CHAPTER 1

SUCCESSION AND TRANSFER TAXES

TOPIC OVERVIEW:
This chapter explains the definition and nature of succession and transfer taxes. It also discusses
the kinds, causes and elements of succession, and describes the different kinds of wills.

LEARNING OBJECTIVE:
After studying this chapter, the students should be able to:
1. Define succession and transfer taxes.
2. Explain the nature of transfer taxes.
3. Enumerate the kinds of succession, and identify the elements of succession.
4. Determine the causes of legal succession or intestacy.
5. Describe the different kinds of wills.

TRANSFER TAXES AND SUCCESSION DEFINED

Transfer taxes are taxes imposed upon gratuitous disposition of private properties or rights.
Gratuitous transfer is one that neither imposes burden nor requires consideration from transferee
or recipient. The transfer of ownership is free because of the absence of financial consideration.
Hence, gratuitous transfers are essentially donations. The reverse side of gratuitous transfer is
onerous, one where the transferee gives consideration in return for the property or right(s)
received. Onerous transfers are subject to business taxes instead of transfer taxes.

Gratuitous transfer or donation may take effect at the time of death of the donor or during the
lifetime both the donor and the donee. The former is known as donation mortis causa subject to
estate tax while the latter is known as donation inter vivos subject to donor’s tax.

Succession is a mode of acquisition by virtue of which the property, rights, and obligations to the
extent value of the inheritance of a person are transmitted through his death to another or others
either by his will or by operation of law. The inheritance includes all the property, rights, and
obligations of a person which are not extinguished by his death. The rights to the succession are
transmitted from the moment of death of the decedent notwithstanding the postponement of the
actual possession or enjoyment of the estate by the beneficiary. The heirs succeed immediately to
all the property of the deceased ancestor at the moment of death as completely as if the ancestor
had executed and delivered to them a deed for the same before his death.

NATURE OF TRANSFER TAXES

The subject matter of a transfer tax is the privilege of the transferor to gratuitously transfer
property or rights which takes effect at the date of death of the transferor (known as transfer
mortis causa subject to estate tax) or during the lifetime of the donor and the donee (known as
transfer inter vivos subject to donor's tax). Although the amount of transfer tax is based on net
estate or net gifts, it shall not be construed as a property tax. On this basis, transfer tax is
classified as "excise tax" or privilege tax imposed on the act of passing the ownership of property
and not on the value of the property or right.

THE LAW THAT GOVERNS THE IMPOSITION OF ESTATE TAX

It is a well settled rule that estate taxation is governed by the statute in force at the time of death
of the decedent. The estate tax accrues as the date of death of the decedent and the accrual of the
tax is distinct from the obligation to pay the same. Upon the death of the decedent, succession
takes place and the right of the State to the tax the privilege to transmit the estate vests instantly
upon death (Section 3, RR 2-2003). In the Philippines, succession itself (excluding the tax
aspect) is governed by the new civil code.

ILLUSTRATION 1
Pedro suffered an unexpected heart attack causing his death on November 1, 2018. His estate
composed of the following:
Cash in bank P 1,000,000
Commercial building 5,000,000
Cars 1,000,000
House and lot 3,000,000

Juan is the only heir of the decedent. Pedro’s remains were cremated on November 8, 2018. The
executor of Pedro’s estate filed the estate tax return and paid the corresponding estate tax on
January 15, 2019. The properties left by the decedent were finally distributed to Juan on
February 14, 2019. Answer the following:

Question 1: When will the transfer of ownership from the decedent to the heir take effect?
 November 1, 2018. The right of succession are transmitted from the moment of death of
the decedent, notwithstanding the actual transfer dated February 14, 2019.

Question 2: When should the estate tax accrue?

 November 1, 2018. Under RA 10963 otherwise known as the TRAIN Law, the filing
period was extended to within one (1) year from the date of death (prior to 2018, six (6)
months). It shall be noted that the accrual of the estate tax is distinct from the obligation
to pay the same.

Question 3: Assume that Pedro’s total outstanding liabilities as of the time of his death
amounted to P12,000,000. How much of the outstanding liabilities of the decedent should be
assumed by Juan?
 P10,000,000. Limited only to the extent of the value of properties and rights inherited.

KINDS OF SUCCESSION (Art. 778 NCC):

Whenever a person dies leaving property (inheritance), a question normally arises as to how his
property or estate will be dealt with by those he/she left behind. The answer depends on whether
or not a decedent left a "will" at the time of his death. The definition of "succession" in the tax
code as discussed, clearly states that the inheritance are transmitted either by his will (with last
will and testament) or by operations of law (in the absence of a last will and testament, the
provisions of the civil code on succession shall apply).

A person is normally said to have died testate if he left a will at the time of his/her death and a
person is said to have died intestate if such a person died without leaving a will. To summarize,
succession may be classified as:

1. Testamentary or testate succession. A type of succession that results from the designation of
an heir, made in a will executed in the form prescribed by law.

2. Legal or intestate succession. A type of succession which is effected by operations of law

(based on the provisions of the civil code regarding succession) since the decedent did not
execute a will or if the last will and testament executed by him is void.
3. Mixed succession. A type of succession which is effected partly by will and partly by
operation of law.

ILLUSTRATION 2:
The following cases illustrate the different types of succession.

Case A. Testamentary Succession

Assume the same data in Illustration 1. In addition, Pedro left a duly executed last will and
testament transferring all his properties to Juan upon his death.

Case B. Intestate or Legal Succession

Assume the same data in Illustration 1 except that Pedro did not execute a last will and testament
during his lifetime and Juan is the only legal heir qualified to inherit his properties. In such a
case, an intestate or legal succession exists. The estate of the decedent will be disposed of in
accordance with the provisions of law on inheritance/succession.

Case C. Mixed Succession

Assume the same data in Illustration 1. Assume further that Pedro left a duly executed last will
and testament transferring all his properties to Juan upon his death. The last will and testament
was dated November 1, 2017 or exactly one year before Pedro’s death. In addition, assume that
from the preparation of the will up to the date of his death, rental income from the commercial
building amounted to P250,000. Of this amount, P150,000 was used to acquire a parcel of land in
Makati while the balance of P100,000 was deposited in a new bank account. Since the parcel of
land and the new bank account were acquired by the decedent after November 1, 2017, they were
not included in the will. Hence, a mixed succession exists.

CAUSES OF LEGAL SUCCESSION OR INTESTACY

1. If a person dies without a will, or with a void will, or one which has subsequently lost its validity

ILLUSTRATION 3:
Case A. Void Will
Juan Dela Cruz devised in his will one of his parcels of land located in Valle Verde Subdivision
to one of his daughters, Maria. Juan can neither write nor read Chinese Mandarin but it was the
language used in his last will and testament. In such a case, the will shall be considered void. As
a rule, the last will and testament shall be executed in a language or dialect known to the testator
to be considered valid.

Case B. Will which has subsequently lost its validity

On November 2, 2018, a day after executing his last will and testament, the testator accidentally
obliterated the same. The testator was not able to prepare a new will before his death.
Consequently, there is no more last will and testament to speak of.

2. When the will does not institute an heir

ILLUSTRATION 4:
Assume the same data in Illustration 3 – Case A except that there was no heir identified in the
last will and testament. The devisee was simply described in the will as follows:

“I am devising my parcel of land in Valle Verde Subdivision to my closest and favorite

daughter.” Assume further that the testator has five children.
Juan Dela Cruz (signed)
November 1, 2017
3. Partial institution of heir. Consequently, intestacy takes place as to the undisposed portion.

4. When the heir instituted is incapable of succeeding

ILLUSTRATION 5:
Case A. Assume Pedro named Juan in his will as his sole beneficiary, except that Juan died
ahead of Pedro. Accordingly, the last will and testament prepared by the testator shall be
considered void.

Case B. Assume Pedro named Juan in his will as his sole beneficiary. However, the latter is
mentally ill. The heir in this case is incapable of succeeding the testator.

5. Other causes such as:

a. Non-fulfillment of the suspensive condition attached to the institution of the heir. Suspensive
condition is a condition depending upon the happening of an uncertain event which must be
fulfilled before an obligation arises.
b. Preterition. Omission in the testator’s will of one, some or all of the compulsory heirs in the
direct line which has the effect of annulling the institution of heir.
c. Fulfillment of a resolutory condition. A resolutory condition refers to a condition whereby
upon fulfillment terminates an already enforceable obligation
d. Expiration of term or period of institution
e. Non-compliance or impossibility of compliance with the will
f. Repudiation of the instituted heir.

ELEMENTS OF SUCCESSION

1. Decedent is the general term applied to the person whose property is transmitted through
succession, whether or not he left a will. If he left a will, he is called a testator (Art. 775 NCC).

Executor is a person designated in the last will and testament to carry out the provisions of the
decedent's will. He also performs a fiduciary duty such as taking care of the decedent's estate
prior to final disposition to the heirs. Administrator is a person appointed by the court and
performs the same duty, in lieu of an executor, if the latter refused to accept the appointment,
failed to qualify under the law or the last will and testament did not appoint one.

2. Inheritance (Estate) - Include all the property, rights and obligations of a person which are not
extinguished by death and all which have accrued thereto since the opening of succession. Rights
which are purely personal are not transmissible for they are extinguished by death (Art. 776
NCC).

3. Successors
An heir or successor is a person who is called to the succession either by the provision of a will
or by operation of law (Art. 782 NCC). Devisees and legatees are persons to whom gifts of real
and personal property are respectively given by virtue of a will. Successors or heirs are classified
under the law as follows:

a. Compulsory heirs – those who succeed by force of law to some portion of the inheritance, in
an amount predetermined by law, known as the legitime. They succeed whether the testator likes
it or not. They cannot be deprived by the testator of their legitime except by disinheritance
properly effected.

Kinds of Compulsory Heirs:

 Primary – those who have precedence over and exclude other compulsory heirs
(legitimate children and descendants)
  Secondary – those who succeed only in the absence of the primary compulsory heirs
(legitimate parents and ascendants)
 Concurring – those who succeed together with the primary or secondary compulsory
heirs (illegitimate children and descendants and surviving spouse)

Table 1-1 COMPULSORY HEIRS

PRIMARY SECONDARY
a. Legitimate children and their legitimate d. Legitimate parents and legitimate
descendants ascendants (They inherit only in default of A)
b. Surviving spouse e. Illegitimate parents (no other descendants)
c. Illegitimate children and their descendants, they inherit only in default of A and C.
legitimate or not
Note: Brothers and sister are neither compulsory heirs nor strangers. However, they may be
voluntary heirs.

b. Voluntary heirs – those instituted by the testator in his will to succeed to the inheritance of
the portion thereof of which the testator can freely dispose. Free portion refers to the portion or
value left in the estate after deducting the legitimes of the compulsory heirs. A voluntary heir is
determined through the last will and testament.

c. Legal or intestate heirs – those who succeed to the estate of the decedent by operation of law
(decedent died without a valid will or his estate was not entirely disposed of by the will)

Table 1-2 ORDERS OF INTESTATE SUCCESSION

1. Legitimate children or descendants
2. Legitimate parents or ascendants
3. Illegitimate children or descendants
4. Surviving spouse
5. Brothers and sisters, nephews and nieces
6. Other collateral relatives within the 5th degree
7. State

The distribution of free portion in intestate succession is based in the order of priority because in
every inheritance, the relative nearest in degree excludes more the distant ones, saving the right
of representation when it properly takes place.

COLLATERAL RELATIVES
Consanguinity is the relation of persons descending from the same stock or common ancestors.
These persons are known as blood relatives, and are said to be related by blood or consanguinity.
It may be lineal or collateral. Lineal consanguinity, which may be descending or ascending, is
that which subsists between persons of whom one is descended in a direct line from the other.
Collateral consanguinity is that which subsists between persons who have the same ancestors,
but who not descend (or ascend) one from the other. Proximity of relationship is determined by
the number of generations. Each generation forms a degree as illustrated below.

AB

CE AB

GK H I JL

M N
 Table 1-3 TABLE OF LEGITIMES
Survivor Legitime Notes
LC ½ Divide by the number of LC
1 LC ½
SS ¼
2 or more LC ½
SS Equal to 1 LC
LC ½ All the concurring CH get from the half free portion, the
SS ¼ share of the SS having preference over that of the IC, whose
IC ½ of 1 LC share may suffer reduction pro-rata because there is no
preference
among themselves
LPA ½
LPA ½
IC ¼
LPA ½
SS ¼
LPA ½
SS 1/8
IC ¼
IC ½ Divide equally among the IC
SS 1/3
IC 1/3
SS ½ 1/3 if marriage is in articulo mortis and deceased spouse dies
within 3 months after the marriage
IP ½
IP Excluded Children inherit in the amounts established in the foregoing
Any child It depends rules
IP ¼ Only the parents of IC are included. Grandparents and other
SS ¼ ascendants are excluded.

WILLS
A will is an act whereby a person is permitted, with the formalities prescribed by law, to control
to a certain degree the disposition of his estate to take effect after his death (Art. 783 NCC). It is
a document whereby a person, called the testator, disposes of his or her properties or estate to
take effect upon his or her death.
The making of a will is a strictly personal act. It cannot be left in whole or in part to the
discretion of a third person, or accomplished through the instrumentality of an agent or attorney.
All persons who are not expressly prohibited by law may make a will. The persons prohibited by
law to make a will are those below 18 years old and those who are not of sound mind at the time
of its execution.
The law presumes that every person is of sound mind, in the absence of proof to the contrary.
The burden of proof that the testator was not of sound mind at the time of making his
dispositions is on the person who opposes the probate of the will. If the testator, one month or
less, before making his will was publicly known be insane, the person who maintains the validity
of the will must prove that the testator made it during lucid interval. Supervening incapacity does
not invalidate an effective will, nor is the will of an incapable validated by the supervening of
capacity. A married woman may make a will without the consent of her husband, and without the
authority of the court. A married woman may dispose by will of all her separate property as well
as her share of the conjugal partnership or absolute community property.
KINDS OF WILLS
1. Notarial or Ordinary or Attested Will - is one which is executed in accordance with the
formalities prescribed by Art. 804 to 808 of the New Civil Code.
Requisites for a Valid Notarial Will
a. It must be in writing and executed in a language or dialect known to the testator.
b. It must be subscribed at the end thereof by the testator himself or by the testator's name written
by some other person in his presence and by his express direction.
c. It must be attested and subscribed by three or more credible witnesses in the presence of the
testator and of one another.
2. Holographic Will – is a written will which must be entirely written, dated, and signed by the
hand of the testator himself. It is subject to no other form and it may be made in or out of the
Philippines and need not be witnessed (Art. 811 NCC). In case of any insertion, cancellation,
erasure, or alteration in a holographic will, the testator must authenticate the same by his full
signature.
Codicil is a supplement or addition to a will, made after the execution of a will and annexed to be
taken as a part thereof, by which any disposition made in the original will is explained, added to
or altered. In order that a codicil may be effective, it shall be executed as in the case of a will.
(Art. 825 and 826)

Reference:
Tabag, E.D., Garcia, E.J. (2018) Transfer & Business Taxation with Special Topics based on
NIRC as amended under RA10963 – Tax Reform for Acceleration and Inclusion Act (TRAIN
Law)
 CHAPTER 2
GROSS ESTATE

TOPIC OVERVIEW:
This chapter describes the nature of estate taxes. It also explains the rules and procedures to be
followed in computing for the gross estate of a decedent.

LEARNING OBJECTIVES:
After studying this chapter, the students should be able to:
1. Define estate tax.
2. Explain the nature of estate taxes and the justification for its imposition.
3. Describe the composition of gross estate.
4. Determine the situs of the assets that may be included in the computation of gross estate.
5. Enumerate the exemptions and exclusions, and inclusions in the gross estate.
6. Discuss the time for filing the estate tax return.

ESTATE TAX - DEFINITION AND NATURE

In the Philippines, Estate Tax is a tax imposed on the privilege that a person is given in
controlling to a certain extent, the disposition of his property to take effect upon death. As
discussed in Chapter 1, it is an excise tax imposed on the act of passing the ownership of
property at the time of death and not on the value of the property or right. On this basis, estate
tax should not be construed as a direct tax on the property of the decedent although the tax is
based thereon. Since estate tax accrues as of the time death, the right of the State to tax the
privilege to transmit the estate vests instantly upon death. The accrual of the tax is distinct from
the obligation to pay the same.

JUSTIFICATION FOR THE IMPOSITION OF ESTATE TAX

1. Benefit-Received Theory
The law considers the service rendered by the government in the distribution of the estate of the
decedent, either by law or in accordance with his wishes. For the performance of these services
and other benefits that accrue to the estate and the heirs, the State collects the tax.

2. Privilege or State Partnership Theory

Under this theory, inheritance is not a right but a privilege granted by the State and legatees have
been acquired only with the protection of the State. Consequently, the State as a passive silent
partner in the accumulation of property has the right to collect the share which is properly due to
it.
3. Ability to Pay Theory
Receipt of inheritance which is in the nature of an unearned wealth or windfall, are place assets
into the hands of the heirs and beneficiaries. This creates an ability to pay the tax and thus
contributes to government income.
4. Redistribution of Wealth Theory
The receipt of inheritance is a contributing factor to the inequalities in wealth and incomes. The
imposition of estate tax reduces the property received by the successor, thus helping to promote
equitable distribution of wealth in society. The tax base is the value of the property and the
progressive scheme of taxation is precisely motivated by the desire to mitigate the evils of
inheritance in the present form.
CLASSIFICATION OF TAXPAYERS AND COMPOSITION OF GROSS ESTATE
Section 85 of the Tax Code states that the value of the gross estate of the decedent should be
determined by including the value at the time of his death of all property, real or personal,
tangible or intangible, wherever situated: Provided, however, that in the case of a nonresident
decedent who at the time of his death was not a citizen of the Philippines, only that part of the
entire gross estate which is situated in the Philippines shall be included in his taxable estate.

The composition of the estate tax may be summarized as follows:

Table 2.1: COMPOSITION OF GROSS ESTATE BASED ON CITIZENSHIP AND

RESIDENCY
Decedent Gross Estate
Citizen/Resident Alien 1. Property (real or personal) wherever situated
2. Intangible personal property
wherever situated
Nonresident alien 1. Real property situated in the Philippines
2. Tangible personal property situated in
the Philippines
3. Intangible personal property with situs in
the Philippines, unless excluded on the basis of
reciprocity as described below.

RECIPROCITY CLAUSE
The tax code excludes "intangible" personal property with situs in the Philippines from the gross
estate of a non-resident alien decedent if there is reciprocity. There is reciprocity if:

 The decedent at the time of his death was a resident citizen of a foreign country which at
the time of his death did not impose an estate tax of any character in respect of intangible
personal property of citizens of the Philippines not residing in that foreign country; or

 The laws of the foreign country of which the decedent was a resident citizen at the time
of his death allow a similar exemption from estate taxes of every character, in respect of
intangible personal property owned by citizens of the Philippines not residing in that
foreign country.

INTANGIBLE ASSET
The term "intangible asset" was not defined in the Tax Code, nonetheless, Accounting Standards
defines intangible asset as an "identifiable nonmonetary asset without physical substance". They
derive their value from intellectual or legal rights, and from the value they add to the other assets.
As a rule, the situs of intangible personal property is the domicile of the owner, also known as
"mobilia sequntur personam". However, the rule is not applicable if the intangible property has
situs elsewhere or where the intangible property has acquired a business situs in another
jurisdiction because the principle of "mobilia sequntur personam" is only used for convenience.
It must yield to the actual situs of such property. The situs of Franchise, for instance, should not
be, based on the domicile of the owner but the place where such franchise is exercised.

INTANGIBLE ASSETS WITH SITUS THE WITHIN THE PHILIPPINES

Section 104 of the Tax Code enumerates the following intangible personal property with situs in
the Philippines:
1. Franchise which must be exercised in the Philippines.
2. Shares, obligations or bonds issued by any corporation or sociedad anonima organized or
constituted in the Philippines in accordance with its laws.
 3. Shares, obligations or bonds issued by any foreign corporation, 85% of the business of
which is located in the Philippines.
4. Shares, obligations, or bonds issued by any foreign corporation if such shares, obligations
or bonds have acquired a business situs in the Philippines.
5. Shares or rights in any partnership, business or industry established in the Philippines.
Table 2.2: SITUS OF TANGIBLE AND INTANGIBLE PROPERTY
Property Situs
Real property and tangible personal property Location of the property
Shares, franchise, copyright, and the like Where the intangible is exercised regardless of
where the corresponding certificate is stored
Receivables Residence of the debtor
Bank deposits Location of the depositary bank

Illustration 1:
A nonresident alien decedent left the following estate:
House and Lot – Hong Kong, inherited before marriage P 15,000,000
Car, acquired during marriage in Cebu 1,500,000
Shares of stocks issued by a foreign corporation, 20% of its 250,000
operations is in the Philippines
Bank deposit with PNB branch in New York, representing income 500,000
earned during marriage
Shares of stocks issued by PLDT group of companies, a corporation 500,000
organized under Philippine Laws
5-year, 12% promissory note, received 2 years ago, during marriage. 500,000
The debtor is a resident of Quezon City

Case A. Assume there is no reciprocity, what is the correct value of the gross estate?
Answer: P2,620,000

Car, acquired during marriage in Cebu P 1,500,000

Shares of stocks issued by PLDT group of companies, a corporation organized 500,000
under Philippine Laws
5-year, 12% promissory note 500,000
Interest income (P500,000*12%*2) 120,000
Gross Estate P 2,620,000

 The shares of stock issued by a foreign corporation (20% of its operation is in the
Philippines) is considered situated outside of the Philippines. Under the tax code, a
nonresident alien decedent is taxable only for properties situated in the Philippines. Same
rule applies to the House and Lot as well as the bank deposit in New York, USA.

 Interest income earned before or at the time of death shall likewise form part of the
decedent's gross estate.
Case B: Assume there is reciprocity, what is the correct value of the gross estate?
Answer: P1,500,000

Only the car in Cebu acquired during marriage shall be included in the decedent's gross estate.
Intangible properties with situs within the Philippines are excluded in the determination of gross
estate if there is reciprocity.
VALUATION OF GROSS ESTATE (as amended under RA10963; RR 12-2018)
Since succession and the accrual of the corresponding estate tax takes effect upon the death, it
shall only be fair to appraise the estate at its fair market value at the time of the decedent's death.
Specifically, the following rules shall apply in, determining the correct valuation of the estate:

1. In General : Fair Market Value at the time of death

2. Real Property : The higher value between:
FMV determined by the Commissioner; and FMV as shown in the schedule of values fixed by
the provincial and city assessors.
For purposes of prescribing real property values, the CIR is authorized to divide the Philippine
into different zones or areas and shall, upon consultation with competent appraisers, both from
the private and public sectors, determine the fair market value of real properties located in each
zone or area. If there is an improvement, the value of improvement is the construction cost per
building permit or the fair market value per latest tax declaration.
3. Personal Property : Fair market value at the time of death
4. Shares of stock

 Unlisted common share: Book value per share of the issuing corporation (Appraisal
surplus shall not be considered, as well as the assigned amount to preference shares, if
any).

 Unlisted Preference share: Par value per share

 Listed shares: FMV shall be the arithmetic mean between the highest and lowest
quotation at a date nearest the date of death, if none is available on the date of death-itself
(RR 22003/ RR Q-2018).

5. Units of participation in any association, recreation or amusement club (ie. golf, polo, similar
clubs)
The bid price nearest the date of death published in any newspaper or publication for general
circulation.
6. Right to usufruct, use or habitation, and annuity
In accordance with the latest Basic Standard Mortality Table taking into account the probable life
of the beneficiary, to be approved by the Secretary of Finance upon recommendation of the
Insurance Commissioner [Section 88(A)-NIRC].

Illustration 3:
Determine the correct amount to be included in the gross estate of the decedent in the following
independent cases:
Case A:
Pedro bought a brand new car with a cash price of P3,000,000. He bought the car on installment
with the following terms: down payment of P500,000 and annual installment of P700,000 for
four years. On his way home, he run over an approaching truck and died.

Answer: P 3,000,000
Case B:
The decedent granted a P2,000,000 loan to his best friend two years before his death with a 10%
interest per annum evidenced by a note. Both the principal and interest are due after three years.

Answer: Principal amount plus interest of 10% for 2 years

Case C:
The decedent devised to his son a 1,000 square meter lot in Global City, Taguig with the
following valuation:
Fair value as determined by city assessors P 20,000/sq.m.
Zonal value as determined by the CIR 17,000,000
FV determined by independent assessors 18,500,000

Answer: P20,000,000 (1,000 sq.m. * P20,000)

Case D:
Decedent owns 100,000 ordinary shares of Alpha Company at the time of his death. At that time,
Alpha’s outstanding shares were 1,000,000 with P10 par value and Retained Earnings amounting
to P5,000,000. The shares are not traded in the stock exchange.

Answer: P1,500,000 {(10M+5M)/1M}*100,000 shares

Case E:
A decedent left 10,000 Pinoy Telecom shares. The shares were traded in the local stock
exchange. At the time of death, the following were available:
Highest quotation P800/share
Lowest quotation P200/share
Book value P350/share

Answer: P5,000,000 {10,000 shares * [(800+200)/2]}

EXEMPTIONS AND EXCLUSIONS FROM THE GROSS ESTATE

A. Exclusions under Sections 85 and 86 of the Tax Code
1. Exclusive property of the surviving spouse.
The gross estate in case of married decedents, is composed of:

 Exclusive properties of the decedent

 Common properties of the decedent and the surviving spouse

Exclusive properties of the surviving spouse should be excluded in the gross estate because these
properties are not owned by the decedent upon his death.
For estate tax purposes, exclusive properties of the husband are known as capital while exclusive
properties of the wife are known as paraphernal properties. Whether such property is exclusive
or common will depend on the type of property relations of the husband and wife. Property
relations are discussed in Chapter 4.
2. Property outside the Philippines of a non-resident alien decedent
Section 85 of the Tax Code provides that for nonresident alien decedents, only his properties
situated or with situs within the Philippines shall be included in his gross estate. Consequently,
properties outside of the Philippines are excluded in determining gross estate.
3. Intangible personal property in the Philippines of a non-resident alien under the Reciprocity
Law
The tax code excludes "intangible" personal property with situs in the Philippines from the gross
estate of a non-resident alien decedent if there is reciprocity.
B. Exclusions under Section 87 of the Tax Code
1. The merger of usufruct in the owner of the naked title.
2. The transmission or delivery of the inheritance or legacy by the fiduciary heir (also known as
the 1st heir) or legatee to the fideicommisary (also known as the 2nd heir).
3, The transmission from the first heir, legatee or donee in favor of another beneficiary, in
accordance with the desire of the predecessor (also known as "special" power of appointment).
4. All bequest devises, legacies or transfers to social welfare, cultural and charitable institutions,
no part of the net income of which inures to the benefit of any individual: Provided, however,
that not more than thirty percent (30%) of the said bequest, devises, legacies or transfers shall be
used by such institutions for administration purposes.
The government agency which is empowered to determine the exemption is the BIR. To enable it
to exercise such power, the value of transfer to social welfare, cultural and charitable institutions
should be included in the gross estate. An equal amount, however, may be taken up as a
deduction. While the Tax Code includes this item in the exempt acquisitions and transmissions, it
is actually considered a deduction from the gross estate. Failure to include the property
transferred to social welfare, cultural or charitable institutions will impair the power of the BIR
to assess taxes properly

Illustration 4:
Case A - Merger of usufruct in the owner of the naked title
In the last will and testament of Mr. Yumao, he assigned the usufruct of his parcel of land to his
son (Juan) while his grandson (Pedro) was named the owner of the naked title.
Upon the death of Mr. Yumao, the parcel of land should be included in his gross estate. However,
upon the death of Juan, the parcel of land should be "excluded" in his gross estate because he is
not the owner of the land but his son, Pedro. There will be merger of usufruct in the owner of the
naked title (Pedro) upon Juan's death. Meaning, Pedro will be entitled to both the usufruct and
ownership of the naked title upon Juan's death.
Case B The transmission or delivery of the inheritance or legacy by the fiduciary heir or legatee
to the fideicommisary.
In the last will and testament of Mr. Yumao, he devised his parcel of land to his son (Juan) but
with a condition that such property should be given to his grandson (Pedro) when the former dies.
Thus, the parcel of land is intended to be inherited by Pedro, not Juan (For purposes of
convenience, disregard rules on legitimes discussed in Chapter 1). Juan is acting only as a trustee
or fiduciary until such time that the property is transferred to Pedro. Since Juan is the father of
Pedro and both were alive at the time of the testator's death (Mr. Yumao), the substitution or
transfer from Juan to Pedro is known as fideicommisary substitution. Upon the death of Mr.
Yumao, the parcel of land should be included in his gross estate. However, upon the death of
Juan, the parcel of land should be "excluded" in his gross estate because Juan is acting only as a
trustee of Pedro.
Elements of a fideicommissary substitution:

 The substitution must not go beyond one degree from the heir originally instituted (i.e.
father to son).

 The fiduciary (first heir) and the fideicommissary (second heir) must be both living at the
time of the testator's death.
Case C - The transmission from the first heir, legatee or donee in favor of another beneficiary,
in accordance with the desire of the predecessor
Assume the same data as presented in "Case B" except that the relationship between Juan and
Pedro is beyond one degree. For instance, Juan is the uncle of Pedro. In this case, there is no
fideicomissary substitution. Nonetheless, the parcel of land is still intended to be inherited by
Pedro, not Juan. Juan is still acting as a trustee or fiduciary until such time that the property is
transferred to Pedro. Likewise, Juan is also known as the 1st heir while Pedro is the 2nd heir.
The only difference between exemption in Case B and Case C is the degree of relationship
between the 1st heir and the 2nd heir. The effect as to whether or not the property is included in
the gross estate is the same. Hence, upon the death of Mr. Yumao, the parcel of land should be
included in his gross estate. However, upon the death of Juan, the property should be "excluded"
in his gross estate because he is not the owner of the property upon his death.

C. Exclusions under Special Laws

1. Proceeds of life insurance and benefits received by members of the GSIS (RA728).
2. Accruals and benefits received by members from the SSS by reason of death
3. Life Insurance proceeds on life insurance policy taken out by the decedent himself, upon his
own life, where the beneficiary is a third person and is irrevocably designated.
4. Life Insurance proceeds on Insurance policy (group insurance) taken out by his employer on
the employee's life, whoever the beneficiary maybe, whether the designation as beneficiary is
revocable or irrevocable.
5. Amounts received from Philippines and United States governments for war damages (RA227).
6. Payments from the Philippines of US government to the legal heirs of deceased of World War
Il Veterans and deceased civilian for supplies/services furnished to the US and Philippine Army
(RAI 36).
7. Amounts received from United States Veterans Administration.
8. Transfer by way of bona fide sales.
9. Properties held in trust by the decedent
10. Acquisition and/or transfer expressly declared as not taxable
11. Personal Equity and Retirement Account (PERA) assets of the decedent-contributor (Sec. 14,
RA 9505 — Personal Equity and Retirement Account Act of 2008)

INCLUSIONS IN THE GROSS ESTATE

A. Property owned by the decedent ACTUALLY AND PHYSICALLY PRESENT IN HIS
ESTATE at the time of his death such as land, buildings, shares of stock, vehicles, bank deposit,
and the like.
B. Decedent's Interest - Refers to the extent of equity or ownership participation of the decedent
on any property physically existing and present in the gross estate, whether or not in his
possession, control or dominion. It also refer to the value of any interest in property owned or
possessed by the decedent at the time of his death (interest having value or capable of being
valued or transferred.
C. Property NOT PHYSICALLY IN THE ESTATE (these have already been transferred during
the lifetime of the decedent but are still subject to payment of estate tax) such as:
1. Transfer in contemplation of death
A transfer in contemplation of death is a disposition of property prompted by thought of death. It
is the thought of death, as a controlling motive which induces the disposition of the property for
the purpose of avoiding the tax. Included within this concept is donation mortis causa. Include in
the gross estate the value of property transferred by the decedent during his lifetime in
anticipation of his death such as:
a. Transfer of property in favor of another person, but the transfer was intended to take effect
only upon the transferor's death.
b. Transfer by gift intended to take effect at death, or after death, or under which the donor
reserved the income or the right to designate the persons who should enjoy the income.
There is no transfer in contemplation of death when the transfer of property is a bona fide sale
for an adequate and full consideration in money or money's worth.
2. Transfer with retention or reservation of certain rights
The decedent have transferred his property during his lifetime, but retained for himself beneficial
enjoyment of the thing or the right to receive income from the same.
3. Revocable Transfers
It is a transfer where the terms of enjoyment of the property may be altered, amended, revoked or
terminated by the decedent. It is sufficient that the decedent had the power to revoke though he
did not exercise the power.
Inclusions C.2 and C.3 above do not actually convey full ownership over the property transferred.
Hence, still part of the gross estate of the transferor.
Illustration 5:
Case A:
A high ranking official realized that due to the nature of her illness, age and the pressure brought
about by the various legal cases filed against her, death might not be that far. Hence, she
gratuitously transferred most of her properties to her children while still alive. Should the
properties transferred be included in the gross estate of the decedent-transferor upon her death?

Answer: Yes
The properties transferred should be included in the estate of the high ranking official at the time
of her death because such transfers were intended to take effect upon her death (donation mortis
causa) regardless of the date of the actual transfer to the beneficiaries or heirs.

Case B:
Renato, a natural philanthropist, gratuitously transferred a property to CJ worth P50,000,000
during his lifetime. What amount should be included in the gross estate of Renato upon his death?
Answer: P0.
The transfer was not intended to take effect upon his death but during his lifetime. It should
therefore be treated as a "donation inter-vivos" rather than inheritance (donation mortis-causa).
The transfer is subject to donor's tax (Chapter 6).

Case C:
Due to an unstable medical condition, Pedro thought that it is only proper for him to gratuitously
transfer his properties to his loved ones now instead of waiting for his death. He then transferred
various condominium units to his children worth P200,000,000 while he was undergoing major
medical operation. At the time of Pedro's death, the fair market value of the properties
transferred increased to P250,000,000. What amount should be included in the computation of
Pedro's gross estate?
Answer: P250,000,000

4. Transfers under a general power of appointment

Power of appointment refers to the right to designate the person or persons who will succeed to
the property of the prior decedent. The power of appointment may be "general" or "special". The
power of appointment is "general" when the power of appointment authorizes the donee of the
power to appoint any person he pleases. The power may be exercised in favor of anybody
including the donee-decedent. The donee of a general power of appointment holds the appointed
property with all the attributes of ownership thus, the appointed property shall form part of the
gross estate of the donee (beneficiary) of the power upon his death.
Special power of appointment exists when the donee can appoint only from a restricted or
designated class of persons other than himself. Property transferred under a special power of
appointment should be excluded from the gross estate of the donee of the power because the
donee-decedent only holds the property in trust. Refer also to exclusions under Section 87 of the
Tax Code as discussed in illustration #4 Cases B and C as well as in illustration #6 Case B.
The power of appointment may be exercised by the donor-decedent through the following modes:
a. By will
b. By deed to take effect in possession or enjoyment at or after his death.
c. By deed under which he has retained for his life or any period not ascertainable without
reference to his death or for any period which does not in fact end before his death.
d. The possession or enjoyment of, or the right to the income from the property.

e) The right, either alone, or in conjunction with any person to designate the persons who shall
possess or enjoy the property or the income therefrom.
Illustration 6:
Case A: General Power of Appointment
Manny donated property to Nonito through his last will and testament. It includes a provision
that Nonito can transfer the property to anyone, Nonito transferred the property to Boomboom
intended to take effect at the time of Nonito's death.

Question 1:
What type of power of appointment is illustrated above?

Answer: General Power of appointment

The "will" provides that Nonito may transfer the property "to anyone". Therefore, the power may
be exercised in favor of anybody including the donee-decedent (Nonito). The power of
appointment is "general" when the power of appointment authorizes the donee of the power to
appoint any person he pleases.

Question 2:
Should the property be included in the determination of Manny's gross estate?

Answer: Yes
Question 3:
Should the property be included in Nonito's gross estate?

Answer: Yes
The donee of a general power of appointment holds the appointed property with all the attributes
of ownership. Thus, the appointed property shall form part of the gross estate of the donee-
decedent (Nonito) upon his death.
Case B: Special Power of Appointment
Manny donated property to Nonito through his last will and testament. It includes a provision
that Nonito can transfer the property only to his son, Boomboom.
Question 1: What type of power of appointment is illustrated above?
Answer: Special Power of Appointment

Question 2:
Should the property be included in the determination of Manny's gross estate?

Answer: Yes
Question 3:
Should the property be included in Nonito's gross estate?

Answer: No

5. Transfer for insufficient consideration

When a sale or transfer (other than a bona fide or valid sale) was made for a price less than its
fair market value at the time of sale or transfer, the excess of the fair market value of the
transferred property at the time of death over the value of the consideration received should be
included in the gross estate. For this purpose, the following fair market values shall be used:
Fair Market Values:
FMV of the property at the time of sale or transfer.
This is used to determine whether or not the consideration was full and adequate. If the
consideration received is substantially the same with the fair market value at the time of transfer,
such sale or transfer is considered a bona fide sale, hence, not subject to estate tax.
FMV of the property at the time of death.
This is used to determine the amount to be included in the gross estate. If the consideration
received is substantially lower or for less than full and adequate consideration compared to the
fair market value at the time of sale or transfer, such sale or transfer was made for insufficient
consideration. In such cases, the excess of the fair market value at the time of death over the fair
market value at the time of sale or transfer should be included in the gross estate of the decedent.
If there was no consideration received at the date of transfer and such transfer was made "in
contemplation of death" (donation mortis causa), the fair market value of the property at the date
of death, not at the date of transfer, should be included in the gross estate of the decedent. If there
was no consideration received at the date of transfer and such transfer was not made "in
contemplation of death", such transfer shall be considered donation inter-vivos subject to donor’s
tax based on the fair market value of the property at the date the donation was made.
Illustration 7:
CASE A
In January 2015, Juan sold for P5,000,000 an apartment with carrying value of P3,500,000 to
Pedro. At the time of sale, the property has a prevailing market price of P7,000,000. Juan died on
June 2015. At the time of death, the prevailing fair market value of the property was P8,000,000.
Question 1: What amount should be included in the gross estate of the decedent?

Answer: P3,000,000
The excess of the fair value of the property at the time of death over the consideration received
(P8,000,000 vs. P5,000,000). The carrying value of the property transferred is disregarded for
purposes of determining whether or not the transfer was made for an adequate and full
consideration.
Question 2: What amount should be included in the gross estate of the decedent assuming the
fair market value of the property at the time of death was P4,000,000.
Answer: P0.
The fair market value at the time of death was lower than the amount of consideration received.
Hence, the P5,000,000 is considered adequate and full consideration.
Question 3: Assume that the property sold is classified as an ordinary asset and the sale or
transfer was made in the ordinary course of trade or business. What amount should be included
as part of the gross estate of the decedent?
Answer: P0. The sale or transfer is a result of a bona fide sale.

CASE B
In January 2015, Juan sold for P5,000,000 an apartment with carrying value of P3,500,000 to
Pedro. At the time of sale, the property has a prevailing market price of P5,000,000. Juan died on
June 2015. At the time of death, the prevailing fair market value of the property was P8,000,000.
Question 1: What amount should be included in the gross estate of the decedent?

Answer: P0
If the consideration received is substantially the same with the fair market value at the time of
transfer, such sale or transfer is considered a bona fide sale, hence, not subject to estate tax.
Question 2: Assume Juan transferred the property without consideration, what amount should be
included in his gross estate at the time of his death?
Answer: P8,000,000
The transfer is considered transfer in contemplation of death. Thus the transfer should take effect
upon Juan's death. The fair market value of the property at the time Juan's death should be
included in his gross estate.
Question 3: Assume Juan transferred the property during his lifetime and the corresponding
donor's tax was paid, what amount should be included in his gross estate at the time of his death?
Answer: P0. The transfer is subject to donor's tax, not estate tax.
6. Claims against insolvent persons
For estate tax purposes, an insolvent is a person whose properties are not sufficient to satisfy,
whether fully or partially, his debt(s). A judicial declaration of insolvency is not required but the
incapacity of the debtor to pay his obligation should be proven. As a rule regardless of the
amount the debtor is unable to pay, the full amount of the claims against the insolvent person
should be included in the gross estate of the decedent. The portion of the claim which is not
collectible should be allowed as a deduction from the gross estate.
Illustration 8:
CASE A
Juan died with an existing collectible of P5,000,000 against Pedro. Since Pedro is financially
stable, Juan exerted all possible efforts to collect the amount during his lifetime, however, Pedro
failed settle the same before Juan's death.
Question 1: How much should be included in the gross estate of Juan?
Answer: P5,000,000 the entire amount of the claim
Question 2: How much is the deduction from the gross estate of Juan?

Answer: P0
The debtor is not an insolvent person. The incapacity of the debtor to pay his obligation should
be proven before a deduction under this category is allowed.
Question 3: Assume that after Juan failed to collect the amount due from Pedro, he decided to
just condone the claim. The condonation was gladly welcomed by Pedro. A year later, Juan died.
How much should be included in the gross estate of Juan?

Answer: P0.
The claim was condoned by him prior to his death. Therefore, the condonation should be
classified as donation inter-vivos subject to donor's tax.

CASE B
Juan died with an existing collectible of P5,000,000 against Pedro whose properties are not
sufficient to satisfy his debts. Pedro's properties are valued at P6,000,000 while his liabilities
amounted to P10,000,000.

Question 1: How much should be included in the gross estate of Juan?

Answer: the entire amount of the claim, P5,000,000

Question 2: How much is the deduction from the gross estate of Juan?

Answer: P2,000,000
Only the uncollectible portion.
Collectible portion = Debtor's assets/Debtor's Liabilities x Claims
Collectible = P6M/Pl0M x P5M
Uncollectible = P5M - 3M = 2M

Question 3: Assume that P2M of Pedro's liabilities are unpaid taxes from the government, how
much should be included as a deduction from the gross estate of Juan?
Answer: P2,500,000
Only the uncollectible portion.
Pedro's assets after unpaid taxes = P6M-2M = P4M
Pedro's liabilities excluding unpaid taxes = P8M
Collectible portion = Debtor's assets/Debtor's Liabilities x Claims
Collectible = P4M/P8M x P5M = P2.5M
Uncollectible P5M-2.5M = P2.5M

7. Proceeds of life insurance

Proceeds of life insurance taken out by the by the decedent on his own life should be included in
the gross estate if the following requisites are present:
a. It must be an insurance on the life of the decedent
b. The beneficiary must be either of the following;

 His estate, his executor, his administrator (revocable or not)

 Any third person provided that the designation is not irrevocable

Table 2.3 PROCEEDS OF LIFE INSURANCE (Taken out by the Decedent)

Beneficiary Designation Gross Estate
Estate Revocable or irrevocable Included
Executor Revocable or irrevocable Included
Administrator Revocable or irrevocable Included
Third party Revocable Included
Third party Irrevocable Excluded

The Philippine Insurance Code presumes that the designation of a policy is revocable in case the
designation of the beneficiary is not clear or silent. Section 11 of the Insurance Code states that
"the insured should have the right to change the beneficiary he designated in the policy, unless he
has expressly waived this right in said policy."

Illustration 9:
Case A:
A life insurance worth P10,000,000 was taken out by Pedro upon his life. He designated his
friend, Juan, as beneficiary. Should the proceeds be included in the gross estate of Pedro upon
his death?

Answer: Yes
The beneficiary was his friend (other than the decedent's estate, executor or administrator). Since
the designation is silent, it should be assumed that Juan's designation as beneficiary is revocable.
As a rule, when the beneficiary is a third person and the designation is revocable, the amount of
proceeds should form part of the decedent's gross estate. Irrevocable designation of a beneficiary
is not presumed. To be excluded from the gross estate, Juan's designation should be clearly stated
as irrevocable beneficiary.

Case B:
Assume the same data in case A, except that Juan's designation as beneficiary is irrevocable.
Should the proceeds be included in the gross estate of Pedro upon his death?
Answer: No
Case C:
Assume the same data in case A, except that the beneficiary was Pedro's executor. The
designation of the beneficiary was irrevocable. Should the proceeds be included in the gross
estate of Pedro upon his death?

Answer: Yes
The designation of the beneficiary as irrevocable beneficiary should be ignored if the beneficiary
is the estate, executor or administrator. In such a case, the proceeds of life insurance should
always be included in the gross estate of the decedent regardless of the beneficiary's designation.

TAX RATES
The transfer of the net estate of every decedent, whether resident or non-resident of the
Philippines, as determined in accordance with the Tax Code, should be subject to the estate tax.
Prior to 2018
The entire value of the net estate is divided into brackets and each rate is imposed on the
corresponding bracket. Below is a table showing the tax and on each bracket and the cumulative
total tax for the entire net taxable estate, pursuant to the rates provided in the Tax Code (Section
2, RR 2-2003).
OVER BUT NOT OVER THE TAX SHALL BE PLUS
- P200,000 Exempt -
P200,000 500,000 P0 5% of excess over P200,000
500,000 2,000,000 15,000 8% of excess over P500,000
2,000,000 5,000,000 135,000 11% of excess over P2,000,000
5,000,000 10,000,000 465,000 15% of excess over P5,000,000
10,000,000 - 1,215,000 20% of excess over P10M

Beginning January 1, 2018

RA 10963, otherwise known as the "Tax Reform for Acceleration and Inclusion Act" (TRAIN
Law) provides that, the net estate of every decedent, whether resident or non-resident of the
Philippines, as determined in accordance with NIRC (as amended), shall be subject to an estate
tax rate of six percent (6%).

THE LAW THAT GOVERNS THE IMPOSITION OF ESTATE TAX AND ACCRUAL
OF ESTATE TAX
As discussed in Chapter 1, it is a well settled rule that estate taxation is governed by the statute in
force at the time of death of the decedent. The estate tax accrues as the date of death of the
decedent and the accrual of the tax is distinct from the obligation to pay the same. (RR 2-2003)
Refer to Chapter 1 for additional discussions and illustrations.

Notice of Death
Prior to 2018: Beginning Jan. 1, 2018
A notice of death shall be filed by the executor/administrator or any of the legal heirs in all cases
when the transfer mortis causa is subject to tax, or, where though exempt from estate tax, the
value of the gross estate exceeds P20,000. Filing should be made within two (2) months after the
executor or administrator has qualified.

Filing of Estate Tax Return and Payment of Estate Tax Due

Under the Tax Code, as amended, the estate tax shall be paid by the executor/administrator or
any of the legal heirs at the time the return is filed (Pay as you file system). An estate tax return
shall be filed under oath in any of the following situation (RR 12-2018):
1. In cases of transfer subject to Estate Tax; and
2. Where regardless of the gross value, the estate consists of registered or registrable property
such as real property, motor vehicle, share of stocks or other similar property for which a
Certificate Authorizing Registration from the Bureau of Internal Revenue (BIR) is required as a
condition precedent for the transfer of ownership thereof in the name of the transferee, the
executor or the administrator, or any of the legal heirs, as the case may be.
Estate tax returns showing gross value exceeding five million pesos (P5,000,000) shall be
supported with a statement duly certified to by a Certified Public Accountant containing the
following:
a) Itemized assets of the decedent with their corresponding gross value at the time of his
death, or in the case of nonresident, not a citizen of the Philippines, of that part of his
gross estate situated in the Philippines;
b) Itemized deductions allowed from the gross estate under Section 86 of the Tax Code, as
amended;
c) The amount of tax due, whether paid or still due and outstanding.

TIME FOR FILING THE ESTATE TAX RETURN

The estate tax return is allowed to be filed one 1 year from the date of death [previously within
six (6) months]. The court approving the project of partition shall furnish the Commissioner with
certified copy thereof and its order within thirty days (30) after promulgation of such order.
However, as discussed in Chapter 1, the estate tax due "accrues" immediately at the time of death.
It shall be noted that the accrual of the estate tax is distinct from the obligation to pay the same
(RR 22003); (Lorenzo vs. Posadas, 64 Phil. 353). The one-year time of filing is the allowable
period of filing the return without surcharges/penalties and interest.

Extension of Time to File the Estate Tax Return

Under Sec. 90(C) of the Tax Code (as amended; RR 10963; RR 2-2003/RR 12-2018) provides,
"the Commissioner or any Revenue Officer authorized by him pursuant to the NIRC shall have
the authority to grant, in meritorious cases, a reasonable extension not exceeding thirty (30) days
filing the return". The application for the extension of time to file the estate tax return must be
filed with the Revenue District Office (RDO) where the estate is required to secure its Taxpayer
Identification Number (TIN) and file the tax returns of the estate, which RDO, likewise, has
jurisdiction over the estate tax return required to be filed by any party as a result of the
distribution of the assets and liabilities of the decedent.

TIME for PAYMENT of the Estate Tax

As a general rule, the estate tax imposed under the Tax Code shall be paid at the time the return
is filed by the executor, administrator, or the heir(s).
EXTENSION OF TIME TO PAY ESTATE TAX
When the Commissioner finds that the payment of the estate tax or of any part thereof would
impose undue hardship upon the estate or any of the heirs, he may extend the time for payment
of such tax or any part thereof not to exceed five (5) years in case the estate is settled through the
courts (Judicial Settlement), or two (2) years in estate is settled extrajudicially (Extrajudicial
settlement). In such case, the amount in respect of which the extension is granted shall be paid on
or before the date of the expiration of the period of the extension, and the running of the statute
of limitations for deficiency assessment shall be suspended for the period of any such extension.
The application for extension of time to file the return and extension of time to pay estate tax
shall be filed with the Revenue District Officer (RDO) where the estate is required to secure its
TIN and file the estate tax return. This application shall be approved by the Commissioner or his
duly authorized representative.
Where the request for extension is by reason of negligence, intentional disregard of rules and
regulations, or fraud on the part of the taxpayer, no extension will be granted by the
Commissioner.
If an extension is granted, the Commissioner or his duly authorized representative may require
the executor, or administrator, or beneficiary, as the case may be, to furnish a bond in such
amount not exceeding double the amount of the tax and with such sureties as the Commissioner
deems necessary, conditioned upon the payment of the said tax in accordance with the terms of
the extension.

Payment of Estate Tax by installment and partial disposition of estate (RR 12-2018)
In case of insufficiency of cash for the immediate payment of the total estate tax due, the estate
may be allowed to pay the estate tax due through the following options, including corresponding
terms and conditions:
1. Cash Installment
a) The cash installments shall be made within two (2) years from the date of the filing of the
estate tax return
b) The estate tax return shall be filed within one (1) year from the date of the decedent's
death;
c) The frequency (i.e., monthly, quarterly, semi-annually, annually) deadline and the
amount of each installment shall be indicated in the estate tax return, subject to the
approval by the BIR.
d) In case of lapse of two (2) years without the payment of entire tax due, the remaining
balance thereof shall be due and demandable subject to applicable penalties and interest
reckoned from the prescribed deadline for filing the return and payment of estate tax; and
e) No civil penalties or interest may be imposed on the estates permitted to pay the estate
tax due by installment. Nothing in this subsection, however, prevents the Commissioner
from executing enforcement action against the estate tax due of the estate tax provided
that all the applicable laws and required Procedures are followed/observed.
2. Partial disposition of estate and application of its proceeds to the estate tax due
a) The disposition, for purposes of this option, shall refer to the conveyance of property,
whether real, personal or intangible property, with the equivalent cash consideration;
b) The estate tax return shall be filed within one (1) year from the date of the decedent's
death,
c) The written request for the partial disposition of estate shall be approve by the BIR. The
written request shall be filed, together with a notarized undertaking that the proceeds
thereof shall be exclusively used for the payment of the total estate tax due;

d) The computed estate tax due shall be allocated in proportion to the value of each property
e) The estate shall pay to the BIR the proportionate estate tax due of the property intended
to be disposed of;
f) An electronic Certificate Authorizing Registration (eCAR) shall be issued upon
presentation of the proof of payment of the proportionate estate tax due of the property
intended to be disposed. Accordingly, eCARs shall be issued as many as there are
properties to be disposed to cover the total estate tax due, net of the proportionate estate
tax(es) previously paid under this option; and
 g) In case of failure to pay the total estate tax due out from the proceeds of the said
disposition, the estate tax due shall be immediately due and demandable subject to the
applicable penalties and interest reckoned from the prescribed deadline for filing the
return and payment of the estate tax, without prejudice of withholding the issuance of
eCARs on the remaining properties until the payment of the remaining balance of the
estate tax due, including the penalties and interest.

REQUEST FOR EXTENSION OF TIME, INSTALLMENT PAYMENT AND PARTIAL

DISPOSITION OF ESTATE
Request for extension to file the return, extension to pay the estate tax and payment by
installment shall be filed with the Revenue District Officer (RDO) where the estate is required to
secure its TIN and file the estate tax return. This request shall be approve by the Commissioner
or his duly authorized representative.

PLACE OF FILING THE RETURN and PAYMENT OF THE ESTATE TAX

In case of a resident decedent, the administrator or executor shall register the estate of the
decedent and secure a new TIN therefor from the Revenue District Office where the decedent
was domiciled at the time of his death and shall file the estate tax return and pay the
corresponding estate tax with the Accredited Agent Bank (AAB), Revenue District Officer or
Revenue Collection Officer having jurisdiction on the place where the decedent was domiciled at
the time of his death, whichever is applicable following prevailing collection rules and
regulations.
In case of a non-resident decedent, whether non-resident citizen or non-resident alien, with
executor or administrator in the Philippines, the estate tax return shall be filed with and the TIN
for the estate shall be secured from the Revenue District Office where such executor or
administrator is registered. Provided, however, that in case the executor or administrator is not
registered, the estate tax return shall be filed with and the TIN of the estate shall be secured from
the Revenue District Office having jurisdiction over the executor or administrator's legal
residence. Nonetheless, in case the non-resident decedent does not have an executor or
administrator in the Philippines, the estate tax return shall be filed with and the TIN for the estate
shall be secured from the Office of the Commissioner though RDO No. 39-South Quezon City.
The foregoing provision, notwithstanding, the Commissioner of Internal Revenue may continue
to exercise his power to allow a different venue/place in the filing of tax returns.
LIABILITY FOR THE PAYMENT OF ESTATE TAX
The executor/administrator of an estate has the primary obligation to pay the estate tax but the
heir or beneficiary has subsidiary liability for the payment of that portion of the estate which his
distributive share bears to the value of the total net estate. The extent of his liability, however,
shall in no case exceed the value of his share in the inheritance.
Where there is no executor or administrator appointed, qualified and acting within the
Philippines, then any person in actual or constructive possession of any property of the decedent
must file the return. The Estate Tax imposed under the Tax Code shall be paid by the executor or
administrator before the delivery of the distributive share in the inheritance to any heir or
beneficiary.
Where there are two or more executors or administrators, all of them are severally liable for the
payment of the tax. The estate tax clearance issued by the Commissioner or the Revenue District
Officer (RDO) having jurisdiction over the estate, will serve as the authority to distribute the
remaining/distributable properties/share in the inheritance to the heir or beneficiary.
PAYMENT BY INSTALLMENT [Sec. 91 (C), as amended]
Prior to 2018
Under RR 2-2003, in case the available cash of the estate is not sufficient to pay its total estate
tax liability, the estate may be allowed to pay the tax by installment and a clearance shall be
released only with respect to the property, the corresponding/computed tax on which has been
paid. There shall, therefore, be as many clearances (Certificates Authorizing Registration) as
there are as many properties released because they have been paid for by the installment
payments of the estate tax. The computation of estate tax, however, shall always be on the
cumulative amount of the net taxable estate. Any amount paid after the statutory due date of the
tax shall be imposed the corresponding applicable penalty thereto. However, if the payment of
the tax after the due date is approved by the Commissioner or his duly authorized representative,
the impossible penalty thereon shall only be the interest.

TRAIN Law
In case the available cash of the estate is insufficient to pay the estate tax due, payment by
installment shall be allowed within two (2) years from the statutory date for its payment without
civil penalty and interest.

Civil penalties and interest

Any amount paid after the statutory due date of the tax, but within the extension period, shall be
subject to interest but not to surcharge. Penalty of 25% if there is no false or fraudulent intent on
the taxpayer. Penalty of 50% if there is false, malice or fraudulent intent on the taxpayer. Interest
of 20% on the unpaid amount of tax from the date computed until fully paid (RR2-2003).

Payment of Tax Antecedent to the Transfer of Shares, Bonds or Rights (Sec. 97, as
amended)
There shall not be transferred to any new owner in the books of any corporation, sociedad
anonima, partnership, business, or industry organized or established in the Philippines any share,
obligation, bond or right by way of gift inter-vivos or mortis causa, legacy or inheritance, unless
a certification from the Commissioner that the applicable tax have been paid.
If a bank has knowledge of the death of a person, who maintained a bank deposit account alone,
or jointly with another, it shall allow any withdrawal from the said deposit account, subject to a
final withholding tax of six percent (6%). For this purpose, all withdrawal slips shall contain a
statement to the effect that all of the joint depositors are still living at the time of withdrawal by
any one of the joint depositors and such statement shall be under oath by the said depositors.
Under RA No. 10963 (TRAIN Law), in case the available cash of the estate is insufficient to pay
the total estate tax due, payment by installment shall be allowed within two (2) years from the
statutory date for its payment without civil penalty and interest.

Reference:

Tabag, E.D., Garcia, E.J. (2018) Transfer & Business Taxation with Special Topics based on
NIRC as amended under RA10963 – Tax Reform for Acceleration and Inclusion Act (TRAIN
Law)
 CHAPTER 3
DEDUCTIONS FROM GROSS ESTATE
TOPIC OVERVIEW:
This chapter enumerates and describes the allowable deductions, ordinary and special, from
gross estate under TRAIN Law.

LEARNING OBJECTIVES:
After studying this chapter, the students should be able to:
1. Enumerate and explain the ordinary deductions, and their requisites for deductibility.
2. Identify and describe the special deductions.

Table 3.1 – Allowable Deductions from the Gross Estate

Citizen and Resident Decedents Nonresident Alien Decedents
I. ORDINARY DEDUCTIONS I. ORDINARY DEDUCTIONS
1. Losses, Indebtedness, Taxes 1. Proportionate Deductions for Losses,
a. Losses Indebtedness, Taxes
b. Indebtedness/Claims against the estate
c. Taxes (Gross Estate, Phil. / Gross Estate, World) *
d. Claims against insolvent person LIT, world
2. Transfer for Public Use 2. Transfer for Public Use
3. Vanishing Deduction 3. Vanishing Deduction
II. SPECIAL DEDUCTIONS II. SPECIAL DEDUCTIONS
1. Standard Deduction Standard Deduction of P500,000 is now
2. Family Home allowed
3. RA 4917
III. SHARE OF THE SURVIVING III. SHARE OF THE SURVIVING
SPOUSE (for married decedents) SPOUSE (for married decedents)

Casualty Losses
Include storms, shipwreck or other casualties, or from robbery, theft or embezzlement. The
amount deductible is the value of the property lost.

Requisites for Deductibility:

a. Arising exclusively from:
 acts of God such as fire, storm, shipwreck and other similar casualty
 acts of man such as robbery, theft, embezzlement

b. Not compensated by insurance or otherwise

c. Not claimed as a deduction in an income tax return of the estate subject to income tax
d. Occurred during the settlement of the estate (not beyond the last day prescribed by law to file
and pay the estate tax which is now within one (1) year from date of death).

ILLUSTRATION:
Among the properties included in the gross estate of the decedent at the time of his death was a
newly developed resort in Siargao valued at P20,000,000. George is the sole heir to the property.
During the settlement of the estate and before the last day of filing the estate tax return, a super
typhoon hit Siargao destroying entirely the newly developed resort. It was determined that the
fair value of the property after the incident was reduced to P500,000.
Question 1: What amount should be included as part of the decedent's gross estate?
Answer: P20,000,000 (FMV at the time of death)

Question 2: What amount should be included as part of the allowable deductions from the gross
estate?
Answer: P19,500,000 The difference on the fair market value before and after incurring
the loss.

Question 3: What amount should be included as part of the allowable deductions from the gross
estate assuming the property was insured for P25,000,000.
Answer: P0 Since the loss was fully compensated by insurance, no deduction shall be
claimed against the gross estate of the decedent.

Question 4: What amount should be included as deductible loss assuming that the incident
happened beyond the settlement period of one (6) months or one (1) year, as the case may be,
and the property was not insured?
Answer: P0. Only losses incurred during the settlement period (within 6 months or 1
year after death, as the case may be) are allowed as deduction from the gross estate.

Question 5: What amount should be included in the gross estate of the decedent assuming the
incident happened one (1) day before the death of the decedent?
Answer: P500,000

Question 6: In relation to question # 5, what amount should be included as deduction from the
gross estate of the decedent?
Answer: P0.

Indebtedness or Claims against the Estate (including mortgage payable)

"Claims" is generally construed to mean debts or demands of a pecuniary nature which could
have been enforced against the deceased in his lifetime and could have been reduced to simple
money judgments. The liability represents a personal obligation of the deceased existing at the
time of his death, contracted in good faith (during his lifetime) for adequate and full
consideration in money or money's worth. Claims against the estate or indebtedness in respect of
property may arise out of the following sources:
 Contract
 Tort
 Operation of Law

REQUISITES FOR DEDUCTIBILITY (RR 2-2003/RR 12-2018):

 The liability represents personal obligation of the deceased existing at the time of his
death;
 The liability was contracted in good faith and for adequate and full consideration in
money or money's worth;
 The liability must be a debt or claim which is valid in law and enforceable in court;
 The death must not have been condoned by the creditor or the action to collect from the
decedent must not have been prescribed.
SUBSTANTIATION REQUIREMENTS:

All unpaid obligations and liabilities of the decedent at the time of his death are allowed as
deduction from gross estate. Provided, however, that the following requirements/documents are
complied with/submitted:

In case of simple loan (including advances):

a) The debt instrument must be duly notarized at the time the indebtedness was incurred,
such as promissory note or contract of loan, except for loans granted by financial
institutions where notarization is not part of the business practice/policy of the financial
institution-lender.
b) Duly notarized Certification from the creditor as to the unpaid balance of the debt,
including interest as of the time of death.

If the creditor is a corporation, the sworn certification should be signed by the President, or Vice
President, or other principal officer of the corporation.

If the creditor is a partnership, the sworn certification should be signed by any of the general
partners.

If the creditor is a bank or other financial institutions, the Certification shall be signed by the
branch manager of the bank/financial institution which monitors and manages the loan of the
decedent-debtor.

If the creditor is an individual, the sworn certification should be signed by him.

In any of these cases, the one who should certify must not be a relative of the borrower within
the fourth civil degree, either by consanguinity or affinity, except when the requirement below is
complied with:

When the lender; or the President/Vice-President or principal officer of the creditor-corporation,

or the general partner of the creditor-partnership is a relative of the debtor in the degree
mentioned above, a copy of the promissory note or other evidence of indebtedness must be filed
with RDO having jurisdiction over the borrower within fifteen days from execution thereof.

c) In accordance with the requirements as prescribed in existing or prevailing internal

revenue issuances, proof of financial capacity of the creditor to lend the amount at the
time the loan was granted, as well as its latest audited balance sheet with a detailed
schedule of its receivable showing the unpaid balance of the decedent-debtor.

In case the creditor is individual who is no longer required to file an income tax return with the
Bureau, a duly notarized Declaration by the creditor of his capacity to lend at the time when the
loan was granted without prejudice to verification that may be made by the BIR to substantiate
such declaration of the creditor.

If the creditor is a non-resident, the executor/administrator or any of the legal heirs must submit a
duly notarized declaration of his capacity to lend at the time when the loan was granted,
authenticated or certified to as such by the tax authority of the country where the non-resident
creditor is a resident.
 d) A statement under oath executed by the administrator or executor of the estate reflecting
the disposition of the proceeds of the loan if said loan was contracted within three (3)
years prior to the death of the decedent.

If the unpaid obligation arose from purchase of goods or services:

a) Pertinent documents evidencing the purchase of goods or service, such as sales
invoice/delivery receipt (for sale of goods), or contract for the services agreed to be
rendered (for sale of service), as duly acknowledged, executed and signed by decedent-
debtor and creditor, and statement of account given by the creditor as duly received by
the decedent-debtor.
b) Duly notarized Certification from the creditor as to the unpaid balance of the debt,
including interest as of the time of death.

If the creditor is a corporation, the sworn certification should be signed by the President,
or Vice President, or other principal officer of the corporation.

If the creditor is a partnership, the sworn certification should be signed by any of the
general partners.

If the creditor is a bank or other financial institutions, the Certification shall be signed by
the branch manager of the bank/financial institution which monitors and manages the
loan of the decedent-debtor.

If the creditor is a sole proprietorship, the sworn certification should be signed by the
owner of the business.

In any of these cases, the one who should certify must not be a relative of the borrower
within the fourth civil degree, either by consanguinity or affinity, except when the
requirement below is complied with:

When the lender, or the President/Vice-President or principal officer of the creditor-

corporation, or the general partner of the creditor-partnership is a relative of the debtor in
the degree mentioned above, a copy of the promissory note or other evidence of
indebtedness must be filed with RDO having jurisdiction over the borrower within fifteen
days from execution thereof.

c) Certified true copy of the latest audited balance sheet of the creditor with a detailed
schedule of its receivable showing the unpaid balance of the decedent-debtor. Moreover,
a certified true copy of the updated latest subsidiary ledgers/records of the debt of the
debtor-decedent (certified by the creditor, i.e. certified by the officers in the preceding
paragraphs) should likewise be submitted.

d) Where the settlement is made through the Court in a testate or intestate proceeding,
pertinent documents filed with the Court evidencing the claims against the estate, and the
Court Order approving the said claims, if already issued, in addition to the documents
mentioned in the preceding paragraphs.
ILLUSTRATION:

A resident decedent died on November 1, 2017. He availed of a P500,000 salary loan from ABC
Manufacturing Corporation (his employer) by issuing a promissory note during his lifetime.

Question 1: If all the requisites in order to be allowed as a deduction as claims against the estate
were present, what amount may be deducted from the gross estate?
Answer: P500,000

Question 2: If the obligation has prescribed as at the time of his death, what amount may be
deducted from the gross estate?
Answer: P0

Question 3: If the loan document (promissory note) was not duly notarized, what amount may be
deducted from the gross estate pertaining to the claim?
Answer: P0 If the indebtedness arises from a debt instrument (i.e. loan document), it
must be notarized to be deductible, except for loans granted by financial institutions where
notarization is not part of the business practice/policy of a financial institution-lender.

Question 4: If the loan document (promissory note) was not duty notarized as the same is not
normally required by ABC Corporation in granting salary loans to its officers and employees,
what amount may be deducted from the gross estate pertaining to the claim?
Answer: P0 The exception on notarization of loan documents is applicable only for loans
granted by financial institutions. In the case provided, the creditor (ABC Corporation) is not a
financial institution.

Question 5: If the loan was contracted three (3) years ago and the executor cannot determine how
the loan proceeds were disposed of, what amount may be deducted from the gross estate
pertaining to the claim?
Answer: P0 RR 2-2003/RR 12-2018 provides that if the loan was contracted within three
(3) years before the death of the decedent, a statement under oath (by the executor/administrator)
must be executed and must be attached therewith a statement showing the disposition of the of
the loan.

UNPAID MORTGAGEs OR INDEBTEDNESS ON PROPERTY

These are deductions allowed when a decedent leaves property encumbered by a mortgage or
indebtedness contracted in good faith and for adequate and full consideration. To be allowed as a
deduction, his gross estate must include the fair market value of the property encumbered. The
amount allowed as a deduction would be the outstanding debt or mortgage. In case unpaid
mortgage payable is being claimed by the estate, verification must be made as to who was the
beneficiary of the loan proceeds. If the loan is found to be merely an accommodation loan where
the loan proceeds went to another person, the value of the unpaid loan must be included as a
receivable of the estate. If there is a legal impediment to recognize the same as receivable of the
estate, said unpaid obligation/mortgage payable shall not be allowed as a deduction from the
gross estate. In all instances, the mortgaged property, to the extent of the decedent's interest
therein, should always form part of the gross estate.
Taxes
These are unpaid taxes that accrued prior to the death of the decedent. However, the following
are not allowed as a deduction:

 Income tax on income received after death

 Property taxes accrued after death
 Estate tax

Other deductions such as claims against an insolvent person

Claims against the estate are "receivables due or owing from persons who are not financially
capable of meeting their obligations". Hence, these are claims by the decedent during his lifetime
that are not collectible. An insolvent is a person whose properties are not sufficient to satisfy,
whether fully or partially, his debt(s).

REQUISITES FOR DEDUCTIBILITY

For purposes of estate taxation, a judicial declaration of insolvency is not required but

a) The incapacity of the debtor to pay his obligation should be proven.

b) The full amount owed by the insolvent must first be included in the decedent's gross
estate and the amount uncollectible shall be allowed as a deduction.
c) If the insolvent could only pay partial amount, the full amount owed shall be included in
the gross estate, and the amount uncollectible shall be allowed as a deduction.

Transfer for Public Use

Dispositions in a last will and testament or transfers to take effect after the death in favor of the
government of the Philippines or any political subdivision thereof (e.g. barangay, province,
city/municipality) for exclusively public purposes. Before a transfer for public use is allowed as
a deduction from the gross estate, same amount shall be included first in the computation of the
gross estate.

Legacies to the Philippine Red Cross (PRC)

Under RA 10072 (An Act Recognizing the Philippine Red Cross as an independent, autonomous,
nongovernmental organization auxiliary to the authorities of the Republic of the Philippines in
the Humanitarian Field, to be known as "The Philippine Red Cross Act of 2009"), all donations,
legacies and gifts made legacies to the PRC to support its purposes and objectives shall be
exempt from donor's tax and shall be deductible from the gross income of the donor for income
tax purposes or from the computation of the donor-decedent's net estate as a "transfer for public
use" for estate tax purposes.

Vanishing Deductions (Property previously taxed)

This deduction is also referred to as a deduction for "property previously taxed". It is an amount
allowed to reduce the taxable estate of a decedent where the property received by him from a
prior decedent or donor by: (l) gift or by (2) bequest, device or inheritance, has been the object of
previous transfer taxation. Hence vanishing deduction is allowed as a deduction from the gross
estate to minimize the effect of or as a remedy against double taxation.
REQUISITES FOR DEDUCTIBILITY:

1. Death - the present decedent died within 5 years from the date of death of the prior decedent or
date of gift.

2. Identity of property - the property with respect to which deduction is sought can be identified
as the one received from the prior decedent, or from the donor, or as the property acquired in
exchange for the original property so received.

3. Location - the property on which vanishing deduction is being claimed must be located in the
Philippines.

4. Inclusion of the property - the property must have formed part of the gross estate situated in
the Philippines of the prior decedent or have been included in the total amount of the gifts of the
donor made within five (5) years prior to the present decedent's death. (Omitted under RA 10963)

5. Previous taxation of the property - the estate tax on the prior succession, or the donor's tax on
the gift must have been finally determined and paid by the prior decedent or by the donor as the
case maybe, and

6. No previous vanishing deduction on the property - no such deduction on the property, or the
property given in exchange therefore, was allowed in determining the value of the net estate of
the prior decedent.

VANISHING DEDUCTION RATES:

Period from receipt to decedent's death Rates

Within one year 100%
Beyond one year to two years 80%
Beyond two years to three years 60%
Beyond three years to four years 40%
Beyond four years to five years 20%

PRO-FORMA COMPUTATION OF VANISHING DEDUCTION:

VALUE TO TAKE (The lower between the value of the property in the
gross estate of the prior decedent or value of the gift and value of the same
property in the gross estate of the present decedent) Xxx
LESS: MORTGAGE PAID (Paid by the present decedent from the
mortgage assumed when the property was inherited or received as
donation)
INITIAL BASIS Xxx
LESS: PROPORTIONATE DEDUCTION
(Initial basis / Gross Estate) * LIT + Transfer for Public Use
FINAL BASIS Xxx
MULTIPLY BY: VANISHING DEDUCTION %
VANISHING DEDUCTION
ILLUSTRATION:
Pedro received a car as a gift from Juan in December 2018. The value of the car at the time it
was donated to Pedro was P1,000,000. However, Pedro assumed a P200,000 mortgage on the car.
The corresponding donor’s tax was paid by Juan. Pedro paid a total of P100,000 on the mortgage
in 2019 and 2020.

On January 1, 2021, Pedro died. His gross estate at the time of his death amounted to P5,000,000
including the car received from Pedro valued at P700,000. The following deductions were also
claimed by his beneficiaries:
Losses P 100,000
Unpaid mortgage including the mortgage on the car 200,000
Unpaid taxes before death 100,000
Unpaid taxes after death 25,000
Donation mortis causa to Quezon City for public purpose 500,000

Question 1: How much is the allowable vanishing deduction?

VALUE TO TAKE (The lower between the value of the property in the
gross estate of the prior decedent or value of the gift and value of the same
property in the gross estate of the present decedent) P 700,000
LESS: MORTGAGE PAID (Paid by the present decedent from the
mortgage assumed when the property was inherited or received as
donation) (100,000)
INITIAL BASIS 600,000
LESS: PROPORTIONATE DEDUCTION
(600,000 / 5,000,000) * 900,000 (108,000)
FINAL BASIS 492,000
MULTIPLY BY: VANISHING DEDUCTION %
VANISHING DEDUCTION P 295,200

Question 2: Assume the corresponding donor’s tax was not paid by Juan upon perfection of the
donation, how much is the allowable deduction?
Answer: P0. Vanishing deduction is a mode of tax relief from multiple imposition of
indirect taxes. Hence, if the donor’s tax was not paid at the time of the perfection of the
donation, vanishing deduction is not allowed.

SPECIAL DEDUCTIONS

Standard deduction
The law allows a standard deduction of P5,000,000 (P1,000,000 prior to the effectivity of
RA10963 otherwise known as TRAIN Law). No qualification, condition nor requisite
whatsoever. This amount shall be allowed as an additional deduction without need of
substantiation. The full amount of shall be allowed as deduction for the benefit of the decedent.

Family Home

The dwelling house, including the land on which it is situated, where the husband and wife, or a
head of the family, and members of their family reside, as certified to by the Barangay Captain
of the locality.
The amount of family home allowable as a deduction would be whichever is lower of
P10,000,000 or the fair market value at the time of the decedent's death, of the family home and
the land on which it stands (P1,000,000 prior to the effectivity of RA10963 otherwise known as
TRAIN Law).
The family home is deemed constituted on the house and lot from the time it is actually occupied
as a family residence and is considered as such for as long as any of its beneficiaries actually
resides therein. (Arts. 152 and 153, Family Code)

Actual occupancy of the house or house and lot as the family residence shall not be considered
interrupted or abandoned in such cases as the temporary absence from the constituted family
home due to travel or studies or work abroad.

In other words, the family home is generally characterized by permanency, that is, the place to
which, whenever absent for business or pleasure, one still intends to return. The family home
must be part of the properties of the absolute community or of the conjugal partnership, or of the
exclusive properties of either spouse, depending upon the classification of the property (family
home) and the property relations prevailing on the properties of the husband and wife. It may
also be constituted by an unmarried head of a family on his or her own property.

Unmarried Head of a Family

An unmarried or legally man or woman with one or both parents, or with one or more brothers or
sisters, or with one or more legitimate, recognized natural or legally adopted children living with
and dependent upon him or her for their chief support, where such brothers or sisters or children
are not more than twenty one (21) years of age, unmarried and not gainfully employed or where
such children, brothers or sisters, regardless of age are incapable of self-support because of
mental or physical defect, or any of the beneficiaries mentioned in Article 154 of the Family
Code who is living in the family home and dependent upon the head of the family for legal
support.

The beneficiaries of a family home are:

 The husband and wife, or the head of a family; and

 Their parents, ascendants, descendants including legally adopted children, brothers and
sisters, whether the relationship be legitimate or illegitimate, who are living in the family
home and who depend upon the head of the family for legal support.

Limitation
For purposes of availing of a family home deduction to the extent allowable, a person may
constitute only one (1) family home.

REQUISITES FOR DEDUCTIBILITY:

1. The decedent was married or if single, was a head of the family

2. Along with the decedent, any of the beneficiaries (as listed above) must be dwelling in
the family home.
3. The family home as well as the land on which it stands must be owned by the decedent.
Therefore, the fair market value of the family home should have been included in the
computation of the decedent's gross estate.
4. The family home must be the actual residential home of the decedent and his family at
the time of his death, as certified by the Barangay Captain of the locality where the
family home is situated.
5. The total value of the family home must be included as part of the gross estate of the
decedent; and
 6. Allowable deduction must be in an amount equivalent to the current fair market value of
the family home as declared or included in the gross estate, or the extent of the decedent's
interest (whether conjugal/community or exclusive property), whichever is lower, but not
exceeding P10,000,000 as amended.

Amounts received by heirs under RA 4917

Any amount received by heir(s) from the decedent's employer as a consequence of the death of
the decedent-employee in accordance with R.A. No. 4917 (An Act Providing that Retirement
Benefits of Employees of Private Firms shall not be subject to Attachment, Levy, Execution or
Any Tax Whatsoever), provided such amount is included as part of the gross estate of the
decedent.

NET SHARE OF THE SURVIVING SPOUSE

The amount deductible under this category is the net share of the surviving spouse in the
conjugal partnership property. The net share is equivalent to 1/2 or 50% of the conjugal property
after deducting the obligations chargeable (ordinary deductions only) to such property. The share
of the surviving spouse must be removed to ensure that only the decedent's interest in the estate
is taxed.

DEDUCTIONS FROM THE GROSS ESTATE OF A NONRESIDENT ALIEN

No deduction shall be allowed in the case of a non-resident decedent not a citizen of the
Philippines, unless the executor, administrator, or anyone of the heirs, as the case may be,
includes in the return required to be filed under Section 90 of the Code the value at the time of
the decedent's death of that part of his gross estate not situated in the Philippines.

The value of the net estate of a decedent who is a non-resident alien in the Philippines shall be
determined by deducting from the value of that part of his gross estate which at the time of his
death is situated in the Philippines the following items of deductions (Section 7, RR2-2003):

Nonresident Alien Decedents

I. ORDINARY DEDUCTIONS
1. Proportionate Deductions for Losses,
Indebtedness, Taxes

(Gross Estate, Phil. / Gross Estate, World) *

LIT, world
2. Transfer for Public Use
3. Vanishing Deduction
II. SPECIAL DEDUCTIONS
Standard Deduction of P500,000 is now
allowed
III. SHARE OF THE SURVIVING
SPOUSE (for married decedents)

ILLUSTRATION:
Mr. King, a resident of South Korea and a Korean citizen died on July 4, 2018 leaving the
following properties:
Condominium unit in Makati P 4,500,000
Family Home, South Korea 7,000,000
Rest House, Australia 2,750,000
Jewelries received as gift dated August 25, 2017 500,000
Car in Makati 1000,000

The heirs of Mr. King claimed the following deductions:

Funeral expenses P 300,000
Claims against insolvent persons 500,000
Judicial expenses 100,000
Medical expenses 200,000
Family Home 1,500,000
Standard Deductions 1,200,000

Required: Determine the net taxable estate.

GROSS ESTATE
Condominium in Makati P 4,500,000
Jewelries 500,000
Car in Makati 1,000,000
Claims against insolvent person 500,000
Total gross estate, Philippines P 6,500,000
ALLOWABLE DEDUCTIONS
Ordinary Deductions (6.5M/16.25M * 500k) (200,000)
Vanishing Deductions** (484,615)
Standard Deduction (500,000)
TAXABLE NET ESTATE P 5,315,385

**
VALUE TO TAKE / INITIAL BASIS P 500,000
LESS: PROPORTIONATE DEDUCTION
(500,000 / 6,500,000) * 200,000 (15,385)
FINAL BASIS 484,615
MULTIPLY BY: VANISHING DEDUCTION % 100%
VANISHING DEDUCTION P 484,615

Reference:
Tabag, E.D., Garcia, E.J. (2018) Transfer & Business Taxation with Special Topics based on
NIRC as amended under RA10963 – Tax Reform for Acceleration and Inclusion Act (TRAIN
Law)
Assessments:
1. Among the properties included in the gross estate of the decedent at the time of his death was
a building valued at P50,000,000. Sam is the sole heir to the property. During the settlement of
the estate and before the last day of filing the estate tax return, an earthquake was experienced
destroying entirely the property. It was determined that the fair value of the property after the
incident was reduced to P800,000.

Questions:

1. What amount should be included as part of the decedent's gross estate?

2. What amount should be included as part of the allowable deductions from the gross estate?
3. What amount should be included as part of the allowable deductions from the gross estate
assuming the property was insured for P60,000,000?
4. What amount should be included as deductible loss assuming that the incident happened
beyond the settlement period of one (6) months or one (1) year, as the case may be, and the
property was not insured?
5. What amount should be included in the gross estate of the decedent assuming the incident
happened one (1) day before the death of the decedent?
6. In relation to question # 5, what amount should be included as deduction from the gross estate
of the decedent?

2. A resident decedent died on November 1, 2018. He availed of a P1,000,000 salary loan from
ABC Manufacturing Corporation (his employer) by issuing a promissory note during his lifetime.

1. If all the requisites in order to be allowed as a deduction as claims against the estate were
present, what amount may be deducted from the gross estate?
2. If the obligation has prescribed as at the time of his death, what amount may be deducted
from the gross estate?
3. If the loan document (promissory note) was not duly notarized, what amount may be deducted
from the gross estate pertaining to the claim?
4. If the loan document (promissory note) was not duty notarized as the same is not normally
required by ABC Corporation in granting salary loans to its officers and employees, what
amount may be deducted from the gross estate pertaining to the claim?
5. If the loan was contracted three (3) years ago and the executor cannot determine how the loan
proceeds were disposed of, what amount may be deducted from the gross estate pertaining to the
claim?

3. Bonifacio, head of family, died on January 15, 2018 leaving the following properties and
obligations:

Cash in bank, 50% donated mortis causa to Natl Govt; 50% to Q.C Govt P 3,000,000
House and lot, Makati, Family Home 15,000,000
Personal properties 15,000,000
Farm lot 8,250,000
Claims against an insolvent debtor 2,250,000
Transfer in contemplation of death 15,000,000
Transfer under special power of appointment 750,000
Deductions Claimed:
Funeral expenses 5,750,000
Judicial expenses 675,000
Donation mortis causa to Q.C. Government 1,500,000
Unpaid mortgage on the farm lot 750,000
Medical expenses 2,250,000
The farm lot was inherited 5 ½ years by the decedent before his death with a value then of
P5,750,000 and a mortgage indebtedness of P1,500,000.

Required: Compute for the following:

1. Gross estate

2. Total allowable deductions

3. Taxable net estate

4. Transfer for Public Use

5. Vanishing Deduction
 CHAPTER 4
PROPERTY RELATIONS

TOPIC OVERVIEW:
This chapter explains the classification of properties of married persons. It distinguishes a
conjugal or community property from an exclusive property.

LEARNING OBJECTIVES:
After studying this chapter, the students should be able to:
1. Define property relation and describe its types.
2. Differentiate absolute community of property from conjugal partnership of gains.

PROPERTY RELATIONS

The system of property relationship is applicable only to married persons. It is used to

distinguish a conjugal or community property from an exclusive property. Under Art. 74 of the
New Family Code (as amended), the property relationship between husband and wife shall be
governed in the following order:

1.) By marriage settlements executed before the marriage.

2.) By the provisions of law
3.) By the local custom.

Types of Property Relations (Art. 75 NFC)

The future spouses may, in the marriage settlements, agree upon the following systems of
property relationship:

a) Absolute community of Property (ACoP)

b) Conjugal partnership of gains (CPG)

c) Complete separation of property, or

d) Any other regime.

In the event the couple had not adopted or agreed upon a system before their marriage, the rule

is Date of Marriage Property relationship

Before August 3, 1988 CPG

On or After August 3, 1988 ACoP

In order that any modification in the marriage settlements may be valid, it must be made before
the celebration of the marriage. The marriage settlements and any modification thereof shall be
in writing signed by the parties and executed before the celebration of the marriage They shall
not prejudice third persons unless they are registered in the local civil registry where the
marriage contract is recorded as well as in the proper registries of properties.

If decedent was married with surviving spouse, property in the gross estate need to be classified
into conjugal or exclusive property to facilitate the computation of the ½ share of the surviving
spouse on the net conjugal property as well as the net taxable estate of married decedent.
Conjugal property is owned by both spouses while exclusive property is owned either by the
husband or the wife. The exclusive property of the husband is known as "capital” while that of
that of the wife is known as "paraphernal” property.

Law Governing Property Relations

Irrespective of the place of the celebration of the marriage and their residence, the provisions of
the New Family Code (E.O. No.209) shall govern the property relations between husband and
wife whose marriage was celebrated on or after its effectivity (August 3, 1988). The provisions
of the civil code shall govern the property relations of husband and wife whose marriage was
celebrated before August 3, 1988. Stipulations in the settlements or contracts in consideration of
a future marriage, including donations between the prospective spouses made therein, shall be
rendered void if the marriage does not take place. However, stipulations that do not depend upon
the celebration of the marriages shall be valid.

ABSOLUTE COMMUNITY OF PROPERTY (ACoP)

This is the most common regime in Philippine marital property relations. If the spouses do not
have a valid marriage settlement, this system will govern the property relations of the couple and
it is more in keeping with Philippine custom and family unity. As a general rule, the provisions
on co-ownership shall apply to the absolute community of property between the spouses. In a
nutshell, the spouses become co-owners of all property they bring into the marriage and those
acquired by each or both of them during marriage, save for the exceptions expressly enumerated
by law. The rules on co-ownership applies in all matters not provided in the New Family Code

PROPERTY ACQUIRED BEFORE MARRIAGE (Community Property)

In general, property owned by the spouses before or upon celebration of marriage and brought
into marriage become part of the community property. These includes among others, property
inherited or received as donation before the marriage.

EXCEPTION:

Property acquired before marriage by either spouse who has legitimate descendants by the
former marriage and the fruits as well as income, if any, of such property shall be classified as
exclusive property.

PROPERTY ACQUIRED DURING MARRIAGE (Either Community or Exclusive

Property):

Property acquired during marriage will be presumed to belong to the community, unless it can be
proven to be exclusive property. Property acquired during marriage by onerous title from a
common fund or from income of either of them is community property.

Community Property under ACoP

As a rule, the following are considered community property when acquired during marriage
unless proven otherwise.

1. Family Home
The family home constituted by husband and wife is community property. However, an
exclusive property does not become community property even if it is used as family home.

2. Proceeds of life insurance (if included in the gross estate)

Exclusive property: if premium was paid from exclusive fund
Conjugal property: if premium was paid from conjugal funds or from income of either spouse
during marriage.
3. Claim against insolvent person is either exclusive or conjugal property.

Exclusive Property under ACoP

1. Property acquired during marriage by gratuitous title by either spouse, and the fruits as well as
the income thereof, if any unless the donor, testator, or grantor expressly provided that it be part
of community.

It shall be noted that under absolute community of property, the classification of "fruits" or
income shall depend on the classification of the principal or source of the fruits. Therefore, if the
income or fruit came from exclusive property, the fruits or income shall likewise be classified as
exclusive property. However, Fruits from "Labor" of either spouse shall always form part of
community or conjugal property.

2. Property for personal and exclusive use of either spouse. Personal effects or belongings such
as clothing, wearing apparel, shoes, and the like for personal and exclusive use of either spouse
are considered exclusive property regardless of what was used to acquire the property.

JEWELRY
However, under ACOP, "Jewelry" shall be considered community property even if they are for
the exclusive use of either spouse [Art. 92(2) NFC].

3, In general, property acquired during marriage by purchase with exclusive money or by

exchange with exclusive property, shall be considered exclusive property.

CONJUGAL PARTNERSHIP OF GAINS (CPG)

Oftentimes referred to as the CPG, it is one of the property relations between the spouses, under
which the husband and wife place in a common fund the proceeds, products, fruits and income
from their separate properties and those acquired by either or both spouses through their efforts
or by chance, and upon dissolution of the marriage or of the partnership, the net gains or benefits
obtained by either or both spouses shall be divided equally between them, unless otherwise
agreed in the marriage settlements.

CPG applies:

1. When the future spouses agree to it in the marriage settlement; or to conjugal partnerships of
gains already established between spouses before the effectivity of the New Family Code
(August 3, 1988), without prejudice to vested rights.

Exclusive property under CPG:

1. That which is brought to the marriage as his or her own.

2. That which each acquires during the marriage by gratuitous title.
3. That which is acquired by right of redemption or by exchange with property belonging to only
one of the spouses.
4. That which is purchased with the exclusive money of the wife or of the husband.

Conjugal property CPG:

1. That which is acquired by onerous title during the marriage at the expense of the common
fund, whether the acquisition be for the partnership or for only one of the spouses.
2. That which is obtained by labor, industry, or work or profession of either or both of the
spouses.
3. The fruits received or due during the marriage coming from the common property from the
exclusive property of each spouse.
Under conjugal partnership of gains, fruits regardless of the source (either from exclusive or
conjugal property including fruits from labor) are classified as conjugal property.

4. The share in the hidden treasure discovered during marriage which the law awards to the
spouses or to either of them as finder or proprietor.
5. Property acquired by occupation such as hunting or fishing by spouses or by either of them.
6. Improvements on the separate property of the spouses at the expense of the partnership or
through the industry of the spouses or either of them.

 Family home, when constituted by husband and wife, is a conjugal property. An

exclusive property, when used as family home, remains an exclusive property.
 Proceeds of life insurance policy when included in the gross estate, is considered
exclusive property if premium was paid out of exclusive funds. Otherwise, conjugal
property.
 Claims against insolvent person can be conjugal or exclusive property depending on
whether the claim is for conjugal or exclusive.

Table 4.1: Similarities & Differences (ACop and CPG)

Similarities
Property Conjugal Absolute
1. Property inherited or received as donation during
Exclusive Exclusive*
marriage
2. Property acquired during marriage (other than
Conjugal Community
inheritance or donation)
3. Property acquired from labor, industry, work or
Conjugal Community
profession of the spouses
4. Fruits or income due or derived during the
Conjugal Community
marriage coming from common property
5. Personal property for exclusive use Exclusive Exclusive**
Differences
1. Property before marriage or brought to the
Exclusive Community
marriage
2. Fruits or income due or received during the
Conjugal Exclusive
marriage coming from exclusive property
* Unless the donor, testator, or grantor expressly provided that it shall be part of community
properties (applicable under ACop only)
** Jewelry shall be considered community property even if they are for the exclusive use of
either spouse (under ACop only as provided under Art. 92(2) of the New Family Code)

ILLUSTRATION:
A decedent died on February 29, 2018. The following assets were provided for the purpose of
determining the decedent’s gross estate. If the item is an inclusion in the gross estate of the
decedent, classify the same as exclusive by writing “E” or community/conjugal property by
writing “C” under the regime of conjugal partnership of gains (CPG) and absolute community
property (ACoP). If the item is an exclusion from the gross estate, mark the item as “X”.

CPG ACP
Cash owned by the decedent before the marriage E C
Commercial building owned before marriage E C
Income from the previous item C C
Commercial building inherited during marriage E E
Income from the previous item C E
Livestock brought into marriage E C
Property acquired by barter using the exclusive property of the
E E
decedent
Property acquired by the decedent with cash owned before the E C
marriage
Personal belongings used exclusively by the decedent E E
Cash from compensation income of the decedent C C

CONJUGAL and EXCLUSIVE DEDUCTIONS

Whether under CPG or ACP, the following expenses are conjugal deductions:

 Funeral expenses; and

 Judicial expenses.

OTHER CONJUGAL DEDUCTIONS, whether under absolute community or property or

conjugal partnership of gains:

1. The support of the spouses, their common children, and legitimate children of either spouse.
2. All debts and obligations contracted during marriage by the designated administrator - spouse
for the benefit of the conjugal partnership, or by both spouse, or by one of them with the consent
of the other.
3. Debts and obligations contracted by either spouse without the consent of the other to the
extent that the family may have benefited.
4. All taxes, liens, charges, and expenses including major and minor repairs upon conjugal
property.
5. All taxes and expenses for mere preservation, made during the marriage, upon the separate
property of either spouse.
6. Expenses to enable either spouse to commence or complete a professional, vocational, or other
activity for self-improvement.
7. Debts before marriage of either spouse in so far as they have redounded to the benefit of the
family.
8. The value of what is donated or promised by both spouses in favor of their common legitimate
children for the exclusive purpose of commencing or completing a professional or vocational
course or activity for self-improvement.
9. Expenses of litigation between spouses, unless the suit is found to be groundless.

 Obligations contracted during marriage are presumed to have benefited the family and
therefore conjugal deductions. While obligations contracted by either spouse before
marriage are exclusive deductions unless shown that the family gained benefits from the
said obligations.

 Share of the surviving spouse (1/2 of net conjugal property), family home, medical
expenses, and standard deduction are deductions to be made from the net estate (total of
net conjugal estate and net exclusive estate) to arrive at the net taxable estate.

 Other deductions are either conjugal or exclusive deductions depending on whether

chargeable against conjugal property or exclusive property, or depending on whether the
property to which the deduction is related is conjugal or exclusive property.

 Wagering loss during marriage shall be borne by the loser. Winnings, however, shall
form part of conjugal property.

 Fines and pecuniary damages or indemnities imposed upon either spouse shall be charges
against exclusive property.
Table 4-2: Pro Forma Computation of net taxable estate & estate tax due if DECEDENT
was married with surviving spouse as amended under TRAIN Law
Conj./Comm. Exclusive Total
Gross Estate
Real or immovable property xx xx
Tangible personal property xx xx
Intangible property xx xx
Certain transfers xx xx
Total xx xx xx
Less: Ordinary Deductions
Losses/Indebtedness/Taxes (LIT) (xx) (xx)
Transfer for Public Use (xx) (xx)
Vanishing Deduction (xx) (xx)
Net Community/Exclusive before special xx xx (xx)
deductions
Less: Special Deductions
Standard Deduction (xx)
Family Home (xx)
Amount received under RA 4917 (xx)
Net Estate before share of the surviving spouse xx
Less: ½ share of the surviving spouse on the (xx)
net conj./comm. Property before special
deductions
NET TAXABLE ESTATE xx
ESTATE TAX DUE xx

ILLUSTRATION:
Proper presentation of family home and standard deduction under TRAIN Law (Other amounts
are assumed for illustration purposes only)

Case 1. Decedent is married; family home is conjugal; valued at more than P10,000,000
Conj./Comm. Exclusive Total
Gross Estate
Conjugal Properties
Real and personal property P 14,000,000
Family home 30,000,000
Exclusive Properties P6,000,000
Total 44,000,000 6,000,000 P 50,000,000
Less: Ordinary Deductions
Conjugal Ordinary Deductions (2,000,000)
Exclusive Ordinary Deduction (1,000,000) (3,000,000)
Net Community/Exclusive before special 42,000,000 5,000,000 47,000,000
deductions
Less: Special Deductions
Family Home (10,000,000)
Standard Deduction (5,000,000)
Net Estate before share of the surviving spouse 32,000,000
Less: ½ share of the surviving spouse on the (21,000,000)
net conj./comm. Property before special
deductions
NET TAXABLE ESTATE P 11,000,000
Case 2. Decedent is married; family home is conjugal; valued below P10,000,000
Conj./Comm. Exclusive Total
Gross Estate
Conjugal Properties
Real and personal property P 14,000,000
Family home 9,000,000
Exclusive Properties P6,000,000
Total 23,000,000 6,000,000 P 29,000,000
Less: Ordinary Deductions
Conjugal Ordinary Deductions (2,000,000)
Exclusive Ordinary Deduction (1,000,000) (3,000,000)
Net Community/Exclusive before special 21,000,000 5,000,000 26,000,000
deductions
Less: Special Deductions
Family Home (4,500,000)
Standard Deduction (5,000,000)
Net Estate before share of the surviving spouse 16,500,000
Less: ½ share of the surviving spouse on the (10,500,000)
net conj./comm. Property before special
deductions
NET TAXABLE ESTATE P 6,000,000

COMPLETE SEPARATION OF PROPERTY

The spouses shall be governed by complete separation of property if the future spouses agree in
the marriage settlements that their property relations during the marriage shall be governed by
the regime of separation of property. To each spouse shall belong all earnings from his or her
profession, business or industry and all fruits, natural, industrial, or civil, due or received during
the marriage from his or her separate property.

Both spouses shall bear the family expenses in proportion to their income or in case of
insufficiency or default thereof, to the current market value of their separate properties. The
liability of the spouses to creditors for family expenses shall, however, be solidary.

PROPERTY REGIME OF UNIONS WITHOUT MARRIAGE

CAPACITATED TO MARRY

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, the
following rules shall apply:

1. Wages and salaries shall be owned by them in equal shares.

2. Property acquired by both of them through their work or industry shall be governed by the
rules on co-ownership.

3. Neither party can encumber or dispose by act inter-vivos his or share in the property acquired
during cohabitation and owned in commons without the consent of the other, until after the
termination of their cohabitation

A party who did not participate in the acquisition by the other party of any property shall be
deemed to have contributed jointly in the acquisition thereof if the former's efforts consisted the
care and maintenance of the family and of the household.
In the absence of proof to the contrary, properties acquired while they lived together shall be
presumed to have been obtained by their joint efforts, work or industry, and shall be owned by
them in equal shares.

INCAPACITATED TO MARRY

1. Only the property acquired by both of them through their actual joint contribution of money,
property or industry shall be owned in common in proportion to their respective contributions. (If
silent, assume equal shares).

2. The share of any party who is married to another shall accrue to the absolute community or
conjugal partnership, as the case may be, if existing under the valid marriage.

Reference:
Tabag, E.D., Garcia, E.J. (2018) Transfer & Business Taxation with Special Topics based on
NIRC as amended under RA10963 – Tax Reform for Acceleration and Inclusion Act (TRAIN
Law)
Assessment:
A decedent died on April 9, 2018. The following were provided for the purpose of determining
the decedent’s gross estate and the estate tax due:
Real and personal properties P 14,000,000
Family home (exclusive property) 30,000,000
Other exclusive properties 6,000,000
Conjugal ordinary deductions 2,000,000
Exclusive deductions 1,000,000

Required: Compute for the following:

1. Gross Estate
2. Allowable Deductions
3. Deductible amount for family home
4. Share of the surviving spouse
5. Net Taxable Estate
6. Estate tax due
 CHAPTER 5
ESTATE TAX CREDIT & DISTRIBUTABLE ESTATE

TOPIC OVERVIEW:
This chapter explains the taxpayer’s right to deduct the amount of tax he paid in a foreign
country from the estate tax due here in the Philippines. This also shows the computation of the
net distributable estate.

LEARNING OBJECTIVES:
After studying this chapter, the students should be able to:
1. Describe the estate tax credit.
2. Calculate the net distributable estate.

Estate Tax Credit

Allowable deductions are deductions from the gross estate. Tax credit, on the other hand, is a
deduction from Philippine estate tax itself. While there are numerous taxes that may be deducted
from the gross estate, there is only this foreign estate tax that may be claimed against Philippine
estate tax.

Estate tax credit refers to the taxpayer’s right to deduct from the tax due the amount of tax he
paid to a foreign country. The amount could be claimed as a deduction if such taxes pertain to
properties which are included in the gross estate for Philippine estate tax computation. This
deduction is allowed by law to lessen the harshness of international double taxation where the
same estate is being subject to both the foreign estate tax and the Philippine estate tax.
Nonresident alien decedents are not entitled to estate tax credit.

Note: The amount of credit for estate tax paid to a foreign country shall not exceed the
proportion of the tax due in the Philippines which the decedent’s net estate situated within such
country bears to his entire net estate.

Philippine Estate Tax Due

The estate tax payable is computed first based on the net taxable estate before tax credit may be
deducted as follows:
Estate tax due (6%) xx
Less: Tax credit for foreign estate taxes paid (xx)
Philippine estate tax payable

Statutory Formula for the Computation of Estate Tax Credit

LIMIT A OR LIMIT 1 – IF THERE IS ONLY ONE FOREIGN COUNTRY

Net estate, foreign country

P xxx (LIMIT) = x Philippine Estate Tax Due
Net estate, world

Versus
Actual tax paid, foreign country
Whichever is lower
ILLUSTRATION:
A resident decedent died during the effectivity of the TRAIN Law leaving the following:
Taxable net estate, Philippines 8,000,000
Taxable net estate, USA 2,000,000
Estate tax paid, USA 400,000

How much is the estate tax payable?

2,000,000
P 120,000 = x 600,000
10,000,000

Versus
P 400,000

Estate tax due P 600,000

Less: Tax credit for foreign estate taxes paid (120,000)
Philippine estate tax payable P 480,000

LIMIT B OR LIMIT 2 – IF THERE ARE MORE THAN ONE FOREIGN COUNTRIES

Step 1 – Compute limit 1 per foreign country as shown above.
Step 2 – Compute limit 2 using the following formula:

Net estate, all foreign countries

P xxx (LIMIT) = x Philippine Estate Tax Due
Net estate, world

Versus
Actual tax paid, all foreign countries

Step 3 – Choose the lower amount between Limit A (Step 1) and Limit B (Step 2)

ILLUSTRATION:
A nonresident citizen died in 2018 leaving the following:
Net estate, Philippines (net of special deductions) P 8,000,000
Net estate, Japan 3,000,000
Estate tax paid, Japan 200,000
Net estate, UK 2,000,000
Estate tax paid, UK 100,000
Net estate, Russia (1,000,000)

Question: How much is the estate tax payable after estate tax credit?
Total taxable net estate P 12,000,000
Estate tax 6%
Estate tax due 720,000
Less: Tax credit for foreign estate taxes paid (240,000)*
Philippine estate tax payable P 480,000

LIMIT 1
JAPAN:
3,000,000
P 180,000 = x 720,000 VS P200,000 P 180,000
12,000,000

UK
2,000,000
P 120,000 = x 720,000 VS P100,000 P100,000
12,000,000
LIMIT 2
4,000,000
P 240,000 = x 720,000 VS P300,000 P240,000
12,000,000

*Lower between limit 1 and 2 = P240,000

NET DISTRIBUTABLE ESTATE

Net taxable estate is the result of the application of the law under estate taxation. Net
distributable estate, on the other hand, is the amount arrived at from gross estate consisting all
properties in the possession and control of the decedent at the time of death and actual expenses,
charges, and payments from the gross estate. Shown below is a comparative schedule of net
taxable estate and net distributable estate.

Net Taxable Estate Distributable Estate

GROSS ESTATE
Real or immovable property Included Included
Tangible personal property Included Included
Intangible personal property Included Included
Transfers in contemplation of death Included Included
Revocable transfers Included Included
Transfers under the general power of appointment Included Included
Proceeds of life insurance Included Included
Exclusions such as SSS, GSIS, etc. Excluded Included
ALLOWABLE DEDCUTIONS
Unpaid taxes Actual Actual
Claims against the estate Actual Actual
Claims against insolvent person Actual Actual
Losses Actual Actual
Transfer for Public Use Actual Actual
Vanishing Deduction As computed Not considered
Standard Deduction P10M Not considered
Family Home With limit Not considered
Amounts received under RA 4917 actual Not considered
Share of surviving spouse ½ of net conjugal ½ of net conjugal
NET TAXABLE ESTATE P xxx
ESTATE TAX DUE xxx (xxx)
NET DISTRIBUTABLE ESTATE P xxx

Reference:
Tabag, E.D., Garcia, E.J. (2018) Transfer & Business Taxation with Special Topics based on
NIRC as amended under RA10963 – Tax Reform for Acceleration and Inclusion Act (TRAIN
Law)
Assessment:
Nama Thai died on April 12, 2018 with the following data:
Philippines USA
Gross estate P 14,200,000 P 4,400,000
Allowable deductions (excluding standard deduction) 6,400,000 2,200,000
Estate tax paid 150,000

Question 1: How much is the estate tax payable in the Philippines assuming the decedent is a
nonresident citizen?
Question 2: How much is the estate tax credit assuming the decedent is a nonresident citizen?
Question 3: How much is the estate tax payable in the Philippines assuming the decedent is a
nonresident alien?
Question 4: How much is the estate tax credit assuming the decedent is a nonresident alien?
 CHAPTER 6
DONOR’S TAX

TOPIC OVERVIEW:
This chapter explains the nature, elements, and purpose of donor’s tax. This also shows the
computation of the gross gifts, the allowable deductions from gross gifts, and the donor’s tax due
under TRAIN Law.

LEARNING OBJECTIVES:
After studying this chapter, the students should be able to:
1. Explain the nature and concepts of donor’s tax.
2. Describe the elements and purpose of donor’s tax.
3. Enumerate the components of gross gift.
4. Identify the deductions from gross gifts.
5. Compute for the donor’s tax due.

INTRODUCTION
Donation is an act of liberality whereby a person disposes gratuitously a thing or right in favor
of another who accepts it. (Art. 725 of the New Civil Code)

Nature of Donor’s Tax

A donor’s tax is a tax levied, assessed, collected and paid upon the transfer by any person,
resident or nonresident, of the property by gift. It is a tax imposed on the exercise of the donor’s
right during lifetime to transfer property to others in the form of gift. Hence, donor’s tax is not a
property tax, but it is an excise tax imposed on the transfer of property by way of gift inter-vivos.
(RR 12-2018)

Perfection/Completion of Donation
The donor’s tax shall not apply unless and until there is a completed gift. The transfer of property
by gift is perfected from the moment the donor knows of the acceptance by the donee. It is
completed by the delivery, either actually or constructively, of the donated property to the donee.

Elements of Donation
1. Capacity of the donor to make donation
It refers to the condition and legal competence of the donor to enter into a contract. Under Article
735 of the civil code, all persons who may contract and dispose of their property may make a
donation. Therefore, it is not enough that a person be capacitated to contract, he must also have
the capacity to dispose. Capacity of the donor is determined at the perfection of the donation.

2. Donative intent or intent to make a gift on the part of the donor

Donative intent refers to the proper declaration of the legal owner of a property or right to
transfer ownership to another without consideration. It is required only in a direct gift.

3. Delivery

4. Acceptance
Acceptance must be made during the lifetime of the donor and the donee.

Purpose of Donor’s Tax

1. To provide avoidance of estate tax
The donor’s tax supplements the estate tax by preventing the avoidance of the latter through the
device of donating the property during the lifetime of the deceased.
2. To prevent or compensate for the loss of the progressive rates of income tax when large estates
are split up by gifts to numerous donees.

Donation of Movable Property/Immovable Property

TABLE 1: Summary of Formal Requirements
Real or Registrable
Personal Property
Property
Amount of ≤P5,000 >P5,000 Regardless of amount
Form of Donation Oral or in writing In writing In a public instrument

Classification of Donation
As to motive or purpose
1. Simple. The cause is pure liberality.
2. Renumeratory. Donations made due to past services rendered or future services or charges
and burdens. These are not really donations in substance, hence, not subject to donor’s tax.
3. Modal. Consideration is less than the value of the thing donated.

Valuation of Gross Gifts

In valuing properties for donor’s tax purposes, the principle in the valuation of properties as
discussed in Chapter 2 for estate tax also applies.
1. In General : Fair Market Value at the time the donation is perfected
2. Real Property : The higher value between:
FMV determined by the Commissioner; and FMV as shown in the schedule of values fixed by the
provincial and city assessors.
3. Personal Property : Fair market value at the time the donation is perfected
4. Shares of stock
 Unlisted common share: Book value per share on the valuation date or on the date nearest
the valuation date
 Unlisted Preference share: Par value per share
 Listed shares: FMV shall be the arithmetic mean between the highest and lowest
quotation at a date nearest the valuation date, if none is available on the valuation date
itself

GROSS GIFTS
TABLE 2: Composition of Gross Gifts
Property Citizen/Resident Nonresident Alien
Property within (personal or real) Included Included
Property outside (personal or real) Included Excluded
Intangible property within Included Included*
Intangible property outside Included Excluded
*Subject to reciprocity

INTANGIBLE ASSETS WITH SITUS WITHIN THE PHILIPPINES

For purposes of donation inter-vivos, the following should be considered intangible property
located within the Philippines.
1. Franchise which must be exercised in the Philippines.
2. Shares, obligations or bonds issued by any corporation or sociedad anonima organized or
constituted in the Philippines in accordance with its laws.
3. Shares, obligations or bonds issued by any foreign corporation, 85% of the business of
which is located in the Philippines.
4. Shares, obligations, or bonds issued by any foreign corporation if such shares, obligations
or bonds have acquired a business situs in the Philippines.
5. Shares or rights in any partnership, business or industry established in the Philippines.
 TABLE 3: Computation of Taxable Net Gift
Gross Gifts
Direct Gifts xx
Gifts through creation of trust xx
Transfer for insufficient consideration xx
Repudiation of inheritance xx
Renunciation by the surviving spouse of his/her share
xx
in the common property
Condonation of debt xx
Deductions
Encumbrances (xx)
Diminutions (xx)
Government, charitable/educational, etc. (xx)
Exempt gift (TRAIN Law) (P250,000)
Taxable Net Gifts xx

Beginning January 1, 2018 (TRAIN Law)

Tax rate: 6% in excess of P250,000 exempt gifts
 The computation of donor’s tax is on a cumulative basis over a period of one (1) calendar
year.
 The revised tax rate of 6% is applicable regardless of the relationship of the donor and
donee.

ILLUSTRATION: (RR No. 12-2018)

Donations were made on January 30, 2018 at P2,000,000; on March 30, 2018 at P1,000,000; and
August 15, 2018 at P500,000.
Transfer for Insufficient Consideration
When property, other than real property that has been subjected to the final capital gains tax, is
transferred for less than an adequate and full consideration in money or money’s worth, then the
difference between the fair value at the time of donation and the consideration received shall be
included in the computation of gross gifts. However, transfers made in the ordinary course of
business and free from any donative intent, even if the consideration is inadequate, shall not be
included in the computation of donor’s tax.

Sale or exchanges not through the Local Stock Exchange of Shares of Stock of Domestic
Corporations
In case the fair market value of the shares of stock sold, bartered, or exchanged is greater than
the amount of money and/or fair market value of the property received, the excess of the fair
market value of the shares of stock sold, bartered, or exchanged over the consideration received
shall be deemed a gift subject to donor’s tax.

Renunciation of Share in Common Property by the Surviving Spouse and Inheritance

Renunciation by the surviving spouse of his or her share in the conjugal partnership or absolute
community after the dissolution of the marriage in favor of the heirs of the deceased spouse or any
other person(s) is subject to donor’s tax. On the other hand, general renunciation by an heir,
including the surviving spouse, of his or her share in the hereditary estate left by the decedent is
not subject to donor’s tax, unless specifically and categorically done in favor of identified heirs to
the exclusion or disadvantage of the other co-heirs in the hereditary estate. (Section 11, RR 2-2003)

Condonation or Cancellation of Indebtedness

Condonation of debt is a mode of extinguishing an obligation. There is no condonation of
indebtedness or donation in the following cases:
 Condonation is due to the rendition of service.
 Condonation was made by a corporation in favor of its shareholders.

Special Rules on Husband and Wife

The spouses are co-owners of conjugal property, nonetheless, they are considered as separate and
distinct taxpayers for purposes of donor’s tax in proportion to their respective interests. Thus, in
case the gift is made by both spouses out of conjugal or community property, each of them can
claim separate exemption.

Donation of Property between Spouses

Every donation or grant of gratuitous advantage, direct or indirect, between the spouses during
marriage shall be void, except moderate gifts which the spouses may give each other on the
occasion of any family rejoicing or family distress. Donations of this kind are not subject to
donor’s tax. The prohibition shall also apply to persons living together as husband and wife
without a valid marriage. (Art. 87 of the New Family Code)

Contribution for Election Campaign

Any contribution in cash or in kind to any candidate, political party or coalition of parties for
campaign purposes shall be governed by the Election Code, hence, not subject to donor’s tax.
(RR 2-2003)

Void Donations
Under Art. 739 of the new civil code, the following donations shall be void:
 Those made between persons who were guilty of adultery or concubinage at the time of
donation
 Those made between persons found guilty of the same criminal offense, in consideration
thereof
 Those made to a public officer or his wife, descendants, and ascendants by reason of his
office
Exempt Gifts
Exemptions are not to be treated as exclusions from the gross gifts of the donor. They are
deductible from the gross gifts in order to arrive at taxable net gifts. Hence, the same amount
shall likewise be presented in the gross gifts of the donor.

1. Gifts made to or for the use of National Government or any entity created by any of its
agencies which is not conducted for profit, or to any political subdivision of the said government.
2. Gifts in favor of non-profit educational and/or charitable, religious, cultural or social welfare
corporation, institution, accredited nongovernment organization, trust or philanthropic
organization or research institution or organization, provided however that no more than 30% of
said gifts shall be used by such donee for administration purposes.

Notice of donation by a donor engaged in business (RR 12-2018)

In order to be exempt from donor's tax and to claim full deduction of the donation given to
qualified and duly accredited donee-institutions, the donor engaged in business shall give a
notice of donation on every donation worth at least Fifty Thousand Pesos (P50,000) to the
Revenue District Office (RDO) which has jurisdiction over his place of business within thirty
(30) days after receipt of the qualified donee-institution's duly issued Certificate of Donation,
which shall be attached to the said Notice of Donation, stating that not more than thirty percent
(30%) of the said donation/gifts for the taxable year shall be used by such accredited non-stock,
non-profit corporation/NGO institution (qualified donee institution) for administration purposes
pursuant to the provisions of Section 101(A)(3) and (B)(2) of the Code.
The function of accrediting donee-institutions has been transferred from Philippine Council for
NGO Certification, Incorporated (PCNC) to the following government agencies effective Nov.
16, 2007 under Executive Order (EO) No. 671 dated Oct. 22, 2007:
a. Department of Social Welfare and For charitable and/or social welfare
Development (DSWD) organizations, foundations and associations
b. Department of Science and Technology For research and other scientific activities
c. Philippine Sports Commission For sports development
d. National Council for Culture and Arts For cultural activities
e. Commission on Higher Education For educational activities

3. Encumbrances on the property donated if assumed by the donee.

For purposes of the donor's tax, "Net Gift" shall mean the net economic benefit from the transfer
that accrues to the donee. Accordingly, if a mortgaged property is transferred as a gift, but
imposing upon the donee the obligation to pay the mortgage liability, then the net gift is
measured by deducting from the fair market value of the property the amount of mortgage
assumed.
4. Donations made to entities as exempted under special laws
a) Prizes and awards given to athletes.
b) Donation to the International Rice Research Institute.
c) Donation to the Ramon Magsaysay Award Foundation.
d) Donation to the Philippine Inventor's Commission.
e) Donation to the Integrated Bar of the Philippines.
f) Donation to the Development Academy of the Philippines.
g) Donation to the Philippine-American Cultural Foundation.
h) Donation to Philippine Health Insurance Corporation.
i) Donations of equipment, materials, services to the Task Force on human settlement
5. Donations not exceeding P250,000 in one year.
TAX CREDIT FOR FOREIGN DONOR'S TAX
In order to minimize or lessen the harsh effect of taxing the same gift twice, the donor is allowed
to claim the gift tax paid in the foreign country as a tax credit against the gift tax paid in the
Philippines. It shall be noted that the formulas and procedures used in computing the allowable
foreign donor's tax credit are the same when computing the allowable foreign estate tax credit as
illustrated in Chapter 5.
Foreign donor's tax credit can only be claimed by citizens or residents of the Philippines at the
time the donation was made.
LIMIT A OR LIMIT 1 – IF THERE IS ONLY ONE (1) FOREIGN COUNTRY

Net gifts, foreign country x Philippine Donor’s Tax

P xxx (LIMIT) =
Net gifts, world Due

Versus
Actual tax paid, foreign country
Whichever is lower

LIMIT B OR LIMIT 2 – IF THERE ARE MORE THAN ONE FOREIGN COUNTRIES

Step 1 – Compute limit 1 per foreign country as shown above.
Step 2 – Compute limit 2 using the following formula:

Net gifts, all foreign countries x Philippine Donor’s Tax

P xxx (LIMIT) =
Net gifts, world Due

Versus
Actual tax paid, all foreign countries

Step 3 – Choose the lower amount between Limit A (Step 1) and Limit B (Step 2)

ILLUSTRATION:
In 2018, a resident citizen taxpayer made the following gifts to his relatives:
Philippines USA UK Italy
Gross gifts P 750,000 P 500,000 P 250,000 P 500,000
Deductions 250,000 200,000 150,000 150,000
Tax Paid 25,000 12,000 10,000

Question: How much is the donor’s tax payable after tax credit?
Gross gifts P 2,000,000
Less: Total Deductions (750,000)
Exemptions 250,000
Net taxable gift 1,000,000
Tax Rate 6%
Donor’s Tax Due 60,000
Less: Tax Credit (34,000)
Donor’s Tax Payable P 26,000

LIMIT 1
USA
300,000
P 18,000 = x 60,000 VS P25,000 P 18,000
1,000,000
UK
100,000
P 6,000 = x 60,000 VS P12,000 P6,000
1,000,000

ITALY
350,000
P 21,000 = x 60,000 VS P10,000 P10,000
1,000,000

LIMIT 2
750,000
P 45,000 = x 60,000 VS P47,000 P45,000
1,000,000

*Lower between limit 1 and 2 = P34,000

ADMINISTRATIVE PROVISIONS (RR 12-2018)

Filing and Payment
Any individual who makes any transfer by gift shall, for the purpose of the said tax make a
return in duplicate. The return shall set forth:
1. Each gift made during the calendar year which is to be included in computing net gifts;
2. The deduction claimed and allowable;
3. Any previous net gifts made during the same calendar year;
4. The name of the donee; and
5. Such further information as may be required by rules and regulations made pursuant to
law.
The return is filed and paid within 30 days after the date the gift is made or completed and the tax
due thereon shall be paid at the same time the return is filed "Pay-as-you file system".

Place of Filing
Except in cases where the Commissioner otherwise permits, the return shall be filed and the tax
paid to (l) an authorized agent bank, (2) Revenue District Officer, or (3) Revenue Collection
Officer having jurisdiction over the place where the donor is domiciled at the time of the transfer,
or if there is no legal residence in the Philippines, with the Office of the Commissioner.

In the case of gifts made by nonresident, the return may be filed with:
1. Philippine Embassy or Consulate in the country where he is domiciled at the time of the
transfer, or
2. Directly with the Office of the Commissioner

The term "Office of the Commissioner" shall refer to the RDO having jurisdiction over the BIR-
National Office Building which houses the Office of the Commissioner, or presently, to the RDO
39-South Quezon City.

Civil penalties and interest

1. Penalty of 25% if there is no false or fraudulent intent on the taxpayer.
2. Penalty of 50% if there is false, malice or fraudulent intent on the taxpayer.
3. Interest of 20% on the unpaid amount of tax from the date computed until fully paid.
References:
Tabag, E.D., Garcia, E.J. (2018) Transfer & Business Taxation with Special Topics based on
NIRC as amended under RA10963 – Tax Reform for Acceleration and Inclusion Act (TRAIN
Law)

Revenue Regulations No. 12-2018 Consolidated Revenue Regulations on Estate Tax and
Donor’s Tax Incorporating the Amendments Introduced by Republic Act No. 10963, Otherwise
Known as the Tax Reform for Acceleration and Inclusion (TRAIN) Law

Assessments:
1. In 2018, Adonis gave a property with a fair market value of P2,000,000, with unpaid mortgage
of P200,000 to be paid by him, to his son Daniel.

Required:
Compute for the following:
a. Net taxable gifts
b. Donor’s tax

2. In 2018, a resident citizen taxpayer made the following gifts to his relatives:
Philippines USA UK Italy
Gross gifts P 1,000,000 P 250,000 P 1,250,000 P 700,000
Deductions 150,000 50,000 350,000 150,000
Tax Paid 15,000 50,000 20,000

Required:
Compute for the following:
a. Gross gifts
b. Donor’s tax due before tax credit
c. Tax credit
d. Donor’s tax payable

3. Alma donated the following in 2018:

 January 1, 2018 – P1,250,000
 April 1, 2018 – P750,000
 August 15, 2018 – P500,000
 November 5, 2018 – P250,000

Compute the donor’s tax payable on January 1, April 1, August 15, and November 5 donations.
 CHAPTER 7
BUSINESS TAXES

TOPIC OVERVIEW:
This chapter explains the nature and purpose of business taxes. This also gives an overview of
the different types of business taxes.

LEARNING OBJECTIVES:
After studying this chapter, the students should be able to:
1. Determine the different types of business taxes.
2. Differentiate value added taxes from other percentage taxes.

Introduction to Business Taxes

Business taxes are those imposed upon onerous transfers such as barter, exchange and
importation. It is called as such because without a business pursued in the Philippines (except
importation) by the taxpayer, business taxes cannot be applied.

Unlike an income tax, which is based on the taxpayer's net taxable income, business taxes are
generally based on gross sales or gross receipts. Hence, irrespective of the results of business
operations (income or loss), taxpayers engaged in trade are still liable to pay for business taxes.

TYPES OF BUSINESS TAXES

There are three (3) major business taxes in the Philippines, namely:
1. Value added tax (VAT)
2. Other percentage taxes (OPT)
3. Excise taxes

As a rule, sale of goods or services made in the normal course of trade or business are subject to
vat unless exempt. Nonetheless, if the sale is exempt from vat, it may be subject to other
percentage taxes except those transactions exempt from business taxes such as those made for
subsistence or livelihood. Consequently, transactions subjected to vat should no longer be
subjected to other percentage tax. However, such is not the case with respect to excise taxes. A
transaction subjected to either vat or other percentage tax may still be subjected to excise tax.

VALUE-ADDED TAX
VAT is a tax on the value added by every seller to the purchase price or cost in the sale or lease
of goods, property or services in the ordinary course of trade or business as well as on
importation of goods into the Philippines, whether for personal or business use. It is a tax on
consumption levied on the sale, barter, exchange or lease of goods or properties and services in
the Philippines (cross border doctrine) and on importation of goods into the Philippines levied at
each stage of production and distribution process (RR 4-2007). Cross border doctrine means that
no VAT shall be imposed to form part of the cost of goods destined for consumption outside the
territorial border of the Philippine taxing authority.

KINDS OF VAT
 VAT on sale of goods or properties
 Vat on importation of goods
 Vat on sale of services and use or lease of properties
Persons Liable
Sale in the Ordinary Course:
Section 4.105-1 of RR 16-2005 provides that any person who, in the course of his trade or
business, sells, barters, exchanges or leases goods or properties, or renders services, and any
person who imports goods shall be liable to VAT imposed in Sections 106 to 108 of the Tax
Code.

Importation:
In the case of importation of taxable goods, the importer, whether an individual or corporation
and whether or not made in the course of his trade or business, shall be liable to VAT imposed in
Sec. 107 of the Tax Code.

Transfer made by a tax-exempt entity to none-tax exempt entity

Transfers made by a tax-exempt person/entity, not enjoying indirect tax exemption, shall be
subject to vat. The none-exempt transferee shall be considered as the importer and shall be liable
for the unpaid vat pursuant to RA No. 9224 as implemented by RR No. 25-03.

Meaning of the term "Goods or Properties"

Section 4.105-2 of RR 16-2005 define the term “goods or properties” as all tangible and intangible
objects which are capable of pecuniary estimation and shall include, among others:
1. Real properties held primarily for sale to customers or held for lease in the ordinary course of
trade or business
2 The right or the privilege to use patent, copyright, design, or model, plan, secret formula or
process, goodwill, trademark, trade brand or other like property or right
3. The right or the privilege to use any industrial commercial or scientific equipment
4. The right or the privilege to use motion picture films, films, tapes and discs; and
5. Radio, television, satellite transmission and cable television time.

Sale of Services
Sale of services means performance of all kind of services in the Philippines for others for a fee,
remuneration or consideration, whether in kind or in cash. VAT on sale of service is a tax on
payments for services rendered in the exercise of profession or calling. It is an indirect tax and,
thus, may be passed on to the client or customer. It is a tax on service and, as such, it accrues at
the time the service fee is collected (regardless of timing of collection). Such payments may be
collected in advance or after the service is rendered (Refer to Chapter 8 for additional
discussions).

Sale of Real Properties

Sale of real properties shall refer to real properties held primarily for sale to customers or held
for lease in the ordinary course of trade or business of the seller. In the case of sale of real
properties on the installment plan, the real estate dealer shall be subject to VAT on the
installment payments, including interest and penalties, actually and/or constructively received by
the seller. (Section 104.106- 3, RR 16-2005).

CHARACTERISTICS OF VAT
1. It is an indirect tax where tax shifting is always presumed.
The value added tax is an indirect tax and the amount may be shifted or passed on to the buyer,
transferee or lessee of the goods, properties or services (Section 105 tax code; Section 4, RR 16-2005). The
seller is the one statutorily liable to pay for the payment of the tax but the amount of the tax may
be shifted or passed to the buyer or transferee or lessee of the goods, properties or services. This
rule shall likewise apply to existing time of contracts of sale or lease of goods, properties or
services at the case of the effectivity of RA 9337 (VAT Reform Act). However, in the
importation, the importer is the liable for the vat (RR 16-2005).
The "burden of the tax" is borne by the final consumers although the producers and suppliers of
these goods and services are the ones who have to file their VAT returns to the Bureau of
Internal Revenue (BIR). Hence, what is transferred or shifted to the consumers is not the
"liability to pay the tax" but the tax burden.

2. It is consumption-based.
VAT is a tax on consumption levied on the sale, barter, exchange or lease of goods or properties
and services in the Philippines and on importation of goods into the Philippines (RR 16-2005). It is
the end user of consumer goods or services which ultimately shoulders the tax as a liability
therefrom, is passed on to the end users by the providers of these goods or services. The vat,
thus, forms a substantial portion of consumer expenditures.

3. It is imposed on the value-added in each stage of production and distribution process.

The vat system assures fiscal adequacy through the collection of taxes on every level of
consumption. Each business in the supply chain takes part in the process of controlling and
collecting the tax.

4. It is a credit-invoice method value-added tax

VAT payable is computed by deducting the input vat from the output vat. The providers of goods
or services passed on to the end users the liability to pay the tax who in turn may credit their vat
liability from the vat payments they received from the final consumer. This is because vat is a
consumption tax levied on sales to be borne by consumers with sellers acting simply as tax
collectors.
In the Philippines, the "Credit-Invoice Method" or "Tax credit Approach" is adopted in
computing the Vat Payable. This means that VAT is imposed on the sale first called "Output
Vat" and a tax credit is allowed or claimed on the VAT passed-on to his purchase or cost of
goods or services known as "Input Tax". The excess of output vat over input vat is called "VAT
Payable".

Output tax means the vat due on the sale, lease or exchange of taxable goods or properties or
services by any person registered or required to register under Section 236 of the Tax Code.
Input tax means the vat due on or paid by a VAT-registered on importation of goods or local
purchase of goods, properties or services, including lease or use of property in the course of his
trade or business. It shall also include the transitional input tax determined in accordance with
Section 111 of the Tax Code, presumptive input tax and deferred input tax from previous period
(Refer to Chapter 8 for a more detailed discussion on input and output vat). Input vat should be
supported with VAT receipts.

Sec. 4.110-7 of RR 16-2005 as amended by RR2-2007 provides that "if the input tax inclusive of
input tax carried over from the previous quarter exceeds the output tax, the excess input tax shall
be carried over to 'the succeeding quarter or quarters, provided, however, that any input tax
attributable to zero-rated sales by a VAT-registered person may at his option be refunded or
applied for a tax credit certificate which may be used in the payment of internal revenue taxes,
subject to the limitations as may be provided for by law, as well as, other implementing rules
(refer to Chapter 8 for 0% sales).

Basis of Value Added Tax

The law that governs the implementation of VAT is RA9337, the VAT Reform Act, passed by
Congress in May 2005 and amended by RA9361. It was implemented on November 1, 2005.
Under this law, a single rate equivalent to 12% (except for 0% sales discussed in Chapter 8) is
based on the following:
Nature of Transaction(s) Tax Base
a. Sale of goods or properties Gross selling price
 b. Sale of services Gross receipts
c. Importation Total landed cost
d. Dealers in securities Gross income

In computing the taxable base during the month or quarter, the following shall be allowed as
deductions from gross selling price:

a) Discounts determined and granted at the time of sale, which are expressly indicated in the
invoice, the amount thereof forming part of the gross sales duly recorded in the books of
accounts. Sales discount indicated, in the invoice at the time of sale, the grant of which is
not dependent upon the happening of a future event, may be excluded from the gross
sales within the same month/quarter it was given.
b) Sales returns and allowances for which a proper credit or refund was made or a credit
memo was issued during the month or quarter to the buyer for sales previously recorded
as taxable sales.

Sale of Goods/Services to Senior Citizens and PWDs (as amended)

Sale of certain goods or services specified under the law (magna carta for senior citizens and
magna carta for PWDs as amended) shall not be subject to the 12% value added tax (Refer to
Chapter 8 for a detailed discussion on vat exemption and discount granted to Senior Citizens and
PWDs.)

Gross Selling Price

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

Note: If the VAT is not billed separately in the document of sale, the selling price or the
consideration therein, shall be deemed to be inclusive of vat.

In the case of sale, barter or exchange of real property subject to VAT, gross selling price shall
mean the consideration stated in the sales document or the fair market value, whichever is higher
(RR 4-2007; Section 4.106-4, RR 16-2005).

Fair Market Value

The term shall mean whichever is higher of:
1) the fair market value as determined by the Commissioner or
2) the fair market value as shown in schedule of values of the Provincial and City Assessors (real
property tax declaration).

However, in the absence of zonal value/fair market value as determined by the Commissioner,
gross selling price refers to the market value shown in the latest real property tax declaration or
the consideration, whichever is higher. (RR 4-2007)

Note: If the gross selling price is based on zonal or market value of property, the zonal or market
value shall be deemed exclusive of vat.

Gross Receipts
Refers to the total amount of money or its equivalent representing the contract price;
compensation, service fee, rental or royalty, including the amount charged for materials supplied
with the services and deposits applied as payments for services rendered and advance payments
actually or constructively received during the taxable period for the services performed or to be
performed for another person, excluding the VAT.
"Constructive receipt" occurs when the money consideration or its equivalent is placed at the
control of the person who rendered the service without restrictions by the payor. The following
are examples of constructive receipts:

a) Deposit in banks which are made available to the seller of services without restrictions.
b) Issuance by the debtor of a notice to offset any debt or obligation and acceptance thereof
by the seller as payment for services rendered; and
c) Transfer of the amounts retained by the payor to the account of the contractor.

Advance Payment
An advance payment is an advance payment on behalf of another if the same is paid to a third
(3rd) party for a present or future obligation of said another party which obligation is evidenced
by a sales invoice/official receipt issued by the obligee/creditor to the obligor/debtor (i.e., the
aforementioned "another party") for the sale of goods or services by the former to the latter.

VAT REGISTRATION

A. Mandatory Registration
1. Any person or entity who, in the course of his trade or business sells, barters, exchanges,
leases goods or properties and renders services subject to VAT, if the aggregate amount of actual
gross sales or receipts exceed ₱3,000,000 beginning January 1, 2018 under RA 10963-TRAIN
Law (previously ₱1,919,500 for the past 12 months (other than those that are exempt) or there
are reasons to believe that the gross sales or receipts for the next 12 months will exceed
₱3,000,000.

2. Radio and/or television broadcasting companies whose annual gross receipts of the preceding
year exceeds ₱10,000,000. Mandatory registration applies within 30 days from the end of the
taxable year to radio/TV broadcasters whose gross annual receipt for the taxable year exceeded
₱10,000,000 (RR 4-2007).

3. A person required to register as VAT taxpayer but failed to register.

Penalty for non-registration of those required to register.

The taxpayer shall be liable to pay the tax as if he were a VAT-registered person but he cannot
avail the benefits of input tax credit for the period he was not properly registered.

VAT THRESHOLD FOR HUSBAND AND WIFE

For purposes of the threshold of ₱3,000,000, as amended, the husband and the wife shall be
considered separate taxpayers. However, the aggregation rule for each taxpayer shall apply. For
instance, if a professional, aside from the practice of his profession, also derives revenue from
other lines of business which are otherwise subject to VAT, the same shall be combined for
purposes of determining whether the threshold has been exceeded. Thus, the VAT-exempt sales
shall not be included in determining the threshold.

B. Optional Registration
1. Any person who is VAT-exempt or not required to register for VAT may elect to be VAT-
registered by registering with the RDO that has jurisdiction over the head office of that person,
and pay the annual registration fee of ₱500.00 for every separate and distinct establishment. Any
person who elects to register under optional registration shall not be allowed to cancel his
registration for the next three (3) years.
2. Any person who is VAT-registered but enters into transactions which are exempt from VAT
(mixed transactions) may opt that the VAT apply to his transactions which would have been
exempt under Section 109(1) of the Tax Code, as amended [Sec. 109(2)].

3. Franchise grantees of radio and/or television broadcasting whose annual gross receipts of the
preceding year do not exceed ten million pesos (₱10,000,000) derived from the business covered
by the law granting the franchise may opt for VAT registration. This option, once exercised,
shall be irrevocable. (Sec. 119, Tax Code).

The above-stated taxpayers may apply for VAT registration not later than ten (10) days before
the beginning of the calendar quarter and shall pay the registration fee unless they have already
paid at the beginning of the year. In any case, the Commissioner of Internal Revenue may, for
administrative reason deny any application for registration. Once registered as a VAT person, the
taxpayer shall be liable to output tax and be entitled to input tax credit beginning on the first day
of the month following registration.

C. Cancellation of Registration
Instances when a VAT-registered person may cancel his VAT registration:

1. If he makes a written application and can demonstrate to the commissioner's satisfaction that
his gross sales or receipts for the following twelve (12) months, other than those that are exempt
under Section 109 (A) to (U), will not exceed ₱3,000,000; or

2. If he has ceased to carry on his trade or business, and does not expect to recommence any
trade or business within the next twelve (12) months.

Power of the Commissioner to suspend business operations

The Commissioner of the Internal Revenue or his authorized representative may order
suspension or closure of business establishment for a period of not less than 5 days for any of the
following violations:

1) Failure to issue receipts or invoices

2) Failure to file vat return
3) "Understatement" of taxable sales or receipts by 30% or more of the correct taxable sales
or receipts for the taxable quarter.
4) Failure of any person to register as required under the law.

Computation of VAT Payable

Output VAT (Sales or Receipts * 12%) ₱xxx
Less: Input VAT (Purchases * 12%) (xxx)
Advance VAT Payment (xxx)
VAT Payable ₱xxx

II. OTHER PERCENTAGE TAXES (OPT)

It is a tax imposed on sale, barter, exchange or importation of goods, or sale of services based
upon gross sales, value in money of receipts derived by the manufacturer, producer, importer or
seller measured by certain percentage of the gross selling price or receipts. Any person who is
not a VAT-registered person (persons exempt from VAT under Sec. 109 of the tax code) and is
not exempt from business tax (i.e. business undertaking by an individual with gross
sales/receipts
≤₱100,000 in any twelve-month period) shall be subject to other percentage taxes. Other
Percentage Taxes are discussed in Chapter 9.
III. EXCISE TAXES

In addition to VAT, excise taxes apply to goods manufactured or produced in the Philippines for
domestic sales or consumption or for any other disposition, and goods imported. The goods
manufactured or imported under this category are classified as either "sin products" or "non-
essential goods" under the Tax Code.

Types Excise Tax:

Specific taxes - Excise taxes based on the weight, volume, capacity or any other physical unit of
measurement of the goods.
Ad valorem taxes - Excise taxes based on the selling price or other specified value of the goods.

Taxpayers Liable to Excise Taxes

1. Manufacturers; and
2. Importers of any of the following categories of goods or article:
 Distilled spirits such as liquors
 Wines
 Fermented liquors (i.e., beer)
 Tobacco products, cigars and cigarettes
 Automobiles
 Manufactured oils and other fuels (i.e., gasoline bunker fue l oil)
 Mineral products (i.e., gold, silver); and
 Non-essential goods (i.e., jewelry, perfumes)
 Fireworks
 Cinematographic films
 Yachts and other vessels intended for pleasure or sports
 Mineral products and quarry resources

Purposes of imposing excise taxes

1) To curtail consumption of certain commodities which are considered as harmful to the
individual or to the community.
2) To protect domestic industries from competition posed by similar imported products.
3) To distribute the tax burden in proportion to benefit derived from a particular government
service.

"Importer"
The term importer refers to persons bringing goods into the Philippines, whether or not made in
the course of trade or business. Importation is not a sale of goods, or sometimes not even a
business activity, yet is subject to vat. This is because vat is a consumption tax levied on sales to
be borne by consumers with sellers acting simply as tax collectors. Since the origin of
importation is from a foreign seller which is outside Philippine jurisdiction, vat is instead paid
directly by the importer.

Reference:
Tabag, E.D., Garcia, E.J. (2018) Transfer & Business Taxation with Special Topics based on
NIRC as amended under RA10963 – Tax Reform for Acceleration and Inclusion Act (TRAIN
Law)
 CHAPTER 8
VALUE ADDED TAX

TOPIC OVERVIEW:
This chapter explains the first type of business taxes – value added taxes. The VAT exempt sales,
zero-rated sales, and the computation of output VAT and input VAT under TRAIN Law are also
discussed in this chapter.

LEARNING OBJECTIVES:
After studying this chapter, the students should be able to:
1. Explain the items under vat exempt sales.
2. Compute for the VAT payable.
3. Calculate the output and input VAT of a business.

Value Added Tax (VAT)

Value added tax (VAT) is a tax on the value added by every seller to the purchase price or cost in
the sale or lease of goods, property or services in the ordinary course of business as well as on
importation of goods into the Philippines, whether for personal or business use. As a rule, sale of
goods or services made in the normal course of trade or business are subject to VAT unless
exempt. Nonetheless, if the sale is exempt from VAT, it may be subjected to other percentage
taxes except those transactions exempt from business taxes such as those made for subsistence or
livelihood.

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

The value-added tax is an indirect tax and the amount of tax may be shifted or passed on to the
buyer, transferee or lessee of the goods, properties or services. This rule shall likewise apply to
existing contracts of sale or lease of goods, properties or services at the time of the effectivity of
Republic Act No. 7716.

The phrase “in the course of trade or business” means the regular conduct or pursuit of a
commercial or an economic activity, including transactions incidental thereto, by any person
regardless of whether or not the person engaged therein is a non-stock, nonprofit private
organization (irrespective of the disposition of its net income and whether or not it sells
exclusively to members or their guests), or government entity.

The rule of regularity, to the contrary notwithstanding, services as defined in this Code rendered
in the Philippines by nonresident foreign persons shall be considered as being rendered in the
course of trade or business.

SEC. 106. Value-Added Tax on Sale of Goods or Properties. -

(A) Rate and Base of Tax. - There shall be levied, assessed and collected on every sale, barter or
exchange of goods or properties, value-added tax equivalent to twelve percent (12%) of the gross
selling price or gross value in money of the goods or properties sold, bartered or exchanged, such
tax to be paid by the seller or transferor.

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

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

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

(a) Export Sales. - The term “export sales” means:

(1) The sale and actual shipment of goods from the Philippines to a foreign country, irrespective
of any shipping arrangement that may be agreed upon which may influence or determine the
transfer of ownership of the goods so exported and paid for in acceptable foreign currency or its
equivalent in goods or services, and accounted for in accordance with the rules and regulations of
the Bangko Sentral ng Pilipinas (BSP);

(2) Sale and delivery of goods to:

(i) Registered enterprises within a separate customs territory as provided under special laws; and

(ii) Registered enterprises within tourism enterprises zones as declared by the Tourism
Infrastructure and Enterprise Zone Authority (TIEZA) subject to the provisions under Republic
Act No. 9593 or The Tourism Act of 2009.

(3) Sale of raw materials or packaging materials to a nonresident buyer for delivery to a resident
local export-oriented enterprise to be used in manufacturing, processing, packing or repacking in
the Philippines of the said buyer's goods and paid for in acceptable foreign currency and
accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas
(BSP);

(4) Sale of raw materials or packaging materials to export-oriented enterprise whose export sales
exceed seventy percent (70%) of total annual production;

(5) Those considered export sales under Executive Order NO. 226, otherwise known as the
“Omnibus Investment Code of 1987”, and other special laws; and

(6) The sale of goods, supplies, equipment and fuel to persons engaged in international shipping
or international air transport operations: Provided, that the goods, supplies, equipment and fuel
shall be used for international shipping or air transport operations.

Provided, That subparagraphs (3), (4), and (5) hereof shall be subject to the twelve percent (12%)
value-added tax and no longer be considered export sales subject to zero percent (0%) VAT rate
upon satisfaction of the following conditions:

(1) The successful establishment and implementation of an enhanced VAT refund system that
grants refunds of creditable input tax within ninety (90) days from the filing of the VAT refund
application with the Bureau: Provided that, to determine the effectivity of item no. 1, all
applications filed from January 1, 2018 shall be processed and must be decided within ninety
(90) days from the filing of the VAT refund application; and

(2) All pending VAT refund claims as of December 21, 2017 shall be fully paid in cash by
December 31, 2019.
Provided, That the Department of Finance shall establish a VAT refund center in the Bureau of
Internal Revenue(BIR) and in the Bureau of Customs(BOC) that will handle the processing and
granting of cash refunds of creditable input tax.

An amount equivalent to five percent (5%) of the total VAT collection of the BIR and the BOC
from the immediately preceding year shall be automatically appropriated annually and shall be
treated as a special account in the General Fund or as trust receipts for the purpose of funding
claims for VAT refund: Provided that any unused fund, at the end of the year shall revert to the
General Fund.

Provided further that the BIR and the BOC shall be required to submit to the Congressional
Oversight Committee on the Comprehensive Tax Reform Program (COCCTRP) a quarterly
report of all pending claims for refund and any unused fund.

(b) Sales to persons or entities whose exemption under special laws or international agreements
to which the Philippines is a signatory effectively subjects such sales to zero rate.

(B) Transactions Deemed Sale. - The following transactions shall be deemed sale:

(1) Transfer, use or consumption not in the course of business of goods or properties originally
intended for sale or for use in the course of business;

(2) Distribution or transfer to:

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

(b) Creditors in payment of debt;

(3) Consignment of goods if actual sale is not made within sixty (60) days following the date
such goods were consigned; and

(4) Retirement from or cessation of business, with respect to inventories of taxable goods
existing as of such retirement or cessation.

(C) Changes in or Cessation of Status of a VAT-registered Person. - The tax imposed in

Subsection (A) of this Section shall also apply to goods disposed of or existing as of a certain
date if under circumstances to be prescribed in rules and regulations to be promulgated by the
Secretary of Finance, upon recommendation of the Commissioner, the status of a person as a
VAT-registered person changes or is terminated.

(D) Sales Returns, Allowances and Sales Discounts. - The value of goods or properties sold and
subsequently returned or for which allowances were granted by a VAT-registered person may be
deducted from the gross sales or receipts for the quarter in which a refund is made or a credit
memorandum or refund is issued. Sales discount granted and indicated in the invoice at the time
of sale and the grant of which does not depend upon the happening of a future event may be
excluded from the gross sales within the same quarter it was given.

(E) Authority of the Commissioner to Determine the Appropriate Tax Base. - The
Commissioner shall, by rules and regulations prescribed by the Secretary of Finance, determine
the appropriate tax base in cases where a transaction is deemed a sale, barter or exchange of
goods or properties under Subsection (B) hereof, or where the gross selling price is unreasonably
lower than the actual market value.

SEC. 107. Value-Added Tax on Importation of Goods. –

(A) In General. - There shall be levied, assessed and collected on every importation of goods a
value-added tax equivalent to twelve percent (12%) based on the total value used by the Bureau
of Customs in determining tariff and customs duties plus customs duties, excise taxes, if any,
and
other charges, such tax to be paid by the importer prior to the release of such goods from
customs custody: Provided, that where the customs duties are determined on the basis of the
quantity or volume of the goods, the value-added tax shall be based on the landed cost plus
excise taxes, if any.

(B) Transfer of Goods by Tax-exempt Persons. - In the case of tax-free importation of goods
into the Philippines by persons, entities or agencies exempt from tax where such goods are
subsequently sold, transferred or exchanged in the Philippines to non-exempt persons or entities,
the purchasers, transferees or recipients shall be considered the importers thereof, who shall be
liable for any internal revenue tax on such importation. The tax due on such importation shall
constitute a lien on the goods superior to all charges or liens on the goods, irrespective of the
possessor thereof.

Computation of VAT on Importation

In general,
Total value for tariff and customs duties (as determined by the BOC) ₱ xxx
Add:
Customs duties ₱ xxx
Excise Tax xxx
Other charges prior to release xxx xxx
Tax base xxx
Tax rate 12%
VAT ON IMPORTATION ₱ xxx

Where customs duties are determined on the basis of quantity or volume of goods, the landed
cost should be used as a basis in computing vat which includes invoice cost, freight, insurance,
customs duties, excise taxes, if any, and other legitimate charges prior to removal of goods from
the customs custody.

Formula
Invoice amount ₱ xxx
Add:
Customs duties ₱ xxx
Excise Tax xxx
Other charges prior to release xxx xxx
Landed Cost xxx
Tax rate 12%
VAT ON IMPORTATION ₱ xxx

ILLUSTRATION:
Nirvana cigar, classified as non-essential article was imported for sale. The particulars of which
are as follows: Exchange rate is $1:₱40
Value of importation as determined by the BOC $ 15,000
Freight and insurance ₱ 20,000
Customs duties 20,000
Other expenses prior to the release of goods from customs duty 10,000
Excise tax 20%
Facilitation expense 5,000
Transfer costs from customs to the importer’s warehouse 25,000
Selling price of the goods imported 1,500,000

Question 1: How much is the applicable excise tax?

Value of importation as determined by the BOC ($ 15,000 * 40) ₱ 600,000
Freight and insurance 20,000
Customs duties 20,000
Other expenses prior to the release of goods from customs duty 10,000
 Total cost before excise tax 650,000
Excise tax rate 20%
EXCISE TAX ₱ 130,000

Question 2: How much is the vat on importation?

Total cost before excise tax ₱ 650,000
Add: Excise tax 130,000
Landed Cost 780,000
Tax rate 12%
VAT ON IMPORTATION ₱ 93,600

Question 3: How much is the total creditable input vat?

On importation ₱ 93,600
On transfer costs (25,000 * 12%) 3,000
INPUT VAT ₱ 96,600

Question 4: How much is the vat payable on sale?

Output VAT (1.5M * 12%) ₱ 180,000
Input VAT 96,600
VAT PAYABLE ON SALE ₱ 83,400

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

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

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

(1) The lease or the use of the right or privilege to use any copyright, patent, design or model,
plan secret formula or process, goodwill, trademark, trade brand or other like property or right;

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

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

(4) The supply of any assistance that is ancillary and subsidiary to and is furnished as a means of
enabling the application or enjoyment of any such property, or right as is mentioned in
subparagraph (2) or any such knowledge or information as is mentioned in subparagraph (3);

(5) The supply of services by a nonresident person or his employee in connection with the use of
property or rights belonging to, or the installation or operation of any brand, machinery or other
apparatus purchased from such nonresident person.

(6) The supply of technical advice, assistance or services rendered in connection with technical
management or administration of any scientific, industrial or commercial undertaking, venture,
project or scheme;

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

(8) The lease or the use of or the right to use radio, television, satellite transmission and cable
television time.

Lease of properties shall be subject to the tax herein imposed irrespective of the place where the
contract of lease or licensing agreement was executed if the property is leased or used in the
Philippines.

The term “gross receipts” means the total amount of money or its equivalent representing the
contract price, compensation, service fee, rental or royalty, including the amount charged for
materials supplied with the services and deposits and advanced payments actually or
constructively received during the taxable quarter for the services performed or to be performed
for another person, excluding value-added tax.

(B) Transactions Subject to Zero Percent (0%) Rate - The following services performed in the
Philippines by VAT- registered persons shall be subject to zero percent (0%) rate.

(1) Processing, manufacturing or repacking goods for other persons doing business outside the
Philippines which goods are subsequently exported, where the services are paid for in acceptable
foreign currency and accounted for in accordance with the rules and regulations of the Bangko
Sentral ng Pilipinas (BSP);

(2) Services other than those mentioned in the preceding paragraph, rendered to a person
engaged in business conducted outside the Philippines or to a nonresident person not engaged in
business who is outside the Philippines when the services are performed, the consideration for
which is paid for in acceptable foreign currency and accounted for in accordance with the rules
and regulations of the Bangko Sentral ng Pilipinas (BSP);

(3) Services rendered to persons or entities whose exemption under special laws or international
agreements to which the Philippines is a signatory effectively subjects the supply of such
services to zero percent (0%) rate;

(4) Services rendered to persons engaged in international shipping or international air transport
operations, including leases of property for use thereof: Provided, that these services shall be
exclusive for international shipping or air transport operations;

(5) Services performed by subcontractors and/or contractors in processing, converting, or

manufacturing goods for an enterprise whose export sales exceed seventy percent (70%) of total
annual production;

(6) Transport of passengers and cargo by air or sea vessels from the Philippines to a foreign
country; and
(7) Sale of power or fuel generated through renewable sources of energy such as, but not limited
to, biomass, solar, wind, hydropower, geothermal, ocean energy, and other emerging energy
sources using technologies such as fuel cells and hydrogen fuels.

Provided that subparagraphs (B)(1) and (B)(5) hereof shall be subject to the twelve percent
(12%) value-added tax and no longer subject to zero percent (0%) VAT rate upon satisfaction of
the following conditions:

(1) The successful establishment and implementation of an enhanced VAT refund system that
grants refund of creditable input tax within ninety (90) days from the filing of the VAT refund
application with the Bureau; Provided, That, to determine the effectivity of item no. 1, all
applications filed from January 1, 2018 shall be processed and must be decided within ninety
(90) days from the filing of the VAT refund application; and

(2) All pending VAT refund claims as of December 31, 2017 shall be fully paid in cash by
December 31, 2019.

SEC. 109. Exempt Transactions.

(1) Subject to the provisions of Subsection (2) hereof, the following transactions shall be exempt
from the value-added tax.

(A) Sale or importation of agricultural and marine food products in their original state,
livestock and poultry of a kind generally used as, or yielding or producing foods for human
consumption; and breeding stock and genetic materials therefor.

Products classified under this paragraph shall be considered in their original state even if they
have undergone the simple processes of preparation or preservation for the market, such as
freezing, drying, salting, broiling, roasting, smoking or stripping. Polished and/or husked rice,
corn grits, raw cane sugar and molasses, ordinary salt and copra shall be considered in their
original state;
TABLE 1: Examples of Agricultural and Marine Food Products in their Original State
Agricultural Marine Livestock Poultry
Polished/husked rice Fish Cows Fowls
Corn grits Crustaceans such as: Bulls Ducks
Raw cane sugar & -Lobster, shrimps Calves Geese
molasses -Prawns, oysters Pigs Turkey
Copra -Mussels, clams Sheep
-Trout, eels Goats
Rabbits
NOTE: Livestock or poultry does not include fighting cocks, race horses, zoo animals, and
other
animals generally considered as pets.

(B) Sale or importation of fertilizers; seeds, seedlings and fingerlings; fish, prawn, livestock
and poultry feeds including ingredients, whether locally produced or imported, used in the
manufacture of finished feeds (except specialty feeds for race horses, fighting cocks, aquarium
fish, zoo animals and other animals generally considered as pets);

(C) Importation of personal and household effects belonging to the residents of the Philippines
returning from abroad and nonresident citizens coming to resettle in the Philippines: Provided,
That such goods are exempt from customs duties under the Tariff and Customs Code of the
Philippines;

(D) Importation of professional instruments and implements, tools of trade, occupation or

employment, wearing apparel, domestic animals, and personal and household effects belonging
to persons coming to settle in the Philippines or Filipinos or their families and descendants who
are now residents or citizens of other countries, such parties hereinafter referred to as overseas
Filipinos, in quantities and of the class suitable to the profession, rank or position of the persons
importing said items, for their own use and not for barter or sale, accompanying such persons, or
arriving within a reasonable time: Provided, That the Bureau of Customs may, upon the
production of satisfactory evidence that such persons are actually coming to settle in the
Philippines and the goods are brought from their former place of abode, exempt such goods from
payment of duties and taxes: Provided, further, That the vehicles, vessels, aircrafts, machineries
and other similar goods for use in manufacture, shall not fall within this classification and shall
therefore be subject to duties, taxes and other charges;

(E) Services subject to percentage tax under Title V of the Tax Code;

(F) Services by agricultural contract growers and milling for others of palay into rice, corn into
grits and sugar cane into raw sugar;

(G) Medical, dental, hospital and veterinary services except those rendered by professionals;

(H) Educational services rendered by private educational institutions, duly accredited by the
Department of Education (DepEd), the Commission on Higher Education (CHED), the Technical
Education and Skills Development Authority (TESDA) and those rendered by government
educational institutions;

(I) Services rendered by individuals pursuant to an employer-employee relationship;

(J) Services rendered by regional or area headquarters established in the Philippines by

multinational corporations which act as supervisory, communications and coordinating centers
for their affiliates, subsidiaries or branches in the Asia-Pacific Region and do not earn or derive
income from the Philippines;

(K) Transactions which are exempt under international agreements to which the Philippines is a
signatory or under special laws, except those under Presidential Decree No. 529 (Petroleum
Exploration Concessionaries under Petroleum Act of 1949);

(L) Sales by agricultural cooperatives duly registered with the Cooperative Development Authority
to their members as well as sale of their produce, whether in its original state or processed form,
to non-members; their importation of direct farm inputs, machineries and equipment, including
spare parts thereof, to be used directly and exclusively in the production and/or processing of
their produce;
TABLE 2: Sales by Agricultural Cooperatives
To Members To Non-Members
Sale of cooperative’s own
EXEMPT EXEMPT
produce
Other than the cooperative’s
EXEMPT VAT*
own produce
*Exempt if referring to agricultural food product at its original state.

(M) Gross receipts from lending activities by credit or multi-purpose cooperatives duly
registered with the Cooperative Development Authority;
TABLE 3: Gross Receipts by Credit or Multi-Purpose Cooperatives
From Members From Non-Members
From lending activities EXEMPT EXEMPT
From non-lending activities VAT VAT

(N) Sales by non-agricultural, non- electric and non-credit cooperatives duly registered with the
Cooperative Development Authority: Provided, That the share capital contribution of each
member does not exceed fifteen thousand pesos (P15,000) and regardless of the aggregate capital
and net surplus ratably distributed among the members;
 TABLE 4: Gross Receipts/Sales by
From Members From Non-Members
Electric cooperatives VAT VAT
Agricultural cooperatives Table 2 Table 2
Lending activities by lending and
Table 3 Table 3
multi-purpose cooperative
Non-agricultural, non-electric, non-
lending/credit cooperatives
Contribution per member
 ≤ P 15,000 EXEMPT EXEMPT
 > P 15,000 VAT VAT

(O) Export sales by persons who are not VAT-registered;

(P) Sale of real properties not primarily held for sale to customers or held for lease in the
ordinary course of trade or business** or real property utilized for low-cost and socialized
housing as defined by Republic Act No. 7279, otherwise known as the Urban Development and
Housing Act of 1992, and other related laws, residential lot valued at One million five hundred
thousand pesos (P1,500,000) and below, house and lot, and other residential dwellings valued at
Two million five hundred thousand pesos (P2,500,000) and below: Provided, That beginning
January 1, 2021, the VAT exemption shall only apply to sale of real properties not primarily
held for sale to customers or held for lease in the ordinary course of trade or business, sale of real
property utilized for socialized housing as defined by Republic Act No. 7279, sale of house and
lot, and other residential dwellings with the selling price of not more than Two million pesos
(P2,000,000): Provided, further, That every three (3) years thereafter, the amount herein stated
shall be adjusted to its present value using the Consumer Price Index, as published by the
Philippine Statistics Authority(PSA);
**However, if such property is used in trade or business of the seller, the sale shall be
subjected to VAT as incidental transaction to the seller’s main business (RR 4-2017, RR 13-2018)
Sale of Parking Lot in the Sale of Condominium Units
Exemption from VAT does not include the sale of parking lot which may or may not be included
in the sale of condominium units. The sale of parking lot in a condominium unit is a separate and
distinct transaction and is not covered by the rules on threshold amount, thus should be subjected
to VAT regardless of amount of selling price. (RR 13-2012)

(Q) Lease of a residential unit with a monthly rental not exceeding Fifteen thousand pesos
(₱15,000);

TABLE 5: Leases of Residential and Commercial Units

Lease of Residential Units
Monthly Rental
≤ ₱ 15,000 Exempt from VAT
> ₱ 15,000 Annual receipts of the
lessor

≤ ₱ 3,000,000 Subject to OPT

> ₱ 3,000,000 Subject to VAT
Lease of Commercial Units
Generally subject to VAT regardless of monthly rental, however,
subject to 3% OPT if the lessor is non-vat registered and annual gross
receipts
≤ ₱ 3,000,000

(R) Sale, importation, printing or publication of books and any newspaper, magazine review or
bulletin which appears at regular intervals with fixed prices for subscription and sale and which
is not devoted principally to the publication of paid advertisements;
(S) Transport of passengers by international carriers doing business in the Philippines;

(T) Sale, importation or lease of passenger or cargo vessels and aircraft, including engine,
equipment and spare parts thereof for domestic or international transport operations, provided
that the exemption from VAT on the importation and local purchase of passenger and/or cargo
vessels shall be subject to the requirements on restriction on vessel importation and mandatory
vessel retirement program of MARINA (RR 15-2015, RR 13-2018);

(U) Importation of fuel, goods and supplies by persons engaged in international shipping or air
transport operations: Provided, that the fuel, goods, and supplies shall be used for international
shipping or air transport operations;

(V) Services of bank, non-bank financial intermediaries performing quasi-banking functions, and
other non-bank financial intermediaries;

(W) Sale or lease of goods and services to senior citizens and persons with disability, as provided
under Republic Act Nos. 9994 (Expanded Senior Citizens Act of 2010) and 10754 (An Act
Expanding the Benefits and Privileges of Persons With Disability), respectively;

(X) Transfer of property pursuant to Section 40(C)(2) of the NIRC, as amended;

(Y) Associations dues, membership fees, and other assessments and charges collected by
homeowners’ associations and condominium corporations;

(Z) Sale of gold to the Banko Sentral ng Pilipinas (BSP);

(AA) Sale of or importation of prescription drugs and medicines for:

(i) Diabetes, high cholesterol, and hypertension beginning January 1, 2020; and

(ii) Cancer, mental illness, tuberculosis, and kidney diseases beginning January 1, 2023.

Provided, That the DOH shall issue a list of approved drugs and medicines for this purpose
within sixty (60) days from the effectivity of this Act; and

(BB) Sale or lease of goods or properties or the performance of services other than the
transactions mentioned in the preceding paragraphs, the gross annual sales and/or receipts do not
exceed the amount of Three million pesos (P3,000,000).

SEC. 110. Tax Credits. -

A. Creditable Input Tax. –

(1) Any input tax evidenced by a VAT invoice or official receipt issued in accordance with
Section 113 hereof on the following transactions shall be creditable against the output tax:

(a) Purchase or importation of goods:

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

(b) Purchase of services on which a value-added tax has been actually paid.
(2) The input tax on domestic purchase or importation of goods or properties by a VAT-
registered person shall be creditable:

a) To the purchaser upon consummation of sale and on importation of goods or properties;

and
b) To the importer upon payment of the value-added tax prior to the release of the goods
from the custody of the Bureau of Customs.

Provided, that the input tax on goods purchased or imported in a calendar month for use in trade
or business for which deduction for depreciation is allowed under this Code shall be spread
evenly over the a month of acquisition and the fifty-nine (59) succeeding months if the aggregate
acquisition cost for such goods, excluding the VAT component thereof, exceeds one million
pesos (P1,000,000): Provided, however, that if the estimated useful life of the capital good is less
than five (5) years, as used for depreciation purposes, then the input VAT shall be spread over
such a shorter period: Provided further, that the amortization of the input VAT shall only be
allowed until December 31, 2021 after which taxpayers with unutilized input VAT on capital
goods purchased or imported shall be allowed to apply the same as scheduled until fully utilized:
Provided, finally, That in the case of purchase of services, lease or use of properties, the input tax
shall be creditable to the purchaser, lessee or licensee upon payment of the compensation, rental,
royalty or free.

ILLUSTRATION:
A manufacturer purchased capital goods on several occasions as follows:
No. of Last month
Month of
Amount Input VAT Useful life monthly of
purchase
amortization amortization
January, 2018 ₱8,500,000 ₱1,020,000 6 years 60 Dec, 2022
February, 2018 8,500,000 1,020,000 4 years 48 Jan, 2022
Outright
March, 2018 750,000 90,000 3 years - claim on
Mar, 2018
December, 2021 10,000,000 1,200,000 5 years 60 Nov, 2026
Outright
January, 2022 10,000,000 1,200,000 5 years - claim on Jan,
2022

Another Illustration:
A VAT registered taxpayer made the following acquisition of capital goods from VAT registered
suppliers (net of vat) during 2018:

Purchase Date Acquisition Cost Estimated Life (Years)

January
1*** ₱ 1,000,000 10
15 500,000 2
March
2 200,000 6
20 300,000 2
October
6 600,000 4
30 800,000 6
December 25 3,000,000 1
***The asset was sold in December 2018

Question 1: How much is the creditable input vat for the month of January?
Answer: ₱ 4,500
 January
1 (₱ 1,000,000 * 12%) / 60 months ₱ 2,000
15 (500,000 * 12%) / 24 months 2,500
₱ 4,500

Question 2: How much is the creditable input vat for the month of February?
Answer: ₱ 4,500

Question 3: How much is the creditable input vat for the month of March?
Answer: ₱ 64,500
January ₱ 4,500
March 2 ₱ 200,000 * 12% 24,000
March 20 300,000 * 12% 36,000
₱ 64,500

Question 4: How much is the creditable input vat for the month of April?
Answer: ₱ 4,500

Question 5: How much is the creditable input vat for the month of October?
Answer: ₱ 7,600
January ₱ 4,500
October 6 (₱ 600,000 * 12%) / 48 months 1,500
October 30 (800,000 * 12%) / 60 months 1,600
₱ 7,600

Question 6: How much is the creditable input vat for the month of November?
Answer: ₱ 7,600

Question 7: How much is the creditable input vat for the month of December?
Answer: ₱ 463,600
January 1 unclaimed input VAT 2,000 * 49 months ₱ 98,000
January 15 2,500
October 1,500 + 1,600 3,100
December 25 3,000,000 * 12% (Not a capital asset) 360,000
₱ 463,600

(3) A VAT-registered person who is also engaged in transactions not subject to the value-added
tax shall be allowed tax credit as follows:

(a) Total input tax which can be directly attributed to transactions subject to value-added tax;
and
(b) A ratable portion of any input tax which cannot be directly attributed to either activity.

The term “input tax” means the value-added tax due from or paid by a VAT-registered person in
the course of his trade or business on importation of goods or local purchase of goods or
services, including lease or use of property, from a VAT-registered person. It shall also include
the transitional input tax determined in accordance with Section 111 of this Code.

The term “output tax” means the value-added tax due on the sale or lease of taxable goods or
properties or services by any person registered or required to register under Section 236 of this
Code.

(B) Excess Output or Input Tax. - If at the end of any taxable quarter the output tax exceeds the
input tax, the excess shall be paid by the Vat-registered person. If the input tax exceeds the
output tax, the excess shall be carried over to the succeeding quarter or quarters. Provided,
however, That
any input tax attributable to zero-rated sales by a VAT-registered person may at his option be
refunded or credited against other internal revenue taxes, subject to the provisions of Section 112.

(C) Determination of Creditable Input Tax. - The sum of the excess input tax carried over from
the preceding month or quarter and the input tax creditable to a VAT-registered person during
the taxable month or quarter shall be reduced by the amount of claim for refund or tax credit for
value- added tax and other adjustments, such as purchase returns or allowances and input tax
attributable to exempt sale.

The claim for tax credit referred to in the foregoing paragraph shall include not only those filed
with the Bureau of Internal Revenue but also those filed with other government agencies, such as
the Board of Investments and the Bureau of Customs.

SEC. 111. Transitional/Presumptive Input Tax Credits. –

(A) Transitional Input Tax Credits. - A person who becomes liable to value-added tax or any
person who elects to be a VAT-registered person shall, subject to the filing of an inventory
according to rules and regulations prescribed by the Secretary of finance, upon recommendation
of the Commissioner, be allowed input tax on his beginning inventory of goods, materials and
supplies equivalent to two percent (2%) of the value of such inventory or the actual value-added
tax paid on such goods, materials and supplies, whichever is higher, which shall be creditable
against the output tax.

ILLUSTRATION:
ABC Company (used to be vat exempt because its annual receipts never exceeded the vat
threshold) decided to register under the vat system on January 2, 2018. The following data were
from the first quarter ending March 31, 2018:
Sales, net ₱ 5,000,000
January – March 2018 Purchases, net 2,000,000
Inventory, January 1, 2018
From VAT registered suppliers, net 500,000
From non-VAT registered suppliers, net 3,000,000

Required: Determine the vat payable of the company for the first quarter of 2018.
Output VAT (₱5M * 12%) ₱ 600,000
Input VAT
Purchases for the quarter (₱2M * 12%) (240,000)
Transitional Input VAT
Actual: ₱500,000 * 12% = 60,000 vs. (70,000)
2%: ₱3,500,000 * 2% = 70,000
VAT Payable ₱ 290,000

(B) Presumptive Input Tax Credits. - Persons or firms engaged in the processing of sardines,
mackerel and milk, and in manufacturing refined sugar and cooking oil, shall be allowed a
presumptive input tax, creditable against the output tax, equivalent to four percent (4%) of the
gross value in money of their purchases of primary agricultural products which are used as inputs
to their production.

As used in this Subsection, the term 'processing' shall mean pasteurization, canning and activities
which through physical or chemical process alter the exterior texture or form or inner substance
of a product in such manner as to prepare it for special use to which it could not have been put in
its original form or condition.

ILLUSTRATION:
Minola Company, a manufacturer of cooking oil made of corn, has the following data for the
month:
 Sales, net ₱ 10,000,000
Purchases, corn 2,000,000
Purchases, tin 250,000
Purchases, wrapping supplies (net) 200,000
Purchases, labels, (net) 125,000

Required: Determine the vat payable of Minola.

Output VAT (₱10,000,000 * 12%) ₱ 1,200,000

Purchases, corn (2,000,000 * 4%) ₱ 80,000
Purchases, tin (250,000 * 12%) 30,000
Purchases, wrapping supplies (net) (200,000 * 12%) 24,000
Purchases, labels, (net) (125,000 * 12%) 15,000 (149,000)
VAT Payable ₱ 1,051,000

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

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

(B) Cancellation of VAT Registration. - A person whose registration has been cancelled due to
retirement from or cessation of business, or due to changes in or cessation of status under Section
106(C) of this Code may, within two (2) years from the date of cancellation, apply for the
issuance of a tax credit certificate for any unused input tax which may be used in payment of his
other internal revenue taxes.

(C) Period within which Refund or Tax Credit of Input Taxes shall be made. - In proper cases,
the Commissioner shall grant a refund for creditable input taxes within ninety (90) days from the
date of submission of the official receipts or invoices and other documents in support of the
application filed in accordance with Subsections (A) and (B) hereof: Provided, That should the
Commissioner find that the grant of refund is not proper, the Commissioner must state in writing
the legal and factual basis for the denial.

In case of full or partial denial of the claim for tax refund, the taxpayer affected may, within thirty
(30) days from the receipt of the decision denying the claim, appeal the decision with the Court
of Tax Appeals: Provided, however, That failure on the part of any official, agent, or employee
of the BIR to act on the application within ninety (90) days period shall be punishable under
Section 269 of this Code.

(D) Manner of Giving Refund. - Refunds shall be made upon warrants drawn by the
Commissioner or by his duly authorized representative without the necessity of being
countersigned by the Chairman, Commission on audit, the provisions of the Administrative Code
of 1987 to the contrary notwithstanding: Provided, That refunds under this paragraph shall be
subject to post audit by the Commission on Audit.

COMPLIANCE REQUIREMENTS

SEC. 113. Invoicing and Accounting Requirements for VAT-Registered Persons. -

(A) Invoicing Requirements. - A VAT-registered person shall issue:

(1) A VAT invoice for every sale, barter or exchange of goods or properties; and

(2) A VAT official receipt for every lease of goods or properties, and for every sale, barter or
exchange of services.

(B) Information Contained in the VAT Invoice or VAT Official Receipt. - The following
information shall be indicated in the VAT invoice or VAT official receipt:

(1) A statement that the seller is a VAT-registered person, followed by his Taxpayer's
Identification Number (TIN); and

(2) The total amount which the purchaser pays or is obligated to pay to the seller with the
indication that such amount includes the value-added tax. Provided that:

(a) The amount of the tax shall be known as a separate item in the invoice or receipt;
(b) If the sale is exempt from value-added tax, the term VAT-exempt sale: shall be written or
printed prominently on the invoice or receipt;
(c) If the sale is subject to zero percent (0%) value-added tax, the term “zero-rated sale”
shall be written or printed prominently on the invoice or receipt.
(d) If the sale involved goods, properties or services some of which are subject to and some
of which are VAT zero-rated or Vat exempt, the invoice or receipt shall clearly indicate
the break-down of the sale price between its taxable, exempt and zero-rated components,
and the calculation of the value-added tax on each portion of the sale shall be known on
the invoice or receipt: Provided, That the seller may issue separate invoices or receipts for
the taxable, exempt, and zero-rated components of the sale.

(3) The date of transaction, quantity, unit cost and description of the goods or properties or
nature of the service; and

(4) In the case of sales in the amount of one thousand pesos (P1,000) or more where the sale or
transfer is made to a VAT-registered person, the name, business style, if any, address and
Taxpayer Identification Number (TIN) of the purchaser, customer or client.

(C) Accounting Requirements. - Notwithstanding the provisions of Section 233, all persons
subject to the value-added tax under Sections 106 and 108 shall, in addition to the regular
accounting records required, maintain a subsidiary sales journal and subsidiary purchase journal
on which the daily sales and purchases are recorded. The subsidiary journals shall contain such
information as may be required by the Secretary of Finance.

(D) Consequence of Issuing Erroneous VAT Invoice or VAT Official Receipt.-

(1) If a person who is not a VAT-registered person issues an invoice or receipt showing his
Taxpayer Identification Number (TIN), followed by the word “VAT”;

(a) The issuer shall, in addition to any liability to other percentage taxes, be liable to:

(i) The tax imposed in Section 106 or 108 without the benefit of any input tax credit; and
(ii) A 50% surcharge under Section 248(B) of this Code;
(b) The VAT shall, if the other requisite information required under Subsection (B) hereof is
shown on the invoice or receipt, be recognized as an input tax credit to the purchaser under
Section 110 of this Code.

(2) If a VAT-registered person issues a VAT invoice or VAT official receipt for a VAT-exempt
transaction, but fails to display prominently on the invoice or receipt the term ‘VAT exempt
sale,’ the issuer shall be liable to account for the tax imposed in section 106 or 108 as if Section
109 did not apply.

SEC. 114. Return and Payment of Value-Added Tax. –

(A) In General. - Every person liable to pay the value-added tax imposed under this Title shall
file a quarterly return of the amount of his gross sales or receipts within twenty-five (25) days
following the close of each taxable quarter prescribed for each taxpayer: Provided, however, that
VAT-registered persons shall pay the value-added tax on a monthly basis: Provided, finally, that
beginning January 1, 2023, the filing and payment required under this Subsection shall be done
within twenty-five (25) days following the close of each taxable quarter.

(B) Where to File the Return and Pay the Tax. - Except as the Commissioner otherwise
permits, the return shall be filed with and the tax paid to an authorized agent bank, Revenue
Collection Officer or duly authorized city or municipal Treasurer in the Philippines located
within the revenue district where the taxpayer is registered or required to register.

(C) Withholding of Creditable Value-added Tax. - The Government or any of its political
subdivisions, instrumentalities or agencies, including government-owned or controlled
corporations (GOCCs) shall, before making payment on account of each purchase of goods and
services which are subject to the value-added tax imposed in Sections 106 and 108 of this Code,
deduct and withhold the value-added tax imposed in Sections 106 and 108 of this Code, deduct
and withhold a final value-added tax at the rate of five percent (5%) of the gross payment
thereof: Provided, That beginning January 1, 2021, the VAT withholding system under this
Subsection shall shift from final to creditable system: Provided, further, That the payment for
lease or use of properties or property rights to nonresident owners shall be subject to ten percent
(10%) withholding tax at the time of payment. Provided, finally, That payments for purchases of
goods and services arising from projects funded by Official Development Assistance (ODA) as
defined under Republic Act No. 8182, otherwise known as the Official Development Assistance
Act of 1996, as amended, shall not be subject to the final withholding tax system as imposed in
this Subsection. For purposes of this Section, the payor or person in control of the payment shall
be considered as the withholding agent.

The value-added tax withheld under this Section shall be remitted within ten (10) days following
the end of the month the withholding was made.

ILLUSTRATION:
ALMA Company, a vat registered trader has the following transactions:
Sales of goods to private entities, net ₱2,500,000
Purchases of goods sold to private entities, gross 896,000
Sales to government owned corporation, net 1,000,000
Purchase of goods sold to GOCC, net 700,000

Question 1: Standard input tax.

Answer: ₱70,000 (₱1,000,000 * 7%)

Question 2: Vat to be withheld by the GOCC

Answer: ₱50,000 (₱1,000,000 * 5%)

Question 3: Net proceeds from the GOCC

Answer: ₱1,070,000
 Sales, net ₱1,000,000
Output VAT 120,000
VAT withheld 50,000
Net proceeds ₱1,070,000

Question 4: Total amount of output VAT

Answer: ₱420,000
Sales, private entities (2.5M * 12%) ₱300,000
Sales, GOCCs (1M * 12%) 120,000
Output VAT ₱420,000

Question 5: VAT payable by ALMA

Answer: ₱204,000

Output VAT ₱420,000

Total creditable input VAT (166,000)
VAT withheld by GOCC (50,000)
VAT Payable ₱204,000

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

(a) In the case of a VAT-registered Person. –

1) Failure to issue receipts or invoices;

2) Failure to file a value-added tax return as required under Section 114; or
3) Understatement of taxable sales or receipts by thirty percent (30%) or more of his correct
taxable sales or receipts for the taxable quarter.

(b) Failure of any Person to Register as Required under Section 236.

The temporary closure of the establishment shall be for the duration of not less than five (5) days
and shall be lifted only upon compliance with whatever requirements prescribed by the
Commissioner in the closure order.

VAT EXEMPTION OF SENIOR CITIZENS AND PWDs

VAT Exemption and Discounts for Senior Citizens
Senior citizen or Elderly - refers to any Filipino citizen who is a resident of the Philippines, sixty
(60) years old or above. It may apply to senior citizens with "dual citizenship" status provided
they prove their Filipino citizenship and have at least six (6) months residency in the Philippines
(RA 9994 otherwise known as "Expanded Senior Citizens Act of 2010" and its related revenue regulations/ circulars RR7-2010,
RR 8- 2010, RMC 38-2012).

Resident Citizen - a Filipino Citizen with permanent/legal residence in the Philippines, and shall
include one, who, having migrated to a foreign country, has returned to the Philippines with a
definite intention to reside therein, and whose immigrant visa has been surrendered to the foreign
government.

VAT Exempt Sales to Senior Citizens (Section 4, RR 7-2010)

The following items sold to a senior citizen are vat-exempt and will entitle the latter to a minimum
discount of 20%:
 Medicine and Drug Purchases including influenza and pneumococcal vaccines and such
other essential medical supplies, accessories and equipment.
  Professional fees of attending physicians in all private hospitals, medical facilities,
outpatient clinics and home health care services.
 Professional fees of licensed health workers providing home health care services in all
private hospitals, medical facilities, outpatient clinics, and home health care services
 Medical and dental services, diagnostic and laboratory fees
 On actual fare for land transportation travel
 In actual fare for domestic air transport and sea shipping vessels and the like
 On the utilization of services in hotels and similar lodging establishments, restaurants,
recreation centers
 On admission fees charged by theaters, cinema houses and concert halls, circuses,
carnivals and other similar places of culture, leisure and amusement
 On funeral and burial services of senior citizens

RULE FOR RESTAURANTS

The discount shall be for the sale of food, drinks, dessert and other consumable items served by
the establishments, including value meals and promotional meals, offered for the consumption of
the general public. Condiments and side products fall within the ambit of "other consumable
items served by the establishments".
The 20% discount and vat exemption for restaurants shall apply to:
 Dine in, take-out, take-home, drive-thru, delivery orders (excluding bulk orders), called-
in or phoned-in orders. Bulk orders are within the context of pre-contracted or pre-
arranged group meals or packages, and hence, not entitled to 20% discount and VAT
exemption.
 Set meals, group meals or group walk-ins including purchase of a whole cake and pizza
orders.
 "Pasalubong" food items which are single-serving/solo meal for the personal and
exclusive consumption of the senior citizen. However, other "pasalubong" food items
(e.g. box of biscocho, bottles or jars of ginamos, several packets of mango preserves, etc.)
which are not for the personal and exclusive consumption of the senior citizen are NOT
entitled to 20% discount and VAT exemption. This limitation extends to "novelty items"
or non- consumables sold in restaurants.

Formula:
a. Discount = (Total Billing Amount – VAT) * 20%
b. Amount Due:
Total bill inclusive of VAT ₱xx
Less: VAT (xx)
Total bill inclusive of VAT xx
Less: 20% discount (xx)
Total Amount Due ₱xx

Discount = [(Total Billing Amount/No of customers) – VAT] * 20%

Grant of 5% Special Discount (Section 5, RR 7-2010 as amended by R 8-2010 and RMC 38-
2012)
A special discount of five percent (5%) of the regular retail price of basic necessities and prime
commodities as defined under Section 2 of the joint DTI-DA Administration Order No. 10-02,
series of 2010, shall be granted to senior citizens on their purchases thereof, taking into
consideration that said purchases shall be for the personal and exclusive consumption and/or
enjoyment of the senior citizen (Section 3, Joint DTI-DA Administrative Order No. 10-02 Series
of 2010).
Basic Necessities
 Rice; Corn; Bread excluding pastries and cakes
 Fresh, dried and canned fish and other marine products Fresh pork, beef and poultry meet
  Fresh eggs
 Fresh and processed milk
 Fresh vegetables including root crops
 Coffee and coffee creamer
 Sugar; Cooking oil; Salt
 Powdered, liquid, bar laundry and detergent soap
 Firewood; Charcoal; Candles

Prime Commodities
 Fresh fruits; Flour
 Dried, processed and canned pork, beef and poultry meat
 Dairy products not falling under basic necessities
 Canned sardines, tuna
 Noodles; Onions; Garlic
 Geriatric diapers
 Herbicides
 Poultry, swine and cattle feeds
 Veterinary products for poultry, swine and cattle
 Nipa shingle, plyboard and construction nails
 Batteries
 Electrical supplies and light bulbs
 Steel wire

Retailers shall mean any natural or juridical person engaged in the business of selling consumer
products directly to consumers, which shall include among others, supermarkets,
grocery/convenience stores and shops but excluding stalls in food courts, food carts and sari-sari
stores with a capitalization of less than ₱100,000, public and private wet markets, talipapa and
cooperative stores.

Purchase of basic necessities and prime commodities are not exempt from vat. The total amount
of purchases shall not exceed ₱1,300 per calendar week without carry-over of unused amount. A
purchase booklet issued by OSCA shall be presented to the retailer upon purchase of basic
necessities and prime commodities.

NOTE:
 The input tax attributable to the exempt sale shall not be allowed as an input tax credit
and must be closed to cost or expense account by the seller (Sec. 10, RR 7-2010).

 While RA 9994 expressly provides for the VAT exemption of Senior Citizens on their
purchase of certain goods and services, the law does not include exemption from the
payment of Percentage Tax:

 In the purchase of goods and services which are on promotional discount, the senior
citizen shall avail of either the promotional discount or the 20%/5% discount, whichever
is higher. However, the discount that must be given to the senior citizen shall in no case
be less than 20%/5%. Moreover, the sale of goods and services on promotional discount
is still exempt from VAT (except sale of basic necessities and prime commodities).

 Meals primarily prepared and intentionally marketed for children and not for senior
citizen's personal consumption are not entitled to 20% discount. (Rule IV, Article 7,
Section 3(d) of the Rules and Regulations implementing RA No. 9994; section 6 RR No.
7-2010).
  Generally, alcoholic beverages are not subject to the 20% discount and VAT exemption
especially if purchased "in bulk", "in buckets" or "in cases". However, if served as a
single serving drink, its purchase by a senior citizen is entitled to the 20% discount and
VAT exemption. However, alcoholic beverages purchased in a bar, club or cabaret are
exempt from VAT but subject to amusement tax of 18% under Section 125 of the NIRC,
as amended. A senior citizen may still avail of the 20% discount on the purchase of an
alcoholic drink but the discount shall be limited only to a single serving of an alcoholic
beverage.

 Cigarettes/cigars are not the food or essential items deemed subject to the 20% discount.

 Toll fees are not the same as "fares". Hence, it is not subject to the 20% Senior Citizen
Discount.

Illustration:
Lola Taw, a senior citizen, bought a medicine with a selling price of ₱9,520 inclusive of VAT.
How much is the net amount to be paid by Lola?
Purchase price (9,520 / 1.12) ₱ 8,500
Discount (8,500 * 20%) 1,700
Amount to be paid ₱ 6,800

Illustration:
Lolo Bog, a senior citizen, went to Jabee to treat his four grandchildren on account of his
retirement. They consumed foods and beverages with gross amount of ₱1,120 inclusive of VAT.
How much is the amount to be paid by Lolo Bog?
Purchase price (1,120 / 5) / 1.12 ₱ 200
Discount (200 * 20%) 40
Allocated to Lolo ₱ 160

Purchase price (1,120 / 5) * 4 ₱ 896

Allocated to Lolo 160
Amount to be paid ₱ 1,056

VAT EXEMPTION and DISCOUNTS to PWDs (RR7277, as amended)

Persons with Disability
A person with disability shall refer to an individual suffering from restriction or different
abilities, as a result of mental, physical or sensory impairment to perform an activity in a manner
or within the range considered normal for human being (RR 1-2009).

SALES DISCOUNTS which may be claimed by a Qualified PWD

Under RR 5-2017, a Qualified PWD
"(a) At least twenty percent (20%) discount and exemption from the value-added tax (VAT), if
applicable, on the following sale of goods and services for the exclusive use and enjoyment or
availment of the PWD:
"(1) On the fees and charges relative to the utilization of all services in hotels and similar lodging
establishments; restaurants and recreation centers;

"(2) On admission fees charged by theaters, cinema houses, concert halls, circuses, carnivals and
other similar places of culture, leisure and amusement;
"(3) On the purchase of medicines in all drugstores;

"(4) On medical and dental services including diagnostic and laboratory fees such as, but not
limited to, x-rays, computerized tomography scans and blood tests, and professional fees of
attending doctors in all government facilities, subject to the guidelines to be issued by the
Department of Health (DOH), in coordination with the Philippine Health Insurance Corporation
(PhilHealth);

"(5) On medical and dental services including diagnostic and laboratory fees, and professional
fees of attending doctors in all private hospitals and medical facilities, in accordance with the
rules and regulations to be issued by the DOH, in coordination with the PhilHealth;

"(6) On fare for domestic air and sea travel;

"(7) On actual fare for land transportation travel such as, but not limited to, public utility buses or
jeepneys (PUBs/PUJs), taxis, asian utility vehicles (AUVs), shuttle services and public railways,
including light Rail Transit (LRT), Metro Rail Transit (MRT) and Philippine National Railways
(PNR); and

"(8) On funeral and burial services for the death of the PWD: Provided, that the beneficiary or
any person who shall shoulder the funeral and burial expenses of the deceased PWD shall claim
the discount under this rule for the deceased PWD upon presentation of the death certificate.
Such expenses shall cover the purchase of casket or urn, embalming, hospital morgue, transport
of the body to intended burial site in the place of origin, but shall exclude obituary publication
and the cost of the memorial lot.

"(b) Educational, assistance to PWD, for them to pursue primary, secondary, tertiary, post
tertiary, as well as vocational or technical education, in both public and private schools, through
the provision of scholarships, grants, financial aids, subsidies and other incentives to qualified
PWD, including support for books, learning materials, and uniform allowance to the extent
feasible: Provided, That PWD shall meet the minimum admission requirements;

"(c) To the extent practicable and feasible, the continuance of the same benefits and privileges
given by the Government Service Insurance System (GSIS), Social Security System (SSS), and
Pag-IBIG, as the case may be, as are enjoyed by those in actual service;

"(d) To the extent possible, the government may grant special discounts in special programs for
PWD on purchase of basic commodities, subject to the guidelines to be issued for the purpose by
the Department of Trade and Industry (DTI) and the Department of Agriculture (DA); and

"(e) Provision of express lanes for PWD in all commercial and government establishments; in
the absence thereof, priority shall be given to them.

"The abovementioned privileges are available only to PWD who are Filipino citizens upon
submission of any of the following as proof of his/her entitlement thereto:

"(1) An identification card issued by the city or municipal mayor or the barangay captain of the
place where the PWD resides;

"(2) The passport of the PWD concerned; or

"(3) Transportation discount fare Identification Card (ID) issued by the National Council for the
Welfare of Disabled Persons (NCWDP).
"The privileges may not be claimed if the PWD claims a higher discount as may be granted by
the commercial establishment and/or under other existing laws or in combination with other
discount program/s.

"The establishments may claim the discounts granted in subsection (a), paragraphs (1), (2), (3),
(5), (6), (7), and (8) as tax deductions based on the net cost of the goods sold or services
rendered: Provided, 'however, That the cost of the discount shall be allowed as deduction from
the gross income for the same taxable year that the discount is granted: Provided, further, That
the total amount of the claimed tax deduction net of value-added tax, if applicable, shall be
included in their gross sales receipts for tax purposes and shall be subject to proper
documentation and to the provisions of the National Internal Revenue Code (NIRC), as
amended.

References:
Tabag, E.D., Garcia, E.J. (2018) Transfer & Business Taxation with Special Topics based on
NIRC as amended under RA10963 – Tax Reform for Acceleration and Inclusion Act (TRAIN
Law)

National Internal Revenue Code as amended under RA 10963

Retrieved from https://www.bir.gov.ph/index.php/tax-code.html#title4
Assessments:
1. For 2018 taxable year, determine the applicable business tax for the following:
Monthly Rental Aggregate Annual Rental
Lease of residential units ₱14,000 ₱3,200,000
16,000 2,800,000
Lease of commercial units ₱13,000 ₱3,200,000
17,000 2,800,000

2. Assume the following transactions with the corresponding invoice costs/prices:

AA, non-VAT taxpayer, sells to BB, VAT taxpayer ₱ 89,600
BB, VAT taxpayer, sells to CC, VAT taxpayer 134,400
CC, VAT taxpayer, sells to DD 201,600

Determine the following:

a. VAT payable of AA
b. VAT payable of BB
c. VAT payable of CC

3. A company imported merchandise for resale. The following data are presented in connection
with the importation:
CIF (cost, insurance, freight) value ₱229,195
Charges/expenses incurred in claiming the goods:
Wharfage 1,540
Arrastre 2,295
Customs duty 4,090
Brokerage fee and documentary stamps 330
Facilitation expense 3,000
Marine cargo insurance 2,550
Other Charges
Freight from customs to warehouse 5,000
 How much is the VAT on importation?
 How much is the VAT payable assuming the goods were subsequently sold for ₱350,000?

4. AA is a VAT-registered processor of fruits. The following data were provided for purposes of
determining the taxpayer’s VAT payable:
Sales (inclusive of VAT) ₱672,000
Purchases, fruits from farmers 200,000
Purchases, raw sugar from millers 60,000
Purchases, bottles (inclusive of VAT) 22,400
Purchases, can containers (exclusive of VAT) 50,000
Purchases, labels (inclusive of VAT) 5,600
Purchases, cardboard (inclusive of VAT) 3,360
 How much is the presumptive input VAT?
 How much is the VAT payable?

5. A VAT registered taxpayer made the following acquisition of capital goods from VAT
registered suppliers (net of vat) during 2018:

Purchase Date Acquisition Cost Estimated Life (Years)

January
1*** ₱ 2,000,000 10
15 1,000,000 2
March
2 500,000 6
20 300,000 2
 October
6 800,000 4
30 600,000 6
December 25 2,000,000 1
***The asset was sold in December 2018
 How much is the creditable input vat for the months of January to December?

6. ALMA Grill, a VAT-registered business in Batangas, has the following data (exclusive of
VAT) for the second quarter of the current year:
Sales, food and beverages ₱ 2,805,500
Sales, wines and beer 1,524,000
Purchases, food and beverages 1,102,200
Purchases, wines and beer 1,012,500
 How much is the VAT payable?

7. A VAT taxpayer had the following data on its operations for the month of January:
Sales, total invoice price ₱592,480
Purchases of goods, VAT not included
From VAT registered persons 100,000
From non-VAT registered persons 80,000
Purchases of services, VAT not included
From VAT registered persons 20,000
From non-VAT registered persons 8,000

This is the first month of being liable to VAT. Data on inventories at the beginning of the month
bought from VAT-registered persons are as follows:
Inventory at cost ₱44,800
Inventory at net realizable value 49,000
Value added tax paid on beginning inventory 4,800
 How much is the creditable input VAT?
 How much is the VAT payable?
 CHAPTER 9
OTHER PERCENTAGE TAXES

TOPIC OVERVIEW:
This chapter explains the other percentage taxes for the items under Section 116 to 127 of the tax
code and the manner of filing the return under Section 128.

LEARNING OBJECTIVES:
After studying this chapter, the students should be able to:
1. Define other percentage taxes.
2. Enumerate the items subject to OPT.
3. Calculate the other percentage taxes for the items under Section 116 to 127 of the tax code.

The Other Percentage Taxes (OPT) under Sections 116 to 127 of the Tax Code are as follows:

SEC. 116. Tax on Persons Exempt from Value-Added Tax (VAT) - Any person whose sales
or receipts are exempt under Section 109(BB) of this Code from the payment of value-added tax
and who is not a VAT-registered person shall pay a tax equivalent to three percent (3%) of his
gross quarterly sales or receipts. Provided that the following are exempt from 3% percentage tax:
1. Cooperatives; and
2. Self-employed individuals and professionals availing of the 8% tax on gross sales and/or
receipts and other non-operating income under Section 24(A)(2)(b) and 24(A)(2)(c)(2)(a)
of the Tax Code, as amended.
Purely Self-employed and/or Professional with Gross Sales and/or Receipts and other
non-operating income
Not exceeding the VAT threshold More than the VAT threshold
Income as SEP: Income as SEP:
Income tax: Graduated tax rate Income tax: Graduated tax rate
Business tax: OPT under Sec. 116 Business tax: Value Added Tax
OR

8% tax on gross sales/receipts and other

operating income in excess of ₱250,000 IN
LIEU of the graduated tax rate and OPT
under Sec. 116

Individual Taxpayer earning Compensation Income + Self-employed and/or Professional

with Gross Sales and/or Receipts and other non-operating income
Not exceeding the VAT threshold More than the VAT threshold
Compensation income: Compensation income:
Subject to graduated tax rate Subject to graduated tax rate

Income as SEP: Income as SEP:

Income tax: Graduated tax rate Income tax: Graduated tax rate
Business tax: OPT under Sec. 116 Business tax: Value Added Tax
OR

8% tax on gross sales/receipts and other

operating income IN LIEU of the graduated
tax rate and OPT under Sec. 116
ILLUSTRATION: Corporate Taxpayers
Case 1:
ALMA Trading Corporation (non-VAT registered) is a trader of electronic products. Data for the
year were provided as follows:
Gross receipts ₱ 1,800,000
Purchases on account from VAT suppliers 1,200,000
Payments made to VAT suppliers 800,000
Purchases on account from non-VAT suppliers 200,000
Payments made to non-VAT suppliers 80,000
Operating expenses 400,000

Question 1: What is the applicable tax and the amount due for the year?
Answer: 3% OPT; ₱54,000*
*1,800,000 * 3%

Question 2: Assuming ALMA opted to register under the VAT system, what is the applicable
business tax and the amount due for the year?
Answer: 12%; ₱72,000
Output VAT (1.8M * 12%) ₱216,000
Input VAT (1.2M * 12%) (144,000)
VAT Payable ₱72,000

ILLUSTRATION: Individual Taxpayers

Pedro (non-VAT registered) is self-employed involved in trading electronic products and a part-
time professor of Hope College. Data for 2018 taxable year were provided as follows:
Compensation income ₱ 800,000
Gross sales 2,800,000
Purchases on account from VAT suppliers 1,200,000
Payments made to VAT suppliers 800,000
Purchases on account from non-VAT suppliers 200,000
Payments made to non-VAT suppliers 80,000
Operating expenses 1,200,000

Question 1: What is the applicable business tax and the amount due for the year?
Answer: 3% OPT; ₱84,000*
*2,800,000 * 3%

Question 2: Assume the same data above except that Pedro opted to be taxed at 8%. How much
is the business tax that Pedro should pay under Section 116?
Answer: None.

SEC. 117. Percentage Tax on Domestic Carriers and Keepers of Garages - Cars for rent or
hire driven by the lessee, transportation contractors, including persons who transport passengers
for hire, and other domestic carriers by land, for the transport of passengers ([except owners of
bancas] and owners of animal-drawn two wheeled vehicle), and keepers of garages shall pay a
tax equivalent to three percent (3%) of their quarterly gross receipts.

The gross receipts of common carriers derived from their incoming and outgoing freight shall not
be subjected to the local taxes imposed under Republic Act No. 7160, otherwise known as the
Local Government Code of 1991.

In computing the percentage tax provided in this Section, the following shall be considered the
minimum quarterly gross receipts in each particular case:
 Minimum Quarterly
Receipts
Jeepney for hire
 Manila and other cities ₱2,400
 Provincial 1,200
Public Utility Bus
 Not exceeding 30 passengers ₱3,600
 Exceeding 30 but not exceeding 50 6,000
 Exceeding 50 passengers 7,200
Taxis
 Manila and other cities ₱3,600
 Provincial 2,400
Cars for hire
 With chauffeur ₱3,000
 Without chauffeur 1,800

Business Taxes of Domestic Common Carriers

Transport of Business Tax
Passengers 3% CCT (Sec 117) regardless of gross receipts
By Land Goods/Cargoes VAT or Sec 116 (threshold)
By Air or By Passengers VAT or Sec 116 (threshold)
Sea Goods/Cargoes VAT or Sec 116 (threshold)

ILLUSTRATION:
Victory Express is a domestic common carrier by land engaged mainly in the transport of
passengers in Luzon areas. Due to the increasing demand of transport goods/cargoes, the
company decided to acquire additional bus units exclusively intended for this purpose. The
company is non- VAT registered. The results of operations for the calendar year 2018 are as
follows:
Gross receipts – transport of passengers ₱50,000,000
Gross receipts – transport of goods 15,000,000
Purchases – supplies and services 12,000,000
Other operating expenses 3,000,000

Question 1: What amount should be recognized as common carriers tax?

Answer: ₱1,500,000. (50,000,000 * 3%)

Question 2: What amount should be recognized as output VAT?

Answer: ₱1,800,000 (15,000,000 * 12%)

Question 3: Assume that Victory’s gross receipts from transport of goods amounted to
₱1,500,000 only. What amount should be recognized as business taxes?
Answer: ₱1,545,000
Common carriers tax (50M* 3%) ₱1,500,000
3% OPT under Sec. 116 (1.5M * 3%) 45,000
Total business taxes ₱ 1,545,000

SEC. 118 Percentage Tax on International Carriers.

(A) International air carriers doing business in the Philippines on their gross receipts derived
from transport of cargo from the Philippines to another country shall pay a tax of three percent
(3%) of their quarterly gross receipts.
(B) International shipping carriers doing business in the Philippines on their gross receipts
derived from transport of cargo from the Philippines to another country shall pay a tax equivalent
to three percent (3%) of their quarterly gross receipts.

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

ILLUSTRATION:
AL TV is a franchise grantee and the leading television broadcasting company in the country.
The gross receipts for the preceding and current year amounted to ₱12,000,000 and ₱11,000,000
respectively.

Question 1: How much is the business tax due?

Answer: ₱1,320,000 (11M * 12%)

Question 2: Assume revenues for the preceding year amounted to ₱9,000,000 only, how much is
the business tax due?
Answer: ₱330,000 (11M * 3%)

ILLUSTRATION:
MA is a water utility franchise grantee for the past ten years operating in Quezon City. Its gross
receipts from the business covered by the franchise amounted to ₱10,000,000 while receipts
from renting out its facilities amounted to ₱5,000,000.

Question 1: How much is the business tax due?

Answer: ₱800,000
OPT under Sec 119 (10M* 2%) ₱200,000
VAT on receipts not covered by franchise (5M*12%) 600,000
Total business taxes ₱ 800,000

Question 2: Assume instead that MA is engaged in the distribution of electricity, how much is
the total business tax due?
Answer: ₱1,800,000
VAT on receipts covered by franchise (10M* 12%) ₱1,200,000
VAT on receipts not covered by franchise (5M*12%) 600,000
Total business taxes ₱ 1,800,000

SEC. 120. Tax on Overseas Dispatch, Message or Conversation Originating from the
Philippines.

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

(B) Exemptions. - The tax imposed by this Section shall not apply to:

(1) Government. - Amounts paid for messages transmitted by the Government of the
Republic of the Philippines or any of its political subdivisions or instrumentalities;
(2) Diplomatic Services. - Amounts paid for messages transmitted by any embassy and
consular offices of a foreign government;
(3) International Organizations. - Amounts paid for messages transmitted by a public
international organization or any of its agencies based in the Philippines enjoying
privileges, exemptions and immunities which the Government of the Philippines is
committed to recognize pursuant to an international agreement; and
(4) News Services. - Amounts paid for messages from any newspaper, press association,
radio or television newspaper, broadcasting agency, or news tickers services, to any other
newspaper, press association, radio or television newspaper broadcasting agency, or news
ticker service or to a bona fide correspondent, which messages deal exclusively with the
collection of news items for, or the dissemination of news item through, public press,
radio or television broadcasting or a news ticker service furnishing a general news service
similar to that of the public press.

ILLUSTRATION:
ALMA Communications provided the following data from its operations:
Gross receipts – local calls ₱50,000,000
Gross receipts – overseas calls 20,000,000
Purchases attributed to local calls, net 10,000,000
Purchases attributed to both local and overseas calls, net 10,000,000
Other operating expenses 100,000

Question 1: How much is the overseas communication tax?

Answer: ₱2,000,000 (20M*10%)

Question 2: How much is the VAT payable?

Answer: ₱3,942,857
Output VAT (50M * 12%) ₱ 6,000,000
Input VAT
Attributed to local calls (10M*12%) (1,200,000)
Attributed to both local and overseas (10M*12%) * 5/7 (857,143)
VAT Payable ₱3,942,857

SEC. 121. Tax on Banks and Non-Bank Financial Intermediaries Performing Quasi-
Banking Functions. - There shall be collected a tax on a gross receipt derived from sources
within the Philippines by all banks and non-bank financial intermediaries in accordance with the
following schedule:

(a) On interest, commissions and discounts from lending activities as well as income from
financial leasing, on the basis of remaining maturities of instruments from which such receipts are
derived:
Maturity period is five years or less 5%
Maturity period is more than five years 1%
 (b) On dividends and equity shares and net income of subsidiaries 0%

(c) On royalties, rentals of property, real or personal, profits, from 7%

exchange and all other items treated as gross income under Section 32 of
this Code

(d) On net trading gains within the taxable year on foreign currency, debt 7%
securities, derivatives, and other similar financial instruments

SEC. 122. Tax on Other Non-Bank Financial Intermediaries. - There shall be collected a tax
of five percent (5%) on the gross receipts derived by other non-bank financial intermediaries
doing business in the Philippines, from interests, commissions, discounts and all other items
treated as gross income under this code.: Provided, that interests, commissions and discounts
from lending activities, as well as income from financial leasing, shall be taxed on the basis of
the remaining maturities of the instruments from which such receipts are derived, in accordance
with the following schedule:
Maturity period is five years or less 5%
Maturity period is more than five years 1%

SEC. 123. Tax on Life Insurance Premiums. - There shall be collected from every person,
company or corporation (except purely cooperative companies or associations) doing life
insurance business of any sort in the Philippines a tax of two percent (2%) of the total premium
collected, whether such premiums are paid in money, notes, credits or any substitute for money;
but premiums refunded within six (6) months after payment on account of rejection of risk or
returned for other reason to a person insured shall not be included in the taxable receipts; nor
shall any tax be paid upon reinsurance by a company that has already paid the tax; nor upon
doing business outside the Philippines on account of any life insurance of the insured who is a
nonresident, if any tax on such premium is imposed by the foreign country where the branch is
established nor upon premiums collected or received on account of any reinsurance , if the
insured, in case of personal insurance, resides outside the Philippines, if any tax on such
premiums is imposed by the foreign country where the original insurance has been issued or
perfected; nor upon that portion of the premiums collected or received by the insurance
companies on variable contracts (as defined in Section 232(2) of Presidential Decree No. 612), in
excess of the amounts necessary to insure the lives of the variable contract workers.

‘Cooperative companies or associations’ are such as conducted by the members thereof with the
money collected from among themselves and solely for their own protection and not for profit.

SEC. 124. Tax on Agents of Foreign Insurance Companies. - Every fire, marine or
miscellaneous insurance agent authorized under the Insurance Code to procure policies of
insurance as he may have previously been legally authorized to transact on risks located in the
Philippines for companies not authorized to transact business in the Philippines shall pay a tax
equal to twice the tax imposed in Section 123 (4%) Provided, That the provision of this
Section shall not apply to reinsurance: Provided, however, That the provisions of this Section
shall not affect the right of an owner of property to apply for and obtain for himself policies in
foreign companies in cases where said owner does not make use of the services of any agent,
company or corporation residing or doing business in the Philippines. In all cases where owners
of property obtain insurance directly with foreign companies, it shall be the duty of said owners
to report to the Insurance Commissioner and to the Commissioner each case where insurance has
been so effected, and shall pay the tax of five percent (5%) on premiums paid, in the manner
required by Section 123.
ILLUSTRATION:
ABC Company, a domestic insurance company, gave the following data for the month:
Gross receipts from its insurance policies
Premium on life insurance ₱2,100,000
Premium on non-life insurance 1,500,000
Gross receipts as agent of a foreign insurance company
Premium on property insurance ₱4,000,000
Premium on other non-life insurance 1,000,000

Question 1: How much is the premiums tax payable of ABC Company?

Answer: ₱242,000
Gross receipts from its insurance policies
Premium on life insurance ₱2,100,000 * 2% ₱ 42,000
Gross receipts as agent of a foreign insurance company
Premium on property insurance ₱4,000,000 * 4% 160,000
Premium on other non-life insurance 1,000,000 * 4% 40,000
₱242,000

Question 2: How much is the total business tax due?

Answer: ₱422,000
Gross receipts from its insurance policies
Premium on life insurance ₱2,100,000 * 2% ₱ 42,000
Premium on non-life insurance 1,500,000 * 12% 180,000
Gross receipts as agent of a foreign insurance company
Premium on property insurance ₱4,000,000 * 4% 160,000
Premium on other non-life insurance 1,000,000 * 4% 40,000
₱422,000

SEC. 125. Amusement Taxes. - There shall be collected from the proprietor, lessee or operator
of cockpits, cabarets, night or day clubs, boxing exhibitions, professional basketball games, Jai-
Alai and racetracks, a tax equivalent to:

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

(b) Eighteen percent (18%) in the case of cabarets, night or day clubs;

(c) Ten percent (10%) in the case of boxing exhibitions: Provided, however, That boxing
exhibitions wherein World or Oriental Championships in any division is at stake shall be exempt
from amusement tax: Provided, further, That at least one of the contenders for World or Oriental
Championship is a citizen of the Philippines and said exhibitions are promoted by a citizen/s of
the Philippines or by a corporation or association at least sixty percent (60%) of the capital of
which is owned by such citizens;

(d) Fifteen percent (15%) in the case of professional basketball games as envisioned in
Presidential Decree No. 871: Provided, however, That the tax herein shall be in lieu of all other
percentage taxes of whatever nature and description; and

(e) Thirty percent (30%) in the case of Jai-Alai and racetracks - of their gross receipts,
irrespective, of whether or not any amount is charged for admission.

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

The taxes imposed herein shall be payable at the end of each quarter and it shall be the duty of
the proprietor, lessee or operator concerned, as well as any party liable, within twenty (20) days
after the end of each quarter, to make a true and complete return of the amount of the gross
receipts derived during the preceding quarter and pay the tax due thereon.

Amusement Place OPT Rate

Jai-alai and racetracks 30%
Cockpits, cabarets, night or day clubs 18%
Professional basketball games 15%
Boxing exhibitions 10%

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

The tax herein prescribed shall be deducted from the 'dividends' corresponding to each winning
ticket or the 'prize' of each winning race horse owner and withheld by the operator, manager or
person in charge of the horse races before paying the dividends or prizes to the persons entitled
thereto.

The operator, manager or person in charge of horse races shall, within twenty (20) days from the
date the tax was deducted and withheld in accordance with the second paragraph hereof, file a
true and correct return with the Commissioner in the manner or form to be prescribed by the
Secretary of Finance, and pay within the same period the total amount of tax so deducted and
withheld.
Taxpayer Winnings from Rate Basis
Bettor Regular bet 10% Winnings or
dividends less cost of
ticket
Bettor double, 4% Winnings or
forecast/quinella and dividends less cost of
trifecta bets ticket
Horse owner - 10% Gross winnings

SEC. 127. Tax on Sale, Barter or Exchange of Shares of Stock Listed and Traded through
the Local Stock Exchange or through Initial Public Offering.

(A) Tax on Sale, Barter or Exchange of Shares of Stock Listed and Traded through the Local
Stock Exchange. - There shall be levied, assessed and collected on every sale, barter, exchange,
or other disposition of shares of stock listed and traded through the local stock exchange other
than the sale by a dealer in securities, a tax at the rate of six-tenths of one percent (6/10 of 1%) of
the gross selling price or gross value in money of the shares of stock sold, bartered, exchanged or
otherwise disposed which shall be paid by the seller or transferor.

ILLUSTRATION:
In 2018, Ben sold 2,000 shares of a domestic corporation in a local stock exchange at ₱110 per
share. The shares were acquired at ₱100 per share three years ago.

Question 1: How much is the capital gains tax on the sale of shares?
Answer: ₱0

Question 2: How much is the income subject to basic or ordinary tax?

Answer: ₱0

Question 3: How much is the business tax due?

Answer: ₱1,320 (220,000 * .006)

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

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

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

(2) Person Retiring from Business. - Any person retiring from a business subject to percentage
tax shall notify the nearest internal revenue officer, file his return and pay the tax due thereon
within twenty (20) days after closing his business.

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

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

References:
Tabag, E.D., Garcia, E.J. (2018) Transfer & Business Taxation with Special Topics based on
NIRC as amended under RA10963 – Tax Reform for Acceleration and Inclusion Act (TRAIN
Law)

National Internal Revenue Code as amended under RA 10963

Retrieved from https://www.bir.gov.ph/index.php/tax-code.html#title4
Assessments:
1. ALMA Corporation (non-VAT registered entity) is engaged in trading products. It generated
total sales of ₱3,200,000 for 2018 taxable year. What is the applicable business tax and the
amount due for 2018?

2. Pedro is engaged in leasing-out its properties. His gross receipts amounted to ₱1,500,000.
 What is the applicable business tax and the amount due for the taxable year?
 Assume Pedro opted to be taxed at 8%. How much is the business tax due?
 Assume Pedro is VAT-registered, what is the applicable business tax and the amount due
for the taxable year?

3. An international air carrier provided the following data for the current year:
Gross receipts – transport of passengers (Philippines to USA) ₱ 12,000,000
Gross receipts - transport of passengers (USA to Philippines) 8,000,000
Gross receipts – transport of cargoes (Philippines to USA) 6,000,000
Gross receipts - transport of cargoes (USA to Philippines) 4,000,000
Purchases (supplies net of VAT) 7,500,000
Other operating expenses 6,000,000
 How much is the business tax due under Section 118?

4. ALMA Bank has the following data for January:

Interest income with a remaining maturity of 5 years ₱120,000
Rentals (gross of 5% expanded withholding tax) 80,000
Net trading loss (30,000)
 How much is the gross receipts tax for the month of January?

5. ALMA is the operator of ALMA Coliseum. During the month, it had the following gross
receipts from various activities:
Income from the concert of One B ₱ 2,000,000
Professional basketball game 3,000,000
Ka Pedro Super (cockfighting) 5,000,000
 How much is the amusement tax payable of ALMA?

6. Betty, a bettor, had the following records of his winnings from horse races for the month:
Type of Winnings Gross Winnings Cost of Winnings
Trifecta ₱100,000 ₱50,000
Ordinary 300,000 100,000
Double 50,000 10,000
Ordinary 75,000 25,000
 How much is the business tax on winnings?