BUSINESS TAXATION

BUSINESS TAXES
 Concept
- A consumption tax payable by resident persons engaged in business
- The sellers are the statutory taxpayers, while the buyers are the economic taxpayers (i.e.
ones who actually shoulder the tax burden)

 Nature
- Consumption tax: A tax on consumption, utilization, and purchase of goods, properties, etc.
- Indirect tax: The burden of tax can be shifted by the taxpayer to someone else
- Privilege tax: A tax on the privilege to do business

 Types
1. VAT on sales The following businesses pay this tax:
a.) VAT-registered taxpayer
b.) VAT-registrable taxpayers – those whose sales or receipts in any
12-month period exceed 1 919 500, and did not register as VAT taxpayer

2. Percentage The following business pay this tax:

tax a.) Those who are specifically subjected to this tax
b.) Non-VAT taxpayers: - those whose sales or receipts in any 12-
month period did not exceed 1 919 500

3. Excise tax This is a tax imposed, in addition to VAT or percentage tax.

NOTES:
 VAT and percentage tax are mutually exclusive. However, a VAT-registered taxpayer
may pay both when it engages in activities are specifically designated by law as
subject to percentage tax.
 When determining items to be included in the VAT threshold, the following must be
given considerations:
- Exempt sales are NOT included in the count
- For taxpayers with branches, the VAT threshold shall be based on the
aggregate sales of the head office and its branches, since branches are not the
taxable units, but the individual/corporation owning them.
- For taxpayers with subsidiaries, each corporation or each subsidiary is a
taxable unit. Thus, the sales are therefore not aggregated.
- For married taxpayers, the husband and the wife are separate taxable units.
- For lessors of residential units, the gross receipts from lease of residential
units are considered only if the monthly rent per unit exceeds 12,800.

BUSINESS
Essential requisites
Since business taxes apply only if the seller is engaged in business, it is important to know what
qualifies as a business. The following requisites must concur:
(1) Habitual engagement
 There must be regularity in transactions to construe the presence of business.
 The following are not businesses under this rule:
A. Lack regularity
a.) Sales by non-dealers
b.) Privilege stores or “tiangge”
Note: To be considered as such, the store should engage in a business activity
for a cumulative period of not more than 15 days.

B. Have regularity, but still not subject to business tax

a.) Businesses principally for subsistence or livelihood – these are business with gross
sales or receipts not exceeding 100 000 per year
b.) Marginal income earners – these are individuals not deriving compensation under
an employer-employee relationship, but who are self-employed deriving gross sales or
receipts not exceeding 100 000 in any 12-month rule

Note: Licensed professionals, consultant, artists, sales agents, brokers, and

those whose income is subject to withholding tax on wages are NOT marginal
income earners, even if their gross sales or receipts do not exceed the limit.

 Sales of non-residents are considered made in the course of business without regard as to
whether the sale is regular or isolated
 (2) Commercial activity
 This refers to the engagement in the sale of goods or services offered to the public aimed
at generating or earning profit. However, whether the business operation results to profit
or loss, business tax still applies. Examples would be agents, consultants, television or
movie talents and artists, cooking instructors and martial art instructors. Further, general
professional partnership is subject to business tax.

 Thus, the following, in the conduct of their functions, are not businesses under this rule:
a.) Government agencies and instrumentalities
b.) Non-profit organizations or associations
c.) Employment
d.) Directorship in a corporation

Note: Thus, activities that depart from the nature of the entity are still subject to business
taxes. This rule applies regardless of the disposition made of such income.

Registration
 Businesses subject to business tax shall:
a.) Register with the appropriate RDO using the appropriate BIR form
b.) Pay annual registration fee of P500, using BIR Form No. 605 for every separate or distinct
establishment where sales transactions occur
Note: The fee shall be paid before the start of such business and every year thereafter on
or before the 31st of January

 A certificate of registration shall be issued to the applicant by the concerned BIR office upon
compliance with the requirements for registration. The original copy of which, together with
the duly validated Registration Fee Return, shall be posted or exhibited at a conspicuous place
in his principal place of business and at each branch.

 A person who maintains a head or main office and offices in different places (i.e. branches) shall
pay registration fee per office. A person who owns different business shall pay the fee on a per
business basis.

BUSINESS TAX REPORTING

 The length of accounting period for business taxes is one quarter, which is synchronized with
the taxable year of the taxpayer for income tax purposes. For individuals, they shall always use
the calendar accounting period. For corporations, the reporting period may either be fiscal or
calendar

 VAT taxpayers are required to report their receipts or sales in two monthly VAT returns for the
first two months of the quarter and one quarterly VAT return on the third and last month of the
quarter. On the other hand, percentage taxpayers generally file 3 monthly percentage tax
returns for the three months of the quarter; thus, there is no need to file a consolidated quarterly
return on the third month. Few percentage taxpayers are required to file the quarterly tax return,
instead of the monthly one.

 The deadline of business tax returns are as follows:

VAT taxpayer Non-VAT taxpayer
Monthly tax return Within 20 days from the end Within 20 days from the end
of month of the month
Quarterly tax return Within 25 days from the end Within 20 days from the end
of the quarter of the quarter

Note: Any person who (a) retires from business with due notice or (b) whose registration has
been cancelled shall file a final quarterly tax return and pay the tax due thereon with 25 days
from the end of the month when the business ceases to operate or when the VAT registration
has been cancelled. If the results of the winding up of the affairs reveal taxable transactions,
such shall still be filed.
VALUE ADDED TAX

Output VAT xx
Less: Input VAT (xx)
VAT Payable xx
Less: Tax credits or tax payments (xx)
Tax still due and payable xx

Generally, who are liable to pay VAT?

a.) VAT-registered taxpayers
b.) VAT-registrable taxpayers
Notes:
- VAT-registrable taxpayers are those whose sales or gross receipts in any 12-month
period exceeded 1 919 500. Taxpayer must register as VAT business within 10 days after
the end of the last month when his sale/receipts exceeds the threshold.
- The phrase “in any 12-month period” means that regardless of the accounting period of
the taxpayer, as long as the sales in 12 consecutive months exceed the threshold, the
entity becomes a VAT-registrable taxpayer
- The threshold refers only to VAT-able sales. In other words, exempt sales are not taken
into account when determining whether the entity exceeded the threshold or not

Part 1. Exempt Sales

Caveat: The following are exempt from all business taxes. TAKE NOTE that all sales or services made
are not subject to business tax if not done in the ordinary course of business. The term taxable, as
used below, shall mean that they are subject to VAT or percentage tax, whichever is applicable.

Exempt goods and properties

1.) Agricultural and marine food products in their original state
- E.G. Cacao, copra, malt, ordinary salt, eggs, milk, corn grits and raw sugar (muscovado)
- Non-food items are therefore not exempt, e.g. cotton and cotton seeds, shells used as
ornaments, orchids, sheep wool, butterfly fishes, etc.
- Food items, but are not agricultural or marine, are thus not exempt, e.g. cocoa
- To be exempt, they must be in their original state. The following processes still make the
product in its original state and unprocessed:
a.) Preparation (GRBBSH): Grinding, roasting, boiling, broiling, stripping and husking
b.) Preservation (SSDF): Salting, smoking, drying and freezing
c.) Packaging (TVS): Tetra-packing, vacuum packing, and shrink wrapping in plastics

Note: THUS, the following processed food products are taxable: marinated foods,
refined/table sugar, wine, vinegar, butter, canned goods, vegetable/coconut oil, and soy.
Note that conversion of fresh eggs into salted eggs is also taxable.

2.) Livestock and poultry for human consumption, and breeding stock and genetic material
therefore, e.g. bulls, sheep, goats, rabbit, fowls, clams, mussels, oysters, eels

3.) Farm or fishery inputs

a.) For plants or fruit cultivation: Fertilizers, seeds and seedlings
- Raw mats used in formulation of fertilizers, e.g. diatomaceous earth, are not exempt
b.) For animal husbandry: Livestock, feeds and ingredients for livestock and poultry feeds
- For feeds and ingredients to be exempt, they must NOT be used for the production or
processing of food for human consumption.
c.) For fishery operations: Fingerlings, fish and prawn
Note: Pesticides, herbicides, farm/fishery equipment and specialty feeds are not exempt.

4.) Books, newspapers, magazine, review or bulletins

The following are the requisites for the education-related items to be exempt (RFN):
- Appear at regular intervals
- With fixed prices for subscriptions
- Not devoted principally to the publication of paid advertisements
Note: The exemption does not cover school supplies, chalks, markers, notebooks, etc.

5.) Residential real properties, under certain conditions

- If the sale is by a non-dealer, i.e. not engaged in business, the sale is exempt.
- ONLY the following sales by a realty dealer, developer or lessor are exempt.
a.) Residential dwelling (i.e. house and lot) – price is 3 199 200 and below
b.) Residential lot – price is 1 919 500 and below
c.) Real properties for socialized housing unit
- House and lot package: price is 450 000 and below
- Residential lot only: price is 180 000 and below
d.) Real properties for low-cost housing – price is 750 000 and below
 Note: The sale of adjacent lots to the same buyer shall be aggregated for purposes of knowing
if the price exceeded the threshold. The aggregation rule does not apply, however, to sale of
parking lots. Sale of parking lot is taxable. Thus, the price of the parking lot is not lumped with
the price of the real properties to determine if the sale exceeded the ceiling.

6.) Sale of passenger or cargo vessels and aircraft, including engine, equipment and spare parts
for domestic or international transport operation. To be exempt, the following are the conditions:
a.) Passenger or cargo vessels – Age is within 15 years from date of commissioning when
these are sold, and weight is 150 tons and above
b.) Tankers – 10 years from date of commissioning
c.) High speed passenger craft – 5 years from date of commissioning

Exempt services
1.) Services by agricultural contract growers and millings in producing for others poultry, livestock
or other agricultural and marine food products in their original state (e.g. palay into rice, corn into
grits and sugar cane into raw sugar)
- Only the receipts from services for human consumption are exempt.

2.) Educational services

To be exempt, these must be rendered by:
a.) Private institutions duly accredited by DepEd, CHED and/or TESDA
b.) Government educational institutions
Note: Seminars, in-service trainings and review classes are taxable.

3.) Health or hospital services

Gen rule: Medical, dental, hospital, laboratory and veterinary services are VAT-exempt
Exception: When these services are rendered by professionals

Note: These services are exempt whether rendered by a private, non-profit, or government
HOSPITAL. Furthermore, remember that the sale of drugs shall be taxable.

4.) Employment
- Services performed by individuals in pursuant to an employer-employee relationship are
exempt, because the provision of services is not a business.
- The following are not employees, and thus taxable: professional practitioners, consultants,
talents, TV artist, brokers and agents. Their compensation income, however, are exempt.
- Directors’ fees are also exempt from business taxes.

5.) Lease of residential units

Exemption applies if the price PER UNIT does not exceed 12 800
Notes:
- Unit shall mean: Per apartment, per house, per person in the case of dormitories,
boarding houses and bed spaces, and per room in case of rooms for rent
- The lease service is exempt, even if the total annual sales for ALL units exceed
1 919 500, so long as the per unit price is 12 000 and below

6.) Lease of passenger or cargo vessels and aircraft, including engine, equipment and spare parts
for domestic or international transport operation, subject to the conditions above

Exempt persons
1.) Regional or area headquarter (RAHQ) is exempt for their services. Regional operating
headquarter (ROHQ) is taxable.

2.) CDA-registered cooperatives

The following are the rules on receipts of cooperatives:
- Receipt from member in related activities: Exempt
- Receipt from member or non-member in unrelated activities: Taxable
- If the cooperatives transact business to both members and non-members, receipt from
non-member in related activities are exempt, ONLY when the accumulated reserves do not
exceed 10M

3.) International carriers, air or shipping, are exempt from business taxes only in their:
a.) OUTGOING transport of passengers
b.) INCOMING transport, whether passengers, baggage, cargoes or mails

Note: Their outgoing transport services of baggage, cargoes or mails are subject specifically to
the 3% common carrier’s tax. International carriers here refer to foreign corporations.
Domestic corporations with international operations are subject to other rules.

4.) Non-VAT persons – only exempt for their export sales. Remember that export sales by VAT
taxpayers are subject to zero-rating, and are not technically exempt.
Part 2. 12% Output VAT

VAT on Goods, Properties and Services

(1) Composition of “goods and properties”
- All tangible and intangible objects which are capable of pecuniary estimation
- Real properties held primarily for sale to customers or held for lease
- Right or privilege to use patent, copyright, plan, secret formula or process, trade mark, etc.
- Right or privilege to use any industrial, commercial, or scientific equipment in PH
- Right or privilege to use motion picture films, tapes and discs
- Radio, television satellite transmission and cable television time

(2) Taxable base

a.) For goods: gross selling price
- This includes purchase price, charges for packing, delivery and insurance, and excise tax
- However, if the sale of the goods is made at an unreasonably lower price, i.e. ratio of
selling price to fair value is LESS THAN 70%, then the taxable base shall be the fair value.
Stated otherwise, if discount is more than 30%, then fair value shall be the basis.
- Sales returns and allowances are deducted to get the gross selling price.
- For business tax purposes, sales discounts granted due to prompt payment (cash
discounts) and/or due to meeting quotas (quantity discounts) are not deductible.

b.) For properties: selling price or zonal value or assessed value, whichever is higher
- Actually, the higher of zonal value and assessed value is the fair value of the property. If
the fair value is higher than the selling price, it is deemed to be EXCLUSIVE of vat.
However, if the selling price is higher, it is deemed to be INCLUSIVE of vat.
- Any appraisal value is ignored

c.) For services: gross receipts

Note: The SALES is subject to the 12% output vat, regardless of the amount paid. Sales of
scrap materials, obsolete inventories and fully depreciated fixed assets are subject to VAT.

(3) Deemed sales transactions

Gen rule: Tax base is the market value on the date of transaction. The VAT on deemed sales
applies only to “VAT-able ordinary assets.” Thus, capital assets, like investments, receivables,
and residences, and VAT-exempt items, like rice, are not subject to VAT on deemed sales.

a.) Consumption of inventory

- This is a transfer, use, or consumption not in the ordinary course of business (e.g. for
personal use) originally intended for sale or for use in the course of business
- To be considered deemed sold, there must be a transfer of ownership over the property.
- Irrevocable transfer or irrevocable designation of beneficiary of properties intended for
the ordinary course of trade is a completed gift, and thus, is considered deemed sales

b.) Distribution to shareholders or creditors

- Acquisition by shareholders of properties declared as property dividends, and by
creditors as payment of their credits under a dacion en pago payment is a deemed sale
- For dacion en pago, i.e. distribution to creditors, the taxable base shall be the actual
amount of liability settled because this represents the value received in the transaction

c.) Consigned goods not sold within 60 days

- If the entity is the consignor, its sales reported by consignees is an actual sale, while
consigned goods not yet sold within 60 days is a deemed sale. Both are subject to VAT.
- If the entity is the consignee, its sales in behalf of consignees is not subject to output
vat; HOWEVER, its commission income on goods sold for consignors is subject to VAT.

d.) Retirement or cessation of business

- Transfer of ordinary assets to the new owners of the business, or to the original owner
as part of the distribution due to the liquidation are considered deemed sales.
- The following fall under this category: Incorporation of a sole proprietorship, sale by a
sole proprietorship of his entire business, and dissolution of partnership
- The tax base in this category shall be whichever is lower between the acquisition cost
and the current market price of the goods or properties.

e.) Change or cessation of status as a VAT-registered person (Vat-registered to Vat-exempt)

The following transactions however are NOT considered deemed sales:

- Change of control of a corporation by the acquisition of the controlling interest of such
corporation by another stockholder or group of stockholder
- Change in the trade or corporate name in the business
- Mergers or consolidation of corporations. In this case, the unused input tax of the
dissolved corporation shall be absorbed by the surviving corporation
 - Giving of goods for free (e.g. samples) in the course of business

(4) Rules on sale of properties

Casual sale (capital asset)
Regular sales (ordinary assets):
a.) Commercial property
b.) Residential lot
c.) Residential house & lot
No business tax, subject to 6% CGT
Subject to VAT, regardless of amount
Subject to VAT, if selling price exceeds 1 919 500
Subject to VAT, if selling price exceeds 3 199 200

Note: Even if the real property is not primarily held for sale or lease to (person is not a
realtor), but the same is used in trade or business of seller, the sale thereof is VAT-able.

Gen rule: Output VAT on sale of real properties shall be reported in full in the month of sale
Exception: Output VAT may be reported in installment upon receipt of monthly payment, ONLY
IF: the sale is made on an installment plan
- Sale is made on an installment plan, if the initial payment (downpayment and other
monthly payments) in the year of sale does not exceed 25% of the selling price
- Interest and penalties received by the seller are added to the taxable base
- Sale on a deferred payment basis is not a sale made on an installment plan. This is
treated as a cash sale, and is subject to full output VAT in the month of sale.

Part 3. 0% Output VAT

Basic Concept
- Yields no output VAT, but the related input VAT is creditable against output VAT for the period or
claimable through refund or tax credit
- Zero-rating is available only for VAT taxpayers. For non-VAT taxpayer, the transaction is exempt
- If the requirements are not met, the sales become VAT-exempt, and thus, the benefits of zero-
rating can no longer be enjoyed by the taxpayer.

Zero-rated sales of goods and properties

(1) Direct export sales
- To avail of zero-rating, the sale must have been paid for in acceptable foreign currency or its
equivalent in good or services, and must be accounted for under the rules of the BSP.
- The sales of VAT-exempt items enumerated above to non-resident are zero-rated. But
remember that sales of VAT-exempt items to residents are exempt, not zero-rated.

(2) Foreign currency denominated sale (indirect export)

This is a sale to non-residents of goods, except automobiles and non-essential commodities,
assembled or manufactured in the PH, for the purpose of delivering it to a resident, paid for in
acceptable foreign currency. This includes sale of raw materials and packaging materials.

(3) Sales to residents considered export sales under Omnibus Investment Act and other laws
a.) Sale of raw materials or packaging materials to an export-oriented enterprise
b.) Sale of gold to the BSP
c.) Sale by a registered export producer to another export producer
d.) Sale by a registered export producer to an export trader
e.) Constructive export sales
- Sales to bonded manufacturing warehouses of export-oriented enterprises
- Sales to Philippine Ecozones
- Sales to enterprises duly accredited with Subic Bay Metropolitan Authority
- Sales to registered export traders operating bonded manufacturing warehouses
- Sales to diplomatic missions and other agencies
- Sales to a BOI-registered manufacturer or producer
f.) Sales of goods, supplies, equipment and fuel to persons engaged in international shipping
or air transport operations

(4) Sales to tax-exempt persons under special laws or international agreements

Exempt entities: SBMA, PEZA, Red Cross, PAGCOR, ADB, IRRI, WHO, UNICEF, embassies, etc.

Notes:
- Items (1), (2) and sales to Eco-zone registered enterprises are subject to automatic zero-
rating treatment. All others shall require prior application with the appropriate BIR office for
“effective zero-rating.” Otherwise, the sale becomes exempt, and loses benefits of zero-rating.
- For purposes of zero-rating, the export sales of registered export traders shall include
commission income
- The exportation of goods on consignment shall not be considered export until the export
products consigned abroad are in fact sold by consignee. No deemed sales!
- Export-oriented enterprise is an enterprise whose export sales exceed 70% of the total
annual production of the preceding taxable year
- Foreign embassies, in order for sales to them to be zero-rated, must have a VAT Exemption
Identification Card (VEIC)
Zero-rated sales of services
(1) Sale of services to non-residents
- This includes:
a.) Processing, manufacturing, or repacking goods for other persons doing business
outside the Philippines, which goods are subsequently exported
b.) Any other services rendered to a person engaged in business conducted outside the
Philippines or to a non-resident person not-engaged in business who is outside the
Philippines when the services are performed

Note: To be zero-rated, the services must be performed in the Philippines, and must be
paid for in acceptable foreign currency or its equivalent in goods or services.

(2) Outgoing transport of passengers and cargoes by domestic air or sea carriers
- Domestic air or sea carriers here refer to domestic carriers with international operations.
- Outgoing flights are zero-rated, while incoming flights are exempt.
- Their domestic flights, however, are subject to regular VAT.

(3) Sale of power or fuel generated through renewable sources of energy

- Thus, the sale generated from biomass, solar, wind, hydropower, geothermal and steam,
ocean energy and other emerging sources using technologies such as fuel cells and hydrogen
fuels are zero-rated.
- Accordingly, sale of power or fuel from coal-powered plants and natural gas-powered plants
are subject to 12% VAT.
- The exemption refers to sale of “power or fuel”; thus, services related to the maintenance or
operation plants generating said power or fuel are subject to 12% VAT

Note: The three items above are automatically subject to zero-rating. Thus, they need not file an
application to the BIR to subject their sales to zero-rating.

(4) Effectively zero-rated sales of services

- These refer to local sale of services to a person or entity who was granted indirect tax
exemption thru special laws or international agreements. Thus, a prior application from the
BIR is necessary for the sale to be zero-rated.
- These shall include:
a.) Services rendered to tax-exempt persons under special laws or int’l agreements
Exempt entities: PEZA, Red Cross, PAGCOR, ADB, IRRI, WHO, UNICEF, embassies
b.) Services rendered to persons engaged in international shipping or air operations,
including lease of property for use thereof
c.) Services performed by subcontractor and or contractors in process, converting or
manufacturing goods for an export-oriented enterprise

Part 4. Input VAT

(1) TRANSITIONAL INPUT VAT

Shall be paid when a person becomes liable to VAT or elects to be a VAT-registered person. The
creditable amount shall be, whichever is higher of:
- 2% of the value of the VAT-able beginning inventory of goods, materials or supplies relating
the month where the person started to become liable for VAT
- Actual VAT paid thereon
Notes:
- The TIV does not apply to equipment and other capital goods.
- Goods exempt from VAT shall be excluded in the computation.
- The TIV shall be claimable in the month of registration as a VAT taxpayer. The actual payment
of the input VAT is immaterial to the claim of the transitional input VAT.

(2) REGULAR INPUT VAT

This 12% of the (a) importation or (b) domestic purchase of goods, services or properties
Source Timing of credit
1. Purchase of goods or properties In the month the goods or properties
are purchased
2. Purchase of services In the month the service is paid
3. Importation In the month the VAT is paid
4. Purchase of depreciable capital goods/properties
a.) Monthly aggregate cost, net of VAT is In the month the
1 000 000 or less capital goods is purchased

b.) Exceeds 1 000 000 Input VAT is deferred and amortized

monthly over, whichever is shorter of:
- Life of the asset in months
 - 60 months
Notes:
- If the depreciable property whose input VAT is deferred is sold prior to the exhaustion of the
amortizable input tax thereon, the entire unamortized goods sold/transferred can be claimed as
input tax on the month when the sale or transfer was made.
- The monthly aggregate cost shall only include depreciable asset for income tax purposes (i.e.
those whose depreciation is deductible from gross income). The following rules apply on the
deductibility of depreciation expense on vehicles:
a.) Only one vehicle for land transport is allowed for the use of an official or employee,
the value of which should not exceed 2 400 000
b.) Yachts, helicopters, airplane and or aircrafts are not depreciated, unless the
taxpayer’s main line of business is transport operations or lease of transport equipment
and the vehicles are used in said operations
c.) The purchase must be substantiated with sufficient evidence.
d.) The direct connection or relation of the vehicles to the development, operation or
conduct of the trade or business or profession must be substantiated.

On construction in progress
- CIP is considered as a purchase of service, the value of which shall be determined based on
the progress billings. This is claimed by the contractee.
- Once the input tax has already been claimed while the construction is still in progress, no
additional input tax can be claimed upon completion of the asset

On real properties purchased in installments

General rule: Claimable at the time of the execution of the instrument of sale, subject to the
amortization rule on depreciable assets
Exception: If the seller is allowed to bill the output VAT in installment, then the buyer can also
claim the input VAT in the same period as the seller recognized the output VAT

(3) PRESUMPTIVE INPUT VAT

Shall be 2% of the gross value in money of the purchases of primary agricultural products which
are used in the productions. This is only claimable by persons or firms engaged in (SAMAMICOPARE):
a.) Processing of sardines, mackerel and milk
b.) Manufacturing of cooking oil, packed noodle based instant meals and refined sugar

OUTPUT VAT (For sardines, mackerel, etc.) xx

LESS: Presumptive input VAT (Based on primary agricultural products) (xx)
Actual input VAT of other related costs (xx)
VAT Payable xx

(4) STANDARD INPUT VAT

Shall be 7% of the VAT-able sales made to government, instrumentalities, agencies or GOCCs. For
sales made to the said entities, this is the input vat creditable against the output VAT, and not the
actual input VAT on the goods sold to them. Given that 5% of the sales is withheld and is credited
to output VAT, the VAT payable on sales to these entities is effectively 0.

Output VAT (12% of sales to gov’t) xx

Less: Standard input VAT (7% of sales) (xx)
Withheld final VAT (5% of sales) (xx)
VAT Payable 0

Actual input VAT (amount to be claimed) xx

Less: Standard input VAT (amount allowed) (xx)
Gain or loss reported in income statement xx

(5) INPUT VAT CARRYOVER

Summary of rules
- IVCO of the prior quarter is deductible in the first month of the current quarter
- IVCO of the prior quarter is deductible in third month quarterly balance of the present quarter
- IVCO in the first month of the quarter is deductible in the second month of the quarter
- IVCO in the second month of the quarter is not deductible to the third month of the quarter

Note: The only IVCO creditable against the third month (cumulative) of the quarter shall be the
IVOC from the previous quarter. No more, no less!
Part 5. Miscellaneous items

 Other sales subject to VAT

Taxable sales
Sales of VAT-registered persons
Sales of VAT-registrable persons
Sales of non-VAT taxpayers who issues
VAT invoice or receipt
Exempt sales billed as regular sales
Tax payable
Output tax, with the benefit of crediting input tax
Output tax, without the benefit of input tax
Output tax, without the benefit of input tax +
Percentage tax + 50% surcharge based on the
output tax charged
Output tax, with the benefit of crediting input tax

 Optional VAT treatment

- Any person who is VAT-registered but enters into transactions which are exempt from VAT
may opt to apply VAT on these exempt sales. Such option must be made within 10 days before
the beginning of the taxable quarter.
- Once the election is made, it shall be irrevocable for a period of 3 years counted from the
quarter when the election is made
- This option is allowed if the main or principal business of the taxpayer falls within the VAT
system, i.e. 50% of its gross sales comes from VAT-able sales (pre-dominance test)

 Billing/Invoicing requirements

Exempt sales
Must be specifically designated as such by indicating or pre-printing the caption EXEMPT
on the invoice or receipt. Failure to comply with this shall make the sale taxable.

Note: A VAT-registered taxpayer may use a single invoice, however, involving VAT and
non-VAT transactions, provided that the invoice must clearly indicate the breakdown of the
sales between taxable, exempt and zero-rated components, and the calculation of VAT on
each portion of the sale shall be shown on the invoice/receipt

For sales where fair value exceeds the selling price

The output VAT must be billed separately in this case, which is an exception to the rule
that output VAT must be indicated in the VAT invoice or receipt itself. If the VAT is not
separately billed, the consideration stated in the document of sale shall be deemed
inclusive of VAT, and VAT is recomputed.

For subsequent sale of goods/properties deemed sold

The actual sale of these goods or properties are no longer subject to VAT. However, the
seller shall indicate the sales invoice number wherein the output tax on deemed sales was
imposed, and the corresponding tax paid on the items sold.

 Sales to senior citizens and PWD

- Both are subject to 20% discount, deducted to get the amount due to the selling entity
- Sales to senior citizens are VAT-exempt
- Sales to PWD are VAT-able based on their sales, net of the 20% discount
- Note that senior citizens and PWD are not exempt from percentage tax
- Note further that sales BY senior citizens and PWD are taxable

 Allocation of common input VAT on mixed sales

The amount of input tax due or paid that cannot be directly and entirely attributed to any one
of the sales transaction shall be allocated pro-rata on the basis of sales

Type of sales Treatment of Input VAT

12% sales Credited as input tax
0% sales Credited as input tax, refunded or claimed
as a tax credit on other taxes
12% sales to government Compared with the 7% standard input VAT,
and the difference is charged to gain or loss
Exempt sales Credited as cost of sales against gross
income or as expenses against net income

 Advanced VAT
Concept
- Not an input VAT, but an advanced payment by certain sellers of goods, which becomes
a deduction after the net VAT payable is determined.
- These are paid before their withdrawal at the point of production
- Unutilized advanced VAT in the period may form part of the Input VAT Carryover if opted
by the taxpayer.
 Basis on the advanced VAT:
On the sale of refined sugar
On the sale of flour
On the sale of naturally
grown and planted timber
products
P1,400 per 50-kilogram bag
75% of the:
a.) Invoice value multiplied by the current exchange
rate on the date of payment
b.) Estimated customs duties and other charges prior to
release of imported wheat from Custom’s custody
c.) Additional 5% on the sum of (a) and (b)
Based on per cubic meter of each species

Note: Since the foregoing are the bases of advanced VAT, they shall be further multiplied by
12% to get the actual advanced VAT.

 Other matters

Payment and filing of VAT

 1st month of the quarter – within 20 days from the end of the month
 2nd month of the quarter – within 20 days from the end of the month
 3rd month of the quarter – within 25 days from the end of the quarter

Note: Monthly VAT return (BIR Form 2550M). Two copies of which are filed to the BIR and
one copy shall be retained by the taxpayer.

Overpayment of VAT
General rule: May be treated as Input VAT Carryover to the succeeding period
Exceptions:
a.) For negative amount arising from input VAT on zero-rated sales
- May be claimed as tax refund or tax credit against other internal revenue taxes,
within 2 years from the close of the taxable quarter when the zero-rated sales were
made, not from the date of the payment of VAT

b.) For negative amount arising from advanced VAT

- May be available for the issuance of tax credit, provided that the claim is made
within 2years from the date of filing of the 4th quarter VAT return of the year such
return is made

Quarterly summary list

- Must be submitted by the taxpayer before the 25th day of the month following the close of the
taxable year
- For each failure to file, the taxpayer shall pay an administrative penalty of 1000, unless such
failure is due to reasonable cause, and not to willful neglect
- The aggregate amount to be imposed for the failures shall not exceed P25 000.
- Quarterly summary list to be submitted by all VAT taxpayers includes:
a.) List of sales to regular buyers, casual buyers and output tax
b.) List of local purchases and input tax
c.) List of importation

Suspension of business
CIR is empowered to suspend business operations, upon:
a.) For a VAT-registered persons’
- Failure to issue receipts or invoices
- Failure to file VAT return
- Understatement of taxable sales or receipt by 30% or more of his correct taxable
sales or receipt for the taxable quarter
b.) Failure to register as a taxpayer

Note: The temporary closure shall be for the duration of not less than 5 days and shall be
lifted only upon compliance with the requirements prescribed by the Commissioner.
OTHER PERCENTAGE TAXES

Scope
1. Services specifically subject to percentage taxes
a.) Transport of passengers through land by domestic common carriers and keepers of garage
b.) Transport of cargos, excess baggage and mails by international carriers
c.) Certain franchise grantees
d.) Overseas dispatch or message from the Philippines (i.e. overseas communication) by
telephone companies
e.) Banks and non-bank financial intermediaries
f.) Life insurance companies, and agents of foreign insurance companies
g.) Amusement places
h.) Sales of shares of stock in the local stock exchange or IPO

Note: These services are subject to OPT, whether the taxpayer is VAT-registered or not.

2. All other sales of goods, services or lease of properties of non-VAT registered taxpayer whose
annual sales is P1 919 500 and below

Basic application
Services specified above as All other sales
subject to OPT or services made
Subject to OPT Subject to 12% VAT, with the
1. VAT-registered benefit of crediting input VAT
on purchases
2. Non-VAT registered, annual Subject to OPT Subject to 3% OPT
sales is 1 919 500 and below
Subject to OPT Subject to 12% VAT, with no
3. Non-VAT registered, annual
benefit of crediting input VAT
sales exceed 1 919 500
on purchases

Services specifically subject to percentage taxes

1. Domestic carriers and keepers of garage

Amount of OPT: 3% of gross receipts (common carrier’s tax)
Subject of tax: Transportation of passengers by land.
- Thus, if the service involves transportation of baggage, mails and cargos, they are not
specifically subject to OPT. Furthermore, it is also not applicable if the mode of transport is
by water or by air. However, note that for non-VAT within the threshold, these services
are subject to the general 3% OPT.

Points to remember
a.) For purposes of OPT, common carriers are:
- Any person, corporation, firm or association engaged in the business of transporting
passengers or goods or both for compensation, offering their services to the public
- Cars for rent or for hire driven by the lessee
- Transportation contractors
- Person who transport passengers for hire and other domestic land carriers on their
transport of passengers, except owners of bancas and owners of animal-driven two-
wheeled vehicle

b.) The tax base of the quarterly percentage tax is subject to the following minimum
presumptive gross receipts

Area of business operations

CITIES PROVINCES
Jeepney for hire 2 400 (2) 1 200 (1)
Taxis 3 600 (3) 2 400 (2)
Public utility bus
1-30 passengers 3 600 (3)
31-50 passengers 6 000 (5)
50 above passengers 7 200 (6)
Car for hire with chauffeur 3 000 (2.5)
Car for hire without chauffeur 1 800 (1.5)
Memorize the numbers as a factor of 1 200, as indicated by the parentheses.

Notes:
 - The figures above are minimum amounts for quarterly receipts. Simply, divide the
amount by 3 to get the monthly minimum figures. Remember that this is per-unit basis.
- The tax base, therefore, of the 3% common carrier’s tax shall be the actual or the
minimum amount, whichever is higher.

c.) Common carriers are exempt from local taxes on their incoming and outgoing freights.
d.) It is believed that pedicabs are exempt from the 3% OPT.

2. International carriers
Amount of OPT: 3% of gross receipts( (common carrier’s tax)
Subject of tax: Transport of cargos, baggage or mails from Philippines to another country (i.e.
outgoing transports), regardless of the country where they are actually billed or paid

Points to remember
a.) Carriers covered are both international air and shipping carriers. These carriers are of
foreign registry (i.e. owned by foreign corporations that operate in the Philippines).

b.) However, international carriers of domestic registry shall be subject to:

- Zero-rated VAT on their transport of cargos and passengers from Philippines to another
country and vice versa (both outbound and inbound)
- 12% VAT on their domestic transports of both passengers and cargos

c.) The 3% common carrier’s tax is not applicable to:

- Off-line international carriers having a branch/office or sales agent in the PH
- Transport of passengers by international carriers

d.) Gross receipts refer to those that are actually or constructively received during the taxable
quarter from cargos, baggage or mails, originating from the Philippines in a continuous and
uninterrupted flights. Thus, in case of transhipments, only the shipment from Philippines to
the point of transhipment shall be included in the gross receipts.

3. Franchises

Gas and water franchises 2% of gross receipts

Radio and/or television broadcasting companies whose annual gross
3% of gross receipts
receipts do not exceed 10 million pesos (i.e. 10 million and below)
Other franchises not specified by law 12% VAT
Notes:
- Franchise tax is not applicable to water refilling or purification stations selling bottled mineral
water. These are VAT-able entities.

- For radio and television companies within the 10 million threshold, the can still opt to
register as VAT taxpayers, and pay the corresponding VAT therein. Once this option is
exercised, the said registration shall be non-cancellable or irrevocable.

FURTHER, if the annual sales exceed 10 million for the first time, mandatory registration
applies. Thus, once the threshold is exceeded, such radio or television firm shall be perpetually
covered by VAT.

- Other franchised entities not covered by franchise tax

a.) Electric utilities (subject to VAT)
b.) Private franchises (subject to VAT)
c.) Telecommunications (10% overseas communication tax or VAT)
d.) Transportation (3% common carrier’s tax or VAT)

4. Overseas dispatch, message or conversation

Amount of tax: 10% of gross receipts (overseas communication tax)
Subject of tax: Those originating from Philippines whose destination is abroad (i.e. outgoing)

Call origin Call destination Applicable business tax

Philippines Abroad 10% overseas communication tax
Abroad Philippines 0% VAT
Philippines Philippines 12% VAT

Note: The 10% overseas communication tax is not applicable to outgoing calls of
a.) Government, including any of its political subdivisions or instrumentalities
b.) Diplomatic services (i.e. transmitted by any embassy and consular offices of a foreign
government)
c.) International organizations that enjoy privileges, exemptions and immunities under
international agreements
d.) News services
5. Banks and others

A. For Banks and Quasi-banks (i.e. nonbanks performing quasi-bank functions)

Source of income or receipt % of gross receipts tax
a.) Discounts, interest income and commissions (DIC) from lending
activities, as well as income from financial leasing, on the basis of
“remaining maturities” of instruments
- Maturity period is 5 years or below 5%
- Maturity period is more than 5 years 1%

b.) Dividends and share in the net income of subsidiaries 0%

c.) All other items treated as gross income, such as: royalties, rents of 7&
real or personal property, profit from exchanges, processing fees, etc.

d.) Net trading gains within the taxable year for foreign currency, debt 7%
securities, derivatives and other similar financial instruments

Note: A trading loss for the year can no longer over be carried over to
the next taxable year to be deducted against any trading gains, but a
trading loss for the month can be offset against the trading gain of the
next month, provided both are within the same taxable year. Further,
the resulting trading loss cannot be deducted against other items of
gross receipts.

B. For non-bank financial intermediaries (e.g. pawnshops and money changers)

Source of income or receipt % of gross receipts tax
a.) Discounts, interest income and commissions (DIC) from lending
activities, as well as income from financial leasing, on the basis of
“remaining maturities” of instruments
- Maturity period is 5 years or below 5%
- Maturity period is more than 5 years 1%

b.) All other items treated as gross income 5%

Points to remember:
a.) In the case of financial leasing, gross receipts consist only of interest income (thus,
recovery of principal is not included). In the case of operating leases, gross receipts refer to
the gross rents.

b.) The gross receipt tax does not apply to revenues realized by the BSP from transactions
undertaken in pursuit of legally mandated functions.

c.) In case of pretermination, the maturity period shall be reckoned to the end as of the date
of pre-termination (i.e. it shall be reclassified as if the maturity period is on the date of pre-
termination). Accordingly, an additional gross receipt tax may be imposed, due to the rise of
GRT from 1% to 5% in some cases.

6. Life insurance
Amount of OPT: 2% of premiums collected (premiums tax)
Subject of tax: Life insurance business, e.g. insurance on human lives, group insurance, health
and accident insurance policies

Points to remember:
a.) Persons, company or corporations, except purely cooperative companies, are subject to the
premium tax, whether the mode of payment of such is in money, notes, credits, etc.

b.) The following shall not be included in the gross receipts subject to premiums tax:
- Premiums refunded within 6 months after payment
- Re-insurance premiums
- Premiums from life insurance of non-residents (foreign consumption)
- Excess of premiums over insurance charges on variable contracts (the excess, or credits
to client account balances, is an investment, thus only insurance charges shall be taxed
with premiums tax)

c.) The following is a summary of the rules on life insurance

Life-insurance Non-life insurance
Direct premiums 2% premiums tax 12% VAT
Re-insurance premiums Exempt Exempt
 Insurance commission 12% VAT 12% VAT

d.) Applicable taxes on foreign insurance

- If made thru an agent: 4% premiums tax
- If made without an agent, i.e. directly from abroad: 5% premiums tax

7. Amusement taxes

a.) Places of boxing exhibitions 10% amusement tax

Note: Boxing bouts may be professional non-titled bouts, or
Philippine Championship bouts. The gross receipts from
professional boxing may be exempt, provided all requisites
are present:
- It is a World or Oriental Championship match
- At least one of the contenders is a Filipino citizen
- The promoter is a Filipino citizen, or a corporation
60% of which is owned by Filipino citizens

b.) Places of professional basketball games 15% amusement tax

Note: Thus, amateur games shall be subject to 12% VAT if
the operator is VAT-registered or to 3% general OPT, if not.

c.) Cockpits 18% amusement tax

Note: Taxable receipts include gate receipts, “tongs”, sales
of foods and drink by the operator. Concessionaires must
be business for mere subsistence, in order for the rent
income from them to be taxed with the amusement tax;
otherwise the rent is subject to the 3% OPT or VAT.
Furthermore, illegal cockpits are still taxable.

d.) Cabarets (disco), day or night clubs 18% amusement tax

Note: For hotels and other establishments, only the disco
operations and all sales or receipts incidental to it are
taxable with the amusement tax. All else are VAT-able.

e.) Jai-alai and race tracts 30% amusement tax

Note: This shall be imposed based on the total gross
receipts of the operators, proprietors or lessees, regardless
of the winnings.

Winnings from horse race or jai-alai

In addition to the 30% amusement tax on gross receipts, these are the following amusement
taxes imposed based on the net winnings made by the bettors.
Winnings in horse race or jai-alai in general 10%
Winnings from double, forecast, quinella and trifecta (DFQT) 4%
Owners of the winning race horses 10%

Note: Remember that the tax based must be the net winnings (winnings less cost of the
winning ticket). Only winnings from horse race are subject to the above amusement taxes.
Winnings from cockpits, billiards, bowling, etc. are not subject to tax.

8. Sale of shares
A. Thru PSE
Amount of tax: 1/2 of 1% of selling price (stock transaction tax)
Points to remember
a.) The stock transaction tax shall be paid by the stockbroker within 5 banking days from the
date of collection.

b.) The stock transaction tax covers sale of shares without regard to its type (ordinary or
preference) and sale of stock options and warrants. This is imposed whether the sale resulted
to a gain or loss, since the tax base is the selling price, and such is not an income tax.

c.) The stock transaction tax does not apply to:

- Sales made directly to the buyer
- Sales made by a dealer in securities

B. Thru IPO (i.e. Initial Public Offering)

Amount of tax:
Proportion of shares IPO tax
25% and below 4% of selling price
 Over 25% but not over 33 1/3% 2% of selling price
Over 33 1/3% 1% of selling price
Subject of tax: Sale, barter or exchange through of shares of stocks of a closely-held corporation

Points to remember
a.) The proportion of shares offering shall be computed as follows:
Primary offering: Primary shares offered / Outstanding shares after IPO
Secondary offering: Secondary shares offered / Outstanding shares before IPO

Primary offering is the unissued shares of the closely held corporation to be sold on IPO.
Secondary offering, on the other hand, is the issued shares or the shares held by
shareholders who wish to sell their shares in the IPO.

b.) A closely held corporation means any corporation at least 50% of the value of the
outstanding capital stock or 50% of all classes of stock entitled to vote is owned directly or
indirectly by not more than 20 individuals (at most 20).

c.) For follow through offering, i.e. sale subsequent to IPO, issuance of the closely held
corporation of its unissued shares shall no longer be subject to the IPO tax. But, for
shareholders, who sell subsequent to IPO, shall be subject to the stock transactions tax.

Miscellaneous items
1.) For sales made to government entities, instrumentalities, including GOOCs made by a non-VAT
taxpayers shall be subject to a withholding of 3% at source. Thus, when a government pays for the
price of the service or goods purchased, it shall already be net of the 3% percentage tax.

Percentage tax DUE (tax on all taxable sales, including to government) xx

Less: Withheld % tax (3% tax on sales to government) xx
Percentage tax PAYABLE (tax on all taxable sales, excluding to government) xx

2.) Cooperatives, generally, shall be exempt from the 3% percentage tax. However, sales or receipts
of cooperatives outside their registered activities are still subject to business tax.

3.) For overseas communications tax and amusement taxes, the frequency of reporting shall be on a
quarterly basis; all other services are reported monthly. Monthly tax returns are due within 20 days
from the end of the month, while quarterly tax returns are due within 20 days from the end of the
quarter.
TRANSFER TAXATION

WHAT IS TRANSFER? This refers to any transmission of property from one person (natural or juridical)
to another.
Types BILATERAL UNILATERAL COMPLEX
Common definition Since they are transfers, they involve the transmission of property.
With consideration
Less than full and
In terms of (in return for
Without consideration adequate
consideration something of equal or
consideration
adequate value)
onerous transactions gratuitous transactions
Other names indirect donation
or simply, exchanges or simply, transfers
Income and transfer
Tax imposed Income tax Transfer tax
tax
Notes: In complex transfers, the determination whether or not a consideration is adequate requires
the consideration of the facts and circumstances of sale (e.g. liquidity of the asset, or availability of
buyers). The exchange element (tax basis vs. selling price) is subject to income tax, while the transfer
element (selling price vs. fair value), to transfer tax.

TYPES OF UNILATERAL TRANSFERS

1. Donation inter-vivos (or This is the gratuitous transfer from a living donor to a donee. This
donation) transfer is subject to the donor’s tax.
2. Donation mortis-cause This is the gratuitous transfer of property from a deceased person
(or succession) (upon death) to his heirs. This is subject to the estate tax.

Notes on unilateral transfers:

 The DONOR’S motive of donation is the determining factor whether to classify a donation as
inter-vivos or mortis-causa. The motive is established out of the wordings of the deed of
donation prepared by the donor, in order to effect the donation. This is particularly important
because:
a. The taxes imposed are different (estate tax has higher tax rates than donor’s tax)
b. The timing of the valuation is different – inter-vivos transfers are valued at the date
of the perfection or completion of the donation, while mortis-causa transfers are
valued at the date of death.

 If the donation is inspired by motives associated with life, it is a donation inter-vivos.

Examples of motives:
a. To reward services rendered
b. To relieve the donor of the burden of management of the property
c. To save on income tax
d. To see children financially independent
e. To see children enjoy the property while the decedent still lives
f. To settle family disputes

 When the donor intends that the donation shall take effect during the lifetime of the donor
(transfer of ownership is made during the lifetime), though the property shall not be delivered
until after the donor’s death, this shall be a donation inter-vivos (Art. 729, Civil Code).
HOWEVER, if the transfer of ownership shall take place at the point of death, though the
property has been delivered during the lifetime of the donor, this shall be donation mortis-
causa. In other words, transfer of ownership, not possession, is the determining factor.

 A donation made during the lifetime of the decedent, which is inspired or motivated by the
thought of death or in contemplation thereof is a donation mortis-causa.

 Other examples of donation mortis-causa are:

a. Donation to take effect at the death of the donor
b. Donation in the last will and testament of the donor
c. Donation with retention of certain rights until death
d. Revocable and conditional transfers
NONTAXABLE TRANSFER – transfer of properties, generally without consideration, which are not
actually donation

1. Void transfers
a. Transfer of property that is prohibited by law
b. Transfer of property not owned (i.e. NO free disposal of the thing due and capacity to
alienate)
c. Donations which do not manifest all essential requisites (consent, object and cause) to
validity, e.g. donations refused by the donee
d. Donations that do not conform to formal requirements, e.g. oral donation of real properties,
or oral donation of personal properties valued at more than 5 000, or donation of real property
in a private instrument

2. Quasi-transfers – no transfer or ownership

a. FROM a person with only a right to usufruct TO owners of the naked title
b. FROM a trustee TO the real owner of the property
c. FROM the first heir TO the second heir, in accordance with the desire of the predecessor

3. Incomplete transfers – delivery of property to another, but ownership is not transferred at the
point of delivery, but at the point of the happening of certain future events or conditions. These are
not taxable upon delivery, but become taxable in the future when the ownership has transferred
a. Conditional and revocable transfers
b. Transfer in contemplation of death
c. Transfers with reservation of title to property until death

Notes on incomplete transfers:

- Incomplete donations are taxable only once they are completed and perfected.

Conditional Completed inter-vivos, upon:

transfers a. The fulfilment of the condition by the transferee
b. The waiver of the condition by the transferor

Completed mortis-causa, when the transfer is preterminated by the death of

the decedent (i.e. transferor died before the fulfilment of the condition)

Revocable Completed inter-vivos, upon:

transfers a. The waiver of the right of revocation by the transferor
b. The lapse of his reserved right to revoke

Completed mortis causa, when the transfer is preterminated by the death of

the decedent (i.e. transferor died before waiving his right)

- For incomplete unilateral transfers, those completed inter-vivos are subject to donor’s tax, at
the fair value of the property at the date of their completion or perfection, while those
completed mortis-cause are subject to estate tax, at the fair value at the date of death.

- For incomplete complex transfers, the valuation is as follows:

a. Inter-vivos – Fair value at the date of completion LESS inadequate consideration given
b. Mortis-cause – Fair value at the date of death LESS inadequate consideration given

- To tax incomplete complex transfers, the property must not have decreased in a value which is
less than the consideration paid at the date of transfer (valuation, as indicated above, must not
be negative).

TRANSFER TAXES
1. Types of transfer taxes
DONOR’S TAX ESTATE TAX
Imposition Donation inter-vivos Donation mortis-cause
Object of taxation Right of the donor to donate The transfer of economic benefits and
enjoyment of property
Taxpayer The donor The estate of the deceased person
Basis of tax The net gift The net estate
Exempt amount Net gift of 100 000 and below Net estate of 200 000 and below
Filing and payment Within 30 days after the date the Within 6 months from the decedent’s
donation is made death
2. Nature of transfer taxes
a. Privilege or excise Transfer taxes are imposed because the transferor is exercising a privilege
b. Ad valorem The amount of transfer tax is dependent on the value of the property
transferred
c. Progressive Tax rates manifest increasing taxes with increasing value of donation
(Exception: donation made to strangers, 30% proportional or fixed rate)
d. National Transfer taxes are levied by the national government
e. Direct Transfer taxes cannot be shifted
f. Fiscal Transfer taxes are levied to raise money for the government

RATIONALE OF TRANSFER TAXATION

1. Tax evasion or minimization theory
- To remedy the limitation of income taxation (in cases of complex transfers), the government
taxes this lost profits (transfer element or gratuity) to transfer taxation.

2. Tax recoupment theory

- To recoup on future losses in income taxes caused by transfers, the government has to tax the
transfer

3. Benefit-received theory
- The government is a party in the orderly transfer of the property made possible by
government laws which enforce or effectuate donation and succession. Without these laws, the
transfer could not have been conveniently possible, hence the need to tax the transfer.

4. State-partnership theory
- Since the government is an indirect partner behind all forms of wealth accumulation, by
ensuring civilized and orderly society, the government should take its fair share by taxing the
transfer.

5. Wealth redistribution theory

- When one transfers his wealth, the transfer should be taxes so that part of the wealth will be
redistributed to benefit the society as a whole.

6. Ability to pay theory

- Since the ability to transfer property is an indication of an ability to pay tax, the transfer
should be taxed.

BASIC RULES ON TRANSFER TAXATION

Classification of taxpayer Taxability

1.RESIDENT OR Subject to tax on all transfers, regardless of the location of the
CITIZENS properties involved

2. NON-RESIDENT ALIEN Subject to transfer tax only on properties transferred which are located
in the Philippines at the date of transfer. In other words, global transfers
are exempted.

Notes on rules on transfer taxation:

 For purposes of donor’s tax, there is no distinction between juridical and natural persons.
Juridical persons shall be considered resident if they have a fixed place of business. Juridical
persons shall be considered citizens based on the incorporation test.

 The location or situs of the property is highly essential for purposes of transfer taxation,
especially in the case of non-resident aliens. The only thing worthy to memorize is this: when
shares, obligations, or bonds issued by foreign corporations, 85% of the business of which is
located in the Philippines is considered to be properties within.

 INTANGIBLE PERSONAL properties (includes cash, investments, receivables, patents, etc.) of

“non-resident aliens” is exempt from Philippine transfer tax, ONLY if the country in which such
alien is a citizen also exempts the intangible personal properties of Filipino non-residents
therein from transfer taxes (reciprocity rule)
ESTATE TAX

Part 1. GROSS ESTATE

VALUATION OF THE GROSS ESTATE

Real properties Whichever is higher of
a. Zonal value, or the value determined by the Commissioner
b. Assessed value, or the value fixed by the provincial or city
assessor

Note: Independent appraisal values are not used in the valuation of real
properties. Further, any mortgages or encumbrances shall not be offset
against the value.

Improvements in real The value of the improvements shall be the construction cost per
properties building permit or the fair value that appears in the latest tax
declaration
Shares of stock If the stocks are unlisted
a. Preferred shares – par value
b. Common shares – book value using the adjusted net method

If the stocks are listed

Whether common or preferred shares – closing price on the date of
death, or if unavailable, the trading price at a date nearest to the
date of death

Newly purchased Purchase price

Not newly purchased Second-hand value
Pawned properties Grossing up pawn value by the loan-to-value ratio
Loans or receivables Amount fixed in the contract, including accrued interest
Foreign currencies Translated at the exchange rate at the date of death

INCLUSIONS IN THE GROSS ESTATE

A. TAXABLE “TRANSFERS”
1. Transfers in contemplation of death
- Properties not physically available in the estate at the time of death because the decedent
transferred them during his lifetime in anticipation of death.

- Examples of transfers held to be in contemplation of death (donations mortis causa):

a. Where a donation was made concurrently with the execution of a will
b. While still alive, the decedent transferred his property in favor of another person, but such
transfer of possession or enjoyment is to take effect at or after death
c. Transfer of property under which the donor reserved his right of possession or enjoyment,
or right over the income of the property until his death (only the portion of the property
reserved by him is included)
d. Transfer of property under which the donor reserved his right to designate the person who
shall enjoy the property or the income therefrom

Note: Transfers made to the government and its instrumentalities are included in the gross estate.

2. Revocable transfers
- Transfer of possession over property during the lifetime of the decedent, but not transfer of
ownership. Ownership is transferred only when the transferor waives his right to revoke, or the
period for the transferor to revoke the transfer has already lapsed

- If the transferor dies without waiving his right of revocation, or dies before the period to revoke
has lapsed, such property should be included in the gross estate, since at the point of death, he is
still the owner of the property.

Note: If the transferor has waived his right to revoke during his lifetime, or was unable to waive
his right since the period for revocation has lapsed, the transfer is deemed inter-vivos, and thus
not included in the gross estate.

3. Conditional transfers
- Ownership is transferred upon the happening of the condition, or by the waiver of the same by
the transferor. If the transferor dies without the condition happening, or without waiving the
condition, then the property is included in the gross estate. The same concept with revocable
transfer is applied.
4. Transfer under general power of appointment
- General power of appointment means that the decedent must have had a power exercisable in
favor of himself, his estate or creditors of his estate, In other words, if the decedent can designate
the property to whomever heir he wants, then he has a general power of appointment over the
said property, and the said property is included in the gross estate of the decedent.

Note: A power is “special” if: (a) it is not exercisable in favor of the decedent, his estate, his
creditors or creditors of his estate or (b) the decedent appointed only among a restricted
designated class other than himself, his estate his creditors, or creditors of his estate. In other
words, if the decedent is bound to transfer or designate the property to a specified heir only, then
such power is special, and such property is not included in gross estate

5. Transfers without consideration or for insufficient consideration

- Mortis-causa transfers of properties without consideration are included in the gross estate at the
fair value of the transferred property at the date of death, while mortis-causa transfers of
properties for insufficient consideration are included at the fair value at the date of death less
consideration paid.

B. OTHER PROPERTIES
1. Generally, all properties owned by the decedent at the date of death (subject to certain
qualifications)

2. Decedent’s interest
- This refers to those accrued in favor of the decedent on or before his death, which have been
received only after his death. In other words, this is his wealth that he would have possessed,
enjoyed and disposed, had he lived. Note that to be included in the gross estate, the interest must
exist at the time of the decedent’s death

- Examples of decedent’s interest are:

a. Dividends declared on or before the death of the stockholder, and received by the estate
after the stockholder’s death
b. Partnerships profit earned prior to death of the partner received by the estate after
partner’s death
c. Accrued interest and rents on or before the time of death, but collection was made after
death

3. Proceeds if life insurance

BENEFICIARY
Designation of beneficiary Estate, administrator, or Other persons
executor
Revocable Include Include
Irrevocable Include EXCLUDE
Notes:
- In summary, if beneficiary is designated as revocable, it is always included in the gross
estate. If the beneficiary is the estate, the administrator, or executor, it is always included in
the gross estate.

- Where the designation of the beneficiary is not stated or is not clear, assume that is
revocable.

- Where the insured transfers a life insurance policy taken out by decedent on his own life in
contemplation of death, the amount included in gross estate is the face value of the policy, not
the cash surrender value.

4. Claims against insolvent persons

- These are receivables left by the decedent, but the court consequently finds the related debtor
insolvent. This shall be included in the gross estate in the full amount of the receivable

5. Amount received by heirs under RA 4917

- The amount received from the decedent’s employer as a consequence of the death of the
decedent-employee shall be included in the gross estate.

EXCLUSIONS FROM THE GROSS ESTATE

1. Merger of the usufruct in the owner of the naked title (i.e. transfer from decedent-usufructuary to
the real owner)
2. The transmission or delivery of the inheritance or legacy by the fiduciary heir or legatee to the
fideicommissary
3. The transmission from the first heir, legatee, or donee in favor of another beneficiary, in accordance
with the desire of the predecessor

Note: In the three cases mentioned above, the transfer from the decedent (who is the usufructuary,
fiduciary heir, or first heir) to the naked owner, fideicommissary or second heir, as the case may be,
does not constitute a donation mortis causa since it is a mere return of the property to the real owner.
Further, the donation to be subjected under the estate tax is the one made from the predecessor-
decedent to the current decedent.

taxable tax-exempt
Predecessor Current decedent Another living person
(Usufructuary, fiduciary heir or first heir) (Naked owner, fideicommissary, second heir)

4. All bequests, devises, legacies or transfers to social welfare, cultural and charitable institutions, no
part of the net income of which goes to the benefit of any individual, PROVIDED, not more than 30%
of the said bequests, devises legacies or transfers shall be used by such institutions for administration
expenses (Note: The limit for administration expenses is 30%; and the rest must be program
expenses)

5. Proceeds of life insurance

a. Irrevocable life insurance policy payable to beneficiary other than the estate, executor or
administrator
b. Under a group insurance taken by the employer for its employees

6. Properties held in trust by the decedent (e.g. held as trustee, consigned to decedent, those
properties held by decedent but registered in another name, borrowed from another person, etc.)

7. Separate properties of the surviving spouse

8. Transfer by way of bona fide sales (i.e. transfer with adequate consideration)

9. Exemptions under special laws, such as

a. Accruals or benefits received from SSS or GSIS
b. Benefits from United States Veterans Administration (USVA)
c. War damage payments
d. Grants and donations to the Intramuros Administration

10. Exemptions under reciprocity clause of estate tax law (for non-resident aliens)

GROSS ESTATE OF MARRIED DECEDENTS

Composition:
1. Exclusive properties of the decedent
2. Common or conjugal properties of the decedent

Note: Thus, the exclusive properties of the surviving spouse is not included in the gross estate of
the deceased spouse. Further, under the Family Code, the exclusive property owned by the
husband is called capital, while that of the wife is paraphernal.

What governs the property relations of the spouses?

1. The agreed property regime in the marriage settlement executed before the marriage
2. In the absence of any contract or marriage settlement before marriage
a. The regime of absolute community of property – for marriages celebrated starting 8/3/1998
b. The regime of conjugal partnership of gains – for marriages prior to August 3, 1988

General rules in the determination of property interest

- In the regime of absolute separation of property, properties are presumed separate, unless
stated otherwise.
- In the regime of ACP and CGP, properties are presumed common or conjugal, unless stated
otherwise.
- In any regime, properties acquired using separate properties are still separate properties.
- In any regime, properties acquired using common properties are still common properties.
SUMMARY OF SEPARATE AND COMMON PROPERTIES UNDER CPG and ACP
1. Before marriage
CPG ACP
1. Acquired by gratuitous title Separate Common
2. Acquired by onerous title Separate Common
3. Properties of the deceased spouse who has a Separate Separate
legitimate descendant from a previous marriage

Notes:
- Under CPG, all properties, including the fruits thereof, of the spouse, before marriage is
considered as his/her separate properties.

- Under ACP, generally, all properties brought into the marriage will become common or
conjugal properties. This is a retroactive feature of the ACP. The only exception to this
retrospectivity is when properties accumulated before the marriage by a spouse with
descendants in a prior marriage are reserved by the law as separate properties to protect the
interests of the descendants which could be prejudiced by the new marriage. It is worthy to
note that the premarital properties of the person who married such spouse with descendants
becomes common properties!

- In both regimes, the acquisition, whether by gratuitous or onerous title, is irrelevant in the
determination of whether such property is separate or common.

2. After marriage
CPG ACP
1. Acquired by gratuitous title Separate Separate
2. Acquired by onerous title Common Common
3. Acquired in exchange for separate property Separate Separate
4. Acquired in exchange for conjugal property Common Common
5. Income from separate property Common Separate
6. Income from common property Common Common
7. Income from separate or joint labor or industry Common Common

Notes:
- Conjugal partnership of gains (CPG) views marriage as a union of gains that accrues during
the marriage. Hence, all fruits of both individual and joint labor and fruits of the properties,
whether separate or common, during the marriage starting from the date of celebration of the
marriage are considered common properties. On the other hand, absolute community of
properties (ACP) is viewed as a union of the present property of the spouses, including fruits
of labor and industries of the spouses during marriage.

- Under both CPG and ACP, properties acquired by gratuitous title (e.g. donation ad
inheritance) shall be separate properties, unless it was given to them as a couple.

- The treatment for both CPG and ACP for properties after marriage is generally the same. One
exception is the treatment of income from separate property. Under CPG, all income after
marriage are considered common properties. Under ACP, however, income of properties
follows the classification of their source. That is why income from separate properties is
separate, and income from common properties is common.

- Under ACP, the general rule is that properties acquired before or after marriage, which are
for the exclusive use of either of the spouse are separate properties, even if they are acquired
from fruits of labor of either spouse or from common properties (e.g. shoes and dress for their
own personal use). The exception to this is jewelry. In other words, jewelries are considered
common properties, whether acquired before or after marriage. But if the jewelries are
acquired by gratuitous title, only then they become separate properties.
MATRIX FOR DIFFERENCES BETWEEN CPG AND ACP
CPG ACP
Properties acquired before marriage Separate Common

Note: Exception to this are properties of the spouse who had a

previous marriage (in which case, under both regimes, considered as
separate property of the said spouse only)

Fruits of properties after marriage and coming from separate properties Common Separate
(e.g. those acquired by donation or inheritance)

Note: Under CPG, all gains after marriage are common, while under
ACP, fruits follow principal!

Properties for exclusive personal use, AFTER marriage, except for Common Separate
jewelry

Note: Jewelries acquired after marriage are common properties under

both regimes! Generally, if the properties for exclusive personal use
are acquired BEFORE marriage, then under both regimes, such
properties are considered separate properties

Jewelries acquired BEFORE marriage Separate Common

Note: In all other cases, the treatment of properties are the same under both regimes.

Other miscellaneous items

1. The acquisition of properties exempt from estate tax shall not be included in the computation of
the gross estate. However, this exclusion cannot be extended to the income of exempt properties.
In other words, income from tax-exempt properties will be included in the separate or common
properties, subject to the applicable regime.

2. If the spouses agreed in the marriage settlements that the property relations shall be governed
by the regime of absolute separation of property (ASP), the rule shall be as follows: each spouse
shall own separately
a.) all of his/her earnings from profession, business or industry, and
b.) all fruits, whether natural, industrial or civil, due or received during the marriage from his
or her separate property
c.) his equal share in properties acquired by them as a couple

3. When a man and a woman who are capacitated to marry each other live exclusively with each
other as husband and wife, without the benefit of marriage or under a void marriage, properties
acquired by them, during their living together as husband and wife, shall be owned by them in
equal share.

Part 2. Deductions

General principles of estate deductions

1. Substantiation rule
- All items of deduction must be supported with documentary evidence, except for standard
deduction
2. Matching principle
- An item of deduction must be part of the gross estate to be deductible therefrom. No deduction
is allowed for those which are not part of the gross estate.
3. Date-to-death valuation rule
- Since valuation of properties included in the gross estate are based on the FMV at the time of
death, the existing obligations of the decedent must also be valued at its outstanding value or FMV
at the date of death
4. Default presumption
- For married decedents, generally, ordinary deductions are presumed to be against the common
properties (conjugal deductions), unless specifically identified by its nature or by law as an
exclusive deduction
5. “No double classification” rule
- Deductions and losses that have been deducted from gross income are no longer allowed to be
deducted from gross estate, and vice versa. To be deductible, it must not be compensated for by
any insurance or extrajudicial settlement
6. Generally, the deductions allowed from the gross estate are decedent’s unpaid obligations before
death, or expenses incurred on or before the burial, or expenses or losses sustained on or before the
settlement date of the estate tax (i.e. within 6 months from the date of death)

Classification of deductions
a. Ordinary deductions – diminish the amount of inheritance, except for vanishing deduction
- consists of ELIT, TPU, and Vanishing Deductions
b. Special deductions – do not reduce the inheritance, but allowed by law as deductions
- consists of Family home, Standard deductions, Medical expenses and Benefits under RA 4917
c. Share of the surviving spouse in the common properties

ORDINARY DEDCUTIONS

1. EXPENSES, LOSSES, INDEBTEDNESS AND TAXES (ELIT)

a. Funeral expenses
Requisites
1. It must be incurred from the
point of death until internment
Notes
Expenses related to death but incurred after internment
such as prayer, entertainment, masses etc. shall not be
allowed as deductions.

2. It must have been paid from or In other words, any portion of funeral expenses borne or
are chargeable against the defrayed by friends and relatives of the deceased are
properties of the decedent not deductible

3. The deductible funeral expenses
must be the lowest of:
a. Actual funeral expenses
b. Php 200 000
c. 5% of the gross estate
Actual funeral expenses include internment and
cremation fees, mourning apparel of surviving spouse
and unmarried minor children, expenses for the
deceased’s wake, fees and charges for the rites and
ceremonies incident to the burial, obituary notices,
telegrams in informing relatives, and cost of the burial,
tombstone or monument, but excluding the upkeep.

These expenses are considered, regardless whether they

have been paid or not at the time of death

b. Judicial expenses
Requisites
1. Must be documented properly
a. If paid, must be
substantiated with receipts or
invoice evidencing their validity.
b. If unpaid, must be supported
by a sworn statement of
account issued and signed by
the creditor
2. Must be incurred within 6 months
from the date of the decedent
c. Losses
Requisites
1. Must be incurred after or since
the death of the decedent, but not
later than the last day for the
payment of the estate tax (within 6
months from death)
Notes
Example of these expenses would include:
- fees (accountant, court, broker, executor,
administrator, attorney, clerk, appraiser)
- costs of preserving and distributing estate
- costs of storing or maintaining properties of the
estate
The manner of settlement of these expenses, whether
judicial or extrajudicial, is irrelevant in determining their
deductibility
The following items are non-deductible
a. Expenses incurred by a beneficiary seeking to
establish the extent of his interest
b. Salary of a trustee given for managing the estate
for the benefit of heirs
c. Premiums paid on the bond filed by the
administrator
d. Litigation costs of conflicting claims of heirs
.
Notes
These include all losses incurred during the settlement
of the estate arising from robbery, theft, embezzlement,
fire, shipwreck, storms and/or other casualties.
In other words, non-deductible losses are those that are
incurred (a) before or at the date of death, since at the
date of death, they are no longer part of the gross
estate, and (b) beyond the 6-month period.
 2. Must not be compensated for by
any insurance or extra-judicial
settlement.
d. Claims against insolvent persons
Requisites
1. The whole amount of said
claims has been initially included
as part of his gross estate
2. The uncollectible portion of
the claim shall be the deduction
from the gross estate
3. The incapacity of the debtor
to pay his debt must be proven
in court, not merely alleged
e. Claims against the estate
Requisites
1. The liability represents a
personal obligation of the deceased
existing at the time of his death,
except funeral and medical
expenses
2. The liability was contracted in
good faith and for adequate and full
consideration in money or money’s
worth
3. The claim must be valid and
enforceable
4. The indebtedness must not have
been condoned by the creditor or
the action for collection must not
have prescribed
f. Unpaid mortgages
- These are unpaid indebtedness secured by a debtor’s property. To be deductible, they must
have been incurred before death and are still unpaid at the point of death. Note that the value
of the property, undiminished by the mortgage, must be included in the gross estate of the
decedent.
g. Unpaid taxes
- To be deductible, taxes should meet the requisites of claims against the estate. All taxes that
have been accrued prior to the decedent’s death are deductible from the gross estate.
- By statutory provision, the following taxes cannot be deducted from the gross estate:
In other words, the deductible loss is net of any
insurance claims
Notes
The following rules shall be used in determining the amount
to be deducted under “claims against insolvent persons
(CAIP)”:
a. Where debtor had no other properties whatsoever
- The whole amount of the receivable shall be deducted
b. Where debtor had other properties whatsoever
- The deductible portion is the whole amount of
receivable multiplied by the ratio of uncovered
obligations to the obligations to ordinary creditors
Total obligations of insolvent debtor xx
Less: Obligations to preferred creditors
(e.g. unpaid taxes) xx
Obligations to ordinary creditors xx
Total assets of insolvent debtor xx
Less: Obligations to preferred creditors xx
Assets available to ordinary creditors xx
Obligations to ordinary creditors xx
Less: Assets available to ordinary creditors xx
Uncovered obligations xx
Notes
Substantiation requirements
a. If the claim is out of a debt instrument (e.g. loans
and advances), the debt instrument must be
notarized.
Exception: Loans granted by financial institutions
where notarization is not part of the business
practice or policy of the institution
b. If the claim was out of a loan incurred within 3
years prior to the death, the administrator or
executor must submit a statement showing the
disposition of the proceeds of loan
An example of a claims against the estate is an
accommodation loan This can be only included in the
deduction, if this is presented as a receivable in the
gross estate.
Illustration: Decedent, while still alive, received 1 800
000 loan in behalf of beneficiary. The decedent has paid
800 000 of the bank loan, but the beneficiary has not
paid the entire loan. The entire amount of 1 800 000 is
included in the gross estate as receivable from
beneficiary, while 1 000 000 is included in the deduction
as part of the “claims against the estate.”
 a. Income tax on income received after death
b. Property taxes not accrued before his death
c. Estate tax

Summary of classification of ELIT for married decedents

1. Funeral expenses
2. Judicial expenses
3. Losses
4. Claims against insolvent
person
5. Claims against the estate,
including unpaid mortgages
and unpaid taxes
Deducted under common expenses
Deducted under common expenses
Deducted based on the property classification rule (i.e. loss of
separate property is a separate expense, and loss of a
common property is a common expense)
Deducted based on the property classification rule
Deducted based on the ff. rules (based on priority):
a. If the obligation was contracted or incurred for the
benefit of the family, deducted under common expenses
(family benefit rule)
b. If the obligation was not for the benefit of the family,
deducted based on the property classification rule

2. TRANSFERS FOR PUBLIC USE

- A transfer for public use is a provision in a last will and testament of the decedent (legacy or
devise) in favor of the Government of the Philippines, or any political subdivision thereof (i.e.
provinces, cities, municipalities and barangays), for an exclusively public purpose. This deduction
is generally presumed to be under separate expenses, unless stated that the property is conjugal
and the transfer is with the consent of the other spouse.

Non-deductible transfers:
- Transfers to government-owned and controlled corporation (commercial, not for public
purpose)
- Transfers to foreign government
- Oral transfer of properties for public use
- Transfer by way of legal succession (i.e. when in the absence of compulsory heirs and
collateral relatives up to the 5th degree of consanguinity, the government inherits the
properties of the decedent)

3. PROPERTY PREVIOUSLY TAXED (VANISHING DEDUCTION)

Requisites for deductibility

Requisites
a. The present decedent must have
died within 5 years from the date of
death of the prior decedent or the date
of receipt of gift from prior donor
Illustrative example
If the decedent died in 2016 and he inherited an
agricultural land from his mother who died in 2008, then
the land is not allowed as a vanishing deduction.

b. The property on which vanishing If A donated a car in Japan to B, present decedent, then
deduction is being claimed must be the car is not allowed as a vanishing deduction.
located in the PH.

c. The property must have formed part
of the taxable estate of the prior
decedent or the taxable gift of donor
If present decedent received a 100 000 tax-exempt cash
donation from his mother within 5 years prior to his
death, the amount of cash is not a vanishing deduction
since the cash is not included in the gross estate of the
mother.

d. The estate taxes and donor’s tax
must have been finally determined and
paid
If present decedent received a villa as inheritance from
his father whose estate tax return was already filed, but
the estate tax remains unpaid at the date of the present
decedent’s death, then the villa is not a vanishing
deduction.
Note: Mere filing of return is insufficient.

e. The property must be identified as
the same property received from prior
decedent or donor OR the one received
in exchange therefore
Note: Deduction is therefore still
claimable, even if property transformed
into another kind of properties
If present decedent, who died in 2016, purchased
residence in 2014, using the money inherited from his
father who died in 2007, then the residence is not
allowed as deduction, having violated the 5-year
requisite.
Generally, only donation and inheritance can qualify as
VD. However, purchased property can qualify as VD, if
 the money or property used in exchange is the one
coming from donation or inheritance received by the
present decedent 5 years prior to his death.

f. No vanishing deduction on the
property or the property given in
exchange therefore was allowed to the
prior estate
In the transfer of condo unit from B to D, D can claim VD.
If D transferred the property to E, E can no longer claim
VD, since VD was allowed to the PRIOR estate of D.
However, if E transferred the property to F, F can now
claim again the VD since it was not allowed to the PRIOR
estate of E.

Illustration. Procedural computation of the vanishing deduction

Mrs. Stalin died on July 1, 2014, leaving the following properties, which are valued at date of death.
Ranch, received as inheritance on June 30, 2009 2 000 000
Orchard, purchased in January 12, 2014, using the money
donated by a friend on December 18, 2012 3 000 000
Rest house, inherited by Mr. Stalin on March 21, 2011 4 000 000
Commercial land, donated by his mother on January 2013 1 000 000
Family home 2 000 000
Other properties 7 000 000

The estate of Mrs. Z claims the following deductions :

Funeral expenses (40% were paid) 300 000 Losses 400 000
Judicial expenses 600 000 Claims against estate 700 000
Medical expenses (30% unpaid) 500 000 Unpaid mortgage on orchard 1 000 000

Additional information:
- The orchard had a fair value of 2 500 00 and 2 300 000 on Dec. 2012 and Jan. 2014
- Mrs. Stalin mortgaged the orchard on Jan. 2013 for 1 500 000
- In the will, the land was donated to the government for public use.
- The fair value of the ranch on Jun. 2009 is 1 500 00.

1. DETERMINE IF PROPERTIES MEET THE REQUISITES

- The ranch cannot be claimed as VD, since it violates the 5-year requisite.
- The orchard can be claimed as VD, since the deduction is still claimable, even if the donated
property, i.e. cash, has transformed into another kind of property, i.e. orchard
- The rest house cannot be claimed as VD, since it is not part of the gross estate of MRS. Stalin,
since it is a separate property of the surviving spouse, MR. Stalin
- The commercial land cannot be claimed as VD, since it is part of the TPU deduction

2. DETERMINE THE INITIAL “VALUE”

The initial value of the property shall be the lower of
a. FV at the date of previous transfer (i.e. date of prior decedent’s death or date of the gift)
b. Fair value at the date of death

Date of prev. transfer Date of death Initial value

Orchard 2 500 000 3 000 000 2 500 000

3. DETERMINE THE INITIAL “BASIS”

The initial basis is the initial value, reduced by any indebtedness on the property, which was
assumed and paid by the present decedent before his death

In the problem, the initial basis is equal to the initial value. It must be remembered that the initial
value will only be reduced by the mortgages the decedent has assumed and paid. Therefore, those
paid mortgages made by the current decedent will not reduce the initial value of the VD

4. DETERMINE THE FINAL BASIS

The final basis is the initial basis LESS proportionate deduction allowed, which is computed by
multiplying the initial basis with the ratio of ordinary deductions other than VD (i.e. ELIT and
TPU) to the total gross estate of the decedent
Ranch 2 000 000 Funeral expenses (subject to limits) 200 000
Orchard 3 000 000 Judicial expenses 600 000
Commercial land 1 000 000 Losses 400 000
Family home 2 000 000 Claims against the estate 700 000
Other properties 7 000 000 Unpaid mortgage 1 000 000
TPU 1 000 000
Gross estate 15 000 000 Ordinary deductions other than VD 3 900 000
 Initial basis of the vanishing deduction 2 500 000
Less: Proportionate deduction allowed (2 500 x 3 900/15 000) 650 000
Final basis of the vanishing deduction 1 850 000

5. DETERMINE THE VANISHING DEDUCTION

The actual vanishing deduction is the final basis multiplied by the following vanishing percentages
based on the period of time from the transfer from prior decedent or donor to current decedent
Within 1 year 100%
More than 1 year to 2 years 80%
More than 2 years to 3 years 60%
More than 3 years to 4 years 40%
More than 4 years to 5 years 20%
More than 5 years 0%

So, the vanishing deduction is 1 480 000. Final basis of 1 850 000 multiplied by vanishing
percentage of 80%. The dates to be considered shall be the date of transfer (Dec. 2012) and date
of death (July 2014). Date of purchase or transformation of property is irrelevant. VANISHING
DEDUCTION IS DEDUCTED UNDER SEPARATE EXPENSES, unless stated otherwise.

SPECIAL DEDUCTIONS
 STANDARD DEDUCTION
- A deduction in the amount of Php 1 000 000 shall be allowed as an additional deduction, without
the need of substantiation. Every decedent is allowed by law to deduct the full amount from his or
her gross estate.

 FAMILY HOME
- This includes the dwelling house, including the land on which it is situated, where the decedent
and/or members of his family reside as certified by the Barangay Captain of the locality
- To be considered family home, the residence shall be characterized by permanency, i.e. the
place to which, whenever absent for business or pleasure, one still intends to return
- Not only married decedents can claim family home, but also a single decedent who is the head of
a family
- A decedent is entitled to deduct only one family home

Requisites for deductibility

a.) The value of the family home must be included in the gross estate
b.) The allowable deduction must be the lower of: Decedent’s interest of the value of family home
included in the gross estate (i.e. FMV at the date of death) or Php 1 000 000

Note: The decedent’s interest therein shall be determined based on the following percentages:
- 100% if it is the separate property of the decedent
- 0% if it is the separate property of the surviving spouse
- 50% if it is the common property of the spouses

 MEDICAL EXPENSES
Requisites for deductibility
a.) Deductible whether paid or unpaid, provided that they have been incurred within 1 year prior
to death of the decedents, which shall be duly substantiated with receipts
b.) The allowable deduction for medical expenses shall not exceed Php 500 000

Note: Unpaid medical expenses within 1 year before death is deducted against medical expenses,
while (a) unpaid medical expenses incurred more than 1 year before death and (b) unpaid
expenses within 1 year before death but are not within the 500 000 limit can no longer be
deducted as claims against the estate.

 BENEFITS UNDER RA 4917

- Any amount received by the heirs from the decedent’s employer as a consequence of death of
the decedent-employee (i.e. payment was induced by the decedent’s death) in accordance with RA
4917 is allowed as a deduction, provided the amount of separation benefit is included as part of
the gross estate of the decedent

Differences in the treatment of benefits under RA 4917

1.) The amount of benefits shall be included in the conjugal column of the gross estate.
a.) If claimed as an ordinary deduction – Deducted in full under common expenses
b.) If claimed as a special deduction – only 50% is deducted as a special deduction, since the
50% is eliminated in the “share of the surviving spouse” deduction (preferred treatment)
 2.) The amount of benefits is included in the separate column of the gross estate
- In this case, the amount of benefits is deducted in full as a special deduction
Note: In all cases, the effect is the same in terms of the net taxable estate of the decedent.

SHARES OF THE SURVIVING SPOUSE

- This is equal to 50% of the net conjugal or community property of the decedent.

PRESENTATION OF DEDUCTIONS ON THE ESTATE TAX RETURN

Exclusive Common Total
Separate property of decedent xx xx
Common property of decedent xx xx
Gross estate xx xx xx
Less: Ordinary deductions
Funeral and judicial expenses xx xx
Loss against separate property xx xx
Loss against common property xx xx
Claims against estate* xx xx
Transfers for public use xx xx
Vanishing deduction xx xx
Net estate before special deductions xx “xx” xx
Less: Special deductions
Standard deduction xx
Family home xx
Net estate xx
Less: Share of surviving spouse (50% of “xx”) xx
NET TAXABLE ESTATE xx

Note: *Remember the default presumption on ELIT!

NON-RESIDENT ALIENS
Treatment of deductions for NRA
1. ELIT
The claimable deductible amounts of ELIT of NRA is pro-rated as
follows:
Total World ELIT x (Philippine gross estate / World gross estate)

Note: ELIT, whether incurred in the PH or abroad, must meet the

requisites for deductibility. Remember that only ELIT is pro-rated!

2. Transfer for public use Only transfers of properties situated in the Philippines given to the
PH government is allowed as a deduction for NRAs

3. Vanishing deductions Can be claimed if the requisites for deductibility are met (e.g.
property received as donation is found in PH, etc.)

Note: In determining the proportionate deduction allowed (in

relation to determining the final basis), the gross estate used as
denominator must be that of the PH gross estate, and not the
abroad gross estate.

4. Special deductions CANNOT be claimed by NRAs

5. Share of the surviving Can be claimed. 50% of the net communal estate (PH only)
spouse

Note: These deductions cannot be availed of by the NRA, if the executor, administrator, or anyone
of the heirs, as the case may be, DID NOT INCLUDE in the estate tax return the value of the part
of his gross estate not situated in the Philippines at the time of the decedent’s death
DONOR’S TAX

ESSENTIAL REQUISITIES
 Capacity of the donor
- A donor, whether natural or juridical, must be legally competent to enter into a valid contract
of donation. The donor’s capacity shall be determined as of the time of making of the
donation. It follows that the donee does not need to be capacitated to receive the gift in order
to make the donation valid.

 Donative intent or Intention to donate or Animo Donandi

- This refers to the proper declaration of the legal owner of a property or right to transfer
ownership without consideration. The donation must be intentional or voluntary, not implied.

 Donative act or delivery

- Donation is a real contract, and is completed by delivery, whether actual or constructive.

 Acceptance by the donee

- Donation is completed by delivery, but the transfer is only perfected from the moment the
donor has known the acceptance of the donee. The donee must accept the donation
personally, or through an authorized person with (a) a special power for that purpose or (b)
with a general and sufficient power. Otherwise, the donation is void.

Note: For transfers with insufficient consideration, donative intent and acceptance by donee
are not required.

REQUIRED FORMS
Real properties Must be in a public instrument
Intangible personal Must be in a public instrument
properties
Tangible personal a.) If value is 5 000 and below – may be made orally
properties b.) If value exceeds 5 000 – must be in writing (whether public or private)
Notes:
- Oral donation requires the “simultaneous delivery” of the thing or the document representing the
right donated
- The acceptance of donation (to be done in the lifetime of donor) of real properties may be made:
a.) in the same deed of donation
b.) in a separate public instrument – in this case, donor shall be notified of such acceptance in
authentic form, and such shall be noted in both instruments

GROSS GIFT

Exclusions from gross gift

1. Donations to tax-exempt donees under the NIRC and special laws (e.g. GSP, IBP, IRRI, UP, PNU,
Phil. Red Cross, Intramuros Administration, Development Academy of the PH, Ramon Magsaysay
Award Foundation, etc.)

2. Donation for election campaign

- These donations must be reported to the ComElec to be exempt from donor’s tax. Donation to a
particular candidate is exempt from donor’s tax, while donation to a political party is subject to
donor’s tax.

3 Transfers for insufficient consideration involving real property classified as capital assets
- This exemption is applicable only to real properties subject to 6% CGT. Since the 6% CGT is
applied to FMV or SP, whichever is higher, if the selling price is set lower than FMV, FMV is taxed,
and there could be no income tax evasion to arise from the manipulation of SP. Thus, there is no
need to impose donor’s tax.

4. Renunciation of inheritance
- General renunciation, if made in favor of NO co-heir; specific, if otherwise
- Generally, general renunciation of the net distributable estate is not a donation, and thus
excluded. Specific renunciation is deemed to be a donation subject to donor’s tax. An exception to
this is when there is only two heirs, and one heir renounces his share. Whether renounced in
general or specific, such is not a donation.
- Renunciation of the spouse of his/her share in the net common properties is always a donation.

5. Void transfers (essential and formal requisites are not complied)

 - Donation between spouses (including live-in partners without valid marriage), except minor or
moderate gifts
- Donation between persons who were guilty (not necessarily criminally convicted) of adultery or
concubinage at the time of donation
- Donation between persons found guilty of the same criminal offenses
- Donations to a public officer (or his wife, descendants or ascendants) by reason of his office
- Donations of future property
- Donation by a person who has no legal title to the property

6. Quasi-transfers (no real transfer of ownership, e.g. from usufruct to naked owner)

7. Donations inter-vivos with reserved powers (e.g. revocable and conditional transfers)

Inclusions in the gross gift

1. Direct donation of property (donated during the lifetime of the donor)
2. Donations in trust, only if irrevocable
3. Specific renunciation of inheritance, unless there are only two heirs
4. Renunciation by the surviving spouse of his share in the conjugal or common property
5. Cancellation or remission of debt where the debtor did not render service in favor of the creditor

Notes on gross gift

 The valuation of properties shall be the same as that under estate taxation.
 The value shall be that existing at the time of perfection of the donation. For conditional
transfers, property is to be valued at the time of satisfaction of the condition, or the waiver of
the donor of the conditions. For revocable transfers, property is to be valued at the time of the
waiver of the donor of his right to revoke, or if there is a period for revocation, the time such
period has elapsed.

 Spouses who make donations out of common or conjugal property shall be considered a
separate donor of his or her interest in the common property. Hence, the husband and the
wife shall file separate donor’s tax return, and 1/2 of the value is a donation made by the
husband and 1/2 is made by the wife.

 Donation to joint or several donees are split according to the number of donees, and are
separated in the donor’s tax return depending on their classification (whether relative or
stranger)

 Any encumbrances such as mortgage, real property tax and unpaid loans thereto which are to
be transferred to, or assumed by the donee, shall not be deducted or offset against the value
of the gross gift. Same principle with estate taxation

 A gift to a parish priest or his Church is included in the gross gift, since the exemption under
the Constitution refers to exemption from property tax or realty tax only.

DEDUCTIONS FROM GROSS GIFT (DEDNA)

1. Dowry These are gifts made on account of marriage by the parents of the children.
exemptions
Notes on deductibility:
a.) They must be given
- before the celebration of marriage
- within one year from the date of marriage

b.) The donee must be a legitimate, a recognized natural or an adopted CHILD

(a recognized natural child is born outside wedlock but is acknowledged by the
biological father)

c.) The deductible amount is only up to 10 000 per child, for all properties
donated within the prescribed period (use FIFO logic). If the property is a
common one, and donee is
- a child of both parents – both can claim the deduction
- a child of one parent in a prior marriage – only the real parent can claim
the deduction
- a child of one parent outside wedlock – only the real parent can claim the
deduction
- an adopted child – both can claim the deduction
- an illegitimate child from another person – no one can claim deduction

d.) This is the only deduction that cannot be claimed by NRAs. For NRAs, EDNA
only.
 2. This is allowed as a deduction only if it is assumed by the donee.
Encumbrances
3. Diminution of This refers to the decrease in the value of property donated as a result of a
gift provided by condition made by the donor to the donee (usually the condition is for the donee
donor to donate part of the donation he received to another donee)

This is a deduction against the original donation, and it forms as part of the gross
gift of the original donee (when he donates to the second donee as specified by
the original donor)

4. Donations to Gifts made for the use of the following are deducted from the gross gift, provided
Nat’l they are included as part of the donor’s gross gift.
government - the National government
- any entity created by any of its agencies which is not conducted for profit
- any political subdivision of the said government

Note: National government and its political subdivisions are exempt from donor’s
tax. If silent, GOCCs are assumed to be for-profit, and thus not included.

5. Donations to Requisites for deductibility

Accredited non- a.) not more than 30% of said gift shall be used by such donee for administrative
profit purposes
institutions b.) the donee entity must be organized as a non-stock entity
c.) the donee entity does not pay dividends
d.) the donee entity’s board of trustees do not earn any compensation
e.) the donee entity must devote all its income, donations, subsidies or other
forms of philanthropy to the accomplishment of its purposes enumerated in its
Articles
Notes:
- Donations with an onerous cause are not in the nature of an endowment or donation. They are in
the concept of a fee or a price in exchange for the performance of a service, use of property or
delivery of an object.

- Endowments or gifts received by associations are not exempt from donor’s tax.

- The donor’s tax accrues upon the completion of a gift. If the donated property was destroyed
after delivery, the donor is still liable to pay the related donor’s tax.

DONOR’S TAX
The computation of the donor’s tax is on a cumulative basis over a period of one calendar year.

Net taxable gift of the donation made today xx

Add: Previous net gifts during the year xx
Aggregate net gifts xx

Aggregate tax due (based on the aggregate net gifts) xx

Less: Donor’s tax on previous net gifts during the year (xx)
Donor’s tax due, current gift xx

Note: This shall be done on a per donee classification basis.

Classification of donees
1. RELATIVES – subject to progressive tax, this includes the following
a.) spouse (always take note that donation between spouses is void, unless moderate gifts are
involved)
b.) brothers and sisters – whether full- or half-blood
c.) ancestors
d.) lineal descendants – including an adopted child
e.) relative by consanguinity in the collateral line up to the 4th degree of relationship – uncles,
aunts, nieces, nephews, first cousins, first cousins of grandparents

2. STRANGERS – subject to 30% proportional tax

Notes on reportorial requirements

- The return is filed within 30 days after the donation is made and the tax due thereon must be
paid on the date of filing. A separate return is required for donations made at different dates
during the year, reflecting therein any previous net gift made in the same year

- Donors shall make a return under oath in duplicate. The return shall set forth:
a.) Each gift made during the calendar year which is to be included in computing net gifts
b.) The deductions claimed and allowable
c.) Any previous net gifts made during the same calendar year
 d.) The name of the donee
e.) Relationship of the donor to the donee

- Donations that are exempt from donor’s tax, or that result to a zero net gift, are not required to
file the returns.

TAX CREDITS

Tax credit limit, formula: Philippine donor’s tax due x (Foreign net gifts / World net gifts)

Note: Net gifts include both gifts made to relatives and strangers. This tax credit limit shall only be
allowed to residents and citizens. Thus NRAs cannot claim tax credit.

1. One foreign country Whichever is lower between

a.) actual foreign donor’s tax paid
b.) Tax credit limit

2. Multiple foreign LIMIT 1: The lower between

countries a.) actual foreign donor’s tax paid per country
b.) tax credit limit on per country net gifts

LIMIT 2: The lower between

a.) The total of the amounts in limit 1
b.) tax credit limit on total foreign net gifts

Computation of donor’s tax payable

Tax due on global donations to relatives xx
Tax due on global donations to strangers xx
Donor’s tax due xx
Less: Foreign tax credit (xx)
Less: PH donor’s tax paid (xx)
Donor’s tax payable xx