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Estate Tax
Estate tax is the tax on the right to transmit property at death and on certain transfers by the
decedent during his lifetime which are made by the law equivalent of testamentary dispositions.
It accrues upon the death of the decedent.
A transmission by inheritance is taxable at the time of the predecessors death, notwithstanding the
postponement of the actual possession or enjoyment of the estate by the beneficiary. (Lorenzo v
Posadas)
The tax is measured by the value of the property transmitted at the time of death, regardless of its
appreciation or depreciation.
The accrual of the tax is distinct from the obligation to pay the tax.

SEC. 84. Rates of Estate Tax. - There shall be levied, assessed, collected and paid upon the transfer of the net estate as determined
in accordance with Sections 85 and 86 of every decedent, whether resident or nonresident of the Philippines, a tax based on the
value of such net estate, as computed in accordance with the following schedule
Over But not over The tax shall be Plus Of the Excess
Over
P200k Exempt
P200k P500k 0 5% P200k
P500k P2m P15k 8% P500k
P2m P5m P135k 11% P2m
P5m P10m P465k 15% P5m
P10m P1.215m 20% P10m

Properties in the Estate

SEC. 85. Gross Estate. - the value of the gross estate of the decedent shall be determined by including the value at the time of his
death of all property, real or personal, tangible or intangible, wherever situated: Provided, however, that in the case of a nonresident
decedent who at the time of his death was not a citizen of the Philippines, only that part of the entire gross estate which is situated
in the Philippines shall be included in his taxable estate.

(A) Decedent's Interest. - To the extent of the interest therein of the decedent at the time of his death;

SEC. 104. Definitions. - For purposes of this Title, the terms "gross estate" and "gifts" include real and personal property, whether
tangible or intangible, or mixed, wherever situated: Provided, however, That where the decedent or donor was a nonresident alien at
the time of his death or donation, as the case may be, his real and personal property so transferred but which are situated outside
the Philippines shall not be included as part of his "gross estate" or "gross gift": Provided, further, That franchise which must be
exercised in the Philippines; shares, obligations or bonds issued by any corporation or sociedad anonima organized or constituted
in the Philippines in accordance with its laws; shares, obligations or bonds by any foreign corporation eighty-five percent (85%) of
the business of which is located in the Philippines; shares, obligations or bonds issued by any foreign corporation if such shares,
obligations or bonds have acquired a business situs in the Philippines; shares or rights in any partnership, business or industry
established in the Philippines, shall be considered as situated in the Philippines: Provided, still further, that no tax shall be collected
under this Title in respect of intangible personal property: (a) if the decedent at the time of his death or the donor at the time of the
donation was a citizen and resident of a foreign country which at the time of his death or donation did not impose a transfer tax of
any character, in respect of intangible personal property of citizens of the Philippines not residing in that foreign country, or (b) if
the laws of the foreign country of which the decedent or donor was a citizen and resident at the time of his death or donation
allows a similar exemption from transfer or death taxes of every character or description in respect of intangible personal property
owned by citizens of the Philippines not residing in that foreign country.
For residents and citizens, gross estate includes ALL properties, real or personal, tangible or
intangible, WHEREVER situated.
For non-resident aliens, gross estate includes only properties those situated in the Philippines.
o Except with respect to INTANGIBLE personal property, its inclusion to the gross estate is the
subject to the rule of reciprocity.
If the foreign country of the non-resident alien does not impose a transfer tax of any

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character on the IPP of Filipinos not residents of that foreign country; or

The foreign country of the non-resident alien allows a similar exemption from
transfer tax in respect of IPP owned by Filipinos not residents of that foreign country,
Then IPPs of the non-resident alien here are exempt from the estate tax.
o Reciprocity must be total. If any of the two states or countries collects or imposes and does
not exempt any transfer, death, legacy, or succession tax of any character, reciprocity does
not apply. (CIR v Fisher)
o Reciprocity in exemption does not require the foreign country to possess international
personality. (CIR v Campos Rueda)
The following, among others, are intangible personal properties located in the Philippines:
1. Franchise which must be exercised in the Philippines
2. Shares, obligations or bonds issued by any corporation or sociedad anonima organized or
constituted in the Philippines in accordance with its laws
3. Shares, obligations or bonds issued by any foreign corporation 85% of the business of which is
located in the Philippines
4. Shares, obligations or bonds issued by ay foreign corporation if such shares, obligations or
bonds have acquired a business situs in the Philippines, and
5. Shares or rights in any partnership, business or industry in the Philippines.

Properties not in the estate

There may be properties which at the time of the decedents death are not in the estate because they
were transferred by him during his lifetime.
These transfers are:
1. Transfers in contemplation of death,
2. Revocable transfers,
3. Transfers under a general power of appointment, and
4. Transfers for an insufficient consideration.
o The values of these properties will be included in the determination of the gross estate for
estate tax purposes.
As such, the gross estate, for purposes of the estate tax, may exceed the actual value of his assets at
the time of his death as it includes the value of transfers of property by him during his lifetime that
partake of the nature of testamentary dispositions.
These kinds of transfers have the following in common:
o They are ostensible transfers, usually with the purpose to evade the estate tax
o They are extension of interests
o If the transfers are in fact for a bona fide consideration, then they will not form part of the
gross estate (this proviso is present in all the provisions regarding these transfers)

Transfers in contemplation of death

(B) Transfer in Contemplation of Death. - To the extent of any interest therein of which the decedent has at any time made a transfer,
by trust or otherwise, in contemplation of or intended to take effect in possession or enjoyment at or after death, or of which he has
at any time made a transfer, by trust or otherwise, under which he has retained for his life or for any period which does not in fact
end before his death (1) the possession or enjoyment of, or the right to the income from the property, or (2) the right, either alone or
in conjunction with any person, to designate the person who shall possess or enjoy the property or the income therefrom; except in
case of a bonafide sale for an adequate and full consideration in money or money's worth.
A transfer in contemplation of death is a transfer motivated by the thought of death, although death
may not be imminent.
The following are examples of circumstances which may be taken into consideration in determining
whether the transfer was made in contemplation of death:
o We can look at the age and state of health of the decedent at the time of the transfer (is he
terminally ill?)

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o Length of time between the transfer and the date of the death.
o Concurrent making of a will or making of a will within a short time after the transfer.
But again, in the case of a bona fide sale for an adequate and full consideration in money or moneys
worth, the value of the property transferred will not be considered in determining the gross estate.

Revocable transfers
(C) Revocable Transfer. -
(1) To the extent of any interest therein, of which the decedent has at any time made a transfer (except in case of a bona fide sale
for an adequate and full consideration in money or money's worth) by trust or otherwise, where the enjoyment thereof was subject
at the date of his death to any change through the exercise of a power (in whatever capacity exerciseable) by the decedent alone or
by the decedent in conjunction with any other person (without regard to when or from what source the decedent acquired such

power), t o alter, amend, revoke, or terminate, or where any such power is relinquished in contemplation of the decedent's death.
(2) For the purpose of this Subsection, the power to alter, amend or revoke shall be considered to exist on the date of the
decedent's death even though the exercise of the power is subject to a precedent giving of notice or even though the alteration,
amendment or revocation takes effect only on the expiration of a stated period after the exercise of the power, whether or not on or
before the date of the decedent's death notice has been given or the power has been exercised. In such cases, proper adjustment
shall be made representing the interests which would have been excluded from the power if the decedent had lived, and for such
purpose if the notice has not been given or the power has not been exercised on or before the date of his
death, such notice shall be considered to have been given, or the power exercised, on the date of his death.
A revocable transfer is a transfer where the terms of the enjoyment of the property may be altered,
amended, revoked or terminated by the decedent.
It is sufficient that the decedent had the power to revoke, though he did not exercise the power to
revoke.
Again, the same rule with bona fide sales applies.

Transfers under a General Power of Appointment

(D) Property Passing Under General Power of Appointment. - To the extent of any property passing under a general power of
appointment exercised by the decedent: (1) by will, or (2) by deed executed in contemplation of, or intended to take effect in
possession or enjoyment at, or after his death, or (3) by deed under which he has retained for his life or any period not
ascertainable without reference to his death or for any period which does not in fact end before his death (a) the possession or
enjoyment of, or the right to the income from, the property, or (b) the right, either alone or in conjunction with any person, to
designate the persons who shall possess or enjoy the property or the income therefrom; except in case of a bona fide sale for an
adequate and full consideration in money or money's worth.
A power of appointment refers to the right to designate the person or persons who will succeed the
property of a prior decedent.
A general power of appointment is one which may be exercised in favor of anybody.
o Carles donated property to Andres, with a provision that Andres can transfer the property to
anyone. Andres transferred it to Iker. The property should be included in the gross estate of
Andres.
A limited power of appointment is one which may be exercised only in favor of a certain person or
persons designated by the prior decedent.
o Carles donated property to Andres, with a provision that Andres should transfer the property
to Iker, and only Iker. The value of the property should not be included in the gross estate of
Andres.
In order that property passing under a power of appointment may be included in the gross estate of
the transferor, the power of appointment must be a general power of appointment.
Again, the bona fide sale rule applies.

(F) Prior Interests. - Except as otherwise specifically provided therein, Subsections (B), (C) and (E) of this Section shall apply to the
transfers, trusts, estates, interests, rights, powers and relinquishment of powers, as severally enumerated and described therein,
whether made, created, arising, existing, exercised or relinquished before or after the effectivity of this Code.

(G) Transfers of Insufficient Consideration. - If any one of the transfers, trusts, interests, rights or powers enumerated and described
in Subsections (B), (C) and (D) of this Section is made, created, exercised or relinquished for a consideration in money or money's

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worth, but is not a bona fide sale for an adequate and full consideration in money or money's worth, there shall be included in the
gross estate only the excess of the fair market value, at the time of death, of the property otherwise to be included on account of
such transaction, over the value of the consideration received therefor by the decedent.
In the transfers in contemplation of death, revocable transfer, or transfer under a GPA, the value to
include in the gross estate will be determined under the following rules:
o If the transfer was in the nature of a bona fide sale for an adequate and full consideration in
money or moneys worth, no value will be included in the gross estate;
o If the consideration received on the transfer was less than adequate and full, the value to
include in the gross estate will be the excess of the fair market value at the time of the
decedents death over the consideration received;
o If there was no consideration received on the transfer (donation mortis causa), the value to
include in the gross estate will be the fair market value of the property at the time of the
decedents death.
When looking at transaction, ask yourself, was the consideration insufficient?
a. If yes, then add the balance of the FMV at the time of death and the consideration.
b. If no, then it was a bona fide sale. Dont add the value to the gross estate.

Analysis of the cases of Zapanta, Tuason, Dizon and Vidal de Roces

Voluntary/Compulsory Time between Will? Remarks

Heir transfer and death
Zapanta Compulsory None Yes Not considered
advances.
Tuason Voluntary 3 years Yes Considered as
advances, because
the donees became
legatees in the will.
Dizon Compulsory 1 day No Considered
advances. The
donee is a
compulsory heir.
Vidal de Roces Voluntary 9 months Yes Considered
advances. Donees
were legatees in the
will
When it comes to transfers done during the lifetime of a decedent, there is a disputable presumption
that the transfers are in contemplation of death if the recipients are compulsory heirs.
o The government presumes that one is transferring property beforehand to escape the estate
tax, and instead pay the lower donors tax.
o The case of Zapanta showed that the presumption is disputable. There, the Court considered
the gifts as not advances even if the recipients were compulsory heirs. The reason for this
was the condition imposed upon the recipients by the decedent (they had to pay the
decedent a certain amount of rice and money during his lifetime). It showed that the transfer
was not in contemplation of death, because the decedent in fact, would benefit from the
transfer.
o The presence of a will also plays a part. In the cases of Tuason and Vidal de Roces, the Court
considered the transfers as advances because a will was made making the transferees
legatees. This played a part in the Courts impression that there was an intention of the
decedent to minimize his gross estate.
o Thus, when looking at cases like these, the totality of all the factors and facts must be taken

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into consideration.
Does the government always want to consider a transfer an advance (to be covered by the estate
tax)? Not necessarily. There are instances where they will argue for it to be considered under the
donors tax.

Life Insurance Proceeds

(E) Proceeds of Life Insurance. - To the extent of the amount receivable by the estate of the deceased, his executor, or administrator,
as insurance under policies taken out by the decedent upon his own life, irrespective of whether or not the insured retained the
power of revocation, or to the extent of the amount receivable by any beneficiary designated in the policy of insurance, except when
it is expressly stipulated that the designation of the beneficiary is irrevocable.
Proceeds of life insurance are paid by the insurance company directly to the beneficiary.
Proceeds of insurance under policies taken out by the decedent upon his life shall constitute part of
the gross estate if the beneficiary is:
1. The estate of the decedent, his executor or administrator; or
2. A third person (not those in #1), and the designation of the beneficiary is revocable.
The Insurance Code states that the designation of a beneficiary is generally revocable.
o Except of course, when the policy states that the designation is irrevocable. In such cases,
the proceeds are not considered as part of the decedents estate.

So, gross estate is made up of:

1. The decedents interests at the time of his death
2. Transfers made during his lifetime (in contemplation of death, revocable, and under a GPA), and
3. Life insurance proceeds
4. Some other stuff required by law to be included in the gross estate in order to allow deductions
(claims against insolvent persons, unpaid mortgage, value of the family home, and the retirement
benefits under RA 4917)

Valuation of the gross estate

SEC. 88. Determination of the Value of the Estate. -
(A) Usufruct. - To determine the value of the right of usufruct, use or habitation, as well as that of annuity, there shall be taken into
account the probable life of the beneficiary in accordance with the latest Basic Standard Mortality Table, to be approved by the

Secretary of Finance, upon recommendation of the Insurance Commissioner.

(B) Properties. - The estate shall be appraised at its fair market value as of the time of death. However, the appraised value of real

property as of the time of death shall be, whichever is higher of:

(1) The fair market value as determined by the Commissioner, or

(2) The fair market value as shown in the schedule of values fixed by the Provincial and City Assessors.
The properties comprising the gross estate shall be valued based on the FMV as of the time of
death.
In case of real property, the fair market value shall be:
1. The FMV as determined by the Commissioner; or
2. The FMV as shown in the schedule of values fixed by the Provincial and City Assessors
o Whichever is HIGHER
In case of personal property recently acquired by the decedent, the purchase price may indicate the
FMV.
o In case of personal property not recently acquired, there should be some evidence of the
FMV.
For shares of stock, the FMV shall depend on whether the shares are isted or unlisted in the stock
exchange.
o If unlisted

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Common shares based on their book value

Preferred shares based on their par value
o If listed
The mean between the highest and lowest quotation on the date of death;
If none, then the date nearest the death.
For use of usufruct, there be taken into account the probable life of the beneficiary in accordance
with the latest basic standard mortality table, to be approved by the Secretary of Finance.

Computation for the net estate

The basic equation to determine the net taxable estate is (gross estate deductions)
The complication arises when the decedent is married at the time of his death. Well tackle that later.
First, lets take a look at the deductions.

Deductions
The deductions from the gross estate are:
1. Ordinary deductions
a. Expenses, losses, indebtedness, taxes, etc:
i. Funeral expenses
ii. Judicial expenses of testamentary or intestate proceedings
iii. Claims against the estate
iv. Claims against the insolvent persons
v. Unpaid mortgage or indebtedness on property
vi. Taxes paid
vii. Losses
b. Transfer for public use
c. Vanishing deductions
2. Special deductions
a. Family home
b. Standard deduction of P1,000,000
c. Medical expenses
d. Amounts received by heirs under RA 4917.
These deductions are allowed for a citizen or resident of the Philippines.
Non-resident aliens are not entitled to special deductions.

Ordinary deductions
Funeral expenses
(A) Deductions Allowed to the Estate of Citizen or a Resident. - In the case of a citizen or resident of the Philippines, by deducting from

the value of the gross estate -

(1) Expenses, Losses, Indebtedness, and taxes. - Such amounts:

(a) For actual 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 (P200,000);

The deduction of funeral expenses is the
o Amount of actual funeral expenses, or
o An amount equal to 5% of the gross estate, whichever is LOWER,
But not to exceed P200,000.
Funeral expenses includes:
1. Mourning apparel of the surviving spouse and the unmarried minor children of the deceased
bought and used on the occasion of the burial
2. Expenses for the deceased wakes
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3. Publication charges for death notices

4. Telecommunication expenses incurred in informing relatives of the deceased
5. Cost of burial plot, tombstones, monument or mausoleum (BUT NOT THEIR UPKEEP)
6. Interment and/or cremation fees and charges, and
7. All other expenses incurred for the performance of the rites and ceremonies incident to
interment
These arent deductible:
o Expenses incurred AFTER the interment
o Expenses borne or defrayed by relatives and friends
The cut-off point is interment. Thus, the expenses for the 9th day, thank you cards, 40th day arent
included.
When some of the items which are actual funeral expenses are covered by a memorial plan, the
value of the memorial plan must be included in the gross estate.
o The value of the memorial plan plus other actual funeral expenses will give an aggregate
which will be compared with the 5% limitation and with P200k.

Judicial expenses of the testamentary/intestate proceedings

(b) For judicial expenses of the testamentary or intestate proceedings;
These are the expenses incurred during the settlement of the estate,
o BUT not beyond the last day prescribed by law for the filing of the estate tax return (within 6
months from the date of death), or the extension period allowed.
These judicial expenses include
1. Fees of the executor or administrator
2. Attorneys fees
3. Court fees
4. Accountants fees
5. Appraisers fees
6. Clerk hire
7. Costs of preserving and distributing the estate
8. Costs of storing or maintaining property of the estate
9. Brokerage fees for selling property of the estate
Expenses on extrajudicial settlement of the estate are allowed as deductions. They come within the
meaning of administration expenses.
o The notarial fee paid for the extrajudicial settlement is deductible since such settlement
effected a distribution of the decedents estate to his lawful heirs. (CIR v CA & Pajonar)
In that case, the notarial fees and the guardianship fee of the attorney were
considered deductibles.
Expenditures incurred for the individual benefit of the heirs, devisees or legatees are not deductible.
Expenses for the improvement and renovation of the decedents residential house were allowed as a
deductible. (Testate Estate of Felix de Guzman v de Guzman-Carillo)
o Admin expenses should be those which are necessary for the management of the estate, for
protecting it against destruction or deterioration, and possible for the production of fruits.
Attorneys fees paid by the heirs to their respective lawyers arising from conflicting claims are not
deductible as judicial expenses. These shall be separately borne by them.

Claims against the estate

c) For claims against the estate: Provided, That at the time the indebtedness was incurred 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;
Claims means debts or demands of a pecuniary nature which could have been enforced against

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the deceased in his lifetime and could not have been reduced to simple money judgments.
o In other words, if enforceable against him when he was alive, the obligations will be claims
against his estate when he shall be dead.
o So, an obligation that has prescribed during his lifetime, or that was unenforceable against
him, will not be a claim against his estate when he shall be dead.
Requisites:
1. The liability must represent a personal obligation of the deceased at the time of his death (except
unpaid obligations incurred incident to his death and unpaid medical expenses classified as a
deduction),
2. The liability was contracted in good faith and for adequate and full consideration,
3. The claim must be a debt or claim which is valid in law and enforceable in court
4. The indebtedness must not have been condoned by the creditor during the lifetime of the
decedent, or the actions to collect must not have prescribed.
Regarding the 4th requisite, if the debts were condoned AFTER the decedents death, the debts are
deductible, following the date-of-death valuation rule. (Dizon v CTA)
If the claim arose out of a debt instrument, the debt instrument must be notarized.
o EXCEPT for loans granted by financial institutions where notarization is not part of the
business practice or policy of the institution.
If the loan was contracted within 3 years before the death of the decedent, the admin or executor
must submit a statement showing the disposition of the proceeds of the loan.
If a monetary claim against the decedent did not arise out of a debt instrument, the requirement of a
notarized debt instrument does not apply.
There is no requirement to add the amount to the gross estate (as compared to claims against
insolvent persons/mortgage). This is a DIRECT DEDUCTION.

Claims against insolvent persons

(d) For claims of the deceased against insolvent persons where the value of decedent's interest therein is included in the value of
the gross estate;
Claims against insolvent persons are deductions from the gross estate
o SUBJECT to the condition that the full amounts of the receivables are first included in the
gross estate.
The deduction from the gross estate will be the uncollectible portion.

Unpaid mortgage or indebtedness on property

(e) For unpaid mortgages upon, or any indebtedness in respect to, property where the value of decedent's interest therein,
undiminished by such mortgage or indebtedness, is included in the value of the gross estate, but not including any income tax
upon income received after the death of the decedent, or property taxes not accrued before his death, or any estate tax. The
deduction herein allowed in the case of claims against the estate, unpaid mortgages or any indebtedness shall, when founded upon
a promise or agreement, be limited to the extent that they were contracted bona fide and for an adequate and full consideration in
money or money's worthWhen a person leaves property encumbered by a mortgage or indebtedness, his gross estate must
include the fair market value of the property, undiminished by the mortgage or indebtedness.
The mortgage or indebtedness will be claimed as a deduction from the gross estate.
o Pique died leaving real property with a FMV of P1m, subject to a mortgage in the amount of
P600k. Before he can deduct the P600k, he has to include the total FMV of his property to the
gross income.
If the loan is merely an accommodation loan, where the proceeds of the loan went to another person,
the value of the unpaid loan must be included in the receivable of the estate.
In the cases of claims against insolvent persons and unpaid mortgage/indebtedness on property, it
is imperative that the values of each are first added to the gross estate.
o These are called zero-sum computations. They dont really benefit the heirs because these
transactions werent supposed to be part of the gross estate anyway.

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Taxes
Taxes are deductions from the gross estate if such taxes accrued prior to the decedents death.
Those that accrued after the decedents death are not deductions from gross estate.
These taxes can NOT be deducted:
1. Income tax on income received after death
2. Property taxes not accrued before death
3. Estate tax

Losses
There shall also be deducted losses incurred during the settlement of the estate arising from fires, storms, shipwreck, or other
casualties, or from robbery, theft or embezzlement, when such losses are not compensated for by insurance or otherwise, and if at
the time of the filing of the return such losses have not been claimed as a deduction for the income tax purposes in an income tax
return, and provided that such losses were incurred not later than the last day for the payment of the estate tax as prescribed in
Subsection (A) of Section 91.
Losses are deductible from the gross estate if:
1. Arising from fire, storm, shipwreck, or other casualty, robbery, theft or embezzlement
2. Not compensated by insurance or otherwise
3. Not claimed as a deduction in an income tax return of the estate subject to income tax
4. Occurring during the settlement of the estate, and
5. Occurring before the last day for the payment of the estate tax (6 months after the
decedents death, or the allowed extension)

o Example: Dude died January 1, 2010. A fire razed his house on March 1, 2010. His estate
was settled January 1, 2012. He can claim a deduction (within 6 months!)
Dude died January 1, 2010. A fire razed his house on January 1, 2011.
He cant claim a deduction.

Transfers for public use

(3) Transfers for Public Use. - The amount of all the bequests, legacies, devises or transfers to or for the use of the Government of

the Republic of the Philippines, or any political subdivision thereof, for exclusively public purposes.
Transfers for public use mean dispositions in a last will and testament, or a transfer to take effect
after death, in favor of the Government of the Philippines, or any political subdivision thereof, for
exclusively public purposes.
You can deduct the value of the property transferred to the government.

Vanishing deductions
(2) Property Previously Taxed. - An amount equal to the value specified below of any property forming a part of the gross estate
situated in the Philippines of any person who died within five (5) years prior to the death of the decedent, or transferred to the
decedent by gift within five (5) years prior to his death, where such property can be identified as having been received by the
decedent from the donor by gift, or from such prior decedent by gift, bequest, devise or inheritance, or which can be identified as

having been acquired in exchange for property so received:

One hundred percent (100%) of the value, if the prior decedent died within one (1) year prior to the death of the decedent, or if the

property was transferred to him by gift within the same period prior to his death;
Eighty percent (80%) of the value, if the prior decedent died more than one (1) year but not more than two (2) years prior to the

death of the decedent, or if the property was transferred to him by gift within the same period prior to his death;
Sixty percent (60%) of the value, if the prior decedent died more than two (2) years but not more than three (3) years prior to the

death of the decedent, or if the property was transferred to him by gift within the same period prior to his death;
Forty percent (40%) of the value, if the prior decedent died more than three (3) years but not more than four (4) years prior to the

death of the decedent, or if the property was transferred to him by gift within the same period prior to his death;
Twenty percent (20%) of the value, if the prior decedent died more than four (4) years but not more than five (5) years prior to the
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death of the decedent, or if the property was transferred to him by gift within the same period prior to his death;
These deductions shall be allowed only where a donor's tax or estate tax imposed under this Title was finally determined and paid
by or on behalf of such donor, or the estate of such prior decedent, as the case may be, and only in the amount finally determined
as the value of such property in determining the value of the gift, or the gross estate of such prior decedent, and only to the extent
that the value of such property is included in the decedent's gross estate, and only if in determining the value of the estate of the
prior decedent, no deduction was allowable under paragraph (2) in respect of the property or properties given in exchange therefor.
Where a deduction was allowed of any mortgage or other lien in determining the donor's tax, or the estate tax of the prior decedent,
which was paid in whole or in part prior to the decedent's death, then the deduction allowable under said Subsection shall be
reduced by the amount so paid. Such deduction allowable shall be reduced by an amount which bears the same ratio to the
amounts allowed as deductions under paragraphs (1) and (3) of this Subsection as the amount otherwise deductible under said
paragraph (2) bears to the value of the decedent's estate. Where the property referred to consists of two or more items, the
aggregate value of such items shall be used for the purpose of computing the deduction.
Property may change hands within a very short period of time by reason of the early death of the
owner who received it by inheritance or by donation (gift).
To provide relief to the burdened taxpayer, vanishing deductions are allowed to reduce the gross
estate.
Vanishing deductions are allowed when:
1. The present decedent died within 5 years from receipt of the property from a prior decedent
or donor;
2. The property on which the vanishing deduction is being claimed must be located in the
Philippines
3. The property must have formed part of the taxable estate of the prior decedent, or of the
taxable gift of the donor
4. The estate tax on the prior succession or the donors tax on the gift must have been finally
determined and paid
5. The property must be identified as the one received from the prior decedent or donor, or
something acquired in exchange therefore
6. No vanishing deduction on the property was allowable to the estate of the prior decedent
How do we compute?
Step 1: Get the basis. Either the value of the property in the prior estate/value used for donors tax
purposes OR the value of the property in the present estate, whichever is LOWER.
Step 2: The Step 1 value will be reduced by any payment made by the present decedent on any mortgage
or lien on the property (when such mortgage/lien was used as a deduction on the prior dead guys
estate, or gift of the donor)
Step 3: The Step 2 value shall be further reduced by:
Step 2 value x Expenses, losses, indebtedness, taxes and transfers for Gross
Estate public use

This is done to prevent double deduction.

Step 4: Look at the chart below and multiply to get the value which you can actually deduct.
% If received by inheritance or gift
100 Within one year prior to death of the decedent
80 More than one year but not more than two years
60 More than two years but not more than 3 years
40 More than 3 years but not more than 4 years
20 More than 4 years but not more than 5 years

Example
Che inherited land from his pop with a fmv of P500k when inherited. Two and a half years later, Che
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died. The FMV of the land was P600k at that time. The gross estate, on which the land was part, was
P2m. deductions from the gross estate (not including the family home, medical expenses, standard
deduction or RA 4917 receivable) amounted to P400k. Whats the vanishing deduction?
Step 1: Get the lower value. - P500k
Step 2: No mortgage mentioned, so P500k
Step 3: P500k x P400k = P100k
P2m
Basis of the vanishing deduction (500k-100k) = P400k
Vanishing deduction (60% of P400k) = P240

Special deductions
Family Home
(4) The Family Home. - An amount equivalent to the current fair market value of the decedent's family home: Provided, however, That
if the said current fair market value exceeds One million pesos (P1,000,000), the excess shall be subject to estate tax. As a sine qua
non condition for the exemption or deduction, said family home must have been the decedent's family home as certified by the

barangay captain of the locality.

The deduction is an amount equivalent to the current FMV of the decedents family home.
o BUT the maximum is P1m only.
Do not forget to add the amount of the family home to the gross estate. Kasama yan!
o Zero-sum? Yes, but only to the extent of P1m. Lugi yung rich folk.
The deduction will be allowed when the famly home is certified to be as such by the barangay
captain of the locality where it is located.
For a person married at the time of death, and who was under a system of conjugal partnership or
absolute community, the deduction for the family home is of the FMV, but should not exceed P1m,
if such family home was conjugal property or community property. (Remember this!)

Standard deduction
(5) Standard Deduction. - An amount equivalent to One million pesos (P1,000,000).
Do not forget to deduct P1m every time! Its standard!

Medical expenses
(6) Medical Expenses. - Medical Expenses incurred by the decedent within one (1) year prior to his death which shall be duly
substantiated with receipts: Provided, That in no case shall the deductible medical expenses exceed Five Hundred Thousand Pesos
(P500,000).
All medical expenses incurred (whether paid or unpaid) within ONE YEAR before the death of the
decedent shall be allowed as a deduction, PROVIDED,
o that the same are duly substantiated with official receipts, and
o The total amount, whether paid or unpaid, does NOT exceed P500k.
If its more than P500k, can you deduct it as a claims against the estate? No. See requisites of claims
against the estate.

Amounts receivable under RA 4917

(7) Amount Received by Heirs Under Republic Act No. 4917. - Any amount received by the heirs from the decedent - employee as a
consequence of the death of the decedent-employee in accordance with Republic Act No. 4917: Provided, That such amount is

included in the gross estate of the decedent.

Retirement benefits received by employees of private firms in accordance with a reasonable benefit
plan maintained by the employer are EXEMPT from all taxes, provided that the retiriing employee has
been in the services of the same employer for at least 10 years and is not less than 50 years old at
the time of his retirement.
The amount must:
o have been received by the heirs of the decedent-employee as a consequence of the latters
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death, and
o included in the gross estate of the descendent. (important!)

Deductions from the gross estate with ceilings

Funeral expenses
Actual funeral expenses, or Whichever is the LOWEST
5% of the gross estate; or
P200k
Medical expenses
Actual medical expenses, or Whichever is LOWER
P500k
Family home
FMV, or Whichever is LOWER
P1m

Deductions for a NON-RESIDENT, NOT CITIZEN of the Philippines

(B) Deductions Allowed to Nonresident Estates. - In the case of a nonresident not a citizen of the Philippines, by deducting from the

value of that part of his gross estate which at the time of his death is situated in the Philippines:
(1) Expenses, Losses, Indebtedness and Taxes. - That proportion of the deductions specified in paragraph (1) of Subsection (A) of this

Section which the value of such part bears to the value of his entire gross estate wherever situated;
(2) Property Previously Taxed. - An amount equal to the value specified below of any property forming part of the gross estate
situated in the Philippines of any person who died within five (5) years prior to the death of the decedent, or transferred to the
decedent by gift within five (5) years prior to his death, where such property can be identified as having been received by the
decedent from the donor by gift, or from such prior decedent by gift, bequest, devise or inheritance, or which can be identified as

having been acquired in exchange for property so received:

One hundred percent (100%) of the value if the prior decedent died within one (1) year prior to the death of the decedent, or if the

property was transferred to him by gift, within the same period prior to his death;
Eighty percent (80%) of the value, if the prior decedent died more than one (1) year but not more than two (2) years prior to the

death of the decedent, or if the property was transferred to him by gift within the same period prior to his death;
Sixty percent (60%) of the value, if the prior decedent died more than two (2) years but not more than three (3) years prior to the

death of the decedent, or if the property was transferred to him by gift within the same period prior to his death;
Forty percent (40%) of the value, if the prior decedent died more than three (3) years but not more than four (4) years prior to the

death of the decedent, or if the property was transferred to him by gift within the same period prior to his death; and
Twenty percent (20%) of the value, if the prior decedent died more than four (4) years but not more than five (5) years prior to the

death of the decedent, or if the property was transferred to him by gift within the same period prior to his death.
These deductions shall be allowed only where a donor's tax, or estate tax imposed under this Title is finally determined and paid by
or on behalf of such donor, or the estate of such prior decedent, as the case may be, and only in the amount finally determined as
the value of such property in determining the value of the gift, or the gross estate of such prior decedent, and only to the extent that
the value of such property is included in that part of the decedent's gross estate which at the time of his death is situated in the
Philippines; and only if, in determining the value of the net estate of the prior decedent, no deduction is allowable under paragraph
(2) of Subsection (B) of this Section, in respect of the property or properties given in exchange therefore. Where a deduction was
allowed of any mortgage or other lien in determining the donor's tax, or the estate tax of the prior decedent, which was paid in
whole or in part prior to the decedent's death, then the deduction allowable under said paragraph shall be reduced by the amount
so paid. Such deduction allowable shall be reduced by an amount which bears the same ratio to the amounts allowed as
deductions under paragraphs (1) and (3) of this Subsection as the amount otherwise deductible under paragraph (2) bears to the
value of that part of the decedent's gross estate which at the time of his death is situated in the Philippines. Where the property
referred to consists of two (2) or more items, the aggregate value of such items shall be used for the purpose of computing the

deduction.

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(3) Transfers for Public Use. - The amount of all bequests, legacies, devises or transfers to or for the use of the Government of the
Republic of the Philippines or any political subdivision thereof, for exclusively public purposes.
A non-resident decedent who was not a citizen of the Philippines at the time of death, with properties
within and outside the Philippines, is subject to tax only on his estate within the Philippines.
Due to this, the estate in the Philippines is allowed deductions for:
1. Expenses, losses, indebtedness, taxes, etc, computed by:
Gross Estate, Philippines x World expenses, losses, indebtedness,
Gross Estate, World taxes, funeral expenses, judicial
expenses, etc
It does not matter where the expenses are paid or incurred. On the total of the items, the
formula provided by law will be applied.
Moreover, it also doesnt matter if you can pinpoint specifically where the expenses were
incurred, you have to use the formula.
2. Transfers for public use of property in the Philippines
3. Vanishing deduction on property in the Philippines
A non-resident, not citizen is NOT allowed:
1. Deduction for family home
2. Standard deduction
3. Deduction for medical expenses
4. Deduction for amount receivable under RA 4917

D) Miscellaneous Provisions. - No deduction shall be allowed in the case of a nonresident not a citizen of the Philippines, unless the
executor, administrator, or anyone of the heirs, as the case may be, includes in the return required to be filed under Section 90 the
value at the time of his death of that part of the gross estate of the nonresident not situated in the Philippines.
No deduction shall be allowed for a non-resident alien unless the executor, administrator or anyone
of his heirs, includes in the return required to be filed under Sec. 90 the value at the time of the
decedents death that part of his gross estate not situated in the Philippines. (Needed for the formula
specified above)

Net Estate Computation of Married Persons

Section 85 (H) Capital of the Surviving Spouse. - The capital of the surviving spouse of a decedent shall not, for the purpose of this
Chapter, be deemed a part of his or her gross estate.
Section 86 (C) Share in the Conjugal Property. - the net share of the surviving spouse in the conjugal partnership property as
diminished by the obligations properly chargeable to such property shall, for the purpose of this Section, be deducted from the net
estate of the decedent.
Gross estate
The gross estate of a decedent who was married and who was under the system of absolute
community of property during the marriage consists of:
1. The EXCLUSIVE properties of the decedent, and
2. The COMMUNITY properties
The exclusive properties are:
1. Property acquired during the marriage by gratuitous title (inheritance/donation) by either spouse,
and the fruits as well as the income thereof
a. Unless the donor, testator or grantor states that they will be part of the community
property
2. Property for personal and exclusive use of either spouse
a. But jewelry will form part of the community property
3. Property acquired BEFORE the marriage by either spouse who have legitimate descendants by a
former marriage, and the fruits as well as the income of such property

Community property will consist of all properties owned by the spouses at the time of the celebration
marriage or acquired thereafter (presumed to belong to the community)

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o The family home constituted by the husband and wife is community property.
Proceeds of life insurance taken out by the decedent on his own life, when includible in the gross
estate, will be exclusive property if the premiums were paid out of exclusive funds.
o They will be community property if the premiums were paid out of community funds.
A claim against an insolvent person will be included in the gross estate as exclusive or community
depending on whether the claim is for exclusive or community property.
Deductions from gross estate
The same rules and ceilings which were discussed on the part of deductions will apply
The following are the community/conjugal deductions:
1. Funeral expenses and judicial expenses
2. Special deductions of family home, standard deduction, medical expenses and amounts
receivable under RA 4917
3. Those obligations contracted during the marriage which are presumed to have benefited the
family (debts incurred during the marriage, etc)
The following are exclusive deductions:
1. Debts before the marriage by either spouse that did NOT redound to the benefit of the family
2. Support of the illegitimate children of either spouse
3. Liabilities incurred by either spouse of a crime

So, how do we get the net estate of a married person?

Step 0: Know which are community/conjugal and which are exclusive
Step 1: Get the net conjugal estate (gross conjugal estate conjugal deductions)
Step 2: Get the decedents share (net conjugal estate/2)
Step 3: Get the gross estate of the decedent (decedents share + exclusive properties)
Step 4: Get his net estate (gross estate of the decedent exclusive & special deductions)
Step 5: Once you reach step 4, yun na yon! Thats the decedents taxable estate.

Mao, a citizen and resident of the Philippines, was married under the system of absolute community of
property during the marriage. He died leaving the following properties and obligations:
Real properties inherited from his father 10 years ago and before the marriage P200k
Real property received as a gift from the mother 7 years ago,
during the marriage P1.115m
Cash income from the property received as gift P5k
Real property owned by Mrs. Mao before the marriage P300k
The family home P500k
Medical expenses P70k
Funeral expenses P50k
Judicial expenses for settlement of estate P100k
Obligations incurred during the marriage P150k
Debt of Mao before the marriage P120k

Step 0: Determine what are conjugal/community and what are exclusive

Step 1: Get the net conjugal estate (gross conjugal estate conjugal deductions)

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(P200k1 + P300k2 +500k3) - (P50k4 + P100k5 + P150k6) = P700k

Step 2: Get the decedents share (Step 1s NCE/2)

P700k/2 = P350k

Step 3: Get the gross estate of the decedent (decedents share + exclusive properties)
P350k + P1.115m7 + P5k8 = P1.47m

Step 4: Get his net estate (Gross estate decedent exclusive deductions & special
deductions)
P1.47m (P120k9 + P250k10 + P70k11 + P1m12) = P30k

Step 5: The net taxable estate is P30k. Check the schedular rate, and youll find out that his estate is tax
exempt!

Tips:
Do not forget the limitations and ceilings imposed by the general rule of deductions.
o Family home only up to P1m.
o Funeral expenses only up to P200k whatevers lower of the actual expense and 5% of the
gross estate (exclusive + conjugal)
o Medical expenses not to exceed P500k
Remember that only of the family home is counted as a special deduction (since half belongs to
the still living spouse).
o And also remember that if the value of the family home (once halved) is above P1m, the
deduction allowed is still P1m because of the ceiling imposed by law.
Dont forget to subtract the standard deduction. Its not usually given as part of the facts but you still
have to deduct that.
Medical expenses are special deductions and are deducted from the gross estate of the decedent.
Funeral deductions are conjugal deductions and are deducted from the gross conjugal/community
estate.

Exemption from Estate Tax

SEC. 87. Exemption of Certain Acquisitions and Transmissions. - The following shall not be taxed:

(A) The merger of usufruct in the owner of the naked title;

(B) The transmission or delivery of the inheritance or legacy by the fiduciary heir or legatee to the fideicommissary;
(C) The transmission from the first heir, legatee or donee in favor of another beneficiary, in accordance with the desire of the

1 Real property inherited from the father

2 Real property owned by Mrs. Mao before the marriage
3 Value of the family home

4 Funeral expenses

5 Judicial expenses

6 Obligations incurred during the marriage

7 Real property gift from mom during marriage

8 Income from the gift

9 debt before marriage

10 the value of the family home

11 Medical expenses

12 Standard deduction! Dont forget!

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predecessor; and
(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, however, That not more than thirty percent (30%) of the said bequests,
devises, legacies or transfers shall be used by such institutions for administration purposes.
The following are exempt from estate tax:
1. Merger of usufruct in the owner of the naked title
2. Transmission or delivery of the inheritance or legacy by the fiduciary heir or legatee to the
fideicommisary
3. Transmission from the 1st heir, legatee or donee in favor of another beneficiary in accordance
with the desire of the predecessor, and
4. All bequests, devises, legacies or transfers to social welfare, cultural and charitable institutions,
no part of the net income inures to the benefit of any individual, provided that not more than 30%
of the said bequests, devises, legacies or transfers shall be used by such institutions for the
administration purposes

Tax Credit for Foreign Estate Tax

E) Tax Credit for Estate Taxes paid to a Foreign Country. -
(1) In General. - The tax imposed by this Title shall be credited with the amounts of any estate tax imposed by the authority of a

foreign country.

(2) Limitations on Credit. - The amount of the credit taken under this Section shall be subject to each of the following limitations:
(a) The amount of the credit in respect to the tax paid to any country shall not exceed the same proportion of the tax against which
such credit is taken, which the decedent's net estate situated within such country taxable under this Title bears to his entire net

estate; and
(b) The total amount of the credit shall not exceed the same proportion of the tax against which such credit is taken, which the
decedent's net estate situated outside the Philippines taxable under this Title bears to his entire net estate.
To minimize the onerous effect of taxing the same property twice, a tax credit against Philippine
estate tax is allowed for estate taxes paid to foreign countries.

One foreign country

What you paid to the foreign country
Tax Credit Limit = Net foreign estate x Tax here in the Philippines
Entire Net Estate

Between what you paid to the foreign country and the tax credit limit here, you choose whatevers
lower as what you can credit.
See example in donors tax part.

If tax is paid to 2 or more foreign countries:

Limitation A: see above
Limitation B: Tax Credit Limit = Total foreign net estate x Tax here in the Philippines
Entire Net Estate

Between limitation A and B, you choose whatevers lower as your credit.

Admin Provisions
SEC. 89. Notice of Death to be Filed. - In all cases of transfers subject to tax, or where, though exempt from tax, the gross value of
the estate exceeds Twenty thousand pesos (P20,000), the executor, administrator or any of the legal heirs, as the case may be,
within two (2) months after the decedent's death, or within a like period after qualifying as such executor or administrator, shall give
a written notice thereof to the Commissioner.
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A notice of death must be filed within two months after the decedents death:
1. In all cases of transfers subject to tax, or
2. When exempt, the value of the estate exceeds P20,000

SEC. 90. Estate Tax Returns. -

(A) Requirements. - In all cases of transfers subject to the tax imposed herein, or where, though exempt from tax, the gross value of
the estate exceeds Two hundred thousand pesos (P200,000), or regardless of the gross value of the estate, where the said estate
consists of registered or registrable property such as real property, motor vehicle, shares of stock or other similar property for
which a clearance from the Bureau of Internal Revenue is required as a condition precedent for the transfer of ownership thereof in
the name of the transferee, the executor, or the administrator, or any of the legal heirs, as the case may be, shall file a return under

oath in duplicate, setting forth:

(1) The value of the gross estate of the decedent at the time of his death, or in case of a nonresident, not a citizen of the Philippines,

of that part of his gross estate situated in the Philippines;

(2) The deductions allowed from gross estate in determining the estate as defined in Section 86; and
(3) Such part of such information as may at the time be ascertainable and such supplemental data as may be necessary to

establish the correct taxes.

Provided, however, That estate tax returns showing a gross value exceeding Two million pesos (P2,000,000) shall be supported

with a statement duly certified to by a Certified Public Accountant containing the following:
(a) Itemized assets of the decedent with their corresponding gross value at the time of his death, or in the case of a nonresident,

not a citizen of the Philippines, of that part of his gross estate situated in the Philippines;

(b) Itemized deductions from gross estate allowed in Section 86; and

(c) The amount of tax due whether paid or still due and outstanding.
(B) Time for Filing. - For the purpose of determining the estate tax provided for in Section 84 of this Code, the estate tax return

required under the preceding Subsection (A) shall be filed within six (6) months from the decedent's death.
A certified copy of the schedule of partition and the order of the court approving the same shall be furnished the Commissioner
within thirty (30) after the promulgation of such order. (C) Extension of Time. - The Commissioner shall have authority to grant, in
meritorious cases, a reasonable extension not exceeding thirty (30) days for filing the return. (D) Place of Filing. - Except in cases
where the Commissioner otherwise permits, the return required under Subsection (A) shall be filed with an authorized agent bank,
or Revenue District Officer, Collection Officer, or duly authorized Treasurer of the city or municipality in which the decedent was
domiciled at the time of his death or if there be no legal residence in the Philippines, with the Office of the Commissioner.
An estate tax return is required to be filed when the estate is:
1. Subject to estate tax,
2. Exempt from estate tax, but the gross estate exceeds P200,000
3. Regardless of the amount of the gross estate, where the said gross estate consists of registered
or registerable property, motor vehicle or shares of stock, or other similar property for which
clearance from the BIR is required as a condition precedent for the transfer of ownership thereof
in the name of the transferee.
The return shall be under oath and shall include the following:
1. Value of the gross estate at the time of the decedent (for non-resident aliens, the value of the
gross estate here in the Philippines)
2. Deductions allowed from the gross estate
3. Whatevers necessary to establish the correct estate tax
If the estate tax return shows that the gross estate exceeds P2,000,000, it should be accompanied by
a statement certified by a CPA. See codal.
The estate tax return should be filed within 6 months after the decedents death.
o The BIR can extend this, but not more than 30 days.
A return need not be complete in all particulars. It is sufficient if it complies substantially with the

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law. There is substantial compliance when:

o The return is made in good faith and is not false or fraudulent;
o It covers the entire period involved; and
o It contains information as to the various items of income, deductions and credits with such
definiteness as to permit the computation and assessment of the tax. (CIR v Gonzales)
Where the return was made on the wrong form, it was held that the filing thereof did
not start the running of the period of limitations, and where the return was very
deficient, there was no return at all. (same case)

SEC. 91. Payment of Tax. -

(A) Time of Payment. - The estate tax imposed by Section 84 shall be paid at the time the return is filed by the executor,
administrator or the heirs.
(B) Extension of Time. - When the Commissioner finds that the payment on the due date of the estate tax or of any part thereof
would impose undue hardship upon the estate or any of the heirs, he may extend the time for payment of such tax or any part
thereof not to exceed five (5) years, in case the estate is settled through the courts, or two (2) years in case the estate is settled
extrajudicially. In such case, the amount in respect of which the extension is granted shall be paid on or before the date of the
expiration of the period of the extension, and the running of the Statute of Limitations for assessment as provided in Section 203 of

this Code shall be suspended for the period of any such extension.
Where the taxes are assessed by reason of negligence, intentional disregard of rules and regulations, or fraud on the part of the

taxpayer, no extension will be granted by the Commissioner.

If an extension is granted, the Commissioner may require the executor, or administrator, or beneficiary, as the case may be, to
furnish a bond in such amount, not exceeding double the amount of the tax and with such sureties as the Commissioner deems
necessary, conditioned upon the payment of the said tax in accordance with the terms of the extension.
(C) Liability for Payment. - The estate tax imposed by Section 84 shall be paid by the executor or administrator before delivery to any
beneficiary of his distributive share of the estate. Such beneficiary shall to the extent of his distributive share of the estate, be
subsidiarily liable for the payment of such portion of the estate tax as his distributive share bears to the value of the total net

estate.
For the purpose of this Chapter, the term "executor" or "administrator" means the executor or administrator of the decedent, or if
there is no executor or administrator appointed, qualified, and acting within the Philippines, then any person in actual or
constructive possession of any property of the decedent.
5 Estate tax shall be paid at the time the return is filed.
6 The Commissioner may extend the payment of such tax.
1 It should not exceed 5 years in case of judicial settlement, and 2 years if extrajudicial settlement.
2 The running of the period of limitation for assessment shall be suspended for the period of such
extension.
7 The estate tax shall be paid by the executor or administrator before delivery to any beneficiary of his
distributive share of the estate.
1 Where there are two or more executors, all of them are severally liable for the payment of the estate
tax. (CIR v Gonzales)
2 The inheritance tax, although charged against the account of each beneficiary, should be paid by the
executor or administrator.
3 Such beneficiary shall be subsidiarily liable for the payment of such tax to the extent of his share
8 Claims for income tax need not be filed with the committee on claims and appraisals in the course of
testate proceedings, and the amount thereof may be collected after the distribution of the decedents
estate among his heirs, who shall be liable in proportion to their share in the inheritance. (Government v
Pamintuan)
9 The government, in collecting unpaid taxes accruing before the death of the decedent, has two ways
of collecting the said taxes. (CIR v Pineda)
1. By going after all the heirs and collecting from each one of them the amount of the tax
proportionate to the inheritance received.
2. By subjecting said property of the estate which is in the hands of an heir or transferee to the
payment of the tax due the estate. (or, go against one heir for the entire tax, subject to the heirs

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right of contribution from his co-heirs.)

Miscellaneous Provisions
SEC. 92. Discharge of Executor or Administrator from Personal Liability. - If the executor or administrator makes a written application
to the Commissioner for determination of the amount of the estate tax and discharge from personal liability therefore, the
Commissioner (as soon as possible, and in any event within one (1) year after the making of such application, or if the application
is made before the return is filed, then within one (1) year after the return is filed, but not after the expiration of the period
prescribed for the assessment of the tax in Section 203 shall not notify the executor or administrator of the amount of the tax. The
executor or administrator, upon payment of the amount of which he is notified, shall be discharged from personal liability for any

deficiency in the tax thereafter found to be due and shall be entitled to a receipt or writing showing such discharge.

SEC. 93. Definition of Deficiency. - As used in this Chapter, the term "deficiency" means:
(a) The amount by which the tax imposed by this Chapter exceeds the amount shown as the tax by the executor, administrator or
any of the heirs upon his return; but the amounts so shown on the return shall first be increased by the amounts previously
assessed (or collected without assessment) as a deficiency and decreased by the amount previously abated, refunded or otherwise

repaid in respect of such tax; or

(b) If no amount is shown as the tax by the executor, administrator or any of the heirs upon his return, or if no return is made by the
executor, administrator, or any heir, then the amount by which the tax exceeds the amounts previously assessed (or collected
without assessment) as a deficiency; but such amounts previously assessed or collected without assessment shall first be

decreased by the amounts previously abated, refunded or otherwise repaid in respect of such tax.
SEC. 94. Payment Before Delivery by Executor or Administrator. - No judge shall authorize the executor or judicial administrator to
deliver a distributive share to any party interested in the estate unless a certification from the Commissioner that the estate tax has
been paid is shown.

SEC. 95. Duties of Certain Officers and Debtors. - Registers of Deeds shall not register in the Registry of Property any document
transferring real property or real rights therein or any chattel mortgage, by way of gifts inter vivos or mortis causa, legacy or
inheritance, unless a certification from the Commissioner that the tax fixed in this Title and actually due thereon had been paid is
show, and they shall immediately notify the Commissioner, Regional Director, Revenue District Officer, or Revenue Collection
Officer or Treasurer of the city or municipality where their offices are located, of the non payment of the tax discovered by them.
Any lawyer, notary public, or any government officer who, by reason of his official duties, intervenes in the preparation or
acknowledgment of documents regarding partition or disposal of donation inter vivos or mortis causa, legacy or inheritance, shall
have the duty of furnishing the Commissioner, Regional Director, Revenue District Officer or Revenue Collection Officer of the place
where he may have his principal office, with copies of such documents and any information whatsoever which may facilitate the
collection of the aforementioned tax. Neither shall a debtor of the deceased pay his debts to the heirs, legatee, executor or
administrator of his creditor, unless the certification of the Commissioner that the tax fixed in this Chapter had been paid is shown;
but he may pay the executor or judicial administrator without said certification if the credit is included in the inventory of the estate

of the deceased.
SEC. 96. Restitution of Tax Upon Satisfaction of Outstanding Obligations. - If after the payment of the estate tax, new obligations of
the decedent shall appear, and the persons interested shall have satisfied them by order of the court, they shall have a right to the

restitution of the proportional part of the tax paid.

SEC. 97. Payment of Tax Antecedent to the Transfer of Shares, Bonds or Rights. - There shall not be transferred to any new owner in
the books of any corporation, sociedad anonima, partnership, business, or industry organized or established in the Philippines any
share, obligation, bond or right by way of gift inter vivos or mortis causa, legacy or inheritance, unless a certification from the

Commissioner that the taxes fixed in this Title and due thereon have been paid is shown.
If a bank has knowledge of the death of a person, who maintained a bank deposit account alone, or jointly with another, it shall not
allow any withdrawal from the said deposit account, unless the Commissioner has certified that the taxes imposed thereon by this
Title have been paid: Provided, however, That the administrator of the estate or any one (1) of the heirs of the decedent may, upon
authorization by the Commissioner, withdraw an amount not exceeding Twenty thousand pesos (P20,000) without the said
certification. For this purpose, all withdrawal slips shall contain a statement to the effect that all of the joint depositors are still
living at the time of withdrawal by any one of the joint depositors and such statement shall be under oath by the said depositors.

Donors Tax
SEC. 98. Imposition of Tax. -
(A) There shall be levied, assessed, collected and paid upon the transfer by any person, resident or nonresident, of the property by

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gift, a tax, computed as provided in Section 99.

(B) The tax shall apply whether the transfer is in trust or otherwise, whether the gift is direct or indirect, and whether the property is
real or personal, tangible or intangible.
Gifts and donors tax will be levied, assessed, collected and paid upon the transfer by any person,
resident or nonresident, of property by gift
o The property can be real or personal, tangible or intangible
o The transfer can be in trust or otherwise
o The gift can be direct or indirect
The donors tax shall not apply unless and until there is a completed gift. The transfer of property by
gift is perfected from the moment the donor knows of the acceptance by the donee; it is completed
by the delivery, either actually or constructively, of the donated property to the donee. Thus,
the law in force at the time of the perfection/completion of the donation shall govern the imposition
of the donors tax. (RR 02-03)

Gross gifts
SEC. 104. Definitions. - For purposes of this Title, the terms "gross estate" and "gifts" include real and personal property, whether
tangible or intangible, or mixed, wherever situated: Provided, however, That where the decedent or donor was a nonresident alien at
the time of his death or donation, as the case may be, his real and personal property so transferred but which are situated outside
the Philippines shall not be included as part of his "gross estate" or "gross gift": Provided, further, That franchise which must be
exercised in the Philippines; shares, obligations or bonds issued by any corporation or sociedad anonima organized or constituted
in the Philippines in accordance with its laws; shares, obligations or bonds by any foreign corporation eighty-five percent (85%) of
the business of which is located in the Philippines; shares, obligations or bonds issued by any foreign corporation if such shares,
obligations or bonds have acquired a business situs in the Philippines; shares or rights in any partnership, business or industry
established in the Philippines, shall be considered as situated in the Philippines: Provided, still further, that no tax shall be collected
under this Title in respect of intangible personal property: (a) if the decedent at the time of his death or the donor at the time of the
donation was a citizen and resident of a foreign country which at the time of his death or donation did not impose a transfer tax of
any character, in respect of intangible personal property of citizens of the Philippines not residing in that foreign country, or (b) if
the laws of the foreign country of which the decedent or donor was a citizen and resident at the time of his death or donation
allows a similar exemption from transfer or death taxes of every character or description in respect of intangible personal property
owned by citizens of the Philippines not residing in that foreign count
There are two kinds of donors (similar to estate tax):
1. The resident or citizen of the Philippines, and
2. The non-resident, not citizen of the Philippines
If the donor is a resident or a citizen of the Philippines, gross gifts would consist of:
1. Real estate, regardless of location
2. Tangible personal property, regardless of location
3. Intangible personal property, regardless of location
If the donor is non-resident, not citizen of the Philippines, gross gifts would consist of:
1. Real estate located in the Philippines
2. Tangible personal property located in the Philippines
3. Intangible personal property located in the Philippines, subject to the reciprocity clause (Similar
to the rules for estate tax, see discussion there for what constitutes intangible property)
a. If donor at the time of the donation was a citizen and resident of a foreign country which
at the time of the donation did not impose a transfer tax of any character in respect of
intangible personal property of Filipino citizens not residing in that country, or
b. If the laws of the foreign country of which the donor was a citizen and resident at the time
of donation allow a similar exemption from transfer taxes of every character in respect
of intangible personal property owned by citizens of the Philippines not residing in that
country

A donation made by a corporation to the heirs of a deceased office out of gratitude for his past
services is subject to the donees gift tax. It is not subject to deduction for the value of said services
which do not constitute a recoverable debt. (Pirovano v CIR, the heirs here wanted to consider it
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remuneratory so it wont be taxed as a gift. In this case, the donees were the ones who were made
liable to pay, not the donor)
A donation for a political candidate is subject to donors tax. (ACCRA v CIR, wherein the ACCRA
partners claimed that political and electoral contributions were not subject to donors tax)

Also to be considered as gifts are the following:

1. Transfers for insufficient consideration
2. Cancellation of indebtedness

Transfers for insufficient consideration

SEC. 100. Transfer for Less Than Adequate and Full Consideration. - Where property, other than real property referred to in Section
24(D), is transferred for less than an adequate and full consideration in money or money's worth, then the amount by which the fair
market value of the property exceeded the value of the consideration shall, for the purpose of the tax imposed by this Chapter, be
deemed a gift, and shall be included in computing the amount of gifts made during the calendar year.
A transfer of real property will be considered a donation/gift and subject to the donors tax when:
1. The transfer was for less than adequate and full consideration,
2. Such transfer was effective during his life time (inter vivos), and
3. Other than real property in Sec 24 (d), i.e. the property was not subject to final capital gains tax
(capital asset).
In cases like this, the amount by which the value of the property exceeded the consideration received
shall be considered a donation.
o Mos sold to Jango for P100k a property which had a FMV of P280k. the P180k will be
considered a donation and thus subject to the tax.
With re: #3, what are the implications if the real property sold was a capital asset as against an
ordinary asset?
o For example, the real property had a cost of P100, a FMV of P200, but sold for only P170.
If it were classified as a capital asset, it will be taxed 6% of the FMV (remember, the
base is either the consideration or the FMV, whichever is higher).
If it were classified as an ordinary asset, it will be taxed twice. First, it will be taxed
for income tax purposes (tax base of P70). Second, it will be taxed for donors tax
(tax base of P30). In this case, donors tax will be attracted unwittingly.

Cancellation of indebtedness
If a creditor desires to benefit a debtor, and without any consideration therefore, cancels the debt
(and the debtor accepts), the amount of the debt is a donation by the creditor to the debtor.

Value of the gifts

SEC. 102. Valuation of Gifts Made in Property. - If the gift is made in property, the fair market value thereof at the time of the gift shall

be considered the amount of the gift. In case of real property, the provisions of Section 88(B) shall apply to the valuation thereof.
The fair market value of the property donated/given at the time of the donation shall be the value of
the gross gifts.

Deductions from gross gifts

SEC. 101. Exemption of Certain Gifts. - The following gifts or donations shall be exempt from the tax provided for in this Chapter:

(A) In the Case of Gifts Made by a Resident. -

(1) Dowries or gifts made on account of marriage and before its celebration or within one year thereafter by parents to each of

their legitimate, recognized natural, or adopted children to the extent of the first Ten thousand pesos (P10,000):
(2) Gifts made to or for the use of the National Government or any entity created by any of its agencies which is not conducted for

profit, or to any political subdivision of the said Government; and

(3) Gifts in favor of an educational and/or charitable, religious, cultural or social welfare corporation, institution, accredited

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nongovernment organization, trust or philanthropic organization or research institution or organization: Provided, however, That not
more than thirty percent (30%) of said gifts shall be used by such donee for administration purposes. For the purpose of the
exemption, a 'non-profit educational and/or charitable corporation, institution, accredited nongovernment organization, trust or
philanthropic organization and/or research institution or organization' is a school, college or university and/or charitable
corporation, accredited nongovernment organization, trust or philanthropic organization and/or research institution or organization,
incorporated as a nonstock entity, paying no dividends, governed by trustees who receive no compensation, and devoting all its
income, whether students' fees or gifts, donation, subsidies or other forms of philanthropy, to the accomplishment and promotion
of the purposes enumerated in its Articles of Incorporation.
These exemptions of certain gifts should be taken to mean the deductions allowed by law to arrive
at the taxable net gifts.
The deductions allowed for a resident or citizen donor:
1. Dowries or gifts made on account of marriage and before its celebration, or within one year
thereafter, by parents to each of their legitimate, recognized natural or adopted children
a. Only to the extent of P10,000
b. Remember, this article only covers gifts of a parent to his/her child, not a parent to his
future son-in-law/daughter-in-law. If the gift is given to a future
son-in-law/daughter-in-law, no deductions will be allowed because the latter are
considered strangers. (ouch naman!)
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
3. Gifts in favor of educational and/or charitable, religious, cultural or social welfare corporations,
institutions, accredited NGOs, trust or philanthropic organizations, research institutions or
organizations, provided that not more than 30% of said gifts shall be used by such donee for
administration purposes

Deductions from the gross gifts by husband and wife

For deductions from gross gifts made by husband and wife, out of community/conjugal property,
each donor has his or her own deductions. Their donations will be distributed equally among them.
(1/2)
o However, if what was donated is a conjugal or community property and only the husband
signed the deed of donation, there is only one donor for donors tax purposes, without
prejudice to the right of the wife to question the validity of the donation without her consent
pursuant to the pertinent provisions of the Civil Code of the Philippines and the Family Code
of the Philippines.
Each of the spouses is entitled to a maximum deduction of P10,000 for donation on account of
marriage.

Example Husband and wife donated P400k to son and daughter-in-law, on account of marriage out of
community property. How do we break this down?

Gross gift by Gross gift to Deduction Kind of donee Net Gift Tax Rate Donors
(see Tax
schedule)
Father P200k Son P100k P10k Non-stranger 90k Exempt 90k
Daughter-in-law None Stranger 100k 30% 30k

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None Stranger 100k 30% 30k
P100k

Mother P200k Son P100k P10k Non-stranger 90k exempt 90k

Daughter-in-law none Stranger 100k 30% 30k
P100k

Deductions for a non-resident, not citizen donor

(B) In the Case of Gifts Made by a Nonresident Not a Citizen of the Philippines. -
(1) Gifts made to or for the use of the National Government or any entity created by any of its agencies which is not conducted for

profit, or to any political subdivision of the said Government.

(2) Gifts in favor of an educational and/or charitable, religious, cultural or social welfare corporation, institution, foundation, trust or
philanthropic organization or research institution or organization: Provided, however, That not more than thirty percent (30%) of

said gifts shall be used by such donee for administration purposes.

Same as the resident or citizen donor EXCEPT that they arent allowed deductions for gifts on
account for marriage

Other deductions
The BIR ahs allowed the following as deductions from gross gifts to arrive at net gifts:
1. Encumbrance on the property donated, if assumed by the donee
2. Those specifically provided by the donor as a diminution of the property donated.

Example Lhizavhel donated land which was subject to a mortgage to Chlahrihvel. The FMV of the land
was P1m, but the mortgage was P400k. Chlahrihvel agreed to assume the mortgage, hence the
deduction of P400k is allowed. The net gift is P600k.

Tax rates Payable by Donor

SEC. 99. Rates of Tax Payable by Donor. -

(A) In General. - The tax for each calendar year shall be computed on the basis of the total net gifts made during the calendar year

in accordance with the following schedule:

If the net gift is:
Over But not over The tax shall be Plus Of Excess over
P100k Exempt
P100k 200k 0 2% P100k
200k 500k 2k 4% 200k
500k 1m 14k 6% 500k
1m 3m 44k 8% 1m
3m 5m 204k 10% 3m
5m 10m 404k 12% 5m
10m 1.004m 15% 10m
(B) Tax Payable by Donor if Donee is a Stranger. - When the donee or beneficiary is stranger, the tax payable by the donor shall be

thirty percent (30%) of the net gifts. For the purpose of this tax, a "stranger", is a person who is not a:

(1) Brother, sister (whether by whole or half-blood), spouse, ancestor and lineal descendant; or

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(2) Relative by consanguinity in the collateral line within the fourth degree of relationship.
(C) Any contribution in cash or in kind to any candidate, political party or coalition of parties for campaign purposes shall be
governed by the Election Code, as amended.
The tax rate for donors are illustrated in the table above.
However, if donee or beneficiary is a stranger, the tax payable by the donor shall be 30% of the net
gifts.
A stranger is a person who is NOT a:
1. Brother, sister (whether by whole or half-blood), spouse, ancestor and lineal descendant, or
2. Relative by consanguinity in the collateral line within the 4th degree of relationship.
Donation made between business organizations and those made between an individual and a
business organization shall be considered as donation made to a stranger. (RR 02-03)
The basic tax formula is as follows:
On the first donation of a calendar year
Gross gifts
Less: Deductions from these gross gifts
Net Gifts
X Donors tax rate
Donors tax due on the net gifts

On a subsequent donation in the same calendar year

Gross gifts made on this date
Less: Deductions from these gross gifts
Net gifts made on this date
Plus: All prior net gifts given with the same calendar year
Aggregate net gifts

Donors tax on aggregate net gifts

Less: Donors tax on all prior net gifts within the same calendar year
Donors tax due on the net gifts of this date

Example
Mr. and Mrs. Lumbat are Filipino residents. On Jan 3, 2010, they donated a lot with a FMV of P2m to their
child, Zombie, and his wife, Honka Monka on account of their marriage. On June 3, 2010, they donated
P100k to Mr. Lumbats brother, Piggie Boy.

Mr. Lumbat Mrs. Lumbat

Jan 3, 2010 Non-stranger Stranger Total Non-stranger Stranger Total
Gross gifts made:
To Zombie, 500k 500k 500k 500k
To Honka Monka, 500k 500k 500k 500k
Total 500k 500k 1m 500k 500k 1m
Deduction: 10k 0 10k 10k 0 10k
For account of
marriage
Net gifts made 490k 500k 990k 490k 500k 990k
Donors tax 13,600 150,000 163,600 13,600 150,000 163,600
(use schedule) (use 30%) (use schedule) (use 30%)

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June 3, 2010
Gross gifts made:
To Piggie Boy 100k 100k 100k 100k
Total 100k 100k 100k 100k
Deduction: 0
Net gifts made on 100k 0 100k 0 100k 100k
this date
Add: All prior net 490k 500k 490k 500k
gifts within the year
Aggregate net gifts 590k 500k 490k 600k
Donors tax on 19,400 150,000 13,600 180,000
aggregate net gifts
Less: Donors tax 13,600 150,000 13,600 150,000
on all prior net gifts
within the year
Donors Tax Due 5,800 0 5,800 0 30,000 30,000

Donors Tax Return

SEC. 103. Filing of Return and Payment of Tax. -
(A) Requirements. - any individual who makes any transfer by gift (except those which, under Section 101, are exempt from the tax

provided for in this Chapter) shall, for the purpose of the said tax, make a return under oath in duplicate. The return shall se forth:

(1) Each gift made during the calendar year which is to be included in computing net gifts;

(2) The deductions claimed and allowable;

(3) Any previous net gifts made during the same calendar year;

(4) The name of the donee; and

(5) Such further information as may be required by rules and regulations made pursuant to law.
(B) Time and Place of Filing and Payment. - The return of the donor required in this Section shall be filed within thirty (30) days
after the date the gift is made and the tax due thereon shall be paid at the time of filing. Except in cases where the Commissioner
otherwise permits, the return shall be filed and the tax paid to an authorized agent bank, the Revenue District Officer, Revenue
Collection Officer or duly authorized Treasurer of the city or municipality where the donor was domiciled at the time of the transfer,
or if there be no legal residence in the Philippines, with the Office of the Commissioner. In the case of gifts made by a nonresident,
the return may be filed with the Philippine Embassy or Consulate in the country where he is domiciled at the time of the transfer, or
directly with the Office of the Commissioner.
The donors tax return must be filed within 30 days after the date of the donation.
On all donations of one date, only one donors tax return is required.
In case of husband and wife as donors the donors tax return of the husband will be apart of the
donors tax return of the wife.
Where to file? See codal.
When and where to pay? The donors tax will be paid at the time the return is filed, and with the office
where the return is filed.

Donors tax credit

(C) Tax Credit for Donor's Taxes Paid to a Foreign Country. -
(1) In General. - The tax imposed by this Title upon a donor who was a citizen or a resident at the time of donation shall be credited

with the amount of any donor's tax of any character and description imposed by the authority of a foreign country.

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(2) Limitations on Credit. - The amount of the credit taken under this Section shall be subject to each of the following limitations:
(a) The amount of the credit in respect to the tax paid to any country shall not exceed the same proportion of the tax against which

such credit is taken, which the net gifts situated within such country taxable under this Title bears to his entire net gifts; and
(b) The total amount of the credit shall not exceed the same proportion of the tax against which such credit is taken, which the

donor's net gifts situated outside the Philippines taxable under this title bears to his entire net gifts.
Only resident or citizen donors are allowed donors tax credit.
Why? Because they are the only ones taxed worldwide. A non-resident non-citizen is not taxed for his
donations in foreign jurisdictions.
For a foreign donors tax paid to a foreign country, a credit is allowed to reduce the Philippine donors
tax to pay, under the formula:

Foreign donors tax paid = xxxx

Limit:
Net foreign gifts x Philippine Donors Tax = xxxx
Net gifts, worldwide

Allowed tax credit is whichever is lower of the foreign donors tax paid and the limit.
Example
Mr. Aquino donated property to Jojo here in the Philippines, net gift value of P200k.
He also donated to Pele in Brazil, net gift value of P300k. In Brazil, he paid a tax of P10k.

Foreign donors tax paid = P10k

Donors tax supposed to be paid worldwide, without the credit = P14,000.

Credit is:
300k x P14,000 = 8,400
500k

So choose whats lower between the tax paid abroad and the credit limitation. So, its P8,400. Thats the
tax credit.
Mr. Aquino has to pay P5,600 na lang.

If two foreign countries

Limitation A: Foreign donors tax paid to the foreign country
Net gifts, foreign country x Philippine donors tax
Net gifts, world
Allowed tax credit = whatevers lower

Limitation B (by totals)

Total of foreign donors taxes paid to the foreign countries
Net gifts, outside the Phil x Philippine donors tax
Net gifts, world
Allowed tax credit = whatevers lower

Tax credit to apply is whatever is lower between Limitation A and Limitation B

Value-Added Tax

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TITLE IV

VALUE-ADDED TAX

CHAPTER I

IMPOSITION OF TAX
SEC. 105. Persons Liable. - Any person who, in the course of trade or business, sells barters, exchanges, leases goods or properties,
renders services, and any person who imports goods shall be subject to the value-added tax (VAT) imposed in Sections 106 to 108

of this Code.
The value-added tax is an indirect tax and the amount of tax may be shifted or passed on to the buyer, transferee or lessee of the
goods, properties or services. This rule shall likewise apply to existing contracts of sale or lease of goods, properties or services at
the time of the effectivity of Republic Act No. 7716.
VAT is imposed on any person who:
1. Sells, barters or exchanges goods or properties in the course of trade or business; or
2. Sells services in the course of trade or business; or
3. Imports goods, whether or not in the course of trade or business.
The VAT is a tax on consumption, levied on the sale, barter, exchange or lease of goods or properties
and services in the Philippines and the importation of goods into the Philippines.
o The seller is the one statutorily liable for the payment of the tax, but the amount of the tax
may be shifted or passed on to the buyer, transferee or lessee of the goods or properties or
services.
Is VAT really a tax on the value-added?
o Yes. Consider this:
A sells to B a piece of wood.
Price: P100
Tax (10% for this example): P10.
Total: P110.

B then makes the wood into a fine chair, and he sells it to C.

Price: P150.
Tax: P15
Total: P165.

B has an output tax of P15, and an input of P10. He has a P5 NET VAT payable (output-input). Ok,
fine, but where do we see the tax on the value added by B?
We see that in the level of the price level. By applying his skills and labor, B made a chair out of the
wood that he bought from A. From P100, the price increased to P150. There was a P50 increase from the
value added by B. And applying the VAT on this P50, it results into the same amount, which is P5. This
proves that the tax is really on the value added.

How do we know if the transaction is subject to VAT? What are the elements?
1. It must be done in the ordinary course of trade or business
2. There must be a sale, barter, exchange, lease of goods or properties, or rendering of service
in the Philippines.
3. It is not VAT-exempt or VAT zero-rated.
o If all three are present, then the transaction is subject to the 12% VAT. Absence of one will
not make the transaction subject to VAT.
But remember that importations are subject to VAT, whether or not in the course of
trade or business.
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As it is a tax on the transaction, there is no need whatsoever for there to be a taxable gain (unlike in
income tax). It is not required by either law or jurisprudence.
o In fact, the NIRC and in CIR v CA and COMASERCO state that non-stock, non-profit
organizations are subject to the VAT, as long as the service is done for a fee or remuneration.
In his comment, Sir said that Comaserco would have escaped liability from VAT if
they pressed the point that they were doing the services not in the course of
business.

Ordinary course of trade or business

Sec. 105
The phrase "in the course of trade or business" means the regular conduct or pursuit of a commercial or an economic activity,
including transactions incidental thereto, by any person regardless of whether or not the person engaged therein is a nonstock,
nonprofit private organization (irrespective of the disposition of its net income and whether or not it sells exclusively to members or

their guests), or government entity.

The rule of regularity, to the contrary notwithstanding, services as defined in this Code rendered in the Philippines by nonresident
foreign persons shall be considered as being course of trade or business.
It means the regular conduct or pursuit of a commercial or an economic activity.
o It also includes transactions incidental thereto.
o It covers any person regardless whether or not the person engaged therein is a nonstick,
nonprofit organization (irrespective of the disposition of its net income and whether or not it
sells exclusively to members or their guests), or a government entity.
There should be
o a commercial or economic activity, and
o regularity in the action.
Regular involves more than one isolated transaction. It requires repetition and
continuity of action.
However, if the taxpayer is a non-resident alien, there is no need for the regularity of conduct.
Services rendered by them in the Philippines are considered as being in the course of trade or
business, and thus, subject to the VAT.
o This is an exception to the regularity requirement.
Any sale, barter or exchange of goods or services not in the course of trade or business is not
subject to VAT. (CIR v Magsaysay)
When determining if this element/requisite exists, be mindful of the following:
o Was the transaction done regularly? Or isolated?
o Was it incidental thereto?
o Is the taxpayer a non-resident alien? (Because if he is, the transaction need not be regular.)
Between an automobile shop who sells 5 parcels of land and a real estate dealer who sold a parcel of
land, both will be subject to VAT. The automobile shop because of its regular conduct, and the real
estate dealer because of the nature of his business (pursuit of a commercial or economic activity,
which takes the quantitative approach.)
This provision notwithstanding, an importation of goods for personal use is still subject to VAT
because of Section 107.
o This is an exception to pursuit of a commercial or economic activity requirement

For the next part, well go by tax rates.

First, well look at those taxed at 12% (Usual VATable and Importations)
Next, those taxed at 0%.
And then finally, the exempt transactions.

Sale, lease, etc of goods or rendering of services

Lets take up sale of goods or properties first.
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SEC. 106. Value-Added Tax on Sale of Goods or Properties. -

(A) Rate and Base of Tax. - There shall be levied, assessed and collected on every sale, barter or exchange of goods or properties,
value-added tax equivalent to twelve percent (12%) 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.
In dealing with this element, youre dealing with two questions:
o Is this a normal sale?
o If not, is this at least a transaction which are deemed sales by law (Sec. 106 (b)?
Generally, the VAT rate is 12% on the gross selling price or gross value in money of the goods,
properties sold, bartered or exchanged.
o We say generally because there are some transactions which are subject to 0% or tax
exempt, but well take those later.
For sale of goods or properties, the tax base is the gross selling price.

The term gross selling price means the total amount of money or its equivalent which the purchaser pays or is obligated to pay to
the seller in consideration of the sale, barter or exchange of the goods or properties, excluding the value-added tax. The excise tax,
if any, on such goods or properties shall form part of the gross selling price.

(D) Determination of the Tax. -

Sales Returns, Allowances and Sales Discounts. - The value of 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. Sales discount granted and indicated in the invoice at the time of sale
and the grant of which does not depend upon the happening of a future event may be excluded from the gross sales within the
same quarter it was given.
The term gross selling price means the total amount of money or its equivalent which the
purchaser pays or is obligated to pay to the seller in consideration of the sale, barter or exchange of
the goods or properties, excluding the value-added tax. The excise tax, if any, on such goods or
properties shall form part of the gross selling price.
o In other words, the gross selling price includes everything that the buyer pays the seller,
except the VAT which is shifted to the buyer.
For example, Toby sold a shirt to Carlo. The quoted selling price was P100, but there
were freight charges of P50. The gross selling price is P150. You apply the VAT to
P150.
o While the law says the VAT is based on the gross selling price, gross selling price does not
mean gross sales. The law and regulations allo downward adjustments for:
Sales returns and allowances;
Sales discounts agreed upon at the time of the sale indicated in the sales invoice,
and availed of by the buyer.

(1) The term goods or properties shall mean all tangible and intangible objects which are capable of pecuniary estimation and
shall include:
(a) Real properties held primarily for sale to customers or held for lease in the ordinary course of trade or business;
(b) The right or the privilege to use patent, copyright, design or model, plan, secret formula or process, goodwill, trademark, trade
brand or other like property or right;
(c) The right or the privilege to use in the Philippines of any industrial, commercial or scientific equipment;
(d) The right or the privilege to use motion picture films, tapes and discs; and
(e) Radio, television, satellite transmission and cable television time.
Goods or properties include:
a. Real properties held primarily for sale to customers, or held for lease in the ordinary course of
trade or business;
b. The right or privilege to use patent, copyright, design or model, plan, secret formula or process,
goodwill, trademark, trade brand or other like property or right;
c. The right or the privilege to use in the Philippines of any industrial, commercial or scientific
equipment;

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d. The right or the privilege to use motion picture films, tapes and discs; and
e. Radio, television, satellite transmission and cable television time.
This is not an exclusive list.

What is a sale?
A sale is the transfer of ownership of property in consideration of money received or to be received.
What are transactions deemed sales?
(B) Transactions Deemed Sale. - The following transactions shall be deemed 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:

(a) Shareholders or investors as share in the profits of the VAT-registered persons; or

(b) Creditors in payment of debt;

(3) Consignment of goods if actual sale is not made within sixty (60) days following the date such goods were consigned; and
(4) Retirement from or cessation of business, with respect to inventories of taxable goods existing as of such retirement or
cessation.
By virtue of law, the following are considered sales in the course of trade or business, and is subject
to the VAT:
a. Transfer, use or consumption not in the course of business of goods or properties originally
intended for sale or for use in the course of business;
b. Distribution or transfer of inventory to shareholders or investors as share in the profits of the
VAT-registered persons; (Property Dividends)
c. Distribution or transfer of inventory to creditors in payment of debt;
d. Consignment of goods if actual sale is not made within sixty (60) days following the date such
goods were consigned; and
e. Retirement from or cessation of business, with respect to inventories of taxable goods existing
as of such retirement or cessation.
o For example, Johnson & Johnson gave Atty. Montero baby powder. Thats a deemed sale by
virtue of transfer of goods originally intended for sale

(E). Authority of the Commissioner to Determine the Appropriate Tax Base. - The Commissioner 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.
The CIR shall determine the appropriate tax base in cases where transactions are deemed sales, or
where the gross selling price is unusually lower than the actual market value.

Now lets look at sale of service and use or lease of properties.

SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties. -

(A) Rate and Base of Tax. - There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (12%) of
gross receipts derived from the sale or exchange of services, including the use or lease of properties.

The phrase "sale or exchange of services" means the performance of all kinds or services in the Philippines for others for a fee,
remuneration or consideration, including those performed or rendered by construction and service contractors; stock, real estate,
commercial, customs and immigration brokers; lessors of property, whether personal or real; warehousing services; lessors or
distributors of cinematographic films; persons engaged in milling processing, manufacturing or repacking goods for others;
proprietors, operators or keepers of hotels, motels, resthouses, pension houses, inns, resorts; proprietors or operators of
restaurants, refreshment parlors, cafes and other eating places, including clubs and caterers; dealers in securities; lending
investors; transportation contractors on their transport of goods or cargoes, including persons who transport goods or cargoes for
hire another domestic common carriers by land, air and water relative to their transport of goods or cargoes; services of franchise
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grantees of telephone and telegraph, radio and television broadcasting and all other franchise grantees except those under Section
119 of this Code; services of banks, non-bank financial intermediaries and finance companies; and non-life insurance companies
(except their crop insurances), including surety, fidelity, indemnity and bonding companies; and similar services regardless of
whether or not the performance thereof calls for the exercise or use of the physical or mental faculties. The phrase 'sale or

exchange of services' shall likewise include:

(1) The lease or the use of or the right or privilege to use any copyright, patent, design or model, plan secret formula or process,

goodwill, trademark, trade brand or other like property or right;

(2) The lease of the use of, or the right to use of any industrial, commercial or scientific equipment;

(3) The supply of scientific, technical, industrial or commercial knowledge or information;

(4) The supply of any assistance that is ancillary and subsidiary to and is furnished as a means of enabling the application or
enjoyment of any such property, or right as is mentioned in subparagraph (2) or any such knowledge or information as is

mentioned in subparagraph (3);

(5) The supply of services by a nonresident person or his employee in connection with the use of property or rights belonging to, or

the installation or operation of any brand, machinery or other apparatus purchased from such nonresident person.
(6) The supply of technical advice, assistance or services rendered in connection with technical management or administration of

any scientific, industrial or commercial undertaking, venture, project or scheme;

(7) The lease of motion picture films, films, tapes and discs; and

(8) The lease or the use of or the right to use radio, television, satellite transmission and cable television time.
Lease of properties shall be subject to the tax herein imposed irrespective of the place where the contract of lease or licensing

agreement was executed if the property is leased or used in the Philippines.

The term "gross receipts" means the total amount of money or its equivalent representing the contract price, compensation, service
fee, rental or royalty, including the amount charged for materials supplied with the services and deposits and advanced payments
actually or constructively received during the taxable quarter for the services performed or to be performed for another person,
excluding value-added tax.
Any sale or exchange of services in the course of trade or business, including the use or lease or
properties, shall be subject to the VAT.
To be defined as sales of services, the services:
o Should be rendered in the Philippines,
o Can be any and all kinds of services rendered to others (provided there is no
employer-employee relationship);
o There is a fee, remuneration or consideration.
Sale of services in the course of trade or business includes those performed or rendered by:
a. construction and service contractors
b. stock, real estate, commercial, customs and immigration brokers
c. lessor of property, whether personal or real
d. warehousing services
e. lessor or distributors of cinematographic films
f. persons engagedin milling, processing, manufacturing or repacking of goods for others
g. proprietors, operators, or keepers of hotels, motels, resthouses, pension houses, inns, resorts
h. proprietors or hoperators of restaurants, refreshment parlors, cafes and other eating places,
including clubs and caterers
i. dealers in securities
j. lending investors
k. transportation contractors on their transport of goods or cargoes, including persons who
transport goods or cargoes for hire and other domestic common carriers by land, relative to their
transport of goods or cargoes (keep this in mind for when we take up percentage tax)
l. common carriers by air and sea relative to their transport of passengers, goods or cargoes from

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one place in the Philippines to another place in the Philippines (same here)
m. sales of electricity by generation companies, transmission and distribution companies
n. services of franchise grantees of electric utilities, telephone and telegraph, radio and television
broadcasting and all other franchise grantees, except those under Section 119 of the NIRC
o. non-life insurance companies (except their crop insurances), including surety, fidelity and
bonding companies
p. similar services regardless of whether or not the performance thereof calls for the exercise or
use of the physical or mental faculties
Also included are:
a. The lease or use of or right or privilege to use any copyright, patent, design or model, plan, secret
formula or process, goodwill, trademark, trade brand and other like property or right;
b. The lease or the use of, or the right to use of any industrial, commercial or scientific equipment;
c. The supply of scientific, technical, industrial or commercial knowledge or information;
d. The supply of any assistance that is ancillary and subsidiary to and is furnished as a means of
enabling the application or enjoyment of any such property, or right as is enumerated in letter (b)
hereof or any such knowledge or information as is mention (c)
e. The supply of services by a non-resident person or his employee in connection with the use of
property or rights belonging to, or the installation or operation of any brand, machinery or other
apparatus purchased from such non-resident person;
f. The supply of technical advice, assistance or services rendered in connection with technical
management or administration of any scientific, industrial or commercial undertaking, venture,
project or scheme;
g. The lease of motion picture films, tapes, and discs,
h. The lease or use of or the right to use radio, television, satellite transmission and cable television
time.
Lease of properties shall be subject to the tax herein imposed irrespective of the place where the
contract or lease or licensing agreement was executed if the property is leased or used in the
Philippines
The list not exhaustive. However, exhibition of movies is not subject to VAT, but subject to
amusement tax imposed by local government units. (CIR v SM Prime)
For the sale or exchange of services, including the use or lease of properties, the VAT rate is 12% of
the gross receipts.
Gross receipts means cash or its equivalent actually received or constructively received (not
including the VAT) as:
o Payments on the contract price, compensation, service fee, rental or royalty;
o Payments or materials supplied with the services; and
o Deposits of advanced payments on the contract for services.
For example, Lionel was a building contractor. He spent P50m for materials and
P30mfor labor. The taxable gross receipts is P80m, the whole of which is VATable by
12%.
o Constructive receipt occurs when the money consideration or its equivalent is placed in the
control of the person who rendered the service without restriction by the payor. (like a bank
deposit; issuance by the debtor of a notice to offset any debt or obligation and acceptance
thereof by the seller as payment for the services rendered)

VAT on Importation of Goods

SEC. 107. Value-Added Tax on Importation of Goods. -
(A) In General. - There shall be levied, assessed and collected on every importation of goods a value-added tax equivalent to ten
percent (12%) 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: Provided, That where the customs duties are determined on the basis of the quantity or volume of the goods, the

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value-added tax shall be based on the landed cost plus excise taxes, If any.
Every importation of goods shall be subject to the VAT, whether the importation is for sale or use in
business, or for personal use.
The imported goods shall be subject to 12% VAT.
The tax base is:
o the total value used by the Bureau of customs in determining tariff and customs duty, plus
customs duties, excise tax (if any), and other charges prior to the removal of the goods from
customs custody; OR
o based on the landed cost, when the customs duties are determined on the basis of the
quantity or volume of the goods. By landed cost is meant the invoice cost, freight,
insurance, customs duties, excise tax (if any), and other charges prior to the removal of the
goods from customs custody.

(B) Transfer of Goods by Tax-Exempt Persons. - In the case of tax-free importation of goods into the Philippines by persons, entities
or agencies exempt from tax where such goods are subsequently sold, transferred or exchanged in the Philippines to non-exempt
persons or entities, the purchasers, transferees or recipients shall be considered the importers thereof, who shall be liable for any
internal revenue tax on such importation. 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.
This article deals with technical importation.
When a person who was exempt from the VAT on his importation subsequently sells (transfers or
exchanges) in the Philippines such imported article to a non-exempt person or entity, the purchaser
(transferee or assignee) will be required to pay the VAT.
o Xavi is a tax-exempt entity who imported stuff. He then sold it to Diego, a non-exempt entity.
Diego has to pay for the VAT. But Diego can claim the VAT paid as creditable input taxes.
The VAT of an importation should be paid prior to the releae of the goods from customs custody. If
its subject to both excise tax and VAT, he has to pay both prior to the release.
A seller of goods or services who imports stuff can claim the VAT paid on importations during a
taxable period as input taxes creditable against the output taxes on the sales of the same period.

Before tackling zero-rated and exempt transactions, lets have an overview of the VAT system.
Understanding VAT is a matter of perspective. We first have to know WHO we are talking about.
Remember that in the VAT system, the burden of paying the VAT is passed on to the buyer. (A sells to
B; B pays the 12% VAT on it.)
o But B can recover the amount he paid to A by selling the shirt to C, since C will pay the 12%
on the VAT.
The biggest difference of zero-rated/effectively zero-rated transactions and VAT-exempt transactions
is the ability to recover VAT already paid to the seller.
o Why do we look at the input tax and not the output tax?
Because the input tax is what we all seek to recover, thats what we paid for.
Output tax doesnt come out of our own pockets because we can pass that burden to
our buyers.
o In zero-rated transactions, there is total relief for the purchaser from the burden of the tax
since he does not have input VAT and in effect, because VAT is at 0%, it does not have output
VAT.
o In exempt transactions, there is only partial relief because the purchaser is not allowed any
tax refund or credit for input taxes paid.
In normal VAT transactions, the VAT paid to A can be recovered by selling it to C. We are talking
about B.

A sells to B B sells to C B paid A P10 as VAT. But he

recovered the P10 by selling

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the product to C. In his sale to

C, he received P15 which
covered the P10 he paid A. So,
in essence, he recovered the
P10 he paid A.
VAT TAXABLE (lets use 10% to VAT TAXABLE
simplify things)
P100 P150
P10 (VAT) P15
P110 P165
What if the transaction of B to C is VAT ZERO-RATED?
A sells to B B sells to C B paid A P10 as VAT. But, his
transaction to C was
zero-rated. So he didnt receive
anything from C to offset his
VAT payment to A.
He has an output of O, and an
input of 10.
He can use the 10 as a tax
credit by applying for a tax
credit certificate with the BIR.

VAT TAXABLE (lets use 10% to VAT ZERO-RATED

simplify things)
P100 P150
P10 (VAT) P0
P110 P150

What if the transaction of B to C is VAT EXEMPT?

A sells to B B sells to C B paid A P10 as VAT. But, his
transaction to C was exempt.
So he didnt receive anything
from C to offset his VAT
payment to A.
He has an output of O, and an
input of 10.
However, unlike a zero-rated
transation, he can NOT use the
excess of 10 to offset his VAT
payment to A. He cant
recover.

VAT TAXABLE (lets use 10% to VAT EXEMPT

simplify things)
P100 P150
P10 (VAT) P0
P110 P150

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So, if we were B, and we had a choice what should our next sale transaction be normal VATable,
zero-rated, or exempt?
o Clearly, we wont go for exempt, because we wont recover the VAT we paid to our suppliers
(A).
o Its a toss-up between going for normal VATable transactions and zero-rated transactions.
In both these cases, we will recover the VAT we paid to our suppliers. It will just
depend on different factors.
If we go for a zero-rated transaction, do we want to go through the hassle of
having to deal with the BIR and paying the fees?
If we go for the normal VATable, the recovery would be quicker. But this
would mean wed have to keep track of the VAT paid to us and then have to
pay the net VAT payable to the government. And what if our line of business
is really engaged in exporting (zero-rated), should we go to the trouble of
looking for buyers here in the Philippines if thats not our main line of
business anyway?

Zero-rated/Effective zero rated transactions

For goods
Sec 106 (2) The following sales by VAT-registered persons shall be subject to zero percent (0%) rate:

(a) Export Sales. - The term "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 of the goods so exported and paid for in
acceptable foreign currency or its equivalent in goods or services, and accounted for in accordance with the rules and regulations
of the Bangko Sentral ng Pilipinas (BSP);
(2) Sale of raw materials or packaging materials to a nonresident buyer for delivery to a resident local export-oriented enterprise to
be used in manufacturing, processing, packing or repacking in the Philippines of the said buyer's goods and paid for in acceptable
foreign currency and accounted for in
accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP);
(3) Sale of raw materials or packaging materials to export-oriented enterprise whose export sales exceed seventy percent (70%) of
total annual production;
(4) Sale of gold to the Bangko Sentral ng Pilipinas (BSP); and
(5) Those considered export sales under Executive Order NO. 226, otherwise known as the Omnibus Investment Code of 1987, and
other special laws.
(6) The sale of goods, supplies, equipment, and fuel to persons engaged in international shipping or international air transport
operations (added by RA 9337)

(b) Foreign Currency Denominated Sale. - The phrase "foreign currency denominated sale" means sale to a nonresident of goods,
except those mentioned in Sections 149 and 150, 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 (BSP).

(c) Sales to persons or entities whose exemption under special laws or international agreements to which the Philippines is a
signatory effectively subjects such sales to zero rate.
For goods, a rate of 0% of the gross selling price will be applied if:
1. Export sale; or
2. Foreign currency denominated sale; or
3. Sales to persons or entities whose exemption under special laws, or international agreements to
which the Philippines is a signatory (effective zero rated sales)
Export sales means:
o the sales and actual shipments or exportations of goods from the Philippines to a foreign
country, irrespective of any shipping arrangement that may be agreed upon which may
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influence or determine the transfer of ownership of the goods so exported, and

o paid for in acceptable foreign currency or its equivalent in goods or services, and accounted
for in accordance with the rules and regulations of the BSP.
The following are within the meaning of export sales:
a. sales 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 said buyers goods and paid for in acceptable foreign currency and accounted
for in accordance with BSP rules and regulations
b. sale of raw materials or packaging materials to an export-oriented enterprise whose export sales
exceed 70% of total annual production
c. sale of gold to the BSP
d. those considered export sales under EO 226 and other special laws
e. sale of goods, supplies, equipment and fuel to persons engaged in international shipping or
international air transport operations
While an ecozone is geographically within the Philippines, it is deemed a separate customs territory
and is regarded in law as foreign soil. Thus, sales by suppliers from outside the ecozone to this
separate customs territory are deemed as exports and treated as export sales. (CIR v Sekisui)
Foreign currency denominated sales means
o sales to residents of goods assembled or manufactured in the Philippines,
o for delivery to residents in the Philippines, and
o paid in acceptable foreign currency and accounted for in accordance with BSP rules and
regulations.
o This does not apply to automobiles and non-essential goods subject to excise taxes.
Under the cross-border principle of the VAT system, no VAT shall be imposed to form part of the cost
of goods destined outside of the territorial border of the taxing authority. (CIR v Seagate)

For services
Sec 108 (B) Transactions Subject to Zero Percent (0%) Rate. - The following services performed in the Philippines by VAT- registered
persons shall be subject to zero percent (0%) rate.
(1) Processing, manufacturing or repacking goods for other persons doing business outside the Philippines which goods are
subsequently exported, where the services are paid for in acceptable foreign currency and accounted for in accordance with the
rules and regulations of the Bangko Sentral ng Pilipinas (BSP);
(2) Services other than those mentioned in the preceding paragraph, the consideration for which is paid for in acceptable foreign
currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP);
(3) Services rendered to persons or entities whose exemption under special laws or international agreements to which the
Philippines is a signatory effectively subjects the supply of such services to zero percent (0%) rate;
(4) Services rendered to vessels engaged exclusively in international shipping; and
(5) Services performed by subcontractors and/or contractors in processing, converting, of manufacturing goods for an enterprise
whose export sales exceed seventy percent (70%) of total annual production.
(6) Transport of passengers and cargo by air or sea vessels from the Philippines to a foreign country (RA 9337)
(7) Sale of power or fuel generated through renewable sources of energy such as, but no limited to, biomass, solar, wind,
hydropower, geothermal, ocean energy, and other emerging energy sources using technologies such as fuel cells and hydrogen
cells. (RA 9337)
For services performed in the Philippines, a rate of 0% of the gross receipts will be applied in the
following instances:
1. From processing, manufacturing or repacking of goods,
a. For other persons doing business outside the Philippines,
b. The goods are subsequently exported,
c. The services are paid for in acceptable foreign currency and accounted for in accordance
with the rules and regulations of the BSP
2. Services other than processing, manufacturing or repacking of goods, rendered to a:
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a. Person engaged in business conducted outside the Philippines, or

b. non-resident person not engaged in business who is outside the Philippines when the
services are performed
i. the consideration is paid in acceptable foreign currency and accounted for in
accordance with the blah blah blah of the BSP
3. Services rendered to persons or entities whose exemption under special laws or international
agreements to which the Philippines is a signatory effectively subjects such services to zero
rate;
4. Services rendered to persons engaged in international shipping or international air transport
operations, including leases of property for use thereof;
5. Services performed by subcontractors and/or contractors in processing, converting, or
manufacturing goods for an enterprise whose export sales exceed 70% of total annual
production;
6. Transport of passengers and cargo by air and sea vessels from the Philippines to a foreign
country, and
7. Sale of power or fuel generated through renewable sources of energy
Services other than processing, manufacturing, or repacking of goods must likewise be performed
outside the Philippines. (CIR v Bumeister and Wain, wherein the recipient of the services was the
Consortium who was deemed doing business within the Philippines)
The VAT system generally follows the destination principle (exports are zero-rated whereas imports
are taxed). However, there is an exception in the form of services performed in the Philippines for a
recipient doing business outside the Philippines. (CIR v Wain)
To be exempt from the destination principle under Section 108(b)(1) and (2), the service must be
o Performed in the Philippines,
o For a person doing business outside the Philippines, and
o Paid in acceptable foreign currency accounted for in accordance with BSP rules.

Difference between zero-rated and effectively zero-rated transactions (CIR v Seagate)

4 Zero-rated transactions refer to the export sale of goods and supply of services. The seller of such
transactions charges no output tax, but can claim a refund or a tax credit certificate for the VAT
previously charged by suppliers. This is for the benefit of the seller.
5 Effectively zero-rated transactions refer to the sale of goods or supply of services to persons or
entities whose exemption under special laws or international agreements to which the Philippines is a
signatory effectively subjects such transactions to a zero rate. Such rate does not yield any tax
chargeable against the purchaser. This is for the benefit of the purchaser.
6 In both zero-rated and effectively zero-rated transactions, the seller who charges zero output tax can
claim a refund or a tax credit certificate for the VAT previously charged by suppliers.

Exempt Transactions
SEC. 109. Exempt Transactions. (1) Subject to the provisions of Subsection (2) hereof, the following transactions shall be exempt

from the value added tax:

(a) Sale or importation of agricultural and marine food products in their original state, livestock and poultry of a kind generally used
as, or yielding or producing foods for human consumption; and breeding stock and genetic materials therefor.
Products classified under this paragraph shall be considered in their original state even if they have undergone the simple
processes of preparation or preservation for the market, such as freezing, drying, salting, broiling, roasting, smoking or stripping.
Polished and/or husked rice, corn grits, raw cane sugar and molasses, ordinary salt and copra shall be considered in their original

state;
(b) Sale or importation of fertilizers; seeds, seedlings and fingerlings; fish, prawn, livestock and poultry feeds, including ingredients,
whether locally produced or imported, used in the manufacture of finished feeds (except specialty feeds for race horses, fighting
cocks, aquarium fish, zoo animals and other animals generally considered as pets);
(c) Importation of personal and household effects belonging to the residents of the Philippines returning from abroad and

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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;
(d) Importation of professional instruments and implements, wearing apparel, domestic animals, and personal household effects
(except any vehicle, vessel, aircraft, machinery other goods for use in the manufacture and merchandise of any kind in commercial
quantity) belonging to persons coming to settle in the Philippines, for their own use and not for sale, barter or exchange,
accompanying such persons, or arriving within ninety (90) days before or after their arrival, upon the production of evidence
satisfactory to the Commissioner, that such persons are actually coming to settle in the Philippines and that the change of
residence is bona fide;
(e) Services subject to percentage tax under Title V;
(f) Services by agricultural contract growers and milling for others of palay into rice, corn into grits and sugar cane into raw sugar;
(g) Medical, dental, hospital and veterinary services except those rendered by professionals;
(h) 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), the Technical Education and Skills Development Authority
(TESDA) and those rendered by government educational institutions
(i) Services rendered by individuals pursuant to an employer-employee relationship;
(j) Services rendered by regional or area headquarters established in the Philippines by multinational corporations which act as
supervisory, communications and coordinating centers for their affiliates, subsidiaries or branches in the Asia-Pacific Region and
do not earn or derive income from the Philippines;
(k) Transactions which are exempt under international agreements to which the Philippines is a signatory or under special laws,
except those under Presidential Decree 529;
(l) Sales by agricultural cooperatives duly registered with the Cooperative Development Authority to their members as well as sale
of their produce, whether in its original state or processed form, to non-members; their importation of direct farm inputs,
machineries and equipment, including spare parts thereof, to be used directly and exclusively in the production and/or processing
of their produce;
(m) Gross receipts from lending activities by credit or multi-purpose cooperatives duly registered with the Cooperative Development
Authority;
(n) Sales by non-agricultural, non- electric and non-credit cooperatives duly registered with the Cooperative Development Authority:
Provided, That the share capital contribution of each member does not exceed Fifteen thousand pesos (P15,000) and regardless of
the aggregate capital and net surplus ratably distributed among the members;
(o) Export sales by persons who are not VAT-registered;
(p) 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, residential lot valued at One million five hundred thousand pesos
(P1,500,000) and below, house and lot and other residential dwellings valued at Two million five hundred thousand pesos
(P2,500,000) and below: Provided, That not later January 31, 2009 and every three years thereafter, the amounts herein stated shall
be adjusted to their present value using the Consumer Price Index, as published by the NSO;
(q) Lease of a residential unit with a monthly rental not exceeding Eight thousand pesos (P10,000); Provided, That not later January
31, 2009 and every three years thereafter, the amounts herein stated shall be adjusted to their present value using the Consumer
Price Index, as published by the NSO;
(r) Sale, importation, printing or publication of books and any newspaper, magazine review or bulletin which appears at regular
intervals with fixed prices for subscription and sale and which is not devoted principally to the publication of paid advertisements;
(s) Sale, importation or lease of passenger or cargo vessels and aircraft, including engine, equipment and spare parts thereof for
domestic or international transport operations;
(t) importation of fuel, goods and supplies by persons engaged in international shipping or air transport operations
(u) services of banks, non-bank financial intermediaries performing quasi-banking functions, and other non-bank financial
intermediaries; and
(v) Sale or lease of goods or properties or the performance of services other than the transactions mentioned in the preceding
paragraphs, the gross annual sales and/or receipts do not exceed the amount of One million five hundred thousand pesos
(P1,500,000): Provided, That not later January 31, 2009 and every three years thereafter, the amounts herein stated shall be
adjusted to their present value using the Consumer Price Index, as published by the NSO.

(2) A VAT-registered person may elect that subsection (1) not apply to its sale of goods or properties or services, Provided, that an
election made under this Subsection shall be irrevocable for a period of three (3) years from the quarter the election was made. (RA
9337)
VAT-exempt transactions refer to the sale of goods or properties and/or services and the use or
lease of properties that is not subject to VAT (output tax) and the seller is not allowed any tax credit
of VAT (input tax) on purchases.
The person making the exempt sale of goods, properties or services shall not bill any output tax to
his customers because the said transaction is not subject to VAT.
A VAT-registered person may elect that the exemptions shall not apply to his sales of goods or
properties or services.
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o But one the election is made, it shall be irrevocable for a period of three years counted from
the quarter when the election was made.
EXCEPT for franchise grantees of radio and TV broadcasting whose annual gross
receipts for the preceding year do not exceed P10m. In their case, the option
becomes perpetually irrecovable. (RR 4-2007)
Itll be too lengthy if RR 16-05 will be replicated here. Instead, Ill just add those parts which further explain
the statutory enumeration above.
Re (a): the term livestock does not include fighting cocks, race horses, zoo animals and other
animals generally considered as pets.
Re (b): Specialty feeds refers to non-agricultural feeds or food for race horses, fighting cocks,
aquarium fish, zoo animals and other animals generally considered as pets.
Re (g): laboratory services are exempted. But if the hospital or clinic operates a pharmacy or drug
store, the sale of drugs and medicine is subject to VAT.
Re (h): Educational services do not include seminars, in-service training, review classes and other
similar services rendered by persons who are not accredited by the DepEd, CHED or Tesda.
Re (j): this only refers to RAHQs. ROHQs are subject to zero-rated sales. (?)
Re (l): importation by non-agricultural, non-electric and non-credit cooperatives of machineries and
equipment, including spare parts thereof, to be used by them are subject to VAT.
o Sale by agricultural cooperatives to non-members can only be exempted from VAT if the
producer of the agricultural products sold is the cooperative itself. It the cooperative is not
the producer (like a trader), then only those sales to its members shall be exempted from
VAT. (RR 4-2007)
Re (p): If the real property is not primarily held for sale to customers or held for lease in the ordinary
course of trade or business BUT the same is used in the trade or business of the seller, the sale
thereof shall be subject to VAT being a transaction incidental to the taxpayers main business.
o Low-cost housing refers to housing projects intended for homeless low-income family
beneficiaries, undertaken by the Government or private developers, which may either be a
subdivision or a condominium.
o Socialized housing refers to housing programs and projects covering houses and lots or
home lots only undertaken by the Government or the private sector for the underprivileged
and homeless citizens.
o If two or more adjacent residential lots are sold or disposed in favor of one buyer, for the
purpose of utilizing the lots as one residential lot, the sale shall be exempt from VAT only if
the aggregate value of the lots do not exceed P1,500,000.
Re (q): Lease of residential units where the monthly rental per unit exceeds P10,000 but the
aggregate of such rentals of the lessor during the year do not exceed P1,500,000 shall likewise be
exempt from VAT. However, it shall be subjected to the 3% percentage tax.
o So, less than P10k/month -> exempt
o More than P10k/month but less than P1.5m/year -> 3% Percentage tax.
o More than P10k/month and more than P1.5m/year -> 12% VAT.
o Residential units shall refer to apartments and houses & lots used for residential purposes,
and buildings or parts or units thereof used solely as dwelling places. Motels are not
included.
o Units refer to an apartment unit in case of apartments, house in the case of houses, per
person in the case of dorms, boarding houses and bed spaces, and per room in case of
rooms for rent.
Re (s): the exemption from VAT on the importation and local purchase of passenger and/or cargo
vessels shall be limited to those of 150 tons and above, including engine and spare parts of said
vessels.
o Importation of life-saving equipment, safety and rescue equipment and communication and

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navigational safety equipment, steel plates and other metal plates including marine-grade
aluminum plates, used for shipping transport operations shall be exempt. It will be subject to
the Domestic Shipping Development Act of 2004.
o Same thing with the importation of capital equipment, machinery, spare parts, life-saving and
navigational equipment, steel plates and other plates to be used in the construction, repair,
etc of any merchant marine vessel operated or to be operated in the domestic trade.
Re (t): said fuel, goods and supplies should be used exclusively or should pertain to the transport of
goods and/or passenger from a port in the Philippines directly to a foreign port, or vice versa, without
docking or stopping at any other port in the Philippines unless the docking or stopping at any other
Philippine port is for the purpose of unloading passenger and/or cargoes that originated from
abroad, or to load passengers and/or cargoes bound for abroad.
o If any portion of such fuel, goods or supplies is used for purposes other than that mentioned,
such shall be subject to 12% VAT. (yari ka boy!)
Re (u): services of such, like money changers or pawnshops, are subject to percentage tax.
Re (v): for purposes of the P1.5m threshold, the husband and the wife shall be considered separate
taxpayers. However, the aggregation rule for each taxpayer shall apply, for instance, if a professional,
aside from the practice of his profession also derives revenue from other lines of business which are
otherwise subject to VAT, the same shall be combined for purposes of determining whether the
threshold has been exceeded. Thus, the VAT-exempt sale shall not be included in determining the
threshold.

SEC. 110. Tax Credits. -

(A) Creditable Input Tax. -

(1) Any input tax evidenced by a VAT invoice or official receipt issued in accordance with Section 113 hereof on the following

transactions shall be creditable against the output tax:

(a) Purchase or importation of goods:

(i) For sale; or
(ii) For conversion into or intended to form part of a finished product for sale including packaging materials; or
(iii) For use as supplies in the course of business; or
(iv) For use as materials supplied in the sale of service; or
(v) For use in trade or business for which deduction for depreciation or amortization is allowed under this Code, except

automobiles, aircraft and yachts.

(b) Purchase of services on which a value-added tax has been actually paid.

(2) The input tax on domestic purchase of goods or properties shall be creditable:

(a) To the purchaser 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.

Provided, that the input tax on goods purchases or imported in calendar month for use on trade or business for wich deduction is
allowed under this Code, shall be spread evenly over the month of acquisition and the 59 succeeding months if the aggregate
acquisition cost for such goods, excluding the VAT component thereof, exceeds One million pesos (P1,000,000): Provided, however,
that if the estimated useful life of the capital good is less than 5 years, as used for depreciation purposes, then the input VAT shall
be spread over such a shorter period: Provided, finally, That, 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 free.
The input tax credit on importation of goods or local purchases of goods, properties or services by a
VAT-registered person shall be creditable:
1. To the importer upon payment of VAT prior to the release of goods from customs custody,
2. To the purchaser of the domestic goods or properties upon consummation of the sale, or

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3. To the purchaser of services or the lessee or licensee upon payment of the compensation, rental,
royalty or fee. (RR 16-2005)
An input tax means the VAT due or paid by a VAT-registered person on importation of goods or local
purchases of goods, properties, or services, including lease or use of properties, in the course of his
trade or business.
o It shall also include the transitional input tax and the presumptive input tax.
o It also includes input taxes which
Can be directly attributed to transactions subject to the VAT, and
A ratable portion of any input tax which cannot be directly attributed to either the
taxable or exempt activity.
Any input tax on the following transactions evidence by a VAT invoice or official receipt by a
VAT-registered person in accordance with Sections 113 and 237 of the Tax Code shall be creditable
against the output tax:
1. Purchase or importation of goods
a. For sale, or
b. For conversion into or intended to form part of a finished product for sale, including
packaging materials, or
c. For use as supplies in the course of business, or
d. For use as raw materials supplied in the sale of services, or
e. For use in trade or business for which deduction for depreciation or amortization is
allowed under the Tax Code
2. Purchase of real properties for which a VAT has actually been paid,
3. Purchase of services in which a VAT has actually been paid,
4. Transactions deemed sale,
5. Transitional input tax,
6. Presumptive input tax,
7. Transitional input tax credits.

Rule on capital goods

Section 110 (A) proviso. Provided, that the input tax on goods purchases or imported in calendar month for use on trade or
business for wich deduction is allowed under this Code, shall be spread evenly over the month of acquisition and the 59
succeeding months if the aggregate acquisition cost for such goods, excluding the VAT component thereof, exceeds One million
pesos (P1,000,000): Provided, however, that if the estimated useful life of the capital good is less than 5 years, as used for
depreciation purposes, then the input VAT shall be spread over such a shorter period: Provided, finally, That, 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 free.
Capital goods or properties refer to goods or properties
o with estimated useful life of more than one year and
o which are treated as depreciable under the income tax law,
o used directly or indirectly, in the production or sale of taxable goods or services.
If the input tax on capital goods purchased or imported in a calendar month does NOT exceed P1m,
the input tax will be allowed in the month of purchase.
If the aggregate acquistion cost of such goods in a calendar month, excluding the VAT, exceeds 1m:
o If the estimated life is 5 years or more, the input tax will be evenly spread over the month of
acquisition and the 59 succeeding months.
o If the estimated life is less than 5 years, the input tax will be spread evenly on a monthly
basis by dividing the input tax by the actual number of months comprising the estimated
useful life of the asset.
For construction in progress (CIP)
o CIP is the cost of construction which is not yet completed. It is considered a purchase of
services, the value of which will be determined based on the progress billins.
o Input taxes on such transaction will be recognized in the moth that payment was made.
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o In case of contract for the sale of service where only labor will be supplied by the contractor
and the materials will be purchased by the contractee from other suppliers,
input tax on the labor will be recognized in the month that payment was made based
on progress billings.
Input tax on the purchase of materials will be recognized at the time when the
materials were purchased.
An asset acquired in installment for an acquisition cost of more than P1m, excluding the VAT, will be
subject to the amortization of input tax despite the fact that the monthly payments/installments may
not exceed P1m.
o When an asset with an unamortized input tax is retired from business, the unamortized input
tax will be closed against the output taxes on the taxable period in which it is retired.

Input tax allocation and mixed transactions

(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:

(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.
The term "input tax" means 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 a VAT-registered person. It
shall also include the transitional input tax determined in accordance with Section 111 of this Code.
The term "output tax" means 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 this Code.

In crediting input tax, you have to look at three things:
1. Those which can be directly attributed to transactions subject to VAT, and
2. Those which cannot be directly attributed to either a VAT taxable or VAT-exempt transaction. For
these cases, the input tax shall be pro-rated to the VAT taxable and VAT-exempt transactions and
only the ratable portion pertaining to transactions subject to VAT may be recognized for input tax
credit.
3. Sales to the Government because you cant credit input tax arising from sales to the Government
since sales to the Government is subject to final withholding VAT.
RR 16-2005 states:
o All the input taxes that can be directly attributed to transactions subject to VAT may be
recognized for input tax credit; provided, that input taxes that can be directly attributable to
VAT taxable sales of goods and services to the Government (or any of its political
subdivisions, etc) shall not be credited against output taxes arising from sales to
non-Government entities.
o If any input tax cannot be directly attributed to either a VAT taxable or VAT-exempt
transaction, the input tax shall be pro-rated to the VAT taxable and VAT-exempt transactions
and only ratable portion pertaining to transactions subject to VAT may be recognized for
input tax credit.

Example
ABC Corporations has the following sales during the month:
To private entities subject to 12% - P100,000
Export sales - P100,000
Exempt goods - P100,000
To the Govt - P100,000
Total - P400,000

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The following input taxes were passed on by its VAT suppliers:

On taxable goods 12% - P5,000
On the exports - P3,000
On sale of exempt goods - P2,000
On sale to government - P4,000
On depreciable capital good, - P20,000
Not attributable to any specific activity
(60 month amortization)
From the facts, we can see that only the input tax on the depreciable capital good can not be allocated to
any specific activity. To get the input tax for that, you have to pro-rate it among the transactions,
using the following equation:

Specific transaction13 X Amount of input tax not directly

Total Sales attributable to any activity

Output Input
Allocated Unallocated Total Creditable Net Vat Excess Refund/ Unrecoverable16
Payable14 Input Creditable15
12% 12k 5k 5k 10k 10k 2k 0 0 0
0% 0 3k 5k 8k 8k 0 8k 8k 0
Exempt 0 2k 5k 7k 0 0 0 0 7k
Govt 12k 4k 5k 9k 7k17 5k 0 0 2k

The input tax attributable to VAT-exempt sales shall not be allowed as credit against the output tax
but should be treated as part of cost or expense.

(B) Excess Output or Input Tax. - If at the end of any taxable quarter the output tax exceeds the input tax, the excess shall be paid by
the VAT-registered person. If the input tax exceeds the output tax, the excess shall be carried over to the succeeding quarter or
quarters: Provided, however, that any input tax attributable 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. (RA 9361)
(C) 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 person 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.
The claim for tax credit referred to in the foregoing paragraph shall include not only those filed with the Bureau of Internal Revenue
but also those filed with other government agencies, such as the Board of Investments the Bureau of Customs.
If at the end of any taxable quarter the output tax exceeds the input tax, the excess shall be paid by
the VAT-registered person. (Known as the Net VAT payable)
If the input tax inclusive of input tax carried over from the previous quarter exceeds the output tax,
the excess input tax shall be carried over to the succeeding quarter or quarters,
o Provided, that any input tax attributable to zero-rated sales by a VAT-registered person may
at his option be refunded or applied for a tax credit certificate which may be used in the
payment of internal revenue taxes. (this is where you can get input tax credit or refunds)
13 Either the VATable, export, exempt or the govt
14 Math column. Output Tax Creditable Tax
15 Law column. Sec 112

16 Total input Creditable Tax

17 Why 7? Because 5% has been withheld by the Govt.

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o In other words, any input tax, attributable to zero-rated sales may be:
Refunded, or
Credited against other internal revenue taxes of the VAT taxpayer.

Transitional and Presumptive Input Tax Credits

SEC. 111. Transitional/Presumptive Input Tax Credits. -
(A) Transitional Input Tax Credits. - A 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 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 two percent (2%) of the value of such inventory or the actual value-added tax paid on such goods, materials
and supplies, whichever is higher, which shall be creditable against the output tax.
Taxpayers who become VAT-registered persons upon exceeding the minimum turnover of P1.5m in
any 12-month period, or who voluntarily register even if their turnover does not exceed P1.5m (except
franchise grantees of radio and tv broadcasting whose threshold is P10m) shall be entitled to a
transitional input tax on the invonetory on hand as of the effectivity of their VAT registration, on the
following:
1. Goods purchase for resale in their present condition
2. Materials purchased for further processing, but which have not yet undergone processing,
3. Goods which have been manufactured by the taxpayer
4. Goods in process for sale, or
5. Goods and supplies for use in the course of the taxpayers trade or business as a VAT-registered
person. (RR 16-2005)
The transitional input tax shall be
a. 2% of the value of the beginning inventory on hand, or
b. actual VAT paid on such goods, materials and supplies
whichever is HIGHER.
The transitional input tax credit operates to benefit newly VAT-registered persons, whether or not
they previously paid taxes in the acquisition of their beginning inventory of goods, materials and
supplies. (Fort Bonifacio Development Corp v CIR)
During that period of transition from non-VAT to VAT status, the transitional input tax credit serves to
alleviate the impact of the VAT on the taxpayer. (FBDC v CIR)
There is no transitional input tax on capital goods or on supplies. (Reyes, 2009 Edition)

(B) Presumptive Input Tax Credits. -

(1) Persons or firms engaged in the processing of sardines, mackerel and milk, and in manufacturing refined sugar and cooking oil
and packed noodle-based instant meals, shall be allowed a presumptive input tax, creditable against the output tax, equivalent to
four percent(4%) of the gross value in money of their purchases of primary agricultural products which are used as inputs to their

production.
As used in this Subsection, the term "processing" shall mean pasteurization, canning and activities which through physical or
chemical process alter the exterior texture or form or inner substance of a product in such manner as to prepare it for special use
to which it could not have been put in its original form or condition.
Presumptive input tax credits are given for those engaged:
o In the processing of sardines, mackerel and milk; and
o In manufacturing refined sugar, cooking oil and packed noodle-based instant meals
The rate is 4% of the gross value in money.
They are given this 4% presumptive input tax because the goods used in the said enumeration are
VAT-exempt.

Refunds or Tax Credits on Input Tax

SEC. 112. Refunds or Tax Credits of Input Tax. -

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(A) Zero-Rated or Effectively Zero-Rated Sales. - Any VAT-registered person, whose sales are zero-rated or effectively zero-rated
may, within two (2) years after the close of the taxable quarter when the sales were made, apply for the issuance of a tax credit
certificate or refund of creditable input tax due or paid attributable to such sales, except transitional input tax, to the extent that
such input tax has not been applied against output tax: Provided, however, That in the case of zero-rated sales under Section
106(A)(2)(a)(1), (2) and (B) and Section 108 (B)(1) and (2), the acceptable foreign currency exchange proceeds thereof had been
duly accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP): Provided, further, That
where the taxpayer is engaged in zero-rated or effectively zero-rated sale and also in taxable or exempt sale of goods of properties
or services, and the amount of creditable input tax due or paid cannot be directly and entirely attributed to any one of the
transactions, it shall be allocated proportionately on the basis of the volume of sales: Provided, finally, that for a person making
sales that are zero-rated under Section 108(B)(6), the input taxes shall be allocated ratably between his zero-rated and

non-zero-rated sales.

(B) 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
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.

(C) Period Within Which Refund or Tax Credit of Input Taxes 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 compete documents in support of the application filed in accordance with Subsection (A) 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 receipt of the decision
denying the claim or after the expiration of the one hundred twenty day-period, appeal the decision or the unacted claim with the
Court of Tax Appeals.-

(D) Manner of Giving Refund. - Refunds 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 refunds under this paragraph shall be subject to post

audit by the Commission on Audit.

There are three instances where one can avail of a VAT refund:
1. When there is excess input VAT versus output VAT;
2. Zero-rated and effectively-zero rated sales
3. Cessation of business
For zero-rated and effectively zero-rated sales of goods, properties or services, the application
should be filed within 2 years after the close of the taxable quarter when such sales were made.
o The two year period is reckoned from the close of the taxable quarter when the relevant
sales were made pertaining to the input VAT regardless of whether said tax was paid or not.
(CIR v Mirant Pagbilao Corp)
o Thus, when a zero-rated VAT taxpayer pays its input VAT a year after the pertinent
transaction, said taxpayer only has a year to file a claim for refund or tax credit of the
unutilized creditable input VAT.
For cessation of business, a VAT-registered person whose registration has been cancelled due to
retirement from or cessation of business, or due to changes in or cessation of status under Sec. 106
(C), may within 2 years from the date of cancellation, apply for the issuance of a tax credit certificate
for any unused input tax which he may use in payment of his other internal revenue taxes.
o Provided, that he shall be entitled to a refund if he has no internal revenue tax liabilities
against which the tax credit certificate may be utilized.
More on cessation of business or change of status as VAT-registered person (RR 16-2005):
o Subject to output tax:
Change of business activity from VAT taxable to VAT-exempt status.
Approval of a request for cancellation of registration due to reversion to exempt
status.
o Not subject to output tax:

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Change of control of a corporation by the acquisition of the controlling interest of

such corporation by another stockholder or group of stockholders. The goods or
properties will not be considered sold, bartered, etc.
Change in the trade or corporate name of the business.
Merger or consolidation of corporations. The unused input tax of the dissolved
corporation shall be absorbed by the surviving or new corporation.

Withholding of creditable value-added tax

(C) Withholding of Creditable Value-Added Tax. - The Government or any of its political subdivisions, instrumentalities or agencies,
including government-owned or -controlled corporations (GOCCs) shall, before making payment on account of each purchase of
goods from sellers and services rendered by contractors which are subject to the value-added tax imposed in Sections 106 and 108
of this Code, deduct and withhold the value-added tax due at the rate of five percent (5%) of the gross thereof: Provided, That the
payment for lease or use of properties or property rights to nonresident owners shall be subject to ten percent (12%) withholding
tax at the time of payment. For this purpose, the payor or person in control of the payment shall be considered as the withholding

agent.
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.
The VAT is withheld in two instances:
1. In sales of goods and services to the Govt (5% withheld by the government)
2. In payment for lease or use of properties to nonresident owners (12% withheld by the lessee)
In transactions with the government, the 5% final withholding VAT shall represent the net VAT
payable for the seller. The remaining 7% accounts for the standard input VAT for sales of goods or
services to the government or any of its political subdivisions, in lieu of the actual input VAT directly
attributable or ratably apportioned to such sales.
o Should actual input VAT attributable to sales to government exceed 7% of gross payments,
the excess may form part of the sellers expense or cost.
o If the actual input VAT attributable to sale to government is less than 7%, the difference
should be counted as income.
Kaka sells to the Government something for P100. The VAT is P12. The P5 is
withheld by the government, so the Government only pays him P107.
o In this scheme, the government assumes that your input VAT will be 7%. If it is 7%, then all is
well.
But if the input VAT is higher than 7 (in Kakas case, for example it was P10), then the
excess of P3 will be treated as an expense. It will form part of the expense column in
the income statement.
But if the input VAT is smaller than 7% (for example, Kaka only spent P5), then there
is income on Kakas side, this will form part of his income.
In both instances, Kaka will lose or be benefited only by 35% (rate of income tax)
because it will form part of his income and subject to the income tax.
In transactions with non-residents, 12% will be withheld with respect to the following payments:
1. Lease or use of properties or property rights owned by non-residents, and
2. Other services rendered in the Philippines by non-residents.
o The government did this as a matter of enforcement. How will the Government run after the
VAT of a non-resident, right? So, they just make the payors withholding agents.
Jhunabhel lives in the condo owned by non-resident Tevez. Jhunabhel will withhold
P12 of the total amount of the lease of P112. Jhunabhel will only pay Tevez P100.
o The one who remits the 12% to the government, when he files his return can state that he is
entitled to an input tax credit.
In Jhunabhels case, she can ask for the input tax credit of P12.

VAT on the sale of real property in installments by a real estate dealer

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A sale on installment of real property by a real estate dealer shall be subject to the 12% VAT of the
gross selling price.
A real estate dealer is any person engaged in the business of buying, developing, selling, exchanging
real property as principal and holding himself out as a full or part-time dealer of real estate.
The gross selling price is whichever is highest of the:
o Consideration in the deed of sale,
o Zonal value, per CIR; and
o The fair market value per real property declaration with the provincial or city assessor.
When the initial payments do not exceed 25% of the selling consideration in the deed of sale, the
steps are:
1. Multiply the gross selling price by 12% (VAT)
2. Get the VAT on the installment payment received, using the formula below:
Collection on the consideration (no VAT) x Computed VAT in
Agreed consideration (no VAT) Step 1
Initial payments are the payments
o which the seller received before and upon the execution of the instrument of sale, and
o payments which he expects or is scheduled to receive in cash or property (other than
evidence of indebtedness of the purchaser) during the taxable year of the sale or disposition.
o It will include more than the down payment in the year of sale.
o It will not include the amount of mortgage on the real property sold which was already there
at the time of sale and which was assumed by the buyer,
EXCEPT when such mortgage exceeds the cost or other basis of the property to the
seller, in which case the excess shall form part of the initial payments.
For example, the mortgaged assumed by the buyer was P600k, and the cost
to the seller was just P500k. The P100k excess will be included as initial
payments
If the initial payments exceed 25% of the selling price, the transaction shall be considered a cash sale
with a VAT at the time of the sale.
Take note that it is the agreed consideration which is used to determine the initial payments, while it
is the highest among the consideration, zonal value and FMV which is used for the computation of
the VAT.

VAT on Lease
All forms of property for lease, whether real or personal, are liable to VAT except when gross annual
sales do not exceed P1.5m, in which case they will be exempt. (See discussion on VAT-exempt)
Lease of property shall be subject to VAT regardless of the place where the contract of lease or
licensing agreement was executed if the property leased or used is located in the Philippines.
See also rules just mentioned when lessor is a non-resident.
In a lease contract, the advance payment by the lessee may be:
1. A loan to the lessor from the lessee, or
2. Option money for the property, or
3. Security deposit to insure the faithful performance of certain obligations of the lessee to the
lessor, or
4. Pre-paid rental.
o If the advanced payment is #1, 2 or 3, not subject to VAT.
o If the advanced payment is #4, then such payment is taxable to the lessor in the month when
it was received, irrespective of the accounting method employed by the lessor.
o If the security deposit (#3) is applied to rental, then it shall be subject to VAT at the time of its
application.

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VAT Registration
Every taxpayer subject to the VAT must register with the BIR as a VAT taxpayer and pay an annual
registration fee of P500 for every separate and distinct establishment, including facility types where
the business is conducted.
Every taxpayer not subject to VAT but subject to the excise tax or percentage tax must register with
the BIR and pay an annual registration fee of P500 for every separate and distinct establishment
where the business is conducted.
o VAT exempt persons under Section 109 who did not opt to be registered as VAT taxpayers
must register as non-VAT taxpayers.

Mandatory Registration
Sec 236 (G) Persons required to register for Value-Added Tax
1) Any person, who in the course of trade or business, sells, barters or exchanges goods or properties, or engages in the sale or
exchange of services, shall be liable to register for VAT if:
a) His gross sales or receipts for the past 12 months, other than those that are exempt under Section 109(A) to (U) have
exceeded One Million Five Hundred Thousand Pesos (P1,500,000); or
b) There are reasonable grounds to believer that his gross sales or receipts for the next 12 months, other than those that are
exempt under Section 109 (A) to (U), will exceed One Million Five Hundred Thousand Pesos (P1,500,000);
2) Every person who becomes liable to be registered under paragraph (1) of this Subsection shall register with the Revenue District
Office which has jurisdiction over the head office or branch of that person, and shall pay the annual registration fee prescribed in
Subsection (B) hereof. If he fails to register, he shall be liable to pay the tax under Title IV as if he were a VAT-registered person, but
without the benefit of input tax credits for the period in which he was not properly registered.
Any person who, in the course of trade or business, sells, barters or exchanges goods or properties,
or engages in the sale or exchange of services shall be liable to register for VAT if:
1) His gross sales or receipts for the past 12 months, other than those exempt under Section 109
(A) to (U), have exceeded P1.5m; or
2) There are reasonable grounds to believe that his gross sales or receipts for the next 12 months,
other than those exempt under Section 109 (A) to (U), will exceed P1.5m
If a person who is mandated to register does not, he shall:
o Be liable to pay the tax as if he were a VAT-registered person, and
o Without the benefit of input tax credits.

Optional registration
(H) Optional Registration for Value-Added Tax of Exempt Person. -
(1) Any person is not required to register for VAT under Subsection (G) hereof may elect to resiter for VAT by registering with the
Revenue District Office that has jurisdiction over the head office of that person, and paying the annual registration fee in
Subsection (B) hereof.
(2) Any person who elects to register under this Subsection shall not be entitled to cancel his registration under Subsection (F)(2)
for the next three years.
For purposes of Title IV of this Code, any person who has registered VAT as a tax type in accordance with the provisions of
Subsection (C) hereof shall be referred to as Vat-registered person who shall be assigned only one Taxpayer Identification
Number (TIN).
Any person who is not required to registered as a VAT taxpayer may register for the VAT.
He, however, cannot cancel his registration for the next three years.

Cancellation of VAT registration

(G) Cancellation of VAT registration. -
(1) A VAT-registered person may cancel his registration for VAT if:
(a) he makes written application and can demonstrate ot the commissioners satisfaction that his gross sales or receipts for the
following 12 months, over than those that are exempt under Section 109 (A) to (U), will not exceed one million five hundred
thousand pesos (P1,500,000), or
(b) he has ceased to carry on his trade or business, and does not expect to recommence any trade or business within the next
twelve months.
The cancellation of registration will be effective from the first day of the following month.

Read codal na lang. Hehe.

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Compliance Requirements
SEC. 113. Invoicing and Accounting Requirements for VAT-Registered Persons. -
"(A) Invoicing Requirements. - A VAT-registered person shall issue:
"(1) A VAT invoice for every sale, barter or exchange of goods or properties; and
"(2) A VAT official receipt for every lease of goods or properties, and for every sale, barter or exchange of services.
"(B) Information Contained in the VAT Invoice or VAT Official Receipt.- The following information shall be indicated in the VAT
invoice or VAT official receipt:
"(1) A statement that the seller is a VAT-registered person, followed by his taxpayer's identification number (TIN);
"(2) The total amount which the purchaser pays or is obligated to pay to the seller with the indication that such amount includes the
value-added tax: Provided, That:
"(a) The amount of the tax shall be shown as a separate item in the invoice or receipt;
"(b) If the sale is exempt from value-added tax, the term "VAT-exempt sale" shall be written or printed prominently on the invoice or
receipt;
"(c) If the sale is subject to zero percent (0%) value-added tax, the term "zero-rated sale" shall be written or printed prominently on
the invoice or receipt;
"(d) If the sale involves goods, properties or services some of which are subject to and some of which are VAT zero-rated or
VAT-exempt, the invoice or receipt shall clearly indicate the breakdown of the sale price between its taxable, exempt and zero-rated
components, and the calculation of the value-added tax on each portion of the sale shall be shown on the invoice or receipt:
"Provided, That the seller may issue separate invoices or receipts for the taxable, exempt, and zero-rated components of the sale.
"(3) The date of transaction, quantity, unit cost and description of the goods or properties or nature of the service; and
"(4) In the case of sales in the amount of one thousand pesos (P1,000) or more where the sale or transfer is made to a
VAT-registered person, the name, business style, if any, address and taxpayer identification number (TIN) of the purchaser,
customer or client.
"(C) Accounting Requirements. - Notwithstanding the provisions of Section 233, all persons subject to the value-added tax under
Sections 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 sales and purchases are recorded. The subsidiary journals shall contain such
information as may be required by the Secretary of Finance.
A VAT-registered person shall issue:
1. A VAT invoice for every sale, barter or exchange of goods or properties; and
2. A VAT official receipt for every lease of goods or properties, and for every sale, barter or
exchange of services
If the sale is exempt from VAT, the term VAT-exempt sale shall be written or printed prominently on
the invoice or receipt
If the sale is subject to 0%, the term zero-rated sale shall be written or printed prominently on the
invoice or receipt
If the sale involves some which are subject to VAT and some which are zero-rated or VAT-exempt, the
invoice or receipt shall clearly indicate the break-down of the sale price between the taxable, exempt
and zero-rated components
o The calculation of the VAT on each portion of the sale shall be shown on the invoice or
receipt.
o But the seller may issue separate invoices or receipts for the taxable, exempt and zero-rated
components of the sale
The date of the transaction, quality, unit cost and description of the goods or properties or nature of
the services must also be indicated.
o Input tax cannot be credited against output tax when supported by an undated official
receipt or invoice. (Nesic Philippines Inc v CIR, May 6, 2010)
When the sale is P1000 or more to a VAT-registered person, the name, business style, address and
TIN of the purchaser, customer or client must also be placed in the receipt or invoice.

Issuing Erroneous VAT invoice or VAT official receipt

Section 113(D) Consequence of Issuing Erroneous Vat Invoice or Vat Official Receipt.
(1) If a person who is not a VAT-registered person issues an invoice or receipt showing his Taxpayer Identification Number (TIN),
followed by the word VAT:
(a) The issuer shall, in addition to any liability to other percentage taxes, be liable to:
(i) The tax imposed in Section 106 or 108 without the benefit of any input tax credit; and

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(ii) A 50% surcharge under Section 248 (B) of this code;

(b) The VAT shall, if the other requisite information required under Subsection (B) hereof is shown on the invoice or receipt, be
recognized as an input tax credit to the purchaser under Section 110 of this Code.
(2) If a VAT-registered person issues a VAT invoice or VAT official receipt for a VAT-exempt transaction, but fails to display
prominently on the invoice or receipt the term VAT-exempt Sale", the issuer shall be liable to account for the tax imposed in Section
106 or 108 as if Section 109 did not apply.
"(E) Transitional Period. - Notwithstanding Subsection (B) hereof, taxpayers may continue to issue VAT invoices and VAT official
receipts for the period July 1, 2005 to December 31, 2005, in accordance with Bureau of Internal Revenue administrative practices
that existed as of December 31, 2004.
If a person is NOT a VAT-registered person issues an invoice or receipt showing his TIN followed by
the word VAT, the issuer shall be:
1. Liable for the percentage tax due on his transaction
2. Liable for the VAT, without credit for any input tax, and
3. Subject to a 50% surcharge.
o VAT shall be recognized as an input tax credit to the purchaser under Section 110, provided
the requisite information required in invoices or receipts are shown on the invoices or
receipts.
If a VAT-registered person issues a VAT invoice or official receipt for a VAT-exempt transaction, but
fails to display prominently on the invoice or receipt the term VAT-exempt sale, he shall be subject
to the VAT, as if Section 109 on exempt transactions did not apply.
o Meaning, he has to pay the VAT.
If the VAT is erroneously billed in the invoice, the total invoice amount shall be presumed to be
comprised of the gross selling price/gross receipts plus the correct amount of the VAT.
o The output tax shall be computed by multiplying the total amount in the invoice by a fraction
using the rate of VAT as the numerator and 100% plus the rate of the VAT as the
denominator.

Return and Payment of VAT

Sec. 114. Return and Payment of Value-Added Tax. -
"(A) In General. - Every person liable to pay the value-added tax imposed under this Title 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:
Provided, however, That VAT-registered persons shall pay the value-added tax on a monthly basis.
"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: Provided, That only one consolidated return shall be filed
by the taxpayer for his principal place of business or head office and all branches.
"(B) Where to File the Return and Pay the Tax. - Except as the Commissioner otherwise permits, the return shall be filed with and the
tax paid to an authorized agent bank, Revenue Collection Officer or duly authorized city or municipal Treasurer in the Philippines
located within the revenue district where the taxpayer is registered or required to register.
3 Every person liable to pay VAT shall file a quarterly return of the amount of his quarterly gross sales
or receipts within 25 days following the close of the taxable quarter using the latest version of Quarterly
VAT Return.
4 The VAT-registered persons shall pay the VAT on a monthly basis.

Power of the Commissioner

SEC. 115. Power of the Commissioner to Suspend the Business Operations of a Taxpayer. - The Commissioner or his authorized
representative is hereby empowered to suspend the business operations and temporarily close the business establishment of any

person for any of the following violations:

(a) In the case of a 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.

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(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.

Percentage Taxes
Generally, percentage taxes are based on gross receipts.
The percentage taxes are payable by the seller of the services,
o EXCEPT the overseas communications tax, which is payable by the user of the facilities of
the seller.
The term gross receipts means cash actually or constructively received.
o Receivables, although income thereon is earned already, are not yet taxable.
o There are no deductions from gross receipts to arrive at the taxable gross receipts.

Three percent (3%) percentage tax

SEC. 116. Tax on Persons Exempt From Value-Added Tax (VAT).- Any person whose sales or receipts are exempt under Section
109(v) of this Code from the payment of value-added tax and who is not a VAT-registered person shall pay a tax equivalent to three
percent (3%) of his gross quarterly sales or receipts: Provided, That cooperatives shall be exempt from the three percent (3%)gross
receipts tax herein imposed. (RA 9337)
What are the requisites to be considered under the 3% Percentage Tax?
1. Gross annual sales or receipts do NOT exceed P1.5,
2. Transaction is NOT under Section 109 (A)-(U),
3. NOT VAT-registered, and
4. NOT under any specific percentage tax.
The 3% percentage tax is imposed on persons who are exempt from the VAT because their gross
annual sales or receipts do not exceed P1.5m.
It is based on gross sales or receipts, without any deduction.
Persons who are otherwise subject to the 3% percentage tax may opt to be under the VAT system by
registering with the BIR as a VAT taxpayer.
o When so registered, they shall be subject to the rules on VAT on their domestic and export
sales.
Why register?!
The VAT system has input credit. Percentage tax does not.

Tax on domestic carriers

SEC. 117. Percentage Tax on Domestic Carriers and Keepers of Garages. - Cars for rent or hire driven by the lessee, transportation
contractors, including persons who transport passengers for hire, and other domestic carriers by land, air or water, for the transport
of passengers, except owners of bancas and owner of animal-drawn two wheeled vehicle, and keepers of garages shall pay a tax

equivalent to three percent (3%) of their quarterly gross receipts.

The gross receipts of common carriers derived from their incoming and outgoing freight shall not be subjected to the local taxes

imposed under Republic Act No. 7160, otherwise known as the Local Government Code of 1991.
In computing the percentage tax provided in this Section, the following shall be considered the minimum quarterly gross receipts in

each particular case:

Jeepney for hire -

1. Manila and other cities P 2,400
2. Provincial 1,200

Public utility bus -

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Not exceeding 30 passengers 3,600

Exceeding 30 but not exceeding 50 passengers 6,000
Exceeding 50 passengers 7,200

Taxis -
1. Manila and other cities P 3,600
2. Provincial 2,400

Car for hire (with chauffer) 3,000

Car for hire (without chauffer) 1,800
A common carrier is a person, corporation, firm or association, engaged in the business of carrying
or transporting passengers or goods, or both, by land, water, or air, for compensation, offering
services to the public, and shall include transportation contractors.
o Common carriers can either be subject to percentage tax (common carriers tax) or VAT.
o For those under the common carriers tax, the rate is 3% of gross receipts.
Those subject to percentage tax are:
1. Cars for rent or hire driven by the lessee (rent-a-car)
2. Transportation contractors, including persons who transport passengers for hire;
3. Other domestic carriers by land for transport of passengers (except owners of bancas and
animal-drawn two-wheeled vehicles), and
4. Keepers of garages
A garage is a closed shelter for automobilies, a business establishment where
automobiles are repaired, stored, etc.
Those subject to VAT are:
1. Transportation contractors on their transport of goods or cargoes, including persons who
transport goods or cargoes for hire;
2. Other domestic common carriers by land relative to their transport of goods or cargoes;
3. 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.
The transport of passengers and cargo by air or sea vessels from the Philippines to a foreign country
is subject to 0% VAT.
Under the law, certain common carriers have statutory minimum quarterly gross receipts (jeepneys,
etc).

VAT or Percentage Tax on DOMESTIC Carriers

Common carrier by LAND:
Transporting goods or cargoes 12% VAT
Transporting passengers 3% Common Carriers
tax
Common carriers by AIR or SEA:
From one point in the Philippines to another point in the Philippines
Transporting goods or cargoes 12% VAT
Transporting passengers 12% VAT
From one point in the Philippines to a point outside the Philippines
Transporting goods or cargoes 0% VAT
Transporting passengers 0% VAT

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Percentage tax on International carriers

SEC. 118. Percentage Tax on International Carriers. -

(A) International air carriers doing business in the Philippines shall pay a tax of three percent (3%) of their quarterly gross receipts.
(B) International shipping carriers doing business in the Philippines shall pay a tax equivalent to three percent (3%) of their
quarterly gross receipts.
International air carriers and international shipping carriers doing business in the Philippines shall
pay a tax equivalent to 3% of their gross receipts from shipping outgoing from the Philippines.

Franchise tax
SEC. 119. Tax on Franchises. - Any provision of general or special law to the contrary notwithstanding, there shall be levied,
assessed and collected in respect to all franchises on radio and/or television broadcasting companies whose annual gross
receipts of the preceding year does not exceed Ten million pesos (P10,000.00), subject to Section 236 of this Code, a tax of three
percent (3%) and on electric, gas and water utilities, a tax of two percent (2%) on the gross receipts derived from the business
covered by the law granting the franchise: Provided, however, That radio and television broadcasting companies referred to in this
Section shall have an option to be registered as a value-added taxpayer and pay the tax due thereon: Provided, further, That once

the option is exercised, said option shall be irrevocable.

The grantee shall file the return with, and pay the tax due thereon to the Commissioner or his duly authorized representative, in
accordance with the provisions of Section 128 of this Code, and the return shall be subject to audit by the Bureau of Internal
Revenue, any provision of any existing law to the contrary notwithstanding.
The franchise tax is:
1. On gross receipts covered by the law granting the franchise;
2. At the following rates:
a. On radio and/or television broadcasting companies whose annual gross receipts of the
preceding year did not exceed P10m: 3%
b. On gas and water utilities: 2%
Those whose annual gross receipts of the preceding year exceeded P10m shall be subject to the
VAT.
o If the gross receipts do not exceed P10m, they may opt to be registered under VAT, but once
they choose to, it cannot be revoked.

Overseas communications tax

SEC. 120. Tax on Overseas Dispatch, Message or Conversation Originating from the Philippines. -
(A) Persons Liable. - There shall be collected upon every overseas dispatch, message or conversation transmitted from the
Philippines by telephone, telegraph, telewriter exchange, wireless and other communication equipment service, a tax of ten percent
(10%) on the amount paid for such services. The tax imposed in this Section shall be payable by the person paying for the services
rendered and shall be paid to the person rendering the services who is required to collect and pay the tax within twenty (20) days

after the end of each quarter.

(B) Exemptions. - The tax imposed by this Section shall not apply to:
(1) Government. - Amounts paid for messages transmitted by the Government of the Republic of the Philippines or any of its

political subdivisions or instrumentalities;

(2) Diplomatic Services. - Amounts paid for messages transmitted by any embassy and consular offices of a foreign government;
(3) International Organizations. - Amounts paid for messages transmitted by a public international organization or any of its
agencies based in the Philippines enjoying privileges, exemptions and immunities which the Government of the Philippines is

committed to recognize pursuant to an international agreement; and

(4) News Services. - Amounts paid for messages from any newspaper, press association, radio or television newspaper,
broadcasting agency, or newstickers services, to any other newspaper, press association, radio or television newspaper
broadcasting agency, or newsticker service or to a bona fide correspondent, which messages deal exclusively with the collection of
news items for, or the dissemination of news item through, public press, radio or television broadcasting or a newsticker service

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furnishing a general news service similar to that of the public press.

Franchise grantees of telephone and telegraph are subject to the VAT on their gross receipts from
their telephone, telegraph, telewriter exchange, wireless and other communication equipment
services. (ingoing messages)
BUT amounts received from overseas dispatch message or conversation originating form the
Philippines (outgoing messages) shall be subject to the overseas communications tax.
The OCT is based on the amount paid by the user to the provider of the communication facility,
imposed on the person paying for the services rendered, and not on the person rendering the service.
o The person rendering the service is merely considered as a tax collector.
The OCT is 10% of the amount paid.
The OCT shall not apply to:
1. The government of the Philippines or any of its political subdivisions,
2. Diplomatic services,
3. International organizations, and
4. News services.

Tax on banks and non-bank financial intermediaries performing quasi-banking functions

SEC. 121. Tax on Banks and Non-Bank Financial Intermediaries. - There shall be a collected tax on gross receipts derived from

sources within the Philippines by all banks and non-bank financial intermediaries in accordance with the following schedule:
(a) On interest, commissions and discounts from lending activities as well as income from financial leasing, on the basis of

remaining maturities of instruments from which such receipts are derived:

Maturity period is 5 years or less - 5%

Maturity period is more than 5 years- 1%

(b) On dividends and equity shares in net income of subsidiaries0%

(c) On royalties, rentals of property, real or personal, profits,
from exchange and all other items treated as gross income
under Section 32 of this Code 7%
(d) On net trading gains within the taxable year on foreign currency, debt

securities, derivaties and other similar financial instruments 7%

Provided, however, That in case the maturity period referred to in paragraph (a) is shortened thru pretermination, then the maturity
period shall be reckoned to end as of the date of pretermination for purposes of classifying the transaction as short, medium or
long-term and the correct rate of tax shall be applied accordingly.
Provided, finally, that the generally accepted accounting principles as may be prescribed by the BSP for the bank or non-bank

financial intermediary performing quasi-banking functions shall be likewise be the basis for the calculation of gross receipts.
Nothing in this Code shall preclude the Commissioner from imposing the same tax herein provided on persons performing similar
banking activities.
The tax base is the gross receipts from sources within the Philippines.
Tax rates are:
On interest, commissions and discounts from
lending activities as well as income from financial
leasing, on the basis of remaining maturities of
instruments from which such receipts are derived:
Maturity period is 5 years or less
Maturity period is more than 5 years 5%
1%
On dividends and equity shares in net income of 0%
subsidiaries

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On royalties, rentals of property, real or personal, 7%

profits from exchange and all other items treated
as gross income under the income tax law
On net trading gains within the taxable year on 7%
foreign currency, debt securities, derivaties and
other similar financial instruments
In case the maturity period is shortened thru pretermination, then the maturity period shall be
reckoned to end as of the date of pretermination
Financial intermediaries are persons or entities whose principal functions include the lending,
investing, or placement of funds or evidence of indebtedness or equity deposited with them, or
otherwise coursed through them, either for their own account or for the account of others.
Quasi-banking activities refer to borrowing funds from twenty or more lenders at any one time,
through issuance, indorsement or acceptance of debt instruments, or through the issuance of
certificates of assignments for the purpose of relending or purchasing receivables and other similar
obligations.

Tax on other non-bank financial intermediaries

SEC. 122. Tax on Other Non-bank Financial Intermediaries. - There shall be collected a tax of five percent (5%) on the gross receipts
derived by other non-bank financial intermediaries doing business in the Philippines, from interest, commissions, and discounts
from lending activities, as well as income from financial leasing, shall be taxed on the basis of remaining maturities of the

instruments from which such receipts are derived, in accordance with the following schedule:

Maturity period is 5 years or less 5%

Maturity period is more than 5 years 1%

Provided, however, That in case the maturity period is shortened thru pretermination, then the maturity period shall be reckoned to
end as of the date of pretermination for purposes of classifying the transaction as short, medium or long-term and the correct rate
of tax shall be applied accordingly.
Provided, finally, that the generally accepted accounting principles as may be prescribed by the SEC for other non-bank financial
intermediaries shall likewise be the basis of the calculation of gross receipts.
Nothing in this Code shall preclude the Commissioner from imposing the same tax herein provided on persons performing similar
financing activities. (RA 9238)
Tax base is the gross receipts from sources within the Philippines
Tax rates are:
On interest, commissions and discounts from
lending activities as well as income from financial
leasing, on the basis of remaining maturities of
instruments from which such receipts are derived:
Maturity period is 5 years or less
Maturity period is more than 5 years 5%
1%
On interests, commissions, discounts and all other 5%
items treated as gross income under the Income
Tax Law
A pawnshop is a non-bank financial intermediary not performing quasi-banking functions.
(Tambunting v CIR)

Tax on insurance companies

SEC. 123. Tax on Life Insurance Premiums. - 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 tax of five percent (5%) of the
total premium collected, whether such premiums are paid in money, notes, credits or any substitute for money; but premiums

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refunded within six (6) months after payment on account of rejection of risk or returned for other reason to a person insured shall
not be included in the taxable receipts; nor shall any tax be paid upon reinsurance by a company that has already paid the tax; nor
upon doing business outside the Philippines on account of any life insurance of the insured who is a nonresident, if any tax on such
premium is imposed by the foreign country where the branch is established nor upon premiums collected or received on account of
any reinsurance , if the insured, in case of 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; nor upon that portion of the premiums
collected or received 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 the variable contract workers.
Cooperative companies or associations are such as are conducted by the members thereof with the money collected from among
themselves and solely for their own protection and not for profit.
Insurance companies may be divided into two classes:
1. Non-life insurance companies, and
2. Life insurance companies
Non-life insurance companies are subject to VAT.
Life insurance companies are subject to a percentage tax called the premium tax, as follows:
o Tax base: total life insurance premiums collected (gross receipts), whether in money, notes,
credits, or any substitute for money
o Tax rate: 5%
The follow are exempted from the premium tax:
1. Premiums refunded within 6 months after payment on account of rejection of risk or returned for
other reasons to a person insured;
2. Reinsurance premiums paid by a company that has already paid a tax;
3. Premiums collected or received by an y branch of a domestic corp, firm or association doing
business in the Philippines on account of any life insurance of an insured who is a non-resident,
if any tax on such premiums is imposed by the foreign country where the branch is established;
4. Reinsurance premiums, if the insured of personal insurance resides outside the Philippines, if
any tax on such premium is imposed by the foreign country where the original has been issued
or perfected;
5. Portion of the premiums collected or received by insurance companies on variable contracts in
excess of the amount necessary to insure the lives of variable contract owners.

Tax on agents of foreign insurance companies

SEC. 124. Tax on Agents of Foreign Insurance Companies. - Every fire, marine or miscellaneous insurance agent authorized under the
Insurance Code to procure policies of insurance as he may have previously been legally authorized to transact on risks located in
the Philippines for companies not authorized to transact business in the Philippines shall pay a tax equal to twice the tax imposed
in Section 123: Provided, That the provision of this Section shall not apply to reinsurance: Provided, however, That the provisions of
this Section shall not affect the right of an owner of property to apply for and obtain for himself policies in foreign companies in
cases where said owner does not make use of the services of any agent, company or corporation residing or doing business in the
Philippines. In all cases where owners of property obtain insurance directly with foreign companies, it shall be the duty of said
owners to report to the Insurance Commissioner and to the Commissioner each case where insurance has been so effected, and
shall pay the tax of five percent (5%) on premiums paid, in the manner required by Section 123.
Every fire, marine or miscellaneous insurance agent authorized under the Insurance Code to procure
insurance as he may have previously been authorized to transact on risks located in the Philippines,
for companies not authorized to transact business in the Philippines, shall pay a tax equal to twice
the tax imposed on life insurance companies.
o So, 10%.
An owner of property can obtain directly for himself policies in foreign companies but he must report
to Insurance Commissioner and to the CIR, and pay a tax of 5% on premiums paid.

Amusement taxes
SEC. 125. Amusement Taxes. - There shall be collected from the proprietor, lessee or operator of cockpits, cabarets, night or day

clubs, boxing exhibitions, professional basketball games, Jai-Alai and racetracks, a tax equivalent to:

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(a) Eighteen percent (18%) in the case of cockpits;

(b) Eighteen percent (18%) in the case of cabarets, night or day clubs;
(c) Ten percent (10%) in the case of boxing exhibitions: Provided, however, That boxing exhibitions wherein World or Oriental
Championships in any division is at stake shall be exempt from amusement tax: Provided, further, That at least one of the
contenders for World or Oriental Championship is a citizen of the Philippines and said exhibitions are promoted by a citizen/s of the

Philippines or by a corporation or association at least sixty percent (60%) of the capital of which is owned by such citizens;
(d) Fifteen percent (15%) in the case of professional basketball games as envisioned in Presidential Decree No. 871: Provided,

however, That the tax herein shall be in lieu of all other percentage taxes of whatever nature and description; and
(e) Thirty percent (30%) in the case of Jai-Alai and racetracks of their gross receipts, irrespective, of whether or not any amount is

charged for admission.

For the purpose of the amusement tax, the term "gross receipts" embraces all the receipts of the proprietor, lessee or operator of the
amusement place. Said gross receipts also include income from television, radio and motion picture rights, if any. A person or
entity or association conducting any activity subject to the tax herein imposed shall be similarly liable for said tax with respect to

such portion of the receipts derived by him or it.

The taxes imposed herein shall be payable at the end of each quarter and it shall be the duty of the proprietor, lessee or operator
concerned, as well as any party liable, within twenty (20) days after the end of each quarter, to make a true and complete return of
the amount of the gross receipts derived during the preceding quarter and pay the tax due thereon.
Tax base: gross receipts
o Embraces all the receipts of the proprietor, lessee or operator of the amusement place.
o It also includes income from TV, radio and motion picture rights, if any.

Amusement Place Tax

Place for boxing exhibition 10%
Place for professional basketball games (which shall be in lieu of all percentage 15%
taxes of whatever name and description)
Cockpits, cabarets, night or day clubs 18%
Jai-alai and race tracks 30%
Boxing exhibitions where World or Oriental Championships in any division is at stake shall be exempt
from amusement tax if:
o One of the contenders is a Pinoy citizen, and
o Said exhibitions are promoted by citizens of the Philippines or by a corp or association at
least 60% of the capital of which is owned by such citizens.

Tax on Winnings
SEC. 126. Tax on Winnings. - Every person who wins in horse races shall pay a tax equivalent to ten percent (10%) of his winnings or
'dividends', the tax to be based on the actual amount paid to him for every winning ticket after deducting the cost of the ticket:
Provided, That in the case of winnings from double, forecast/quinella and trifecta bets, the tax shall be four percent (4%). In the case

of owners of winning race horses, the tax shall be ten percent (10%) of the prizes.
The tax herein prescribed shall be deducted from the 'dividends' corresponding to each winning ticket or the "prize" of each winning
race horse owner and withheld by the operator, manager or person in charge of the horse races before paying the dividends or

prizes to the persons entitled thereto.

The operator, manager or person in charge of horse races shall, within twenty (20) days from the date the tax was deducted and
withheld in accordance with the second paragraph hereof, file a true and correct return with the Commissioner in the manner or
form to be prescribed by the Secretary of Finance, and pay within the same period the total amount of tax so deducted and
withheld.
Tax base:
o If a person wins in horse races and jai-alai, based on his winnings or dividends (tax to be
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based on the actual amount paid to him for every winning ticket, after deducting the cost of
the ticket),
o If a person owns a winning race horse, based on the price.
The tax shall be withheld from the dividends or prize by the operator, manager or person in charge of
the horse races or jai-alai.

Tax on Winnings Tax

In horse races or jai-alai 10%
But if from: double, forecast, quinella and trifecta bets 4%
Owner of winning horse 10%

Tax on Stock Transactions (Stock Transaction Tax)

SEC. 127. Tax on Sale, Barter or Exchange of Shares of Stock Listed and Traded Through the Local Stock Exchange or Through

Initial Public Offering. -

(A) Tax on Sale, Barter or Exchange of Shares of Stock Listed and Traded Through the Local Stock Exchange. - There shall be
levied, assessed and collected on every sale, barter, exchange, or other disposition of shares of stock listed and traded through the
local stock exchange other than the sale by a dealer in securities, a tax at the rate of one-half of one percent (1/2 of 1%) of the
gross selling price or gross value in money of the shares of stock sold, bartered, exchanged or otherwise disposed which shall be

paid by the seller or transferor.

(B) Tax on Shares of Stock Sold or Exchanged Through Initial Public Offering. - There shall be levied, assessed and collected on
every sale, barter, exchange or other disposition through initial public offering of shares of stock in closely held corporations, as
defined herein, a tax at the rates provided hereunder based on the gross selling price or gross value in money of the shares of stock
sold, bartered, exchanged or otherwise disposed in accordance with the proportion of shares of stock sold, bartered, exchanged or

otherwise disposed to the total outstanding shares of stock after the listing in the local stock exchange:

Up to twenty-five percent (25%) 4%

Over twenty-five percent (25%) but not over thirty-three

and one third percent (33 1/3%) 2%

Over thirty-three and one third percent (33 1/3%) 1%

The tax herein imposed shall be paid by the issuing corporation in primary offering or by the seller in secondary offering.
For purposes of this Section, the term "closely held corporation" means any corporation at least fifty percent (50%) in value of
outstanding capital stock or at least fifty percent (505) of the total combined voting power of all classes of stock entitled to vote is

owned directly or indirectly by or for not more than twenty (20) individuals.
For purposes of determining whether the corporation is a closely held corporation, insofar as such determination is based on stock

ownership, the following rules shall be applied:

(1) Stock Not Owned by Individuals. - Stock owned directly or indirectly by or for a corporation, partnership, estate or trust shall be

considered as being owned proportionately by its shareholders, partners or beneficiaries.

(2) Family and Partnership Ownerships. - An individual shall be considered as owning the stock owned, directly or indirectly, by or
for his family, or by or for his partner. For purposes of the paragraph, the 'family of an individual' includes only his brothers and

sisters (whether by whole or half-blood), spouse, ancestors and lineal descendants.

(3) Option. - If any person has an option acquire stock, such stock shall be considered as owned by such person. For purposes of
this paragraph, an option to acquire such an option and each one of a series of options shall be considered as an option to acquire

such stock.
(4) Constructive Ownership as Actual Ownership. - Stock constructively owned by reason of the application of paragraph (1) or (3)
hereof shall, for purposes of applying paragraph (1) or (2), be treated as actually owned by such person; but stock constructively
owned by the individual by reason of the application of paragraph (2) hereof shall not be treated as owned by him for purposes of

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again applying such paragraph in order to make another the constructive owner of such stock.

(C) Return on Capital Gains Realized from Sale of Shares of Stocks. -

(1) Return on Capital Gains Realized from Sale of Shares of Stock Listed and Traded in the Local Stock Exchange. - It shall be the
duty of every stock broker who effected the sale subject to the tax imposed herein to collect the tax and remit the same to the
Bureau of Internal Revenue within five (5) banking days from the date of collection thereof and to submit on Mondays of each week
to the secretary of the stock exchange, of which he is a member, a true and complete return which shall contain a declaration of all
the transactions effected through him during the preceding week and of taxes collected by him and turned over to the Bureau Of

Internal Revenue.
(2) Return on Public Offerings of Share Stock. - In case of primary offering, the corporate issuer shall file the return and pay the
corresponding tax within thirty (30) days from the date of listing of the shares of stock in the local stock exchange. In the case of
secondary offering, the provision of Subsection (C)(1) of this Section shall apply as to the time and manner of the payment of the

tax.
(D) Common Provisions. - Any gain derived from the sale, barter, exchange or other disposition of shares of stock under this
Section shall be exempt from the tax imposed in Sections 24(C), 27(D)(2), 28(A)(8)(c), and 28(B)(5)(c) of this Code and from the
regular individual or corporate income tax. Tax paid under this Section shall not be deductible for income tax purposes.
On the sale, barter, exchange or other disposition of shares listed and traded thru a local stock
exchange, other than by a dealer in securities
o Tax base: gross selling price or gross value in money of the shares sold, bartered, exchanged
or otherwise disposed of,
o Tax rate: of 1%
o Paid by: the seller
On the sale, barter, exchange or other disposition thru initial public offering of shares of stock in a
closely held corporation, in accordance with the proportion of the shares sold, bartered, exchanged
or otherwise disposed of to the total outstanding shares of stock after the listing in the local stock
exchange
o Up to 25% 4%
o 25% - 33.33% 2%
o over 33.33% 1%
o Paid by: the issuing corporation in primary offering, and the seller in the secondary offering
For purposes of tax on initial public offerings, the term closely-held corporation means any
corporation at least 50% in value of the outstanding capital stock or at least 50% of the total
combined voting power of all classes of stock entitled to vote, is owned directly or indirectly by or for
not more than 20 individuals.

Return and payment of percentage taxes

SEC. 128. Returns and Payment of Percentage Taxes. -

(A) Returns of Gross Sales, Receipts or Earnings and Payment of Tax. -

(1) Persons Liable to Pay Percentage Taxes. - Every person subject to the percentage taxes imposed under this Title shall file a
quarterly return of the amount of his gross sales, receipts or earnings and pay the tax due thereon within twenty-five (25) days after
the end of each taxable quarter: Provided, That in the case of a person whose VAT registration is cancelled and who becomes liable
to the tax imposed in Section 116 of this Code, the tax shall accrue from the date of cancellation and shall be paid in accordance

with the provisions of this Section.

(2) Person Retiring from Business. - Any person retiring from a business subject to percentage tax shall notify the nearest internal

revenue officer, file his return and pay the tax due thereon within twenty (20) days after closing his business.

(3) Exceptions. - The Commissioner may, by rules and regulations, prescribe:

(a) The time for filing the return at intervals other than the time prescribed in the preceding paragraphs for a particular class or
classes of taxpayers after considering such factors as volume of sales, financial condition, adequate measures of security, and

such other relevant information required to be submitted under the pertinent provisions of this Code; and

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(b) The manner and time of payment of percentage taxes other than as hereinabove prescribed, including a scheme of tax

prepayment.
(4) Determination of Correct Sales or Receipts. - When it is found that a person has failed to issue receipts or invoices, or when no
return is filed, or when there is reason to believe that the books of accounts or other records do not correctly reflect the
declarations made or to be made in a return required to be filed under the provisions of this Code, the Commissioner, after taking
into account the sales, receipts or other taxable base of other persons engaged in similar businesses under similar situations or
circumstances, or after considering other relevant information may prescribe a minimum amount of such gross receipts, sales and
taxable base and such amount so prescribed shall be prima facie correct for purposes of determining the internal revenue tax

liabilities of such person.

(B) Where to File. - Except as the Commissioner otherwise permits, every person liable to the percentage tax under this Title may, at
his option, file a separate return for each branch or place of business, or a consolidated return for all branches or places of
business with the authorized agent bank, Revenue District Officer, Collection Agent or duly authorized Treasurer of the city or

municipality where said business or principal place of business is located, as the case may be.
The taxpayer may file a separate return for each branch or place of business, or a consolidated
return for all.
General rule: every person liable to pay a percentage tax shall file a monthly return of the amount of
his gross receipts and pay the tax thereon, within 20 days after the end of each taxable month.
Except:
1. 3% tax within 20 days after the end of the month, except when the tax was a final tax through
the withholding tax system
2. Overseas communications tax within 20 days after the end of the quarter
3. Amusement tax within 20 days after the end of the quarter
4. Tax on winnings remitted to the BIR within 20 days from the date withheld
5. Stock transaction tax of of 1% remitted to the BIR within 5 banking days from the date
withheld by the broker
6. Stock transaction tax of 4%, 2% and 1% on primary offering, within 30 days from the date of
listing in the local stock exchange

Summary of the percentage taxes

The tax Tax Base Rate
3% percentage tax Gross sales/ gross receipts 3%
Domestic common carriers tax Gross receipts 3%
(land, for passengers),
international common carriers
tax
Franchise tax on: Gross receipts
Gas and water facilities 2%
Radio and/or broadcasting 3%
companies whose gross receipts
in the preceding year did not
exceed P10m
Overseas communications tax Amount paid 10%
Tax on banks and non-bank Gross receipts from 1% and 5%
financial intermediaries lending/financial leasing
performing quasi-judicial
functions
Gross receipts from other gross 7%
income items

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Dividends 0%
Tax on other non-bank financial Gross receipts from 1% and 5%
intermediaries lending/financial leasing

Gross receipts from other gross 5%

income items
Tax on life insurance companies Premiums collected 5%
(premium tax)
Tax on agents of foreign Premiums collected 10%
insurance companies
Amusement taxes on:
Boxing exhibitions 10%
Pro basketball games Gross receipts 15%
Cockpits, cabarets and night 18%
clubs
Jai-alai and race tracks 30%
Tax on winnings:
Of persons in horse races or 10%
jail-alai
But if from double, forecast, Winnings 4%
quinella and trifecta bets
Owners of winning horses 10%
Stock transaction tax (secondary Selling price of 1%
offering

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