order to prevent abuses from the taxpayers
by transferring his properties during his lifetime, and
2. To raise revenue to support the governments projects.
For example:
Mr. Malla has three children. He owns a parcel of land in the province. Mr.
Malla would like to evade estate tax so, while still alive, he transfers his
property to his children.
Question:
Can Mr. Malla evade taxes?
Answer:
No, because although Mr. Malla will not pay estate tax as he still alive, he will
pay instead a donors tax.
If the transfer was done while Mr. Malla is still alive but suffering from a
terminal disease, this is a transfer in contemplation of death and is subject to
estate tax and not donors tax.
Kinds of Donations
1. Inter-vivos. This means that the gifts are made and intended to take effect
during the lifetime of the donor. Subject to donors tax
2. Mortis-causa. This means that the gifts are made and intended to take effect
upon the donors death. Subject to estate tax.
3. Contemplation of death. This means that the gifts are made during the
donors lifetime. This is in contemplation of his death, regardless of whether
his death is impending, forth coming or not. This is subject to estate tax.

Various Classifications Relating to Donation


A) Classification of donor:
1. Resident citizen donor the donor is a resident citizen of the Philippines at
the time of donation.
2. Non-resident citizen donor the donor is a citizen of the Philippines but
qualified to be classified as non-resident citizen during the taxable year. This
is in accordance with the rules governing the classification of such citizen as a
non-resident citizen status.
3. Resident alien donor the donor is a resident alien of the Philippines at the
time of donation.

B) Classification of donee:
1. Relative this means that the donee is related by blood or by affinity to the
donor.
For example:
Related by blood:
a) brother or sister
b) parents and other ascendants
c) children and descendants
d) aunts and uncles
e) nephews and nieces
f) grandnephew/nieces
g) first cousins
h) lineal descendant up to the fourth degree of relationship
Other relatives by blood not mentioned above are treated as not relatives as far
as donors tax is concerned.
For example:
a) Second degree cousin
Related by affinity
a) husband and wife
b) legally adopted children
c) legally adopted parents
Other relatives by affinity other than those mentioned above are treated as not
related.
For example:
a) parents-in-law
b) brother-in-law
2. Not-relative this means that the donee is not related to the donor by blood
or by affinity as defined above.
For example:
a) friend
b) teacher
c) neighbour
d) supervisor
e) any others not related by blood
Rules on gifts between spouses
1. Each spouse is considered as a taxing unit and therefore must file a separate
donors tax return.
2. The gifts which were given by a married couple before and after their
marriage, are subject to donors tax.
3. Ordinarily, gifts by and between spouses after marriage are prohibited and
invalid except:
a) when the gifts are of moderate value and
b) when they are given on an occasion of rejoicing like birthday, anniversary,
etc.
C) Classification of property to be donated:
1. Real property. This refers to a property that is immovable. The donation of
an immovable property is valid, if this is supported by a public document
which will specify the location and the value of the property.
For example:

a) land
b) building
c) improvement
d) trees
e) machinery
f) construction of all kinds adhered to the soil, and
g) real rights to or equity in immovable property
2. Personal property. This refers to a property that is movable or can be
transferred from one place to another. Donation of 5,000 or less can be
made orally. However, if the donation exceeds 5,000 donation and the
acceptance must be in writing in order to be valid.
For example:
a) money
b) credits
c) shares of stocks
d) bonds
e) securities
f) jewelry
g) animals
h) merchandise
i) furniture
3. Tangible properties. This refers to real or personal properties, which can be
physically seen or touched.
4. Intangible property. This refers to any personal property, which cannot be
physically seen or touched.
For example:
a) franchise, which must be exercised in the Philippines
b) shares, obligations, bonds issued by any corporation, Sociedad Anonima
organized, or constituted in the Philippines in accordance with its laws
c) shares, obligations or bonds issued by any foreign corporation, eighty five
percent (85%) of the business of which is located in the Philippines
d) shares, obligations or bonds issued by any foreign corporation, if such
shares, obligation, or bonds have acquired a business situs in the Philippines
e) share or rights in any partnership, business or industry established in the
Philippines

6. Real property. Fair market value means the common value of the property
as agreed upon by a willing buyer and the willing seller.
Lesson 2: Gross Gifts
Factors affecting the computation of gross gifts:
1. Classes of donors
2. Location of properties
3. Classification of properties
4. Relationship of donor and the donee
5. The nature of donation
Gross gifts of various classifications of donors
A. For resident citizen, resident alien, and non-resident donor
The gross gifts of these types of donors will be the total fair market value of
all donated properties whether.
1. Situated within and without the Philippines
2. Real or personal properties
3. Tangible or intangible
4. Transferred directly or indirectly
5. In trust or otherwise
6. Subject or not subject to gift tax
B. For non-resident alien donor
The gross gifts of this type of donor will be the total value of all donated
properties situated within the Philippines only, whether:
1. Real or personal properties
2. Tangible or intangible (subject to reciprocity clause)
3. Transferred directly or indirectly
4. In trust or otherwise
5. Subject or not subject to gift tax
Reciprocity Clause:
There will be no gift tax that will be collected from a non-resident donor in
respect to an intangible personal property that is located within the Philippines
under the following circumstances:
1. If the country of that non-resident donor did not impose gift tax at the time
of donation to Filipino citizens residing in that country.
2. If the laws of the country of that non-resident donor granted similar
exemption on gift tax to Filipino citizens who are living in that country.

Classification of property donated by spouses


1. Exclusive donation. This means that the husband or the wife made a
donation from out of his/her exclusive property.
2. Conjugal donation. This means that the couple made a donation from out of
their conjugal properties.

Exclusion from gross gifts


1. Donation of property situated outside the Philippines in the case of nonresident alien donor.
2. Donation of intangible personal property in the Philippines if provided for
under a reciprocity clause. law in the case of non-resident alien donor.

D) Classification of donation according to its place of origin


1) Those properties that are located from within the Philippines
2) Those properties that are located from outside the Philippines

3. Donation or transfer of property subject to estate tax:

The nature of donation


1. First donation during the calendar year
2. Subsequent donations during the same calendar year
Valuation of property donated
1. Properties donated should be valued at their fair market value at the time of
donation.
2. If there is no known fair market value of the properties, then the fair market
value of the properties nearest to the date of donation will be considered.
3. Shares of stocks listed in the stock exchange. The fair market value refers to
the quotation price of the stock exchange. This is the average of the highest
and the lowest quoted price at the time of the donation).
4. Shares of stocks not listed in the stock exchange. Fair market value refers to
the book value at the time of donation.
5. Usufruct. This refers to the right to enjoy or use the fruits of the property or
benefits of the property. The fair market value of the usufruct shall be
determined by taking into account the probable life of the beneficiary in
accordance with the latest American tropical experience table.

a. Donation mortis-causa
b. Transfer in contemplation of death
c. Transfer subject to revocation
d. Transfer under a general power of appointment
4. Sale or exchange of real property in the Philippines held as capital asset,
subject to the final capital gains tax.
5. Transfer of property by way of: bona-fide sale, arms-length transaction, and
those made in the ordinary course of business
6. Gratuitous rendition of service by a person to another (it is not a taxable gift
since the law specifies that the donors tax is imposed only on the transfer of
property or right)
Exemption of certain gifts
The following gifts are exempted in the computation of donor tax but should
be a part of the computation of the gross gifts.
1. Dowries or gifts made on account of marriage and before its celebration or
within one year thereafter by parents to each of their legitimate recognized
natural or legally adopted children, This is applicable for the first ten thousand
pesos only.

Example on page 68
2. Gifts made to or for the use of the National Government or any entity
created by any of its agencies which is not conducted for profit or to any
political subdivisions of the said government;
Example in page 68
3. Gifts in favour of an educational, charitable, religious, cultural or social
welfare corporations, institutions, foundations, trust or philanthropic
organization, or research institutions or organizations. Provided, that not more
than thirty percent (30%) of said gifts shall be used by such donee for
administration purposes.
Prizes and awards given to athletes
Donations in the form of prizes and awards given to athletes in international
sports tournaments and competitions, held in the Philippines or in other
countries, which are sanctioned by national sports bodies, are exempted from
the payment of donors tax. Example on page 69
Exempted gifts under special laws:
The donations to the following are exempted from taxes under special laws
through presidential decrees or republic acts.
1. Social welfare, cultural or charitable institutions, no part of the net income
of which inures to the benefit of any individual, if not more than 30% of said
gift shall be used for administrative purposes (PD507 R.A. 1916)
2. Donation of equipment, materials, services to the task force on human
settlement (PD297)
3. Government of the Philippines, for the purpose of scientific, engineering
and technological research, inventions, and development (RA 1606)
4. Any international civic organization for religious or charitable purposes, for
its use or free distribution (RA 1616)
5. International Rice Research Institute (RA2707 PD1620)
6. Philippine American Cultural Foundation (RA3076)
7. Integrated Bar of the Philippines (PD181)
8. Philippine Inventors Commission (RA3480)
9. Ramon Magsaysay Award Foundation (PR3076)
10. Development Academy of the Philippines (PD205)
11. Aquaculture Department of the Southeast Asian Fisheries Development
Center of the Philippines (PD202)
12. National Action Center (PD294)
13. National Museums, National Library, and the Archives of the National
Historical Institute (RA373)
14. Southern Philippine Development Administration (PD690)
15. Museum of Philippine Costumes (PD1349 amended by PD1388)
16. Intramuros Administration (PD1616 amended by PD1388)
Please take note that gifts to the above-mentioned recipients are exempted
from gift tax or donors tax, but these are not exempted from inclusion as part
of the gross gifts computation. Since these should be included in the gross
gifts computation, it will also be presented as part of the allowable deduction,
thus making a zero effect on the net taxable donors tax.
The following are included in the gross gifts.
I. Donation subject to donors tax
A. Actual gifts made during the year. Ordinary gifts, donations inter-vivos or
gratuitous transfer of property.

a. Franchise, which must be exercised in the Philippines


b. Shares, obligations or bonds issued by any corporation, organized and
constituted under Philippine laws
c. Shares, obligations or bonds issued by any foreign corporation, 85% of
which is located in the Philippines
d. Shares, obligations or bonds issued by any foreign corporation which have
acquired a business situs in the Philippines
e. Shares or rights in any partnership, business, or industry established in the
Philippines
For non-resident alien, the gross gifts consist of the following (with
reciprocity)
1. Real property within the Philippines
2. Tangible personal property within the Philippines
B. Transactions or transfers of property deemed gifts during the year.
1. The condonation or forgiveness of receivables without or with inadequate
consideration is considered as a donation.
Example on page 71
2. Any property transfer for inadequate consideration, except the following:
a. Taxable transfer subject to estate tax such as: donation mortis-causa,
transfer in contemplation of death, revocable transfer, transfer under a general
power of appointment.
b. Sale or exchange of real property situated in the Philippines held as capital
asset subject to final capital gains tax.
c. Transfer of property representing bona-fide sale, arms-length transactions
under ordinary course of business.
Please take note that the computation for gifts that are given with inadequate
consideration will be the difference between the adequate consideration and
the actual inadequate consideration.
II. Donation exempted from donors tax
a. Exempted gifts under section 101 of the NIRC
b. Exempted gifts under special decrees and laws
Lesson 3: Allowable Deductions from Gross Gifts
Allowable deductions:
I. Resident citizen, non-resident citizen, and resident alien donor
A. Deduction as per BIR rules/regulation
1. Encumbrances and liabilities on the donated property if assumed by the
donee
Example on page 73
2. The diminution on the donated property as directed/instructed by the donor
is also deductible from the gross gift.
Example on page 74
II. Non-resident alien donor
A. Deductions as per BIR rules/regulation
1. Encumbrances, liabilities on the donated property if assumed by the donee
(same rules for resident donor above)
2. The diminution on the gifted property as directed/instructed by the donor is
also deducted from gross gift. (Same rules for resident donor above).

For resident citizen or resident alien, the gross gifts will consist of the
following:
1. Real property, within and outside the Philippines
2. Tangible property, within and outside the Philippines
3. Intangible property within and outside the Philippines

B. Those gifts that are exempted under NIRC (section 101) as enumerated in
lesson of this module
C. Those gifts that are exempted under special laws
Example on page 74

For non-resident alien, the gross gifts consist of the following (without
reciprocity):
1. Real property within the Philippines
2. Tangible personal property within the Philippines
3. Intangible personal property within the Philippines subject to the
following:

Rules on gifts on account of marriage:


1. The total fair market value of the dowry or gift on account of marriage must
be first included/presented in the gross gifts.
This means that gift given on account of marriage must be included first in the
listings of gross gift and then a deduction from said gross gift as provided can
be claimed.

2. The amount allowed as a deduction shall be the lower between the two
amounts as follows:
a. Fair market value of the property given or.
b. Maximum amount of 10,000
3. The donor is entitled to claim said exemption on account of marriage for
each of his qualified children donees.
4. The donee must be a qualified child of the parent donor.
a. A legitimate child. A legitimate child is a child born within wedlock. This
means that the child was born of parents who were married to each other at
the time the child was conceived.
b. Natural child. A natural child is a child born outside of wedlock. This
means that at the time the child was conceived, the parents were not qualified
to marry.
Perhaps one or both of the parents were underage when the child was
conceived.
c. Legally adopted child. This means that parents under a judicial decree
adopted the child or the adoption has a legal adoption paper.
5. The dowry or gifts on the account of marriage must have been given before
the date of marriage, during the marriage or even after the date of marriage if
within a year from the date of marriage.
6. For married couple giving dowries or gifts to their qualified children on
account of marriage, each spouse shall get therein 50% equity in such
conjugal gifts, which amount shall be presented in their separate computation
of gross gift. However, each
spouse can claim a maximum deduction amounting to 10,000 for each
qualified child. Example on page 76
Lesson 4: Taxable Gifts

The above-illustrated table is used if the donee is a relative. If the donee is not
a relative of the donor: a flat rate of 30% of the net taxable gift is imposed.
Example on page 78
Procedures for computing donors tax
1. Determine the net taxable gift.
2. Trace net taxable gift to the bracket in the table of donors taxes.
3. Just follow the bracket
4. If for example there was a subsequent gift, and therefore another filing is
required.
Example on page 79
How about if the Mr. Ogawa made subsequent gifts, say on August 4,
2004 example on page 79
Lesson 5: Administrative Provisions of Donors Tax
Who are required to file donors tax returns?
Any individual who makes gratuitous transfer of rights or property to another
person (except those that are exempted under NIRC) shall file a donors tax
return under oath in duplicate.
When shall this return be filed?
The return shall be filed within 30 days after the gift is given to the donee.
Where shall this return be filed?
1. With an authorized agent bank (AAB)
2. With the revenue district officer, revenue collection officers or duly
authorized treasurer of the city or municipality where the donor was domiciled
at the time of the gift or transfer of rights or property to the donee.
3. If the donor has no legal residence in the Philippines, the return shall be
filed with the BIR Commissioner.

4. If the gift is given by a non-resident alien donor, the return shall be filed
with the Philippine Embassy or Consulate in the country where he is
domiciled at the time of the transfer or directly with the office of the BIR
Commissioner.
5. In other places as permitted by the BIR Commissioner.
What documents are to be attached to the return?
1. A photocopy of the deed of donation covered by said tax return.
2. In case of prior gifts (but made during the taxable year), the previous
donors tax return filed and the receipt of payment.
3. If the donors tax was paid abroad, a certified copy of the receipt
evidencing tax payment.
4. Photocopy of Owners certificate of title and or tax declaration in case of
real property.
5. Certificate of registration of motor vehicle, stock certificate, certificate of
investment/deposits, etc.

MODULE 3
Lesson 1
Business defined
Business pertains to trade or commercial activity regularly engaged in as a
means of livelihood or with an end to earn profit or income by any person or
government entity.
The requisites for one to be considered engaged in business are:
1. The activity should be a commercial or economic activity.
2. The commercial or economic activity should be done with regularity. By
regularity, it means that the transaction is not just one isolated transaction.
3. Business must be lawful.
4. Business must be within the commerce of man.
5. The purpose is to earn profit or livelihood is the motive.
Types of Business organizations according to nature
There are three types of businesses according to nature. Trading or
merchandising refers to a business that is engaged in buying of goods or
merchandise and selling them at a higher price. Manufacturing or production
refers to a business that is engaged in buying of raw materials, processing and
then transforming these raw materials into a finished product by adding on
labor, and selling the produced product to dealers or retailers.
Service concern refers to the rendering of professional or non-professional
services for a fee. For example, an accountant does auditing or public
accounting practice to clients for a specified fee agreed upon
Types of Business organizations according to form
Sole proprietorship or single proprietorship refers to a form of business
organization that is owned by one person only.
Partnership is a form of business organization wherein two or more persons
enter into a contract and bind themselves to contribute money, property or
industry to a common fund with the intention of dividing the profits among
themselves.
Corporation is an artificial being created by operation of law having the right
of succession and the powers, attributes and properties expressly authorized
by law or incident to its existence.
The distinctions between sole proprietorship, partnership and corporation are:
1. As to ownership:
As to ownership

As to
distribution of
profit

Sole P.
Owned by one
person called
proprietor

Partnership
Owned by 2 or
more called
partners

All the profits


go to the owner

Profit is divided
among the
partners

Corp.
Owned by
incorporators
who are either
stockholders or
members.
Incorp. Should
not be less than
5 but not more
than 15
Share on the
profits of the
stockholders are
distributed in the
form of dividend
as approved by
Board

Business Taxes are internal revenue taxes imposed by the national


government on the onerous transfer of property, services or rights in the
normal course of business. They are likewise privilege taxes paid upon the
privilege of engaging in business or pursuing an occupation, calling or
profession.
Major Classifications of Business Taxes (RA 8424)
a.
Value-Added tax (VAT) is a tax levied on the sale of goods or
properties, sale of services or the importation of goods or
merchandise.
b.
Percentage tax is a tax levied on the sale or receipt of any person
not subject to VAT and who is not a VAT-registered person and
other persons falling under sections 117-127 of the National
Internal Revenue Code.

c.
-

Excise tax is a tax levied on goods manufactured or produced in


the Philippines for domestic sale or consumption or for any other
disposition or to things imported.
Specific tax and the Ad valorem tax. The excise tax imposed and
based on weight or volume capacity or any other physical unit of
measurement is referred to as Specific tax while the excise tax
based on selling price or other specified value of the good is
referred to as Ad valorem tax.

Lesson 2
Value-Added Tax
- refers to the business tax imposed by the national government on any person,
who in the course of trade or business, sells, barters, exchanges, leases goods
or properties, renders services, and on any person who imports goods as per
section 106 to 108 of the National Internal Revenue Code.
- It is an indirect tax and the amount tax may be shifted on to the buyer (R.A.
7716. (Section 105)).
Persons Liable to Value-Added tax
1. Any person who in the course of trade or business, sells, barters, or
exchanges goods.
2. Any person who renders services unless exempted.
3. Any person who imports goods whether for business or non-business
purpose.
The phrase in the course of trade or business means the regular conduct or
pursuit of a commercial or an economic activity, including transactions
incidental thereto, by any person regardless of whether or not the person
herein is a non-stock, non-profit private organization (irrespective of the
disposition of its net income and whether or not it sells exclusively to
members or guests), or government entity.
Transactions subject to Value-Added Tax
1. Every sale, barter or exchange transaction in the course of trade or business.
2. Every transaction deemed sale for vat purposes.
3. Every importation whether it is for business or non-business purposes.
4. Every sale of services made in the course of trade or business other than
services rendered by persons subject to other percentage taxes, including the
use or lease of properties.
Requisites for Transactions to be subject to VAT
1. There must be an actual or deemed sale of goods or properties or services
for a consideration.
2. The transaction is undertaken in the ordinary course of trade or business
3. Such transaction is not exempt under the NIRC code, special laws or
international agreements.
Characteristics of VAT
1. It is an indirect tax. Vat is considered an indirect tax because the seller of
the goods or services may shift the burden of tax to the buyer.
2. It employs tax credit. The vat charged by the seller becomes the vat credit
of the buyer against the vat he charged on his sales. This is output tax minus
input tax equals vat payable where the input tax is the vat credit.
3. It is cumulative. The vat is cumulative in effect as the tax is borne by the
last consumer. Unless and until the goods reach the final consumer, such
goods continue to cumulate tax passed on to the buyer.
VAT Transactions and Rates
1. VAT Taxable Transactions at 10%. These are sales transactions on goods or
properties, services and/or importation subject to the rate of ten percent
(10%).
2. Zero-rate transactions at 0%. These are the export sales, and sales that are
effectively zero-rated, and the zero-rated sales on services.
3. VAT-Exempt transactions. These are the transactions that are exempt under
the provision of section 109 of the National Internal Revenue Code and those
exempted under special laws and international agreements.
Elements of Value-Added Tax System
1. Output tax or Output VAT
Refers to the 10% VAT on the sale of a VAT-registered person.

section 109 of the National Internal Revenue Code:


2. Input tax or Input VAT
Refers to the 10% VAT on purchases charged by the VAT seller. Sources of
Input Tax:
a. Vat paid on local purchases and importation of goods for sale, used as
supplies, form part of the products for sale, or used in business subject to
depreciation except automobiles, aircraft and yachts.
b. Vat paid on the purchase of real properties.
c. Vat paid on the purchase of services.
d. Transitional input tax.
e. Presumptive input tax.
Transitional Input tax
Any person who becomes liable to value-added tax or any person who elects
to be a VAT-registered person shall, subject to the filing of an inventory
according to the rules and regulations prescribed by the Secretary of Finance,
upon recommendation of the Commissioner, be allowed input tax on his
beginning inventory of goods, materials and supplies equivalent to eight
percent (8%) of the value of the goods, materials and supplies, whichever is
higher, which shall be creditable against output tax (section 111,(A)).
Presumptive Input Tax shall be for the following:
1. Persons or firms engaged in the processing of sardines, mackerel and milk,
and in manufacturing refined sugar and cooking oil, shall be allowed a
presumptive input tax, creditable against the output tax, equivalent to the one
and one-half percent (1 1/2%) of the gross value in money of their purchases
of primary agricultural products which are used as inputs to their production.
2. Public work contractors shall be allowed a presumptive input tax equivalent
to one and one-half percent (1 %) of the contract price with respect to
government contracts only in lieu of actual input taxes, therefrom (Section
111, (B)).
3. VAT Payable
Refers to the excess of the output tax over the creditable input tax
Computation of Value-Added Tax Due example on page 96
Accounting Entries for Vat transactions (January) on page 97
Creditable VAT withheld refers to vat withheld by the government or any of
its political subdivisions, instrumentalities or agencies including government
owned or controlled corporations, before making payment on account of its
purchase of goods from sellers who are subject to vat, equivalent to 3% of the
gross payment for the purchase of goods, which is creditable against the vat
liability of such seller.
Example on page 98-99
VAT exempt Persons
1. Persons not engaged in undertaking VAT taxable transactions.
a. Persons whose annual gross receipts or sales do not exceed 550,000;
b. Non-stock/non-profit organizations.
In the foregoing, if said persons exceeded their annual gross receipts of
550,000, they now become liable to VAT and therefore register as VATperson.
2. Persons considered in subsistence livelihood activities.
Exempt from vat and percentage tax and the payment of registration fee of
500. These persons shall be considered to be principally for subsistence
livelihood activities only and not in the course of trade or business when their
aggregate gross sales or receipts do not exceed 100,000 during the 12month period (Revenue Circular 4-98)
3. Persons exempt from VAT under special laws.
a. Cooperative Development Authority (RAs 6938, 8424)
b. Those registered with the Special Economic Zone or Free Ports in the
Philippines. (Destination principle)
c. Regional or Area headquarters of multinational companies in the
Philippines. (BIR ruling 176-88)
4. Inventors. (RR 19-93)
Lesson 3:
Exempt Transactions from Value-Added Tax

10

a) Sale of nonfood agricultural products; marine and forest products in their


original state by the primary producer or the owner of the land where the sales
are produced;
b) Sale of cotton and cotton seeds in their original state, and copra;
c) 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 therefore;
Products classified under this paragraph and paragraph a) 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, and ordinary salt shall be considered in
their original state;
d) 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);
e) Sale or importation of coal and natural gas, in whatever form or state, and
petroleum products (except lubricating oil, processed gas, grease, wax and
petrolatum) subject to excise tax imposed under Title VI;
f) Sale or importation of raw materials to be used by the buyer or importer
himself in the manufacture of petroleum products subject to excise tax, except
lubricating oil, processed gas, grease, wax and petrolatum;
g) Importation of passenger and/or cargo vessels of more than five thousand
(5,000) tons, whether coastwise or ocean-going, including engine and spare
parts of said vessel to be used by the importer himself as operator thereof;
h) 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;
i) 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 person are actually coming to settle in the
Philippines and that the change of residence is bona fide;
j) Services subject to percentage tax under Title V;
k) Services by agricultural contract growers and milling for others of palay
into rice, corn into grits and sugar cane into raw sugar;
l) Medical, dental, hospital and veterinary services subject to the provisions of
Section 17 of Republic Act NO. 7716, as amended;
m) Educational services rendered by private educational institutions, duly
accredited by the Department of Education, Culture and Sports (DECS) and
the Commission on Higher Education (CHED), and those rendered by
government educational institutions;
n) Sale of an artist himself of his works of art, literary works, musical
compositions and similar creations, or his services performed for the
production of such works;
o) Services rendered by individuals pursuant to an employer-employee
relationship;

p) Services rendered by regional or area headquarters established in the


Philippines by multinational corporations which act as supervisory,
communications and coordinating centers for their affiliates, subsidiaries or
branches in the Asia-Pacific Region and do not earn income from the
Philippines;
q) Transactions which are exempt under international agreements to which the
Philippines is a signatory or under special laws, except those under PD Nos.
66, 529 and 1590;
r) 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;
s) Sale of electric cooperatives duly registered with the Cooperative
Development Authority or National Electrification Administration, relative to
the generation and distribution of electricity as well as their importation of
machineries and equipment, including spare parts, which shall be directly used
in the generation and distribution of electricity;
t) Gross receipts from lending activities by credit or multi-purpose
cooperatives duly registered with the Cooperative Development Authority
whose lending operation is limited to their members;
u) Sales by non-agricultural, non-electric cooperatives duly registered with the
Cooperative Development Authority; Provided, that the share capital
contribution of each member does not exceed fifteen thousand pesos
(15,000) and regardless of the aggregate capital and net surplus ratably
distributed among the members;
v) Export sales by persons who are not VAT-registered;
w) Sale of real properties not primarily held for sale to customers or held for
lease in the ordinary course of trade or business or real property utilized for
low-cost and socialized housing as defined by Republic Act No. 7279,
otherwise known as the Urban Development and Housing Act of 1992, and
other related laws, house and lot and other residential dwellings valued at One
million pesos (1,000,000) and below; Provided that not later than January
31st of the calendar year subsequent to the effectivity of this Act and each
calendar year thereafter, the amount of one million pesos (1,000,000) shall
be adjusted to its present value using the Consumer Price Index as published
by the National Statistics Office (NSO);
x) Lease of a residential unit with a monthly rental not exceeding eight
thousand pesos (8,000); Provided, that not later than January 31st of the
calendar year subsequent to the effectivity of Republic Act 8241 and each
calendar year thereafter, the amount of eight thousand (P8,000) shall be
adjusted to its present value using the Consumer Price Index as published by
the National Statistics Office (NSO);
y) 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; and
z) 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 Five hundred fifty thousand
pesos (550,000); Provided, that not later than January 31st of the calendar
year subsequent to the effectivity of Republic Act No. 8241 and each calendar
year thereafter, the amount of Five hundred fifty thousand (550,000) shall
be adjusted to its present value using the Consumer Price Index, as published
by the National Statistics Office (NSO).
Example on page 107- 110
Lesson 4
Rate and Base of Tax

11

There shall be levied, assessed and collected on every sale, barter or exchange
of goods or properties, a value-added tax equivalent to ten percent (10%) of
the gross selling price or gross value in money of the goods or properties sold,
bartered or exchanged, such tax to be paid by the seller or transferor.
The tax base for value-added tax is gross selling price or gross value in money
of goods sold, bartered or exchanged. The tax rate applicable is 10%.
Goods or Properties defined
Goods or properties shall mean all tangible and intangible objects which are
capable of pecuniary estimation and shall include:
1. Real properties held primarily for sale to customers or held for lease in the
ordinary course of trade or business;
2. The right or the privilege to use patent, copyright, design or model, plan,
secret formula or process, goodwill, trademark, trade brand or other like
property or right;
3. The right or privilege to use any industrial, commercial or scientific
equipment in the Philippines;
4. The right or the privilege to use motion picture films, films, tapes and discs;
and
5. Radio, television satellite transmission and cable television time.
Transactions subject to Value-Added Tax
1. Every sale, barter or exchange transaction in the course of trade or business.
2. Every transaction deemed sale for vat purposes.
3. Every importation whether it is for business or non-business purpose.
4. Every sale of services made in the course of trade or business other than
services rendered by persons subject to other percentage taxes including the
use or lease of properties.
Requisites for Transactions to be subject to VAT
1. There must be an actual or deemed sale of goods or properties or services
for a consideration.
2. The transaction is undertaken in the ordinary course of trade or business.
3. Such transaction is not exempt under the NIRC code, special laws or
international agreement.
Transactions deemed sale
The following transactions shall be deemed as sale:
1.
Transfer, use or consumption not in the course of business of goods
or properties originally intended for sale or for use in the course of
business.
2.

Distribution or transfer to shareholders or investors as share in the


profits of the VAT-registered person.

3.

Consignments of goods if actual sale is not made within sixty (60)


days following the date such goods were consigned.

4.

Retirement from or cessation of business, with respect to


inventories of taxable goods existing as of such retirement or
cessation

Gross selling price, defined


means the total amount of money or its equivalent which the
purchase pays or is obligated to pay to the seller in consideration
of the sale, barter or exchange of the goods or properties,
excluding value-added tax. The excise tax, if any, on such goods or
properties shall form part of the gross selling price. For example,
an item is sold for 500 per unit. The gross selling price is 500
and the vat is 50 (500x10%), so the total price of the item sold
is 550.

Zero percent (0%) rate


The following sale of VAT-registered persons shall be subject to zero percent
(0%) rates:
1. Export sales;
2. Foreign Currency denominated sales; and
3. Sales to persons or entities whose exemption under special laws or
international agreement to which the Philippines is a signatory effectively
subjects such sales to zero rates.
Export sales, defined
Export sales means:
1. The sale and actual shipment of goods from the Philippines to a foreign
country, irrespective of any shipping arrangement that may be agreed upon
which may influence or determine the transfer of ownership in accordance
with the rules and regulations of the Bangko Sentral ng Pilipinas;
2. Sale of raw materials or packaging materials to a non-resident buyer for
delivery to a resident local export-oriented enterprise to be used in
manufacturing, processing, packing or repacking in the Philippines of the said
buyers goods and paid for in acceptable foreign currency and accounted for
in accordance with the rules and regulations of the Bangko Sentral ng
Pilipinas;
3. Sale of raw materials or packaging materials to export-oriented enterprise
whose export sales exceed seventy percent (70%) of the total annual
production;
4. Sale of gold to the Bangko Sentral ng Pilipinas;
5. Those considered export sales under Executive order no. 226, otherwise
known as the Omnibus Investment Code of 1987, and other Special Laws.
Foreign Currency denominated sale, defined
means sale to a non-resident of goods, except those mentioned in
sections 149 and 150 of NIRC, assembled or manufactured in the
Philippines for delivery to a resident in the Philippines, paid for in
acceptable foreign currency and accounted for in accordance with
the rules and regulations of the Bangko Sentral ng Pilipinas.
Example on page 117
Changes in or cessation of status of a VAT-registered Person
In other words, the vat rate of 10% shall likewise apply to the goods disposed
of or existing at the time there is a change in the status of VAT-registered
person or the business is terminated. For example: Wise Partnership is a vatregistered person that is into the sale of goods or merchandise. After two years
of operation, the owners incorporated Wise Partnership into Wise Corporation.
The inventories at the time of change in status of the business transferred to
the new corporation should be applied with 10% vat for tax purposes.
Determination of the Tax
The tax shall be computed by multiplying the total amount indicated in the
invoice by one-eleventh (1/11).
For example: A vat-registered person sold 55,000.00 worth of merchandise.
The vat shall be computed as 55,000 x 1/11 = 5,000.
Sales returns, allowances and sales discounts
The value of the goods or properties sold and subsequently returned or for
which allowances were granted by a VAT-registered person may be deducted
from the gross sales or receipts for the quarter in which a refund is made or a
credit memorandum or refund is issued. Example on page 119
Authority of the Commissioner to determine the Appropriate Tax Base
The Commissioner of Internal Revenue shall, by rules and regulations
prescribed by the Secretary of Finance, determine the appropriate tax base in
cases where a transaction is deemed a sale, barter or exchange of goods or
properties under subsection (B) hereof, or where the gross selling price is
unreasonably lower than the actual market value.
Example on page 119
Lesson 5

12

Sale or Exchange of services defined


- Means the performance of all kinds of services for others for a fee,
remuneration or consideration in the Philippines. It includes the following:
1. Professional/technical services performed or rendered by:
o Construction and service contractors;
o Stock, real estate, commercial customs and immigration brokers;
o Persons engaged in milling, processing, manufacturing or repacking;
o Dealers in securities;
o Lending investors;
o Transportation contractors on their transport of goods or cargoes;
o Banks, non-bank financial intermediaries and finance companies;
o Non-life insurance companies (except crop insurance) including surety,
fidelity, indemnity and bonding companies
o A nonresident person or his employee in connection with the use of property
rights belonging to, or the installation of any brand, machinery or other
apparatus purchased from nonresident person.
2. Transfer of technology such as:
o The lease or use of any industrial, commercial knowledge or information;
o The supply of scientific, technical, industrial or commercial knowledge or
information;
o The supply of any assistance that is ancillary and subsidiary to and is
furnished as a means of enabling the application or employment of any such
property, or right or any such knowledge or information.
3. Lease or use of intangible property.
This includes copyrights, patents, designs, models, plans, secret formula or
process, goodwill, trademark, trade brand or other like property or right, right
to use radio, television, satellite transmission and cable television time.
4. Lease or use of tangible property such as:
o Lessors of property, whether real or personal;(except lease of residential unit
where the monthly rental does not exceed 8,000; and the aggregate rentals
received by the lessor does not exceed 550,000
o Warehousing services;
o Lessors/distributors of cinematographic films;
o Proprietors, operators or keepers of hotels, motels, rest houses;
o Proprietors, operators of restaurants, refreshment parlors, cafes and other
eating places including night club and caterers;
o Services of franchise grantees of telephone and telegraph, radio and
television broadcasting and all other franchise grantees except those under
section 119 of the NIRC;
o The lease or use of the right or privilege to use any copyright, goodwill,
trademark brand or other like property or right;
o The lease of motion pictures, films, tapes and discs;
o The lease or right to use radio, television, satellite transmission and cable
television time.
Tax base
The VAT on supply of services is based on gross receipts. Gross receipts refer
to cash or its equivalent, whether actually or constructively received.
Tax Rates
The tax is:
1. 10% of the gross receipts.
2. 0% of the gross receipts from the services performed in the Philippines if:
a. From processing, manufacturing or repacking of goods for other persons
doing business in the Philippines, the goods are subsequently exported, or the
services are paid for in acceptable foreign currency and accounted for in
accordance with the rules and regulations of the Bangko Sentral ng Pilipinas;
b. Services other than letter a, if the consideration is paid in acceptable foreign
currency and accounted for in accordance with the rules and regulations of the
Bangko Sentral ng Pilipinas;
c. Services rendered to persons or entities whose exemption under special
laws or international agreements to which the Philippines is a signatory;
d. Services rendered to vessels engaged exclusively in international shipping;

e. Services performed by subcontractors and/or contractors in processing,


converting or manufacturing goods for an enterprise whose export sales
exceed 70% of total production.
Presumptive input tax is allowed for public work contractors equivalent to 1
% of the contract price with respect to government contracts in lieu of actual
input taxes therefrom.
Creditable VAT withheld
refers to vat withheld by the government or any of its political
subdivisions, instrumentalities or agencies including government
owned or controlled corporations, before making payment on
account of services rendered by contractors which are subject to
VAT. The VAT rate shall be equivalent to 6% of the gross receipts
on every release or instalment payment. The amount withheld on
VAT is creditable against the vat liability of such contractor.
In case of government public works contractors, the withholding VAT is 8%.
For payment of lease of properties or property rights to nonresident owners
the withholding VAT is 10%.
Determination of the Tax
The tax shall be computed by multiplying the total amount indicated in the
invoice by one-eleventh (1/11).
For example: A contractor received its payment of a contract on constructing a
house for the quarter amounting to 350,000. The output tax on the service
fee received by the contractor shall be computed as follows:
Service fee received 350,000/11 = 31,818.18
Example on page 126
Lesson 6
General Rule
There shall be levied, assessed and collected on every importation of goods a
value-added tax equivalent to ten percent (10%) based on the total value used
by the Bureau of Customs in determining tariff and customs duties, plus
customs duties, excise taxes, if any, and other charges, such tax to be paid by
the importer prior to the release of such goods from customs custody: (Section
107)
Definition of Relevant Terms
Importation is the process of bringing in goods or merchandise from a
foreign country into the Philippines. The importation of goods whether for
sale or for use of business or not is subject to VAT.
Importer refers to any person who brings in goods into the Philippines from a
foreign country.
Landed Cost comprises invoice cost, insurance, freight, customs duties and
excise tax if any and other charges prior to the release of the goods from
customs custody.
Dutiable Value is the value of the imported goods used as a basis of
assessment by the Bureau of Customs for tariff or customs duties. It is the
total of the cost price, insurance and freight charges of the imported goods.
Cost Price is the invoice price which the importer and the supplier have
agreed upon as the price of the imported goods.
Insurance Premium is the amount of insurance charges relating to the
importation of the imported goods.
Freight refers to the cost of transporting the goods from the foreign country to
the Philippines paid by the importer.
Tariff and Customs Duties refers to the duties charged or collected by the
Bureau of Customs on the imported goods prior to its release from Customs
custody.
Other Charges refers to the other expenses related to the imported goods that
are lawful such as wharf age fees, arrester, brokers fee, documentary stamp
tax, interest and other bank charges, storage fees, excise tax if any. It should
be noted that charges not deemed lawful should not form part of the other
charges for purposes of computing the landed cost as basis of the vat
obligation.
Tax base and rate
The VAT is ten percent (10%) of the value used by the Bureau of Customs in
determining tariff and custom duties (Dutiable value) plus custom duties and
excise taxes if any and other charges. If the customs duties are determined on
the basis of the quantity or volume of goods, the VAT shall be based on
Landed Cost. Landed Cost is comprised of invoice cost, insurance, freight,

13

customs duties and excise tax if any. The importer, prior to the release of the
goods, shall pay the VAT from the custody of the Bureau of Customs.

Example on page 132


Transfer of Goods by Tax-exempt persons
The tax due on such importation shall constitute a lien on the goods superior
to all charges or liens on the goods irrespective of the possessor thereof.
Lesson 7
VAT credits defined
refer to the amount allowed by law as a deduction from the output
tax or output vat to arrive at the vat due for the month or quarter.
VAT credits allowed
1. Creditable input tax on purchases
1. Excess Vat credits. It refers to the excess input tax over the output tax in a
quarter
2. Vat payments. It refers to the vat payment during the first two months of the
quarter
3. Withholding Vat payments. It refers to the vat payments withheld by any
government agency instrumentalities or political subdivision thereof,
including government owned and controlled corporations.
Input tax, defined
refers to the value-added tax due from or paid by a VAT-registered
person in the course of his trade or business, on importation of
goods or local purchase of goods or services, including lease or use
of property, from VAT-registered person. It shall also include the
transitional input tax determined in accordance with section 111 of
NIRC code.
Output tax, defined
refers to the value-added tax due on the sale or lease of taxable
goods or properties or services by any person registered or required
to register under section 236 of NIRC code.
Excess Output or Input Tax
If at the end of any taxable quarter the output tax exceeds the input tax, the
VAT-registered person shall pay the excess. The formulation is Output tax
minus input tax equals VAT payable or VAT Due where output tax is greater
than input tax.
If the input tax exceeds the output tax, the excess shall be carried over to the
succeeding quarter or quarters. The formulation is Output tax minus input tax
where output tax is less than input tax, the result is Excess input tax credit.
Any input tax attributable to the purchase of capital goods or to zero-rated
sales by a VAT-registered person may at his option be refunded or credited
against other internal revenue taxes, subject to the provisions of section 112.

Creditable Input Tax


1. Any input tax as evidenced by a VAT invoice or official receipt issued in
accordance with section 113 of the code on the following transactions shall be
creditable against output tax:
a. Purchase or importation of goods:

a.1 For sale;


a.2 For conversion into or intended to form part of a finished product for
sale including packaging materials;
a.3 For use as supplies in the course of business;
a.4 For use as materials supplied in the sale of services; and
a.5 For use in trade or business for which deduction for depreciation or
amortization is allowed under this code, except automobiles, aircraft
and yachts;
b. Purchase of services on which a value-added tax has been actually paid.

a. To the purchase upon consummation of sale and on importation of goods or


properties; and
b. To the importer upon payment of the value-added tax prior to the release of
the goods from the custody of the Bureau of Customs.
c. However, in the case of purchase of services, lease or use of properties, the
input tax shall be creditable to the purchaser, lessee or licensee upon payment
of the compensation, rental, royalty or fee.

cancellation, apply for the issuance of a tax credit certificate for any unused
input tax which may be used in payment of his other internal revenue taxes.
Period within which Refund or Tax credit of input shall be made
In proper cases, the Commissioner shall grant a refund or issue the tax credit
certificate for creditable input taxes within one hundred twenty (120) days
from the date of submission of complete documents in support of application
filed in accordance with subsections (A) and (B) hereof.
In case of full or partial denial of the claim for tax refund or tax credit, or the
failure on the part of the Commissioner to act on the application within the
period prescribed above, the taxpayer affected may, within thirty (30) days
from the decision denying the claim after the expiration of the one hundred
twenty-day (120) period, appeal the decision or the unacted claim with the
Court of Tax Appeals.
Manner of Giving Refund
Refund shall be made upon warrants drawn by the Commissioner or by his
duly authorized representative without the necessity of being countersigned by
the Chairman, Commission on Audit, the provisions of the Administrative
Code of 1987 to the contrary notwithstanding; Provided, that the refunds
under this paragraph shall be subject to post audit by the Commission on
Audit.

3. A VAT-registered person who is also engaged in transactions not subject to


the value-added tax shall be allowed tax credit as follows:

Lesson 9
Compliance Requirements
1. Registration (whether initial or annual)

2. The input tax on domestic purchase of goods or properties shall be


creditable:

a. Total input tax which can be directly attributed to transactions subject to


value-added tax; and
b. A ratable portion of any input tax, which cannot be directly attributed to
either activity.
Determination of Creditable Input Tax
The sum of the excess input tax carried over from the preceding month or
quarter and the input tax creditable to a VAT-registered during the taxable
month or quarter shall be reduced by the amount of claim for refund or tax
credit for value-added tax and other adjustments, such as purchase returns or
allowances and input tax attributable to exempt sale.
Example on page 137
Lesson 8
Persons Entitled to VAT refunds or Tax credits of Input tax
1. Persons whose sales are zero-rated or effectively zero-rated.
2. Vat-registered persons that have input taxes on capital goods purchased.
3. Persons whose registration has been cancelled.
Zero-rated or Effectively Zero-rated sales
The vat-registered person that have zero-rated or effectively zero-rated
transactions may apply for issuance of the a tax credit certificate or refund of
creditable input tax within two years after the close of the taxable quarter
when the sales were made if the following requisites are complied with:
a. In the case of zero-rated sales, the acceptable foreign currency exchange
proceeds thereof has been duly accounted for with the Bangko Sentral ng
Pilipinas;
b. where the taxpayer is engaged in zero-rated or effectively zero-rated or
exempt transactions, the amount of creditable input due or paid shall be
allocated proportionately on the volume of sales if such creditable input tax
paid cannot be directly attributable to any of the transactions.
Capital Goods
A VAT-registered person may apply for the issuance of a tax credit certificate
or refund of input taxes paid on capital goods imported or locally
purchased, to the extent that such input taxes have not been applied against
output taxes. The application may be made only within two (2) years after the
close of the taxable quarter when the importation or purchase was made.
Cancellation of VAT Registration
A person whose registration has been cancelled due to retirement from or
cessation of business, or due to changes in or cessation of status under
section 106(C) of this code may, within two (2) years from the date of

Initial registration is required for those engaging in business for the first time
on or before the commencement of business or before the payment of any tax
due or upon filing of the return or statement of declaration required by law. It
includes application for Tax Identification Number or TIN.
Annual registration is to be done on or before the last day of January and
payment of a fee of P500 for every distinct establishment or place of business
or branch.
2. Keeping of the accounting records. Accounting records such as journals and
ledgers or their equivalents shall be maintained and kept or preserved for a
period beginning the last entry in each book up to the last day prescribed by
law for the Commissioner to make assessment.
3. Issuance of invoices and receipts. All persons subject to internal revenue
taxes shall for each sale or transfer of merchandise or services rendered valued
at twenty five (25.00) or more, issue duly registered receipts or sales
commercial invoices in duplicate copies which shall be preserved or kept in
the place of business for a period of three years.
4. Filing of internal revenue returns and payment of taxes. The filing of
returns shall be at the following:
a. Authorized agent banks;
b. Revenue district officer;
c. Collection agent;
d. Duly authorized Treasurer of City or Municipality having jurisdiction over
the location of the principal place of the business filing the return.
The payment of the tax due shall be at the time of filing the return in a manner
prescribed by the Commissioner. This is what you call the pay as you file
system.
5. Withholding of tax if required by law.
Invoicing Requirements
A VAT-registered person shall, for every sale, issue an invoice or receipt with
the following info:
1. A statement that the seller is a VAT-registered person, followed by his
taxpayers identification number (TIN); and
2. The total amount that the purchaser pays or is obligated to pay to the seller
with the indication that such amount includes the value-added tax.
Accounting Requirements
Notwithstanding the provisions of section 233, all persons subject to valueadded tax under section 106 and 108 shall, in addition to the regular
accounting records required, maintain a subsidiary sales journal and
subsidiary purchase journal on which the daily information are recorded.
Return and Payment of Value-added tax

14

Every person liable to value-added tax shall file a quarterly return of the
amount of his gross sales or receipts within twenty-five (25) days following
the close of each taxable quarter prescribed for each taxpayer; Any person,
whose registration has been cancelled in accordance with section 236, shall
file a return and pay the tax due thereon within twenty-five (25) days from the
date of cancellation of registration:
Where to file the return and Pay the Tax
a. Authorized agent banks;
b. Revenue Collection Officer; or
c. Duly authorized city or municipal Treasurer in the Philippine located within
the Revenue district where the taxpayer is registered or required to register.
Withholding of Creditable Value-Added Tax
The government or any of its political subdivisions, instrumentalities or
agencies, including government-owned or controlled corporations, shall,
deduct and withhold the value-added tax due at the rate of three percent (3%)
of the gross payment for the purchase of goods and six percent (6%) on gross
receipts for the purchase of services rendered by the contractors on every sale
or instalment payment which shall be creditable against value-added tax
liability of the seller or the contractor: Provided, however, that in the case of
government public work contractors, the withholding rate shall be eight and
one-half percent (8.5%): Provided further; that the payment for lease or use of
properties or property rights to non-resident owners shall be subject to ten
percent (10%) withholding tax at the time of payment.
The value-added tax withheld under this section shall be remitted within ten
(10) days following the end of the month the withholding was made.
Power of the Commissioner to Suspend the Business Operation of a
Taxpayer
The Commissioner or his authorized representative is hereby empowered to
suspend the business operations and temporarily close the business
establishments of any person for any of the following violations:
A) In the case of VAT-registered person
1. Failure to issue receipts or invoices;
2. Failure to file a value-added tax return as required under section 114; or
3. Understatement of taxable sales or receipts by thirty percent (30%) or more
of his correct taxable sales or receipts for the taxable quarter.
B) Failure of any person to register as required under section 236
The temporary closure of the establishment shall be for the duration of not
less than five (5) days and shall be lifted only upon compliance with whatever
requirements prescribed by the Commissioner in the closure order.

15

MODULE 4
Lesson 1
Percentage taxes, which is one of the privilege taxes the government is
imposing as contained in the national internal revenue code. These percentage
taxes are covered in the following sections of the Code as follows:
1. Section 116 tax on value added tax exempt persons under section 109 (z)
2. Section 117 tax on domestic carriers and keepers of garage
3. Section 118 tax on international carriers
4. Section 119 tax on franchise grantees
5. Section 120 tax on overseas communications from the Philippines
6. Section 121 tax on banks and non-bank financial intermediaries
7. Section 122 tax on finance companies
8. Section 123 tax on life insurance premiums
9. Section 124 tax on agents of foreign insurance companies
10. Section 125 tax on amusement places
11. Section 126 tax on winnings in horse races
12. Section 127 tax on sellers of shares of stocks through the local stock
exchange or initial public offerings
This percentage taxes as conceptualized by the government is the obligation
of the seller and not of the buyer. But because percentage taxes are deemed as
indirect taxes, the seller can have the following option:
1. The business can personally absorb the percentage taxes. Under this option,
the seller will just simply compute the percentage tax on the actual receipts
issued by the seller to the customer. Example on page 149
2. Pass this percentage tax to the customers or clients. Under this option, aside
from the selling price of merchandise sold to the companys customers, the
seller will also charge the amount of percentage tax.
Example on page 149
The Concept of Gross Selling Price
N
N - means the total amount of money or its equivalent which the
customer will pay to the seller of merchandise. This total amount
includes the following:
N
1. Actual selling price of the merchandise sold by the seller to the customer
whether in cash or on account; and
2. The amount of other charges and the percentage tax passed on to the
customer by the seller.
The Concept of Gross Receipts
N - means the total amount of money or its equivalent, which the
customer will pay to the seller of services. This total amount
includes the following:
1.
The contact price, compensation or service fee, including the
amount of materials supplied by the contractor for the delivery of
services and the deposits or advance payments actually or
constructively received during the period covered by the return;
and
2. The amount of percentage tax passed on by the contractor to the
customer.
Generally, the following rules shall apply to the various business enterprises
operating in the country.
1. Subject to percentage taxes only. This is applicable to those business
enterprises whose annual gross selling price or annual gross receipts exceed
the 100,000 threshold but do not go beyond 550,000.
2. Subject to value added taxes only. This is applicable to those business
enterprises whose annual gross selling price or annual gross receipts exceed
the 550,000 threshold.
3. Subject to percentage taxes and value added taxes. This is applicable to
business enterprises that are not subject to value added tax but issue vat
registered receipts.
4. Exempted from both percentage taxes and value added taxes. This is
applicable to single proprietorship business enterprises which annual gross

16

selling price or annual gross receipts do not exceed the 100,000 threshold.
These are the business enterprises that are considered as marginal income or
business for livelihood subsistence.
Lesson 2
Section 116 Percentage tax on persons exempt from value added tax
1. Have an annual gross selling price/gross receipts of not more than
550,000. Under this category, a taxpayer will register his enterprise as a
non-vat enterprise because he estimates that his annual gross income will not
exceed the threshold of 550,000.
Example on page 152
2. Have an annual gross selling price or gross receipts of not more than
550,000 but issue vat registered official receipts. These persons will be
subjected to both percentage and value added taxes. These persons cannot
claim input vat.
Example on page 154
Lesson 3
Generally, franchise grantees are subject to the value added taxes except those
persons subject to the percentages taxes under the following sections of the
NIRC.
Section 117
Section 118
Section 119
Section 120
Section 125
The franchise as referred to in these sections refers to the legislative grant
from the government authorizing a person to operate public utility services or
engage in a very restricted and regulated business activity.
Section 117 Percentage tax on domestic carriers and keepers of garage
This section includes the following:
a. Cars for rent or hire driven by the lessee;
b. Transportation contractors, including persons who transport passengers, for
hire;
c. Other domestic carriers by land, air, or water, for the transport of
passengers; and
d. Keepers of garages
Exempted from payment of percentage taxes are:
a. Owners of bancas and
b. Owners of animal-drawn two wheeled vehicles
The gross receipts of common carriers arising from their income or outgoing
freight shall not be subjected to percentage taxes but instead this will be
covered by value added taxes:
Example on page 158
Section 118 Percentage tax on international carriers
This section includes the following:
1. International air carriers doing business in the Philippines
2. International shipping carriers doing business in the Philippines
Percentage tax of companies under this section is 3% based on gross receipts.
The ruling on the 550,000 threshold still applies in this section. This means
that the moment the company is already earning more than 550,000, the
company is already governed by the law on value added taxes.
Section 119 Percentage tax on franchise grantees
Franchise tax on electric, gas and water utilities 2%
Franchise tax on radio and television Broadcasting Company
(If the preceding years gross receipts did not exceed 10,000,000) 3%
Should the gross receipts of the radio and/or television broadcasting
companies exceed 10,000,000 then said company is no longer subject to
percentage tax but to value added taxes. Example on page 160
Section 120 Percentage tax on overseas communications originating
from the
Philippines

The service provider shall collect the percentage tax imposed in this section
from the user of the service equivalent to 10% of the amount paid by the latter.
The provider, however, is subject to 10% value added tax on its gross receipts
from its domestic and local communication services sold/rendered.
The percentage tax in this section shall not apply to:
1. Government. Amount paid for messages transmitted by the government of
the
Republic of the Philippines or any of its political subdivisions or
instrumentalities.
2. Diplomatic services. Amount paid for messages transmitted by any
embassy
and consular offices of a foreign government.
3. International organizations. Amount paid for messages transmitted by a
public international organization or any of its agencies based in the
Philippines enjoying privileges, exemptions, and immunities,
4. News services. Amounts paid for messages from any newspaper, press
associations, radio, or television, newspaper broadcasting agency or news
sticker services or to a bona-fide correspondent, which messages deal with
public press.
Section 121 Percentage tax on domestic carriers and keepers of garage
Section 122 - Percentage tax on domestic carriers and keepers of garage
These sections were already repealed/abolished/deleted as the persons covered
by these sections are now subjected to value added tax as per Republic Act
9010 and BIR revenue regulation no. 12-2003. The change took effect January
1, 2003.
Lesson 4
Section 123 Percentage tax on life insurance company
There shall be collected from every person, company or corporation (except
purely cooperative companies or associations) doing life insurance business of
any sort in the Philippines, a percentage tax of five (5%) based on the gross
receipts on total life insurance
Examples of life insurance:
1. Accident insurance
2. Health/hospitalization insurance
3. Disability insurance
4. Life insurance
Under the insurance code of the Philippines, the above life insurance will be
treated as:
a. Non-life insurance if issued by a non-life insurance company.
b. Life insurance if issued by a life insurance company.
The percentage tax imposed in this section shall not apply to the following
insurance premiums:
a. Refunded within 6 months after payment on account of rejection of risk or
returned for other reasons to the insured persons.
b. Reinsurance by a company that has already paid the tax.
c. Collected or received by any branch of a domestic corporation, firm or
association doing business outside the Philippines on account of any life
insurance of an insured who is a non-resident if any tax on such premium is
imposed by the foreign country where the branch is established.
d. Collection account of any reinsurance if the insured for personal insurance
resides outside the Philippines. If any tax on such premiums is imposed by the
foreign country, where the original insurance has been issued or perfected.
e. Portion of the insurance premiums collected by the insurance companies on
variable contracts (as defined in section 232 (2) of presidential decree no. 612
in excess of the amounts necessary to insure the lives of variable contract
workers.
Non-life insurance premiums are not subject to the foregoing percentage tax
but are rather subject to the 10% value added tax.
Examples of non-life insurance are:
1. Property insurance
2. Marine insurance

17

3. Fire insurance
4. Surety
5. Fidelity
6. Indemnity
7. Bonding insurance
Section 124 Percentage tax on agents of foreign insurance companies
For agents of authorized foreign insurance companies
5% on gross receipts on non-life insurance premium
For agents of unauthorized foreign insurance companies 10% on gross
receipts on non-life insurance premium. For owners of properties obtaining
insurance directly with foreign insurance companies 5% of gross receipts on
non-life insurance premium payment
Section 125 Percentage tax on amusement places
1. Local amusement tax. This refers to amusement taxes which are collected,
imposed, and administered by the local government unit such as city or
municipality, on:
a. movie houses
b. carnivals or circus
c. stage theaters
2. National amusement tax. This refers to amusement taxes which are
collected, imposed, and administered by the national government, particularly
the BIR, and which is the one covered by this section of the national internal
revenue code.
Examples:
a. Boxing exhibitions: 10% of gross receipts.
Exception:
Boxing exhibitions wherein world or oriental championship is at stake,
provided, that at least one of the contenders is a citizen of the Philippines and
said exhibitions are promoted by a corporation or association of which at least
60% of the capitalization is owned by a Filipino citizen.
b. Professional basketball games: 15% of gross receipts
c. Cockpits, cabarets, or night clubs: 18% of gross receipts
d. Jai alai, race tracks: 30% of gross receipts
Example on page 166
Section 126 Percentage tax on horse races
The percentage tax on horse races shall be deducted from the dividends
corresponding to each winning ticket and the price of each winning racehorse
owner in a form of a withholding tax which shall be remitted to BIR.
a. For owners of winning horses: 10% of gross winnings/prizes
b. For bettors: On bets such as double, forecast, trifecta, quenelle: 4% of gross
winning/dividends
On other bets such as win, place: 10% on gross winnings
Section 127 Percentage tax on seller, transferor of stocks
For this section, you are supposed to learn the following terms for easy
comprehension of the discussion.
a. Gross selling price the money or its equivalent, which the buyer pays to
the seller in exchange for the shares of stock purchased.
b. Gross value in money fair market value. In case of shares traded through
the local stock exchange, the fair market value shall consist of the actual
selling price as certified by the local stock exchange where the sale was
affected.
c. Primary/initial public offering (IPO) the stock offering made for the first
time in the local stock market.
d. Secondary public offering stock offering made after the initial public
offering.
e. Shares of stocks shares of stocks of corporation, joint stock company, or
insurance company.
a. Sale of shares of stocks through the local stock exchange (by non-dealer of
marketable securities):
of 1% of gross sales price or gross value in money
b. Sales of shares of stocks through initial or secondary public offering:

2. The main office will file a consolidated report for all branches.

In case of primary public offering, the issuing corporation shall file the
percentage tax return within 30 days from the date of listing of the shares of
stocks in the local stock exchange.
In case of secondary offering, the stockholder who effected such sale shall be
required to collect the tax, file, and remit to the BIR within 5 banking days
from the date of collections and tax.
Lesson 5
Who are required to file the percentage tax returns?
The following persons/entities shall file percentage tax returns using BIR
Form No. 2251M April 2002 (ENCS):
1. Persons whose gross annual sales and/or receipts do not exceed 550,000
and who are not VAT-registered persons.
2. Domestic carriers and keepers of garages, except owners of bancas and
owners of animal-drawn two wheeled vehicle.
3. Operators of international air and shipping carriers doing business in the
Philippines.
4. Franchise grantees of electric, gas or water utilities.
5. Franchise grantees of radio and/or television broadcasting companies whose
gross annual receipts of the preceding year do not exceed Ten Million Pesos
(10,000,000) and did not opt to register as VAT taxpayers.
6. Banks, non-bank financial intermediaries and finance companies.
7. Life insurance companies.
8. Agents of foreign insurance companies.
9. Stocks, real estate, commercial customs and immigration brokers.
10. Cooperative shall be exempt from the three percent (3%) gross receipt tax.
When to file the percentage tax return?
The return shall be filed not later than the 20th day following the end of the
each month, provided, however, that with respect to taxpayers enrolled with
the Electronic Filing and Payment System (EEPS), the deadline is:
For section 127
1. In case of sale, barter of shares of stocks listed and traded through the local
stock exchange or through secondary public offering, this should be filed at
the Bureau of Internal Revenue at least 5 banking days from the date of
collection and submitted on Monday of each week to the secretary of the stock
exchange of which he is member. A complete percentage tax return which
shall contain a declaration of all the transactions effected through him during
the preceding week and of the taxes collected by him and turned over to the
BIR shall likewise be submitted.
2. In case of initial public offering, the tax shall be paid by the corporation
within 30 days from the date of the listing of shares of stocks in the local
stock exchange.
When to pay the percentage taxes
All percentage taxes shall be paid upon filing.
When to file the percentage taxes
The percentage tax return shall be filed with the authorized agent bank
(AAB), revenue district officer, revenue collection agent/officer or duly
authorized treasurer of the city municipality where said business or principal
place of office is located, as the case may be.
Every person liable for such percentage tax has the following options on filing
of percentage taxes:
1. Per branch. There are companies that operate branches located in various
places nationwide. If this company will adopt this option, then every branch
has to file a percentage tax in his area where the business is located.

18

Surcharges
1. There shall be imposed, in addition to the tax required to be paid, a penalty
surcharge equivalent to twenty five percent (25%) of the amount due for each
of the following violations:
a. Failure to file any return and pay the tax due thereon as required under the
provisions of the tax code or rules and regulations on the date prescribed;
c. Failure to pay the full or part of the amount of tax shown on any return
required to be filed under the provisions of the tax code or rules and
regulations,
d. Failure to pay the deficiency tax within the time prescribed for its payment
in the notice of assessment.
2. The penalty/surcharges to be imposed shall be fifty percent (50%) of the tax
or of the deficiency tax, in case any payment has been made on the basis of
such return before the discovery of the falsity or fraud, for each of the
following violations:
a. Willful neglect to file the return within the period prescribed by the tax code
or by rules and regulations
b. A false or fraudulent return is willfully made
Interest
1. In general, there shall be assessed and collected on any unpaid amount of
tax, interest at the rate of twenty percent (20%) per annum or such higher rate
as maybe prescribed by rules and regulations from the date prescribed until
the full payment thereof.
2. Deficiency interest. Any deficiency interest in the tax due shall be subject to
(20%) interest per annum, which interest shall be assessed and collected from
the date prescribed for its payment until the full payment thereof.
3. Delinquency interest. A (20%) interest per annum shall be imposed on the
unpaid amount in case of failure to pay:
a. The amount of the tax due on any return required to be filed; or
b. The amount of the tax due for which no return is required; or
c. A deficiency tax, or any surcharge or interest thereon on the date appearing
in the notice of assessment and demand of the commission.
d. Interest on extended payment.
Compromise
1. Ten percent (10%) of the basic tax, if due to the taxpayers inability or
financial difficulty to pay or
2. Forty percent (40%) of the basic tax, if due to other meritorious reasons.
Registration of persons subject to percentage tax
Every person other than those required to be registered as value added tax
persons engaged in any business should register on or before the
commencement of his business or whenever he transfers to another revenue
district with the revenue district office concerned within 10 days from the
transfer. He shall pay the applicable registration fee of 500.00 for every
separate distinct establishment or place of business and every year thereafter
on or before January, 31.
The 500 registration fee shall be paid at any accredited bank where each
place of business or branch is situated. In areas where there is no accredited
bank, such person shall pay the registration fee prescribed herein with the
revenue district officer, revenue collection agent officer or authorized
treasurer of the city or municipality where said business or principal place of
office is located as the case may be.
However, at the option of the taxpayer, payments maybe made on a semiannual basis in the amount of two hundred fifty (250.00) payable on or
before January 31 for the first semester and on or before the 10th day of the
1st month of the succeeding semester.

Module 5
Lesson 1: Kinds of Excise Taxes
NIRC imposes excise taxes on manufacturers and importers. Excise taxes are
other means by which the government raises revenues. Excise taxes are of two
(2) kinds, namely; specific tax and ad valorem tax. Specific tax is imposed
based on weight or volume capacity or any other physical unit of
measurement, while an ad valorem tax is imposed based on selling price or
other specified value of the article.
Articles Subject to Excise Taxes
The following articles are subject to excise taxes:
a) distilled spirits;
b) wines;
c) fermented liquors;
d) tobacco products;
e) cigars;
f) cigarettes;
g) automobiles;
h) manufactured oils and other fuels;
i) mineral products; and
j) non-essential articles.
The tax bases and rates in the computation of excise tax vary depending on the
need of the government for funding. Thus, when computing the excise tax,
reference should be on the latest revised bases and rates.
Tax Bases and Tax Formulas
Distilled Spirits, Wines, Fermented Liquors, Tobacco Products, Cigars and
Cigarettes Subject to Specific Tax

The tax formula is by the liters multiplied by the tax rate. Manufactured oils
and other fuels include, but not limited to, lubricating oils and greases, base
stock for lube oil and greases, high vacuum distillates, aromatic extracts and
similar preparations. They likewise include naphtha, regular gasoline and
similar products of distillation, leaded premium gasoline, unleaded premium
gasoline, aviation turbo jet fuel, diesel fuel oil, and other similar fuel, etc.
Mineral Products - Subject to Either Specific Tax (S) or Ad Valorem Tax
(A)

Non-essential Articles Subject to Ad Valorem Tax


include 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, opera
glasses and lorgnettes, and even perfumes. Likewise, yachts and
other vessels intended for pleasure or sports are considered nonessential articles. They shall be taxed based on the wholesale price,
or if imported, on the value used by the Bureau of Customs in
determining tariff and customs duties, net of excise taxes and
value-added tax, multiplied by the tax rate.
Who are Liable to Pay the Excise Taxes
The manufacturer, who removes from his place of production any of the above
mentioned articles for the purpose of domestic consumption or sale, or any
other form of disposition, shall be liable to pay the excise tax.
The excise tax on an imported article shall be paid by the owner or importer.
The payment of the excise tax shall be in addition to the value-added tax.

Automobiles Subject to Ad Valorem Tax


If manufactured, or imported for sale:
On the selling price which is net of excise and value added tax, an ad
valorem tax as determined by the engine displacement.
If imported, not intended for sale:
On the total value as used by the Bureau of Customs in computing tariff and
customs duty, inclusive of customs duty and all other charges, plus 10% of the
total thereof, as computed by the engine displacement.

Manufactured Oils and Other Fuels Subject to Specific Tax

19

When Shall Excise Taxes be Paid


The excise tax on locally produced or extracted metallic mineral or mineral
products shall be paid within fifteen (15) days after the end of the calendar
quarter when such products were removed.
The excise tax on non-metallic and mineral products or quarry resources shall
be paid upon removal from the locality where mined or extracted.
The excise tax on imported article shall be paid before the release of the goods
from the customhouse.
The excise tax on any other domestic article subject to such tax shall be paid
immediately before removal of the article from the place of manufacture.

Module 6
Lesson 1 Republic Act 9337
Republic Act 9337 is the Reformed Value Added Tax Law. It is the reforms in
the VAT system to increase government revenues. It was implemented
November 1, 2005.
We need RA 9337 because the Government needs to raise additional revenues
to provide basic public services for the growing population and to
immediately address the countrys debt that has accumulated through the
years. It addresses the delivery of basic services by earmarking the equivalent
of 20% VAT collection for the following purposes:
20% of incremental VAT collection*
Public Elementary and Secondary Education 6%
Health Insurance Premiums 4%
Environmental Conservation 6%
Agricultural Modernization 4%
TOTAL 20%
Who will bear the heavier burden of VAT?
Since, VAT is a consumption tax; its burden is heavier on those who consume
more VATable goods and services.
Most of the goods consumed by lower income families are VAT exempt.
Based on the spending profiles of Filipino families across income classes,
those families spending not more than 60,000 annually spend only 0.2% of
their expenditures on taxes (VAT, excise and other taxes). This is largely
because of their purchases of VAT-exempt goods ( such as foodstuffs
consumed at home, which constitute more than 60% of their purchases).

For Domestic Corporations the computation of income tax for the year 2005
would be :

Note : The above computation of income tax is applicable only for the year
2005, because
the implementation of RA 9337 being effective Nov. 01, 2005 ( the taxable
income for January to October will be multiplied using the old rate of 32%.
November and December,2005 taxable income will be multiplied at a new
rate of 35% ). Example on page 184
Rates on income tax on domestic corporations :
However, due to the implementation of RA 9337 effective November 01,
2005, PAGCOR will be subjected to the payment of income tax at the rate
applicable to domestic corporations.

On the other extreme, those families spending upwards of 250,000


annually spend at least 4.10% of their expenditures on taxes, largely because
they consume more VATable goods and services.
Is RA 9337 anti-poor?
No, the RA 9337 recognizes the needs of the poor and exempts basic
commodities and socially sensitive products from VAT. Among these VAT
exempt commodities are:
Agricultural and marine products in their original state such as vegetables,
meat, fish, fruits, eggs and rice
lease of residential houses not exceeding 10,000 monthly
educational services rendered by both public and private educational
institutions
books, newspapers and magazines;
sales of persons and establishments earning not more than 1.5 million
annually, which include sari-sari stores, carinderias and street vendors.
Rates on income tax on domestic corporations:
I. Net Income Tax (NIT)
Domestic corporations are obliged to pay the Net Income Tax at the rate of
32% on its taxable net income derived during each taxable year from all
sources within and outside the Philippines effective January 1, 2000. This rate
was amended effective November 1, 2005, due to the implementation of RA
9337. Below are the rates applicable to domestic corporations based on NIRC
and RA 9337:

Rates on income tax on foreign corporations:


resident foreign corporations are taxable in the same manner as that of
domestic corporations. One of the income taxes discussed in the said module
was the Net Income Tax (NIT). Ordinary corporations are subject to the
ordinary rate of 32% of their taxable income. But with the implementation of
RA 9337 effective November 1, 2005, this rate was changed to 35%.
In the case of non-resident corporations, they are liable to pay the (1) Gross
Income Tax (GIT). The basis of the tax is the gross income which means the
total of all income received from all sources without any deductions
multiplied by 32%. But due to the implementation of RA 9337 this rate was
amended to 35% effective Nov. 1, 2005. Unlike the resident foreign
corporations, the basis of the tax in non-resident corporations is gross income
and not the net income, thats why it is called gross income tax.
Please take note that the applicable rate for 2006 up to December 31, 2008 is
35%, rate will be reduced to 30% effective January 1, 2009.

Example on page 186

The method of computing the tax is called Net Income Tax because the basis
of taxing said corporations is their taxable net income. In order to compute
for the taxable net income the formula is as follows :

20

VALUE ADDED TAX (VAT )


Value Added Tax or simply called VAT refers to the business tax imposed by
the national government on any person, who in the course of trade or business
sells, barters, exchanges, leases goods or properties, renders services, and on
any other person who imports goods as per section 106 to 108 of the National
Internal Revenue Code.
Characteristics of VAT
It is an indirect tax. VAT is considered an indirect tax because the seller of
the goods or services may shift the burden of tax to the buyer.

It employs tax credit. The VAT charged by the seller becomes the VAT
credit of the buyer against the VAT he will charge on his sales. This is, output
tax minus input tax equals VAT payable, where the input tax is the VAT
credit.
It is cumulative. The VAT is cumulative in effect as the tax is borne by the
consumer. Unless and until the goods reach the final consumer, such goods
continue to cumulate tax as passed on to the buyer.

Special Rule on Adjacent Lots per RR-16-2005


- Sale of two adjacent lots to one buyer to be used as one residential lot greater
than or equal to 1.5M.
- Presumption of sale of one residential lot if the adjacent lots are sold to one
and same buyer though covered by separate title and/or separate deed of sale.

VAT rate shall be 12% if any of the following conditions have been satisfied:
- VAT collection to GDP ratio for 2005 exceeds 2.8%, or the National
Government deficit to GDP ratio for 2005 exceeds 1.5%

Tax base for sale of real property per RR16-2005


- Selling Price (SP) or Fair Market Value (FMV) whichever is higher.
- If the selling price is based on zonal value or market value ( based on the tax
declaration), it is deemed inclusive of VAT.
- If VAT is not billed separately in the Deed of Sale, the selling price stated in
the deed is deemed inclusive of VAT.
Exchange of Real Property for Share per RR 16-2005
- 10% VAT on exchange of real properties held for sale or lease, for shares of
stock, whether resulting to corporate control or not.
Special Rules on VAT- exempt lease on residential units per RR 16-2005
- Lease of residential unit less than or equal to 10,000
- Lease of residential unit greater than or equal to 10,000 but the aggregate
annual rental rentals is less than or equal to 1.5M.
- Varied rental rates.
If some residential units are leased greater than or equal to 10,000 per
month and other units are leased less than or equal to 10,000 per month, the
lease shall be:
VAT exempt lease of less than or equal to 10,000/month
VAT exempt lease of greater than or equal to 10,000 but the aggregate
annual rentals from said unit ( not including rentals from unit with monthly
rental less than or equal to 10,000) is less than or equal to 1.5M.

21

- If output tax is 2,000 and input tax is 1,200, the net amount payable is
800.
If input tax exceeds output tax for the quarter, the 70% cap on input tax
credit applies:
- If output tax is 2,000 and input tax is 2,200, the maximum input tax for
the quarter is 1,400, the net amount payable is 600, and the excess input
tax of 800 is carried forward. Example on page 195

Under Sec. 110 (A) (2) (b), a taxpayer must spread the input tax on capital
goods if:
- the aggregate acquisition cost ( including VAT) of depreciable goods
purchased or imported in a calendar month exceeds 1 million.
The input tax must be spread over the lesser of: (a) sixty months or (b) the
depreciable life of the goods.
The rule should not apply to the acquisition of land (non-depreciable).
Example on page 192

Example on page 197

(Domestic corporation: known before as special corporation)

Based on RR 16-2005
If output tax exceeds input tax for the quarter, pay the difference

22

Revenue Memorandum Circular 62-2005


(Registration and Invoicing Requirements)
Who are required to register as VAT taxpayers?
- Any person who, in the course of trade or business, SELLS BARTERS,
EXCHANGES or LEASES goods or properties or engages in the SALE or
EXCHANGE of services.
- GROSS SALES or RECEIPTS for 12 months shall exceed 1,500,000.00
- Franchise grantees of radio and television broadcasting, whose annual gross
receipts for the preceding calendar year exceed 10M.
What are the registration requirements of professionals now covered by
VAT?
- Professionals now covered by VAT (doctors and lawyers should update their
BIR registrations.
- Use BIR FORM 1905.
- If gross receipts for 12 months exceeds 1.5M register as VAT taxpayers.
- If gross receipts for 12 months is equal to 1.5M register as PT taxpayers.
- Use BIR FORM 1906 to print receipt as VAT or PT taxpayers.

Sale to Eco zones (PEZA and Subic Special Economic Zone)


Revenue Memo Circular No. 74-99
- Automatic zero-rating on sale of goods and services to PEZA registered
enterprises.
Republic Act No. 9337 ( Reformed VAT Law )
- Sale of goods to PEZA registered enterprises
- subject to zero percent (0%) VAT rate.
(Section 106 A (2) )
- Sale of services to PEZA registered enterprises
- subject to zero percent (0%) VAT rate.
(Section 108 B (4)
Revenue Regulations 16-2005
(Consolidated VAT Regulations)
- Except for export sales and foreign currency denominated sales, there should
be prior BIR approval to qualify for zero rating.
- Sale of services to PEZA registered enterprises requires prior BIR approval
for zero rating;
- Effectively Zero-rated sales of services shall be limited to the following:
1. Services rendered to persons or entities whose exemption under special
laws or international agreements to which the Philippines is a signatory;
2. Services rendered to persons engaged in international shipping or air
transport operations, including leases of property for use thereof;
Provided, however, that the services referred to herein shall not pertain to
those made to common carriers by air and sea relative to their transport of
passengers, goods or cargoes from one place in the Philippines to another
place in the Philippines; and
3. Services performed by subcontractors and/or contractors in processing,
converting, or manufacturing goods for an enterprise whose export sales
exceed seventy percent (70%) of the total annual production.
Effect of 70% Cap on Input VAT Credits
-70% cap on input VAT credits may result in the perpetual accumulation of
input taxes particularly for low margin businesses.
-For most companies (those not engage in zero-rated or effectively zero-rated
sales), the only option for recovery comes when they cease business and
deregister from VAT.
- Integrity of supporting documents.
- Companys policy of retention of records.
- Priority of the BIR ( refunds definitely not on the shortlist).
- Cost of pursuing the claim ( e.g. legal fees, filing fees if elevated to the
courts).
- Applications for refund/tax credit certificates spark off BIR audits.
- Governments liquidity ( if issued a tax credit certificate, will have to be sold
at a discount).

23

Where should a new VAT taxpayer register?


- Revenue District Office (RDO) having jurisdiction over the principal place
of business.
- Call BIR Contact Center 981-8888.
- Pay registration fee of 500 use BIR FORM 0605.
- T.P. are required to pay annual registration fee P500 not later than Jan. 31,
every year.
What is the liability of a T.P. becoming liable to VAT and did not register
as
such?
- Shall pay the output tax but without the benefit of input tax credit for the
period he was not properly registered as VAT taxpayer.
When can a VAT-registered person cancel his VAT registration?
- Written application or request to the CIR that gross sales or receipts for 12
months shall not exceed 1.5M.
- Ceased to carry his trade or business and does not expect to recommence
within the next 12 months.
What is the invoicing/receipt requirement of a VAT-registered taxpayer?
- Tax Payer shall issue:
1. VAT SALES INVOICE for every sale, barter or exchange of goods and
Properties.
2. VAT OFFICIAL RECEIPT for every lease of goods or properties and for
every sale, barter or exchange of services.
Manner of issuing VAT invoice or VAT official receipt (Section 4.113-1,
RR No. 16-2005)
Two options of a VAT-registered person undertaking transaction with various
components i.e. VAT or VAT exempt or not subject to VAT:
a. Single invoice or official receipt for all such transactions; or
b. Separate invoices or official receipts for the taxable, exempt and zero-rated
transactions.
Single Invoice/Receipt
(Section 4.113-1 (B) (2), RR No. 16-2005 )
1. Breakdown of the sale price between the persons taxable, exempt and zerorated components and the calculation of the VAT on each portion of the sale;
2. The terms VAT-exempt sale, Not subject VAT, Zero-Rated Sale, as
the case may be, predominantly printed or written on the VAT invoice or VAT
OR.
Information in the VAT invoice or Official Receipt
1. Name of the seller
2. Business Style of the seller
3. Business Address of the seller
4. Statement that Seller is VAT registered followed by his TIN
5. Name, business style and address of buyer
6. TIN of buyer, if vat t.p. and amount exceeds 1000
7. Date of transaction
8. Quantity
9. Unit cost

10. Description of the goods or nature of services


11. Purchase price plus the VAT as separate ITEM
12. Authority to Print Receipt Number at the lower left corner of the invoice
or receipt
Example on page 206
Consequences of erroneous issuance of a VAT invoice or VAT official
receipt (Section 113 (D), Tax Code as amended by RA NO. 9337 )
1. Issuance of a VAT invoice or VAT official receipt by a non-VAT person.
The NON-VAT person shall be liable to:
- The percentage taxes applicable to his transactions;
- The VAT due on the transactions under Sections 106 and 108 of the Tax
Code;
- a 50% surcharge under Section 248 (B) of the Tax Code.
On the part of the purchaser, customer, client
- VAT to be recognized as input tax to the purchaser subject to compliance
with the prescribed information
Liability of a VAT T.P. in the issuance of VAT invoice/receipt for VATexempt transactions.
- If no words VAT-EXEMPT SALE printed or displayed in the
invoice/receipt, the transactions shall become taxable.
- The T.P. becomes liable to output tax.
Transitional Period/Transitory Provisions on Invoicing ( Section 113 (E)
of RA 9337 and Sec. 4.113-5 of RR 16-2005)
1. Taxpayers may continue to issue VAT invoices and VAT official receipts for
the period November 1, 2005 to December 31, 2005, in accordance with the
old VAT Law and implementing RR that existed as of December 31, 2004.
2. Unused Invoice or receipts.
i. Taxpayers who changed status from NON-VAT to VAT or from VAT to
NON-VAT as a result of the implementation of RA 9337.

24

* Submit within 30 days from effectivity of the law (i.e. November 1,


2005) an inventory of unused invoices or receipts as of the day immediately
preceding the effectivity of RA 9337 indicating the number of booklets and
the corresponding serial numbers.
ii. Unused non-VAT invoices/receipts allowed for use in transactions subject
to VAT provided the phrase VAT-registered as (effectivity date of RA no.
9337 ) is stamped on all copies.
iii. Unused VAT invoices/receipts allowed in VAT-exempt transactions
provided the phrase Non-VAT registered as of ________________ is
stamped on all copies.
iv. Use of unused invoices or receipts with the proper stamp in transactions
subject to VAT/Non-VAT allowed up to December 31, 2005.
Effect of NEW VAT LAW on CRM/POS relative to the issuance of
receipts.
T.P. has to re-configure to conform with the invoicing requirements until
December 31, 2005
CRM Cash Receipts Machine
Basis of OUTPUT VAT Payable if the generated receipts/invoices are
inclusive of VAT pending re-configuration of system.
The OUTPUT VAT payable shall be computed by multiplying the total
amount by 1/11.

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