INCOME TAX Bar Answers: (2007-2103)

Mere increase in the value of property without actual realization is not taxable.
Increase in the value of an asset is not income as it has not yet been exchanged
or transferred for something else.

Tax liability for income tax attaches only if there is a gain realized resulting
from a closed and complete transaction

Charitable institution engaging in activities conducted for profit does not lose its
tax exempt status for its not-for-profit activities. The only consequence is that
the income of whatever kind and character of charitable institution from any of
its activities conducted for profit, regardless of the disposition made of such
income shall be subject to tax.
The immediacy test is applied to determine whether the accumulation of
after tax profits by a domestic or resident foreign corporation is really for the
reasonable needs of the business. Under this test, the reasonable needs of the
business are construed to mean the immediate needs of the business,
including reasonably anticipated needs. To determine whether profits are
accumulated for the reasonable needs of the business, the controlling
intention of the tax payer is that which is manifested at the time of
accumulation, not the subsequently declared intentions, as it is merely a
product of afterthought.
Final Adjustment Return (of Corporation). While the law gives the taxpayer an
option to whether carry-over or claim as refund the excess tax credits shown
on its final adjustment return, once the option to carry-over has been made,
such option shall be considered irrevocable for that taxable period and no
application for cash refund or issuance of a tax credit certificate shall be
allowed. (Sec. 76)
Final Adjustment Return (of Corporation). Unutilized excess income tax
payments may now be carried over to the succeeding taxable years until fully
utilized. In addition, the option to carry-over excess income tax payments is
now irrevocable. Hence, unutilized excess income tax payments may no longer
be refunded.

By express provision of law, Joint Ventures formed for the purpose of undertaking
construction projects are not considered as a corporation for income tax
purposes. Thus, the joint venture entered into by two corporations will not
create a separate taxable entity.
The allocation and distribution of the saleable lots between two companies in
a JOINT VENTURE is a mere return of their capital contribution. Not yet
taxable, as there is no realized income yet.

DONORs TAX

The cost basis (for determining gain or loss from sale or disposition of property )
for those acquired by purchase is the actual cost.

The old car is a capital asset. It is property held by the taxpayer (whether or
not connected with his trade or business), but is not stock in trade of the
taxpayer or other property of a kind which would properly be included in the
inventory of the taxpayer if on hand at the close of the taxable year, or
property held by the taxpayer primarily for sale to customers in the ordinary
course of his trade or business, or property used in the trade or business, of a
character which is subject to the allowance for depreciation; or real property
used in trade or business of the taxpayer (Section 39, NIRC).
The old car is a capital asset. It is property held by the taxpayer (whether or
not connected with his trade or business), but is not stock in trade of the
taxpayer or other property of a kind which would properly be included in the
inventory of the taxpayer if on hand at the close of the taxable year, or
property held by the taxpayer primarily for sale to customers in the ordinary
course of his trade or business, or property used in the trade or business, of a
character which is subject to the allowance for depreciation; or real property
used in trade or business of the taxpayer (Section 39, NIRC).

If parents gave donation to their child on account of marriage, divide the whole
donated amount by 2 , then less 10K, then less 100K to get the TAXABLE gift of
each parent. (Yes, because the value of the gift exceeds P10,000 (Sec. 101
[A1] NIRC). However, they are each entitled to a deduction of P100,000 for the
net value of the gift (Sec.99[B] NIRC). Each spouse shall be liable for a taxable
gift worth P890,000 each at the progressive rate of 2-15%, since the donee is a
relative).
a non-resident alien, is not allowed any dowry exclusion. The dowry applies
only to a donor who is either a citizen or resident of the Philippines (Sec
101(A)(1), NIRC).
Gifts in favor of an educational and/or charitable, religious, social welfare
corporation, or cultural institution, accredited non-government organization,
trust or philanthropic organization or research institution or organization are
exempt from the donors tax, provided, that, not more than 30% of the gifts
are used for administration purposes. The donation being in the nature of a
real property complies with the utilization requirement. (Section 101 (A)(3).
NIRC).

Donors Tax: Reciprocity Rule (2009) (XV) Miguel, a citizen and resident of Mexico,
donated US$1,000.00 worth of stocks in Barack Motors Corporation, a Mexican company, to
his legitimate son, Miguelito, who is residing in the Philippines and about to be married to a

Filipino girlfriend. Mexico does not impose any transfer tax of whatever nature on all gratuitous
transfers of property.
(b) Is Miguel entitled to the rule of reciprocity in order to be exempt from the Philippine donor's
tax? Why or why not? (3%)

SUGGESTED ANSWER: No. The donation is not subject to the Philippine donors
tax because the donor is non-resident alien and the property donated is a
property not situated in the Philippines. The rule of reciprocity applies only if
the property transferred by a non-resident alien is an intangible personal
property situated in the Philippines. This is designed to reciprocate the
exemption from donors tax granted by a foreign country to Filipinos who are
not residing thereat. (Sec 104, NIRC).
If the renunciation is a general renunciation such that the share of the heir
who waives his right to the inheritance goes to the other co-heirs in
accordance with their respective interest in the inheritance, the law on
accretion applies and the property waived is considered to pass through the
other co-heirs by inheritance; hence, it has no tax implication. Undoubtedly,
when the compulsory heir renounced his share in the inheritance, he did not
donate the property which did not become his. Such being the case, the
renunciation is not subject to the donors tax. If it is not a general
renunciation in favor of the other co-heirs, the heir renouncing his right is
considered to have made a donation and the renunciation is subject to donors
tax. In both cases, however, the renunciation has no tax implication to the
other co-heirs (BIR Ruling No. DA (DT-039) 396-09, dated July 23, 2009).

Donors Tax: Renunciation of Shares (2013) (IX) In the settlement of the estate of Mr.
Barbera who died intestate, his wife renounced her inheritance and her share of the conjugal
property in favor of their children. The BIR determined that there was a taxable gift and thus
assessed Mrs. Barbera as a donor. Was the BIR correct? (7%) SUGGESTED ANSWER:
The BIR is correct that there was taxable gift only insofar as the renunciation of the share
of the wife in the conjugal property is concerned. This is a transfer if property without
consideration which takes effect during the lifetime of the transferor/wife and this
qualifies as a taxable gift. (RR Mo. 2-2003). But the renunciation of the wifes share it the
inheritance during the settlement of the estate is not a taxable gift considering that the
property is automatically transferred to the other heirs by operation of law due to her
repudiation of her inheritance. (BIR Ruling DA No. 333-07)
The first transaction where a lot was sold to a brother-in-law for a price below its fair
market value will not be subject to donors tax if the lot qualifies as a capital asset. The
transfer for less than adequate and full consideration, which gives rise to deemed gift,
does not apply to sale of property subject to capital gains tax. However, if the lot sold is
an ordinary asset, the excess of the fair market value over the consideration received
shall be considered as a gift subject to the donors tax.
The sale of share of stock below the fair market value thereof is subject to the donors
tax pursuant to the provisions of section 100 of the Tax Code. The excess of the fair
market value over the selling price is a deemed gift.
Contributions to candidates or political parties duly reported to the BIR are not subject to
any donors tax.

Contributions in cash or in kind to any candidate or political party or coalition of parties

for campaign purposes, duly reported to the Commission on Elections shall not be
subject to the payment of any gift tax.
Conditions in order that all grants, donations and contributions to non-stock, non-profit
PRIVATE EDUCATIONAL INSTITUTIONS may be EXEMPT from the DONORs TAX:
o Not more than 30% of said gifts be used by such done for administration purposes
o The educational institution is incorporated as a non-stock entity
o Paying no dividends
o Governed by trustees who receive no compensation, and
o Devoting all its income to the accomplishment and promotion of the purposed
enumerated in its Article of Incorporation.
Gift splitting: splitting the donation into two, given on two different years will relieve the
donor from the donors tax because the first 100K donation in the graduated bracket is
exempt. While the donors tax is computed on the commulative donations, the
aggregation of all donations made by a donor is allowed only over one calendar year.
Condonation of the unpaid balance of the obligation has the effect of a donation. The
amount of the debt cancelled is a gift from the creditor to the debtor. For the balance of
the debt that was condoned, the creditor shall be subject to the Donors tax at the
applicable rates provided for under the National Internal Revenue Code.
Cost basis: if the property was acquired by gift, the basis for determining gain shall be
the same as if it would be in the hands of the donor or the last preceding owner by whom
the property was not acquired by gift. Hence, the gain is computed by deducting the
basis (historical/original cost) from the amount realized ( selling price).

If the gift was received by inheritance, the gain is computed by the FMV as of
the date of acquisition.

VALUE ADDED TAX (VAT)

domestic corporations importing used vehicles that are stored, used or

traded within the Subic Naval Base Area enjoy an exemption from customs
duties and VAT, provided they are registered with the SBMA (R.A. 7096;
Executive Secretary v. Southwing Heavy Industries, G.R. No. 164171, 20
February 2006). domestic corporations importing used vehicles that are
stored, used or traded within the Subic Naval Base Area enjoy an exemption
from customs duties and VAT, provided they are registered with the SBMA
(R.A. 7096; Executive Secretary v. Southwing Heavy Industries, G.R. No.
164171, 20 February 2006).
Duties and taxes must be paid upon release of the vehicle from Customs
custody. Custom duties for motor vehicles are based on the value being used
by the Bureau for assessing customs duties. VAT is also based on the value
being used by the Bureau for motor vehicles (Sec. 107[A] NIRC). Duties must
be paid to the Bureau of Customs. VAT must be paid to the Bureau of Internal
Revenue.
I will advise Emiliano that he is not required to register as a VAT taxpayer. His
transactions of leasing residential units for an amount not exceeding

P10,000.00 per unit per month are exempt from VAT irrespective of the
aggregate amount of rentals received annually (Sec 109 (1)(Q), NIRC).
Under RR No. 16-2005, liability for VAT arises only if the annual gross receipts
exceed P1.5 million. Secondly, under Sec. 106(A1a) NIRC, the lease must be
pursuant to the ordinary course of trade or business of the taxpayer. The lease
of the ground floor to the bank is a casual transaction. The Association is liable
for the business tax of 3% of the gross receipt if the gross receipts of the
taxpayer do not exceed P1.5 million per annum (Sec. 116 NIRC).
The transaction is subject to VAT at the rate of zero percent (0%). ADB is
exempt from direct and indirect taxes under a special law, thereby making the
sale of services to it by a VAT-registered construction company, effectively
zero-rated (Sec 108 (B)(3), NIRC).
The transaction is subject to VAT at the rate of zero percent (0%). Zero-rated
sale of services includes services rendered to a person engaged in business
outside the Philippines and the consideration is paid in acceptable foreign
currency duly accounted for by the Bangko Sentral ng Pilipinas (Sec 108 (B)
(2), NIRC).
The sale of orchids is subject to VAT at 12%. This is a sale of agricultural nonfood product in its original state which is no longer one of the exempt
transactions (Sec 109, NIRC, as amended by RA 9337).
The real property sold, being in the nature of a capital asset, is not subject to
VAT. The sale is subject to VAT only if the real property sold is held primarily
for sale to customers or held for lease in the ordinary course of trade or
business. A real property classified as a capital asset does not include a real
property held for sale or for lease, hence, its sale is not subject to VAT (Sec 39
and 106, NIRC).
Yes, PCC is liable to the VAT as seller of services for a fee. However, the sale of
services to FC is subject to VAT at zero percent rate. Services rendered to a
person engaged in business conducted outside the Philippines or to nonresident person not engaged in business who is outside the Philippines when
the services are performed paid in foreign currency inwardly remitted through
the banking system are zero-rated sales of services (Section 108(B)(2), NIRC)
The payment to XYZ Law Offices by Gainsburg Corporation is subject to VAT
and income tax in the Philippines. For VAT purposes, the transaction is a zerorated sale of services where the output tax is zero percent and XYZ is entitled
to claim as refund or tax credit certificate the input taxes attributable to the
zero-rated sale. The services were rendered to a nonresident person, engaged
in business outside the Philippines, which services are paid for in foreign
currency inwardly remitted through the banking system, thereby making the
sale of services subject to tax at zero-rate. (Sec 108 (B)(2), NIRC)