TABAG - Transfer & Business Taxation (2023 Edition)

‘and incision (TRAIN) Act
| }RA 11494; Bayanihan to Recover as

| One Act (also known as BAYANIHAN I!)
) foe bh J
nia Ps »
EDT Tatkes
= NI ole ~ TAB. KC
EARL JIMSON R. GARCIA

The Book R̶e̶a̶d̶e̶r̶s̶ Raiders | Nevule
Based on NIRC asamended by;
> RA 11534: Corporate Recovery and Tax Incentives
‘for Enterprises Actor"CREATE Law” ti
> RA 10963: Tax Reform for Acceleration.
and Inclusion (TRAIN) Act
» RA 11494: Bayanihan to Recover as
One Act (also known as BAYANIHAN !1)
Wotch my videos discussing

various topics in Taxation
through my YouTube channel,
EDT Talke
https //www. youtube. com/Ponricodtabag
EARL JIMS
The
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Rae
Philippine Copyright, 2023
ISBN: 978-621-96557-8-1
By
ENRICO D. TABAG
EARL JIMSON R. GARCIA
All Rights Reserved
Printed in the Philippines.

Published by EDT Book Publishing
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PREFACE
Tan aid Business ey 20.23 edition
This book entitled Transfer and | Business Taxation, is primarily intended to

address the needs of students taking up B.S. Accountancy, B.S. Management
Accounting, B.S. Accounting Information Technology, B.S. Accounting Technology,
and other. Business Courses offering taxation subjects. Likewise, this educational
material may also serve as supplementary reading for those who are reviewing for
the CPA licensure examination, tax practitioners, as well as other professionals in
various fields who wish to have knowledge on the concepts and application of
transfer and business tax law in the Philippines:
The discussions of the topics presented in this book were primarily lifted
from RA No. 8424, otherwise known as the National Intermal Revenue Code of 1997
(NIRC), also known as the “Tax Code of the Philippines’, ‘as amended primarily by
RA 11534 [the Corporate Recovery and Tax Incentives for Enterprises (CREATE)
Act] and RA No. 10963 [the Tax Reform for Acceleration and Inclusion Law (TRAIN
Law)]. Recent cases decided by the Supreme Court in relation to the different topics
in income taxation were also integrated in this book including RA 11469 and RA
11494 or the Bayanihan Act 1 and 2, to further support the principles and theories
illustrated in this humble undertaking of the authors.
The chapter exercises in this book have been designed to test and further
enhance the understanding of the reader in the different aspects of transfer and
business taxation.
The authors hope that this will be useful to students taking up B.S.
Accountancy in realizing their dreams to become CPAs in the future, to students
taking up other business courses in passing their tax subject and to professionals in
various fields in understanding the concepts of transfer and business taxation which
will be useful in their present and prospective endeavors in life.
June 2023
The Authory
end D. TABAG
Tit I ; I
The
Brief Contents
Chapter. TOPIC Page
Succession and Transfer Taxes. Apetnabiasedn ol
Gross Estate ...... uate eke eet eee ee ER 33
Deductions from the Gross Estate ................ 89
Property Relations <..:..s0ssscsssescssscescseesesees 129
Estate Tax Credit and Distributable Estate ..... 159
DONGIS TAN oon stew diet tenets 169
Introduction to Business Tax@s .........:.c..0eeee 223
Value Added Vax hiscee ie weriecwucunnav tele Pevecs 243
Other Percentage Taxes .............:cccecceeeeees 361
Excise Tait. cse hig deesreass ea 433
Documentary Stamp Taxes ........ Saseaie Wess 451
Preferential Taxation... sk sdeae “489
Tax Incentives under Title Xill of the Tax.
Ct i a cmarree te ee ln naneneaninets 483
ot ene AR
DAGAT OB GOITAWS
The
Table of Contents
Chapter TOPIC Page
1 Succession and Teanafeh TENGS ici ee nciiencwsescqueetiasive
AOARMRDRWWNH==
Definition-Succes sion and Transfer Taxes ............0eceeeeeees
Definition — SUCCESSION «si cciscciecsenskigccnesey cenyoeaebeecs tenes
Nature of Transfe PLONE eda csotinci rataantddcabanieentente Ta
Law that Governs the Imposition of Estate Tax........ papieeerye
Kinds Of SUCCOSSION .......:.ss2ssccseseeenestiensesserasoesensenecs
Causes of legal SUCCESSION .........:s:cceeeteeeeerteeeetraeeernees
Elements Of SUCCESSION ........c..ccceecessesceeesseeseeereeeeseeeenes
Composition of gross estate ...........::cecesteecseeeeeeereneerseees
SP
Order of intestate succession (Table 1-2)..........sseeceeeeeees
’ Determining blood relationship (Relatives)..........:.:sseeeree
—
Table of legitimes (Table 1-3) .........ccccseseeeseeebesesenseeteeeees
fF WD
Wills .......... oe
COON
Ordinary wills .... Seem meee eee ee ee ewe BRETT EEO E Re Hee HEEB EEE EHH A TEER EEE EE
Holographic wills eee een eee REE REE E TREN E EEE E EE ER EERE TEETH ESET RE EE EH
aAaan
Codidladiunrs cae Mite Ga bina
Probate of a will . » caale SOUS Saa as dea sae e sae eed che eebeceawenedeanneauuns
Foreign Wills ..... Segata Seach GeWbos Vewelecs Woabwitenesaveneens tan senees me
ODO
Revocation of will S eivdivebedescevercceedsocsanscdeceeenseeeusccegeescans
Institution of Heir causnoceomselenssrardseet (astaccewetsunscatauswieesees
Disinhenitance .... PPP eePTOPEPE TEPC POrerse rire eee ae,
CAUSES TOF GISINGTHANCE siievcccen titre

dei icdecnwerlib aeeectons
Right of Representation .........:+ssesseesesersees colina:
Chapter EXONCICOS: ..sisiseseegrssernnesncerenestnacenencensnstedineneens
2 Gross Estate .... 33

Definition and Nature .........ccsestessesesessseesseeeseseseaneesenens
sce ..
’ Justification for the imposition of estate tax ...... 34
Classification of d ecedents and composition of gross estate.
Reciprocity ClaUS@ ........scscesestercseeseeseesseessereneteenneaeens 35
Intangible assets eves ewenesepecccanvevscnpscccsacncerensgsesssecae
qanane 36
The
Intangible assets with situs within the Philippines .............. 36
Situs of Tangible and Intangible Property (Table 2-2)......... 36
Valuation of Gross Estate ........ asyawaeyesgancbodnouveuestqeueerates 40
Exemptions/Exclusions from the Gross Estate ......... seseseees 42
« — Exclusive property of the surviving spouse .........:...+4+. 42
« Property outside the Philippines of a nonresident alien
MOORMAN. yscasyssinshveeumentirnttces osiyepne Sager eprancescigene 42
= — Intangible property of a nonresident alien decedent
(With TOCIDFOCHEY) ...d..ceccascocisessconesiccesloccnonsrsveccagacade 42 |
» The merger of usufruct in the owner of the naked title.. 43
“= The transmission from the first heir, legatee or donee in
favor of another beneficiary, in accordance with the
desire of the predecessor .......0...cccccessccsesseenecclceceens 44
» The transmission or delivery of the inheritance or legacy
by the fiduciary heir (1s heir) or legatee to the
fideicommisary (2 heir) ;...... Se EA VERNER oes 45
= — Exclusions under special laws ..........cecsccsesscseveeees 46
COMPOSITION OF GROSS ESTATE ........0:ccceccceieeeees 46
Property physically present in the GE ..:...0..00.....0. 47
Transfer in contemplation of death ........cc:ccceieceeeees 47
Revocable transters ....0.0i0..cececsccnesseesdisesdvedscacdvens ‘ 48
Transfers under a general power of appointment ......... 50
- Transfers under a special power of appointment......... 50
Transfers for insufficient consideration .............:0000+ 93
Rules on insufficient consideration (Table 2-3)............ 54
Claims against insolvent persons .....:..2....scc00ee sees 55
» Proceeds of life insurance ................ fost wait Weseesus 36
Estate Tax Ralé:iccsiccccssccccsscans. Bere ee eeduiethen : 58
Filing of estate tax Tetum ....cccccise cdi icipetaeoeteacversarceaae 58
Payment of estate tax .........ccceecereeees dbdines relat: 61
Payment by installment ........22sesseeseeeeeeees ahell Tie cyeaiidenss 63.
Chapler OxerciseS ..........0sssssessrsssecteccetecdees ies 65
Deductions from the Gross Estate ..:...0.:.....sscssesseeeerees 89

Summary of Allowable Deductions (Table 3-1)......... Wes ibavies 89
. Ordinaly Deductions sacs 90
Losses, Indebtedness, Taxes, etc. (LIT@) .............0+ sit 90
PGBS Sal otc ssts enh estes sua eeastiayid
pened tania 90
92
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Unpaid Mortgage «...,..++ ekgesdboeelgoavanitis cyebeeed f FUibseavithiene 96
97
Claims against an insolvent DEISONS.ceesevsesee« See aaetescs 98
Transfer for public USC ....i..cseessesesteeteesteetsseeneetsesseaeenen 100
Vanishing GEductions cs, sinnerscssenesctastecsshearacuntsesentesdences 101
Vanishing deduction rates...... s..ssssesceseseeeeeeererseeeren 102
Pro-forma computation. of vanishing deduction......... as 102
SHeScial: DOGUCHONGS csisieis vies vincccrspteagssnparpentvsevensessesects 106
Stafidard DeduCuone serctscncxcsiadecevavcybethtatsianerforcemeccennne “105
Patnlly’ HOMO gesckca Gteaccbsessacdeesensesnteansevtxnsanane nse 105
Amounts received by heirs under RA 4917 ........c:cecseseeee 108
Net share of the SUIVIVING SPOUSE ...........:eseeteeeeeeseerseeees 108
Allowable Deductions for Nonresident Alien :..........:-.00+ 108
Estate Tax Retum Preparation..........ssscsscessrerrsrereeetien 110
Chapter exercises ............000:. hn pecan 113
Property Relations ee ta Jasnapeaeateal toucthud yeaxtus 129

Definition and Nature of Property Reaione, solute Bas enuee 130
Types of Property Relations ..........:scscveediieccepeiteeteenees 130
Law governing property relations............c:c.cccesetecseeeees 130
Absolute Community of Property (ACoP) ....... srnaneatenesiceten 131
Community property under ACOP ........:.cseesceeeeren wah 132
Exclusive property under ACOP ..........:sesseqesseseseens JET vase 132
Conjugal Partnership of Gains (CPG) «.......cscssetee eters 133
Conjugal property under CPG .......:.ssscseeseeereeees “bestia: 134
Conjugal DedUCHONS ss civi2i int ieee iiceniens 136
Pro-forma computation of Net Taiabi Estate (Table 4-3)... 138
Complete Separation of Property .......sssesesseesseseesenseeees 144
Property regime of unions without marge seacsuneteazaenntans 141
Estate Tax Preparation ........sscstessrreecesegeeerneeensneenses an 143
Chapter Exercises ........:.s+s0e0e++ $e SN oni Vi Rta eaetiews 147
Estate Tax Credit and Net Distributable Estate 159

159
Definition and Nature of estate tax Credit .....s.seseseeeseen
Philippine Estate Tax DUC....,-.-sesesrsreereserertenenens eaves 160
The
Formula for the computation of estate tax credit......1.......0 160
Net distributable estate ........ciccccersssecarserssierensecgsesseans 162
‘Chapter Exercises ..........0+. ‘aainaneieiaen juan 165
6 Dom's Tax .......cssesseseseeeseneeneneenes gaseabegee sfaseaupessasicaie 169

Definition and Nature of Donor’s TaX .....:ssscsesrseagesseeseesees : 169
PuMPOsSS. OF DONOIS TAK istics Vicccctsecsesccetuiadenaescsaveigases 170
Elaments Of DONATUON.......srcsnearerorsvecnereseesnstaancbsdihaasaents 170
Completion and perfection of donation.........:ccseeeeecees 172
The Law that govems the imposition of donor's LAX ssescdiieeee 173,
Formalities of donation.......ssssesseseeeseee. WP iaideliesceoteds aa 173
Summary of formal requirements (Table 6-1)..........cccseeceee 174
Characteristics Of GONOIS aK iiccsiccccsiscicciccssatacasevecduowsens 174
Classification of donation.............ccccseccccseeeseeeeeeeeeeneserens 174
Void donations............+: Fannie dywisnnxetbebacane sual sate, ATE one 175
Valuation Of gross: gifts... ..uileeiss dacevaceassiligvansaedaorszenttoness 175
Comparisons between estate donor’s tax (Table 6-2)......... 177
Donor’s tax rate............. StiupRenr
uence onaS faaidet ebehibnantens 178
ROSS GETS sack Sean baeacarsrattanens cornchassinisle 178

Composition of Gross Gifts (Table 6-3)............::cccseceeeees 178
RECIDTOCIEY TUG iscsi dveiaerirevadpunctsavncwedorsessonensncdasiesune 179
Intangible personal property in the Philippines ................0+ 179
Classification Of DOMOSS ...........csssssssceeseeseeeerseesersneneaeaees 179
Inclusion in the gross gifts .............. aediseeeseseversneveeeevens 180
Transfer for insufficient Consideration .......:..::ccseeeeeseeeeqenes 183
Condonation or cancellation of indebtedness ..............:0008 185
Payment of loan by the guarantor .............4. swank pasenieneys 186
Repudiation of inheritance...............sssesessessseseeeesseneeecees 187
Renunciation of share in common property by the
surviving spouse and share in inheritance ..........sesessesesees 187
Exempt Gifts/ Deductions from Gross Gifts ..........ccsesseren 189
Gifts made to or for the use of the governMent ........cse+ 189
- Gifts in favor of non-profit educational and/or charitable,
religious, cultural or social welfare corporation .........::+20+++ 189
Notice of donation (under TRAIN Law) by a donor engaged
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I DUSITIOSS eiicisscwvicceccetkadasbtezesseldibettetentvetestecsubestioncs 190
Exempt donations under special laws ....... Nida Welleldideias 190
EMCUMDIANCES ....c...cccsssessgeecsccevscvseddsvedersdecssesdierdocooens 190
DiMWULONG fi iicaenaiaarncyee: pavisees hicudieveh 191
Summary deductions allowed (Table 6-5)....:+s:sseeessseeee 192
Donation to Philippine Red Cross .......sessceseseeeesereaeeen 192
Computation of Donors Tax DUe.........::eecceeeeteeeeeeseneeeees 193
Cumulative basis of computing the net taxable gifts............ 193
Donations made by SPOUSES............sssssereestseseseseeeteraees 194
Donations made by a foreign Corporation .......:seeseeerreeeee 196
Splitting of Gift............... scunnaaticenaerevaxpiagitn coxepnarseeterenente 196
Tax credit for foreign donor's taX.......cscsssssesereeeseeeseeeel 197
Filing of tax return and payment of tax GUC........--::eseeeeeees 199
Tax Tetuin Brena ation eis csssucss aess es cy edercapaaiasesossexeenes 201
Chapter Exercises.............cccsessesrseseeeeeseeeenes mea Reus 209
7 Introduction to Business Taxes.............0:csesesetesseeeeeeees 223

Definition and Nature of business taxes ..:........00.cseeeeeese 223
Types Of transfer ........ccceeeeeeeesrens RANE RR UScuRUeARCUSEE 224
Types of business taxes.........issceseeceesssssesereeteeeeeseenen 225
Value Added Tax (VAT) ........++- eal ieigun lina neunceEnreNe sees 227
Persons liable to Vat ........cccccceccessreceeseesereeseeeseeeseeeeeeeees 227
’ Transfer by a tax-exempt entity to none-tax exempt entity... 228
Definition of “Goods or ProperticS”.....0..:cceccesesseeeeseeeeeees 228
Sale Of SQIVICES asicciilevuecavcinnchuadecscdsisiunesdivousedendsaxwesaces 228
Sale of real properties. .:.1....csisecseesseceressentescenneennasseeenees 228
Characteristics Of VAT......:.:ssssestseseneesseseesenseetteeneees 229
Basis of Value Added TaX.....:.seiseteseseeeterenseesreerseees 231
Sale Of GOOdS:.:,.....rssssitedsvavessentideeed lanier ei 232
Sale Of S€rViCe ......sscsseeesesererteetsrseseseseseedeeeseeerereneess 232
Dealer in Securities & Lending Investors ..........sssscessesseenees 233
Grss Selling Price ......ssesseeeeeestereeeeetseeneeseeeaesaeeasenenne 233
Fair market Value ....-.s-csessscseccssdevsssacennsaarsebersesecceeees 233
; Gross receipts ......iccscsesereeseeeeseeteresceneenesseseneussnenenens 234
VAT registration .......sscercecereesenseereeserserssseeeeseereessenen 234
Mandatory registration ......sss+sessecssesssnseereseessesesseensenen 234
[vi]
‘|
The
VAT Threshold for husband and Wile cdantsinsetoenenmain 235
Optional registration .....s.sescessevseevdsereeneereeenseeeserctaeees 235
— Cancellation of registration ........cccccescseseeceseesereeepeasenns 236
Power of the CIR to suspend business operations, Rshaaptbede 236
Computation of Vat Payable oo... css teteeseneeeerenss 237
Oihior Parceritage Taxes siscscctiscisscuicauisieainnaaerencaess 238
EXGisd TaxO8 .aisainiseaanoinctitahinis VEN bsite 238
‘ Chapter Exercises ............ rerkass suckle chi aLiaay nell Weeitthivase 239
Value Added Tax .......ssssesscssessssseesseeessseess spe ial 243

Various Exempt Sales/T FANSACHONG sia. bverscarsteerisnatests 243
Agricultural and marine food prods (Table 8- A):Te aaaada sagas 244
VAT EXGMPU SUGGE 57,305. <cndecvusar
sent en caansanedtaceT Gooceoteons 244
Salo of Marinated Fish sissoc.c.ec+.idscsceessseseesesssctocseleees si 245
Sale or importation of feeds and fertilizers ..............00 a 245
Importation of personal household and effects ..............6+++ 246
Importation of professional instruments ............0.cccceeeee 246
Services subject to other percentages taxes ..........2.....s008 247
Services by agricultural contract growers ............cccceceeees 248
VatExonipt MING osesv cca usissometee
A Rae 248
Medical, dental, hospital and veterinary Services ...........6 248
Services rendered by individuals pursuant to employer-
employee relationship........,...ssceseessesencsneenseseeeeesseteeans 250
Services rendered by Regional or Area Headquarters......... 250
Transactions exempt under international agreements......... 291
Sales/Gross Receipts by COOPERATIVES
Lease of residential Unit ..........ccccccecssesseccescecesseeeenseaeens 257
‘ Sale, importation, printing or publication of books, and any’
such educational reading material..............cscsscerseeeeeeneees 260
Transport of passengers by international carriers doing
business in the Philippin@s,.............c:seseecesecedebeaeeesseesees 260
Sale, importation or lease of passenger or cargo vassals:
UGL
ANG AUCIAR bes creskenscecessnshvnnesssieannreshenatoxseTeOsiMETRRLTT 261
Services of financial intermediaries performing quasi- .
banking fUNCtONS..........:.ccessesceeeesseeeeerseeeenneeesepenaeeenens 262
Sale or lease of goods and services to SCs and PWDs... es 262
[vii]
The
Transfer of property 262
Sale of Gold to the Bangko Sentral ng Pilipinas................. 262
Sale or importation of prescription drugs and medicines
prescribed for diabetes, high cholesterol, hypertension........ 262
‘COMPUTATION OF VAT PAYABLE ......... rade lepesinit 264

SOURCES of OUTPUT VAT: sssiseussiscsevinsdivecssanvavsazjzeias 264
Actual Siler is at itetnsilinss Lode 264
tncidenital tranSactiOns \ui...cces
ei siseisasssadadeore 266
Transaction Deemed Sales .........é.d-000 © HAP cea ». 267
- EXPORT SALE- |
Export salé'by a vat régietated entity veccceeceseeeeee 272
Zero-rated (0%) sale Of QOOS .....:iseeseeseeseseeses 272
Zero-rated (0%) sale of Services ..:.....c.seleseseeeeees 275
INPUT: VAT--‘definition? 5 SU ATRL aylediann 298
SOURCES OF INPUT VAT
Input vat on capital goods prior..........0...+. en 279
Input vat on importation’: <c..tes.cei Teas 284
~ Importations by tax exempt persons .............c000 285
Computation of input vat on importation .............. 286
| Presumptive FADE VAL. .cgnciacasnisttes estes grateniasvenies 289
Transitional input Vat ...:.ccscssesccesersssecseeeneseeeeee 291
Creditable withholding Vat .......s:scsscstssneseesseeons 292
Carry-over of excess input Vat .......ccceceeeeeeeees 295
VAT on Lease of Real Properties ..........0cceceeeeees sdeicntes 295
VAT on Sale of Real Properties .............cecccsesssseeeesensenees 296
Installment payment Of VAT......s+ssseeeseseeeee erence: 296
Deferred payment Of VAT.....-:s:scsseeeseeeers ieee 298
VAT on Sale of Services
.. ie sean 300
Vat exemption and 20% dibooitt of SCs aii PWDs. eaeals, 305
5% special discount for SCS .....ssssscsesesesssesseeseesennecrenenee 309
5% special discount for PWDS ......:sssessersesseess Eenaaecunt 310
VAT exemption and discount to Solo Parents..........ssses0 312
Tax treatment of the discount granted to Solo Parents........ 318
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The
VAT and discount granted to National Athletes and Coaches
314
Mixed Business Transactions ......sccsssssescsssessessessessesesees 316
Filing Of Vat returm’......iseccesssrsssreosssesnescansntonnsnennnsnceiscens 317
5% creditable vat withheld by the government ...........::c8+ 320
Invoicing and accounting requirement ............ccccccceseesenes 321
Vat Return Preparation .......ccccccseersereseees cca Shee elle 1a 324
Chapter exercises .......cccccssessecscssesseeess sscguivenenatinaniyti | 331
Other Percentage Taxes .........2......00cscsecessessesseseseeseeere 361

Kinds of percentage taxes ............sssesseesseeseecssesesneeeeenes 361
Percentage tax on persons exempt from WAT ce Seenssskaitin 362
Option to register under the VAT System ..............:::00006 363
VAT threshold for married individuals...............cc0cccceeeees 364
Self-employed and/or Professionals (SEP) ................ wares 366
Transportation Network Companies (TNCs) Nite teak = 374
[ntertiational Camere:
iis sigs sas livesyeccategreurencdreconavieicianys 377
Percentage taxes On Franchises ...............ccceceesesssseeeneneees 379
Summary of business tax for franchise grantees (Table 9-3). 380
Overseas Communication Tax (OCT) .........ccsesceseesteeeseees 382
Gross Receipts Tax (GRT) on banks and non-bank financial
Intermediaries performing quasi-banking operations .......... 383
Gross Receipts Tax (GRT) on tax on other non-bank
financial Intermediaries.............::::ccsccseesseseeeeseserseseeeenees 385
Money changers and paWnshopS..........:cssseceerereeneees 386
Gross Receipt Tax (GRT) on Lending Investors..............++ 387
Gross Receipt Tax (GRT) on Non-Stock Saving and Loan
Assocations (NSSLAS); «ssicascisisenacsessuies annineaviet 38/7
Microlinance NGOS. wicccseeindéccyentverspatsnesexectysboraneanseraents 387
Percentage tax on Life Insurance Premiums ...........ss++s0 389
Tax on Agents of Foreign Insurance Companies ...........+0 390
AMUSGINGNE TAKES scsssicesitecyiasctganpsvespnonsngpepesocart
esterases 392
Gaming Tax on Offshore Gaming Licensees (OGLSs) ......... 394
397
Tax OM WINNINGS ......scseseseeseeeesessevensnesseevaneseenesensennyes
Stock Transaction TAaXx .....:csesereeererees See error 398
[ix]
The
Retum and Payment of Percentage Tax .....sseeersssrreeeeeee 401
Preparation of tax FOUN iaisitiss 402
Chapter Exercises weave eneeeeneetaaees
405
1 0 EENGIGO THROS Ay bacesGhaceccccacecdncccsacvedeisiestinesdasatiesteceiss 433

Types of excise tax.:Reese reeeeeeeeeaee TORR
e eee ea eae eeeenereeeereebatee | 433
Major classification of excisable articleS..........ccceeeeneens 434
Persons liable to excise tax....... 434
Goods and services subject to excise taX......iccieseetereees 425
AIGONOL DIQUUCNS sieavisserenctinrpranadiae dl eeteeiand Sie 435
Nicotine and non-nicotine products..........scsscsecceeeeeres 437
Petroleum products SOR eee eee e ee eee ewer enone ee aee 440
Automobiles an2 ssagidsiedrd
Ween iuntigey Set AG hve 441
Non-essential goods. Reem meee ee Eee ee meee eee eee eee 443
Non-essential service-invasive cosmetic procedures........... 443
Sweetened beverages 444
Minerals and mineral products 445
Administrative provisions 446
Excise taxes on imported articles 448
Tax free articles brought or imported in the Philippines........ 448
Chapter Exercises..........0.0000 Ree eee eee eee eee ee eeeeueeeaeeeees 449
1 4 Documentary Stamp Taxes (DST)...........::sssseeereeeeeeees 451

ENS TAPS a wsSaicdasray cases acdadeta a oake busses tanta tietad Ticats 451
Liability to pay DST 451
Filing and payment eRe Ue ee UOC ESSUSSCSSUS SE eee 451
Effect of failure to pay DST ....... 452
List of documents and transactions subject to DST and DST
452
PRO ee eRe TERE REE EER ER REE 456
12 Preferential Taxation.............. ARE R ORO O RENE REET EERE HET RE ESR ERE H NES 459
BS&CKOTOUNG -ssisessrsecvorsterconsssncdeneneaiaastagdscvastveun sexpesents 459
Definition of terms SRS e ere heen e ee eee ese wee tees eee ee eeee 460
Income tax of SCs, PWDs and Solo Parents...........ccssereer 461
Benefits for SCs, PWDs and Solo Parents.........cc:esceseeenees 462
Additional compensation expense for private entities........... 462
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iid
The
Barangay Micro Business Enterprises (BMBE).........:....040+ 463
Incentives Of BMBES........s.sssseeseees wedisbiocodelNbnrssant@Qlii 464
Double Taxation Agreement (DTA)...... stan quasi eqluneoryeses 465
Tax treaty bonefits.......cessceseeseseeeans resi vcdbavevul venuacipeabendt 468
Regular tax rate under the Tax Code vs. Tax Treaty rates.... 469
Filing of Request for Confirmation (RFC)......cssseseeeseresees 469
International Tax Affairs Division (ITAD)......sssseseseees satis 470:
Procedures in availing relief from double taxation............+.. 470
OECD Model Tax Conventions..:....055i.cctccsisssssserecsseneereens 473
United Nations Model Double Taxation Convention...........- ; 414
Chapter EXemcises...<:.ciiecssesersiovesssensdsliinacslactseavaluineeins 475
483
13 Tax Incentives under Title XiIll of the Tax Code...............
Scope and Coverage.........sccccccesseeees vdidosdverancavoadecovevans 483
Extent of authority to grant incentives..............004 Eatin 484
Summary of tax and duty incentives and period of
AVAIIMENTS......eeeeeees Jdreadispania me tacreeaeme shinai ;, 484
Income Tax Holiday (1TH) .cccsssiserst sess janevecsesestarveceasecss 485
Special Corporate Income Tax (5% SCIT) or 5% GIT.......... 487
Enhanced deductions (ED).........sse:cs+:qssstesseesesteteeestzeens 489
Value-added tax (VAT) zero-rating and exemption baad comenas 492
~ Customs Duty EXem pion ssasicsseisntsosncaecsnnenterrenstanesnptens 494
Transitory Provisions............ssccccrecoosenstsreeerssnevceseoeagananns 496
Taxation after expiration of inCentives..........::ecceeeeeeees 496
Fiscal incentives for renewable energy (RE) projects and
ACUVINCS) 5 cssconsieuscnsavdnxsanmncneceesntpalocsonenteenedeseansanesioesas ‘497
Fiscal Incentives Review Board (FIRB).........:::ssseeseeereees 501
Strategic Investment Priority Plan............ grestaalieaasucigeemone 501
Power of the President to grant incentives............cesseeeee 503
Qualifications of a registered business enterprise for tax
(CONTIGS cee ciscscicacecsasash
eboeey potee teat vna ya eae a eden 503
Filing of tax returns and submission of tax incentives reports. 503
. Prohibition on registered activitieS..........ccsceseeeeeeeeserneees 504
Concept Of ECOZONCS,vs. scccoscestecrpapscccapsiaaevavenss SF eavians 504
BOI Registered Enterpris@s.........:cssessssrsereseeessersnsateneneees 506
Strategic Investment Priority Plan (SIPP).......:sccsseseeeneerees 506
Sample Sworn Statement.......c:ccscsecceseseresees Haar 508
_ Chapter Exercises. debe deteas eitiwdavavseliedalecibiaoedaqueaversneenibull 510
The
Chapler 1
Succession and Transfer Taxes
The modes and mechanics of acquiring ownership and other real

rights over property are fairly complex. One can gain, transfer and lose
ownership on a number of ways.
Under the Civil Code (CC),

ownership may be acquired — Art. 712 (Civil Code):
~ through: “Ownership is acquired by
occupation and by intellectual
- 4.- Occupation creation. Ownership and other real
2. Intellectual creation rights over property are acquired
3. Law pa and transmitted. by law, by
4. Donation donation, by testate and intestate
, 5. Tradition. succession, and in consequence
6. Contract of certain contracts, by tradition.
7. Prescription They may also be acquired by
3. Succession means of prescription’.
_ Transfer Defined
Transfer taxes are taxes imposed upon the 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.
However, onerous transfers are subject to business taxes instead of
transfer taxes. Business taxes are discussed in chapters 7 to 9 of this
book:
The
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Book R̶Readexs-Raiders
e̶a̶d̶e̶r̶s̶ Raiders || Nevule
Chapter 7 - Successton tid Transfer Les
Types of Transfer Taxes |

1. Estate tax
2. Donor’s tax
Gratuitous transfer or donation may take effect at the time of death of

the donor or during the lifetime of 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.
Consequently, transfer taxes, which are typically assessed on the net
value of the taxable assets transferred, fall into two basic categories,
namely, estate tax and donor's tax. Estate tax is discussed in Chapters 1
to 5 of this book while donor's tax is discussed in Chapter 6. —
Succession Defined
Since donation mortis causa .takes effect upon the death of a

decedent, it is appropriate to discuss first the concept of Succession.
Succession is a mode of acquisition by virtue of which, the property,
rights and obligations to the extent of the 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 (Art.774 CC). The inheritance includes all the
property, rights and obligations of a person which are not extinguished by
his death (Art. 776 CC). The rights to the succession are transmitted from
the moment of death of the decedent (Art. 777 CC), 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.
Decedent's Estate** To ry Pe elisa ct by the Heir(s)
Obligations Obligations
**Cut-off Period: The amount of obligation acquired/inherited by

As of the date of death of the testator. an heir should not be more than the combined
value of the properties and rights inherited.
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Chapter 7 - Succession and Transfer Tawees
Nature of transfer taxes
Transfer taxis an excise tax. 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 Civil Code.
‘ILLUSTRATION 1:
Pedro suffered an unexpected heart attack causing his death on November 1, 2023.
His estate is composed of the following: |
Cash in bank P1,000,000
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,
2023. The executor of Pedro’s estate filed the estate tax return and paid the
corresponding estate tax on April 30, 2024. The properties left by the decedent were
finally distributed to Juan on June 30, 2024.
Answer the following:

Question 1: When will the transfer of ownership from the goat to the heir take
effect?
«> Answer: November 1, 2023.
The rights to the succession are transmitted from the moment of death of the decedent
(Nov. 1, 2023), notwithstanding the actual transfer dated June 30, 2024 (Art. 777 CC).
The
Question 2: When should the estate tax accrue?
’ % Answer: November
4, 2023
0 The estate tax accrues immediately at the time of death, irespective of

actual date of filing the estate tax retum. It shall be noted that the accrual of
the estate tax is distinct from the obligation to pay the same@.(RR 2-2003);
(Lorenzo vs. Posadas, 64 Phil. 353).
© — Under the TRAIN Law, the filing of estate tax retum is within one (1) year from
date of death.
Question3: Assume that Pedro's total outstanding liabilities as of the time of his
death amounted to 12,000,000, how much of the outstanding ‘liabilities of the
decedent should.be assumed by Juan?
“> Answer: P10,000,000 —
& The amount of liability to be assumed by the heir(s) shall be limited only to the
extent of the value of properties and rights inherited.
0 — Art.774 of the Civil Code provides:

“Succession is a mode of acquisition by virtue of which, the property,
rights and oobligations to the extent of the 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.”
Kinds of Succession (Art. 778 CC):
Whenever a person dies leaving property (inheritance), a question

normally arises as to how his property or estate will be dealt with by those
s/he left behind. The answer depends on whether or not a decedent left a
"will” at the time of his death. - The definition of “succession” as
discussed in page 2, clearly states that the inheritance is transmitted ~
either through /ast will and testament or by operations of law (in the
absence of a /ast 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 (refer to

the definition of a “will” iri Page 13) 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.
The
Chapter 7 - Successton al’ Traks / Lives
!
2. Legal or intestate succession. A type of succession which is effected

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

“wil 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, assume that 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 “will” was dated November 1, 2022 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 land 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, 2022, the aforementioned properties
were not included in his will. Hence, a mixed succession exists. Some of the estate
will be transferred in accordance with the duly executed will (testamentary) while the
new parcel of land in Makati and the bank account will be distributed in accordance
with the law on succession (intestate or legal succession). —
b¥
The
Chapter 7 - Succession aid Trans Ur" Laes
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 Dela Cruz. 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 the eve of November 2, 2023, 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. An intestate or legal succession exists. At the time of the decedent's death,
his estate shall be disposed of by operations of law.
2. When the “Will” does not institute an heir.
ILLUSTRATION 4: |
Pedro D. Magiba executed a last will and testament on November 1, 2023, devising a
parcel of land located in Batangas to one of his daughters. However, Pedro failed to
indicate an heir in his will. The devisee was simply described as follows:
: |
‘| am devising my parcel of land in Batangas City to my closest and favorite |
daughter.” |
Pedro D. Magiba (signed) |

November 1, 2023 |
Assume further that Pedro has five (5) children.
"No heir was identified in the will. As a result, there is no valid “will” because |
of the absence-of an instituted heir. -
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Chapter 7 - Succession wie Trans cr Lapees
=>
Ss
3. Partial institution of heir. Consequently, intestacy takes place as

to the undisposed portion.
Partial institution, of heir means the entire estate was not disposed
of in the last will and testament. Therefore, a mixed succession
exists. Part-of the estate will be disposed of or distributed to the heirs
based on the last will and testament. Nonetheless, since there are
properties in the estate that were not included in the will, such
properties shall be disposed of in accordance with law (only as to the
undisposed portion or as to the portion of the estate not mentioned in
the will).
ILLUSTRATION 5 (Partial Institution):

“+ Refer to CASE C of illustration No. 2. |
4. Other causes of legal succession or intestacy:

a. When the heir instituted is not capable of succeeding
b. Non-fulfillment of the suspensive condition attached to the

institution of heir. Suspensive condition is a condition
depending upon the happening of an uncertain event which
must be fulfilled before an obligation arises.
c. 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).
d. Fulfillment of “resolutory condition’. A resolutory condition

refers to a condition whereby, upon fulfillment terminates an
already enforceable obligation.
e. Expiration of term or period of institution.
f. Non-compliance or impossibility of compliance with the will.
g. Repudiation of the instituted heir.
i 1 f z I
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7 Chapter 7 - Successton
ani Transfer Lapees
Elements of Succession:
1. Decedent is the general term applied to the person whose property ig

transmitted through succession, whether or not he left a will. If he left
a will, he is called a testator (Art. 775 CC).
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 Mey are extinguished by
death (Art. 776 CC).
3. Successor
An heir or successor is a person who is called to the succession
either the provision of a will or by operation of law (Art. 782 CC).
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 (i-e., legitimate children and descendants).
« Secondary— those who ‘succeed only in the absence of the

primary compulsory heirs; (i.¢.,. legitimate parents and
ascendants).
= ‘Concurring — those who succeed together with the primary or

secondary compulsory heirs: (i.e., illegitimate children and
descendants and surviving spouse).
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Chapter 7 - Successton an Tre Tes
Thee uid alee

Primary Compulsory Secondary Compulsory
A. Legitimate children and their D. Legitimate parents and legitimate
legitimate descendants. ascendants. (They inherit only in
-
default of “A”)
B. Surviving spouse E. Illegitimate parents (no — other
C. Illegitimate. children and their descendants). They inherit only in
descendants, legitimate or default of “A” & “C”.
illegitimate
NOTE: Brothers and sisters 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 legitime of the compulsory heirs. The
share of 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 will)
COMPOSITION OF GROSS ESTATE:

The gross estate is divided into two main categories for
succession purposes, the legitime and free portion as shown below:
Mee |
“Compulsory Heirs:
This portion of the estate is reserved by law
specifically to compulsory heirs, regardless of whether
LEGITIME.
a last will and testament was prepared Rare to Table
(ie., , 75% of the estate)
1-3_Table of Legitimes).
FREEPORTION _—if| Compulsory Heirs and/or Voluntary Heirs.

(i.e., 25% of the estate) | « — Asprovided in the last will and testament.
« Inthe absence of a will, this portion of the estate
shall be distributed to “intestate heirs” based in
the order of priority as provided in Table 1-2.
The
Chapter — mere bid Trans c/" Lives
LEGITIME is part of a testator's property which he cannot dispose of

because the law has reserved it for certain heirs who are, therefore, called
compulsory heirs (Art. 886 CC). The compulsory heirs cannot be deprived of their
legitime by the testator except by disinheritance properly effected. On the other hand,
Free Portion is that portion of the estate which the testator can freely dispose of.
Hence, anyone may inherit from free portion (compulsory or voluntary heirs).
Nonetheless, voluntary heirs may inherit only if mentioned in the will. In the absence
of a provision in the will, voluntary heirs will not inherit anything. In such cases, the
free portion shall be disposed of to intestate heirs based in the order of priority as
presented below:
TABLE 1-2: ORDER OF INTESTATE SUCCESSION
Legitimate children or descendants

Legitimate parents or ascendants
PED ONS
Illegitimate children or descendants

Surviving spouse
Brothers and sisters, nephews and nieces
ON
Other collateral relatives within the 5th agree

State or the government
The distribution of free portion in intestate succession is based on the

order of priority because in every inheritance, the relative nearest in
degree excludes the more 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
10
The
Chap er 7 = SUCCOSSLONW tid 7Trans (es Ti CS
3ILLUSTRATION 6: Determining Blood Relationship
M N
NOTE:
1. Inthe illustration, C and D are siblings. Their common parents are A and B.
2. Gis the daughter of C and E; J is the son of D and F.
3. Mis the son of G and K; N is the daughter of J and L.
4. A,C,G and M, in that order, are relatives in the descending direct line. From
A to C is one degree; from C to G is another degree and from G to M is
another degree.
5. N, J, D and B, in that order, are relatives in the ascending direct line.
6. C, Gand M, are relatives of D, J and N in the collateral line.
7. Gis the niece of D, D is the uncle of G; J is the nephew of C, C is the aunt of J.
8. Hand | are first cousins; they are four degrees apart, H to C, C to AB, AB tod
and D tol.
9. Mand N are second cousins; they are six degrees apart:
. Because of G's marriage to K, K becomes H's brother-in-law, H being G's
brother. They become relatives by affinity. Affinity is the connection existing in
consequence of a marriage between each of the married spouse and the
kindred of the other.
11
The
3 an
t
Chapter 7 - Succession tie Transp Lagves
Vs ABLE O
Survivor Legitime Notes
LC Ys divide by the number. of LC, whether they survive alone or with|
concurring compulsory heir (CH)
1LC Ve
ss “%
2 or more LC 7" san
SS Equal to 1 LC
LC % All the concurring CH get from the half free portion, the share of the S$ |
SS % having preference over that of the IG, whose share may suffer
IC * %,of1LC | reduction pro-rata because there is no preference among themselves
LPA vA Whether they survive alone or with concurring CH
LPA % IC succeed in the % in equal shares ea
IC - Y%, ‘
—
LPA %
Ss %
LPA © %
Ss 1/8
IC 114
IC ~ 1/2 .|-Divide equally among the IC
ss 1/3 ‘
IC 1/3
Ss ~1/2 1/3 if marriage is in articulo mortis and deceased spouse dies within 3
months after the marriage
IP - Ve
IP Excluded Children inherit in the amounts established in the foregoing rules
Any child lt depends
IP % Only the parents of IC are included. Grandparents and other
ss uv, ascendants are excluded.
| ILLUSTRATION 7 (LEGITIMEs and FREE PORTION of the ESTATE):
Case A: Namaalam Nha died leaving an estate valued at. P12,000,000. The surviving | °
heirs were his spouse, 2 legitimate children and 1 illegitimate child..
|
Required: Distribute the estate by applying the rules on legitime.
Answer: |
The distribution of his estate should be as follows (Based on Table 1-3):
Legitimate Children (1/2): P6,000,000
= — Legitimate child # 1 P3,000,000
* — Legitimate child # 2 3,000,000
Illegitimate child (1/2 of 1 LC) 1,500,000
_ Surviving Spouse (1/4) 3,000,000
Free Portion (remainder) 1,500,000
Total . P42,000,000
12
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Chapter 7 - Successtonvan Transfer Tawces
a,
Hole
The legitime of the laiirnate children as provided in the table of legitime is % of the total
estate (regardless of the number of legitimate children).
‘| = The legitime of an illegitimate child is % of the legitime of 1 legitimate child.
= The legitime of the surviving spouse is 4 as provided in the table of legitime
« The remaining portion in this particular case is the free portion. It may be given by the
\* testator to anyone in accordance with his wishes. However, only those voluntary heirs |
included in the provisions of the will should be recognized.
Case B: Assume the amount of estate is P12 000,000 and the decedent is survived only
by his two (2) illegitimate children. The distribution of the estate under intestate |
succession should be: ’ |
Illegitimate Child (1/2); (P3M Ee 1.C.) P6,000,000 |
Free Portion (1/2) 6,000,000 |
Total P12, 000, 000
Case C: Assume the same’ data in Case B except that the testator provided P8,000,000 |
to Ana (his secretary) through his last will and testament. Obviously, the legitimes of the |
two. (2) illegitimate children were impaired. The amount of estate left after deducting the© |
P8,000,000 will not be enough to satisfy the legitimes of the compulsory heirs amounting
to P6,000,000. Hence, the amount to be given to the secretary should be modified or |
reduced to P6,000,000 to eo the legitimes. The distribution of the decedent's estate
should be as follows:
Illegitimate Child (1/2); (P3M per I.C.) ~ P6,000,000

Secretary (free Portion); (1/2) 6,000,000
Total oe —___ P12,000,000
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 CC). 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 of 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 ite time of its execution.
13
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Chapter 7 - Successtow ile’ Trans oS Ta -C5
{
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 to be insane, the person who
maintains the validity of the will must prove that the testator made it during
a 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
tothe 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.
The following are disqualified from being witnesses to a will (Art. 821 CC):
» Any person not domiciled in the Philippines.
« Those who have been convicted of falsification of a document, perjury,
or false testimony.
In the absence of bad faith, forgery,

or fraud, or undue and _ improper
Art. 795 CC:
pressure and influence, defects and
“The validity of a will as to its
imperfections in the form of attestation
form depends upon the
or in the language used therein shall not observance of the law in
render the will invalid if it is proved that force at the time it is made.”
the will was in fact executed and
attested in substantial compliance with iageomeesy
~ all the requirements of the law. £
14
The
Chapter 7- Successtonw “3 Tes er Lacees
2. HOLOGRAPHIC WILL-is a written will which must be entirely written,

dated and signed by the hand of the testator himself. It subject to no
other form and it may be made in or out of the Philippines and need
not be witnessed (Art. 811 CC).. 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 (Arts.825 and 826 CC).
PROBATE OF A WILL is a court procedure

_Art.815CC =... ~—_sby which a will is proved to be valid or
“No property of a invalid. In the probate of a holographic will
testator shall pass it shall be necessary that at least one witness
to an heir unless who knows the handwriting and signature of
proven that all the the testator explicitly declare that the will and
terms in the last will the signature are in the handwriting of the
and testament is testator.
legal and valid in The proceedings in the absence of a last
court”. will and testament is called “intestate
proceedings’.
Foreign Wills
The will of an alien who is abroad produces effect in the

Philippines if made with the formalities prescribed by the law of the place
in which he resides, or according to the formalities observed in his
country, or in conformity. with those which the Philippine civil code
prescribes. A will made in the Philippines by a citizen or subject of another
country, which is executed in accordance with the law of the country of
which he is a citizen or subject, and which might be proved and allowed
by the law of his own country, shall have the same effect as if executed
according to the laws of the Philippines.
When a Filipino is in a foreign country, he is authorized to make a

will in any of the, forms established by the law of the country in which he
may be. Such will may be probated in the Philippines (Art. 815 CC).
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Revocation of wills and testamentary dispositions

A will may be revoked by the testator at any time before his death.
any waiver or restriction of this right is void (Art. 828 CC). A revocation
done outside the Philippines, by a person who does not have his domicile
in the Philippines, is valid when it is done according to the law of the place
where the will was made, or according to the law of the place in which the
testator had his domicile at the time and if the revocation takes place the
. Philippines when it is in accordance with the provisions of the new civil
code. ;
MODES OF REVOKING A WILL:

1) By implication of law
2) By some will, codicil, or other writing executed as provided in case of
wills
3) By burning, tearing, cancelling, or obliterating the will with the intention
of revoking it, by the testator himself, or by some other person in his
presence, and by his express direction. If burned, torn, cancelled, or
obliterated by some other person, without the express direction of the
testator, the will may still be established, and the estate distributed in
accordance therewith, if sits contents, and due execution, and the fact
of its unauthorized destruction, cancellation, or obliteration are
established according to the Rules of Court. —
Subsequent wills which do not revoke

Art. 837 CC: the previous ones in an express manner, annul
‘If after making a will, the only such dispositions in the prior wills as are
testator makes a second inconsistent with or contrary to those
will expressly revoking the contained in the latter wills. A revocation made
first, the revocation of the in a subsequent will shall take effect, even if the
: Sout ia whic Ha new will should become inoperative by reason.
Se eee of the incapacity of the heirs, devisees or
revived only by another will : ; :
5 legatees designated therein, or by~ their
or codicil”. ae : 5
renunciation. A revocation of a will based on a
false cause or an illegal cause is null and void.
Institution of heir (Art. 840 CC)

Institution of an heir is an act by virtue of which a testator
designates in his will the person or persons who are to succeed him in his
property and transmissible rights and obligations, A will shall be valid
even though it should not contain an institution of an heir, or such
institution should not comprise the entire estate, and even though the
person so instituted should not accept the inheritance or should be
incapacitated to succeed. In such cases the testamentary dispositions
made in accordance with law shall be complied with and the remainder of
_the estate shall pass to the legal heirs.
16
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Chapter 7 = Success LOW MH. Ly Touasfe Laces
A compulsory heir may, in consequence of disinheritance, be

deprived of his legitime, for causes expressly stated by law.
Disinheritance can be effected only through a will wherein the legal cause
therefore shall be specified. The burden of proving the truth of the cause
for disinheritance shall rest upon the other heirs of the testator, if the
disinherited heir should deny it.
-
*s Disinheritance
Disinheritance is a testamentary disposition by which a compulsory

heir is deprived of, or excluded from: the inheritance to which he has a
right. Disinheritance is not applicable to voluntary heirs.
REQUISITES for Disinheritance:

Effected only through a valid will
NOOKRWNSA
For a cause expressly stated by law

Cause must be stated in the will itself
Cause must be certain and true
Unconditional: ,
Total (there is no partial disinheritance)
The heir disinherited must be designated in such a manner
that there can be no doubt as to his identity
As stated above, the ground(s) or cause(s) of disinheritance shall

-be limited to those expressly stated by law. Under Art. 850 of the Civil
Code, the burden of proving the truth of the cause for disinheritance shall
rest upon the other heirs of the testator, if the disinherited heir should
deny it. Disinheritance without a specification of the cause, or for a cause
the truth of which, if contradicted, is not proved, or which is not one of
those set forth in civil code, shall annul the institution of heirs insofar as it
may prejudice the person disinherited.
The devises and legacies and other ART. 856 CC

~ testamentary dispositions shall be valid to such
extent as will not impair.the legitime. The “A subsequent
children: and descendants of the person reconciliation between the
disinherited shall take his or her place and shall offender and the offended
preserve the rights of compulsory heirs with person deprives the latter of the
respect to: the legitime; but the disinherited fight to disinhent, and renders
parent shall not have the usufruct or _ ineffectual any disinheritance
administration of the property which constitutes that may have been made.”
the legitime.
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Chapter ~ Suecesston. duh’ LaAus Jer Lae “05
COMMON CAUSES FOR ODISINHERITANCE of children’ or

descendants, parents or ascendants, and spouse;
1. When the heir has been found guilty of an attempt against the life of
the testator, his/her descendants or ascendants; and spouse in case
of children and parents;
2. When the heir has accused the testator of a crime for which the law
prescribes imprisonment for 6 years or more, if the accusation has
been found groundless;
3. When the heir by fraud, violence, intimidation. or undue influence
causes the testator to make a will or to change one already made;
4. Refusal without justifiable cause to support the testator who disinherits
such heir. ,
Peculiar Causes for Disinheritance
1. CHILDREN/DESCENDANTS:
a. When the child or descendant has been convicted of adultery or

concubinage with the spouse of the testator;
b. Maltreatment of the testator by word or deed by the
child/descendant;
c. When the child or descendant leads a dishonorable or disgraceful
life;
d. When the child or descendant is convicted of a crime which
carries with it a penalty of civil interdiction.
2. PARENTS/ASCENDANTS:
a. When the parents have abandoned their children or induced their
daughters to live a corrupt or immoral life, or attempted against
their virtue;
b. When the parent or ascendant has been convicted of adultery or
concubinage with the spouse of the testator;
c. Loss of parental authority for causes specified in the Civil Code;
and
d. Attempt by one of the parents against the life of the other, unless
there has been reconciliation between them.
' 3. SPOUSE:
a. When the spouse has given cause for legal separation;
b. When the spouse has given grounds for loss of parental
authority.
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Okaple 7 - Successtouw ial Trans C7" Lagees
Right of Representation
It a “right” created by fiction of law where the representative is

raised to the place and degree of the person represented, and acquires
the rights which the latter would have if he were living or could have
inherited. Representation may arise either because of:
1.Death -
2. Incapacity ©
3. Disinheritance
The representative(s) shall not inherit more than what the person
they represent would inherit, if he were living or could inherit (Art. 974).
The law further provides that “representation” is not available to:
1. As to compulsory heirs: In case of repudiation, the one who

repudiates his inheritance cannot be represented. Their own heirs
inherit in their own right.
2. As to voluntary heirs
3. Voluntary heirs, legatees and devisees who

a. Predecease the testator; or
b. Renounce the inheritance cannot be represented by their
own heirs, with respect to their supposed inheritance.
Right of representation takes place only in favor of children of

brothers or sisters, whether full or half blood and only if they concur with at
least one uncle or aunt. This rule applies only when the decedent does
not have descendants. Nephews and nieces already alive when the aunt
or uncle died can inherit by representing their predeceased parents. If
the nephews and nieces are illegitimate, then they are prohibited by
Article 992 of the new civil code from inheriting from the relatives of their
father or mother like their uncles or aunts, or even from their
grandparents. | Grandnephews and grandnieces in the collateral line
cannot inherit, by right of representation.
The
Okapter 1 - Succession and. Transfer Tieces
CHAPTER EXERCISES
TRUE OR FALSE.
1. Estate tax is a tax on the right to transfer property at death and on

certain transfers which are made by law the equivalent of
testamentary disposition and is measured by the value of the property.
Estate tax is an excise tax.
The taxpayer in estate taxation is the estate of the decedent as a

juridical person.
Estate tax accrues as of the date of the actual possession or
enjoyment of the estate by the beneficiary.
Executor is the person appointed by a court to carry out the directions

and request of a decedent in his will and to dispose of his property
according to his testamentary provisions after his death.
Intestate succession arises when there is transmission of properties in
the absence of a will, or if there is a will, the same is void or lost its
validity, or nobody succeeds in the will.
Every will may be in writing and executed in a language not.

necessarily known to the testator.
A holographic will is a will entirely written by a testator with his own
hand and may be witnessed or attested. :
The will of an alien residing abroad produces effect in the Philippines if

made in conformity with the formalities prescribed by law of the place
in which he resides.
10. A person has unlimited right to make donations in his last will and-
testament.
a1, The rights to the succession are transmitted from the moment the
heirs receive their share in inheritance.
12. The law presumes that every person is of sound mind in the absence
of proof to the contrary.
13. Brothers and sisters (whether half or full blood) of the decedent are
not compulsory heirs.
- 14. Brothers and sisters (whether half or full blood) of the decedent can be
an intestate heir.
15. There cannot be a disinheritance for compulsory heirs.

16. Relatives by affinity are strangers for estate tax purposes.
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Chapter 7 - Successton wil Trans 13 Lagees
17.An heir who inherits a specific personal property by will is known as

devisee.
18. A codicil is.a So pplement or addition to a will, made after the eeabulion
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.
19. Under the law on.legitime, if the only survivor is the widow or widower,
she or he shall be entitled to one half of the hereditary estate of the
deceased spouse, and the testator may freely dispose of the other
half..
20. Representation is a right created By f fiction of law by virtue of which
the representative is raised to the place and degree of the person
represented and acquires the rights which the latter would have if he
were living or if he could have inherited.
MULTIPLE CHOICE. Choose the letter of the correct answer.
Transfer Taxes
1. Which of the following statements is false? Transfer tax is

a. ‘Imposed upon gratuitous transfer of property
b. Of two kinds: estate tax and donors’ tax
c. Classified as national tax
d. None of.the above
2. The object of estate tax is the:

a. Right to transmit c. Properties of the decedent
b. Decedent d. Beneficiaries
3. Justification for the imposition of transfer tax.

a. Redistribution of wealth theory;
b. Benefit received theory;
c. State partnership theory;
d. All of the above
4. Mortis causa transfer of property is effected:

a. When the property is received by the heir.
b. When the court awarded the ownership of property to a particular
heir.
c. Upon the death of the decedent.
d. Upon payment of estate tax.
\
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Chapter 7 - Successton wid’ Transfer Lagves
5. The tax imposed on the transfer of property without consideration

between two or more persons who are living at the time the transfer is
made.
a. Estate tax c. Donor’s tax
b. Business tax d. Personal tax
6. Statement 1: Cancellation of existing debt as payment for services

rendered by the debtor to the creditor is a gratuitous transfer.
Statement 2: A sale is a form of transfer transaction that requires

payment of transfer tax.
a. Statements 1 and 2 are false
b. Statement1 is true but statement.2 is false
c. Statement1 is false but statement 2 is true
d. Statements 1 and 2 are true
7. Statement 1: A sale on installment basis is considered as an onerous

transfer. : ,
Statement 2: A gift out of love to former girlfriend is an onerous:

transfer.
b. Statement 1 is true but statement 2 is false
Definition/Elements of Succession
8. It is a mode of acquisition by virtue of which, the property, rights and

obligations, to the extent of the value of the inheritance, of a person
are transmitted through his death to another either by his will or by
operation of law.
a. Succession c. Barter
b. Purchase ~ d. Donation
- 9. The elements of succession are:

|. Decedent
ll. Estate
lll. Heirs
IV. Administrators/Executors
a. | and Il only c. All of the above
b. I, Il and Ill only d. None of the above
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Chapter 7 - Successton td Touasfo Tagees
10. Estate
a. ls the sum of all the property of a deceased individual which
are available for disposition to his heirs, successors or
beneficiaries, represented by an executor or administrator as
the case may be.
b. Is a person designated in the last will and testament to carry
out the provisions of the decedent's will.
c. Is aperson who performs a fiduciary duty such as taking care
of the decedent's estate prior to final disposition to the heir(s).
d. Isa 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.
11. Statement 1: Inheritance réfers to 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.
Statement 2: Rights which are purely personal are not transmissible

for they are extinguished by death.
c. Statement is false but statement 2 is true
12. Which is not true about inheritance?

a. Inheritance includes property, rights, and obligations of a
person that have accrued since the opening of the succession.
b. Inheritance includes devise and legacy.
c. Inheritance includes. property, rights, and_ obligations
extinguished by a person's death.
- d. Inheritance includes property, rights, and obligations of a
person existing at the time of death.
13. Heirs, for estate tax purposes are classified as

1, Voluntary heirs
Il. Compulsory heirs ~
Ill. Legal or intestate heirs
a. | only | c. All of the above
b. | and Il only d. None of the above
14. Heir who inherits personal property by will is known as:

a. Devisee c, Compulsory heir
b. Legatee « d. Donee
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oe Chapter 7. - Suecessiov and?Transfer Lagees
15. Which.of the following is not a compulsory heir?

a. Legitimate children and descendants, with respect to their
legitimate parents or ascendants
b. In default of letter a, legitimate parents or ascendants, with
respect to their legitimate children or descendants
c. Widow or widower
d. Relative by affinity
16. The “compulsory heirs” are classified as:

|. Primary - legitimate children and/or descendants
Il. | Secondary - legitimate paral, and/or ascendants; illegitimate —
parents
Ill. © Concurring- surviving spouse; illegitimate-children and/or
descendants
a. lonly c. All of the above
b. | and II only d. None of the above
17. A person appointed by the testator to carry out the provisions of the
will is called:
a. Administrator, c. Enforcer
b. Executor ; d. Beneficiary
Classification of Succession
18. Which of the following could legally effect transfer of properties
through succession?
a. By virtue of a will
b. By operations of law
c. By onerous transfer
d. By both “a” and “b”
19. Which among the following are the kinds of succession?

|. Testamentary or testate succession
Il. Legal or intestate succession
Ill. Mixed succession
a. | only c. All of the above
20. Succession which results from the designation of an heir, made ina
will executed in the form prescribed by law is known as:
Legal or interstate succession
_ Testamentary succession
aoc
_ Mixed succession
Ordinary succession.
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Chapter 7 - Successton au Trane Tasees
21, Which is true? Legal or intestate succession does not take place
a. If a person dies without a will, or with a void will, or one which
has subsequently lost its validity.
b. When the heir instituted is capable of succeeding.
Cc. When the will does not-dispose of all the property belonging to
the testator.
d. If the suspensive condition attached to the institution of heir
does not happen or is not fulfilled.
22. Which of the following is regarded as an intestate succession?

“a. The will is designating the State as beneficiary of the free
portion.
b. The will was subsequently rendered void by circumstances.
Cc. The will designate a part of free portion to a stranger.
d. The will disposed the legitime to its rightful heir.
Relatives by Consanguinity
23. The following statements pertain to relatives by consanguinity, except

Consanguinity is the relation subsisting among all the different
persons descending from the same stock or common ancestor.
Portion of the blood of the common ancestor flows through the
veins of all his descendants, and though mixed with the blood
_ flowing from many other families, yet it constitutes the kindred or
alliance by blood between any two of the individuals.
This relation is also known as relation by blood
IV. , Relation by consanguinity is of two kinds; lineal and collateral.
a. | and II only c. All of the above

b. 1, land IV only ~ d. None of the above
24. Which is not true about relationships?

a. The relation subsisting between son, father and grandfather, in
that order is an example of an ascending lineal consanguinity.
b. Consanguinity is the relation of persons ascending from the
same stock or common descendants.
» C. Collateral consanguinity is that which subsists between
persons who have the same ancestors, but who do not
descend or ascend one from the other.
Affinity is connection existing in consequence of a marriage
between each of the married spouse and kindred of the other.
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7 - Successton wok’Tre Tagves
Chapter
25. Which of the following statements regarding degree of relationship is

incorrect? J
a. In the direct line, ascent is made to the common: ancestor.
Thus, the child is one degree removed from the parent, two
from the grandfather, and three from the great-grandparent.
b. In the collateral line, ascent is made to the common ancestor
and then descent is made to the person with whom the
computation is to be made. Thus, a person is two degrees
removed from his brother, three from his uncle, who is the
brother of his father, four from his first cousin, and so forth.
c. Both “a” and “b”
d. Neither “a” nor “b”
26. How many degrees (of generation) apart are third cousins?
a. two Cc. Six
b. four d. eight
Intestate Successors
27. In a legal succession
a. Only full blood brothers and sisters may inherit.
b. Even half blood brothers and sisters may inherit:
c. Half blood brothers and sisters are not considered collateral
relatives.
d. Full blood brothers and sisters do not inherit.
28. Who is not an intestate heir?

a. Legitimate children/descendants
b. State ;
c. Legitimate parents/ascendants
d. Collateral relatives within the 6" degree
29. In default of testamentary heirs, the law determines who are to

succeed to the inheritance of the deceased. Which one of the
following ranks first in the order of succession?
a. Legitimated children c. Legitimate parents
b. Surviving spouse d. Illegitimate parents
30. In case where there are no relatives to receive the inheritance, who of
the following has the claim on the estate?
a. The nearest relative beyond fifth degree.
b. The closest associate or friend.
c. Any charitable institution located in the place where the bulk of
_ the estate is located.
d. The State.
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Chapter f « Sirsestinw and Transfer Cie
31: Statement 1: Compulsory: heirs include. illegitimate children.
Statement 2: In the absence of compullsory heirs, relatives to the 37

degree would inherit the estate.
. b. Statement 1 is true but statement2 is false
c. Statement 1 is false but statement 2 is true
d. Statements 1 and 2 are true -
Legitime
32. Certain parts of the estate of a deceased Filipino citizen cannot be

freely disposed of because Philippine law reserves them for the
“compulsory heirs”. This portion of the decedent’s estate is known as
a. Legitime. c. Legacy
b. Free Portion d. Bequest
33. Statement 1: In testamentary and legal succession, the compulsory

heirs are assured of their legitimes.
Statement 2: In every inheritance, the relative nearest in degree

excludes the more distant ones, saving the right of representation
when it properly takes place.
b. Statement1 is true but statement 2 is false
34. If the surviving heirs in an intestate succession are the parents and a
legitimate child of the decedent, what is the share of the parents in the
legitimes?
a. 1/3 c. 1/4
b. 1/2 d. None
35. Which of the following statement is true?

a. The sharing of heirs in intestate succession does not satisfy
the rule on legitimes.
b. The sharing of heirs in leslamantary” succession must satisfy
the rules on legitimes.
c. Acompulsory heir cannot receive more 5 than his legitimes.
d. There cannot be disinheritance for compulsory heir.
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Ckapler 7 - Successtow Bik’ Trans cr" Cages
36. Statement 1: Under the law on legitime, if the only survivor is the
widow. or widower, she or he shall be entitled to one half of the
~ hereditary estate of the deceased spouse, ang the testator may freely
dispose of the other half
Statement 2: Legitimate and illegitimate child has equal share under

intestate distribution of estate.
37. Statement 1: A free portion of the estate could be transferred to

compulsory heirs by virtue of a will.
Statement 2: The surviving spouse is always entitled to his or her
legitime that varies according to the number and classes of the other
surviving compulsory heirs.
'b. Statement 1 is true but statement 2 is false
c. -Statement1 is false but statement 2 is true
38. Statement 1: The presence of children does not disqualify parents to

inheritance.
E Statement 2: The rules on legitime are substitute for testamentary
dispositions.
Will
39. Statement 1: 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 upon his death.
Statement 2: A “codicif’ is a supplement or an addition to a will, made
after the execution of a will and annexed to be taken as a part thereof,
by any disposition made in the original will is explained, added to, or
altered.
a. Statements1 and 2 are false’
Cc. Statement 1 is false but statement 2 is true
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Chapter T's Si UCCESSLON 3 TraMUS] CT Lagees
40. No Will shall be revoked, except

a. By implication of law
b. By some will, codicil, or other writing executed as provided in
the case of wills.
c. By burning, tearing, canceling, or obliterating the will with the
intention of revoking it, by the testator himself, or some other
person in his presence, .and by his express direction. -
d. All ofthe above
41. Which of the following is a VALID will?

a. That which reduces the legitime of compulsory heirs.
b. That which increase the share of one-heir without impairing the
legitimate of the other heirs.
c. That which transfer the legitime of one heir to the other heir.
d. That which impair the legitimate of compulsory heirs.
42. Probate of a will involves the following processes, which one is not?
a. Collecting the decedent's estate. ‘
b. Liquidating liabilities and paying necessary taxes.
c. Distributing property to the heirs
d. Collecting the heir’s estate.
43. Mr. Mhalapit Nha executed a second will three months after he
executed the first one. The second will is silent as to the first will.
What effect does the second will produce?
a. The second will is void because he waived his right tto revoke
‘the first will.
b. The first will is automatically revoked because of the existence
of a subsequent will.
c. The second will annul provisions of the first will that are
inconsistent with the second will.
d. The first will shall subsist over the second will because it is the
original will.
44. In which.of the following cases is a will invalid?

a. When no heir has been instituted.
b. When the will was executed in a language not known to the
testator.
_c. When the institution does not cover the entire estate.
'd.. When the instituted heir is incapacitated to succeed.
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Chapter 7 ml Suecesston na MUST CT Tages
45. Which of the following is not a valid will?

a. That which increases the legitime of a compulsory heir.
b. That which transfers the portion of legitime to other ©
successors other than compulsory heir(s).
c. That which reduces the free portion of the estate tax.
d. That which transfers a part of free portion to a compulsory |
heir.
i
46. Statement 1: The making of a person’s will may be left in part to the —
discretion of a third person.
Statement 2: Persons of either sex under eighteen years of age |

cannot make a will.
47. A testator may execute a holographic will instead of an ordinary will.

Which among the following statements pertaining to holographic will is
false? ©
|. A person may execute a holographic will which must be
entirely written, dated and signed by the hand of the testator
himself.
ll. A holographic will is subject to no other form, and may be
made within or outside of the Philippines, and need not be
witnessed.
lll. In case of any insertion, cancellation, erasure or alteration in a
holographic will, the testator must authenticate the same by
his full signature.
a. Il only c. All of the above
b. Ill only d. None of the above
48. Choose the incorrect statement from the following:

|. If a compulsory heir is given by will, less than his legitime, the
provisions of the last will and testament should not be modified
in such a way that he will receive his legitime,
ll. | Compulsory heirs have rights to insists that the legitime be
given in the form of a property. '
lll. The property left by the decedent without a will shall be
transferred in favor of the government.
a. | only c. | and Il only
b. Il only d. |, Il and Ill
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Chapter 7 - Successton ok Toaasfe Lawes
Disinheritance
49. It deprives an heir to inherit properties by the decedent through the

issuance of a will.
a. Disinheritance c. Legitimate
b. Distributable share ‘d. Disqualification
50. The following are causes of disinheriting a child. Which one is not?
a. When a child has been found guilty of an attempt against the -
life of the testator.
b. When a child has been convicted of adultery or concubinage
with the spouse of the testator.
C: When a child marries a person other than the testator’s
choice.
d. When a child leads a dishonorable or disgraceful life.
51. The following are causes for disinheriting a spouse, which one is not?
a. When the spouse justifiably refuses to support the children or
the other spouse.
b. When the spouse has accused the testator of a crime for
which the law prescribes imprisonment for six years or more,
and the accusation has been found to be false.
When the spouse by fraud, violence, intimidation, or undue
influence causes the testator to make a will or to change one
already made.
d. When the spouse has given cause for legal separation.
52. Which is not true about an inheritance?

a. The acceptance of an inheritance may be express or tacit.
b. The express acceptance of an inheritance may be made in a
public or private document.
Cc. An heir may accept or repudiate an inheritance.
d. The inheritance or repudiation of an inheritance takes effect
upon inheritance or repudiation.
Representation
53. Statement 1: Representation is a right created by fiction of law by

virtue of which the representative is raised to the place and degree of
the person represented and acquires the rights which the latter would
have if he were living or if he could have inherited.
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Chapter 7 - Succession BergTreas Tae .
Statement 2: \|f a compulsory heir dies ahead of the testator, his

legitime goes to the child by representation.

d.. Statements 1 and 2 are true
54. Statement 1: The right of representation takes place in ae direct

descending line, but-never in the ascending line.
Statement 2: The child of a voluntary heir who predeceases the

testator gets nothing, because there is no. representation among
_ voluntary heirs nor in the free portion. :

c. Statement1 is.false but statement 2 is true
d. Statements 1 and2 are true
55. Which is not authorized to take charge: of the estate during intestate
period?
a. Executor : c. Administrator
b. Court -° d. Heirs
32
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| Clepir 2 3
Gross Estate
. The first estate tax law in’ the Philippines is embodied in

Act 2601 which took effect on July 1, 1916. It imposes graduated
estate tax rates computed on net inventoried property left by a
decedent. It was subsequently amended by the Revised
Administrative Code of the Philippines imposing upon “every
transmission by virtue of inheritance, devise, bequest, gift mortis
causa, or advance in anticipation of inheritance, devise or
bequest.” Since then, several laws were introduced to amending
Act 2601.
RA 8424 also known as “Tax Reform Act” or the National

Internal Revenue Code (NIRC) Effective .Jan.1, 1998 further
restructured the tax base and rates of both estate and donor's
taxes in addition to allowing the deduction of medical expenses
from the gross estate. Bulk of the estate tax law aside from
determining the tax base and rates which are found in NIRC are
embodied in the Civil Code and Family Code of the Philippines.
The recent amendment to Estate Tax law was introduced

by. RA 10963, or the “Tax Reform for Acceleration and Inclusion
(TRAIN) Act” which took effect on January 1, 2018. It substantially
amended the estate tax law by getting rid of the use of graduated
tax rate and changed it to a single rate of 6% of the net taxable
estate as well as revising the thresholds for Standard Deduction,
Family Home and other.amendments such as repealing funeral
expenses, judicial expenses and medical expenses.
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Olapter gfe Gross Estate |
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 tendered 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 rgnitato 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.
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The Book
Chapter a = Gross Estate
Classification of Decedents and Composition of Gross Estate
For estate taxation purposes, decedents are classified into three

(3); citizens, resident aliens and nonresident aliens.
Section 85 of the Tax Code provides 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 éstate which is situated in the Philippines
shall be included in his taxable estate. The composition of the estate may
be summarized as follows:
TABLE 2-1: Composition of ES Estate based on citizenship and

DECEDENT GROSS ESTATE
» Citizen 1) Property (Real or Personal) wherever situated
= Resident alien 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.
RECIPROCITY CLAUSE (Section 104 of the Tax Code, as amended)
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.
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CG,lapler 2 Poa - Gross Fhvky
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, such
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 “WITHIN” THE PHILIPPINES
Section 104 of the Tax Code enumerates the following intangible personal
property with situs in the Philippines, for estate tax purposes: -
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 Location of the property
Tangible personal property
» — Shares, franchise, Where the intangible is exercised regardless of
copyright, and the like. where the corresponding certificate is stored
= Receivables Residence of the debtor
= Bank deposit Location of the depository bank 2
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Chapter ae Gross Estate
ILLUSTRATION 1:
Anonresident alien decedent left the following estate:
House and Lot - Hongkong, inherited before marriage P15,000,000

Car, acquired during marriage in Cebu 1,500,000
Shares of stocks issued by a foreign corporation, 20% of its
operation is in the Philippines 250,000
\ Bank deposit with PNB branch in New York, New York
representing income earned during marriage 500,000
Shares of stocks issued by PLDT group of companies, a 500,000
corporation organized under Philippine laws
5-year, 12% promissory note, received 2 years ago, during
marriage. The debtor is a resident of Q.C. 500,000
Case A: Assume there is no reciprocity, what is the correct value of the gross estate?
**
oe Answer: P2,620,000
Solution:
Car, acquired during marriage in Cebu P1,500,000
Shares of stocks —- PLDT 500,000
5-year, 10% Promissory Note 500,000
Interest income (P500,000 x 12% x 2) 120,000
Gross Estate P2,620,000
» The shares of stock issued by a foreign corporation (20% of its operations 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.
37
The
:)
ILLUSTRATION 2:
From the list of properties shown below, determine the following:
1) Situs of the Property
2) Whether or not the property is included in the decedent's gross estate.
Composition of Gross Estate

: Citizen NRA
or ithout
em
No. | PARTICULARS SITUS | Resident Le Sai
1 Parcel of Land — Makati
|
2 Parcel of Land — Bali, Indonesia
|
3 House and Lot (Family Home) - Taguig_
|
4 RestHousé - Batangas
|
5 Rest House —-Palawan
|
6 Rest House — Malaysia
|
7 Cars-Philippines
|
8 Cars—Abroad
|
—=
9 BPI Deposit-Philippine branch
|
10 BPI Deposit-U.S. branch
|
41. ABN Amro Bank (Foreign bank) -
|
Philippine Branch
42 | ABN Amro Bank (Foreign bank) — London
Branch
13 | Receivables-debtor from Philippines
44 | Receivables-debtor from Canada
15 | Shares of stocks of domestic corporations. :
The certificates are stored in the
| Philippines
16 | Shares of stocks of domestic corporations.
j The certificates are stored abroad
17. | Shares of stocks of foreign corporations. oH

Philippines 23)
18 | Shares of stocks of foreign corporations.
The certificates are stored abroad =
19 | Shares of stocks of foreign corporations,
90% of its operations is in the Philippines aie
20 | Shares of stocks of foreign corporations,
80% of its operations is in the Philippines
21 | Shares of stocks of foreign corporations
which acquired business situs in the
Philippines
22 | Patents and copyrights sated in the eit
Philippines
23 _| Patents and copyrights exercised abroad ae
38
I,
The
GROSS ESTATE
Citizen NRA
No_ms | PARTICULARS| Ht vi
SITUS | Resident | Reciprocity | Reciprocity
Without
1 | Parcel of Land - Makati Within | Include Include Include
2 | Parcel of Land — Bali, Indonesia Wo Include Exclude Exclude
3 | House and Lot (Family Home) — Taguig Within | Include Include Include
4. | Rest House -Batangas Within | Include Include Include
. 5 | Rest House -Palawan Within | Include Include Include _
6 | Rest House — Malaysia Wio Include Exclude Exclude|
7. | Cars-Philippines Within | Include Include Include
8 | Cars —Abroad Wio Include Exclude Exclude _
9 | BPI Deposit-Philippine branch Within | Include Exclude Include
10 | BPI Deposit-U.S. branch - W/o Include Exclude Exclude
11. | ABN Amro Bank (Foreign bank) - Within | Include .| Exclude Include
Philippine Branch
12 | ABN Amro Bank (Foreign bank) —- London W/o Include Exclude Exclude
Branch
13 | Receivables-debtors from Philippines Within | Include Exclude | Include
Wio Include Exclude | Exclude
14 | Receivables-debtors from Canada _-
Include Exclude Include
15 | Shares of stock of domestic corporations. | Within |
Philippines -
of domestic corporations. | Within | Include Exclude Include
46 | Shares of stock
4
The certificates are stored abroad
of foreign corporations. Wlo Include | Exclude Exclude
17 | Shares of stock
Philippines _
Wio Include Exclude Exclude
18 | Shares of stock of foreign sarporations,
The certificates are stored abroad |
Within | Include Exclude Include
19. | Shares of stock of foreign corporations,
90% of its operations is in the Philippines
W/o Include Exclude Exclude
20. | Shares of stock of foreign corporations,
80% of its operations is in the Philippines __ # [is cee ee
Within | Include Exclude Include
21. | Shares of stocks of foreign corporations
which acquired business situs in the
Philippines
~| Within | Include Exclude Include
22. | Patents and copyrights exercised in the
Philippines ncSwernen
23. _| Patents and copyrights exercised abroad W/o Include | Exclude | Exclude
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Valuation of Gross Estate (as amended by RA10963; RR 12-2018)
The estate of the décedent shall be appraised at its fair market value
at the time of his death. Since succession and the accrual of the
corresponding estate tax takes effect upon 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 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 (also known as
assessed value or FMV for real estate tax
purposes).
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 pershare
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 2-2003/ RR 12-2018).
5. Units of The bid price nearest the date of death published

participation. in in any newspaper or publication for general
any association, circulation.
recreation or
amusement club
(ie.,golf, polo,
similar clubs)
6. Right to usufruct, In accordance with the latest Basic Standard
use or habitation, Mortality Table taking into account the probable life
and annuity of the beneficiary, to be approved by the Secretary
of Finance upon recommendation of the Insurance
Commissioner [Section 88(A)-NIRC].
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Gross Estate
‘| 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: P3,000,000
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: P2,400, 000, Principal amount plus interest of 10% for 2 years
CaseC: ,
The decedent devised to his sons a 1,000 square meter lot in Global City,. Taguig with the
following valuation:
Fair value as determined by city assessors ~ P20,000/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 x P20,000)

The higher between the fair value as determined by city assessors and the zonal
value as determined by the Commissioner of Internal Revenue (CIR)
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
Book value per share of Alpha Company multiplied by the number of shares held
by the decedent at the time of death
P10M + 5M
1,000,000 shares X . 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 per share
Lowest quotation P200 per share
Book value P350 per share
“+ Answer: P5,000,000 —_[40,000sh. x ((800+200)/2)}
41
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Gross Estat
EXEMPTIONS AND EXCLUSIONS FROM THE GROSS ESTATE
The following shall be excluded fron the gross estate of a decedent:
A. Exclusions under Sections 85 and 104 of the Tax Code
1. Exclusive property of the surviving spouse [Sec. 85(H)}.
The gross estate in case of married decedents, is composed of:

« Exclusive properties of the decedent; and
* 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 (Article 135 of the Civil Code). Whether such property
is exclusive or common will depend on the type of property
relations or marriage settlement of the husband and wife.
Marriage settlements are discussed in Chapter 4 of this book.
2. Property outside the Philippines of a non-resident alien decedent

(Sec. 85 and 104). 3
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
the gross estate of a nonresident alien decedent.
3. Intangible personal property in the Philippines of a non-resident

alien under the Reciprocity Law.
Section 104 of the Tax Code expressly provides that

“intangible” personal property in the Philippines of a nonresident
alien decedent shall be excluded from the gross estate if there is
reciprocity.
42
The
The Book
Gross Estale
B. Exclusions under Section 87 of the Tax Code

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 1° heir) or legatee to the
fideicommisary (also known as the 2" 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 “Transfer under 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.
THE MERGER OF USUFRUCT IN THE OWNER OF THE NAKED TITLE
The decedent in this particular case (known as donee-decedent or

current decedent) only received from the prior decedent (donor-decedent
or prior decedent) usufruct over the latter's property. Usufruct pertains
only to the right or privilege to enjoy the use and advantages of another's
property. Thus, the current decedent is not considered the owner of the
property. Consequently upon his death, the usufruct will be merged to the
owner of the naked title, the intended beneficiary of the property.
ILLUSTRATION 4:
In the last will and testament of Mr. Yumao, he assigned the usufruct of one of his
parcels 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 current decedent), the
parcel of land should be “excluded” in his gross estate because he is not the
intended owner/beneficiary of the land but his son, Pedro. Upon Juan's death, there
will be merger of usufruct in the owner of the naked title (Pedro). Meaning, Pedro will
be entitled to both the usufruct and ownership of the naked title upon Juan's death.
43
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The Book
Gross Estat»
"Merger of usufruct in the owner of the naked title

Sant) Juan (1 heir) Pedro (2" heir)
Mr. Yumao devised his
See * Usufructuary but | = The intended owner

JPN not the Intended of the land
Pp e eae owner of the land (naked title)
Naked ownership to = The usufruct will be
Pedro and usufruct to
Juan for as long as merged to his naked
Juan lives title upon Juan’s
death
' = +in GE upon death Excluded in GE * +in GE Subject to

= Subject to Estate Tax f= Not Subject to Estate Tax
Estate Tax
TRANSMISSION FROM THE FIRST HEIR, LEGATEE OR DONEE IN

FAVOR OF ANOTHER BENEFICIARY (Also known as 2nd Heir), IN
ACCORDANCE WITH THE DESIRE OF THE PREDECESSOR
(Also known as Transfer under Special Power of Appointment)
f
ILLUSTRATION 5:
In the last will and testament of Mr. Yumao, he devised a parcel of land to Juan but
with a condition that such property should be given to Pedro upon Juan's death.
Thus, the parcel of land is intended to be inherited by Pedro, not Juan. Juan is
acting only as a trustee or fiduciary until such time that the property is transferred to
Pedro. Upon Juan's death, the parcel of land should be “excluded” in his gross estate
simply because he is not the owner of the property.
In the illustration provided, Juan only received the parcel of land

under a Special Power of Appointment (SPA) from Mr. Yumao, the
prior decedent/predecessor or also known as the donor of the power
or donor-decedent. Thus, Juan is known as the donee-of the power or
donee-decedent or current decedent.
Special Power of Appointment exists when the donee-decedent

(Juan) can appoint only from a restricted or designated class of
persons other than himself. In the problem above, Juan is restricted
to transfer such property only to Pedro, in accordance with the desire
of the Predecessor (Prior Decedent or Donor-Decedent). 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.
The
The Book
Gross Estate
Special Power of Appointment

Mr. Yumao Juan (1" heir) Pedro (2"¢ heir)
Mr, Yumao devised = The parcel ofland = Theintended —

his parcel of land as is not intendedfor beneficiary of Mr.
fey le ES Juan . Yumao.
" Actingonlyas —
To Juan, thereafter trustee/fiduclary
to Pedro, upon of Pedro
Juan’s death
* +inGE ‘SERRE Mies

* Subject to Estate Tax = Not Subject to * +In GE upon death
Estate Tax ® Subj. to Estate Tax
TRANSMISSION ‘OR DELIVERY OF THE INHERITANCE OR LEGACY

BY THE FIDUCIARY HEIR/LEGATEE (Also known as the 1st heir) TO
THE FIDEICOMMISARY (Also known as the 2nd heir).
ILLUSTRATION6:
Using the same information in the immediately preceding illustration (Illustration No.
5) and assuming further that Juan is the father of 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 fideicommissary substitution.
Upon the death of Mr. Yumao, the parcel of land should be included in his gross
estate. However, upon thd death of Juan, the parcel of land should be “excluded” in
his gross estate because Juan is acting only as the trustee of Pedro.
Fideicommisary transfer of property is in substance, the same with transfer of

property received under Special Power of Appointment (SPA), except that the
relationship of the 1st heir and the 2nd heir should not be more than one (1) degree
apart (Refer to Illustration #7 of Chapter 1 for the determination of degree of
relationship),
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.
45
ittat
The
es Gross Estute
C. Exclusions under Special Laws

4. 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 (RA1792).
3. Amounts received from. Philippines and United States
governments for war damages (RA227).
4. Amounts received from United States Veterans Administration.
5. Payments from the Philippines of US government to the legal heirs
of deceased of World War II Veterans and deceased civilian for
supplies/services furnished to the US and Philippine Army
(RA136).
6. Retirement benefits of omcials/emproyees of a private firm
(RA4917).
7. Personal Equity and Retirement Account (PERA) assets of the
decedent-contributor (Sec. 14, RA 9505 — Personal Equity and
Retirement Account Act of 2008).
8. Compensation paid to private and public health workers who have
contracted COVID-19 in case of death, the said amount shall not
be included as part of the gross estate of the decedent subject to
estate tax as provided under Republic Act No. 11494 or. the
"Bayanihan to Recover as One Act".
COMPOSITION OF THE GROSS ESTATE
Generally, gross estate consists of all the property owned by a

decedent or which the decedent had an interest at the time of death, such
as:
* Real property.
« Personal tangible property
« Intangible personal property (shares of stocks,
Shares of stock
QLNANNAN
Bank deposit
Dividends declared before his death but received after death.
Partnership profit which have accrued before his death,
Usufructuary & rights
46
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Gross Estale
- Section 85 of the Tax Code enumerates the composition of the Gross

Estate.
|. Property owned by the decedent that are 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.
Decedent's Interest [Sec. 85(A)]
The Tax Code provides that Decedent's Interest to the extent of

the interest therein of the decedent at the time of death shall be
_included in the gross estate. .
Decedent 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).
ll. | Property NOT PHYSICALLY IN THE ESTATE but are still subject to
payment of estate tax.
These properties have already been transferred during the lifetime

of the decedent, however, such properties shall still form part of his
gross estate because the transfers were either intended to take effect
only upon his death or does not actually convey full ownership over
_ the property transferred.
a. Transfers in Contemplation of Death [Sec. 85(B)]
The Tax Code, as amended, provides:
To the extent of any interest therein of which the decedent has at

any time made a transfer, by trust or otherwise, in contemplation of or
intended to take effect in possession or enjoyment at or after death, or of
which he has at any time made a transfer, by trust or otherwise, under
_which he has retained for his life or for any period which does not in fact
end before his death (1) the possession or enjoyment of, or the right to the
income from the property, or (2) the right, either alone or in conjunction with
any person, to designate the person who shall possess or enjoy the
property or the income therefrom; except in case of a bonafide sale for an
adequate and full consideration in money or money's worth.
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' 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. Included within this concept is donation mortis
causa.
The gross estate shall include the value of property

transferred by the decedent during his lifetime in anticipation
of his death (transfer in contemplation of death) such as:
1) Transfer of property in favor of another person, but the
transfer was intended to take effect only upon the
transferor’s death.
2) 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 enloy the
income.
3) Transfer with retention or reservation of certain rights. The
decedent had transferred his property during his lifetime, -
but retained for himself beneficial enjoyment of the thing or
the right to receive income from the same.
Section 85° of the Tax Code, as amended, provides

that there is no transfer in contemplation of death when the
transfer of property is a bonafide sale for an adequate and full
consideration in money or money's worth.
b. Revocable Transfers [Sec. 85(C)]
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. Section 85(C) of the Tax Code, as
amended, provides:
(1) To the extent of any interest therein, of which the decedent has at any
time made a transfer (except in case of a bonafide sale for an
adequate and full consideration in money or money's worth) by trust
or otherwise, where the enjoyment thereof was subject at the date of
his death to any change through the exercise of a power (in whatever
capacity exercisable) by the decedent alone or by the decedent in
conjunction with any other person (without regard to when or from
what’ source the decedent acquired such power), to alter, amend;
revoke, or terminate, or where any such power is relinquished in °
contemplation of the decedent's death.
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(2) For the purpose of this Subsection, the power fo alter, amend or
revoke shall be consideréd to exist on the date of the decedent's
, death even though the exercise of the power is subject to a precedent
giving of notice or. even. though -the alteration, amendment or
revocation takes effect only on the expiration of a stated period after
the exercise of the power, whether or not on or before the date of the
decedent's death notice has been given or the power has been
exercised. In such cases, proper adjustment shall be made
representing the interests which would have been excluded from the
power if the decedent had lived, and for such purpose if the notice has
not been given or the power has not been exercised on or before the
date of his death, such notice shall be considered to have been given,
or the power exercised, on the date of his death.
|
ILLUSTRATION
7:
Case A:
Ahigh ranking official realized that due to the nature of his illness, age and the pressure
| brought about by the various legal cases filed against him, death might not be that far.
_Hence, he gratuitously transferred most of his properties to his children while still alive.
Should the properties transferred be included in the gross estate of the decedent-
transferor upon his death?
=» Answer: Yes
The properties transferred should be included in the estate of the decedent because the
transfers were intended to take effect upon his 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: PO.
The transfer was not intended to take effect upon his death but during his lifetime, thus,
it should be treated as a “donation inter-vivos” rather than inheritance (donation mortis-
~ causa). The transfer is subject to donor's tax instead of estate tax.
Case C:
Due to an unstable medical contin, Pedro fhowoti that it is only proper for him to
gratuitously transfer his properties to his love 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? ;
49
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“> Answer: P250,000,000. Gl

The transfer is a donation mortis causa intended to take effect at the time of the
decedent’s death. It is the thought of death, as a controlling motive which induces the
disposition of the property. The fair market value of the property at the date of the
actual transfer should be ignored.
Case D:
Pedro transferred all his real properties worth P10,000,000 to Juan, in trust for Boy,
Juan's legitimate minor son. Pedro reserved his right to terminate the transfer anytime.
Question 1:
What amount should be included in Pedro's gross estate upon his death?
“* Answer: P10,000,000.
Question 2:
Assume Juan subsequently died a year after Pedro's death, what amount should be
included in Juan's gross estate?
“* Answer: PO
The transfer is revocable on the part of the testator (Pedro). A revocable transfer does
not actually convey ownership over the property transferred because it may be revoked
anytime by the testator (regardless of whether the right to revoke was exercised).
c. Transfers under a General Power of Appointment [Sec. 85(D)]
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”. It is considered “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 (SPA) 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 SuSeLRE He in illustration #5, #8 Case B and Page
45.
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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.
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 8 - GENERAL POWER OF APPOINTMENT (SPA):

In the last will and testament of Mr. Yumao, he devised a parcel of land located in
Batangas to Juan, with the power to appoint any person he pleases. Juan decided to
transfer the property to Pedro through his last will and testament.
In this illustration, Juan received the property under “General Power of Appointment
(GPA)”. GPA exists 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.
Mr. Yumao = .Donor of the power
= Predecessor/ Donor-decedent
Juan = Donee of the power or ‘st heir
« — Current decedent / Donee-decedent
Parcelofland = Appointed property
General Power of Appointment

Mr. Yumao PO TTET Me hada C-ilg betl ate eet lLg
Mr. Yumag
devised his parcel
of land as follows:
To Juan,
thereafter to
anyone
® +In GE upon death = +InGE _ © +InGE

= Subject to Estate Tax = Subject to = Subject to Estate
Estate Tax Tax
51
The
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a,
ILLUSTRATION
9:
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: 2s
Should the property be included in the determination of Manny's gross estate?
_% Answer: Yes
Question 3:
Should the property be included i in1 Nonito S gross estate?
“> Answer: Yes
The donee of a general power of appointment holds the appointed property with
ail the attributes of ownership. Thus, the appointed property shall form Rar 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
Special power of appointment exists when the donee can appoint only from a
. restricted or designated class of persons other than himself. In the case
provided, no other person ‘Should inherit the ‘property left by Manny but
Boomboom.
Question 2: Should the ropa be included iin ay s gross estate?

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

** Answer: No ,
The donee of the power (Nonito) only holds the property in trust. The intention of
Manny is to transfer the property to Boomboom not to Nonito. Consequently, the
property transferred by Manny should be excluded in Nonito’s gross estate.
52.
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d. Transfers for Insufficient Consideration [Sec. 85(G)]
When a sale or transfer (other than a bonafide 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):
** FMV of the property at the time of sale or transfer.

This is use 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. |f 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 consideration received 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, Donor’s tax is discussed in
Chapter 6. The above rules on insufficient consideration are
summarized in Table 2-3 below:
53
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Table 2-3: Rules on insufficient consideration
Consideration => FMV at the mum» Bonafide sale. Excluded from the
time of transfer. decedent's gross estate.
Consideration < FMV at the mamm» Insufficient consideration.

time of transfer. Include in the gross estate the
. excess of FMV @ the time of
death over the consideration
? received.
Sale was made in the omni Bonafide sale regardless of the

ordinary course of trade amount of consideration.
No consideration received samme Either donation mortis causa

(subject to estate tax) or donation
inter-vivos (subject to donor's tax).
ILLUSTRATION 10:
CASEA
On January 2023, Juan sold for P5,000,000 an spati waite 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 2023. 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 carying 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 af the time of death was P4,000,000?
“+ Answer: PO.
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: PO. — The sale or transfer is a result of a bona fide sale
54
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CASE B
On January 2023, 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 2023. 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: PO
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 bonafide 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: PO. The fransferis subject to donor's tax, not estate tax
lil. MISCELLANEOUS ITEMS

a. Claims against insolvent persons (Sec. 85)
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 claim 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 11:
CASEA
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: the entire amount of the claim, P5,000,000.
Question 2: How much is the deduction from the gross estate of Juan?
“+ Answer: PO.
2
55
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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: PO.
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 Ciaims
Collectible= P6M/P10M x P5M = P3,000,000
Uncollectible= P5M— 3M= P2,000,000
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= P2,500,000
Uncollectible= P5M— 2.5M = P2,500,000
b. Proceeds of life insurance [Sec. 85(E)]

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:
1. It must be an insurance on the life of the decedent; and
2. The beneficiary must be either of the following;
o His estate or executor/administrator (revocable or not)
o Any third person (other than’ estate oF
administrator/executor) provided that the designation is not
- irrevocable
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ww
Gross Estate
lf the policy does not expressly say that the designation of the
beneficiary is irrevocable, then it is presumed to be revocable.
Also, proceeds of life insurance under.a group insurance taken by
the employer are not subject to estate tax.
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 (RA 10607)
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. Notwithstanding the foregoing, in
the event the insured does not change beneficiary during his
lifetime, the designation shall be deemed irrevocable.”
TABLE 2-4. PROCEEDS OF LIFE INSURANCE (Taken out

by the!Decedent)* ”
Beneficiary Designation Gross Estate
Estate Revocabie or Irrevocable. Included
Executor Revocable or Irrevocable ~ Included
Administrator Revocable or Irrevocable Included
3° Party (i.e. wife) Revocable Included
3% Party (i.e. wife) Irrevocable Excluded
a8 Exclude proceeds from SSS and GSIS as provided by law.
ILLUSTRATION 12:
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’ 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 i in the gross estate of Pedro upon his
death?
“Answer: No
57
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Gross Es latte
—,
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 benef iciary 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.
ESTATE TAX RATE
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, as amended, should be subject to the estate tax. Beginning
January 1, 2018 or upon the effectivity of RA 10963, otherwise known as
the “Tax Reform for Acceleration and Inclusion Act” (TRAIN Law), the net
estate of every decedent, whether resident or non-resident of the
Philippines, 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.
Filing of Estate Tax Return and Payment of Estate Tax Due
The Tax Code, as amended, provides that 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).
FILING and PAYMENT:

* Primary responsibility to file and pay — Executor or
~ administrator;
* Secondary responsibility to file and pay — any of the heirs
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
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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
Section 90(B) of the Tax Code, as amended, provides that the

estate tax return is required to be filed within one (1) year from the
decedent’s death. 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.
The period allowed to file the estate tax return shall be

distinguished from the “accrual” date of the estate tax due. The
accrual of the estate tax is distinct from the obligation to pay the same
[(RR 2-2003); (Lorenzo vs. Posadas, 64 Phil. 353)}. As discussed in
page 1, the estate tax due “accrues” immediately at the time of death.
The one-year time of filing is the allowable period of filing the return
without incurring surcharge/penalty and interest.
EXTENSION of Time to File the Estate Tax Return
Under Sec. 90(C) of the Tax Code, “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 for filing the return”. The application for the
59
The
irs | Gross Estate
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 (Pay as File system) by the
executor, administrator, or the heir(s). Consequently, the estate tax
due may be paid within the one-year Period allowed to file the estate
tax return.
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
case the 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 furnisha 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.
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Payment of Estate Tax by installment and partial disposition of

estate (RR 12-2018 as amended by RR 8-2019)
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, using the payment form
(BIR Form 0605) or a payment form dedicated for this transaction
for succeeding .installment payments after filing the first (1%)
payment through 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;
61
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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 approved by the Commissioner or
his duly authorized representative.
PLACE OF FILING THE RETURN
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.
PLACE OF FILING THE RETURN
In case of a non-resident decedent, whether non-resident citizen or

non-resident alien, with executor or administrator in the Philippines, the
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Gross Estale
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, not withstanding, 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
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, using the payment form (BIR Form 0605) or a payment form
dedicated for this transaction for Succeeding installment payments after
filing the first (1') payment through the estate tax return.
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Gross Estate
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 shall be computed on the unpaid amount of tax from
the date computed until fully paid (20% prior to TRAIN Law; 12% upon
effectivity of the TRAIN Law).
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 Philippinés 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.
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ae CHAPTER EXERCISES zs
PROBLEMS
P2.1.
A decedent taxpayer died leaving the following:
Family home (land and residential pascal in the P8,000,000

Philippines
Parcel of land with vacation house in Malaysia 5,000,000
Farm land in the Philippines, with a mortgage in favor of: 3,000,000
the Philippine National Bank for 600,000
Shares of stock of a domestic corporation 2,000,000
Shares of stock of a foreign corporation, the entire 500,000
- business of which is in the Philippines
Receivable from a friend who has no property 300,000
whatsoever
Receivables under the following insurance policies:

« Life insurance policy, taken by the decedent on 200,000
his own life, with his estate as revocable
beneficiary
« Life insurance policy, taken by the decedent on 300,000
his own life, with his Rauahites as revocable
beneficiary
2 Life insurance policy, taken iy the decedent on 600,000
his own life, with his son as irrevocable
beneficiary
« _ Life insurance (group) taken by the employer of 150,000
the decedent, with the estate as revocable
beneficiary
REQUIRED:
Determine the correct Gross Estate assuming the decedent was:
1. Aresident citizen
2. Resident alien
3. Non-resident alien with reciprocity
4. Non-resident alien without reciprocity
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Okepler 2 — Estate Lae
P2.2.
The decedent devised to his four (4) children separate parcels of land with
the following data:
TO JUAN, 1,000 square meter lot in Sampaloc, Manila with the
following
following valuation:
* Assessed value determined by the City of Manila,
P25,000/sq.m.
= Zonal value as determined by the CIR, P18,000;000
» FMV as determined by independent assessors, P20,000,000
TO PEDRO, 1,000 square meter lot in Q.C. with the following
valuation:
= Assessed value determined by Q.C., P15,000/sq.m.
= Zonal value as determined by the CIR, P18,000,000
= FMV as determined by independent assessors, P20,000,000
TO MARIA, 1,000 square meter lot in Makati with the following
valuation:
» Assessed value determined by the City of Manila,
P15,000/sq.m.
= FMV as determined by independent assessors, P20,000,000
REQUIRED: Determine the gross estate of the decedent
P2.3.
Pedro owns various shares of stock from different companies during his
lifetime. At the time of his death, the following details were provided to
you by his administrator:
100,000 shares of Frozen Company's ordinary shares, not traded
= Outstanding shares - 800,000 shares; P10 par
« Retained Earnings - P3,000,000
100,000 shares of Divergent Company's ordinary shares, listed shares
« Outstanding shares - 1,000,000 shares; P10 par
« Retained earnings - P5,000,000
« Mean value of the shares in the stock exchange - P15
100,000 shares of Lenovo Company's ordinary shares, listed shares
« Outstanding shares - 1,000,000 shares; P10 par
* Retained earnings - P5,000,000
« Mean value of the shares in the stock exchange- P12
REQUIRED: Determine the gross estate of Pedro
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Chapter a — Eskile Lie
P2.4. For each of the following independent cases, determine the value of
the property in the gross estate:
Le A parcel of land inherited from the father was acquired by the
decedent's father then for a cost of P250,000. Upon inheritance,
the fair market value was P200,000 as shown in the schedule of
values from the Assessor's office and P230,000 as determined by
the office of the BIR Commissioner.
A property, acquired for P1,000,000, was transferred in
contemplation of death for a consideration of P100,000. Fair
market value at the time of transfer, P1,500,000, while at the time
of death, P1,200,000.
A property, acquired at a cost of P1,000, 000, was transferred in
contemplation of death for a consideration of P1,200,000. Fair
market value at the time of transfer, P1,500,000, while at the time
of death, P1,200,000.
The decedent was about to present to his girlfriend a brand new
car worth P5,000,000 cash. Installment price is valued at —
P6,000,000. on his way to meet his girlfriend, he met a car
accident and died.
On January 1, 2020; Pedro granted a loan worth P1,000,000 to
Juan, due on January 1, 2022. The latter executed a promissory
note with an annual interest of 10%. Pedro died on June 30,
2021.
(MODIFIED) IDENTIFICATION:
Exercise A (Inclusions and Exclusions)
Determine whether the following is included or excluded from the gross
estate.
indluded Excluded
1, Transfer with reservation of certain
rights
Transfer for insufficient consideration
Transfer for an adequate and full

consideration in money's worth
Transfer in contemplation of death

Insurance proceeds from SSS and
GSIS
Proceeds of group insurance taken

out by a company for its employees.
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Chapter 2 ~ Estile Tar
a,
7. Transfer from the first heir to the

second heir designated by the
_ predecessor.
“8. Donation to the national .

government
» 9. Merger of usufruct in the owner of

the naked title «
10. Legacy to a charitable institution

whose administrative expenses did
not exceed 30% of the legacy
Exercise B (Insufficient Consideration)

Determine the amount to be included in the Gross Estate of the Transferor-
Decedent from the following independent cases:
Inclusion in the
Particulars: _. Gross Estate (P)
1. FMV atthe time of Transfer P5,000,000
FMV at the time of Death 6,000,000
Consideration received 5,000,000"
Answer:

FMV at the time of Death - 6,000,000
Consideration received 6,000,000

FMV at the time of Death - » 6,000,000
4, FMV atthe time of Transfer P5,000,000

_ FMV at the time of Death 6,000,000
5. FMV at the time of Transfer P5,000,000

FMV at the time of Death 6,000,000
Consideration received nil
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Chapter < — Eskite Tage
Exercise
C (Proceeds of Life Insurance Premium)
Determine the amount that should be included in the gross estate:
fl Inclusion in the
Particulars: Gross Estate (P)
1: The decedent took an insurance on his life for
P10,000,000
2. The-decedent took an insurance on his life for
P20,000,000 and.designated his estate as the
revocable beneficiary.
3. The decedent took an insurance for his life for
P5,000,000 and irrevocably designated the
. administrator of his estate as the beneficiary.
4. The decedent took an insurance on his life for |
P10,000,000 and designated his son as
beneficiary.
5. The decedent took an insurance on his life for
' P10,000,000 and designated his son as |
irrevocable beneficiary.
TRUE OR FALSE
A Estate tax is a tax imposed on the privilege that a person is given in
the disposition of his property, either by will or by operations of law, to
take effect upon death.
Estate tax is an ad-valorem tax.
3. The accrual of the estate tax is distinct from the obligation to pay the
same.
Delivery and acceptance are essential elements of estate taxation.
Under the “ability to pay theory”, the imposition of estate tax is
i justifiable because it reduces the property received by the successor,
thus, helping to promote equitable distribution of wealth in society.
Regardless of situs, the tax code excludes intangible personal
property of a non-resident alien decadent in determining his taxable
estate.
Section 85 of the Tax Code provides that the value of the gross estate
of a nonresident alien should be determined by including the value at
-. the time of his death, of all property, real or personal, tangible or
intangible, wherever situated.
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 tangible
69
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Cheer & — Bstobe Ti
personal property of citizens of the Philippines not residing in that
foreign country.
For estate tax computation, real estate, in general, shall be valued at
fair market value at the date of death of the decedent.
10. lf zonal value of a real estate is available at date of death, and this is
higher than the fair market value per assessor's listings of values, then
the amount to be reported in the gross estate is the zonal value.
11. Donation mortis causa are transfers intended to take effect at the time
of the decedent's death. Hence, the property should be valued at the
fair market value of the property at the date of the actual transfer.
12. Donation to the national government is an exempt transaction but
should still require inclusion of the property in the gross estate.
13. Juan devised in his will a piece of land; naked title to Pedro. and
usufruct to Ana for as long as Ana lives, thereafter to Pedro. The
transmission from Juan to Pedro and Ana is subject to estate tax but
the merger of the usufruct and the naked title to Pedro upon the death
of Ana is exempt.
14. Ron devised in his will real property to his brother Bert who is
entrusted with the obligation to preserve and transmit the property to
Jay, son of Bert, when Jay becomes of age. The transmission from
Bert to his son Jay is subject to estate tax.
15. When an estate, under administration, has income-producing
property, the annual income of the estate becomes part of the taxable
gross estate.
16. When an estate, under administration, has income-producing property
and its income during the year is distributed to the heirs, the income
so distributed is taxable to the heirs as part of their gross:income for
the year.
17. A special power of appointment authorizes the donee of the power to
appoint only from among a designated class or group of persons other
than himself.
18. The donee-decedent of a special power of appointment only holds the
property in trust, hence, the property shall form part of the donee-
19. The Tax Code as amended under RA10963 (T RAIN Law) provides
that the filing of estate tax return should be done within one (1) ear
from the decedent's death.
20. The payment of estate tax could only be extended up to the maximum
of thirty (30) days from the date of filing.
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Chapter 2 — Estate Lage
MULTIPLE CHOICE .
Principles
iF An excise tax on transfers inter-vivos

a. Donor’s tax c. Income tax ‘
b. Estate tax ; d. VAT
An excise on transfers mortis causa I

a. VAT _ c. Income tax
b. Estate tax d. Donor’s tax
Which among the following statements is not correct?

|. Estate taxation is governed by the statute in force at the time
of ‘death of the decedent. |
ll. Estate tax accrues as of the death of the decedent.
‘Ill. Succession takes place and the right of the State to tax the
privilege to transmit the estate vests instantly upon death.
a. | only c. Ill only
b. Il only d. None of the above
Estate tax is a tax on the right of the deceased person to transmit his
estate to his lawful heirs and beneficiaries. Hence, it is
|. | Atax on property.
ll. | An excise tax
a. | only | c. Both
| and Il
b. Il.only d. Neither I'nor Il
Estate tax is'imposed upon the:

a. Decedent
b. Property or rights transferred
c. Right to transfer property upon death
d. Privilege to receive inheritance
When will the transfer through succession be effective?

Upon the signing of a written will.
Upon payment of estate tax.
aoom
Upon death of the testator

Upon registration in the register of deeds.
71
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Cle ter2 — Estate Cea
7 Which of the following is not a characteristic,of donation mortis

causa?
a. The transfer to the donee is irrevocable while donor is alive.
b. There is no conveyance of title or ownership to. the doneee
before the death of the donor.,
CG: The transferor retains the full or naked ownership and control
of the property while alive.
d. The transfer should be void if the donor should survive the
donee.
8. Mr. Wais thought that due to old age, death may be imminent.
Knowing that the value of estate tax is high, he disposed his
properties to his rightful heirs prior to his death (transfer in
contemplation of death). To prevent undue avoidance of tax, inter-
vivos disposition in contemplation of death is subject to:
a. Donor’s tax c. Income tax
b. Estate tax d. Excise tax.
Classification of Taxpayers
9. The gross estate of a decedent shall be comprised of the following

properties and interest therein at the time of his death, including
revocable transfers and transfers for insufficient consideration, etc.:
Residents and citizens: All properties, real or personal or
intangible, wherever situated.
Nonresident aliens: Only properties situated in the Philippines,
that, with respect to intangible personal property, its inclusion
in the gross estate is not subject to the rule of reciprocity
‘a. lonly c. Both
| and II
b. Il only d. Neither
| nor Il
10. The personal property of a non-resident, not citizen of the Philippines,

would not be included in the gross estate if;
a. The intangible personal property i is in the Philippines. -
b. The intangible property is in the Philippines and the reciprocity
clause of the estate tax law applies.
c. The tangible property is in the Philippines.
d. The personal property is shares of stocks of a domestic
corporation 90% of whose business is in the Philippines.
11. Which of the following is subject to the rule of reciprocity?

a. Car in the Philippines owned by a non-resident alien decedent.
b. Investment in stock in a US Corporation owned by a non-
resident alien decedent.
72
The
c. Investment in bonds in a U.S.-Corporation that has acquired

business situs in.the Philippines, and is owned by a resident
alien.
d. Shares owned by a non-resident alien in a partnership
42. The rule of reciprocity applies to:

Non-resident alien Intangible personal property
decedent in the Philippines
a. Yes Yes
b. No | No
CG Yes No
d. No Yes
13. Intangible Personal Property of Non-Resident Alien. Decedent with

Situs in the Philippines. shall be Exempt from Taxation 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.
ll. | 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.
a. | only c. Either I or Il
b. Il only d. Neither | nor II
14. One of the following is not an intangible personal property situated in

the Philippines:
|. | Shares, obligations or bonds issued by any corporation or
sociedad anonima organized and constituted in the Philippines
in accordance with its laws.
ll. | Shares, obligations or bonds issued by any foreign corporation
where 85% of its business is located in the Philippines.
Ill. | Shares, obligations or bonds issued by a foreign corporation if
such shares, obligations or bonds have acquired business in
the Philippines.
lV. Shares or rights in any partnership, business or industry
established outside the Philippines.
b. Il only d. IV only
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Situs of Estate
45. Which of the following rules on: “situs” of property of a decedent
correct?
|. As a general rule, the situs of real property is the place or
country where it is situated.
ll. | As ageneral rule, the situs of tangible personal property is the
place or country where such is actually located at the time of
the decedent's death.
lll. The rule that situs of intangible personal property is the
domicile or residence of the owner does not apply when the
property has a situs elsewhere.
IV. The test of situs of property of a non-resident alien decedent is
not important at all because only the transmissions of property
located in the Philippines are subject to estate tax.
a. ‘| only c. |, ll and III only
b. | and
Il only d. |, ll, Ill, and IV
16. Which is not a test of situs?

a. Residence of the debtor in case of accounts receivable.
b. Place of storage in case of certificates of stocks.
c. ‘Location of depository bank in case of bank deposit.
d. Place of exercise in case of copyright.
17. One of the following is not an eee personal property situated in

the Philippines:
a. Shares, obligations or Bonds issued by any corporation or
sociedad anonima organized or constituted in the Philippines
in accordance with its law;
b. Shares, obligations or bonds issued by any foreign corporation
85% of the business of which is located in the Philippines;
c. Shares, obligations or bonds issued by any foreign corporation
if such shares, obligations or bonds have acquired’ business
situs in the Philippines;
d. Shares, obligations or bonds issued by a non-resident foreign
corporation. i
18. Which of the following statements is correct?

‘ a. The estate tax accrues as of the death of the decedent and
the accrual of the tax is distinct from the obligation to pay the
same.
b. Estate taxation is governed by the statute in force at the time
the return is filed.
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The Book
Cha ter2 — Estate Lae
19. Which of the following item is considered situated outside the

Philippines?
a. Franchise in the name of the decedent which is exercised in the
Philippines
b. Share of stock holdings of decedent in a foreign corporation
whose business is 90% done in the Philippines
c. Bond certificate issued by a domestic corporation owned by a non-
resident decedent |
d. Foreign currency deposited in bank outside the Philippines
20. Pedro died on April 13, 2023,-leaving the following properties:

Common stocks of Sunchamp Corporation (2,000 shares) - listed in
_ + the Philippine Stock Exchange (highest - P40; lowest - P39).
Common stocks of AgriNurture Corporation (1 500 shares) - not listed
in the stock exchange. Cost - P50 per share; book value - P45 per
share. -
Preferred stocks of Greenergy' Inc. (3,000 shares) — not listed in the
stock exchange. Cost - P70 per share; book value - P60 per share;
par value — P50 per share
Car (cost - P600,000; book value - P350,000; market value -
P400,000) |
Real properties (zonal value - P120,000; assessed value - P72,000)
The gross estate of Pedro is —

a. P817,500 c. P824,000
b. P816,500 d. P846,500
Use the following data for the next two (2) questions
21. Following are properties in the gross estate with their fair market
values: :
House and lot, family home in Quezon City 1,500,000
Bank deposit in the foreign branch of a domestic 500,000
bank
Bank deposit in Makati branch of a foreign bank 300,000
Shares of stock issued by a domestic corporation 1,000,000
(certificate kept in Canada) |
Franchise exercised in Manila 800,000
Receivable, debtor from Mindanao 200,000
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Ohepte a = Estate Loa
If the decedent was non-resident alien and there is reciprocity, property
excluded from gross estate is valued at
a. P2;800,000° c. P2,300,000
b. P2,600,000_ d. P2,000,000
22. If the decedent was non-resident alien and there is no reciprocity, the
gross estate is valued at
a. P4,300,000 c. P3,500,000
b. P3,800,000_ d. P3,200,000
23. A Filipino decedent residing in Hawaii during his lifetime, left. the
following properties:
House and lot, USA P10,000,000
Mansion, Philippines - 50,000,000
Cars, Philippines 2,000,000
Shares of stock, Singapore 5,000,000 '
Accounts receivable, USA 3,000,000
+. The gross estate of the decedent is

a. P70,000,000 c. P65,000,000
b. P67,000,000 d. P62,000,000
The gross estate of a decedent included the following:
Cost Fair value
Land and building, Philippines P1,600,000 P2,000,000
House and lot, UK 1,800,000 1,500,000
Personal properties, UK 1,000,000 600,000 _
House and lot, Philippines 4,000,000 3,500,000
Shares of stocks, UK corp. 200,000
Shares of stocks, domestic corp. 250,000
(certificate kept in UK)
Shares of stocks, domestic corp. 100,000
(certificate kept in Phils.)
Franchise exercised in the Phils. 200,000
Franchise exercised in UK 150,000
Receivables, debtor is from UK 50,000
Receivables, debtor is from Phils. 50,000
24. If the decedent was a nonresident alien and his country exempts a
Filipino citizen from estate tax, how much of his assets would be
~ subject to reciprocity?
a. P1,000,000 c, P600,000
b. P800,000 d. P350,000
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Chapter 2 ~ Estate Lage
25. If the dece

é dent was a nonreside nt'alien
i and assuming the
reciprocity, how much is the gross estate? i
a. ee
P10,700,000 . . €. P6,100,000
b. P6,600,000 d. P5,850,000
|
Valuation of Estate
26. When the property

sa aren e is donated.in cori emplati
i on
of death, the basisi of
a. Fair market value at the time of donation.

b. Fair market value in the hands of the donor before the time of
the donation. re
c. Fair market value at the time of death of the donor
d. Cost when the property was acquired
27. As a tule, the basis of valuation of property in the gross estate is the
fair market value prevailing at the time of decedent's death. In the
case of domestic shares of stock not traded thru the stock exchange,
the fair market value is
a. The value appearing in the schedule of fixed values from the
assessor's Office
Net realizable value
Acquisition cost
ao
Issuer's book value.
28.: Which of the following value is not used when valuing gross estate?
a. Fair market value at the time of death;
b. Fair market value at the time the estate return is filed;
¢. Zonal value when higher than the assessed value in case of
real property;
d. Book value in case of shares not traded in the stock
_ exchange.
29. The following statements pertain to rules on valuing the estate left by
a decedent. Select the incorrect statement.
the time of
‘|... Values in the gross estate are based on values at
the heir
the decedent's death because it is at this time that
legally succeeds to the inheritance. .
ll. Receivable are appraised on the basis of the amount of the
the time of death.
principal and interests due and unpaid at
a. | only c. Both | and Il
b. Il only d. Neither | nor Il
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The
Chapter 2 ~ Estate Tay
30. A decedent left a piece of land. The following data were available jn
connection with the property.
Assessed valued, one (1) month before death P2,500,000
Zonal value, time of death 2,000,000
FMV at the time of filing estate tax return 3,000,000
What would be the value of the piece of land in the gross estate?
a. P3,000,000 _c. P2,000,000
b. P2,500,000 d. cannot be determined
Use the following data for the next four (4) questions:
A decedent left 1,000 XYZ Corporation common shares. The shares were
not traded in the stock exchange. The following data were made available:
Capital stock, XYZ Corporation P10,000,000
Retained earnings 2,000,000
Outstanding shares 100,000
31. What was the value included the decedent's gross estate?
a. P100,000 c. P150,000
b. P120,000 . d. PO
32. Assume that the shares were classified as preference shares, what
was the value included the decedent's gross estate?
a. P100,000 c. P150,000
b. P120,000 ~ d. PO
33. Assume that the shares were traded in the stock exchange: Assume
further that the average value at the time of death was P100 per
share. What was the value included the decedent’s gross egaler
a. P100,000 c. P120,000 .
b. P110,000 d. P150,000
34. Assume that the shares were traded in the stock exchange. However,
the quoted price at the time of death was not determinable.
Nonetheless, the highest and lowest quotations of the shares in the
market were P140 and P80, respectively, what was the value included
the decedent's gross estate?
= a. P100,000 c. P120,000
eS b. P110,000 d. P150,000
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Chapter — Estate Lie
35. Decedent died: in, 2022 ‘leaving a will which directed all real estate
owned by him not to be disposed or sold for a period of 2 years after
his death, and ordered that the property be given to Juan Dela Cruz
after 2 years. In 2022, the estate left by the decedent had a fair
market value of P500,000. In 2024, the fair market value of the said
estate increased by P4,500,000 and the BIR Commissioner assessed
thereon estate tax based on assessed value ‘of P4,000,000. What
would.be the correct amount of the gross estate?
a. P5,000,000 - ¢. P4,500,000
b. P4,000,000 d. P500,000
INCLUSIONS IN THE GROSS ESTATE

Decedent’s Interest
36. Decedent's Interest

l.. ' Refers to the extent of equity or ownership participation of the
decedent on any property .physically existing and present in
the gross estate, whether in his possession, control or
dominion.
ll. | Refers to the value of any interest, having value or capable of
being valued or transferred, in property owned or possessed
by the decedent at the time of his death.
a. | only é c. Both | and II
37. Which of. the following is not to be included in the gross estate of
citizen decedent?
a. Dividend income declared, but not yet actually received at
date of death
b. Share in partnership’s profit earned immediately after date of
death
c. Rent income accrued before death but collected after death
d. _ None of the above
Transfer in Contemplation of Death
38. Transfer in contemplation of death

|. Contemplates a situation where the transferor during his
lifetime, transfers property in contemplation of or intended to
take effect in possession or enjoyment at or after his death.
ll. Includes situations where the transferor retains for life the
possession or enjoyment, or the right to the income from the
property, or the right to designate the person who shall
possess or enjoy the property or the income therefrom.
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Olapter 2 - Estate Tae
ill. | At the time of the decedent's death, the decedent no longer
owned the property, but such property forms part of his gross
estate for estate tax purposes.
a. l only c. All of the above
39. Which among the following is correct?

|. | There may be properties which at the time of the decedent's
. death are not in the estate because they were transferred by
him during his lifetime.
_ Il. The gross estate, for purposes of the estate tax, may exceed
the actual value of his assets at the time of his death as it
includes the value of transfers of property by him during his
lifetime that partake of the nature of testamentary dispositions.
a. | only | and Il
c. Both
b. Il only | nor Il
d. Neither
40. Which of the following shall be included in the gross estate of a

decedent? . . :;
|. Transfer of property in favor of another person, but the transfer
was intended to take effect only upon the transferor’s death.
ll. 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.
lll. | Transfer with retention or reservation of certain rights. The
decedent had transferred his property during his lifetime, but
retained for himself beneficial enjoyment of the thing or the
right to receive income from the same.
b. Il and III only d. None of the above
41. The following are deemed transfers in contemplation of death, except

a. While still alive, the decedent donated property where the
donation will take effect at the time of his death.
b. The decedent transferred a property in the regular course of
the business operation.
c. The decedent donated a property with the condition that
he/she will enjoy the fruits of such while still alive.
d. The decedent transferred a property to take effect after his/her
death
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42. Transfers in contemplation of death:

Consideration - FMV upon FMV upon |
received| transfer death
Land P1,500,000 P1,500,000 P2,000,000
Shares of stock 100,000 50,000 150,000
Vintage car 50,000 «= 80,000 100,000
Painting ; 250,000 400,000 © 500,000
The correct gross estate’ should be

a. P120,000 c. P350,000
b. P300,000 d. P400,000
Transfer with reservation of rights and revocable Transfers
43. An agreement created by will or an agreement under which title to

property is passed to another for conservation or investment with the
income therefrom and ultimately the corpus to be distributed in
accordance with the directives of the creator as expressed in the
governing instrument
a. Estate C. Fiduciary
b. Trust d. Beneficiary
44. All of the following statements are true, except

a. In a revocable transfer, the decedent during his lifetime may
revoke, alter, amend, or terminate the terms of enjoyment or
ownership of the property.
b. A revocable transfer is always includible in the gross estate of
the decedent-transferor.
c. The power of the decedent-transferor to revoke terms may be
exercised just once.
d. A revocable transfer shall be: included in the gross estate of
the decedent-transferor even though the power to revoke was
not exercised.
A5. A revocable transfer Was made for a consideration of P100,000. Fair

market values of the property at the time of transfers and at the time of
death were P250,000 and P300,000, respectively. In the gross estate,
the value of the property was
a. P100,000 c. P200,000
b. P250,000 d. Exempt
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Clapler 2 — Estate Law:
Transfer under general power of appointment
46. Which of the following statements regarding transfer under general

power of appointment and transfer under special power of
appointment is correct?
l. There are three persons involved under this rule; the
transferor, the first transferee, and the second transferee. The
first transferee is the decedent.
ll. If authority is granted by the transferor to the first transferee to
determine the person, who, upon the latter's death, would next
possess or enjoy the property transferred, his authority
emanates from a general power of appointment.
lll. If the transferor himself had determined beforehand who upon
the death of the first transferee, would next possess or enjoy
the property, then the authority of the first ransferee
emanated from a special power of appointment.
b. Il and Ill only d. None of the above
47. Which is wrong?

a. A power of appointment is the right to designate the. person or
persons who shall succeed to the property of a prior decedent.
b. A special power of appointment authorized the donor of the
power to appoint only from among a designated class or group
of persons including himself.
c. The done-decedent of a special power of appointment only
holds the property in trust, hence, the property shall not form
part of the done-decedent’s gross estate.
d. None of the above
48. Which of the following statements is not true?

a. A general power of appointment authorizes the donee of the
power to appoint any person to possess or enjoy the property.
b. A general power of appointment makes the donee of the
power the owner of the property.
c. A power of appointment is not always general.
d. The appointed property passing under a general power of
appointment is not includiblé in the gross estate of the donee-
decedent.
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49. The power of appointment may be exercised by the donor-decedent

through the following modes
By will
ll. | By deed to take effect in possession or enjoyment at or after
his death.
lll. | By deed under which he has retained for his life or any period
not ascertainable without reference to his death or for any
period which does not in fact end before his death.
a. | only c. | and Il only
b. ll only d. |, Il.and Ill
Transfer for insufficient Consideration
50. Which of the following transfer is not included in the gross estate?
a. Transfer with reservation of certain rights
b. Transfer for insufficient consideration
c. Transfer for an‘ adequate full consideration in money. or
money’s worth
d. Transfer in contemplation of death
51. In determining whether the value of a property transferred onerously

by a decedent during his lifetime should be included in his estate, ask
yourself, was the consideration insufficient?
l. If yes, then add the excess of the FMV at the time of death over
the consideration received.
ll. If no, then it was a bona fide sale. Exclude the property in
determining the decedent's gross estate.
a. | only c. Both1 and Il
Proceeds of life insurance
52. Proceeds of life insurance includible in the taxable gross estate

a. Insurance proceeds from SSS or GSIS
-b. Amount.receivable by any beneficiary other than the estate,
administrator or executor, irrevocably designated in the policy
by the insured |
c. Amount receivable by any beneficiary designated in the
insurance policy
d. Proceeds of group insurance taken out by a company for its
employees.
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Chapter 2 ~ Extate Te
53. Amounts receivable by the estate of the deceased, his executor o-
administrator as an insurance under policy taken by the decedent
upon his own life is:
a. Excluded from the gross estate.
b. Part of the gross estate whether the beneficiary is revocable or
- . irrevocable.
Cc. Part of the gross estate if the beneficiary is revocable.
d. Part of the gross estate if the beneficiary is irrevocable.
54. Which of the following is not included in the gross estate?

a. Revocable transfer where the consideration is not sufficient
b. Revocable transfer where the power of revocation was not
exercised
Cc. Proceeds of life insurance where the beneficiary designated is
the estate and-the designation is irrevocable
d. Proceeds of life insurance where the beneficiary designated is
the mother and the designation is irrevocable. :
55. Proceeds of life insurance where the beneficiary of the decedent is not ;
his estate, executor or administrator is
a. Part of gross income if the beneficiary is revocable
b. Part of gross income regardless of whether the beneficiary is
revocable or irrevocable
c. Not part of gross estate if the beneficiary is irrevocable
d. Part of gross estate regardless of whether the beneficiary is
revocable or irrevocable
56. Proceeds of life insurance to the extent of the amount receivable by

the estate of the deceased, his executor or administrator under
policies taken out by the decedent upon his own life shall be
Part of the gross estate irrespective of whether the insured:

retained the power of revocation
Not part of the gross estate if the beneficiary is irrevocable.
Part of the gross income if the designation of the beneficiary is
revocable
IV. Not part of the gross income irrespective of whether the
insured retained the power of revocation
a. land Il c. land IV _
b. | and Ill d. only|
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Chapter 2 ~ Estate Tag
'57. Ms. Balo, spouse of the decedent who died in a bus accident (Harurot
Transport), received P2,500,000 broken down as follows:
P900,000 From Habambuhay Life Insurance Company.
A life insurance taken out by the decedent
designating his wife as revocable beneficiary.
P1,200,000 “From Walang Hangganan Life Insurance

‘Company taken out by the decedent
designating his wife as __ irrevocable
eM beneficiary.
P400,000 From Harurot Transport Company (owner of
the bus involved’ in the accident) where
settlement was made outside court
proceedings. =
The gross estate of the decedent shall include

a. P900,000 c. P2;100,000
b. P1,200,000 d. P2,500,000
Claims against insolvent persons
58. Which of the following is not true regarding a claim against insolvent
persons?
a. The decedent's ciaim is deductible i in full because the debtor’s
liabilities exceed his remaining assets.
b. The decedent's claim must be included in full in the gross
estate.
c. The decedent's claim which cannot be collected is deductible
according to the ratio of the debtor's assets to his liabilities.
d. Claim against insolvent person is a claim against person
'~ whose assets are not sufficient to pay his liabilities.
59. Which is correct?

|. In a claim against insolvent person, the insolvency of the
debtor must be proven and not merely alleged.
ll. It could be that the amount to be included as part of the gross
estate in a claim against insolvent person is less than the full
amount owed.
a. lonly _ c. Both
| and II
b. Il only d. Neither
| nor II
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the ter 2 — Estate Lage
60. Which of the following is included In the income of the estate of a

decedent?
a. Income received by the estate of a deceased person during
the period of administration or settlement of the estate.
b. Excess of selling price over the appraised value placed upon
the property at the time of death, where the property was sold
after the settlement of the estate.
Cc. Appreciation in the value of property passed to the executor or
administrator upon death of decedent.
d. Delivery of property in kind to legatee or devisee.
61. One of the items in the gross estate of a decedent is a claim against
an insolvent person amounting to P500,000. The insolvent debtor can
still pay P100,000 out of the P500,000.
How much will be included in and deducted from the gross estate?
Gross estate Deduction
P100,000 P100,000
P500,000 P100,000
aooM
P500,000 P400,000
None | None
EXCLUSIONS FROM THE GROSS ESTATE
62. The following are transactions exempt from transfer tax except:
a. Transmission from the first heir or donee in favor of another
beneficiary in accordance with the desire of the predecessor
b. transmission or delivery of the inheritance or legacy by the
fiduciary heir or legatee to the fideicommissary.
C. The merger of usufruct in the owner of the naked title.
d. - All bequest, devices, legacies, or transfers to social welfare,
cultural and charitable institutions
63. Which of the following exempt transmissions will still require inclusion
of the property in the gross estate?
a. Merger of the usufruct in the owner the naked title;
b, Legacy to a charitable institutions whose administrative
expenses did not exceed 30% of the legacy;
Cc. Transfer from a first heir to a second heir designated by the
decedent;
Death benefits under the GSIS and GSIS.
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Chapter 2 ~— Estate Lage
64. One of the following is included in the gross estate of a nonresident
alien decedent:
a. Wholly uncollectible claims against a debtor who absconded,
debtor resides outside the Philippines.
b. Partially collectible claims against an insolvent person who
resides in Manila, the country of the nonresident alien
decedent does not impose transfer taxes of any kind.
c. Proceeds of life insurance of the decedent where the
decedent’s estate was designated as irrevocable beneficiary,
the policy was procured in Manila.
d. Personal property situated in the Philippines donated by the
decedent before he died to a son on account of the son’s
marriage.
‘65. Which of the following is a transfer in contemplation of death?

a. Mhalapit Nha has been fighting for his life since he was
diagnosed to have a terminal illness. Accepting his fate, he
* sought the assistance of Atty. Lho Yer, and made his will.
b. Mr. Matibay celebrated his 101° birthday. Feeling that death
is not far, he transferred all his properties to Pedro and Juan.
66. Which of the following is a transfer under special power of

appointment?
|. Earl transfers his property in trust for his son, Gabry and then
in trust’ for anybody whom Gabry may, by will, appoint or
designate.
ll. Mr. Byahero frequently travels due to the nature of his
profession. He thinks that he is not spared from meeting
accidents considering the rampant occurrence of accidents
these days. He decided to execute his last will and testament
appointing his properties to his children.
Ill. | Georgia designated his special friend, E. Garcia as beneficiary
of an insurance which he took upon his own life.
a. | only c. All of the above

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Chapter 2 — Estate i:
Administrative Provisions
67. Under which of the following situations an estate tax return is required
to be filed under the TRAIN Law?
a. Transfers which are subject to estate tax.
b. The estate consists of registered or registrable properties for
which a clearance from the BIR is required as a condition
precedent for the transfer of ownership.
68. Who shall file the estate tax return?

a. Executor, or administrator, or any of the legal heirs
b. Creditors of the decedent
c. Personal secretary of the decedent
d. Debtors of the decedent
69. Statement 1: 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.
Statement 2: The executor or administrator of an estate has the
primary obligation to pay the estate tax but the heir or beneficiary has
subsidiary liability for paying that portion of the estate corresponding to
his distributive share in the value of the total net estate.
b. Statement1 is.true but statement 2 is false
70. Statement 1: The Commissioner or any of the Revenue Officer

authorized by him pursuant to the tax code shall have the authority to
grant, in meritorious cases, a reasonable extension not exceeding
thirty (30) days for filing the return.
Statement 2: The application for the extension of time to file the estate
tax return must be filed with the RDO where the estate is required to
secure its TIN and file tax return of the estate.
‘a. Statements 1 and 2 are false
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Deductions from the Gross Estate
To compute the net estate of the deceased, there are certain items
that can be deducted from the value of the gross estate-under the Tax
Code. RR 12-2018 in relation to sections 86(A) and 86(B) of the Tax
Code, as amended under TRAIN Law, allows deductions from the gross
estate to arrive at the taxable net estate which is used as a basis in
determining the applicable estate tax due.
Deductions from the gross estate are classified as follows:
1. Ordinary deductions
2. Special deductions
3. Share of the surviving spouse, if the decedent is married
Beginning January 1, 2018 or upon the effectivity of the TRAIN Law, the
allowable deductions from the gross estate are summarized as follows:
TABLE 3-1.. SUMMARY. OF‘ALLOWABLE DEDUCTION FROM THE GROSS ESTATE

NIC)
DB) a4 DL ULON ie os oe 8 Cab) NE
Citizen/Resident Nonresident Alien
A. Ordinary Deductions
1. LiTe (Losses, Indebtedness, v \ (proportional)***
Taxes, etc.) ;
2. Vanishing Deduction y v
3. . Transfer for Public Use (TFPU) V. V
B. Special Deductions
1. Standard Deduction 1 (P5M) / (P500,000)
2. Family Home | v NA
3. RA4917 . v NA
C. Share of the Surviving Spouse . v v
|___(For married decedents)
*** Total LITe x (GE Phils, / GE world)) —
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Chapter 3'- De petion ron thy Gross Estate
ORDINARY DEDUCTIONS
A. LITe (Losses, Indebtedness, Taxes, atc.)
1. Losses
For purposes of estate taxation, deductible losses from the

- gross estate shall pertain to “casualty losses’.
Casualty losses include losses arising from acts of God such as

losses due to storms, shipwreck and other casualties. It also
includes losses arising from acts of man, specifically 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 (refer to Illustration #1, Case B).
d) Incurred during the settlement period of the estate. Settlement
period pertains to the period prescribed by law to file and pay
the estate tax, which is, under the TRAIN Law, within one (1)
year from the date of death.
| ILLUSTRATION 1:
CASE A:
Among the properties included in the gross estate of the decedent at the time of his
death was a newly developed tourist destination 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 partially
destroying the newly developed property. It was determined that the fair market value
of the property after the incidentwas reduced to 218,000,000.
Question 1: What amount should be included in the decedent's gross estate?
“+ Answer: P20,000,000 (FMV at the time of death)
Question 2: How much should be the allowable deduction from the gross estate?
“> Answer: P2,000,000.
. Deductible loss= P20M- P 18,000,000= P2M
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Question 3: What amount should be included as part of the allowable deductions from
the gross estate assuming the property was insured for 225,000,000
' % Answer: PO
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 the incident
happened beyond the settlement period of one (1) year, and the property was not
insured.
“+ Answer: PO.
Only losses incurred during the settlement period (within 1 year after death)
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: PO.
Gross estate shall compose of the properties of the decedent at the time of
his death. If the incident happened before death, then the property is no
longer existing as of the date of death, hence, should no longer be included
in his gross estate.
Question 6: In relation to question # 5, what amount should be included as deduction

from the gross estate of the decedent?
“+ Answer: PO.
o Aside from the requirement that losses, to be deductible, should have
been incurred after death but during the settlement period, the property
is no longer included in the gross estate of the decedent. Consequently,
no deduction from the gross estate should be allowed.
CASE B:
Use the same data in Case A. In addition, assume that the property earned gross
income of P6M and incurred operating expenses of P2 from the date of death of the
decedent up to the time of the incident or the calamity (typhoon). Assume further that
the loss incurred due to the typhoon was recognized as additional operating expenses
for purposes of computing the net taxable income of the estate.
Question: How much should be allowed as deduction from the gross estate?
. “+ Answer: PO.
o Since the loss was already claimed as deduction for purposes of
determining the taxable net income of the estate, such loss should no
longer be allowed as deduction in determining the taxable gross estate.
‘
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Chapter SD pctions from the Gross Estate
2. Indebtedness or Claims against the Estate

“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 (CAE) or
indebtedness in respect of property may arise out of the following
SOUICceS:
=» Contract
=» Tort
= Operation of Law
REQUISITES FOR DEDUCTIBILITY (RR 12-2018):

a. The liability represents personal obligation of the deceased
existing at the time of his death;
b. The liability was contracted in good faith and for adequate and
full consideration in money or money's worth;
c. The liability must be a debt or claim which is valid in law and
enforceable in court;
d. The debt 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.
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Chapter Ss Deductions from the Gross Estate
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 manger 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.
e);. 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 creditoris 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.
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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.
lf 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.
lf 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 manger of the
bank/financial institution which monitors and manages the.
loan of the decedent-debtor.
lf 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,
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Chapter Sim. Ley lions rom He Gross Estate
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 perpen) 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.
Funeral, Medical, and Judicial Expenses
Beginning January 1, 2018 or upon effectivity of the

TRAIN Law, the following expenses are no longer allowed as
deduction from the gross estate of a decedent:
» Funeral expenses
» Medical expenses
» Judicial expenses
ILLUSTRATION
2:
A resident decedent died on April 1, 2023. 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: P500,0000
Question 2: If the obligation has prescribed as at the time of his death, what amount
may be deducted from the gross estate?
«* Answer: PO
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: PO .
If the indebtedness arises from a debt instrument (ie., loan document), it
must be notarized to be’ deductible.
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Question 4:
‘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: RO
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 proceeds 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. .
ACCOMODATION LOAN
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.
| ILLUSTRATION 3:
CASE A: :
A resident decedent left the following upon his death:
Cash in bank (from various peso accounts) P8,000,000
Cash in bank (from various FCDU accounts) 9,600,000
Real property, Philippines ; ; 10,000,000
Real property abroad — 10,000,000
_| The real property located in the Philippines was mortgaged for P8,000,000.
Determine the following:
1. Gross estate of the decedent
- 2. Deductions for “unpaid mortgage”
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a Ss - Deletions fon sft GrTOSS Estate
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Answers:
1. 37,600,000
Cash in bank (peso accounts) P8,000,000
Cash in bank (FCDU’ accounts) 9,600,000
Real properties Philippines | 10,000,000
Real properties abroad) 10,000,000
Gross Estate me P37,600,000
2. P8,000,000 .
CASE B:
Pedro died in 2023. The following claims against Pedro's estate were claimed by his
heirs as deductions from the decedent's gross estate.
Notes payable (notarized) P500,000
Notes payable (not notarized) 200,000 |
Unpaid property taxes before his death © 300,000 |
Unpaid property taxes on his estate (after death) 100,000
Unpaid mortgage on his properties before death’ ~ 0,000
Debts from gambling losses questioned by decedent while still alive 50,000
Question: How much is the deductible Indebtedness or claim against the estate?
“+ Answer:-P850,000 computed as follows:

Notes payable (notarized) P500,000 |
Unpaid property taxes before death 300,000
Unpaid mortgage before death 50,000
Claim against the estate ‘ P850,000
= Claims against the estate should pertain only to valid claims as of the
date of death. Claims arising after death are not allowed as deductions
from gross estate.
- Receivables from gambling (wagering gains) before death are inclusions

from the decedent's gross estate, however, debts from wagering or
gambling losses are not allowed as deductions from the gross estate.
3. 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
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Chapter Ss - De ptions from the Gross Estate
~
|ILLUSTRATION 4:
Which among the following should be allowed as deduction from the Gross Estate of a
Filipino decedent who died on March 30, 2023?
ITEM PARTICULARS
1 Unpaid donor's tax on donations made during the previous year
2 Unpaid donor's tax on donations made during the current year
3 Unpaid income tax on decedent's income for 2022
4 Unpaid income tax on decedent's income from January to March
2023 !
5 Unpaid income tax attributable to the estafe’s income from April to
December 31,2023.
6 Unpaid business tax for 2022 taxable year.
7 Unpaid business tax from January to March 2023
8 Unpaid business tax on the decedent's estate from April to
December 31, 2023
9 Unpaid municipal taxes from January to March 2023
10 Unpaid municipal taxes on the decedent's estate (business) from
April to December 31, 2023
11 Unpaid import duties on importations made from January 1 to
March 2023
12 Tax assessment/deficiencies prior to death
“> Answer: Items 1, 2, 3, 4, 6, 7, 9, 11 and 12

4. Claims Against Insolvent Persons (CAIP)
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; and
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Chapter os Didvchions TOU the Gross Estate
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.
ILLUSTRATION 5:
Case A:
Juan is indebted to Pedro for 1,000,000. -For the past ten (10) years, the credit
standing and reputation of Juan is outstanding. However, during 2022, the relationship
of Juan and Pedro was tainted by a personal disagreement. Consequently, Pedro was
unable to collect the amount of P1,000,000 due from Juan. Juan intentionally ignored
several collection/demand letters from Pedro. In 2023, Pedro died.
Question 1:
Should the P1,000,000 collectible from in Ke included in the gross estate of Pedro?
“+ Yes.
The 21M is a valid and érisrconki claim of Pedro as of the date of his death.
Question 2:
Should the 21,000,000 collectible from Juan be deducted in Pedro's gross estate?
“ No.
Only uncollectible claims against insolvent persons are deductible from the gross
estate. In the case provided, Juan is obviously not an insolvent person for estate
. fax purposes.
Case B:
Assume the same data in Case A, except that during 2022, Juan experienced financial
difficulty and his assets are no longer sufficient to settle his liabilities. Consequently,
Juan was only able to pay 500,000 to Pedro in 2022. In the same year, Juan asked a
competent court for a judicial declaration that he is insolvent. The court is yet to decide
on Juan's petition. In 2023, Pedro died.
Question 1:
Should the remaining amount of P500,000 collectible from Juan be included in the
gross estate of Pedro?
“ Yes
Question 2: t
Should the unpaid amount of 500,000 collectible from Juan be deducted in Pedro's
gross estate?
“Yes.
Judicial declaration of insolvency is not required to consider a person insolvent. It
is sufficient that the person's insolvency is proven.
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Clapter S - Deductions _ the Gross Estate
Case C: |
Pedro died in 2023. At the time of his.death, he has a collectible sum of P1,000,000
from a debtor who was subsequently declared by a court as insolvent for having total
liabilities of 24,000,000 against his total properties valued at P800,000 only.
Question 1: .
How much should be included in the gross estate of Pedro?
“¢ Answer:-P1,000,000.
Question 2:
How much.may be claimed as deduction from the gross estate of Pedro?
“* Answer: P800,000 computed as follows
Amount of Claim P1,000,000

Collectible: % x P800,000 (200,000)
Uncollectible portion : P800,000
OR:
Amount of Claim P1,000,000
Collectible: P800/P4,000 x P1M (200,000)
Uncollectible portion P800,000
B. TRANSFER FOR PUBLIC USE
Transfers For Public Use (TFPU) are 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 of its political subdivisions
thereof (e.g. barangay, province, city/municipality) for eactslvely
public purposes.
-In order for a transfer for public’ use to be allowed as a deduction

from the gross estate of a decedent, the same amount shall be
included in the computation of the decedent's gross estate. «
Legacies to the Philippine Red Cross (PRC)
Under RA 10072 (An Act Recognizing the Philippine Red Cross as an independent,
autonomous, nongovemmental 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.
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Chapter Six Deductions from thes Gross Estate
c. 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 a property included in his gross estate
was previously received by him, either:
1) From a prior decedent by way of inheritance; or

2) From a donor by way of gift or donation
The aforementioned property has been the object of a previous

transfer taxation, either estate. tax or donor’s tax (thus, the term
property previously taxed).' Therefore, vanishing deduction is allowed
as a deduction from the gross estate to minimize the effect of or as a
remedy against indirect 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.
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.
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VANISHING DEDUCTION RATES:

Period (from receipt up to the decedent's death) Rate
Within one year 100%
Beyond one year to 2 years 80%
Beyond 2 years to 3 years 60%
PRO-FORMA COMPUTATION OF VANISHING DEDUCTION:

VALUE TO TAKE | PXxx
Whichever is lower between the value of the property:
‘= — In the gross estate of the prior decedent or in the gross
gift of the donor; and
= In the gross estate of the present decedent
LESS: MORTGAGE PAID (also known as 15" deduction)

(Paid by the present decedent from the mortgage
assumed when the property was inherited or received as
donation) (xxx)
INITIAL BASIS”. PXxx
Less: Proportional deduction (or 2°4 deduction) computed as:
Initial basis
Gross estate x “*LIT + Transfer for Public Use
(Xxx)
FINAL BASIS XXX
x Vanishing deduction % Soe 35]
VANISHING DEDUCTION PXXX
_** Under the Tax Code, as amended under the TRAIN Law, the multiplier to the ratio of Initial Basis over
the Gross Estate is the total of LITe, plus Transfer for Public Use.
ILLUSTRATION 6: nt
CASE A:
Determine the correct vanishing deduction rate of the following:
1) Ana died in April 1, 2023. A vehicle included in her gross estate was previously
received by her as inheritance from her father on January 8, 2020.
2) Pedro died in April 1, 2023, A parcel of land which was included in his gross estate
__Was previously received by him as donation from his best friend on May 3, 2020.
3) Juan died in April 1, 2023. A parcel of land was donated to him by his sister as a
+ wedding gift on September 7, 2017. ae
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Chepter S.- Deg tions from the Gross Estate
4) Lorna died on June 1, 2023. Included in her estate is a vacation house which she
purchased on June 30, 2021.
“+ Answer:
1. 40% (more than 3 years but not more than 4 years)
2. 60% (more than 2 years but not more than 3 years)
3. ‘NA. The property was received as donation more than five (5)
years before death of the decedent.
4. NA. Vanishing deduction is applicable only to gratuitous
transfers. In this particular case, Lorna purchased (acquired
through onerous-transfer) the property.
CASE B:
A
Pedro received a car as a gift from Juan on January 1, 2021. 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 2021 and 2022.
)
On Nov. 1, 2023, 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 benefi iciaries©
Losses 100,000 |
Unpaid mortgage (including the iors on the car) 200,000
Unpaid taxes before death. . 100,000
Unpaid taxes after death ie 25,000
_ Donation mortis causa to Quezon City for public purpose 500,000
Question 1: How much is the allowable vanishing deduction?

“+ Answer: 295,200 computed as:
Value to take (lower amount) P700,000
1st Deduction (100,000)
Initial basis 600,000
Less; 2"4 deduction [600/5,000 x (P900,000***)] (108,000)
Final Basis P492,000
x rate (within 3 years) 60%
Vanishing deduction P295,200
Losses P100,000
Unpaid mortgage 200,000
Unpaid taxes before death 100,000
Transfer for Public Use 500,000
(Donation mortis causa to Quezon City) se ha Se el eee
TOTAL ** : — P900,000_
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Chabter 3 - De tions from the Gross Estate
—
Question 2: Assume the corresponding donor's tax was not paid by Juan upon
donation, how much is the allowable vanishing deduction?
“> Answer: PO
Vanishing deduction is a mode of ‘tax relief” from multiple imposition of
indirect taxes. This is the reason why payment of donor's tax or estate
tax from the grantor is a requisite before vanishing deduction is allowed.
Hence, if the donor’s tax was not paid at the time of the donation,
vanishing deduction is not allowed due to the absence of “indirect
double taxation”.
Question 3: Assume the corresponding donor's tax was paid by. Juan upon perfection
‘of the donation. Assume further that the donation was made on January 1, 2015. How
much is the allowable vanishing deduction?
“+ Answer: PO
The donation was made more than five (5) years prior to Pedro's death.
CASE C:
In 2023, Pedro died, leaving a property worth 210,000,000 which he inherited 4h

years ago from Juan. The property's fair market value at the time of Juan’s death was
P8,000,000. An unpaid mortgage of P1,000,000 was also.assumed by Pedro which
remained unpaid at the time of his death. Other properties in Pedro's gross estate
had fair market value of P30,000,000. The losses, taxes and transfer for public purpose
amounted to P4,000,000.
Question 1: What is the correct amount of vanishing deduction?

‘¢ Answer: P1,440,000 computed as follows:
Value to take . P8,000,000

1st Deduction -
Initial basis 8,000,000
Less: 294 deduction [8,000/40,000* x (P4M)] (800,000)
Final Basis 7,200,000
X rate 20%
Vanishing deduction P1,440,000
Correct amount of GE **
FV of the property inherited upon Pedro's death P10,000,000
Other properties in Pedro's estate 30,000,000_
Total GE P40,000,000**
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\
Clapter SS: & Dea potions from te Gross Estate
SPECIAL DEDUCTIONS
A. STANDARD DEDUCTION
The law allows a standard deduction without qualification, condition.
nor requisite, whatsoever: This amount shall be allowed as an additional
deduction without need of substantiation. The full amount shall be
allowed as deduction for the benefitof the decedent. The allowable
amounts under the TRAIN Law are:
« ‘If the decedentis a citizen or resident — P5,000,000
« If the decedent is a nonresident alien — P500,000
This is the only special deduction allowed to a nonresident alien

decedent. The other special deductions (family home and RA 4917) can
be claimed only by citizen and resident decedents.
B. FAMILY HOME
The amount of family home allowable
Family Home as a deduction would be whichever is
The dwelling house, including lower of 10,000,000 or the fair market
the land on which it is | value at the time of the decedent’s death,
situated, where the husband —__ of the family home and the land on which it
and wife, or a head of the stands.
family, and members of their The family home is deemed constituted
family reside, as certified to on the house and lot from the time it is
by the Barangay Captain of = actually occupied as a family residence
the locality. 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.
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/
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.
BENEFICIARIES OF A FAMILY HOME:

= 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 thee 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. 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
3. 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..
4. Allowable deduction must be in an amount equivalent to the
current fair market value of the family home as declared of
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 210,000,000, as amended.
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Chapter J. De lions from the Gross Estate
ILLUSTRATION 7:
| Determine the allowable deduction for Family Home (FH) from the following
independent cases:
Case A: FH valued at P15,000,000. Decedent was single.

“+ Answer: PO.
Case B: FH valued at P15,000,000. Decedent was head of the family.

“+. Answer: P10 ,000,000.
Case C: FH valued at P5,000,000. Decedent was head of the family.

“+ Answer: P5,000,000
Case D: FH valued at P15,000,000 (exclusive). Decedent was married.

“+ Answer: P10,000,000
Case E: FH valued at P15,000,000 (conjugal). Decedent was married.

“+ Answer: P7,500,000.
For married decedents, the FMV of the family home should be divided by two
(2) if the same is conjugal or community property.
Case F: FH valued at P15,000,000 of which, P10,000,000 is allocated to the land

(exclusive) and P5,000,000 to the house (conjugal). Decedent is married
“+ Answer: P10,000,000
Land (exclusive) . ?10,000,000
House (conjugal) P5,000,000/2 2,500,000
Total 12,500,000
{1 Maximum deductible amount is P10,000,000.
Case G: The fair market value of the family home which is partly exclusive and partly
common follows:
Family lot (exclusive) ~ 5,000,000
Family house (common) 9,000,000
«* Answer: P9,500,000
Land (exclusive) P5,000,000
House (common) P9,000,000/2 _ 4,500,000
Total P9,500,000
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Ne Chapter es Wood cline rom the Gross Estite
C. 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 % 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 fron the Gross Estate ofa. Nowresidaut Aber

a - F
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 summary of allowable deductions, as discussed in Table
3-1, page 89 are shown below (based on RR2-2003; RR 12-2018):
DEDUCTION oS ShelsMhee VaT Se

A. Ordinary Deductions :
1. _LiTe (Losses, ¥ (proportional deduction only**
Indebtedness, Taxes, etc.) **Total LITe x (GE Phils./GE world)
2. Vanishing Deduction V
3. Transfer for Public Use 1
(TFPU)
B. Special Deductions
1. Standard Deduction 1 (P500,000)
2. Family Home NA
3. RA4917 NA
C. Share of the Surviving Spouse 1
(For married decedents) a EL
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[|LLUSTRATION 8:
Mr. Krung, a resident of Seoul, South Korea and a Korean citizen died on July 4, 2023
leaving the following properties:
Condominium unit in Makati P4,500,000
Family Home in Seoul, Korea 7,000,000
Rest House in Australia 2,750,000
Jewelries received as gift dated puget 25: 2022 500,000
Car in Makati 1,000,000
The heirs of Mr. Krung claimed the following deductions:
Funeral expenses P300,000
Claims against the estate * 500,000
Claim against insolvent person ~ $00,000
Judicial expenses 100,000
Medical expenses 200,000
Family Home 1,500,000
Standard Deductions 1,200,000
Required:
Determine the net taxable net estate..
“+ Answer: P5,130,769
Solution:
GROSS ESTATE
Condominium unit in Makati P4,500,000
Jewelries 500,000
Car in Makati 1,000,000
Claims against insolvent person 500,000
Total gross estate -.Philippines P6,500,000**
ALLOWABLE DEDUCTIONS
Ordinary Deductions:
LITe = (P6.5M/P16.25M™ x P1,000,000) (400,000)***
Vanishing Deductions** (469,231)
Special Deductions= Standard Deduction (500,000)
TAXABLE NET ESTATE P5,130,769
OQ ‘Funeral and judicial expenses are no longer allowed under TRAIN Law.
£1 GE**= include claim against insolvent person
Q LITe of P1M*** = Claim against the estate and claim against insolvent person.
However, the allowable amount shall only be the proportional amount of GE
Phils. over GE world if the decedent is a nonresident alien
(1 Standard deduction of P500,000 is allowed as deduction from the gross estate
of nonresident alien decedents under the TRAIN Law.
The
Ckapter Ss - Detection fom ah. Gross Estate
Computation of Vanishing Deduction

Value to take P500,000
\ Less: Mortgage paid
Initialbasis 500,000
Less: Proportional deduction
(500/6,500 x P400,000) (30,769)
Final Basis ~ P469,231
x Vanishing deduction rate (within 1 year) 100%
Vanishing deduction + P469,231
ESTATE TAX RETURN PREPARATION
Mr. Bu Ang, single and a non-resident alien, died of a heart attack in 2020, eer
the following properties in favor of his heirs:
Gross estate within the Philippines P30,000,000 ©

Gross estate outside the Philippines 20,000,000
Funeral Expense 500,000
Judicial and administrative expenses 2,000,000
Claims against the estate * 5,000,000
His gross estate includes family home valued at P8,000.000.
Required:
1. Compute the correct estate tax due
2. Fill-up the Estate Tax Return
Solution:
Gross estate, Philippines P30,000,000
Ordinary deduction (3,000,000)
Standard deduction (500,000)
Taxable net estate P26,500,000
x Estate tax rate 6%
Estate Tax Due P1,590,000
NOTE:
Additional exercises on Estate Tax Return preparations are shown in the
Chapter 4.
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Chapter S - Deductions from Be. o OSS Estate
. 5 Re aii
forem secs
Use Orey, tem: Beress
of wanenal tesvoons
BIR Forn No.
1801 Estate Tax Return
Jarry Boaw ws equred rte BF CAPITAL LETTERS ying BLACK PR Liet anita bores with an %*
ane cS) ‘Two cones MUST be Sed mat Pe BA ari ore Pend by Pe treaytr.
0, 1,1 ,5,2)0| 2Amended Return? No | 3 No. of Sheet’s Attached
Number (TIN)n
$ Taxpayer Identificatio | 4, 2,3 [1B19,4 2 [al 3,6 0, 0, 0, 0| ERDO Code
A\N
158 Has an extension tb fie return been

158 Has the estate Deen setied
15C Has an ertansion to pay the tax been granted?
46 NET TAXABLE ESTATE pomrarv, toma

47 Apgicable
Tax Rate
48 ESTATE TAX DUE fem 1582859 ty 823 7)
9A Foregn
Esute Tax Paid
98 Tax Paid n Ret Previously Fiied, f ths is an Amended Retum
$9C Tota amo ies tht ans 125
20 Tax Payable fer Stee95

21 Less: Porton of tax allowed for payment by inctaimert be pad on or before
22 Tax Payable
(re reatrere fen Dies24)
ZBD Total Penatties paum or ters 34 © tem 235

24 TOTAL AMOUNT PAYABLE gr rs Darel 220) Fer fem 22 ari 2D) 1 9,0 0 0
pusartt te posers df the Nalend ter Revenue Code. 01 smerded, ond fe requtrtons caved under efor bevel. Futter, we ave macur consent bb he procezang of myow miemeion
ANG ,GUMALI NG
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Clap 3 - Deductions fhm the Gross Estate
BIR Form No.

1801 | ‘Estate Tax Return ait
a erm!
2
4231914) 36,5,0,0 OfAIN U
Perey.
30 Farndy HOM iron Pet v tered 144
34 Gross Estate pase of mere 29 te 3h
STA Standard Seductions [ns¢ kane t Cine 9 Reseet nd Peo trae tr Non Reses hays
STC Often Specty§

S7O Total Speci Detuciors Sued aen Sa Q
SB NET ESTATE (ae Oierstem
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39 Less: Stare of Survvang Spouse pve Coqtioet Bxiate uncer tem 36-Cotumn & eyted ty
0 HET TARABLE ESTATE prem 53 Lexs tem 3H (To Pate tem 1G ty
Scock Cortiicate} No. of Far Vartet

Vsue | Boot
No. ‘Shares Value ver Share
The
| CHAPTER EXERCISES 7
PROBLEMS
P3.1. (LOSSES)
Various types of losses were incurred by a decedent/estate as follows:
» Loss due to typhoon, a day before the decedent's death, P1,000,000.
« Loss due to shipwreck, two (2) months after the decedent's death,
P500,000.
» Loss due to robbery, eight (8) months after the decedent's death,
P2,000,000.
* -Swindling loss incurred 2 months before death, 800,000
« Gambling losses before death, P2,250,000
REQUIRED:
Question #1: How much is the deductible “losses” from the gross
estate of the decedent?
Question #2: How much is the deductible “losses” from the gross
estate of the decedent assuming the robbery loss was incurred 1 %
years after the decedent's death?
P3.2. (CLAIMS AGAINST THE ESTATE / INDEBTEDNESS, CAIP, etc.)

The heirs of a resident citizen decedent with a total gross estate of
P15,000,000 provided the following data:
# Receivable from Juan, a debtor P500,000

» Amount collectible from Juan 400,000
= Unpaid taxes on the estate before death 150,000
» Unpaid taxes on the estate after death 50,000
« Unpaid mortgage on the estate 200,000
= Funeralexpenses_ . 82,000
« Unpaid loans arising from debt instruments (notarized) 125,000
"Unpaid loans arising from aeet instruments (not 75,000
notarized),
* Casualty loss 65,000
REQUIRED: Determine the total amount of allowable deduction

from gross estate of the decedent including applicable special
deduction.
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Chapter 2: Dadactions from the. Gross Estate
P3.3.. (CLAIMS AGAINST INSOLVENT PERSONS - CAIP)

Case A Case B Case C Case D
Receivable from a P500,000 P500,000 P500,000 PS500,000
debtor
Amount collectible 400,000
Debtor's total assets 400,000 1,200,000 1,200,000
Debtor's total liabilities 1,200,000 800,000 800,000
- excluding tax payable
Unpaid taxes 800,000
Allowable deductions-
CAIP
P3.4. (CLAIMS AGAINST INSOLVENT PERSONS)

The following data were taken from the estate of Pedro:
= Claims against Juan (insolvent), 2100,000, fully uncollectible.
* Claims against Manuel (insolvent), 200,000, 50% collectible.
* Claims against a person who absconded, P300,000.
REQUIRED: Based on the data provided, determine the allowable

deduction from Pedro’s gross estate.
P3.5. (CLAIMS AGAINST INSOLVENT PERSONS)

The gross estate of Juan includes P200,000 receivables which is duly .
notarized from a debtor (Pedro) whose records show:
Assets P400,000
Liabilities 800,000
Pedro’s liabilities composed of the following:

= Due to the BIR for unpaid taxes, P200,000
= Due to Juan, P200,000
= Due to other creditors, P400,000
REQUIRED; Determine the amount of allowable deduction from

Juan’s gross estate in relation to its receivable from Pedro.
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Chapter JS = Deductions fom the Gross Estate
P3.6. (VANISHING DEDUCTION)

Juan, a Filipino residing in Davao died on December 10, 2023, leaving a
gross estate of P45,000,000 including a parcel of land valued at
P11,250,000, which he inherited from his father who died on October 5,
2020; that the land was previously taxed with a fair value of P9,375,000
for estate tax purposes in the estate of his father; that the land was
subjected to a mortgage of P4,687,500 at the time it was inherited by the
present decedent, which amount was deducted from the net estate of the
father; that the present decedent paid P1,875,000 of the mortgage
indebtedness and that the total deductions claimed for expenses, losses,
including the unpaid mortgage of P2,812,500 was P5,625,000.
REQUIRED: Determine the correct amount of vanishing deduction, if any.
P3.7. (STANDARD DEDUCTION)

Determine the allowable standard deduction from the following
independent cases:
CASE PARTICULARS
: Decedent is single and a resident citizen of the Philippines
WP
Decedent is a head of the family and a resident citizen of the

Philippines
Decedent is a resident alien
OO
Decedent is a non-resident alien, reciprocity clause under the

tax code is applicable
Decedent is a non-resident alien, reciprocity clause under the
m
tax code is not applicable
P3.8. (FAMILY HOME)

Determine the deductible family home in 2024 from the following
independent cases: -
CASE Particulars Family Home
A Decedent is single P10,0000,000
B Decedent is a head of a family 5,000,000
C Decedent is married. The family home
is the exclusive property of the surviving 8,000,000
spouse
D _Decedent is married. The-family home . 10,000,000 .
is the exclusive property of the decedent
E Decedent is married. The family home 12,000,000
is classified as conjugal property
F Decedent is married. Fifty percent 10,000,000
(50%) of the family home is.classified as
conjugal property, the remainder is the
exclusive property of the decedent
» 115
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y
Chapter 3 - Deductions fri the Gross Etat,

COMPREHENSIVE PROBLEM
P3.9.
The administrator of a decedent's estate (head of the family) provided the
following data: \
Property:
Shares of stock of a domestic corporation (2,000 P8,000,000
shares) inherited six (6) years ago
House and lot, family home, located in Davao, inherited 2,000,000
two (2) years ago at a value of P1,500,000
Jewelry items, in the Philippines at the time of death 400,000
Jewelry items kept abroad 200,000
Bank deposit in a Philippine branch of a U.S. bank 5,000,000
Interest from bank deposit earned after death 25,000
Expenses.and other charges:

Funeral expenses, Philippines 280,000
Judicial expenses, abroad ~ 400,000
Judicial expenses, Philippines - 50,000
Claims against the estate with the notarized debt 120,000
instrument issued in the Philippines,
Donation to the Philippine government as provided.in ns 250,000
will
REQUIRED: Determine the net taxable estate assuming:

1. The decedent was a Filipino citizen but a resident of Australia
2. The decedent was not a Filipino citizen but a resident of
Davao City
P3.10.
_ A resident decedent, head of family, died leaving the following properties
and obligations:
Cash in bank, 50%, donated mortis causa to Nat'l
Govt;50-% to Q.C. gov't P 300,0000
House and lot in Makati, Family Home 1,500,0000
Other real properties 15,000,000
Farm lot 825,000
Claim against an insolvent debtor 225,000
Transfer in contemplation of death (gratuitous) 4,250,000
Transfer passing under special’ power of 75,000
appointment:
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Chapter as ei Deductions from rr Gross Estate
Deductions claimed:
Funeral expenses * 575,000
Judicial expenses . 67,500
Donation mortis causa to Quezon City government 150,000
Unpaid mortgage on the farm lot ' 75,000
The farm lot was inherited 5 % years ago by the decedent before his
death with a value then of P575,000 and a mortgage indebtedness of
P150,000.
REQUIRED: Determine the following:

-1._ The taxable net estate .
2. The taxable net estate assuming the farm lot was inherited five
(5) years ago.
P3.11.
Juan died leavinga gross estate of P12;800,000 including a land inherited
from his uncle 3 % years before his death.and a car donated to him seven
(7) years before his death. The following data pertain to the two
properties:
Unpaid Mortgage FMV upon receipt FMV upon death

Land P100,000 P1,800,000 P1,250,000
Car 50,000 300,000 400,000
The decedent was able to pay % of the unpaid mortgage on the land
‘before his death.
Other deductions claimed are as follows:

Expenses, losses, indebtedness, taxes © 2 300,000
(excluding the unpaid mortgages above)
Transfer to the Govt. (included inthe estate) __ - 300,000
Death Benefits from Employer under RA 4917 200,000
Family home (included in the estate) 2,000,000
REQUIRED; Determine the net following:

1. Vanishing deductions
2. The net taxable estate
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Chapter JS - Deductions from te, Gross Estate
TRUE OR FALSE
1. Deductions from gross estate are highly disfavored in law; he who
claims deductions must be able to justify his claim or right.
2. Deductions from the gross estate are generally presumed to be
conjugal deductions, unless specifically provided otherwise.
3. Obligations contracted by a person during his lifetime are terminated
upon his death.
4. All claims against the insolvent person are deductible from the
5. In a claim against insolvent person, the insolvency of the debtor must
be proven and not merely alleged.
6. It could be that the amount to be included as part of the gross estate
in a claim against insolvent person is less than the full amount owed.
7. So that unpaid mortgage may be deducted from the gross estate, the
fair market value of the mortgage property must form part of the gross
estate in full.
8. For unpaid taxes to be deductible from gross estate, such must have
accrued at the time or before the decedent's death.
9. Unpaid income taxes: incurred before the decoronts death is
deductible from the gross estate.
10. Casualty loss is deductible from gross estate if such loss was incurred
during the settlement of the estate.
11. Casualty losses could be claimed as deduction from the gross income
and from the gross estate.
12. In computing for vanishing deduction, the value to be taken is the
lesser amount of the value of the property at the date of the previous
transfer or the value of the Propel at the date of death of the
decedent. —
13. Vanishing deduction is being allowed to lessen the impact of
successive taxation of the same property. within a very short period.
14. The benefit of vanishing deduction may only be applied once.
15. The maximum amount of deductible family hame from the gross
estate is P10, 000, 000.
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MULTIPLE CHOICE.
Choose the letter of the correct answer.
1. Which of the following statements is true?

a. Deductions from gross estate are highly disfavored in law; he who
claims deductions must be able to justify his claim or right.
b. Receipts or invoices or other evidence to show that the expense
was really incurred, if applicable, must duly support deductions
against the gross estate. °
d. Neither ‘a” nor “b”
2. Which is false?
a a. The estate tax is computed based on the net estate or taxable
estate.
b. The net estate is:determined by subtracting from the gross estate
the deductions authorized by law.
ORDINARY DEDUCTIONS
LITe — Indebtedness or Claims against the Estate

3. Which among the following statements is correct?
|. | An obligation that had prescribed already during the lifetime of
the decedent, or that was unenforceable against him when still
alive, will not be claim against his estate when he shall be
dead.
ll. If a monetary claim against the decedent did not arise out of a
debt instrument, the requirement on a_ notarized debt
instrument does not apply. ,
a. lonly c. Both| and Il
b. Ilonly - d. Neither
I nor II
- 4, The following statements pertain to indebtedness for estate tax

purposes. Which is false?
|. | When a person leaves property shtitvibersd by a mortgage or
indebtedness, his gross estate must include the fair market
value of the property, undiminished by the mortgage or
indebtedness.
ll. Include in the computation for the gross estate only the equity
of the decedent on the property.
119
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Chester 3 - De ctions fom the Gross Estate
lll. . If the loan is merely an accommodation loan, where the

proceeds of the loan went to another person, the value of the
_ unpaid loan must not be included in the receivable of the
estate.
a. only. c. | and Il only
b. Il only d. Il and III only
5. -Which among the following is false?

|. Ifa claim against the estate arose out of a debt instrument, the
debt instrument must be notarized regardless of its source.
ll. If a monetary claim against the decedent did not arise out of a
debt instrument, the requirement on a notarized debt
instrument does not apply. : or,
lll. If the loan was contracted within three years before the death
of the decedent, the administrator or executor must submit a
statement showing the disposition of the proceeds of the loan.
b. Il only Me d. Il and III only
6. Awa Nhen died on January 1, 2023 leaving among others the

following charges and obligations:
Real property tax for the year 2022. P100,000
Notarized interest-bearing promissory note 100,000
Accrued interest on the promissory note at the time of
death 20,000
Interest to accrue on the promissory note from the date 10,000
of death to the date of maturity
Income tax due for 2022 200,000
. How much were the allowable ordinary deductions from the gross
estate? ;
a. P420,000 c. P510,000
b. P430,000 d. P520,000
7. Claims against the estate of the decedent who died on February 2023:
Notes payable for money borrowed, not notarized P500,000
Accounts payable for supplies used in business 200,000
Debts from gambling losses 120,000
How much is the deductible claims against the estate?

a. P200,000 c. P470,000
b. P320,000 - _d. P850,000
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Chipler 3 - De. ection from he Gross Estate
LiTe-Claims against Insolvent persons
8. The following statements regarding “claims against'insolvent persons”

are correct, except
It is a deduction even if the debtor had some properties
It can be a deduction even if secured by a mortgage
2979
It should always be included in the gross estate

Should be omitted: in the computation for the net taxable
estate if entirely uncollectible

a. A person is insolvent when his properties are not sufficient to
pay his obligation.
b. The claims of the creditors will be satisfied out of the available
properties of the insolvent debtor.
c. For estate tax purposes, there are two kinds of. creditors,
preferred and ordinary creditors.
d. All of the above
LiTe-Taxes
10. Which of the following is not deductible from the gross estate of a
decedent?
I. Income taxes on income received after death
Il. | Property taxes not accrued before death
lll. Estate Tax
b. Il and Ill-only d. None of the above
11. Which of the following taxes is deductible from the gross estate?
a. Income tax paid on income received after death
b. Property tax not accrued prior to death
_¢. Estate tax paid on a foreign country
d. Donor’s tax accrued prior or before death
12.On June 30, 2023, Juan Dela Cruz passed away. The following
unpaid taxes relate to his property, income on. his property, and
estate, Estate tax was filed and paid early on December 31, 2023.
2022 Income tax from practice of profession P300,000
Income tax-practice of profession for Jan. to June 2023 100,000
Income tax of the estate, July to December 2023 200,000
Real property taxes for 2021 and 2022 150,000
Business taxes for 2022 . 100,000
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Chapter 3S - Dec ions from the Gross Estate
The total taxes that may be deducted from the gross estate is:
a. P550,000 c. P850,000
b. P750,000 d. P650,000
LITe-Losses
13. Which of the following is wrong? Losses deductible from the gross
estate
a. Should only be of property included in the Philippine gross
estate.
Should be incurred during settlement
of the estate.
aos
May be arising from storm.

Should not be compensated by insurance or other form of
indemnity.
14. Which is deductible from the gross estate of resident decedent?

a. Loss of portion of the estate incurred during settlement period
such as those arising from theft.
b. Loss of portion of the estate incurred 200 days before the
death of the decedent.
Cc. Loss of portion of the estate incurred a month before the death
of the decedent.
d. Losses on the portion of exclusive capital of surviving spouse
incurred during settlement of the estate.
Use the following information for the next four questions:

Among the properties included in the gross estate of the decedent at the
time of death is a three-story commercial building with a fair market value
of P12,000,000. During the settlement of the estate and before the last
day of paying the estate tax, the said property is destroyed by fire. The
fair market value at the time of the incident was P13,000,000.
15. The amount that should be included as part of the gross estate is
a. PO c. P12,500,000
b. P12,000, 000 d. P13,000,000
16. The amount of deductible loss will be

a. PO ; c. P12,500,000
b. P12,000,000 d: P13,000,000
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Chapter JS = Dy ction from aha: Gross Estate
17. Assume that the property was insured for P10,000,000 and the
amount recovered from the insurance company was P9,000,000. The
amount of deductible loss will be ‘
a. P1,000,000 ~ ¢. P9,000,000
b. P3,000,000 d. P12,000,000
18. Assume that 70% of the property is destroyed by fire and the property
is not insured. The deductible loss will be
a. PO c. P8,400,000
b. P3,600,000 d. P12,000,000
Transfer for Public Use
19. It pertains to the amount of all the bequests, legacies, devises or

transfers to or for the use of the Government of the Republic of the
Philippines, or any political subdivision thereof, for exclusively public
purposes.
a. Transfer for public use c. Property previously taxed
b. Vanishing deduction d. Inheritance
20. By "transfer for public use" as deduction from the gross estate is
meant dispositions in:
|. A last will and testament in favor of the Government of the
Philippines or any political subdivision thereof, for exclusively
public purposes.
ll. | Transfer to take effect after death in favor of the Government
of the Philippines, or any political subdivision thereof, for
exclusively public purposes.
a. | only c. Both | and II
b. Il only d. Neither|
nor II
21. Which of the following is nof a remedy against double taxation

a. Estate tax credit
b. Vanishing deduction
c. Delivery of property from fiduciary heir to fedeicommissary in a
fideicommissary substitution
d. Transfer for public use
22. Which is wrong? Deduction for transfer for public use:

a. Means legacy in a last will and testament to the government
b. Means device in a last will and testament to the government
c. Includes any kind of transfer to the government for public
. purpose
d. Will not include legacies to charitable institutions
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leper 3 - Deductions from i Gross Estule
23. Yumao Na Rhin transferred a 3,000 square meter lot purposely to be

converted as a zoo to be administered by the city government of Tawi-
tawi. The lot was acquired by the decedent 10 years ago for P50,000.
Its fair market value at the time of Yumao Na Rhin’s death was
P5,000,000. The deduction from the gross estate relative to this
transfer is ,
a. P50,000 _ *c, P5,000,000
b. P2,500,000 d. PO
Vanishing Deductions
24. Pedro died leaving a car he acquired by purchase from Juan 4 years
ago. The car, was correctly included in his Siess estate. The
ee vanishing rate:is
0% c. 60%
r 40% ; d. 80%
25. Vanishing deduction is availed by taxpayer to:

|. Reduce his output vat
ll. | Reduce his gross income
lll. | Reduce his gross estate
a. | only . c. Ill only
b. ll ony d. Il and Ill only
26. Which of the following statements regarding gross estate is incorrect?

a. Vanishing deduction is being allowed to lessen the impact of
successive taxation of the same property within a very short
period due to the death of the decedent-transferor.
b. Even property previously taxed situated outside the
Philippines of a non-resident alien decedent, for estate tax
purposes, can be allowed vanishing:deduction
c. So that unpaid mortgage may be deducted from the gross
estate, the fair market value of the mortgaged property must
form part of the gross estate in full.
d. For unpaid taxes to be deductible from the gross estate, such
must have accrued at the time or before the decedent's death.
27. Which of the following properties of Namayapa Nha who died

December 1, 2023 is subject to vanishing deduction?
Property 1: Rest House in Tagaytay purchased in 2021
Property 2: Commercial lot and building inherited from her mother
in 2020 and where the estate tax thereon had not been paid. -
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C Aifier J - Datctions frm he Gross Estate
Property 3: Donation from a friend in 2022.

Property 4: Property won in a lottery six (6) months before death.
Property1 Property2 Property3 Property 4
a..-No No _ Yes Yes
b. No No _ Yes No-
c. "Yes Yes No Yes
d. Yes Yes - No No
28. Ded Nha, a citizen of the Philippines and a resident of Bacolod City,
died testate on May 10, 2023. Among his gross estate are properties
inherited from his deceased father who died on April 4, 2020. What
percentage of deduction will be used in computing the amount of
vanishing deduction?
a. 80% of the value taken as basis for vanishing deduction;
b. 100% of the value taken as basis for vanishing deduction;
c. 60% of the value taken as the basis for vanishing deduction
d.. 40% of the value taken as the basis for vanishing deduction
29. On .September 4, 2023, Yumao N. Rin died leaving an apartment

building which has a fair value of P10,000,000 which :he inherited from
his mother. The property was valued at.P9,000,000 at the time of
inheritance dated July 28, 2020. The building has a previous
mortgage of P1,500,000 of which P500,000 was paid by Yumao.N.
Rin prior to his death. In computing for the vanishing deduction, what
percentage will be used and how much will be the vanishing
deduction?
a. 40%; P3,060,000 c. 40%; P3,230,000
b. 60%; P3,000,000 d. 20% P3,050,000
SPECIAL DEDUCTIONS
Standard Deduction
30. Which is not true about standard deduction?

a. Itneed not be substantiated
b. ‘It does not apply to nonresident alien decedent -
c. It must be reflected in the estate tax return
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Chapter 3 = De ction from ae. Gross Estate
31. Statement 1: The P5,000,000 standard deduction for estate tax

purposes is a short-cut, legal mechanism to further exempt the less
privileged estate and heirs from the tax burden.
Statement 2: The BIR may examine the bank deposit of a decedent

for the purpose of determining his gross estate without violating the
Bank Secrecy Law.
b. Statement 1 is true but statement2 is false
c. Statement is false but statement 2 is true
Family Home
32. Statement 1: The maximum amount of deductible family home from

the gross estate is P10,000,000
Statement 2: \f the family home is exclusive property of the surviving

spouse and has a current market value of P10,000,000, such amount
is not subject to estate tax.
a. Statements 1 and 2 are correct
b. Only statement 2 is correct
c. Only statement 2 is correct
d. Statements 1 and 2 are incorrect
33. Only one statement is correct? A deduction for family home

a. Shall be allowed if the family home is in the Philippines.
b. Shall be at a maximum of P10,000,000, based on cost.
c. May be allowed for two family homes (one in the city and
another in the province), both in the Rhilippines and with
certifications of the barangay captains.
d. Shall be deducted at lesser than P10,000,000 if, with
vanishing deduction and unpaid mortgage or indebtedness,
the value of the family home is already reduced to zero.
34. A resident citizen had family home in the Philippines. He worked

abroad and was temporarily absent from his family home when he
died. Which of the following statements is correct?
a. The decedent would not be allowed family home deduction
because he was abroad when he died. °
b. The decedent would not be, allowed family home deduction
because he was a nonresident citizen when he died.
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Chapter Sie Ley hetons from thy Gross Estate
c. The decedent would be allowed family home deduction

because actual occupancy of the family home was not
interrupted or abandoned because of his temporary absence.
d. The decedent would be allowed family home because: all
decedents were allowed family home deduction.
Amount received under RA 4917
35. Which of the following statements regarding amount(s) received or

receivable under RA4917 is not correct?
a. Any amount received by the heirs from the decedent’s
employer as a consequence of the death of the decedent-
employee in accordance with Republic Act 4917 shall be
included in the gross estate of the decedent.
b. Any amount received by the heirs from the decedent's
employer as a consequence of the death of the decedent-
employee in accordance with Republic Act 4917 shall be
deductible from the gross estate of the decedent.
36. A decedent has one year left to complete 30 years of continuous

service with his employer when he died. His only heir received
P1,500,000 as benefit under RA 4917. What should be the amount to
be included in the gross estate?
a. P1,500,000 c. P1,000,000
b. P500,000 d. PO
37. Based on the preceding problem, what amount should be included as

part of deductions from gross estate?
a. P1,500,000 c. P1,000,000
b. P500,000 d. PO
Deductions for Nonresident Alien Decedents
38. One of the following is allowed as a deduction from the gross estate of
a non-resident alien under the Tax Code but is prorated between
Philippine gross estate and the total or world gross estate
a. Losses, indebtedness, claims against the estate and taxes
b. Share of the surviving spouse
c. Vanishing deduction
d. Standard deduction
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Chapter J - Detection from a Gross Estate
39. A nonresident alien decedent left the following assets:

Shares of stock, domestic corporation P10,000,000
Shares of-stock, foreign corporation 30,000,000
Tangible personal property, Philippines © 60,000,000
Losses, unpaid indebtedness. and 12,000,000
taxes
The country where the decedent is a citizen and resident does not
impose transfer tax on transmission ‘of intangibles of Filipinos not
residing therein.
The taxable net estate in the Philippines is

a. P38,000,000 mR, c. P47,800,000 -
b. P42,800,000 d. P52,300,000
40. A nonresident alien died on Maret 10, 2023 leaving the following
properties and deductions
Shares of stock, domestic corporation P5,000,000
Shares of stock, foreign corporation 5,000,000
Tangible personal property 15,000,000
Deductible losses, indebtedness and 5,000,000
taxes
Assuming there is no reciprocity, the estate tax due is

a. P930,000 c. P15,000,000
b. P660,000 d. P16,000,000
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Chapter Z
Property Relations
Pre-nuptial agreements are no longer new nowadays. This

practice, based on history, dates back to the ancient Egyptians and have
existed for many centuries in Anglo-American tradition. In previous times,
including the Philippines, the parents of the bride and groom negotiated
the agreement on the new couple's behalf. The term is also used
interchangeably with premarital agreement or ante-nuptial agreement. -
Preparing a prenuptial agreement in

The , pre-nuptial
the Philippines is relatively easy since agreement, which must be
Philippine laws do not require the agreement in writing, should be
between the future spouses to be registered executed prior to the
in a government office to. be binding between celebration of the
the parties. However, as security for the ‘Marriage, and signed by
properties which may, be affected by the the future spouses. Any
agreement, and in order to bind third parties; modification Ms ian
Philippine law requires the recording of the amendment thereto may
prenuptial agreement in the Local Civil only be allowed before the
Registry where the marriage is celebrated, celebration of the
and at the Register of Deeds of the province marriage.
where the affected property is located.
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Chapter 4 - Ree Riltiin ;
PROPERTY RELATIONS
The system of property ( B Art.1 Family Code (EO 209)
relationship is applicable only to Marriage is a special contract
married persons. /t is used to of permanent union between a
_ distinguish a conjugal or community man and a woman in
property from an exclusive property. accordance with law. It is not
Under Art. 74 of the: Family
;
Code, the eubions, 2 sapton, excep
that marriage settlements may
property relationship between fix the property relations during
husband and wife shall be governed the marriage within the limits
in the following order: provided by law.
1) By marriage settlements executed

before the marriage. 4
2) By the provisions of law i,
3) By the local custom.
Types of Property Relations or Marriage Settlements (Art. 75 FC)
The future spouses may, in the marriage settlements, agree upon the
following systems of property relationship:
(1) Absolute community of Property (ACoP)

(2) Conjugaf partnership of gains (CPG)
(3) Complete separation of property
(4) Any other regime
In order that any modification in the marriage settlements may be

valid, it must be made before the celebration of the marriage (Art. 76 FC).
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 régistered in the
local civil registry where the marriage contract is recorded as well as in the
proper registries of properties.
Law Governing Property Relations
Irrespective of the place of the celebration of the marriage and

their residence, the provisions of the Family Code (E.0. 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.
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Clete &#-£ Vo ty Relations
In the event the couple had not adopted or agreed upee a system
before their marriage, the rule is
Date of Marriage Property relationshi
Before August 3, 1988 —> CPG
On or After August 3, 1988 —> ACoP
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.
_ If decedent was married: with surviving spouse, property in the

gross estate need to be classified’ into conjugal or exclusive property fo
facilitate the computation of the % share of the surviving spouse on the
_ net conjugal property as well as the net taxable estate of a married
decedent. Conjugal property is owned by both spouses while Exclusive
property is owned either by the husband or by the wife. The exclusive
_ property of the husband is known as “capital” while that of that of the wife
is known as “paraphernal’ property.
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. /n general, 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
Family Code.
Chapter 3 of the Family Code provides the provisions applicable to

Absolute Community of Property. The absolute community of property
between spouses shall commence at the precise moment that the
marriage ,is celebrated. Any stipulation, express or implied, for the
commencement of the community regime at any other time shall be void
- (Art. 88).
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Chapter 4. - Lay Riletions
Uv
COMMUNITY PROPERTY under ACoP
‘In general, property will be presumed to belong to the community,

unless it can be proven to be exclusive property. Article 91 of the Family
Code provides:
Unless otherwise provided or in the marriage settlements, the community property

shall consist of ALL the property owned by the spouses at the time of the celebration
of the mamiage or acquired thereafter (Art. 91).
EXCLUSIVE PROPERTY under ACoP

The following shall be excluded from the community property (Art. 92):
1. Art. 92(1) of the Family Code - 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. Art. 92(2) of the Family Code - Property for personal and exclusive
use of either spouse. However, jewelry shall form part of the
community property.
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 fo acquire the property. In
general, property acquired during marriage by purchase with exclusive
money or by exchange with exclusive property, shall be poreMaeet
exclusive property.
3. Art. 92(3) of the Family Code - Property acquired before the

marriage .by either spouse who has legitimate descendants by a
former marriage, and the fruits as well as the income, if any of
such propery,
Property acquired during the marriage is presumed to belong to the

community, unless it is proved that it is one of those excluded therefrom
(Art. 93).
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Chapter “p - cone” Relations
TABLE 4-1: Exclusive and Common Pro under ACoP

PROPERTY CLASSIFICATION
| Acquired BEFORE marriage: ;
1. ALL properties owned before marriage or brought to the * Community
marriage. :
Acquired DURING marriage:
2. Property acquired during marmage (other than Community
inheritance or donation); Art. 91
3. Property acquired during marriage through gratuitous Exclusive
transfer (inheritance or donation)
4. Property acquired during marriage through gratuitous Community
transfer (inheritance or donation) where the donor,
testator or grantor provided that they shall form part of
the community property [Art. 92(1)]
5. Property acquired using common fund Community
6. Property for personal and exclusive use Exclusive
= EXCEPT, JEWELRY = Community
NOTE: The classification of the fruit or income of the property shall follow the classification
of the source of the fruit or income.
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 (Art. 106 Family Code).
CPG APPLIES (Art. 105):
1. When the future spouses agree to it in the marriage settlement; or
2. To conjugal partnerships of gains already established between
spouses before the effectivity of the Family Code (August 3, 1988),
without prejudice to vested rights.
Exclusive property under CPG (Art. 109):
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 ITHnEY of the wife or of the
husband.
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CONJ UGAL PROPERTY - CPG:
All property acquired during the marriage, wither the acquisition

appears to have been made, contracted or registered in the name of one
or both spouses, is presumed to be conjugal unless the contrary is proved
(Art. 116).
Article 117 of the Family Code provides that the following are
conjugal partnership properties:
“hh 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;
That which is obtained by labor, industry, or work or profession of

either or both of the spouses;
The fruits received or due during the marriage coming from the
common property or 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;
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;
Property acquired by occupation such as hunting or fishing by

spouses or by either of them;
Livestock existing upon the dissolution of the partnership in excess of

the number of each kind brought to the marriage by either spouse;
and
Those which are acquired ‘by chance, such as winnings from gambling
or betting. However, losses therefrom. shall be borne’ exclusively by
the loser-spouse.
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Chapter 4 - Prpery Relations
; , "
TABLE 4-2: ed . Exclusive and Conjugal Property under CPG
PROPERTY CLASSIFICATION
Acquired BEFORE marriage:
1. ALL properties owned before marriage or brought to the Exclusive
marmiage.
Acquired DURING marriage:

2. Property acquired through onerous title using common Conjugal
fund
3. Property through gratuitous transfer (inheritance or Exclusive
donation)
4. Property acquired using exclusive fund Exclusive
NOTE: Under CPG, the fruit or income of the property shall be classified as conjugal
property (Art. 106 FC)
ILLUSTRATION 1:
A decedent died on February 29, 2020. 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 (ACP). If the item is an exclusion from the gross estate, mark the item
as “X”
ITEM | PROPERTY CPG ACP

Cash owned by the decedent before the marriage
Os
Commercial building owned before marriage .

Income from item no.2
BS) Sy eGo
Commercial building inherited during marriage

Personal property received by the surviving spouse as
gift before the marriage
SN
Property acquired by the decedent with cash owned

before the marriage
Personal belongings used exclusively by the decedent
10. Property unidentified when and by whom acquired
11. Income from item no.10
12. Cash from compensation income of the decedent
13. Lot acquired before the marriage by the surviving
spouse (surviving spouse had a previous marriage
and legitimate children in that previous marriage)
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Chapter 4. - Prperty Reletdince
14, Income from the lot (item no. 13)
15. Exclusive property was sold, and was repurchased
| using conjugal property
16. Residential house built using the salary of the surviving
spouse during the marriage. (House was built on the
. | exclusive lot of the decedent)
17. Lot described in item no. 16
18. Livestock brought into marriage
19. Livestock in excess of what was brought into the
marriage after the dissolution of the marriage
20. Property acquired by barter using the exclusive
property of the decedent
ANSWERs:
CONJUGAL PARTNERSHIP OF GAINS
1.E 6. X 11.C 16.:

' 2; TG 12.¢ ATSE
3. C 8. E “hE 18.E
4.E 9.E 14.C 19.C
5. C 10.C 15.C 20.E
ABSOLUTE COMMUNITY OF PROPERTY
1. C 6. C 11.C 16.C
2. C 7.C 12.C 17.E
3. C 8. C 13..E 18.C
4.E 9. E 14.E 19.C
5. E 10.C 15.C — 20.E
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.
\’
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Chapter 4 - is al Relations
All taxes; liens, charges, and ‘expenses including major and minor
repairs upon conjugal property.
. All taxes and expenses for mere ‘preservation, . made during the
marriage, upon the separate property of either spouse.
Expenses to enable either spouse to commence or complete a

professional, vocational, or other activity for self-improvement.
Debts before marriage of either spouse in so far as they have

redounded to the benefit of the family.
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.
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 (% 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.
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Chapter 4 - ee Relations
i TABLE 4-3: PRO-FORMA COMPUTATION of Net Taxable Estate

Conj/Comm. Exclusive Total
GROSS ESTATE: XX XX
« — 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 (LITe) (xx) (xx)
« — Transfer for public use “ (Xx)
» Vanishing deduction (ACOP) (Xxx) (xx)
= Vanishing deduction(CPG)*** - (xx) (xx)
= Net Community/Exclusive before. XX XX
special deductions
LESS: SPECIAL DEDUCTIONS

» — Standard deduction (xx)
= Family home (xx)
« Amount received under RA4917 (xx) -
NET ESTATE before share of the surviving spouse XX
LESS: % SHARE OF THE SURVIVING SPOUSE on the net (xx)

conj./comm. property
NET TAXABLE ESTATE Pxx
x Estate Tax Rate 6%
ESTATE TAX DUE Pxx
NOTE:
*Intangible properties including rights accruing before death, claims against insolvent persons, RA
4917, and receivable as proceeds from life insurance taken out by the decedent.
**Refer to certain transfers made before death but will take effect upon death (transfer mortis causa)
as well as revocable transfers (Chapter 2).
*** Always an exclusive deduction under CPG.
Transfer for public use shall be classified as exclusive deductions unless expressly provided
otherwise.
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ILLUSTRATION 2 (Based on RR 12-2018):
Proper Presentation of FAMILY HOME and STANDARD DEDUCTION under TRAIN Law
(Other amounts are assumed for illustration purposes only)
CASE A — Decedent is unmarried; Family Home (FH) is more than 210,000,000:
Real and personal properties P14,000,000

Deductions:
Ordinary Deductions
Unpaid Real estate tax (2,000,000)
Special Deductions
Family Home - (10,000,000) -
Standard Deduction (5,000,000) _(47,000,000)
Net Taxable Estate ~_P 27,000,000
(£Q Although the value of the Family Home is.P30,000,000, the allowable
deduction from the gross estate as provided in the Tax Code (as amended) is
P10,000,000 only.
CASE B — Decedent is unmarried; Family Home (FH) is below 210,000,000:

Deductions:
Ordinary Deductions
Unpaid Real estate tax (2,000,000)
Special Deductions
Family Home (9,000,000)
Standard Deduction (5,000,000) (16,000,000)
Net Taxable Estate P7,000,000
CASE C — Decedent is married: FH is conjugal valued at more than P10,000,000:

Exclusive Conjugal Total
Conjugal properties:
Exclusive properties P6,000,000
Gross Estate P6,000,000 P44,000,000 —P50,000,000
LESS:
Ordinary Deductions: -
Conjugal Ordinary Deductions (2,000,000)
Exclusive Deductions (1,000,000)
! (3,000,000)_
Net estate before Special Deductions P5,000,000 P42,000,000 = P47,000,000
139
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The
Chapter 4 - Property Rilticn
ete, ~
Special Deductions
Family Home (P30M/2); Max P10M (10,000,000)
Standard Deduction (5,000,000)
Net estate before share of the surviving spouse P32,000,000
Share of the Surviving Spouse (P42M/2) (21,000,000)
Net Taxable Estate ___P11,000,000
£Q If decedent is married: Special deductions are neither classified as exclusive nor
common deductions.
CASE
D - Decedent is married; FH is conjugal valued below 210,000,000:
Exclusive Conjugal Total
Conjugal properties: .
Real and personal properties _ P14,000,000
Exclusive properties P6,000,000
Gross Estate P6,000,000 P23,000,000 P29,000,000
LESS:
(3,000,000)
Net estate before Special Deductions P5,000,000 P21,000,000 ° P26,000,000
Special Deductions
Family Home (P9M/2) (4,500,000)
Standard Deduction (5,000,000)
Net estate before share of the surviving spouse P16,500,000
Net Taxable Estate ~ ; P6,000,000
CASE E - Decedent is married; es is exclusive valued at more than P10,000,000:

Exclusive °. Conjugal Total
Conjugal properties:
Exclusive properties:
Family Home P30,000,000
Other exclusive properties 6,000,000
Gross Estate P36,000,000 P14,000,000 P50,000,000
LESS: , |
(3,000,000)_
Net estate before Special Deductions P35,000,000 P12,000,000 = P47,000,000
Special Deductions
Family Home (Max P10M) (10,000,000)
Standard Deduction af (5,000,000)
Net Estate ~ P32,000,000
Net Taxable Estate P26,000,000_
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Chas ter # - ey Relations
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 So

(Title IV, Chapter 7 of the Family Code)
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
common, without the consent of the other, until after the
termination of their cohabitation
In the absence of proof to the

contrary, properties acquired while A party who did not participate in the
they lived together shall be acquisition by the other party of any
property shall be deemed to have
presumed to have been obtained by
their joint efforts, work or industry, contributed jointly in the acquisition
and shall be owned by them in equal thereof if the former's efforts consisted in
shares. the care and maintenance of the family
and of the household.
141
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Olapter 4p - prey Relation,
)
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 ney be, if
existing under the valid marriage.
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Chapter 4+ - Lr ey Relations
ESTATE TAX RETURN PREPARATION

Mr. Pim Musay, Filipino and married, died in 2021, leaving his
estate in favor of his
surviving spouse. The following information were made available:
Real property in Quezon City, acquired during marriage. Said property is supported bya
barangay certification that the spouses resided in this property at the time of Mr. Musay’s
death. The fair market value of this property as per latest tax declaration is P15,000,000 -
while the zonal valuation as of the time death is P 20,000,000. Said real property was held
as a mortgage in a loan applied by the spouses. As of the time of death, the outstanding
balance of the mortgage payable amounted to P5,000,000.
Real property in Batangas, inherited by Mr. Musay during marriage, two and half years
ago, from his late father. The fair market value per tax declaration as of his death is
P8,000,000 while the zonal valuation is P12,000,000. Said property. was previously taxed
at a value of P10,000,00 when Mr. Musay inherited the property from his father. .
Real property in Cavite, donated to Mrs. Musay, 10 years ago (before marriage) by his
parents-in-law . The fair market value as per latest tax declaration as of the time of Mr.
Musay’s death is P3,000,00 while the zonal valuation is P4,000,000.
Other exclusive properties of Mr. Musay P1,000,000; ; Other properties of Mr. and Mrs.
_ Musay- P3,000,000. Funeral expenses incurred by the estate during the wake and burial
of Mr. Musay amounted to P1,900,000.
REQUIRED:
Compute item 34 (Gross Estate) of BIR Form No. 1801

Compute Schedule V (Ordinary deductions) of BIR Form No. 0801
Compute item 40 (Net Taxable Estate) of BIR Form No. 1801
Compute item 20 (Estate Tax Payable) of BIR Form No. 1801
ANSWERS: =
Item 34'(Gross Estate) of BIR Form No. 1801 =P40,000,000

Schedule V (Ordinary deductions) of BIR Form No. 0801 =P10,250,000
Item 40 (Net Taxable Estate) of BIR Form No. 1801 =P3,750,000
Item 20 (Estate Tax Payable) of BIR Form No. 1801 =P225,000
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Solution:
Exclusive Common Total

RP QC P20,000,000
RP Batangas. P12,000,000
RP Cavite < : 4, 000,000
Other excl 1,000,000
Other common 3,000,000 ;
GROSS ESTATE P22,000,000 P27,000,000 — P40,000,000
ORDINARY DEDUCTIONS:
Mortgage Payable ((et;74) (5,000,000) (5,000,000)
Vanishing deduction [(et:74) (5,250,000) ** (5,250,000)_
P7,750,000. 22,000,000 —_P29,750,000
NET ESTATE :
Share ofthe SS - (11,000,000)
Standard deduction (5,000,000)
Family Home (P20M/2) . (10,000, 000)
P3,750,000
NET TAXABLE ESTATE
Estate tax rate 6%
Estate Tax Payable P225,000
Value to take/initial basis , P10,000,000

= Value in the GE of the decedent - P12M
» — Value upon inheritance — P10M
Proportional deduction:
10/40 x P5,000,000 (1,250,000)
Final Basis P8,750,000
x 60%
Vanishing Deduction P5,250,000**
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Chel ‘toy fe - Property Relations
Repudiic
of the
memes ofrmaees”
Wee Ory. Rem washen oF meson mioseone
BIR Form No.

Jarusny D8 ENS) Ermer at equred norman & CANTALLETTERS wing BLACK Pa iet eepicabie bores wan an xt
‘Two Contes MUST be Seed nat: te 892 and one hes by Pe temper.
Page1
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48 ESTATE TAX DUE fem t¢s.tany ty 220 15
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188 Tax Pad n Retin Previously Filed, i ths is an Amanded Retan
TSC Total Sanctions
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20 Tax Payable free tis em ej
21 Less: Porton of tax allowed for payment by installment in be paid cn or before
22 Tax Payable pr renter pet 201 ess Ben 2}
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24 TOTAL AMOUNT PAYABLE grer tt pyrene Suen cf tems Dard 20) (For hatiiment Dames tem 22 ar 2) 2)5 0 0
Further, Swe que oyour caraent b Pe pocetang ofmyostatin
PAMPAM MUSAY
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si :by es pert Reilitiai,
[|
BIR Form No.
4,2 3 9,4 )2,3,6,5,0,0 S|ALY, ,)PyI
30 Farnty Home prem hen ¥ toned $4)

1,000,000
‘MM Gross Estate pier of pave 29% TD
S7O Tota Spetd Deturs Ganges Ske TO

‘3B NET ESTATE (tee: 3¢ Less tem 37D 1 75,0 ,0,0,0
39 Less: Share of Surving Spouse pret Cayuga Exae uncer fem 36-Coaem 8 Grwed by 5
40 RET TAXASLE ESTATE mem 34 Lers mer 32) (TD Fat 2 Oem 12) 7 0 0,0
Narme of Corporation Gasstcaton | os oon =e. fie at Nt Bee

\Vauue per
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| CHAPTER EXERCISES
PROBLEMS
P4.1. ;
Classify the following as exclusive or conjugal property under Absolute
Community of Property (ACoP) and Conjugal Partnership of Gains (CPG).
Write “C” in the space provided if the property is classified as common
property and write “E” if the property is classified as exclusive.
ACoP CPG
4. Properties owned by the spouses before the
marriage
2. Rental income on a property acquired before
marriage.
3. Property acquired during marriage
4. Income on property described in #3
5. Property acquired by gift before marriage
7. Property inherited during marriage
9. Property acquired during marriage from
common fund
41. Car purchased during marriage using funds
derived from practice of profession
12. Property owned before marriage for personal
and exclusive use of the decedent.
13. Jewelry items during marriage for personal and
exclusive use by the decedent
14. Real property acquired during marriage with
decedent's own income
15. Car inherited during marriage
P4.2.
A citizen decedent died in 2021 leaving the following:
Land inherited from mother (during marriage) two (2) years 24,000,000
before death; valued at P15M when inherited
Personal property owned before marriage 16,000,000
Other personal property acquired during marriage 5,000,000
Deductions claimed:
Casualty losses 500,000
Unpaid taxes 400,000
Claims against the estate 600,000
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Funeral:expenses | 300,000
Medical expenses 400,000
DETERMINE THE FOLLOWING under Absolute Community of Property:

a) Net exclusive property of the decedent
b) Net community property..
c) Share of the surviving spouse
d) Net Taxable estate
DETERMINE THE FOLLOWING under Conjugal Partnership of Gains:

e) Net exclusive property of the decedent
f) Net community property
g) Share of the surviving spouse
h) Net Taxable estate
P4.3.
A non-resident alien decedent died leaving the following:
= Conjugal properties, Philippines, R5,000,000
« Exclusive properties, Philippines, 2,000,000
= Conjugal properties, USA, 10,000,000
« Exclusive properties, USA, 5,000,000
The following deductions were claimed:

« Funeral expenses, 21,250,000
« Judicial expenses, 800,000
= Claims against the estate, 1,725,000
= Transfer for public use, 200,000
= Medical expenses, 875,000
Included in the Philippines gross estate (conjugal) were the following:

= Shares from domestic corporation, P500,000
* Interest in a local partnership, P-1,000,000
« Other tangible personal properties, P3,500,000
The exclusive properties in the Philippines are all tangible personal

properties, including a car, which was inherited 3 % years before the
decedent's death. The fair market value of the car at the time of death of the
decedent was P500,000.

a) Net exclusive property of the decedent
* b) Net community property
c) Net Taxable estate
d) Estate tax due
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P4.4. |
A resident alien, single died intestate on November 2, 2023. The following
data were provided to you:
House and lot, USA (Family home) P20,000,000
Investment in stocks, Philippines 8,000,000
Investment in stocks, USA” 10,000 000
Investment in bonds, USA (85% of the business of the 7,000,000
USA Corporation is in the Philippines) 5
Cash in bank, Philippines 3,000,000
Cash on hand, Philippines 500,000
Accounts receivable from a debtor who resides in USA 2,000.000
(fully uncollectible)
Vehicles in the Philippines 8,000,000
Actual funeral expenses 1,500,000
Judicial expenses 3,000,000
Unpaid Philippine income tax for income in 2022 1,200,000
Loss on December 31, 2023 due to theft 800,000
Bequest to Quezon ay government for children’s 700,000
playground
Receivable under RA 4917 500,000
Medical expenses 5,000,000
DETERMINE THE FOLLOWING:
a) Net Taxable estate
b) Estate tax due
P4.5.
Pedro Cruz died intestate on September 30, 2023. He left the following
properties:
a) Land (1,000 sqm.) inherited from his father 15 months before his
death. Fair market value per tax declaration at the time of Pedro's
death was 220,000,000 while the zonal value was 230,000 per sqm.
The estate of the Pedro’s father paid the estate tax on the land based
_ona fair market value of P25,000,000.
During marriage, Pedro mortgaged the inherited land for 27,000,000

for the benefit of the family. Of this amount, P3,500,000 was by Pedro
before his death.
b) House and lot (Family Home) acquired during marriage, FMV,

50,000,000.
Other tangible personal properties (mode of acquisition unknown),

FMV, P22,00,000.
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The following were claimed as deductions from the gross estate:

= Funeral expenses, R480,000
Medical expenses, P:1,200,000
.Unpaid taxes, R-1,200,000
Other claims against the conjugal broperties, P5,000,000
Claims against insolvent persons, P500,000

a) Vanishing deduction
b) Net Taxable estate
c) Estate tax due
TRUE OR FALSE
Write True if the statement is correct, otherwise, write False.
1. Under the regime of absolute community of property, the husband
and the wife place in a common fund the proceeds, products, fruits and
income from their separate property and those acquired by, Biter or both
spouses through their effort or by chance.
2; The gross estate of a married decedent under the system of
conjugal partnership of gains during the marriage is a mixture of his
exclusive property and conjugal property.
< The inclusion of claims against insolvent person in the gross

estate of the decedent spouse as either exclusive or communal property
will depend on the nature of the Gaimwnethes itis for an exclusive or for a
communal property.
4. Under conjugal partnership of gains regime, the spouses become
co-owners of all property they bring into the marriage and those
acquired by each or both of them during marriage. _
5. The share of the surviving spouse in the estate shall be deducted
equal to % of the gross conjugal property.
6. Properties acquired by gratuitous title during the marriage are

generally classified as conjugal properties under conjugal partnership of
gains.
7. Property inherited before the manage becomes community
property upon marriage.
8. —° In the property relationship of absolute community, the spouses
are co-owners of community properties.
9. Modifications in the marriage settlements or prenuptial
agreements may be made anytime during marriage.
10. ‘ Under the system of absolute community of property, the
vanishing deduction is a charge against community property.
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Chapter 4 — Property Relations
11s Under the system of conjugal partnership of gains, the vanishing
deduction is a charge against exclusive property.
12. Spouses shall be governed by complete separation of property

regime 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.
13. Under absolute community of property regime, property acquired

during the marriage by gratuitous title by a spouse, and the fruits as well
as the income thereof are the property of such spouse.
14. Under conjugal partnership of gains, property for personal and

exclusive use of either spouse is considered as exclusive property, except
jewelry.
15. Property acquired before the marriage by either spouse who has
legitimate descendants by a former marriage, and the fruits as well as the
income, if any, of such property is classified as exclusive property under
Absolute Community of Property.
MULTIPLE CHOICE.
Principles °
1. Under the law, the property relationship between husband and wife
shall be governed in what order?
|. | By marriage settlements executed before the marriage.
ll. | By the provisions of law
lll. | By the local custom.
a. |, Il, Il c. Il, Il, |
b. |, Ill, Il d. Ill, il, |
2. ‘In the absence of a marriage settlement, or when the regime agreed

upon is void, the property relations of the spouses who married before
August 3, 1988 shall be governed by:
a. Absolute community of properties.
b. Conjugal partnership of gains
c. Absolute separation of properties.
d. No property relations.
3. In the absence of a marriage settlement, or when the regime agreed

upon was void, the property relations of the spouses who were
married on or after August 3, 1988 would be:
a. Absolute community of property
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b. Conjugal partnership of gains

c. Absolute separation of property
d. Either absolute community or conjugal partnership of gains
Properties owned by the spouses before and brought into the

marriage will be classified as:
Under absolute community Under conjugal partnership
a Community ‘Conjugal
b Exclusive Exclusive
GC Community Exclusive
d Exclusive . Conjugal |
The fruits from exclusive property of each spouse due or received

during the marriage are classified as: -
Under absolute community Under conjugal partnership
a Community : Conjugal
b. Exclusive Exclusive
c Community Exclusive
d. Exclusive ‘Conjugal
Under the system of absolute community, the following are not

exclusive property, except:
a. Rental income on a property acquired before marriage
-b. Property from which the rental income in “a” was derived
c. Receivable arising from lending of funds inherited before
marriage
d. Property owned before marriage for personal and exclusive
use of the decedent when he was still alive
Which of the following is exclusive property under the system of

conjugal partnership of gains?
a. Property before marriage
b. Inheritance during marriage
c. Property acquired during marriage out of exclusive money
d. Allof the above.
Under absolute community of property, which of the following is 4

community property?
a. Property inherited by the surviving spouse during the
marriage..
b. Property bought during the marriage using the salary of the
decedent earned before marriage.
c. Personal belongings bought during the marriage for the
exclusive use of the decedent.
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9. Whichis not an exclusive property of a spouse?

a. That which is brought to the marriage as his or her own.
b. ‘That which each acquired during the marriage by gratuitous
title.
c. That which is acquired by right of redemption.
d. That which is purchased with the spouses’ common fund.
10. Which of the following distinguishes conjugal property from community

property?.»
a. Properties inherited during marriage.
b. Those acquired through occupation during marriage.
c. Fruits of exclusive property.
d. Income earned by each spouse during marriage.
11. The gross estate of a decedent who was married at the time of death
will be composed of:
a. His capital property, the wife’s paraphernal property and the
common property
b.- His capital property and the common property
c. Common property
d. His capital property
12. Statement 1:. Under the regime of absolute community of property,

property acquired during the marriage is presumed to belong to the
community, unless it is proved that it is one of those excluded
therefrom.
. Statement 2: Under the system:of conjugal partnership of gains 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. s
Deductions
13. Statement 1: ‘Under the system of absolute community of property,

vanishing deduction is a charge against community property.
Statement 2: Under the system of conjugal partnership of gains, the
vanishing deduction is a charge against exclusive property.
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c. Statement 1 is false but statement2 is true
14. Which of the following rules shall apply 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?
a. Wages and salaries shall be owned by them in equal shares.
b. Property acquired by both of them through their work or
industry shall be governed by the rules on co-ownership.
c. Neither party can encumber or dispose by act inter-vivos his or
share in the property acquired during cohabitation and owned
in common, without the consent of the other, until after the
termination of their cohabitation.
d. All of the above
15. The following are required to be listed as part of the gross Saale but
are exempted from estate tax, except
Share of the surviving spouse
Transfer for public use
aooD
Exclusive property of the decedent

Amount received by heirs under RA 4917
16. All of the following items are allowed as deductions against exclusive
portion of the estate, except
a. Unpaid taxes
b. Claims against insolvent persons
c. Vanishing deduction
d. Family home
17. The following are exclusive property of each spouse. Which one is
not?
a. That which each acquires during the marriage by lucrative title.
b. That which is purchased with the exclusive money of either
spouse.
c. That which is acquired by exchange with other property
belonging to the spouses.
d. That which is brought to the marriage as his or her own,
18. Net share of surviving spouse equals

a. Gross conjugal property less charges against conjugal
property.
b. Net conjugal property multiplied by two.
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c. Net conjugal property divided by two.
Decedent is a citizen of the Philippines and a resident of Quezon City,
died leaving the following:
Rest house in Batangas inherited from his father during P2,500,000
marriage
Car received as gift from his mother before his marriage 1,000,000
Commercial land received as ait from .his mother before 5,000,000
marriage
Income from the commercial land 500,000
Commercial building inherited by the surviving spouse 1,500,000
during marriage
Income from exclusive Pretty: of ‘his spouse, during 200,000
marriage
Jewelry owned before the marriage 300,000
Personal exclusive property of the surviving spouse 100,000
Other properties at the time of her death 1,000,000
19. Under the regime of conjugal partnership of gains, how much is the
decedent's gross exclusive properties?.
a. P8,800,000 c. P8,700,000
b. P8,600,000 d. P10,300,000
20. How much is the gross conjugal properties?

a. P7,700,000 c. P1,500,000
b. P9,200,000 d. P1,700,000
21. Under the regime of absolute’community of property, how much is the

decedent's gross exclusive properties?
a. P2,800,000 c. P3,800,000
b. P2,500,000 d. P3,500,000
22. Using the same assumption in the preceding number, how much is the
gross conjugal properties?
a. P7,500,000 c. P7,800,000
b. P6,800,000 . d& P6,800,000
23. Pedro died on November 1, 2023, leaving the following properties:

¢ A parcel of land inherited during marriage from his father who died
on December 30, 2017 .
» Fair market value in 2019 — P3,500,000
« Fair market value in 2023 — P5,000,000
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= Mortgage assumed and paid by Pédro - P500,000
“+ Conjugal properties valued at 20,000,000.

Deductions claimed against the estate:
Casualty loss incurred ten (10) months after death ‘3,500,000
Unpaid taxes 2,000,000
Other claims against the estate _ 4,500,000
How much is the share of the surviving spouse?

a. P10,000,000 c. P5,250,000
b. P4,500,000 d. P5,000,000
24. A married, nonresident citizen died leaving the following common

properties, obligations, and expenses:
Real property, Philippines P7,000,000
Real property, USA 5,000,000
Claim against insolvent persons 50,000
Unpaid taxes 50,000
Additional information:
«The real property in the Philippines includes the family home
valued at P1,500,000.
How much is the taxable net estate? ©

a. P225,000 c. P2,025,000
~ b. P250,000 d. P2,050,000
25. The following data were provided by the administrator of Pedro who
died in 2023:
Conjugal real properties P7,000,000
Conjugal family home 5,000,000
_ Exclusive properties 2,500,000
Paraphernal properties 3,500,000
Deductions claimed:
« " Casualty losses - exclusive 100,000
«= Unpaid taxes 50,000
«Other losses . 1,000,000 ©
Additional Information:
" 25% of “Other losses” were incurred beyond one year from
death of the decedent.
= Unpaid taxes pertain to property taxes (conjugal assets)
incurred after death of the decedent:
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The taxable net estate is

a. P525,000 , c. P6,150,000
b. P875,000 d. P8,300,000
Use the following data for the next three (3) questions:
The following data were taken from the records of a citizen decedent:
Land. inherited from his mother 2 years before death, P24,000,000
during marriage (valued of P15,000,000 when
inherited)
Other personal property owned before marriage 16,000,000
Other personal property acquired during marriage 5,000,000
Cost and expenses:
Claim against the estate ahD 2,000,000
Losses 1,000,000
26. The amount of exclusivé property under absolute community of

property should be:
a. P15,400,000 c. P45,000,000
b. P30,800,000 _ d. P24,000,000
27. The share of the surviving spouse under the absolute community of
property should be:
a. P15,400,000 c. P45,000,000
b. P30,800,000 d. P9,000,000
28. The share of the surviving spouse under conjugal partnership of gains
should be:
a. P1,000,000 c. P9,000,000
b. P2,000,000 d.- P18,000,000 ©
The next two (2) questions are based on the following:

A married decedent who was under absolute community of properties died
on October 15, 2023. His executor provided the following information:
Real property inherited during marriage P5,000,000
Real property abroad given as gift by his uncle during 15,000,000
marriage
Land received as donation during the marriage © 5,000,000
House built on the donated land using communal fund 9,000,000
Income from the real property received as gift 1,000,000
Real property received by the surviving spouse before 18,000,000
the marriage
Real property acquired by the spouses during the 15,000,000
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marriage
Poa properties acquired during the marriage 10,000,000
Donation mortise causa to the City of Manila 1,500,000
The following were considered as deductions from the gross estate:

Actual funeral expenses P 1,000,000
Judicial expenses . . + 1,500,000
Obligations incurred that benefited the community 2,500,000
properties
Claims against an insolvent debtor 500,000
Unpaid mortgage on inherited land (originally © © 600,000
P2,000,000 during inheritance)
‘Loss of vehicle due to theft on December 31, 2023 3,000,000
(part of personal properties acquired during
marriage)
Unpaid realty tax on real property received. as gift 300,000
from his uncle
- The value of the real property at the time of inheritance was
P3,000,000, received 3 years before death.
- The value of the real property received as gift (4 % years before
death) from his uncle was P:10,000,000 at the time of donation.
- The donated land (received 6 years before death) and the house built
on it were certified by the Barangay Captain as their family home.
29. How much was the vanishing deduction?

a. P169,000 c. P-1,431,000
b. P858,600 d. P1,976,484
30. How much was the estate tax due?

a. 169,000 c. P1,431,000
b. P858,600 d. P1,976,484
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Chapter .
Estate Tax Credit and 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
the amount of tax it has paid to a foreign credit for estate tax paid:
country. The amount could be claimed as to a foreign country
a deduction if such taxes pertain to _ shall not exceed the
properties which are included in the gross proportion of the tax
estate for Philippine estate tax due in the Philippines
computation. This deduction is allowed which the decedent's
by law to lessen the harshness of net estate situated
international double taxation where the within such country
same estate is being subject to both the bears to his entire net
foreign estate tax and the Philippine estate.
estate tax.
Nonresident alien decedents are not entitled to estate tax credit. This
is because under the law, the properties of nonresident alien decedents
located abroad or with situs abroad are excluded in the computation of
gross estate subject to estate tax in the Philippines. Thus, not affected by
the harshness of indirect international double taxation.
159
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Z los ie pee Tee Ch Le (® Wircehetubee Estate
Philippine Estate Tax Due
In determining the allowable estate tax credit, the estate tax due in
the Philippines shall be computed first based before the estate tax credit
may be deducted, as follows: —
Estate TaxDue_ Pxx

Less: Tax credit for foreign estate taxes paid (xx)
(The lower between estate tax paid abroad and the limit)
Philippine Estate Tax Payable - Pxx:
STATUTORY FORMULA FOR THE COMPUTATION OF ESTATE TAX CREDIT:
LIMIT 4 or LIMIT A= IF THERE IS ONLY ONE (1): FOREIGN COUNTRY
Net estate, foreign country Philippine Estate

Net estate, world X Tax Due = Pxxx (Limit)
Versus
Actual Tax Paid, foreign country = Pxxx (Actual)
Allowed Tax Credit (Lower amount) = Pxxx (Tax credit).
ILLUSTRATION 1: - ae <
A resident citizen died in 2023 leaving the following:
Taxable net estate, Philippines P8,000,000
Taxable net estate, USA 2,000,000
Estate tax paid, USA 3 400,000
How much is the estate tax payable?

“+ Answer: P480,000 computed as follows:
Limit Actual Allowed
P2,000,000
P10,000,000 X P600,000% =P120,000 400,000 120,000
Estate Tax Due (P10M x 6%) P600,000**

Less: Estate tax credit (120,000)
Estate tax still due and payable P480,000
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LIMIT 2 or LIMIT B: IF THERE ARE > 1 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 Philippine Estate =

Net estate, world X Tax Due Pxxx (Limit)
Versus
Actual Tax paid, all foreign countries = Pxxx (Actual)
Limit 2 (Lower amount) = Pxxx (Limit 2)
« Step 3 - Choose the lower amount between Limit A and LimitB. -

Limit 1 (from Step 1) PXxx
Limit 2 (from Step 2) "POO
Allowed Tax Credit (Lower amount) Pxxx
ILLUSTRATION 2: |
A nonresident citizen died in 2023 leaving the following: |
Net estate, Philippines (net of special deductions) P8,000,000

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?
“* Answer: P480,000
Solution:
Total taxable netestate —-R-12,000,000

Estate tax % (TRAIN Law) 6%
Estate tax due P720,000
Less: Estate Tax Credit ( 240,000)**
Estate Tax Payable P480,000
raa rnd
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, Chapter S : Estate Tae Cred t (® Distihetabkle Estate
LIMIT 1:
JAPAN:
Limit Actual Allowed,
P3,000,000 '
P12,000,000 X 720,000 =P180,000 P200,000 180,000
UK:
P2,000,000
P12,000,000 X P720,000 =P120,000 100,000 —P100,000
LIMIT1 P280,000
LIMIT 2:
P4,000,000
P12,000,000 XxX P720,000 =P240,000 P300,000 240,000
ALLOWABLE TAX CREDIT (Lower between Limit'1 & 2) P240,000**
NOTE:
Under Limit 1, the allowed tax credit for Russia was not computed because the net estate
therein was negative. There was no estate tax paid in Russia. However, for purposes of
computing Limit 2, the negative net estate of a foreign country shall be included in the numerator
net estate all foreign countries).
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.
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. Chapter 5 ~ Estate Tage Credit. Distribatable 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 includéd 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 _ included ~ included
of appointment
Proceeds of life insurance included included
Exclusions such as SSS, GSIS, etc. _ not included included
ALLOWABLE DEDUCTIONS
Funeral expenses** Non-deductible Actual expense
Judicial** Non-deductible Actual expense
Unpaid taxes actual actual
Claims against the estate actual actual
Claims against insolvent perso actual actual
Losses actual (settlement period) actual
Transfer for public purpose actual actual
Vanishing deduction as computed Non-deductible
Standard deduction - P5M Non-deductible
Family home ~ with limit of P10M Non-deductible ©
Medical expenses** Non-deductible actual
Amount received under RA 4917 actual Non-deductible
Share of surviving spouse %2 net conjugal % net conjugal
NET TAXABLE ESTATE Pxxx
ESTATE TAX DUE PXxxx (xxx)
DISTRIBUTABLE NET ESTATE PXxx
{2 **No longer allowed as deductions from gross estate beginning January 1, 2018.
21 The rules in classifying property into conjugal and exclusive property are the same for
purposes of computing the net distributable estate.
£4 The estate tax due shall be deducted in computing the net distributable estate
£2 For purposes of illustration, assume the decedent in the Formula above is a citizen decedent.
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ILLUSTRATION
3:
A resident alien decedent, head of the family, died in 2023 leaving the following:
House and Lot, Ayala Alabang (Family Home) P30,000,000
Car in Ayala Alabang . 5,000,000
Cash in bank, Ayala Alabang 15,000,000
House and Lot-Global City 10,000,000
Cash in bank-Global City 15,000,000
House and Lot-Libis, Q.C. 10,000,000
Cash in bank-Libis, Q.C 15,000,000
Funeral expenses 1,000,000
Judicial expenses 1,500,000
Claim against the estate 3,000,000
Losses 4,000,000.
(50% were incurred more than 1 year after death)
Determine the correct amount of estate tax due and the net distributable estate.
Solution- ESTATE TAX DUE:

Deductions:
Claim against the estate P3,000,000
Losses (within the settlement period) 2,000,000
Medical expenses Not allowed
Standard deduction 5,000,000
Family Home 10,000,000 __—_ (20,000,000) —
Net Taxable Estate P80,000,000 °
x Estate tax rate 6%
Estate Tax Due ___
4,800,000 _
Solution-NET DISTRIBUTABLE ESTATE:

‘Gross Estate P100,000,000
Deductions:
Funeral expenses P1,000,000
Judicial Expenses 1,500,000
Claim against the estate 3,000,000
Losses 4,000,000
Estate Tax Due 4,800,000. _ (17,300,000)
Net Distributable Estate P82,700,000
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PROBLEMS
P5.1.
The administrator of a decedent (single) died with the following
’ information: 7 :
Net estate before special deductions, P12,000,000
Philippines
Net estate, France 3,000,000
Estate tax paid, France 200,000
REQUIRED: Determine the estate tax payable assuming: -
a) The decedent was a resident citizen, determine the estate tax
payable.
b) The decedent was a nonresident alien, determine the estate
tax payable.
P5.2.
A Filipino decedent, residing in U.S. died in 2023 leaving the following:
Net taxable estate, Philippines P710,000,000
Net taxable estate, Canada 8,000,000
Net taxable estate, USA 2,000,000
Estate tax paid in USA 90,000
Estate tax paid in Canada 520,000
REQUIRED: Determine the estate tax payable.
P§.3.
A resident alien decedent died in 2023 leaving the following:
Net taxable estate, Singapore 5,000,000
Net taxable estate, China 3,000,000
Net taxable estate, Japan 2,000,000
Estate tax paid in Singapore 200,000
Estate tax paid in. China
Estate tax paid in Japan - 100,000
REQUIRED: Determine the estate tax payable.
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| Ohepte Exercises - Tee Credit @ Distribatable Estate
P5.4.
A nonresident citizen (head of the family) from Quezon City died intestate
on November 2, 2023. The following data were provided to you:
House and lot, USA (family home) P8,000,000

Investment in stock, Philippines 800,000
Parcel of land in Quezon City inherited from his father 2 % 1,000,000
years ago
Investment in bonds of a foreign corporation (85% of its ©. 700,000
business is located in the Philippines) |
Cashin bank, USA_ ~ 650,000
Cash in bank, Philippines 450,000
Accounts receivable from a debtor who resides in Quezon 200,000
City (fully uncollectible)
Car, USA 2,000,000
Car, Philippines 800,000
Actual funeral expenses 480,000
Claim against the estate (indebtedness of the decedent in 940,000
the Philippines during his lifetime)
Unpaid Philippine income tax for income in 2021 and 2022 320,000 -
Loss on December 31, 2023 due to theft (Q.C., 180,000
Philippines)
Devise to Quezon City for children’s playground 1,400,000
‘Medical expenses incurred prior to death 500,000

a) Net Taxable estate
b) Estate tax due
c) Net distributable estate
1. Tax credit for death taxes paid to a foreign country is not allowed to a
decedent who was .
a. Non- resident citizen of the Philippines
b. Resident alien decedent
c. Non-resident alien with intangible personal property in the
Philippines and there is reciprocity.
d. None of the above.
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Chapter Evercises ~ (7 Credit (® Distributable Estate
2. Which of the following is not allowed with tax credit for payments of
estate tax on foreign countries?
a. An American residing in the. Philippines at the date of death
b. A Filipino citizen who migrated in the United States.
c. An alien who was a resident of his own country at the date of
death
3. Statement 1: Tax credit for foreign estate’ tax” is allowed to minimize

the effect of multiplicity of situs.
Statement 2: Filipino citizen decedents whether resident or non-
resident are allowed of tax credit for foreign estate tax.
4. The amount derived by the ratio of net estate in foreign country over
net estate from all locations on the Philippine estate tax.
a. Vanishing deductions - c¢, Estate tax credit limit
b. Estate tax credit d. Tax avoidance
5. AFilipino taxpayer died in 2021 leaving the following:

Net taxable estate, Philippines, P3,000,000; Net Estate - Korea,
P1,000,000; Estate tax paid in Korea, P80,000.
How much is the estate tax due after tax credit?

a. P60,000 c. P200,000
b. P180,000 d, P240,000
6. An American, residing in the Philippines, diéd in 2023 leaving the

following estate before deducting special deductions, if any:
Net taxable estate, Qatar 3,000,000
Net taxable estate, Dubai 1,000,000°
Estate tax paid, Qatar =
Estate tax paid, Dubai -
There is no estate tax law in Qatar and Dubai. The estate tax due
after tax credit is
a. PO c. P600,00
b. P400,000 d. P1,000,000
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Chapter Exvercises - Tage Credit (& Dustthutable Estat,
7, The decedent is a resident citizen under the absolute community

property regime. The following data were provided:
Gross estate, Philippines P14,000,000

Gross estate, France 6,000,000
Deductions, Philippines 3,000,000
Deductions, France 2,000,000
Estate tax paid, Philippines
Estate tax paid, France
Community property is composed of 60% of the total estate

including a family home amounting to.P8,000,000.
The correct estate tax due after tax credit is .
a. P90,000 c. P150,000
b. P60,000 d. P125,000
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Donor’s Tax >
Donation is an act of liberality whereby. a person disposes
gratuitously of a thing or right in favor of another, who accepts it (Art. 725
of the Civil Code). ‘Although the law used the term “act”, the law considers
donation as a “contract”, as shown by the fact that it requires acceptance,
and that the rules on obligations and contracts aphly to it as a suppletory
law ot 732 CC).
NATURE OF DONOR’S TAX

A donor's tax (or gift tax) is a
tax levied, assessed, collected and
Wane
e IO:
paid upon the transfer by any person,

Tee
& Jars
©“) The donors. tax shall be

PRIOR
resident or nonresident, of the plopeny

~ imposed to the transfer of
by gift.
EE AT SOOT
property by gift, whether the

transfer is in trust or otherwise,
eSRtOC
peer yeme RENiT
It is a tax imposed on the

Sint
whether the gift is direct or

indirect, and whether the exercise of the donor's right during
property is real or personal, lifetime to transfer property to others in
entrar eee
tangible or intangible the form of gift. Hence, donor's tax is

Tau
oe 98(B), NIRC). not a property tax but an excise tax

SoeTa
pp LLB
ENT imposed on:the transfer of property by
way of gift inter-vivos (RR 12-2018).
. Donor’s tax is a direct tax because the tax is imposed on the

donor and determined with reference to all the donor's gifts. Donor’s tax
applies to both natural and juridical persons.
The term “transfer of property in trust or otherwise, direct or

indirect’ is used by the law in the most comprehensive sense. It includes
not only the transfer of ownership in the fullest sense but also the transfer
of any right or interest in property, but less than the title. A transfer
becomes complete and taxable only when the donor has divested himself
of all beneficiary interest in the property transferred and has no power to
revest any such interest in himself or his estate.
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Chapter 6 - Donar’s Lae
PURPOSE OF DONOR’S TAX
_ 1. To prevent 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. ;
ELEMENTS OF DONATION
In order to determine whether there was a donation, all.the following

elements shall be present:
1. Capacity of the donor to make donation
It refers to the condition and legal competence of the donor to

enter into a contract (since “donation”, as discussed in the preceding
page, is 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 “Consideration” i
property or right to transfer ownership means money or E
to another without consideration. Such equal value or some |
intent followed by a donative act is goods ‘or service |
essential to constitute a gift, and no capable of being |
strained and artificial construction of a evaluated in money.
supplementary statute should be banaue oem
PSR oan aa aS
included to tax as gift a transfer fy
actually lacking of donative intent.
Donative intent; If a gift is indirect, taking place by way of sale,

is required only | exchange, or other transfer of property (transfer for
in direct gifts inadequate consideration), donative, intent is not
necessary ‘(Section 100 NIRC). The intention to
donate is known by observing the forms required by
law to make it valid,
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Chapter 6 - Doner’s Lage
||LLUSTRATION 1:
Case A:
San Mig, Incorporated transferred a plant asset to Bibo Corporation, a subsidiary of
San Mig, Incorporated. Is the transfer subject to donor’s tax?
“+ Answer: No.
Due to the relationship of the donor and the donee (parent-subsidiary relationship),
the transfer is not subject to donor's tax because of wanting in “Donative Intent’.
Intent followed by a donative act is essential to constitute a gift.
Case B: i
A creditor merely desires to benefit a debtor. On January 1, 2023, without any
consideration from the debtor, cancels the debt. Should the amount of debt |
condoned be considered as donation by the creditor? |
+ Answer: Yes. .
‘Donative Intent” is present when a creditor cancels a debt without any
consideration. It was done by the creditor with pure act of liberality. |
Case C:
On January 1, 2023, a creditor cancels the debt of a debtor in exchange for services
rendered by the latter. Should, the debt cancelled by the creditor be considered as
donation?
“+ Answer:, No.
The cancellation of debt in the case provided was in consideration for services
rendered by the debtor. Hence, such transfer is onerous in nature, not gratuitous,
therefore not subject to donor's tax. The transaction has the effect of payment of
compersatian: The debtor is therefore subject to income tax, if applicable.
Case D:
In 2024, Omega Corporation cancels the P100,000 debt of its debtor-shareholder,
Pedro, because of a good thing done by him to the latter. Should the amount of debt
cancelled by the. creditor be considered as donation?
“+ Answer: No.
It is tantamount to a declaration of dividend. Therefore, it is an income which i is
subject to 10% final withholding tax on the shareholder.
Condonation or remission of debt is a mode of extinguishing an obligation. In the

case of Rafael Arsenio Dizon vs CTA (G.R. No. 140944), the Supreme Court
defined condonation or remission of debt as “an act of liberality, by virtue of which
the creditor, without receiving any equivalent, renounces the enforcement of the
obligation which is extinguished in its entirety or in that part or aspect of the same
to which the remission refers”. It simply means that by a generous act of a person
who, for instance, lends money to another with an obligation to repay, the borrower
is released from such obligation, hence, subject to donor's tax. WS
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3. Delivery
Donor’s tax applies to a.completed gift. .It is completed by the

delivery, either actual or constructively, of the donated property or the
instrument, to the donee. Section 12 of RR 12-2018 provides that the
law in force at the time of the perfection or completion of the donation
shall govern the imposition of donor’s tax, based on the fair market
value (FMV) of the property.
INCOMPLETE GIFT
A gift that is incomplete because of reserved powers becomes

complete when either:
= Donor renounces the power; or
= The donor's right to exercise the power ceases because of the
happening of some event or contingency or the fulfillment of some
condition, other than the death of the donor.
4. Acceptance
Donation is perfected not from the time of acceptance but from the
time of knowledge of the donor that the donee has accepted the
same. This is because the tax law consider donation not merely as an
act of gratuitously transferring property or right but as a “contract”.
Hence, there should be “meeting of the minds” between the donor and
the donee before the “donation (contract)” is perfected. As such,
delivery and acceptance is required to consummate donation.
Article 734 of the Civil Code (CC)
* The transfer is perfected from the moment the donor knows
of the
acceptance by the donee.
Acceptance must be made during the lifetime of the donor and of

the donee [Art. 746 (CC)]. Donations made to conceived and unborn
children may be accepted by those persons who would legally
represent them if they were already born (Art. 742 CC)
Completion and Perfection of Donation
The donor's tax shall not apply unless and until there is a
completed gift (RR 12-2018). The transfer of property by gift is perfected
from the moment the donor knows of the acceptance by the donee. On
the other hand, it is completed by the delivery (either actually or
constructively) of the donated property to the donee.
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The Law that Governs the imposition of Donor’s Tax
The law in force at the time of the perfection/completion of the

donation shall govern the imposition of donor's tax (Sec. 12, RR 11-2018).
ILLUSTRATION 2:
Ana is an OFW residing in Canada. As promised, she sent her younger

brother (Pedro) in the Philippines several pairs of Air Jordan shoes, a
cellphone and other gadgets worth P400,000 on December 1, 2023. Pedro
received the gifts on January 15, 2024 and immediately informed Ana of his
acceptance.
Question: What is the applicable donor's tax rate?
Answer: — ;
** 6% in excess of P250,000 (TRAIN Law)
he £2) The law in force at the time of the completion of the donation shall
: govern the imposition of donor's tax. The Tax Code as amended.
by the TRAIN which took effect on January 1, 2018, imposed a |
donor's tax_rate of 6% in excess of P250,000. Prior to the |
effectivity of the TRAIN Law, the donor's tax rate is subject to |
either graduated. tax rate or 30% of net gift depending on the |
classification of the donor and the relationship of the donor and |
the donee (refer also to page 178). |
FORMALITIES
DONATION OF MOVABLE PROPERTY
Donation of movable property may

Donation is a FORMAL
be made orally or in writing. An oral CONTRACT. Hence,
donation requires the simultaneous. delivery donations not in accordance
of the thing or of the document representing with the formalities as S
the right donated. If the value of the required by law shall be e
personal property donated exceeds P5,000, considered void. ;
of
the donation and the acceptance shall be | ;a

&
made in writing. Otherwise, the donation
shall be void (Art. 748 CC).
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Ohypte 6 - Donor’s Tait
DONATION OF IMMOVABLE PROPERTY
In order that the donation of an immovable may be valid, it must

be made in a public document, specifying therein the property donated
and the value of the charges which the donee must satisfy (Art. 749 CC),
A donation of this kind that does not comply with the formalities required
by law shall be deemed void.
Acceptance of immovable property

To be valid, immovable property may be accepted:
« In the same deéd of donation; or
« Ina separate public document. The donor shall be notified thereof
in an authentic form, and this — shall be noted in both
instruments.
TABLE 6-1: SUMMARY OF FORMAL REQUIREMENTS

| | REAL or REGISTRABLE
_ PERSONAL PROPERTY ‘PROPERTY
Amount | $P5,000 >P5,000 | Regardless of amount
Form of Donation | Oral or in writing In writing _|_In.a public instrument
Characteristics of Donor’s Tax

1. Donor’s tax is an “excise tax”, not a property tax. It is a tax imposed
on the “right” or “privilege” to transfer property by way of gift inter-
vivos.
2. Donor’s tax, being a “contract”, does not apply unless and until there
is a completed gift.
3. The transfer is perfected from the moment the donor knows of the
acceptance of the done.
4. Donor’s tax is a direct tax because the tax is imposed on the donor
and determined with reference to all the donor's gifts.
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. Consequently,
renumeratory donations are not really donations in substance.
The cause is not gratuitous, hence, not subject to donor's tax.
3. Modal - consideration is less than the value of the thing donated.
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Chapter 6 - Doner’s Lae
As to time of taking effect (Perfection):

1. Donation inter-vivos. A donation which takes effect during the
lifetime of the donor and the donee.
2. Donation mortis-causa. A donation which takes effect upon death
of the donor.
Void Donations
Under Art. 739 of the new civil code, the following donations shall be void:
1. Those made between persons who were guilty of adultery or
concubinage at the time of the donation.
2. Those made between persons found guilty of the same criminal.
offense, in consideration thereof.
_ 3. Those made to a public officer or his wife, descendants and
ascendants, by reason.
of his office.
In the case referred to in No.1, the action for declaration of nullity may
be brought by the spouse of the donor or donee and the guilt of the donor
and donee may be proved by preponderance of evidence in the same
action.
VALUATION-OF GROSS GIFTS
_ In valuing properties for donor's tax purposes, the principles in the

valuation of properties discussed in Chapter 2 for estate tax purposes also
applies. Therefore, as a rule, donor's tax should be based on the fair
market value of the property donated at the time the donation is
completed.
1. In General : Fair Market Value (FMV) at the time of death

2. Real property — : The higher between:
= FMV determined by the Commissioner; and
=» FMV as shown in the schedule of values fixed by the
provincial and city assessors (also known as
‘assessed value or FMV for real estate tax purposes).
3. Personal property — : Fair market value at the time of donation
4. Stocks, bondsand = Unlisted common share: Book value per share of the
other securities 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 (common or preference shares): FMV
shall be-the arithmetic mean between the highest and
lowest quotation at a date nearest the date of
COLNE a
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Cha fey" 6 - Douor’s Lage:
ILLUSTRATION 3: Determine the amount of gross gift in the following cases:
Case A: -
Pedro donated a parcel of land to Ana with the following details:
* — Area: 500 square meters
= Assessed value for real estate tax purposes: P 1,500,000
= — Zonal value determined by the BIR: P1,800,000
“+ Answer: P1,800,000
Case B:
Loma donated 10,000 shares of stock of PLDT ee and traded)
= — No. of shares: 1,000 shares
= — Highest quotation: P150 per share
= — Lowest quotation: P100 per share
“+ Answer: P125,000
" — The value of the gift shall be based on the mean value of the shares of stock. Gross
gift= 1,000 shares x [(P150 + P100)/2]= P125,000
Case C:
Mr. Mapagbigay bought a brand new car for his only son, Juan. The car was purchased at an
installment price of P1,050,000, payable in four (4) equal annual installment of P262,500.
The cash price at the date of purchased was P900,000. Determine the amount of gross gift.
« Answer: P900,000.
Installment price is not equivalent to fair market value.
Case D:
Mr. and Mrs. Mapagbigay donateda parcel of land to their only son, Juan with the following
details:
Assessed value as determined by City assessors P3,000,000
Zonal value as determined by the BIR 2,500,000
Fair market value as determined by independent real 3,300,000
property appraisers
Unpaid real property tax assumed by Juan * 250,000
Mortgage assumed by Juan - 500,000
Question: How much is the gross gift of the spouses (total)?

“ PANES: P3,000,000
The mortgaged and the unpaid taxes assumed by Juan are deductions from the gross
gift of the spouses, not exclusions, Hence, ignored for purposes of determining the
amount of the gross gif.
=_ Fair market value determined by independent real property appraisers shall be ignored
for donor's tax purposes. —_—— a
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TABLE 6-2: COMPARISONS BETWEEN ESTATE TAX AND DONOR'S TAX

RC as amended by RA 10963- T
ESTATE TAX » DONOR’S TAX
Concept Involved Succession Gift or donation

Donation mortis causa Donation inter vivos
Requisites or 1. Death of the decedent 1. Donative intent of the donor;

Elements 2. Heir or successor is alive at 2. Capacity or authority of the donor; ”
the time of the decedent's death 3. Delivery of donated property;
and is not disqualified to inherit. 4. Acceptance by the donee;
2.1 compulsory heir Additional requisite: -
2.2 voluntary heir Donation must be in proper form
3.Estate/Inheritance otherwise, void (Refer to Table 6-1)
Accrual Period upon the date of death of the at the time the gift or donation is made
decedent
Governing Law statute in force at the time of statute in force at the time of the
death of decedent perfection/completion of donation
Tax Rate e 6% net estate e 6% net gifts in excess of

P250,000
Filing & Payment e Within one (1) year from e Within 30 days from donation
death
e extension to file: e no extension to file
not more than 30 days
e pay as you file e pay as you file
e with extension to pay: e no extension for payment
2 years (extrajudicial) *
5 years (if judicial)
Scope RC, NRC, RA — on estate within RC, NRC, RA — on gifts within and
and without without
NRA — on estate within only NRA — on gifts within only
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Chapter 6 - Dounor’s Lage
RECIPROCITY RULE (Sec. 104 Tax Code)

The rule on reciprocity applies to nonresident alien donor with respect
to donations of intangible properties within the Philippines. | If there is
reciprocity, the intangibles shall be excluded.in the computation of gross
gift. There is reciprocity when:
» The donor, at the time of the donation was a citizen and resident of a
foreign country which at the time of the donation did not impose a
transfer tax on intangible personal property of the citizens of the
Philippines not residing in that foreign country; or
« The foreign country described in the preceding paragraph allows a

similar exemption from transfer taxes of every character or description
in respect of intangible personal property owned by citizens of the
Philippines not residing in that foreign country. ©
INTANGIBLE PERSONAL PROPERTY in the Philippines (Sec. 104)

For purposes of donation inter-vivos, the following should be
considered intangible personal property located within the Philippines:
1. Franchise which must be exercised within 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 a foreign corporation if
such shares, obligations or bonds have acquired a business situs
in the Philippines; and
5. Shares or rights in any _ partnership, business or . industry
CLASSIFICATION OF DONORS
Classifying the donors is important to properly determine the

composition of the gross gift. Citizen and resident donors are taxable on
their donations made within and without the Philippines while nonresident
alien donors are taxable only on their donations made in the Philippines,
subject to rule on reciprocity (refer to Table 6-3).
| Donors under the Tax Code are classified as follows:

1. Citizen and resident
2. Nonresident alien with reciprocity
3.. Nonresident alien without reciprocity
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Chapter 6 - Douwor’s Tar
DONOR’S TAX RATE
Section 99(A) of the Tax Code, as amended, provides that beginning

January 1, 2018, the tax rate payable by a donor for each calendar year
shall be 6% on the basis of the total gifts in excess of P250,000 exempt
gift made during the calendar year. The donor's tax rate shall apply
irrespective of the relationship of the donor and the done (relative or
stranger, natural or juridical person).
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 [Sec. 99(B) of NIRC; RR
12-2018)}.
The tax shall apply whether the transfer is in trust or otherwise,

whether the gift is direct or indirect, and whether the property is real or
personal, tangible or intangible [Sec. 98(B) of NIRC].
GROSS GIFT
The term “gross gift” is defined under Section 104 of the Tax
Code, as amended, as follows:
“Gifts” include real and personal property, whether tangible or intangible, or
mixed, wherever situated: Provided, however, that where the donor was a non-
resident alien at the time of donation, his real and personal property so
transferred but which are situated outside the Philippines shall not be included as
part of “gross gift’. ts
Generally, the rules in computing “gross estate” discussed in

Chapter 2 of this book shall also apply in determining the composition of
the “gross gift”. The composition will depend on the citizenship and/or
residence of the donor. If resident or citizen, the donor is taxable on
donations made within and without the Philippines. However, if the donor
is a nonresident alien, he shall be subject to tax on properties donated
which are located within the Philippines only.
TABLE 6-3: COMPOSITION OF GROSS GIFTS

Property Citizen/resident donor | Nonresident alien
= — Property within (personal or real) Included Included
= — Property without** (personal or real) Included Excluded
= — Intangible property within Included Included***
= _Intangible without _ Included Excluded
** Without = properties outside of the Philippines ; *** Subject to reciprocity rule
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INCLUSIONS IN THE GROSS GIFTS -
The composition of gross giftis generally discussed in preceding page

in relation to Section 104 of the Tax Code, as amended. Specifically,
gross gift for purposes of computing the donor’ s tax shall be composed of
the following:
Direct gifts (Sec. 98 of the Tax Code);
Gifts through creation of a trust (Sec. 98 of the Tax Code);
Sis
Transfer for insufficient consideration (Refer to discussion below)

Condonation of debt (Refer to Page 185).
Repudiation of inheritance (Refer to Page 187); and
SOU
Renunciation by the surviving spouse of his/her share in the

common property (Refer to Page 187)
Transfer for insufficient consideration

Where property, other than a real property
that has been subjected to the final capital gains
tax, is transferred for less than an adequate and full Where the
consideration in money or money’s worth, then the consideration is
amount by-which the fair market value of the fictitious, the
property at the time of the execution of the Contract entire value of the
to Sell or execution of the Deed of Sale which is not property
preceded by a Contract to Sell exceeded the value transferred shall
of the agreed or actual consideration or selling price be subject to
shall be “deemed a giff’, and. shall be included in donor's tax.
computing the amount of gifts made during the
calendar year.
However, bonafide transfers made in the ordinary course of

business and free from any donative intent, even if the consideration is
inadequate on account of bad bargain shall not be Subject to donor's tax
(Sec. 100 of the Tax Code).
TABLE 6a: Transfer for Insufficient Consideration
Real Property subject to Other than Real Property

Capital Gains Tax (CGT) subject to Capital Gains Tax
Se 4}
Donor’s Tax is not applicable
4
Donor’s Tax is Applicable
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AMOUNT TO BE INCLUDED IN THE GROSS GIFT

Tax Implication
IF Consideration is= FMV of the «Valid sale; not subject to
property at the time of sale Donor's Tax
IF Consideration is < FMV of the " — Insufficient consideration

_ property at the time of sale = — Include in the Gross Gift: The
excess of the FMV of the
property sold over the
consideration received.
IF Consideration is FICTITIOUS Include in the Gross Gift: The entire

FMV of the property
ILLUSTRATION 4:
In 2023, Pedro sold his car for P1M to his friend, Juan. The fair market value of the car at
the time of sale was P3,000,000.
Case A:
Question: How much is the amount of donor's tax due?
£2 Answer: P105,000
Solution:
Donation (P3M-1M) P2,000,000
Less: Exempt gift (250,000)
_ Taxable gift P1,750,000
Donor’s tax rate 6%
“Donors tax due P105,000
{2 Where property, other than a 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 amount by which the fair market value of the property exceeded
the selling price shall be “deemed a gift’, and shall be included in computing the amount
of gifts made during the calendar year.
Gift = FMV - SP
Gift = P3M—1M = P2M
Case B: Assume the property sold was a real property classified as ordinary asset.

£1) Answer: P-105,000 (same solution with Case A)
. = nina
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Cha iter 6 - Donors (dee
= If the property transferred for less than full or adequate consideration is a real property
classified as an ordinary asset, the excess of the fair market value of the property at
the time of transfer over the selling price or consideration received shall be considered
“deemed gift” subject to donor's tax.
Case C: Assume the property sold was a real property classified as capital asset.

2 Answer: None
o The transaction is not subject to donor's tax but to 6% capital gains tax based on the
higher amount between the consideration received and FMV at the time of transfer.
o The transfer for less than adequate and full consideration which gives rise to a deemed
gift, does not apply to a sale of real property subject to capital gains tax (Sec. 100,
NIRC). However, if the property sold is an ordinary asset, the excess of the fair value
over the consideration received shall be considered as a gift subject to donor's tax.
Case D:
In 2023, Pedro donated a land classified as capital asset to his friend, Juan. The fair
market value of the land at the time of sale was P3,000,000. .
Question : How much is the amount of donor's tax due?
© Answer: P165,000
Gift P3,000,000
Taxable gift P2,750,000 5
Donor’s tax rate 6% '
Donor’s tax due P165,000
£2 The transaction is clearly a “donation”, not “sale” as compared to Case-C. Hence,
not subject to CGT.
Case E (BARGAIN TRANSACTIONS):

A company engaged in the manufacture and sale of machineries introduced a new product °
in the market at a cash price of P2,000,000. A client negotiated with the sales manager to
reduce the price to P1,800,000. The latter thought that the price asked was reasonable
considering that the product is still on its introductory phase. As a result, the sales
manager acceded to the client's request. Should the difference between the original cash
price and the amount paid by the client subject to donor's tax?
“+ Answer: No. , :
The transaction is not subject to donor's tax although the consideration received is
considered insufficient. The transaction is a bonafide sale and there is wanting of
donative intent because the reduced price was a result of a bargaining transaction
between the buyer and the seller.
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Gti ter 6 - Douor’s Tue
Case F:
Mr, and Mrs. Mapanlinlang sold a parcel of land to their daughter. They immediately
executed a deed of sale with the following details:
Location ; Ayala Alabang
Fairmarketvalue = =~—-—~P15,000,000
Selling price Fictitious
Question: How much should be reported as gross gift?

«+ Answer: P15,000,000
The amount of consideration received is considered fictitious. Under the law, if the
consideration received is fictitious, the entire amount shall be subject to donor's tax.
TRANSFER FOR INSUFFICIENT CONSIDERATION

Sale of Shares of Stock of a Domestic Corporation
(Not through the-local stock exchange) lower than its FMV
Section 100 of the Tax Code (Transfer for Less Than Adequate
and Full Consideration), as amended provides:
Where property, other than real property referred to in Section 24(D), is transferred for
less than an adequate and full consideration in money or money's worth, then the amount
by which the fair market value of the property exceeded the value of the consideration
shall, for the purpose of the tax imposed by this Chapter, be deemed a gift, and shall be
included in.computing the amount of gifts made during the calendar year: Provided,
however, That a sale, exchange, or other transfer of property made in the ordinary course
of business (a transaction which is a bonafide, at arm’s length, and free from any
donative intent), will be considered as made for an adequate and full consideration in
money or money's worth.
The intention of the above provision is to discourage the parties to a

sale from manipulating their selling price in order to save on income taxes.
This is because under the Tax Code, the measurement of gain from the
disposition of property merely considers the amount realized from the sale,
which is the selling price minus the cost basis of the property sold. Hence, if
parties would declare a lower selling price per document of sale than the
actual amount of money which changed hands, there is a foregone revenue
and the government is placed at a very disadvantageous position. In order to
plug this leakage, Section 100 treats the disparity between the fair market
_value and the selling price of the property as gift subject to donor's tax. This
has been confirmed in The Philippine American Life and General Insurance
Company vs. Secretary of Finance, et al., where the Supreme Court ruled that
“the absence of donative intent, if that be the case, does not exempt the sale
of stock transaction from donor's tax since Section 100 categorically states
that the amount by which the fair market value of the property exceeded the
value of the consideration shall be deemed as gift. Thus, even if there is no
actual donation, the difference in price is considered “donation”.
183
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The
Chapter 6- Douor?s Cage
The TRAIN Law, however, provides an exception. Section 100, as

amended states that “Provided, however, that a sale, exchange or Other
transfer of property made in the ordinary course of business (a transaction
which is bonafide, at arm’s length, and free of donative intent), will be
considered as made for an adequate and full consideration in money or
money’s worth”.
Thus, when shares of stock not traded in the stock exchange are
sold for less than it fair value, the excess of the fair market value over the
selling price shall be treated as a gift subject to donor's tax, EXCEPT,
when it is sold at arm’s léngth, free from any donative intent (in the
ordinary course of business).
RMC 30-2019 emphasized that the issue of whether the

transaction is arm's length is question of fact and not of law. The parties
must present proof of business purpose to fall within the exception to rule
on the imposition of donor's tax on transfer of shares for less than its
FMV. Unfortunately, RMC 30-2019 did not provide for example
acceptable proof of bonafide business transaction.
ILLUSTRATION 5:
| Manny, a resident citizen, sold in 2023 shares of stocks of Pinoy Company, a

closely held domestic corporation, with the following data:
Selling price on a direct sale to a buyer P3,000,000
FMV of the shares of stock at the time of sale 3,500,000
Purchase price of the shares 2,200,000
Question 1: How much is the applicable capital gains tax

Answer:
“ P120,000
Selling price (net) P3,000,000
Cost (2,200,000)
Capital gain P800,000
CGT rate ; 15%**
_ Capital gainstax * | P120,000
“Under RA 10963, the revised tax rate for capital gains tax on sale of shares of
domestic corporations is 15% based on the amount of capital gain. |
Question 2: How much is the donor's tax due?
Answer:
“+ P15,000
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The
Chapter 6 - Donor’s Cae
Solution:
FMV at the time of sale P3,500,000

Selling price (net) (3,000,000)
. Insufficient consideration=gift 500,000
Less: Tax exempt gift (250,000)
Amount subject to donor's tax P250,000
Donor’s tax rate under RA10963._: 6% :
Donor’s Tax Due P15,000
Condonation or cancellation of Indebtedness
Condonation or remission.of debt is a mode of extinguishing an

obligation. ° In the case of Rafael Arsenio Dizon vs CTA (G.R. No.
140944), the Supreme Court defined condonation or remission of debt as
“an act of liberality, by virtue of which the creditor, without receiving any
equivalent, renounces the enforcement of the obligation which is
extinguished in its entirety or in that part or aspect of the same to which
the remission refers”. It simply means that by a generous act of a person
who, for instance, lends money to another with an obligation to repay, the
borrower is released from such obligation, hence, subject to donor’s tax.
Nonetheless, there is no condonation of indebtedness or donation in the
following cases:
* Condonation is due to the rendition of service.

The transaction has the effect of payment of compensation. The debtor is
therefore subject to income tax.
* Condonation was made by a corporation in favor of its shareholders.

The transaction has the effect of payment of dividend by the issuing corporation
(creditor). The debtor is assumed to have earned a dividend income.
Es | =F 7.
|
ILLUSTRATION 6:
George borrowed P10,000,000 from Earl payable in 3 years without interest.

When the loan became due, George was unable to pay because of business
reverses. Although George was still solvent at the time of the maturity of the
loan, Earl‘decided to condone the same. Subsequently, the BIR assessed
Earl for unpaid donor's tax. Earl questioned the assessment and argued that
the condonation is not subject to donor's tax because George was not
insolvent at the time of the condonation.
185
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Question 1: |s the contention of Earl correct?
“> Answer: No
Obviously, Ear! merely desired to benefit George by condoning the loan.
Therefore, in view of the absence of consideration for the cancellation, it
shall be considered as a gift from Earl, subject to donor's tax. Whether the
donee is insolvent is irrelevant for purposes of determining the donor's tax.
Question 2: Did George derive income from the condonation on his loan or
_| indebtedness? .
“* Answer: No
The reason for condonation is pure act of liberality on the part of Earl.
Question 3: Assume Earl condoned George's indebtedness after the latter

rendered services to the former. Did George derive income from the
condonation of his indebtedness? :
“+ Answer: Yes ~
Under this assumption, Earl did not merely desire to benefit George. The
‘ condonation is onerous in nature because of the presence of consideration
(services performed by the debtor) for the cancellation of the loan. The
cancellation is not subject fo donor’s tax and the debtor derived a taxable
income in exchange for his services subject to income tax.
PAYMENT OF LOAN BY THE GUARANTOR

A “guarantee”, as a rule is gratuitous unless stated
otherwise. However, if the obligation is “jointly” entered into by the
guarantor and the borrower with a creditor-bank, the security given
by the guarantor to fulfill the obligation of the borrower is not
gratuitous because the guarantor must be indemnified by the
principal debtor in case the guarantor pays for the debt. In such
case, payment by the guarantor is not subject to donor's tax (BIR
Ruling No. DA 006-2005, January 11, 2005).
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Chapter 6 - Douar’s Lace
Repudiation of inheritance .
Section 11 of RR 2-2003 provides that repudiation or “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:
1. The renunciation was categorically done in favor of identified

heir(s); and
- 2. To the exclusion or disadvantage of other co-heir(s).
To be subject to dover tax, the two (2) conditions enumerated

must be present.
Renunciation of share in common property by the surviving spouse

and repudiation of inheritance
Renunciation by the surviving spouse of his or her ehar 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.
ILLUSTRATION 7:
Mr. Kupido died on November 1, 2023 with net conjugal estate of P20,000,000
before deducting the share of the surviving spouse. Mrs. Kupido
waived/renounced the following in favor of their only child, Pedro:
* Her share in the community property
= Her share in the “hereditary estate” left by Mr. Kupido -
Question 1: How much is the donor's tax due on the renunciation of Mrs.
Kupido of her “share in the community property"?
¢* Answer. P585,000 ; [(P10M-250,000)
x 6%)
« Her share in the community property is 50% of the conjugal property
equivalent to 210,000,000. The.donor's tax rate under RA 10963 is 6% in
excess of P250,000.
*. 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 heir(s) of the deceased spouse or
“ any other person(s) is considered donation subject to donor's tax. Consider
the diagram below:
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The
Chapter 6 - Donors Cae
Share of the * Subject to donor's tax when =| |

P10M surviving spouse in renounced in favor of any . |
their common one.
A property /
Spouses’
common . P20M |
property
“Ne P10M Estate of the » Subject to donor's tax when
decedent. renounced PROVIDED:
: . (1) il was expressly made in
~ Also known as favor of an heir, and
| “hereditary estate”. (2) to the exclusion or
| This is the disadvantage of another
amount to be heir(s).
inherited by the
. heirs including the
| ID surviving spouse oh
_ Question 2: How much is the donor's tax due on the renunciation of Mrs.
| Kupido of her share in the “hereditary estate”?
“+ Answer: PO 7
» As-shown in the diagram above; renunciation of share in the “hereditary
esiate/inheritance” is subject to donor's tax only if the renunciation was
made: ;
1) specifically and categorically done in favor of identified heir(s); and
2) to the exclusion or disadvantage of the other co-heir(s) in the
hereditary estate (Section 11, RR 2-2003).
_ Since the renunciation did not result to #2 requirement above because they -
only have one (1) child, the renunciation is not subject to donor's tax.
_ Question 3: How much is the donor's tax due on the renunciation of Mrs.
| aes of her share in the “hereditary estate” assuming:
They have two children (Pedro and Ana);
* — Mrs. Kupido’s share in the hereditary estate is P2,500,000; |
* — Mrs. Kupido renounced her share in the hereditary estate in favor of
Pedro to the exclusion or disadvantage of Ana. |
“+ Answer: P135,000 ; [(P2.5M-250,000) x 6%] |
" — Renunciation of share in the “hereditary estate/inheritance” is subject to |

donor's tax only if the renunciation was made:
1) specifically and categorically done in favor of identified heir(s); and
2) to the exclusion or disadvantage of the other co-heir(s) in the|
ered estate (Section 11,RR2-2003),
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Chai ter 6 - Donor’s Lage
EXEMPT GIFTS and/or DEDUCTIONS FROM THE GROSS GIFTS
Exemptions (exclusions) are not to be treated as. exclusions from

the gross gifts of the donor.. They partake the nature of deductions and
are, therefore, deductible from the gross gifts in order to arrive at taxable-
net gifts. Hence, the same item/amount shall likewise be presented in the
gross gifts of ue donor.
1. Donations Gt exceeding P 250,000 during the year, regardless of the

relationship of the donor and the donee [Sec. 99(B) of NIRC].
2. Gifts made to or for the use of the National Government or any entity -
created by any of its agencies which is not conducted for profit, or to
any political subdivision of the said Government (Sec. 101 of NIRC).
3. 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 not more
than 30% of said gifts shalt-be used by such donee for administration
purposes. (RA 1916; Sec. 101 of NIRC).
Non-Profit Educational and/or Charitable Corporation under RA10963

A nonprofit educational and/or charitable corporation, institution,
accredited non-govemment organization, trust or philanthropic organization
and/or research institution or organization is a school, college or university and/or
charitable corporation, accredited nongovernment organization, trust or
philanthropic organization and/or research institution or organization,
incorporated as a nonstick entity, paying no dividends, governed by trustees who
receive no compensation, and devoting all its income, whether students’ fees or
gifts, donation or subsidies or other forms of philanthropy, to the accomplishment
and promotion of the purposes enumerated in its Articles of Incorporation.
In case the donation was made to or for the use of the national
government/entity created by any of its agencies which is conducted for
profit, the donation should be subject to donor's tax. The amount should
be included in the gross gift but not allowed as part of deductions. The
same rule shall apply to 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 if more than 30% of said gifts shall
be used by such donee for administration purposes.
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Chapter 6 - Donors Lage
"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.
4. Donations made to entities as exempted under special laws

Prizes and awards given to athletes.
“sa mopaogD
Donation to the International Rice Research Institute.

Donation to the Ramon Magsaysay Award Foundation.
Donation to the Philippine Inventor’s Commission.
Donation to the Integrated Bar of the Philippines.
Donation to the Development Academy of the Philippines.
Donation to the Philippine-American Cultural Foundation.
Donation to Philippine Health Insurance Corporation.
Donations of equipment, materials, services to the Task Force on
human settlement
Donations to Intramuros Administration
2 Sy ree.
Donations to Southern Philippines Development Administration

Donations to National Social Action Council :
. Donations to the Museum of Philippine Costumes
Donations to the Aqua-culture Department of Southeast Asia
Fisheries Development Center of the Philippines
o. Exempt donations under Bayanihan Act
5. 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.
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Chapter 6 - Denor’s Lage
6. Diminutions
Reduction in the value of the donated property as provided by the

donor. It refers to the decrease in the value of the donated property
as a result of a condition made by a donor to the donee.
ILLUSTRATION 8:
CASE A:
In 2023, Managayat made donations to John and Ara, son and daughter-in-law, on
account of mariage, of real property with a fair market value of P2,000,000. The property
was mortgaged for P300,000 assumed by the donees.
REQUIRED: Determine the donor's tax due.

{2 Answer: P87,000 computed as follows:
Gross gift
Less: mortgage assumed by the donees
Net gifts
Less: 5 (250,000)
Net gift subject to tax
x Donor's tax rate
Donor’s fax due '
NOTE: Relationship of the donor and the donee is irrelevant under TRAIN Law
CASE B:
In June 1, 2023, Mr. and Mrs. Mapagbigay donated house and lot valued at P20,000,000
to their son and daughter in law on account of a forthcoming marriage. The property is
subject to a mortgage of P4,000,000 to be assumed by the donees.
Question:
How much is the donor's tax payable of each spouse?
“+ Answer: P465,000 each computed as follows:
Mr.
Gross Gift (P20M/2) P10,000,000 P 10,000,000
Mortgage payable (P4M/2) (2,000,000)
Net gift P8,000,000
Less: exemption (250,000)
Net taxable gift P7,750,000
x donor's tax rate (TRAIN Law) 6%
Tax Due : _ _ P465,000
a NOTE: For donor's tax purposes, husband and wife are treated as separate taxpayers.
191
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Ohepte 6 - Douer’s T% a
‘
TABLE 6-5: SUMMARY DEDUCTIONS ALLOWED

DONOR
Citizen or Nonresident
resident Alien
Encumbrances (i.e. mortgage assumed) Allowed Allowed
Diminutions Allowed Allowed
Gifts to the National Government Allowed Allowed
Gifts to educational, charitable institutions, etc. Allowed Allowed
Exempt Gift under Special Laws Allowed Allowed
Net Gift shall mean the net economic benefit from the transfer
that accrues to the done (RR 2-2003). Thus, the aforementioned
deductions are allowed under the law.
PHILIPPINE RED CROSS
RMC 59-2010 in relation to RA10072 entitled “An Act Recognizing the Philippine
National Red Cross as an Independent Autonomous, Non-Government Organization
Auxiliary to the Authorities of the Republic of the Philippines in the Humanitarian
Field, to be known as the Philippine Red Cross.
To allow it to fully realize its mandate under the Geneva Conventions, the
Statutes of the International Red Cross and Red Crescent Movement and RA 10072,
the Philippine Red Cross shall be exempt from payment of all direct and indirect
taxes, all provisions of law to the contrary, notwithstanding, including value added tax
(vat), fees and other charges of all kinds on all income from its operations, including
the use, lease or sale of its real property, and provision of services. The Philippine
Red Cross shall also be exempt from direct and indirect taxes, including vat, duties,
fees and other charges on importations and purchases for its exclusive use.
Likewise, all donations and legacies and gifts made to the Philippine Red
Cross 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 of
from the computation of donor-decedent’s net estale as a transfer for public use for
estate tax purposes
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Chapter 6 - Denar’s Lage
COMPUTATION OF DONOR’S TAX DUE

For purposes of computing the donor's tax due and payable, refer —
to the following pro-forma computation:
FIRST Donation during the year SUBSEQUENT Donation(s)

during the calendar year
Gross Gift PXXX . - Gross Gift, current Pxxx

Allowable deductions (Xxx) ‘Allowable deductions, current (Xxx)
Net gift PXxx Net gift, current PXXxX
; | Add: Prior Net Gift XXX
: Total Net Gift (cumulative) —- PXXx
Less: tax exempt donation (250,000) Less: tax exempt donation (250,000)
Net Taxable Gift PXxXx Total Net Taxable Gift PXxx
Multiply by donor's tax rate 6% Multiply by donor's tax rate 6%
Donor’s Tax Due. PXXX Donor’s Tax Due PXxx
Less: Less: j
Donor’s Tax Credit (xx) ‘| Donors Tax Credit (xxx)
Donor's tax paid — Prior gift(s) (Xxx)
Donor’s Tax Payable PXXx Donor’s Tax Payable PXxx
CUMULATIVE BASIS OF COMPUTING THE NET TAXABLE GIFTS
The computation of donor’s tax shall be on a cumulative basis (on

gifts made within the same calendar year), regardless of the relationship
of the donor and the donee (relative or stranger, natural or juridical
person).
ILLUSTRATION 9 - Computation of Donor’s Tax Due for the year |
Juan donated the following in 2024:

» January 1, 2024 - To his daughter, Ana, P2,000,000 |
=» — April 1, 2024 — To his father, 1,000,000 .
» August 15, 2024 — To his best friend, Juan, P500,000
Compute the donor's tax payable on January 1, April 1 and August 15

** Answers: P105,000; P60,000; P30,000
January 1 (donation to a relative):

Net gift P2,000,000
Less; Exempt gift (250,000)
Net Taxable gift P1,750,000
Donor's tax rate gtPe
‘ Donor’s tax due/payable- Jan. 1_ P105,000) ==
193
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Chapter 6 - Douor’s Lage
a
April 1 (donation to a relative):

Net gift, April 1 P1,000,000
Prior net gift, January 1 2,000,000
Net Taxable gift (cumulative) P2,750,000
Donor’ tax rate 6%
Donor’s tax paid, Jan. 1 (105,000)
Donor’s tax payable - April 1 P60,000
August 15 (donation to a stranger):

Net gift, Aug. 15 P500,000
Prior net gift, January 1 2,000,000
Prior net gift, April 1 1,000,000
Net Taxable gift (cumulative) P3,250,000
Donor’s tax rate 6%
Donor’s tax paid as of Ap. 1 (165,000)
Donor’s tax payable-Aug. 15 P30,000
£0 Under the TRAIN Law, the donor's tax rate is 6% of net gifts in
excess of P250,000, regardless of the ‘elauenshe between the
Be donor and the donee.
Donations made by Spouses
Section 14 of RR 12-2018 provides that husband and wife are

considered as separate and distinct taxpayers for purposes of the donor's
fax. However, if what was donated is a conjugal or community property
and only the husband signed the deed of donation, there is only one donor
for donor’s tax purposes, without prejudice to the right of the wife to
question the validity of the donation without her consent pursuant to the
pertinent provisions of the Civil Code of the Philippines and the Family
Code of the Philippines.
Gift from Common Property — the gift is taxable one-half to each

donor spouse.
Donation between husband and wife during the marriage

GENERAL RULE: The gift is not taxable, as it is declared void by
law.
EXCEPTION: Moderate gifts between the spouses are valid.
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€ kapter 6 - Donors ae
ILLUSTRATION 10:
Mr. and Mrs. Perpekto made the following donations during 2023:
o May 25:
Vacation house and lot in Cebu worth P40,000,000 to their grandson Paul. The
property was mortgaged for P20,000,000 ee at the time of donation), % was
assumed by the Paul.
o June 30:
Jewelry (capital property of Mr. Perpekto) worth P5,000,000 to Ana. Tey agreed that
Ana will be the one to pay the donor’s tax thereon.
Question 1: How much is the donor's tax due of Mrs. Perpekto on May 25?
“> Answer: P885,000
May 25 Mr. : Mrs.

Gross gifts = P40M /2 P20,000,000 _ P20,000,000
Mortgage assumed by the done (Eee (5,000,000) (5,000,000)
Net gift P15,000,000 = P 15,000,000
Less: Exempt gifts - (250,000) (250,000)
Taxable Net Gifts P14,750,000 P14,750,000
x Donor’s Tax Rate a HO een
Donor’s Tax Due P885,000 P885,000
Question 2: How much is the donor's tax due of Mr. Perpektc on May June 30?
“* Answer: P300,000
Mr.
Gross gifts-June P5,000,000
Add: Prior net gift - May 25 15,000,000
Total net gift P20,000,000
Less: Exempt gifts (250,000)
Taxable Net Gifts P19,750,000
x Donor's Tax Rate te 6%
Donor’s Tax Due P1,185,000
Less: Donor's Tax Paid - May 25 (885,000)
Donor’s Tax Payable -— June 30 P300,000
NOTE:
o The agreement that the donee shall pay the donor's tax due is binding only
between the donor and.done. It will not bind the BIR.
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| Olapter 6 - Donors. Lace
Donations made by a Foreign Corporation
Foreign corporations effecting a donation are subject to donor's

tax only if the property donated is located In the Philippines. Accordingly,
the donation of a foreign corporation of its own shares of stocks is not
subject to donor's tax. However, if 85% of the business of the foreign
corporation ‘is located in the Philippines or the shares donated have
. acquired business situs in the Philippines, the donation may be taxed in
_ the Philippines subject to the rule of reciprocity.
On the other hand, donation of a foreign corporation of its own

shares of stocks in favor of a resident employee is not subject to donor’s
tax (BIR Ruling No. 018-87, January 26, 1987) because it should be
assumed that such were given to the resident employee in consideration
of his services to the corporation. Likewise, the same shall constitute
taxable compensation income to the recipient because it is a
compensation for services rendered under an employer-employee
relationship, hence, subject to income tax. The value of the shares shall
therefore constitute deductible expense to the corporation provided it is
subjected to applicable withholding taxes on compensation.
Splitting
of Gift
Splitting of gift is a tax minimization scheme (tax avoidance) which

is done by spreading the gifts over numerous calendar years instead of
adding it to the donations made during the same calendar year to avoid a.
higher tax due to a higher tax base if such gifts were made.in the same
calendar year. Prior to the effectivity of the TRAIN law, donor's. tax due is
computed using a graduated tax rate wherein the tax rate increase as the
tax base increases.
Under the TRAIN Law, the first P250,000 donation during the
calendar year is exempt. Therefore, splitting the gift into several taxable
years may result to a lower tax due. :
ILLUSTRATION 11:
On December 1, 2023, Mr. and Mrs. Mapagbigay wishes to donate P1,000,000 to their
one and only child, Ana. Nonetheless, they were surprise to know that the corresponding
donor's tax was significant for them. They decided to consult the matter to Atty. Lo Yer. |
| The latter advised the couple that donations made by husband and wife shall be taxed
separately for the reason that they are considered separate taxpayers for donor's tax
purposes, They were also informed that donations made by each of them, not exceeding
P250,000 in a calendar year, is exempt from donor's tax under the TRAIN law.
es
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Chas ter 6 - Dunor’s Lace
Atty. Lo Yer advised the couple to SPLIT THE GIFT as follows:
DATE of . DONOR's
Donation DONOR » —» AMOUNT TAX DUE «
Dec. 25, 2023 Husband ~ P250,000 Exempt
Dec. 25, 2023 Wife 250,000 Exempt
Jan. 1, 2024 Husband 250,000 Exempt

Jan. 1, 2024 Wife 250,000 Exempt
TOTAL P1,000,000 Exempt
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 only by Citizens or

residents .of the Philippines at the time the donation was made.
Nonresident alien decedents are cannot claim for tax credit on estate tax
paid abroad.
The amount of tax credit allowed to citizen decedents and resident

decedents is the amount of donor's tax paid to the foreign country subject
to each of the following limitations presented below:
LIMITA OR LIMIT 1: IF THERE IS ONLY ONE FOREIGN COUNTRY
| Net Gifts, foreign country Philippine Donors = = _—-Pxxx (Limit) | |

| Net Gifts, world X Tax Due |
Versus |
Actual Tax paid, foreign country = Pxxx (Actual)

Allowed Tax Credit (Lower amount) Pxxx (Tax credit)
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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 (include all foreign countries) using the following formula:
Net gifts all foreign countries Philippine Donor’s

Net gifts, world _X_ Tax Due = Pxxx (Limit)
Versus
Actual Tax paid, all foreign countries = Pxxx (Actual)
Limit 2 (Lower amount) =
= Step 3 - Choose the lower amount between Limit 1 and Limit2

Limit 1 (from Step 1) Pxxx
Limit 2 (from Step 2) Pxxx
Allowed Tax Credit (Lower amount) PXxx
ILLUSTRATION 12:
A resident citizen taxpayer made the following gifts to his relatives:
Philippines USA UK Italy
Gross gift P750,000 P500,000 250,000 P500,000
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?
£2 Answer: P30,800 computed as follows:
Total Gross Gifts P2,000,000
Total deductions (750,000)
Net gift ‘P1,250,000
Less: tax exempt (250,000)
Net taxable gift P1,000,000
Tax Rate (TRAIN Law) 6%
Donor’s Tax Due P60,000
Less: Tax Credit __(29,200)***
Donor’s Tax Payable P30,800
/ 198
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Chapter 6 - Donor’s Tae
he
LIMIT 1: Deductible
USA: P300/P1,250 x P60,000 P14,400
Paid 25,000
Allowed : P14,400
UK: P100/P1,250 x P60,000 4,800

Paid 12,000
Allowed . 4,800
ITALY: P350/P1,250 x P60,000 16,800

Paid fes 10,000 ;
Allowed 10,000
TOTAL-LIMIT 1 , P29,200
LIMIT 2: 36,000
P750/P1,250 x P60,000 P36,000
Actual (25k + 12k + 10k) 47,000
{) L1=P29,200 vs. L2 = P36,000; Lower amount is L1
FILING OF TAX RETURN AND PAYMENT OF TAX DUE
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 The return is filed and
gifts: paid within 30 days
2: The deduction
A claimed: and allowable : after the date the gift is
made or completed and
3. Ay ee be an made during (he the tax due thereon shall
year; be paid at the same time
The name of the‘donee; and the retum is filed “Pay-
a>
Such further information as may be required —_as-you file system" (RR

by rules and regulations made pursuant to —12-2018).
law.
199
The
Olapter 6 Diner's Ta
_ Place of Filing
Section 15(B) of RR 12-2018 provides that, exceptin cases where the

Commissioner otherwise permits, the return shall be filed and the tax paid to
(1)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 a 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 on the unpaid amount of tax from the date computed until
fully paid.
INTEREST RATE:
*» Under TRAIN Law — 12%
« Prior to 2018 — 20%
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Chapter 6 - Donor’s Lage
TAX RETURN PREPARATION
Mr. and Mrs. Pinagpala donated the following 2020:
March 30 ,
*. Land valued at P620,000 to Ana, legitimate daughter, on
account of marriage.
» Cash of P100,000 to Juan, legitimate son, for successfully

passing the CPA Licensure exam
= Second hand car (capital property) valued at P400,000 to Mr.

Pinagpala’s long-time friend, Pedro
May 15 tS
» Cash of P200,000 to Melda, mother of Mrs. Pinagpala
« Jewelry (paraphernal property) worth P100,000 to Emma, Mrs.

Pinagpala’s best friend
Required:
1. Determine the correct donor’s due on March 30 and May 15
2. Fill-out the donor’s tax returns for March 30 and May 15
Solution:
March 30 Donation | March 30 Donation
Mr. Pinagpala Mrs. Pinagpala

To Ana (P620k/2) P310,000 To Ana (net) P310,000
To Juan. 50,000 To Juan 50,000
To Pedro 400,000 ;
Less: Tax Exempt gift (250,000) Less: Tax Exempt (250,000) _.
- Total taxable gifts P510,000 Total taxable gifts P110,000
x Donor’s tax rate 6% x Donor's tax rate 6%
Total Donor’s Tax Due P30,600 Donor's Tax Due ___ P6,600__
201
5
i I
The
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Caste 8 Donors D,
Fors” sc
Use Ory ner
RE
BIR Form No.
1800 Donor’s Tax Return

2018 (ENCS) re of eared PRCT Does wih an
FF CAPTAL LETTESS uit BLACK Pe Mere aanicant
Page 1 Yeo copes MUST De feo eit fe GR awoe -et & fe mone.
’ Pi
= ‘
Ere 0,3 30 2 Amended Renzn? [_] Yes [X] No cyte toersge sean
Code
3 Donor’s Taxpayer identification

Number (T7N) 7,8 0)! 2,3)4 0,0,0,0,0)
SRDO Code 3,8
1,N P,A LAA, Ay BE; RT E

T Ty. T
9, 2,2; 77,7 )4)35 ajl,bje,ryt

12 sheess Fnecessayi
yu Yes No
14 Total Net G&s Sublect m Tax on Pativ fem 3

15 Applicable
Donors Tax Rae
16 Teta Doror's Tax Due fan 141 fem 15
4TA Paymerts Sr Pror Gas Duerg the Calendar Year

17B Dorer's Tax Paid 101 of he NC
417C Tax Paid n Previously Fied Retum, f tus is an Amerxied Retum
17D Tow! Tax CedtsPaynerts (amdfrn ADIT
18 Tax Payable(Quvepayment)
fem 18 Lex fem 170)
19A Suthape
198 terest
19C Compromse
190 Total Penaites (Gung’tems
oA b 100)
20 TOTAL AMOUNT (uma
tern 18. anc 19)
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Fapher, bar Gut ryaa Corset be puceare Fryty Mens s we corercoted rues Pe Tes Peay ASTOR
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202
The
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Chapter 6 - Donors
c
Donor’s Tax Return
2,3 \4 ,0,0,0,0,0
Schneier)
Propertes
(From Part v Schecte 6}
in ts Return (unc fees TSav 23
Total Deductions
Alowed (Sum of irs 29 £9 32)
Total Net Gits in ths Return (fers 27 Less tom 33)
Total Prior Net Gitts During the Calendar Year (tem 36 of Retum Previously Fed néhn the year)
Total Net Gits Sum of fems 34 ang 3) 7,6,0,0,0
Less: Exergt Git 2,5,0,0,0,0
Net Géts Subject to Tax (fem 30 Les fem 37) 511,0
FAIR MARKET VALUE (FMV) PER TD FMV PER BIR (ZONAL VALUE)
Ch-Comerery (ot GL- Government Lot Aageeea & STON

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Ne A Oe mew in fatencgan Gromesrvcese bnasmel Wy Pray Ceeeomen
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203
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Book R̶ e̶a̶d̶e̶r̶s̶ Raiders || Nevule
Readexs-Raiders Nevule cs CamScanner
Chapter o - Donor’; Ce
Solution:
May 15 Donation
Mr. Pinagpala
To Melda P100,000
Prior net gift 760,000
Less: Tax Exempt gift __(250,000)
Total taxable gifts P610,000
x Donor's tax rate 6%
Donor’s Tax Due P36, 600
Less: Tax Paid (30,600)
Donor’s tax payable P6,000
Mrs. Pinagpala
To Melda P100,000
ToEmma — 100,000
Prior net gift 360,000
Less: Tax Exempt gift (250,000)
Total taxable gifts P310,000
> x Donor’s tax rate 6%
Donor's Tax Due P18,600 —
Less: Tax Paid (6,600)
Donor’s tax payable P12,000
204
The
Chapter 6 - Denor’s Lage
FoaorR. Bcc Of ine Prunippines

Use Orty. Rec of Finance
BIR Form No
4800
2018 (ENCS)
rer et eared Porat FOAM TAL LETTERS uty MACK
© fi
Meet aptcat bes whte
on
Page 1 Te Cones MUST de fed eth the ENA and ore hats ty te Ieoayer
ae
jo | 2amended
Retun? [“] ves [X] No. | 3 No.of Sheets o| |4fehamurer< | on o10
$ Donors Identification Number (™?9 | 1,09 2,3 5,34 $440, 0,0; 0,0} R00 Code 8
1,N PAL Ry A; sc
9,2,2, 7,8,8)5
12 i
a Yes [Xx] No
14 Total Net G&s Subject m Tax from Rat tem 33

15 Appicatile
Danes Tax Rate
46 Total Dorer’s Tax Due fen 141 Bem 15
17A Paymerts for Price Gtts Duzing the Calendar Year

178 Donor’s Tax Pad 2! Fhe NRC}
47C Tax Pad in Previously Fied Retarn. 7 fis is an Arensed Ret
: 17D Total Tax CreitsPaymerts (Sung
tens 7Ab 17)
18 Tax Payable/{Overpaymert)
fom 36 Less fem 17D)
18A Suthaye
138 biterest
19C Comproumse
190 Tota Penaiies Qumatens
10Ab 199)
20 TOTAL AMOUNT
205
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Chapter 6 - Donar?s la et
41800. Donor’s Tax Return [|

January 2518 (ENCS)
Page2
6,7 Of ,2,3)4 ,0,0,0,0,0
Propertes
Pan Pat ¥ Scedue A)
Propertes
fom Pat v Scnane 8)
Total Gas in ths Retum (aan of ews 2$and 25
Total Deductions
Alowed (Sum ar teens 28 1 32)
Net G&ts in tus Return
ters ZT Less tem 33
Add Total Prior Net Gits During the Calendar Year tem 3 of Retum Preiunly Filed wan fhe year}
Total Net Géts (Gum oftems M at 39

Less: Exenpt Gt
Total Net Géts Subject b Tax fem 35 12x tem 37)
FAIR MARKET VALUE (Fig) PER TD Filly PER GIR (ZONAL VALUE)
Ch-Cometery
Lot Gl-Goveramentlot Aa ute!
PSPaamg Lit GP Genera Purcosebasement oe ter Proty Orveopment
APO-Ar0a
206.
The
The Book
(; Wn ler 6 - Deuor’s Lage
Foret = BCS varece:

Use Ory: Rev.
BIR Form No.
tenon cinerea
2018 (ENCS) | Ever at eored nteran P CAPITAL LETTERS uairy BLACK re Lit aceecatse Does wih an x7
Page 1
fepet
Two conts VUST be fed wih Pe BR and one hee ty Pe towers.
te
Oo |
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ent 15 1115
’
2 Amended
Reten? [_] Yes[X]No | 3/No.of Sheet's AAehoeumers | Dy 010
Sours Tupayw Weiiicdian Nanberime 11.0.9 2,34=15)3 0,0,0,0,0} SRDO Code 3,8
1,N P,A)LIA, My AREA) IC
9,2,2, 7, 8,8);5)5
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44 Total Net G@s Subject i Tax on Ast fy fein 35

1S Appicabie
Donars Tax Rate
16 Tota Donor's Tax Due fn t4x fem 15)
147A Paymerts for Prior G2s During the Calendar Year

178 Donor’s Tax Paid WIidteNRy
{7C Tax Paid in Previously Fied Retum, # tus is an Amended Retum
17D Total Tax CreditsPaynents (Sum o'tars 7A0 7G
18 Tax Payablel(Overpayrnert)
(fem 16 Less fe 170)
19A Suhage
198 rterest
19C Comprmae
190 Total Peratties (uncrtens
104m 100)
(matters 18973 10)
Number
207
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Chapter 6 - Doner’s Lage
4800
BIR Form No.
2018 (ENCS)
age 2
1,0 2,3, 5,3)4 ,0,0,0,0,0
Personal Properties
far Pat v Scnectue A)
Real Properties
Ram Pat V Scene 8
Total Gits in fis Retsn (Som orfeos 25.30 59
Total Deductions
Afowed (Summ a’ evs 28 & 32)
Total Met Gits in ts Rather @ers 27 Less ten 55
Akt Total Prior Net Géts During the Calendar Year (fem 36 of Retum Prewously Fed nth the yea)
Total Net Géts Cum oftees Mand 29

Less Bernt GR
Total Net Géts Subject to Tax stem 39255 Iem<7)
RR Ac sterte Reger CACorsommum Reg e Ch-Cemetery

Let GL-Sovernmentiot Adgkutval insmons
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208
The
| NF 9d
PROBLEMS
P6.1. (GROSS GIFTS) ‘
A donor made the following donations during the year:
= To Abel, a car worth P800,000
* To Jen, condominium unit worth P3,000,000 in Macau
« To Gore, GJ Company shares (domestic corp.) amounting to
P250,000
To Alexa, P100,000 worth of shares of stock of a resident foreign
corporation where 90% of.its operation is in the Philippines.
* To Earl, a building in Singapore valued at P5,000,000 mortgaged ©
for P2,000,000 assumed by the donee
= To Hananiah, parcel of land in Isabela, P1,500, 000
* To Chen, P100,000 bank deposit i in BPI
* To Kristine, P100,000 bank deposit in Metrobank, U.S. Branch”
« To Gavrie, P500,000 cash
The donor also made ‘the following transfer of properties within the year:
Property Consideration Fair market value at the
“ received time of transfer
Land 1 —Q.C. P2,000,000 3,000,000
Land 2 — Taguig 3,000,000 2,000,000
Land 3 — U.S.A. 5,000,000 10,000,000 .
Car- Manila — 800,000 1,000,000
REQUIRED: ;
Determine the amount of gross gifts. subject to donor’s tax assuming
the donor is
a) Resident citizen
b) Nonresident citizen
c) Resident alien
d) Nonresident alien with reciprocity
e) Nonresident alien without reciprocity
P6.2. (GROSS GIFTS)

Juan, a citizen of the Philippines, made the following donations:
" To Pedro, a parcel of land worth P4,500,000 located in Pasig
* To Amber, a parcel of land worth P1,000,000 located in Malaysia
" To Roger, PLDT shares amounting to P1,500,000.
"To Aby, a building in Belgium worth. P2,000,000 mortgaged for
P500,000 assumed by the donee,
" To Alex, land in Pampanga worth P3,000,000.
" To Jamylle, P500,000 cash in PNB New York
209
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ae Ap 6 . Dondr’s Law
Juan has also transferred the following properties:

FMV Selling Price
Car, Alabang 600,000 P400,000
Car, Malaysia 600,000 400,000
Land in MactanCebu _. 1,000,000. ~: 1,000,000
REQUIRED:
Determine the amount of gross gifts subject to donor's tax assuming
the donor is
a) Residentalien |
b) Nonresident alien with reciprocity
P6.3. (GROSS GIFTS-Insufficient Consideration-Real Property)

Mike is a sole proprietor engaged in the distribution of various consumer
. products. During the year, he sold his vacant lot located in Davao valued
at P2,500,000 to his long-time buddy, Leomar, for only P1,500,000. The
property was purchased by Mike two years ago at a cost of P1,200,000.
REQUIRED:
a) Donor’s Tax Due
b) Capital Gains 1
Assuming the land sold was Classified as an ordinary asset,

determine the following:
c) Donor’s Tax Due
d) Capital Gains Tax
P6.4. (GROSS GIFTS-Insufficient Consideration-sale of shares)

Pedro sold to Ana, his shares of stock in Makabayan Corporation (a
closely held domestic corporation) for P400,000 when its fair market value
was P850,000. The shares were purchased by Pedro five years ago for
P500,000.
REQUIRED:
a) Donor’s Tax Due
b) Assuming the shares were sold in the ordinary course of
business, at arm’s length transaction, without donative
intent, how much is the donor's tax due?
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Chapter 6 — Doenor’s Lage
P6.5. (CUMULATIVE GIFTS)

A resident citizen made the following donations:
* On March 1, P200,000 to his son, on account of marriage
celebrated on January 1, 2023.
» On May 30, a parcel of land worth P500,000 to his brother, subject -
to the ‘condition that the donee would assume the mortgage
indebtedness in the amount of P100,000.
* On June 30, P300,000 to an ailing friend
* On July 31, P200,000 cash to Bantay Bata
» On September 30, a house and lot worth P3,000,000 to his
daughter and son in law, on account of their scheduled marriage
on December 25, 2023. A mortgage of P600,000 will be
‘assumed by the donees.
Required: Determine the tax payable on:

a) March 1
b) May 30
c) June 30
d) July 31
e) September 30
P6.6. (CUMULATIVE GIFTS)

A resident citizen donor made the following donations:
» March 30, 2023: P1,000,000 to a friend as a wedding gift.
» May 1, 2023: P2,000,000 to his brother in-law.
REQUIRED: Determine the donor's tax payable on:

a) March 30, 2023
b) May 1, 2023
P6.7. (CUMULATIVE GIFTS, DONATIONS BY HUSBAND & WIFE)
Mr. and Mrs. Galante, citizen and residents of the Philippines, made the
following donations during 2023 calendar year:
June 6, 2023
= To their legitimate son on account of marriage, cash
amounting to P4,600,000; ~ ;
« To Bea (daughter), property valued at 2,000,000 with a
mortgage of P400,000 assumed by Bea.
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Chapter 6 — Donar’s Lae
October 8, 2023
To Robert, a legitimate son of the wife by a prior marriage,
P600,000
November 4, 2023
To a charitable organization (25% of donations made were
used for administrative purposes), P1,000,000
To Cindy, a family friend, P 400,000
REQUIRED: Determine the donor's tax payable of the spouses on:

a) June 6, 2023
b) October 8, 2023
c) November 4, 2023
P6.8. (CUMULATIVE GIFTS, DONATIONS BY HUSBAND & WIFE)

Mr. and Mrs. Palabigay, made the following donations during uae
Date Particulars
Feb. 15 Car worth P4,000,000 to their legitimate son, on account of
marriage. The car was mortgaged for P2,000,000. Only
50% of the mortgage was assumed by the donee.
March 30 To Mr. Palabigay’s brother, his capital property worth
P2,000,000.. They agreed that the donee shall pay the
donor's tax. thereon.
June 1 To Charmaine (daughter of Mrs. Palabigay by former
marriage), Mrs. Palabigay’'s paraphernal property worth
P1,000,000.
Oct. 12 To Charmaine, conjugal car worth P4,000,000 with
P2,000,000 unpaid mortgage. Charmaine assumed 50% of
the unpaid mortgage.
Oct. 12 Parcel of land valued at P5,000,000 to their other two (2)
sons on account of their graduation. The land was co-owned
by the couple and a friend, Clifford, who agreed to donate the
same. The share of Clifford in the property was valued at
P1,000,000.

a) The gift tax payable of Mr. Palabigay on March 30, 2023
b) The gift tax payable of Mrs, Palabigay on June 1, 2023
c) The gift taxes payable of Mr. and Mrs. Palabigay on
October 12, 2023
d) The donor's tax due of Clifford
212
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a 6 — Donor’ J Lage
TRUE OR FALSE:
te Donor’s tax shall apply, whether the gift is direct or indirect, and
whether the property is real or personal, fenigibie or intangible, even if
the transfer is merely in trust.
Any person making a donation, unless the donation is specifically
exempt under the Tax Code or other special laws, is required, for
every donation, to accomplish under oath a donor’s tax return.
Donation is a transfer of Property for a consideration other than
money.
As a tule, all persons who may contract to dispose of their property
a
may donate.
Donor’s tax is imposed to all natural and artificial persons.
On
The gross gifts of citizen or resident donor will include all properties
donated, regardless of location.
Minors can be a. donor or a donee.
Under the TRAIN law, the 6% donor's tax rate shall apply regardless
of the relationship of the donor and the donee (relative or stranger).
9. Donation inter-vivos is subject to estate tax while donation mortis
causa is subject to donor's tax.
10. Donor’s tax is a liability of the donee.
11. A donation on which the donor's tax is not paid is a valid donation.
12: Any contribution in cash or in kind to a candidate, political party or
coalition of parties for campaign purposes shall be subject to donor's
tax.
13. Donation on account of marriage is not taxable if the marriage did not
actually take place.
14. Agreement between the donor and the donee that the latter shall pay
the donor's tax is binding on the BIR.
15. In donor’s tax, the exemption is P250,000 while in estate tax, the
exemption is P100,000.
16. The donor’s tax return is filed within thirty (30) days from the date of
completion of the donation. *
TF. Donation of a personal property worth 5,000 must be in writing.
18. Donation of real property worth P3,000 need not be in writing.
19. Contracts of donation between husband and wife are void in all cases.
20. Donation to a senator in view of his public office is void in all cases.
Ai Donations between persons guilty of adultery or concubinage are void.
22, Donations to conceived or unborn children are valid. ©
23. A donation can be both part of the gross gift of the donor and a
taxable income to the donee.
24, A donation may be exempt from donor's tax but not necessarily a
deduction from the donor's gross income.
213
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Chapter 6 — Denor’s Lage
25. Reciprocity clause is applied to non-resident alien donating real

property
MULTIPLE CHOICE.
Principles
1. Which of the following constitutes a taxable gift?
a. Creditor’s gratuitous discharge of a debtor’s obligation.
b. One day rent free use of another’s property.
c. Agratuitous transfer by a minor.
d. , An agreement to make a future transfer which is not ‘supported
by a consideration.
2. The donation of personal (movable) property may be made:

l- Orally if the value is P5,000 or less requiring simultaneous
delivery
Il- In writing if the value is more than P5,000.
a. Both! and Il are correct
b. Both statements are incorrect .
c. Only | is correct
d. Only Il is correct
3. Which of the following donations is required to be in a public

document?
a. Donation of personal property worth more than P5,000
b. Donation of personal property
c. Donation of real property
d. Donations required to be in writing
4. For the donation to be valid, acceptance of the donation must be

made ;
a. During the lifetime of the donor only.
b. During the lifetime of the donee only.
c. During the lifetime of the donor and the donee.
Taxpayers |
5.. Statement 1: Citizen or resident donor is subject to donor's tax
regardless of where the gift was made or where the property donated
is located.
Statement 2: Resident alien would be subject to donor's tax only on
their donations of property located in the Philippines.
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Chapter 6 — Deoner’s Lage

6. The reciprocity clause in the donor's tax law applies to:

a. Juan Dela Cruz, a non-resident citizen.
b. Chrispa, a Korean citizen residing in the Philippines.
c. Mrs. Pedro, a Filipino citizen residing in Malaysia.
d. Mr. G.I. Joe, a non-resident American.
7. Reciprocity clause is applied to which of the following?

a. Non-resident alien donating real property
b. Adonation of tangible property by a non-resident alien
c. When a resident alien donates intangible property
d. Adonation by a non-resident’alien of intangible property
Tax Rates
8. Statement 1: The computation of the donor's tax is on a cumulative
_ basis over a period of one calendar year.
Statement 2: Husband and wife are considered as separate and
distinct taxpayers for purposes of the donor’s tax.
b. Statement1 is true but statement-2 is false
9. In computing the donor's tax on a subsequent donation, the donor

must also consider
a. Only the present donation
b. All prior net gifts during his lifetime
c. The present and immediately subsequent donations
d. All prior net gifts during the calendar year
10. On June 1, 2021, Pedro, a resident citizen, donated a parcel of land to

a relative in Makati and a real property located in Canada to a friend.
In taking a credit for the foreign donor's tax paid, the credit shall be
against the Philippines donor's tax on the
a. Donation to a friend
b. Donation to a relative
c. Donation to the relative and to a friend
11. Statement 1: Donation made to a legally adopted child shall be

considered as donation made to a relative, subject to 6% donor's tax
rate in excess of P250,000.
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Olapter 6 — Deuor ’s ae
Statement 2: For donor’s tax purposes, donations to the children of

the first cousin of the donor are considered donations to strangers,
_ subject to 6% donor's tax rate in excess of P250,000.
12. When the donee is a stranger, the tax payable by the donor for a
donation made in 2018 shall be:
6% of net gifts in excess of P250,000.
30% of net gifts.
aoom
Based on the graduated rates

Based on the graduated rates or 30% of the net gifts, at the
option of the donor.
Valuation
43. When a property is donated, the basis of the donor’s tax is
a. The cost of acquisition if acquired by purchase or the fair
market value at acquisition date, whichever is higher.
b. The agreed value by the donor and the donee.’
Cc. The fair market value at the time of donation.
d. Any of the above
14. Statement 1: If the gift is made in properties, it shall be appraised at

its fair market value as of the time of donation.
Statement 2: In valuing properties for donor's tax, the ptiriciples in
valuation of properties for estate tax purposes shall apply.
a. Statements 1 and2arefalse —
b. Statement 1 is true’but statement 2 is false
Taxable Gifts |
15. Statement 1: A receivable from a debtor can be a donation only if the
creditor notifies the debtor that he is not collecting anymore and the
debtor makes a positive act signifying his acceptance of the
benevolence of the debtor.
Statement 2: A donation inter-vivos that had paid the donor’s tax can
still be reduced if the legitimes of the compulsory heirs were reduced,
and there would be a resulting refundable donor's tax.
a. Statements 1and2arefalse
' ¢. Statement1 is false but statement 2 is true
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Chapter 6 — Deuor’s Lae
7 d. Statements 1 and 2 are true |
16. Which of the following statements is false?

a. The donor's tax for each calendar year is computed on the
basis of the total net gifts made during the calendar year.
b. Gifts in property shall be valued at the fair market value of the
property at the date of donation.
c. A gift to the International Rice Research Institute is exempt
from gift
17. Which of the following statements is false?

I. Contracts of donation between husband and wife are void in
all cases.
ll. | Donation to the President in view of his public office is void in
. all cases.
ill. | Donations between persons guilty of adultery or concubinage
are void.
IV. Donations to conceived or unborn children are valid.
a..| only c. | and Il only
b. Il only d. Il, Il and IV only
18. Du30 sold his car to CJ Sereno. The cost of the car was P800,000
and has a fair market value of P600,000 at the time of sale. The sale
‘ was considered fictitious as the consideration was valued for P5,000
only.- For donor's tax purposes, which of the following statements is
correct?
a. Thereisa taxable gift of P800, 000
b. There is a taxable gift of P600,000
c. There is a taxable gift of P595,000
d. The transfer is for insufficient consideration, hence, not subject
to gift tax.
Exemptions
19. Statement 1: When the donee is tax exempt, the donation of a
taxable individual is also tax exempt. .
Statement 2: Donor’s tax shall be paid within 30 days after the
donation is made.
b. Statement 1-is true but statement 2 is false
d. Statements 1 and 2 are true —
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ihe ter 6 — Donors li (©
20. A resident alien made the following donations In 2021. Which is

exempt from donor's tax?
a. Gifts made on account of marriage and before its celebration
" * by parents to each of their legitimate, recognized natural, or
adopted children.
b. Gifts made to or for the use of the National Government or any
entity created by any of its agencies which is not conducted for
profit, or to any political subdivision of the said Government.
c. Gifts in favor of an educational and/or charitable, religious,
cultural or social welfare corporation, institution, foundation,
trust or philanthropic organization or. research institution or
organization, where more than 30% of said gifts were used by
such donee for administration purposes. es
d. All of the above.
Transfer for Insufficient Consideration

21. Which of the following is subject to donor's tax?
a. Cancellation of debt in exchange for services rendered
b. Share of one of the heirs which was renounced in favor of
another heir.
c. Transfer of property for less than adequate and full financial
consideration.
d. All of the above
22. All of the following are subject to donor's tax in case there is a transfer
for less than adequate and full consideration, except:
a. Real property classified as capital asset
b. Personal property
c. Intangible property
d. Tangible property
Deductions from the Gross Gifts

23. All the following statements are correct, except one. If the donor is a
nonresident, not citizen of the Philippines:
a. Property situated abroad, but donated to a citizen of the
Philippines is exempt from donor's tax.
b. Property situated in the Philippines but donated to a donee
abroad will pay the donor's tax.
c. Property in the Philippines with a value of P300,000, donated
to a citizen of the Philippines, is subject to donor's tax.
d.. None of the above
24. In 2023, spouses Romeo and Juliet, both Filipino citizens are Owners
of a residential house and lot in Quezon City. After the recent wedding
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Chas ter 6 — Donor’s Lage
of their son (Pedro) to Clara, the spouses donated the said real
property to them. At the time of donation, the real property has a fair
market value “of P2,000,000. The property was mortgaged for
P200,000 but was not assumed by the donees. Which of the following
statements is correct? .
a. Pedro and Clara are subject to income tax based on the fair
market value of the real property donated to them
b. Romeo's taxable gift is P500,000
c. Juliet’s taxable gift is P750,000
d. Romeo's taxable gift is P1,000,000
25. Which of the following is not a deduction from the gross gifts?
a. Unpaid mortgage on the donated property assumed by the
donee.
b. Unpaid real estate tax on donated property assumed by the
donee.
c. Diminution on the property donated speci cally provided by
the donor.
d. Unpaid donor’s tax on the property assumed by the donee.
26. On February 20213, Mr. and Mrs. Mapagbigay donated a conjugal

parcel of land to their son, Pedro who was getting married within six
(6) months after the date of donation. The fair market value of the
property at the time of donation was P5,000,000. Its fair market value
at the time of marriage was P5,500,000. The donated property was
subject to P1,000,000 mortgage assumed by Pedro. How much i is the
net taxable net gift of Mr. Mapagbigay?
a. P1,750,000 : c. P2,250,000
b. P2,000,000 d. P2,500,000
27. On February 14, 2023, Clifford donated a property located in Manila

and cash as follows:
* Land with a fair market value of P6,800,000: To a legitimate
daughter on account of marriage, subject to a mortgage of
P800,000 to be assumed by the daughter.
* Cash of P1,500,000: To a legitimate son, on account of
marriage.
What is the correct amount of net gifts made?
a. P7,000,000 c. P7,400,000
b, P7,300,000 d. P7,500,000
28. Professor X, a renowned Filipino scientist, made the following

donations during 2023. i
« February 29: Cash of 500,000 to Barangay Discovery.
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Olapter 6 — Donor’; Ceca:
» Apnril.1: - Car to his brother on account of marriage. The car
has a FMV of P1,000,000 and is subject to mortgage of
P500,000 to be assumed by his brother.
= May 31: Aland worth P 5,000,000.
How much is the donor's tax payable on April 1?

a. PO c. P300,000
b. P15,000 d. P315,000
29. How much is the donor’s tax payable on May 317

a. P300,000 c. P450,000
b. P330,000 d. P464,000
The next three (3) questions are based on the following data: |
Mr. and Mrs. Mapagbigay, resident citizens, made the following donations
out of their conjugal properties:
Date Amount Donee
Mar. 1,2023 P500,000 Adel, legitimate daughter
May 1, 2023 P400,000 Belle, legitimate daughter, on account of
marriage on June 1, 2023
July 1, 2023 P200,000 Cindy, legitimate daughter
30. How much was the donor's tax payable of Mr. Mapagbigay on his first
donation?
a. PO c. P30,000:
b. P15,000 d. P60,000
31. How much was the donor’s tax payable of Mrs. Mapagbigay on her
second donation?
a. PO c. P24,000
b. P12,000 d. P27,000
32. How much was the total donor’s tax payable of Mr. and Mrs.
Mapagbigay on all donations
a. P36,000 c. P65,400
b. P33,000 d. P66,000
A donor gave the following donations during 2024;
« Jan. 24- Land located in the Philippines valued at P2,000,000 to.
her uncle subject to the condition that the: latter will pay the
donor's tax due and unpaid mortgage amounting to P500,000.
* Nov.30- Building in U.S. valued at R4,500,000 to her sister.
Donor’s tax paid in U.S. was R400,000.
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33. The donor's tax payable on the January 24 donation shall be:
a. PO c. P90,000
b. P75,000 | d. P120,000
34. The donor’s tax payable on the November 30 donation shall be:
a. PO c. P248,750
b. P11,250 : ‘d. P345,000
Donations to the National Government and its Political Subdivision

Donations to Non-Profit Organization
35. ABC Corporation donated P100,000 to the barangay for the purpose
of cementing a barangay road where its factory iis located.
Statement 1: The donation is exempt from donor's tax
Statement 2: The corporation may claim full deduction for income tax
purposes
Charitable Institutions
36. Since a donation to a charitable institution has a deduction without any
ceiling.
Statement 1: The net gift will be zero, so that in computing the donor’s
tax, the donation may be omitted in gross gifts as if it is likewise
omitted in the deductions.
Statement 2: The gross gifts should be reported and the deduction
shall be claimed.
d. Statements 1.and 2 are true
37. Statement 1:-When a donor's tax return was filed and it was found out
by the BIR to have errors which gave rise to a deficiency donor's tax,
the donor may be required to pay the deficiency although he does not
possess or own the property anymore.
Statement 2: The government is not bound by any agreement
* between the donor and the donee that the latisr shall pay the donor Ss
tax instead of the former.
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c. ‘Statement 1 is false but statement 2 is.true
38. One of the following statements is wrong. When a donor with several
donations during the year fails to file the donor's tax return for each of
the dates that donations were made:
a. Such failure shall be cured by filing a donor’ s tax return at the
end of the year reflecting all donations made within the year
and paying the taxes shown in that one return.
Each failure is subject to penalties for non-filing of return and
nonpayment of the tax on time.
He can voluntarily file late the donor's tax return for each date
. that donations were made and make payments on the tax due
shown on each return, with penalties.”
If the different donor’s taxes were not paid on the original due
dates because of requests for extension seasonablyfiled with
the Commissioner of Internal Revenue, each required
payment of tax shall have an extended period of not more than
six months.
39. A person making a donation is required to file a tax return to BIR at

a. The residence of the donee within 30 days from the date of
donation.
b. The residence of the donor within 30 days from the date of
donation.
c. The residence of the donor at the end of the year.
d. The residence of the donee at the end of month when the
donation was made °
40. Statement 1: Tax credit for donor's tax paid to a foreign country is
allowed only if the donor is a citizen or resident of the Philippines.
Statement 2: There canbe a donor's tax paid to a foreign country
even if the citizen or resident donor had no donation of property in the
Philippines.
a. Both statements are correct
b. Onlyfirst statement is correct
c. Both statements are incorrect
d. Only first statement incorrect
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Chapter 7
Introduction Business Taxes
Business taxes are those imposed upon onerous transfers such as sale,|
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

Business taxes are in taxpayer's net taxable income, business taxes
addition to income and are generally based on gross sales or gross
other taxes paid, unless receipts. Hence, irrespective of the results of
specifically exempted. business operations (income or loss), taxpayers
engaged in trade are still liable to pay for
business taxes (either vat or percentage tax, plus
excise tax, if applicable).
“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 the person engaged
.therein is a non-stock, non-profit private organization or government entity
(Sec. 105 NIRC; Sect. 4.105-3 of RR 16-2005).
Vat provisions pertain to those persons whose undertakings are intended

to be pursued on a going concern basis where the end view is to realize
unrestricted amounts of pecuniary gains or profits from those who may avail
of the goods they sell or the services they render (RMC 77-2008). Therefore,
isolated transactions are generally not considered in the ordinary course of
trade or business, hence, not subject to business tax. However, RR 16-2005
provides that services rendered in the Philippines by non-resident persons
shall be considered as being rendered in the course of trade or business even
if the performance is not regular.
By residents are considered not in the ordinary course of
trade or business, thus, not subject to vat.
Isolated
Transactions _ By nonresidents (on services rendered in the Philippines)
are considered in the ordinary course of trade or business,
thus, subject to Final withholding vat.
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ILLUSTRATION 1: Sale in the ordinary course of trade or business’

Determine which of the following transactions are considered sale in the
| ordinary course of trade, consequently subject to business tax
1. Pedro sold his vehicle acquired 3 years ago for P400,000.

2. Abe Corporation, distributor of appliances, sold TV units from its
inventory to various malls in Metro Manila.
3. An auditing firm rendered audit and tax services to its clients.
4. Anasold some of her jewelry for P50,000 to her best friend, Lorna
Answer:
* Transactions 2 and 3 only. ;
Transactions 1 and 4 are casual or isolated sales not made in the ordinary
course of trade or business.
TYPES of TRANSFER:
1. Gratuitous Transfer (transfer without consideration) — not subject to
business tax but subject to transfer taxes (donor's tax or estate tax).
2. Onerous Transfer (transfer with consideration):

a. In the ordinary course of trade or business including incidental
transactions:
Subject to (unless exempt under the law):
« Business tax; and
= Income
‘b. Not in the course of trade or business - not subject to business tax
but may be subject to income tax.
ILLUSTRATION 2: INCIDENTAL TRANSACTION |
Pinas Energy Corp. entered into a Built-Operate-Transfer (BOT) contract

with the PNOC for finance, engineering, supply, installation, testing,
_ -| commissioning, operation and maintenance of a Geothermal Power Plant.
During the year, Pinas Energy Corp. sold for P200,000 a fully depreciated
vehicle (Nissan Patrol) used in business,
Question: How much is the business tax, if any?

Answer: VAT = P200,000 x 12% = P24,000
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BASIS: Mindanao Geothermal Il_vs. CIR, GR No. 193301 dated March 11,
2013 (refer also to Sec. 105 of the Tax Code, as amended).
GUIDE:
If the asset sold is an ordinary asset, it is generally subject to vat unless exempt
under the law, Mindanao II's business is to covert the steam supplied to it by the
PNOC into electricity and to deliver the electricity to NPC. In the course of its
business, Mindanao |! bought and and eventually sold a Nissan Patrol. Prior the
sale, the Nissan Patrol was part of Mindanao Il’s property, plant and equipment.
Therefore, the sale of Nissan Patrol is an incidental transaction made in the course
of of Mindanao II’s business which should be liable for VAT.
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) or simply Percentage Tax
3. Excise taxes
As a rule, all sale of goods or services made in the normal course

of trade or business are subject to vat unless exempt under the law (refer
to Chapter 8 of this book for vat exempt sales). Nonetheless, if the sale is
exempt from vat, it may be subject to Other Percentage Tax (OPT) under
Sections 116 to 127 of the Tax Code as discussed in Chapter 9.
Consequently, transactions already subjected to vat should no longer be
subject to Percentage Tax. However, such is not the case with respect to
excise taxes. A transaction subjected to either vat or percentage tax may
still be subjected to excise tax as illustrated. below:
Table 7-1: Business Taxes ~ :

VAT - OPT Excise Tax
SALE of Goods/Properties or Service may be subject to:
* VAT, in general X
><
mm<e
= Exempt from vat but subject to OPT Vv X

: Exempt from business taxes E
Manufacturing/Importation and Sale of Sin-products, Non-
essential goods/services may be subject to:
= In general, Vat (+ excise tax, if applicable); OR
jinn
xs
<<
_"Percentage Tax (+ excise tax, if applicable) -
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| Chapter 7 ~ Business Téees
A transaction subjected to value added tax must no longer be
subjected to percentage tax. Nonetheless, a business entity or taxpayer
may be engaged in transactions that are subject to vat, exempt from vat
and subject to percentage tax (mixed transactions) at the same time.
Therefore, a taxpayer may be subjected to value added tax and at the
same time, percentage tax including excise tax if applicable.
ILLUSTRATION 3:
CASE A:
ABC Corporation is a vat registered taxpayer engaged in trading consumer
goods.
Question 1: What is the applicable business tax of ABC Corporation?
“+ Answer: vat
Question 2: May the BIR subject the sale of ABC Corporation to Percentage
tax in addition to vat? ; :
“+ Answer: No.
* A transaction already subjected to vat should no longer be
subjected to Percentage fax.
CASE B:
Jeepney Transport Corporation is engaged in operating jeepneys in Metro
Manila.
Question 1: What is the applicable business tax of the company?
“> Answer: Percentage Tax.
» Jeepney operation is subject to Common Carriers Tax
(CCT), a Percentage Tax under Section 117 of the Tax
Code (Refer also to Chapter 9 - Percentage Taxes).
Question 2: May the BIR subject the company to 12% vat in addition to
Percentage tax?
** Answer: No.
* _A transaction already subjected to percentage tax should
no longer be subjected to vat.
CASE C:
Jeepney Transport Corporation is engaged in:
» Jeepney operations in Metro Manila; and
« — Sale of jeepney spare parts and accessories
Question: What is the applicable business tax of the company?
“+ Answer: Percentage Tax and Vat
= Jeepney operation - Percentage tax
Sale of Jeepney spare parts and accessories - VAT
= The company is engaged in mixed transactions, hence,
may be subjected to vat and percentage tax wa
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LET Chapter 7 - Busttess des
CASE D:
Cigarette Corporation in manufacturing and selling premium cigarettes.
Question: What is the applicable business tax of the company?
«+ Answer: Vat and Excise Tax
o Manufacture of cigarettes - Excise tax (Refer to Chapter 10)
0. Sale of cigarettes - 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 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 (ATLAS Consolidated Mining vs. CIR, June 8, 2007).
KINDS OF VAT
1. VAT on sale of goods or properties
2. Vat on importation of goods
3. 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. pe i
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TRANSFER
BY A TAX-EXEMPT ENTITY TO NONE-TAX EXEMPT ENTITY
Section 107(B)‘of the Tax Code provides that 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.
MEANING OF THE TERM “GOODS OR PROPERTIES”

Section 106(A)(1) of the Tax Code defined 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 eee commercial or
scientific equipment
- 4. 'The right or the privilege to use motion pictiire’ films, films, tapes
and discs; and
5. . Radio, television, satellite transmission and cable television time. ©
‘ SALE OF SERVICES [Sec. 108(A)]

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
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Chapter 0 - Bustitess Tages
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
4. Itis an indirect tax where tax shifting is gays 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 on the buyer or
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 RA 9337 (Vat
Reform Act). However, in the case of 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. Itis 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. I/tis imposed on the value-added in each singe 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. To
illustrate vat on each stage of production, refer to the illustration in the
next page.
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Chapter 7 - Bustness ‘Cages:
ILLUSTRATION 4:
VAT is imposed.on the value-added in each stage of production and/or

distribution process.
Tabako Manufacturing is a manufacturer of bombastic tobacco (sin product subject

to excise tax). It sells its products to Noypi Distibutors, the company’s exclusive
distributor in the Philippines.
Noypi sells the same to the following:

ABC Company - exclusive distributor for Luzon
DEF, Incorporated— exclusive distributor for Visayas
XYZ Company— exclusive distributor for Mindanao
ABC sells the products to its various customers such as “7/24 supermarket’
VAT IS IMPOSED AS FOLLOWS:

** Tabako is subject to vat on its sale to Noypi. In addition to vat, Tabako is alo
subject to excise tax.
“+ Noypi will charge vat (output vat) on its sale to ABC, DEF, XYZ and DEF.
“ABC will charge vat fo its customers such as 7/24.
“+ 7/24 will charge vat to its customers/end-users.
NOTE: The end-users will ultimately shoulder the tax passed-on to them by the
suppliers of the goods.
4. It is a credit-invoice method value-added tax
Vat payable or the amount of vat to be remitted by taxpayers to the

Bureau of Internal Revenue (BIR) is computed by deducting the input
vat from the output vat. The.sellers 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”.
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Chapter 0 - Business Lagees
ILLUSTRATION 5: Tax Credit Approach

On January 10, 2023, Alpha Corporation sold product “X” to Delta Incorporated for
-| P1,000,000 plus 12% vat. On January 15, 2023, Delta sold the product to Omega
Corporation for P1,200,000 plus vat of P144,000.
Question: How much is the vat payable of Delta?

“> Answer: P24,000
Output Vat (from sale to Omega) P144,000
Input Vat (purchases from Alpha) - (120,000). tax credit
Vat Payable P24,000
o Vat payable is the excess of output vat (vat ‘on sale) over input vat (vat
on purchases). The excess of vat passed-on by Delta to Omega |
(P144,000) over the vat paid on its purchases from Alpha (P120,000).
o'. The input vat is a deduction (tax credit) from output vat.
‘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. /nput 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.
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 (for
additional discussion, refer to Chapter 8 for 0% sales).
Basis of Value Added Tax
The'12% value added tax shall be based on the following:

Nature of Transaction(s
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
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a ate
Chabter 7 - Bustaess Ty tes
Sale of Goods:
Gross Sales Pxx
Less: Sales discounts xx**
Sales returns xx** XX
Net sales XX
Add: Excise tax, if any XX
Tax Base XX
x Vat rate 12%
Output Vat, ° , thee
Less: Input vat (xx)
VAT Payable/ (Excess input tax) Pxx
**Sales Discounts, Retums and Allowances (Sec. 4.106-9 of RR 16-2005)
In computing the taxable base during the month or quarter, the

following shall be allowed as deductions from gross selling price
[Section 106(D) of the Tax Code, as amended]:
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 Services:
Cash received (actually and constructively)*** Pxx
Deposits/Advance payments for future projects XX
Materials charged for services l
Gross receipts XX
x Vat rate 12%
Output Vat ’ XX
Less: Input vat (xX).
VAT Payable/ (Excess input tax) - Pxx_|
“Receivables (For Sale of Services), although ened, are not includedinin the
computation of vat payable.
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Dealer in Securities and LendingInvestors:

Gross Selling Price Pxx
Less: Acquisition cost of securities sold for the month/quarter (xx)
Balance XX
Add: Other income subject to basic tax XX
‘| Gross Income XX
x Vat rate 12%
* Output Vat XX
Less: Input vat (xx)
VAT Payable Pxx
GROSS SELLING PRICE
The total amount of money or its ' If the vat is not billed
equivalent which the purchaser pays or is separately in the
obligated to pay to the seller in consideration _ document of sale, the
of the sale, barter or exchange of the goods or selling price shall be
properties, excluding VAT. The excise tax, if _ deemed to be inclusive ©
any, on such goods or properties shall form of vat.
part of the gross selling pricehin 106(A)(1),
NIRC]}.
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 if the gross. selling
of: 1) the fair market value as determined by the price is based on
Commissioner or 2) the fair market value as shown zonal or market
in schedule of values of the Provincial and City value of property,
Assessors (real property tax declaration). However, the. zonal or market
in the absence of zonal value as determined by the value shall be
Commissioner, gross selling price refers to the deemed exclusive of
market value shown in the latest real property tax vat.
declaration or the consideration, whichever I's
higher (RR 4-2007).
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GROSS RECEIPTS
Gross receipts refer 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 service

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.
VAT REGISTRATION
Under the Tax Code, as amended, vat registration is classified into -

two (2), mandatory and optional 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 R3,000,000 beginning January 1, 2018
under RA 10963-TRAIN Law 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
P3,000,000.
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| Chapler 7 ~ Business Lagees
2. Radio and/or television broadcasting

companies whose annual gross Penaltyfornon-registration %
receipts of the preceding year ofthose required to register. %
exceeds P10,000,000. Mandatory he taxpayer shall be fiable fos
registration applies within 30 days P@¥ the fax as if he were a VAT-
from the end of the taxable year to eae hence e) fe a
radio/ TV broadcasters whose gross ad Fel fal no ;
annual receipt for the taxable year properly recjsleted 8
exceeded R10M (RR 4-2007). '
3. A person required to register as VAT
taxpayer but failed to register.
VAT THRESHOLD, FOR HUSBAND AND WIFE
. For purposes of the threshold of P3,000,000, 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 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. Franchise grantees of radio and/or television broadcasting whose

annual gross receipts of the preceding year do not exceed ten
million pesos (P10,000,000) 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).
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Chap ter 7 - Business Cices
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.
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 P3,000,000; or
2. If he has ceased to carry on The cancellation for registration }%

his trade or business, and will be effective from the first’ [>
does not expect to day of'the following month the |)
recommence any trade or cancellation was approved. 4
business within the next i
twelve (12) months. , “aU a CE Sd eee ey Baie eee
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 soil
3 “Understatement” of taxable sales or receipts by 30%.or more of the
correct taxable sales or receipts for the taxable quarter.
Failure of any person to register as required under the law.
1 '
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Clapton 7n Bustess Lagees
COMPUTATION OF VAT PAYABLE
~ The corresponding liability on: value added tax, as discussed in the

preceding pages, is generally eerniuted as follows:
Output Vat (Sales or Receipts x 12%) Pxx

Less: Input Vat (Purchases or Disbursements Goods x 12%) (xx)
Vat Payable (Excess input vat) Pxx | -
Output vat means the vat due on the sale, lease or exchange of
taxable goods or properties or services by any vat registered person or
non-vat registered person but required to register under Section 236 of the
Tax Code. It is an’ad valorem tax charged on the selling price of taxable
goods or services, and is payable by the customer.
ILLUSTRATION 5:
Case A: Sale of Goods

Orange Corporation, the leading distributor of orange juice in the country, sold 10 boxes
of its products to 7/24 convenience store. The selling price is 210,000 per box exclusive
of vat. If Orange Corporation is a vat registered entity, it should charge an additional |
amount of P-12,000 per box representing 12% vat. Consequently, 7/24 will pay a total of
P 112,000 computed as follows:
Selling Price (10 boxes x P10, 1000) P100,000
Add: 12% VAT 12,000
Total Amount due/payable by 7/24 —_P11,200
Case B: Sale of Services .

In anticipation of lvan’s birthday party, Josephine went to Belo Medical Group to avail
facial services for P30,000 exclusive of vat. Belo is a vat registered entity, hence, |
charges additional 12% vat. Consequently, seeRING should pay a total of P33,600
computed as follows:
Value of the services rendered — P30,000
Add: 12% VAT 3,600
Total Amount Due payable by Ivan P33,600
Case C: Lease of Property

Jamylle Development Corporation (vat registered entity) leases a commercial space to
JC Corporation for 250,000 a month. JC will pay a total of 256,000 per month to the
lessor computed as follows:
F Rent per month ’ P50,000
: Add: 12% VAT (50,000x 12%). 6,000
; Total Amount due/payable by JC P56,000
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Case D: Sale of Services by a non-vat registered entity

Mas Smart, Tayo a non-vat registered corporation rendered professional services to
Kate (vat registered) for 2100,000. Annual gross receipts of Mas Smart.exceeded the
P3,000,000 vat threshold during 2021.
Question 1: How much is the total amount due by Kate to Mas Smart?
“+ Answer: P100,000
“For failure to register under the VAT System, MAS Smart cannot pass-on the output
vat to its customers.
Question 2: Using the same assumption in the preceding question, how much is the vat
due/payable of Mas Smart to the BIR?
“* Answer: P12,000
A non-vat registered entity required to register as vatable entity but failed to do so is
liable to pay the equivalent output vat of 12% and is not entitled to claim input tax.
Il 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
<P100,000 in any twelve-month period) shall be subject to other
percentage taxes. A more detailed discussion of Percentage Taxes is
presented in Chapter 9 of this book.
lll. 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” (such
as wines and cigarettes) or “non-essential goods” (such as automobile
and minerals) under the Tax Code. A more detailed discussion of Excise
Taxes is Prgeenied in| Chapter 10 of this book.
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Chu tor 7 - Bustitess ‘Lagees
4
e aya da (BAY hy) :

MULTIPLE CHOICE.
4. Business Taxes are
a. Imposed upon onerous transfers such as sale, barter, exchange or
importation.
b. Imposed upon gratuitous transfers such donation inter-vivos and
donation mortis causa.
C. Imposed upon gratuitous and onerous transfers.
2. Under the tax code, the following are major internal revenue business taxes,
except:
a. Value added tax c. Excise tax
b. Percentage tax d. Income tax
a. Without a business pursued in the Philippines (except importation) by
the taxpayer, value added tax cannot be imposed.
b. “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, non-profit private
organization or government entity.
Services rendered in the Philippines by a non-resident foreign person
shall be considered as being rendered in the course of trade or
business even if the performance is not reget:
d. All of the above
4. Which statement is false? Transactions considered “in the course of trade or

business”, and therefore subject to the business taxes include:
a. Regular conduct or pursuit of a commercial or an economic activity
by a stock private organization.
b. Regular conduct or pursuit of a commercial or an.economic activity
by a non-stock, non-profit private organization.
c. Isolated services in the Philippines by non-resident foreign persons.
d. Isolated sale of goods or services for a gross selling id or receipts
of R950, 000.
5. The provisions of vat law shall apply to persons whose undertakings are
intended to be pursued on a going concern basis where the end view is to
realize unrestricted amounts of pecuniary gains or profits from those who may
avail of the goods they sell or the services they render. Which of the following
statements is correct?
a, Services rendered in the Philippines by a-citizen or resident person
shall be considered as being rendered in the course/of trade or
business even if the performance is not regular.
/
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b.. Services rendered in the Philippines by a non- -resident foreign
ae person shall be considered as being rendered in the course of trade
_ or business even if the performance | is not regular.
c. Both “a” and “b"
d. Neither “ a” nor D
6. Statement 1: Business taxes are Sco on gross income.

Statement 2: Business tax is in addition to income tax, ~
a. Only statement 1 is correct
c. Both statements are correct
d. Both statements are incorrect
7. Statement 1: 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 VAT.
Statement 2: The excise tax, if any, on such goods or properties shall-form
part of the gross selling price.
8. Which of the following statements is correct? In the case of sale, barter or

“exchange of real property subject to vat,
a. Gross selling price shall mean the consideration stated in the sales
document or the fair market value, whichever is higher.
b. Fair market value shall mean whichever is higher of the fair market
value as determined by the BIR Commissioner or the fair market
value as shown in schedule of values of the Provincial and City
Assessors.
c. Gross selling price, in the absence of zonal value or fair market
value as determined by the BIR Commissioner, shall refer to the
market value shown in the latest real property tax declaration or the
consideration, whichever is higher.
d. All of the above

|. | Vat may be imposed together with other percentage tax
hy Vat may be imposed together with excise tax
lll... Vat and other percentage tax may be inppsee together win income
‘tax
' a. ll only c. Il and Ill only
-b. Illonly qj 1, land Il
40. As to tax rate, value added taxi is an exinible of

a. Graduated tax c. Regressive tax
b. Progressive tax d. Proportional tax. ,
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Chapter 7 - Business Lawes
We Which of the following statements is correct? ?

a. The seller of goods/services is the one statutorily liable to pay vat.
b..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. Hence,
what is transferred or shifted to the consumers is not the ‘liability to pay
the tax” but the tax burden.

a. All vat-exempt taxpayers shall be subject to other percentage taxes.
b. A taxpayer who is subject to percentage. tax on his OSs receipts will also
be subject to income tax on his net income.
d. Neither “a” nor “b” arise Sue
13. Georgia is a manufacturer of “GJ supermini-cigarettes”. In making sales,
taxes on the products and transactions are passed on to the buyers. For vat
purposes, which of the following forms part of the gross selling price?
a. Value added tax c. Excise tax
b. Percentage tax d. Income tax
14. Alex imported cigarettes for sale in the Philippines. What business tax will
‘ Alex pay?
1" Answer. He will pay VAT on importation and on the sale of the
cigarettes.
2” Answer. He will pay excise tax on inipereiao of the cigarettes.
a. Both answers are correct
b. Both answers are incorrect
c. Only the 1° answer is correct
d. Only the 2" answer is correct

a. An excise tax which imposes a tax based on weight or volume capacity or
any other physical unitof measurement is called specific tax.
b. An excise tax which imposes a tax based on selling price or other
specified value of the article is called ad valorem tax.
c. Apercentage tax which is imposed whether the transaction resulted in a
gain or loss is called transaction tax.
16. A taxpayer imported cigarettes from China for sale. At a later date, he sold
‘the cigarettes in the Philippines. .He is subject to value-added tax. He is also
subject to business tax of
a. Income tax c:. Excise tax
b. Percentage tax d. None of the above
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Chapter vy - Business Lagves
Af: Who of the following is NOT subject to vat?

a. Vat registered person whose gross sales do not exceed P3,000, 000.
b. Avnonresident lessor or foreign licensor-who is not vat registered.
c. Any person who is required to a under the vat system but failed to
register.
d.° None of mis above.
18. Anon-VAT registered whose sales for the year exceeded PS, 000,000 is
a. Exempt from VAT
b. Subject to 0% VAT
c. Subject to percentage tax
d. Subject to 12% VAT °
49. Which of the following is/are correct?

I. Persons whose transactions are exempt from value added tax under
-Section 109 because their gross sales/and or receipts do not exceed
P3,000,000 may voluntarily apply for ale under the VAT
system.
Il. A VAT-registered person whose gross sales and/or receipts for two
(2) consecutive years did not exceed P3,000,000 may apply for
cancellation of VAT registration and revert back to being VAT-exempt
under Section 109.
a. | only | c. Both! and II
b. Il only , d. Neither | nor II
20. Which is incorrect?

a. A taxpayer whose annual gross receipts or sales exceed P3,000,000
shall pay VAT even if not VAT registered.
b. A taxpayer whose annual receipts or sales do not exceed
P3,000,000 but who is VAT registered shall pay VAT.
c. The same transaction may be subjected to both income tax and VAT.
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— J
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. 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 is may be subject to other percentage taxes except those
transactions exempt from business taxes such as those made for
subsistence or livelihood.
VAT EXEMPT SA Soy ss!

aaa esi GRIN) ;
> RA 11534 (CREATE PS yicede Lena panieas Ae aI ei 021
The vat exempt transactions provided in the Tax Code are as follows:
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.
RR 16-2005 provides that products classified under this exemption

(such as meat, fruits and vegetables) 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 including those those using advanced
technological means of packaging, such as shrink wrapping in plastics,
vacuum packing, tetra-pack, and other similar packaging methods.
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Ta
Bare
Examples of Agricultural and Marine Food Products in their Oye] Bee
Agricultural Marine Livestock Poultry
Polished/husked rice Fish Cows Fowls
Corn grits - Crustaceans such as: Bulls Ducks
Raw cane sugar & molasses | = Lobster, shrimps Calves Geese
= — 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.
Polished and/or husked rice,:corn: grits, raw cane sugar and

molasses, ordinary salt and copra, as provided in Table 8-1 above, shall
be considered in their original state. For this purpose, notwithstanding the
process/es involved in its production, “raw sugar or raw cane sugar’
means sugar whose content of sucrose by weight, in the dry state, ~
corresponds to a polarimerer reading of /ess than 99.5 degrees. [Sec. 109,
NIRC]
VAT EXEMPT SUGAR
RAW SUGAR CANE refers to sugar produced by simple process of

conversion of sugar cane without need of any mechanical or similar
device. Under the revised regulation, raw cane sugar refers only to
muscovado sugar. Thus, only raw sugar cane is exempt from vat under
the tax code (RR 4-2015). The following other definitions were also
provided under RR 13-08 as amended by RR 12-2013, RR 4-2015 and
RR 6-2015:
Raw Sugar as sugar whose content of sucrose by weight in dry stale,

corresponds to a polarimeter reading of /ess than 99.5°.
Refined Sugar as sugar whose content of sucrose by weight in dry state,
corresponds to a polarimeter reading of 99.5° and above.
Sugar Refinery Mill refers to entity, natural or juridical, engaged in the
business of milling sugar cane into raw or in the refining of.raw sugar
‘Cane Sugar produced from the following shall be presumed, for internal
revenue purposes, as refined sugar.
= Product of a refining process
» . Products of a sugar refinery; or ~
= — Product of a production line of a sugar.mill accredited by the BIR to
. be producing and/or capable of producing sugar with polarimeter
reading of 99.5° and above
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Okepter 8 - Valte Added Le
SALE OF MARINATED FISH (Rev. Ruling 348-11 dated Sept 28, 2011)
Sale of marinated fish is not exempt from vat. Laws granting
exemption from tax are construed strictly against the taxpayer.
Exemption from payment of tax must be clearly stated in the language
of the law
Determine which transaction is subject to vat:

TRANSACTION PARTICULARS
1 Sale of copra
me” Sale of bonsai
3 Sale of wood
4 Sale of barbeque
5 Sale of tilapia |
6 Sale of roasted chicken
7 Sale of canned pineapple chunks
8 Sale of salted eggs
ts a Sale of smoked fish
x 10 Sale of flowers:
11 Sale of raw sugar cane
12 Sale of muscovado
13 Sale of refined sugar |
ANSWER: Transactions 2,3,7,10and13 |
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).
Specialty feeds refer to non-agricultural feeds or food for race horses, fighting cocks,
aquarium fish, Zoo animals and other animals generally considered as pets are subject to vat.
For the sale or importation of certain feed ingredients (whey powder,

skimmed milk’ powder, lactose, buttermilk powder, whole milk powder and
such other feed ingredients and additives which may. be hereinafter be
determined by competent authority to have possible utilization for human
consumption, there must be a showing that the same is unfit for human
consumption or that the ingredient cannot be used for the production of
food for human consumption as certified by the Food and Drug
Administration (FDA) [RMC 55- 2014 as revised by RMC 66-2014 and
RMC 78-2014].
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Chapter 8 - Valeo Added Tig
ILLUSTRATION 2:
Transaction PARTICULARS
Gh—
Sale/importation of V-Mig hogfeeds.
Sale/importation of V-Mig feeds for pets
Purchase of local raw materials for the formulation of hogfeeds.
Importation of raw materials for the formulation of hogfeeds
&
Importation of raw materials for the formulation of feeds for animals

Oo
generally considered as pets

6 Importation of fertilizers.
ANSWER:
Transactions 2 and 5
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.
ILLUSTRATION 3:
Mike retumed from Serbia after watching Gilas games during the 2021 Olympic Qualifying
Tournament. He brought with him several personal effects (souvenirs) he bought from
Serbia.
Question: Are the personal effects brought by Lester to the Philippines subject to vat?
“* Answer: No. "s
Personal and household effects brought from abroad by a resident of the Philippines
are exempt from vat. .
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 herein
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
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_that the goods are brought from their former place of abode, exempt
such goods from payment of duties and taxes: Provided, further,
vehicles, vessels, aircrafts and 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, as

amended (Sections 116-127). Percentage Taxes are discussed in
Chapter 9 of this book.
ILLUSTRATION 4:
Transaction PARTICULARS
1 Gross receipts of transportation contractors engaged in the

. transport of passengers by land.
2 Gross receipts of transportation contractors engaged in the
transport of goods and/or cargoes by land. .
3 -Gross receipts of domestic carriers engaged in the transport of
passengers by air or sea.
4 Gross receipts of domestic carriers engaged in the transport of
_ goods and/or cargoes by air or sea.
5 Gross receipts of international air carriers doing business in the
Philippines.
6 Gross receipts frorn international flights of domestic carriers.
7 Gross receipts of Banks and non-bank entities doing business in
the Philippines.
8 Gross receipts of radio and/or television broadcasting companies
with annual gross receipts from the preceding year exceeding
P10,000,000.
9 . Gross receipts of radio and/or television broadcasting companies
whose annual gross receipts of the preceding year does not exceed
P10,000,000 (assume non-vat registered),
10 Gross receipts of operators of cabarets, night and day clubs.
ANSWER:
Transactions 2, 3, 4, 6, and 8 .
Transactions 1, 5, 7, 9 and 10 are subject to Percentage Taxes (Refer to Chapter 9)
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Chapter 8 - Value Added’ Lae
F. SERVICES BY
a) "Agricultural contract growers” and
b) Milling for others of: *
= Palay into rice
* _ Corn into grits; and
» Sugar cane into raw sugar
Section 4.109-1(B)(1)(f) of RR 16-05 provides, that “Agricultural

contract growers” refer to those persons producing for, others’ poultry,
livestock or other agricultural and marine food products in their original
state. Its services growing of poultry, livestock or other agricultural
and marine food products into marketable poultry, livestock or other
marine food products. There are agricultural contract growers which
offer toll processing/toll cress manufacturing as.a packaged
service to its toll growing. . “Toll processing/toll dressing/toll
manufacturing’ involves procedures: such as; weighing, killing,
dressing, scalding, cut-ups; and packaging.
However, after careful re-study by the Bureau, it was clarified

under RR 97-2010, that “toll processing services exempt from vat”
shall pertain only to services to clients from which growing of animals
were contracted. As such, preparing and packaging hogs/chicken
ready for delivery after producing or growing them can be said to be
within the purview of “agricultural contract growing’. However, if such
an activity is done independently of growing poultry, livestock or other
agricultural and marine food products, the same can be considered as
vatable services not covered by agricultural contract growing.
G. Medical, dental, hospital and veterinary services except those

rendered by professionals.
Laboratory services are exempted. If the hospital or clinic
operates a pharmacy or drugstore, the sale.of drugs and medicines.
are subject to VAT. Hospital bills constitute medical services. The
sales made by the drugstore to the in-patients which are included in
the hospital bills are part of medical bills ‘exempt from vat. Sales of
_the drug store to the out-patients are taxable because they are not
part of medical services of the hospital.
Medical practitioners, under the aforementioned regulation,

shall likewise include medical technologists, allied health workers
(e.g., occupational therapists, physical therapists, speech therapists,
nurses, etc.) and other medical practitioners who are not under an
employer-employee relationship with the hospital, clinic or HMO and
other similar establishments.
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Pursuant to RR 16-2005, services of Professional Practitioners

are subject to VAT if annual gross professional fees exceed
R3,000,000. Otherwise, such professional fees are subject to
_ Percentage Tax under Sec. 116, of the Tax Code, as amended.
Professional Practitioners include, among others, the following:
« Medical practitioners
» CPAs
« Insurance Agents (Life & Non-life)
= Other Professional Practitioners required to pass the government
examination
ILLUSTRATION 5: - fo t
CASE A:
Ana was delighted after spending a well-deserved summer vacation in Palawan.
However, due to high temperature brought about by the weather and fatigue, she suddenly
felt wobbly. She consul a ted a better assessment of her
doctor upon arrival in Manila. For
condition, she was advised to undergo some laboratory tests and other medical
procedures in a prominent hospital in Taguig. The following were incurred by Ana:
Doctor's consultation fee P50,000
Various laboratory fees in the hospital ~ _ 240,000 |
Medicines purchased from the hospital's pharmacy 120,000
REQUIRED: Determine the total amount of vat paid by Ana.

Doctor’s consultation fee (P50,000x 12%) P6,000
Medicines purchased (P120,000 x 12%) 14,400 |
Total vat paid P20,400 |
£2 Laboratory fees are vat exempt
CASE B:
After a heated confrontation with Juan, Pedro suffered physical injuries requiring one (1)
month hospitalization. The following were incurred by Pedro: ~
Hospital bills P250,000
Laboratory expenses exclusive of medicines 175,000
Medicines purchased from the hospital's pharmacy 60,000
Medicines purchased from a phanmiacy outside of the hospital 75,000
Required Determine the amount of vat from the foregoing expenditures

“* Answer: P16,200 computed as follows:
Medicines purchased from the hospital's oheanitiagy (P60,000 x 12%) P7,200
- Medicines purchased outside of the hospital (P75,000 x 12%) ___9,000_
VAT =
PI
“P16,200_
t
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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.
“Educational services” shall refer to academic, technical or

vocational education provided by private educational institutions duly
accredited by the DepEd, the CHED and TESDA and those rendered
by government educational institutions and it does not include
seminars, in-service training, review classes and other similar services
rendered by persons who are not accredited by the DepEd, the CHED
and/or TESDA. [Sec. 4.109-1 (B)(h), RR 16-2005]
ILLUSTRATION 6:
Transaction PARTICULARS.
1 Gross receipts by ABC University, a proprietary educational
institution registered under CHED.
2 Gross receipts by Saint Mary's University, a non-stock non-profit
educational institution registered under CHED.
3 Gross receipts by XYZ primary school accredited by the
Department of Education (DepEd).
4 Gross receipts by Employ Me Now Institute, a vocational school.
registered under TESDA.
Gross receipts by a review school offering CPA review course.
no
Gross receipts by a tutorial school offering review courses for

college entrance examinations.
ANSWER: Transactions 5 and 6
I. Services rendered by individuals pursuant to an employer-employee

relationship.
J. Services rendered by Regional or Area Headquarters (RHQs)

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.
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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
Concessionaires under the Petroleum Act'of 1949.) .
Examples (special laws):

PD 1869 - PAGCOR Charter
‘BS
RA 9367 — Biofuels Act

-
RA 10072 — Philippine Red Cross

8
RA 9994 — Expanded Senior Citizens Act of 2010

8
x
RA 10754 — Magna Carta for PWDs

=
RA 11861 - Solo Parent Law

=
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. product.
CaCO EC yy CMe aru

iey a al ee
EN ee er ee Gules
Sale of cooperative’s own produce
(Processed or at its original state) Exempt Exempt
Other than the cooperative’s own produce (i.e.
from “traders”) Exempt VAT*
*Exempt if referring to agricultural food product at its original state.
It is to be reiterated however, that sale or importation of

agricultural food products in their original state is exempt from
VAT irrespective of the seller and buyer thereof, pursuant to
Subsection (a) [Sec. 4.109-1 (B) (I), RR 4-2007]
ILLUSTRATION 7:
| Benguet Agri Coop is a duly registered agricultural cooperative engaged in growing
abaca and production of bags made of abaca. It is also engaged in the sale of other
kitchen kits made of rattan from other cooperatives and traders. The following data for
the year were provided:
To members To non-members
Sale of abaca bags P6,000,000 P4,000,000
Sale of kitchen kits 2,000,000 3,000,000
Question: How much is the vat payable of Benguet?

| Answer: P36,000; (P3M x 12%)
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.M. Gross receipts from “lending activities” by credit or multi-purpose

cooperatives. duly registered with the Cooperative Development
Authority”. Exemption is not only limited to the gross receipts on loans
extended to its members but also to other persons who are not
members.
From lending activities Exempt . - Exempt

From non-lending activities VAT “VAT
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”.
Importation by non-agricultural, non-electric and noncredit
cooperatives of machineries and equipment including spare parts
thereof, to be used by them are subject to vat.
As eae to els 50-1 Ie) dau eas

wy
Electric cooperatives me ss VAT
Agricultural cooperatives Table 8-2. | Table 8-2
“Lending activities” by lending and multi- Table 8-3. | Table 8-3
purpose cooperatives
Non-agricultural, non-electric, non-
lending/credit cooperatives
= Contribution per member SP15,000 Exempt Exempt
* Contribution per member >P15,000 VAT VAT
ILLUSTRATION 8:
CASE A:
Kuryente Natin, an electric cooperative provided the following data for the taxable
year (net of applicable taxes):
Sales P5,000,000
Purchases 2,000,000
“Question: What is the correct amount of vatpayable, if any?
“+ Answer: P360,000
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Solution:
Output vat (P5Mx 12%) P600,000
Input vat (P1,000,000 x 12%) (240,000)
Vat Payable ___ P360,000_
CASE B:
Coop Natin is a duly registered non-agricultural, non-electric and non-credit
cooperative founded and operated by the employees of Chriska Group of Companies
with maximum contribution of P15,000 each. The cooperative is duly registered with
the Cooperative Development Authority. The following data were provided for the
taxable year (net of applicable taxes):
Sales P5,000,000
Purchases 1,000,000.
Question 1: What is the correct amount of vat payable, if any?

‘+ Answer: None. The cooperative is vat exempt.
| Question 2: Assume further that Coop Natin imported equipment valued at P1M for
its own use. What amount, if any should be recognized as liability for vat?
¢* Answer: P120,000; (P1,000,000 x 12%)
£2 Only “agricultural cooperatives” are exempt from importation of equipment
to be used directly and exclusively'in the production or processing of the
agricultural cooperative’s produce.
‘_Q. Export sales by persons who are not vat-registered
Export sales may be exempt or subject to vat as shown in the figure

below: .
Table 8-5; Business Taxes ofExportSales

*)
| Vat Exempt
Export Sales
Vatable
@ 0%
_| (zero-rated sales)
Refer to pages 270 to 277 for additional discussion on zero rated sales.
a
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ILLUSTRATION 9: ,
James Corporation provided the following data for the taxable year:
Export Sale (net) P5,000,000
Purchases (net) 2,800,000
Question 1: If James is vat registered, how much is the vat payable/refundable?

«+ Answer: (P120,000) computed as follows:
Output vat (P5M x 0%) PO
Input vat (P2,800,000 x 12%) © (336,000)
Excess Input/Refundable (P336,000)
Question 2: If James is non-vat registered, how much is the vat payable/refundable?

«+ Answer: None. The sale is vat exempt.
© The attributable input vat on purchases shall be recognized either as part of
cost or expense.
19,0210):9 tS) Veer

By a Vat Registered Exporter ahi EM OVClea lel Chagoo ACls
(Subject to.0%.Vat) ets Cu eeu cl)
FORMULA:
Output Vat (@ 0%) PO Output Vat None
Input Vat (xx) | Input Vat"** NIA
Excess Input Vat** (Pxx) | Vat Payable None
**MAY BE: | ***The attributable vat on purchases is not

1. Refunded allowed to be recognized as input vat.
2. Used as Tax Credit against output vat However, it may be closed to expense or
in relation to sales subjected to 12% cost.
vat (local sales)
3. May be converted into a tax credit
certificate for payment of any intemal
revenue taxes (BIR taxes)
' P. SALE OF REAL PROPERTY
The TRAIN Law provides that the vat exemption on sale of real
property beginning January 1, 2021 shall only apply to the following:
a. 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 not primarily held for sale or for lease is, in general, vat
exempt. However, if such property is used in the trade or business of the seller, the
sale shall be subject to VAT as an incidental transaction to the seller's main business
(RR 4-2007, RR 13-2018). On the other hand, sale of real properties held primarily
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for sale to customers or held for lease in the ordinary course of trade or business of
the seller shall be subject to vat (RR 16-2005 as amended by RR 13-2012 and RR
13-2018).
Sale of real property utilized for socialized housing as defined

under RA No. 7279, as amended;
Socialized Housing refers to housing programs and_ projects covering

houses and lots or home lots only that are undertaken by the government or the
private sector for the underprivileged and homeless citizens, which shall include sites
and services development, long-term financing, - liberalized terms on_ interest
payments, and as such other benefits in accordance with the provisions of Republic
Act 7279, otherwise known as the “Urban Development and Housing Act of 1992”
and RA No. 7835 and RA No. 8763. “Socialized Housing” shall also refer to projects
intended for the underprivileged and homeless wherein the housing package selling
price is within the lowest interest rates under the Unified Home Lending Program
(UHLP) or any equivalent housing program of the Goverment, the private sector or
non-government organizations.
. - Sale of House and Lot and Other Residential dwellings with selling
price of not more than P3,199,200.
RR 8-2021 provides that the adjusted threshold to be used "

shall be P3,199,200 as adjusted in 2011 using the 2010
consumer price index (CPI). Provided further, that every three
(3) years thereafter, the amounts stated herein shall be
adjusted to its present value using the Consumer Price Index,
’ as published by the Philippine Statistics Authority (PSA).
NOTE:
= The provision of the CREATE law, increasing the threshold for vat exempt
sale of residential house and lot and other residential dwellings to
P4,200,000 was VETOED by then President Duterte.
= SALE OF PARKING LOT IN THE SALE OF CONDOMINIUM UNITS

(RR 13-2012)
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 is a separate and distinct transaction and is not
covered by the rules on threshold amount not being a residential lot, house
and lot or a residential dwelling. Thus, should be subject to VAT
regardless of amount of selling price.” (RR-13-2012).
on
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GUIDE:
If the sale of real property was NOT made in the ordinary course of trade or
business, the real property is classifi ed as capital asset, hence, not subject to
‘vat but to capital gains tax.
2. If the sale was made in the ordinary course of trade or business:
_ = VAT EXEMPT:
a. Sale of residential house and’ lot and other residential dwellings
‘provided the selling price is not more than P3,199,200 (RR 8-2021
dated June 11, 2021);
b. Sale of real property utilized for socialized housing
« — SUBJECT TO VAT:
a. Sale of residential house and lot and other residential dvelinas if the
selling price is MORE than P3,199,200 (RR 8-2021 dated June 11;
2021);
b. Sale of residential lot:
c. Sale of commercial lot/units;
d. Other real properties not specifically provided. under the law as vat-
exempt.
ILLUSTRATION
10:
Which of the following sales in 2023 taxable year is subject tovat?
1. Sale of a parcel of land heid as capital asset.
Sale of a parcel of land not ordinarily held forsale to customers but is used
in business operations.
3. Sale of “commercial lot” ordinarily held for sale in the course of trade or
business.
4. Sale by a real estate dealer of “residential lot’ ordinarily held for sale in the
course of trade or business.
5. Sale of condominium unit forP3,199,200.
6. Sale of parking space in a condominium unit for P800,000
“* Answer: # 2, 3, 4, and6
#1 is subject to 6% capital gains tax. It is not subject to a business tax.
#2 is considered incidental transaction subject to vat.
#3 sale of commercial lot is subject to vat.
#4 beginning 2021 taxable year, sale of residential lot by a real estate dealer is no
longer exempt from vat.
#5 is vat-exempt because the selling price is not more than the vat threshold of
P3,199,200 as provided under RR 8-2021 dated June 11, 2021.
#6 is subject to vat. It is not classified as residential house and lot and other
residential dwellings.
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Q. Lease of Residential Unit
Lease of a residential unit with a monthly rental per unit not

exceeding fifteen thousand pesos P15,000 regardless of the amount
of aggregated rentals received by the lessor during the year (RR 16-
2011; RR 13-2018).
Lease of residential units‘ where the monthly rental per unit

exceeds P15,000 but the aggregate of such rentals of the lessor
during the year do not exceed P3,000,000 shall likewise be exempt
from VAT, however, the same shall be subject to Percentage Tax
under. Section 116 of the Tax Code as amended (RR 16-2011; RR 13-.
2018)..
The Percentage Tax rate under Section 116 of the Tax Code, as
amended by RA 11534 (CREATE law) shall be as follows:
Prior to July 1, 2021 fits: Hove
From July 1, 2021 to June 30, 2023 : 1%
Beginning July 1, 2023 ft vo
EL ee Al ER easCCeEeCRe CELA
[ Lease of Residential Units Lease of

commercial
——~ units
Monthly rental is Monthly rental is
s P15,000 >-P15,000
= Generally
~ subject to vat
: regardless of
Annual receipts of
the lessor >P3M SO ee
Subject to OPT
under Sec. 116 if
lessor is non-vat
registered and
Exempt from vat annual gross
receipts
S$ P3M
[ Subject to Sec. 116 | [ Subjectto vat \ )
~ £2 The revised threshold of P15,000 and P3,000,000 shall apply only upon effectivity of
RA10963 (TRAIN Law) beginning January 1, 2018.
{The gross receipts from lease of residential units with monthly rental per unit of not more
than P15,000 and more than P15,000 shall not be combined for vat purposes.
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In cases where a lessor has several residential units for

lease, some are leased out for a monthly rental per unit of not
exceeding, R15,000 (as amended) while others. are leased out for
more than P15,000 per unit, his tax liability will be:
(a) The gross receipts from rentals not exceeding P15,000 per
month per unit shall be exempt from vat regardless of the
aggregate annual gross receipts; and
(b) The gross receipts from rentals exceeding P-15,000 per month
per unit shall be subject to vat if the annual gross receipts
exceed R3,000,000, as amended, from said units only — not
including the gross receipts from units leased out for not more
than P15,000. Otherwise, the gross receipts shall be subject
to Percentage Tax under Section 116 of the Tax Code (RR 16-
2011; RR-13-2018).
Residential Unit shall refer to:

= Apartments and houses and lots used for residential purposes;
* — Buildings or parts or units thereof used solely as dwelling-places (i.e.,
dormitories, rooms, bed spaces) except motels, motel rooms, hotels and hotel —
rooms.
UNIT shall refer to:

. ™ Apartment unit in case of apartments
= — House in case of residential houses
= Per person in case of dormitories, boarding houses and bed spaces; and
= — Per room in case of rooms for rent
ILLUSTRATION 11:
Which of the following transactions by a property developer is subject to vat?

‘Case 1: Lease of commercial units in Makati for 215,000 per unit per month. Gross
receipts during the year was P2,200,000. The developer is a.vat-registered entity
“+ Answer: Subject to vat
Being a vat-registered entity, the lease shall be subject to vat regardless of the amount
of aggregate annual gross receipts. Since the transaction pertains to lease of
‘ * commercial units, the amount of monthly rental is irrelevant.
Case 2: Lease of residential units in Makati for 215,000 per unit per month. The
aggregate gross receipts of the lessor during the year was P5,000,000.
“> Answer: Exempt from vat
Since the monthly rental.is not more than the vat threshold, it is exempt from vat
regardless of the amount of aggregate gross receipts.
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Case 3: Lease of residential units in Makati for P20,000 per unit per month. The
aggregate gross receipts of the lessor was P5,000,000.
¢+ Answer: Subject to vat
Since both the monthly rental and the aggregate annual gross receipts exceeded the
applicable thresholds, the lease is subject to vat. .
Case 4: Lease of several residential units in Makati with the following details:
Monthly Rent — Annual Gross Receipts
P12,000 P3,200,000
P16,000 P2,800,000
“> Answer: Exempt from vat
The lease of units with monthly rent of 12,000 is exempt from vat even if the annual
gross receipts from such lease exceeded the vat threshold. Likewise, the lease with
monthly rental of 216,000 is also vat-exempt because although the monthly rental is
more than 215,000, the annual gross receipts did not exceed the vat threshold of
R3,000,000. To be subjected to vat, both the monthly rental and annual gross receipts
must exceed the thresholds of 215,000 and 23,000,000, respectively. The two leases
must be treated independently. The lease with monthly rental of 16,000, however, is
subject to Percentage Tax under Section 116 of the Tax Code, as amended.
Case 5: Lease of residential units in Makati with the following details: |

Monthly Rent Annual Gross Receipts |
P12,000 P3,200,000
P46,000 P3,800.000
“* Answer: Exempt from vat; Subject to vat
As discussed in Case #4, the lease with monthly rent of 212,000 is exempt from vat.
However, the lease with monthly rental of 16,000 is subject to vat because both the
monthly rental and annual gross receipts in this particular case exceeded the applicable
vat thresholds of 215,000 and P3,000,000, respectively. The two leases must be
treated independently. |
Case 6: Lease of commercial and residential units in Makati with the following details:
Monthly Rent — Annual Gross Receipts
Commercial - P12,000 P71,800,000
Residential P16,000 P2,500,000 |
“+ Answer: Subject to vat
This particular problem was taken from the illustration provided under RR 12-
2018. As arrule, lease of commercial units are subject to vat. On the other hand, lease
of residential units with monthly rent per unit of more than P15,000 will either be subject
to Vat or Percentage Tax under Section 116 of the Tax Code, as amended. In this
particular transaction, the gross receipts from the commercial units and residential units
shall be subject fo vat since both may be subjected to vat provided the total annual
gross receipts exceeded the vat threshold of P3M. The total gross receipts from both
transactions amounted to P4,300,000. Consequently, both transactions shall be
subjected to vat.
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R. (As. amended under CREATE Law): Sale, Importation, printing or
* publication of books, and any newspaper, magazine, Journal, review
bulletin, or any such. educational reading material covered. by the
United. Nations Educational, Scientific and Cultural Organization
(UNESCO) Agreement on the. importation of educational, ‘scientific
and cultural materials, including the digital or electronic format thereof.
Provided, That the materials enumerated herein are not devoted
principally to the publication of paid advertisements. Provided further,
That the materials enumerated herein are compliant with the
requirements set forth by the National Book Development Board
pursuant to R.A. No. 8047 (RR 4-2021).
Under BIR Ruling No. 083-2014, the term, "book, newspaper,

magazine, review and bulletin" only covers printed matters in hard
copy, and does not apply 0 electronic format or versions including but
not limited to:
0 e-books
0 e-journals
© electronic copies
® ~ online library sources
® CDS and software
Furthermore, the activities that exempt from vat under this

provision are as follows (1)sale, (2)lmportation, (3)printing; and
(4)publication of books, newspapers, magazines, reviews and
bulletins or any such educational reading material covered by the
UNSESCO. Thus, a corporation's other transactions (such as the
printing of brochures, bookbinding, engraving, stereotyping,
electrotyping, lithographing of various reference books, trade books,
journals and other literary works), are subject to VAT. The taxpayer
is required to register its business as a VAT business entity and issue
a separate VAT invoice/receipt to record such transactions.
S. Transport of passengers by international carriers doing business in the

Philippines.
Transport of passengers by international carriers doing. business

in the Philippines is:not subject to business tax (vat and percentage
tax). On the other hand, transport of cargo by international carriers is
not also subject to vat, however, it is subject to percentage tax under
Section 118 of the Tax Code, also. known as Common Carrier's Tax
on International Carriers (Refer also to Chapter 9 of this book — “Other
. Percentage Taxes’).
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GUIDE:
» International Carriers (resident eg corporations):

TRANSPORT. OF in the Philippines
Passengers Vatexempt
Cargo or goods Vat exempt. However, it is subject to Common
Carrier's Tax (Percentage tax) under Section 118. | .
.# Doniastte Common Carriers:

Baoan uct the Philippines aU el ert!
Passengers |
« Byland Common Carrier's Tax = O%vat
under Sec. 117
« By air or sea** Vat ' 0% vat
Cargo or. goods** Vat : 0% vat

~ “Generally subject to vat. However, if applicable, it may be subject to percentage tax under Sec. 116.
. 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).
. 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. Thus, said fuel, goods and supplies shall be
used exclusively or shall pertain to the transport of goods and/or
passenger from a port in the Philippines directly to a foreign. port, or
vice versa, without docking or stopping at any other port in the
Philippines, unless the docking or stopping at any other port in the
Philippines is for the purpose of unloading passengers/and or cargoes
that, originated from abroad, or to load passengers .and/or cargoes
bound for abroad; Provided, further, that if any portion of such fuel,
goods or supplies is used for purposes other than that mentioned in
this paragraph, such portion of fuel, goods or supplies shall be subject
to 12% vat.
eet,
eens to
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V. Services of banks, non-bank financial intermediaries performing quasi-
banking functions, and other non-bank financial intermediaries, such
as money changers and pawnshops, subject to percentage tax under
Sections 121 and 122, respectively of the Tax Code.
W. Sale or lease of goods and services to senior citizens and persons

with disabilities, as provided under RA No. 9994 (Expanded Senior
Citizens Act of 2010) and RA No. 10754 (An Act Expanding the
Benefits and Privileges of Persons with Disability (PWD), respectively.
X. Transfer of property pursuant to Section 40(C)(2) of the Tax Code, as

amended (Upon effectivity of RA10963-TRAIN Law only; new
provision). '
Y. Association dues, membership fees, and other assessments and

charges collected on a purely reimbursement basis by homeowners’
associations and condominium corporations established under RA No.
9904 (Magna Carta for Homeowners’ and Homeowners Association)
and RA No. 4726 (Condominium Act), respectively. This provision
shall take effect only beginning January 1, 2018 or upon the effectivity
of RA10963-TRAIN Law (new provision). '
Z. Sale of Gold to the Bangko Sentral ng Pilipinas (Beginning January 1,

2018 or upon the effectivity of RA10963-TRAIN Law. It is subject to
‘0% vat prior to 2018).
AA. _ Sale or importation of prescription drugs and medicines prescribed

for diabetes, high cholesterol, hypertension beginning January 1, 2020
and cancer, mental illness, tuberculosis and kidney diseases
beginning January 1, 2021 (CREATE Law; RR 4-2021).
The exemption from VAT under this subsection shall

only apply to the safe or importation by the manufacturers,
distributors, wholesalers and retailer of drugs and medicines if
included in the "list of approved drugs and medicines" issued ‘by the
Department of Health (DOH) for this purpose (RR 4-2021).
BB. — Sale or importation of the following beginning January 1, 2021 to

December 31, 2023: ’
() Capital equipment, its spare parts and raw materials,
necessary for the production of personal protective equipment
(PPE) components such as coveralls, gown, surgical cap,
surgical mask, n-95 mask, scrub suits, goggles and face
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shield, double or surgical gloves, dedicated shoes, and shoe
covers, for COVID-19 prevention;
(ii) All drugs, vaccines and medical devices specifically prescribed

and directly used for the treatment of COVID-19; and
(iii) Drugs for the treatment of COVID-19 approved by the Food

and Drug Administration (FDA) for use in clinical trials,
including raw materials directly ey for the production of
such drugs.
Provided, That the Department of Trade and Industry (DTI)

shall certify that such equipment, spare parts or raw materials for
importation are not locally available or insufficient in quantity, or
not in accordance with the quality or specification required. _
Provided further, That for item (ii), within sixty (60) days
from the effectivity of the CREATE, and every: three (3) months
thereafter, the Department of Health (DOH) shall issue a list of
prescription drugs and medical devices covered by this provision.
. Provided finally, That for items (i) and (iii) hereof, on the
sale or importation of equipment, spare parts and raw materials
for the production of PPE components as well as the sale or
importation of raw materials directly necessary for the production
of drugs for the treatment of COVID-19, the supplier/s or importer
shall submit, for the purpose of availing the exemption, the
following:
1) Certified true copy of "License to Operate", issued to the

manufacturer-buyer by the DOH-FDA authorizing the
manufacture of medical grade PPE components and drugs for
the treatment of COVID- 19; and.
2) "Sworn Declaration" from the manufacturer-buyer that the items

shall be used for the manufacture of the PPE components and
drugs for the treatment of COVID-19.
&
The exemption claimed under this subsection shall be subject to

post audit by the Bureau of Internal Revenue (BIR) or the Bureau of
Customs (BOC), as may be applicable.
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CC. (Originally under paragraph 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 R3,000,000. -
The P3,000,000 gross annual. sales shall comprise of the

business’ total revenues from sale of its products, which are either
goods or services, including nonrefundable © advance
deposits/payments for services, net of discounts, sales returns and
allowances, covering the fiscal or calendar year. Sales incidental to
the registered operations. of the business shall. also be included
pursuant to Section 105 of the Tax Code, as amended.
COMPUTATION OF VAT PAYABLE

The corresponding liability on value added tax is generally computed as
follows:
Output Vat (Gross Sales or Gross Receipts x 12% or 0%) Pxx :

Less: Input Vat (Gross Purchases or Payments x 12%) (XX)
Vat Payable (Excess over input vat) Pxx
The formula and illustrations in computing the vat payable, basis of output vat, persons liable to vat,
deductions from gross selling price, among others, are extensively discussed in Chapter 7 of this book.
SOURCES of output vat. OUTPUT vat may come from:
» Actual Sale (Domestic Sale)

= Transaction deemed sales
«Zero (0%) rated sales (Export Sale)
1. ACTUAL SALE
- Sales where there are actual exchanges between buyer(s) and a

. Seller(s) in the ordinary course of trade or business including transactions
incidental thereto, by any person, regardless of whether or not the person
engaged therein is a non-stock, non-profit private organization or
government entity (Section 105 of the Tax Code, as amended), shall be
Subject to 12% vat, unless exempt under the law: -
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BASIS IN COMPUTING THE 12% OUTPUT VAT

SWNEEXe)s BASIS
1. Goods. * Gross selling price et
2. Service « Gross, receipts
3. Securities «Gross income
4. Real property * Gross selling price or fair market
value, whichever is higher
FORMULA IN COMPUTING OUTPUT VAT
“Sale of Goods or Properties
| Gross Sales* : ~ PxKx

| VAT rate (other than 0%_vat discussed in page 270 to 277) 12%
| OUTPUT VAT ' Pxxx
* Refer to Chapter 7, page 232.
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 (Sec. 106(A)(1) NIRC).
Me rikisiindien lays peceielasce silat
Gross Receipts (actual or constructive**) ia Pxxx

VAT rate (other than 0% vat discussed in page 270 to 277) 12% =
OUTPUT VAT SCG Pxxx
* Refer to Chapter 7, page 232.
ADVANCE PAYMENTS IN A LEASE CONTRACT.

Advance payment by the lessee may be.
1. Aloan to the lessor from the lessee.

2. An option money for the property.
3. Asecurity deposit to insure the faithful NOT subject to
performance of certain obligations of VAT
the lessee to the lessor.
4, , Prepaid rental Subject to VAT
The term “gross receipts” refer 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.
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INCIDENTAL TRANSACTIONS
As discussed ‘in page 264 and in Chapter 7, “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, non-profit private organization or government entity
(Section 105:NIRC; Section 4.105-3 of RR 16-2005).
ILLUSTRATION 12 - Computation of Output Vat Sse

The computation of output vat will depend on whether the amount provided is
exclusive (or net) or inclusive of vat.
_| CASE A — Net of vat approach
Panatag Corporation, a vat registered domestic corporation, reported gross

sales of P5,000,000, exclusive of vat, for the 3 quarter of the current year.
Determine the correct output vat for the quarter.
’| Answer: P600,000
Output VAT = Gross Sales’x 12%
= P5,000,000 x 12%
= P600,000
CASE B - Gross of vat approach
Panatag Corporation, a vat registered domestic corporation, reported gross

sales of P7,840,000, inclusive of vat, for the 3¢ quarter of the current year.
Determine the correct output vat for the quarter.
Answer: P840,000
The output vat may be computed in any of the following approaches:
Output VAT (option 1)

= Gross Sales / 1.12 x 12% = P7,840,000/1.12 x 12% = P840,000

= Gross Sales x 3/28 = P7,840,000 x 3/28 = P840,000

= Gross Sales x 12/112 = P7,840,000 x 12/112 = P840,000
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9. TRANSACTIONS DEEMED SALE

Under section 106(B) of the Tax Code, certain transactions which
are not actually sales because of the absence of actual exchange
between the buyer and the seller, are considered or included in the
term “sale” for value added tax purposes. One of the characteristics
of vat as discussed in Chapter 7 is that, “it is a credit-invoice method
value-added fax”. Meaning, vat due/payable is computed by
deducting the input vat from the output vat.
OUTPUT VAT , be
(Vat on sale of goods, services, lease of properties, etc.)
INPUT VAT (xx)
(Vat on purchase of goods, services, lease of properties, etc.)
VAT PAYABLE Pxx
In a transaction deemed sale, the input vat was already used

by the seller as a credit against the output vat. However, since there
was no actual sale, no output vat is actually charged to customers.
Consequently, the State will be deprived of its right to collect the
output vat. To avoid a situation where a vat registered taxpayer avail
of input vat credit without being liable for the corresponding output vat,
certain transactions should be considered sales even in the absence
_ of actual sale.
ILLUSTRATION 13: |
On May 1, 2024, Mas Smart Company (the leading mobile network in the |
Philippines) celebrated Labor Day by distributing free sim cards and prepaid
cards to all its employees. Determine the effect for output vat purposes.
Answer: |
‘The sale shall be treated as a transaction deemed sale, hence, |
subject to vat.
Due to the lack of actual sale or exchange between the company and its
employees, no output vat was charged to the employees upon distribution of the
cards, However, the related input vat for the production and/or acquisition of
the cards by Mas Smart may be availed as tax credit against the company's total
output vat. Obviously, only Mas Smart will benefit from the transaction because
E they can claim input tax credit regardless of how they dispose the cards. It
deprives the State to collect the output vat should the cards been sold in the
ordinary course of trade or business instead of giving the same to employees for
be
treated
free. Hence, such transaction should as a sale even in the absence
of an actual sale. Consequently, Mas Smart is liable for the corresponding
output vat,
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Chapter 8 - Valee Aled,Tie

THE FOLLOWING TRANSACTIONS ARE CONSIDERED DEEMED SALE;
a) Transfer, use or consumption not in the ordinary: course of

business of goods or properties ordinarily intended for sale or use
in the course of business (i.e., illustration #14 below). The basis in
computing the applicable vat shall be the fair market value of the
goods consumed.
ILLUSTRATION 14: |
Determine which of following is transactions deemed sale:
TRANSACTION PARTICULARS
1 Super Mig Corporation, manufacturer of the best
beer in the world, “Beer Fab”, celebrated its
centennial anniversary a week ago. The company
consumed P1,000,000 worth of “Beer Fab” during |
the celebration.
2 Assume the same data in the preceding transaction

except that the P1,000,000 worth of beer were sold
to the company's customers.
3 Pure Water, the leading distributor of distilled and

purified water, consumed some of its merchandise
valued at P300,000 during the company’s team
building activity.
4 Pure Water, the leading distributor of distilled ‘and

purified water, distributed grocery goods to in its
recent chanity activities.
“+ Answer: Transactions 1 and 3 only

« Transaction 2 is an actual sale, not a transaction deemed |
sale.
«Transaction 4 involves grocery goods which are not
~ ordinarily held for sale in the ordinary course of trade or
business of Pure Water. . Therefore; transaction #4 is
- neither an actual sale nor transaction deemed sale.
b) Distribution or transfer to:

= Shareholders or investors as share in the
profits of a VAT-registered person; and Basis:
* Distribution or trahsfer to creditors in Market Value
payment of debt or obligation.
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c) Consignments of goods if actual sale is not made within sixty (60)

days following the date such goods were consigned. Goods
returned within the 60- day period are not deemed sold. :
d) Retirement from or cessation of status as vat registered person

with respect to all “goods on hand’ (as of the date of retirement or
cessation), whether or. not the business is continued by the new
owner or successor. Goods on hand refer to capital goods, stock
\ in trade and supplies and materials (Basis should be the
acquisition cost or market value whichever is lower).
RR 16-2005 as amended by RR4- 2007 provides that the vat

provided above shall apply to goods or properties originally
intended for sale or use in business, and capital goods which are
existing as of the occurrence of the following:
4 Change of business activity from VAT taxable status to VAT-

exempt status. An example is a VAT-registered person
engaged in a taxable activity (wholesaler/retailer) who
decides to discontinue such activity and engages instead in
any other business not subject to VAT.
2. Approval of a request for cancellation of registration. due to
reversion to exempt status.
3. Approval of a request for cancellation of registration due to a
desire to revert to exempt status after the lapse of three (3)
consecutive years from the time of registration by a person
who voluntarily registered despite being exempt under Sec.
109 (2) of the Tax Code.
4. Approval of a request for cancellation of registration of one
who commenced business with the expectation of gross sales
or receipts exceeding P3,000,000, as amended, but who
failed to.exceed this amount during the first twelve months of
operation.
VAT (TRANSACTION DEEMED SALE) SHALL NOT BE IMPOSED ON

GOODS OR PROPERTIES EXISTING AS OF THE OCCURRENCE OF
' THE FOLLOWING: ©
a. Change of control of a corporation by the acquisition of the

controlling interest of such corporation by another stockholder or
group of stockholders. The goods or properties used in business
or those comprising the stock-in-trade of the corporation, having a
change in corporate control, will not be considered sold, bartered
or exchanged despite the change in the ownership interest in the
' Said corporation.
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ILLUSTRATION 15 (Per RR 16-2005):
Alpha Corporation is a merchandising concern and has an inventory of goods for

sale amounting to P10M. Omega Corporation, a real estate developer,
exchanged its real estate properties for the shares of stocks of Alpha
Corporation resulting to the acquisition of corporate control. The inventory of
goods owned by Alpha Corporation (P10M) is not subject to output tax despite
the change in corporate control because the same corporation still owns them.
This is in recognition of the separate and distinct personality of the corporation
from its stockholders. However, the exchange of real estate properties held for
sale or for lease, for shares of stocks, whether resulting to corporate control or
not, is subject to VAT. This is an actual exchange of properties which makes the
transaction taxable (RR 16-2005) _ -
b. Change in the trade or corporate name of the taxpayer.
c.. Merger or consolidation of corporations. The unused input tax of

the dissolved corporation, as of the date of merger or
consolidation, shall be absorbed by the new or surviving
corporation.
3. ZERO RATED SALES (0% VAT)
EXPORT SALE BY A VAT REGISTERED ENTITY
A “zero rated sale” of goods, properties and/or services by a

vat registered person is a taxable transaction for VAT purposes, but
shall not result in any output tax. However, the input tax on purchases
of goods, properties or services, related to such zero-rated sale, shall -
be available as tax credit or refund in accordance with existing
regulations (RR 21-2021).
PURPOSE OF ZERO-RATING:
« The zero rated seller becomes internationally competitive by

allowing the refund or credit of input taxes that are attributable to
export sales. (CIR vs. Seagate Technology Phils., G.R.
No.153866, Feb. 11,2005).
RATIONALE FOR ZERO RATING OF EXPORT SALES:
« The Philippine vat system adheres to the “Cross Border Doctrine”

_ (also known as destination principle), according to which, no VAT
Shall be imposed to form part of the cost of the goods destined for
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Chapter 8 - Va bs Added DLage
consumption outside of the territorial border of the taxing authority

[CIR vs. Toshiba Information Equipment (Phils.), Inc., G.R.
No.150154, Aug. 9, 2005]. Nonetheless, vat zero-rating in the
Philippines is not limited only to actual export sale but also to
registered activities of registered business enterprises (RBEs)
granted by Investment Promotion Agencies like PEZA and BO/
(refer to pages 273 to 275 and Tax Incentives under TitlexXilI of
the Tax Code, as amended).
FORMULA:
Gross Sales (regardless of shipping arrangements) Pxx
x VatRate 0%
OUTPUT VAT : PO
INPUT VAT -
VAT PAYABLE (REFUNDABLE) (Pxx) **
**The Input Vat attributable to zero rated (0%) sale may be:
a. Refunded; or
b. Claimed as deduction/tax credit against output vat on domestic sales; or
c. Claimed as tax credit (TCC). against any other internal revenue taxes.
**Refund of Input Vat on zero rated (0%) sale

(Sec. 122 NIRC; RR 13-2018)
A vat registered person whose sales of goods, properties or

services are zero-rated or effectively zero-rated may apply for the
issuance of a tax refund of input vat attributable on such sales. The input
vat that may be subject of the claim shall exclude the portion of the input
vat that has been applied against the output vat. The application should
be filed within two (2) years after the close of the taxable quarter when
such sales were made.
Where the taxpayer is engaged in both zero-rated and non-zero

rated (12%) or exempt sale of goods, properties or services, and the
amount of creditable input vat due or paid cannot be directly or entirely
attributed to any one of the transactions, only the proportionate share of
input vat allocated to zero-rated sales can be claimed for refund or
issuance ofa tax credit certificate (TCC).
In case of taxpayers engaged in the transport of passengers and

Cargo by air or sea vessels from the Philippines to a foreign country, the
input vat shall be allocated ratably between zero rated sales and non-zero
rated sales (sales subject to 12% vat rate, subject to final vat withholding,
and vat exempt sales).
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EXPORT SALE BY A NON-VAT REGISTERED ENTITY
Export sale by a non-vat registered entity is a vat-exempt transaction.

Under Section 109 of the Tax Code, a vat exempt sale refers to sale of goods,
properties or services or the use or lease of properties that is not subject to
VAT (output tax) and the seller/supplier is not allowed any tax credit of VAT
(input tax) on purchases related to such exempt transaction.
Gross Sales - Pxx,

x Vat Rate N/A Vat Exempt
OUTPUT VAT PO
INPUT VAT ; N/A. Not Allowed
VAT PAYABLE :
_ The vat paid by a non-vat registered purchaser of goods or services

shall be treated by the purchaser as either part of operating expense or cost.
ZERO RATED SALE ool anal sss Saale

The following sales by vat-registered persons shall be subject to 0%
vat under the Tax Code, as amended RR 21-2021 as amended by RR 3-
2023 dated April 20, 2023) .
A. Export Sale (Zero-Rated Sale) of GOODS or PROPERTIES: _

1) Export Sales shall mean:
a. 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, 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);
b. 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 exclusively for international shipping or air transport
operations; ’ ’
3 972
The
The sale of goods, supplies, equipment and fuel to persons engaged
in intemational shipping or international. air transport operations is
limited to goods, supplies, equipment and fuel that shall be used in
the transport of goods and passengers from a port in the Philippines
directlyto a foreign port, or vice.versa, without docking or stopping at
any other port.in the Philippines unless the docking or stopping at any
other Philippine port-is for the purpose -of unloading passengers
and/or cargoes that originated from abroad or to load passengers
and/or cargoes bound for abroad; Provided, further, that -if only a
portion of such fuel, goods, supplies or equipment is used for
purposes other than that mentioned in this paragraph, such portion of
fuel, goods, supplies, and equipment shall be subject to 12% vat.
2) Sales to persons or entities whose exemption from direct or indirect

taxes under special laws or international agreements to which the
Philippines is a signatory effectively subjects such sales to zero rate;
and
3) Sale of raw materials, inventories,- supplies, equipment,

materials, and goods to a Registered Export Enterprise (REE), to
packaging
be used directly and exclusively in_its registered project or

. activity pursuant to Section 294(E) and 295(D) of RA 11534
(CREATE Act), and Sec. 5, Rule 2 of its IRR for a maximum period of
17 years from the date of registration, unless otherwise extended
under the Strategic Investment Priority Plan (SIPP); Provided; that
the term “registered export enterprise” shall refer to an export
enterprise as defined under Sec. 4 (M) Rule 1 of CREATE Act IRR,
that is also registered business enterprise as defined in Sec. 4 (W) of
the same IRR: Provided further, that the above-described sales to
existing registered export enterprises located inside ecozones and
free port zones shall also be qualified for vat zero-rating (0%) until the
expiration of the transitory period.
Local idee of goods relating to the following services shall

NOT be considered as “directly and exclusively used” in the
registered projector activity of a registered export enterprise, to wit:
Janitorial services
Security services
Financial services
Consultancy services
Marketing and promotion; and
Services rendered for administrative operations such as
Human Resources (HR), legal, and accounting
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This notwithstanding, the registered export enterprise is not

precluded from further proving, with supporting evidence, to the
concerned Investment Promotion Agency (IPA) that any of the local
purchase of goods relating to the above-listed services are indeed
directly and exclusively used in its registered project or activity. In all
instances, in issuing the VAT zero-rating certification, the concerned
IPA shall be guided by the rule that such local purchases of goods
are directly attributable to the registered project or activity without
which such registered project or activity cannot be carried out. These
are costs that are indispensable to the project or activity, i.e., without
which the project or activity cannot proceed, and these include
expenses that are necessary or required depending on the nature of
the registered project or activity of the export enterprise.
If the purchased goods are used in both the registered project

or activity and administrative operations, the registered export
enterprise shall adopt a method to best allocate the same. If a proper
allocation could not be determined, the purchase of such goods shall
be subject to twelve
percent (12%) VAT.
The VAT zero-rating ON LOCAL PURCHASES OF GOODS

shall be availed of on the basis of the VAT zero-rating certification
issued by the concerned IPA, without prejudice, however, to the
conduct _of post audit investigation/verification by the Bureau_of
Internal_Revenue_ (BIR) that the goods are, indeed directly and
exclusively used by the registered export enterprise in its registered
project or activity [For additional discussion on this topic, refer also to
Chapter 13 of this book (Tax Incentives under Title XIll of the Tax
Code as amended by RA 11534 or the CREATE Act)].
For this purpose, local suppliers of goods of registered export

enterprise shall no longer be required to apply for approval of VAT
zero-rating with the BIR. All applications with accompanying VAT
zero-rating certification issued by the concemed IPA which have been
received but have not yet acted upon by the concerned office of the
BIR shall be accorded VAT zero-rating treatment from the date of
filing of such application subject to the conduct of post audit by the
BIR that the goods are indeed directly and exclusively used by the
' registered export enterprise in its registered project or activity.
The concerned IPA shall fumish the BIR through the

Assessment Service Attention: Audit Information, Tax Exemption and
Incentives Division (AITEID) within twenty (20) days following the
Close of éach taxable quarter a list of registered export enterprise
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. issued with VAT zero-rating certification. In order to obtain relevant

information, for audit Purposes, the Commissioner of Internal
Revenue may prescribe a report template in a separate revenue
issuance.”
. Export Sale (Zero-Rated Sale) of SERVICES shall mean:
Services other than processing, manufacturing or repacking of goods,

rendered to a person engaged in business conducted outside the
Philippines or to'a non-resident person not engaged in business who is
outside the Philippines when the services are performed, 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);
Services to persons or entities whose exemption from direct or indirect

taxes under special laws or international agreements to which the
Philippines is a signatory effectively subjects such sales to zero rate;
Sale of services, including provision of basic infrastructure, utilities, and

maintenance, repair and overhaul of equipment, to a Registered Export
Enterprise (REE), to be used directly and exclusively in its registered
‘project or activity pursuant to Sections 294(E) and 295(D) of CREATE
Act, and Section 5, Rule 2 of its IRR for a maximum period of seventeen
(17) years from the date of registration, unless otherwise extended under
the SIPP; Provided, That the term "Registered Export Enterprise (REE)"
shall refer to an export enterprise as defined under Section 4(M), Rule 1
of the CREATE IRR, that is also a Registered Business Enterprise
(RBE) as defined in Section 4(W) of the same IRR: Provided further, That
the above-described sales to existing registered export enterprises
located inside ecozones and freeport zones shall also be qualified for
VAT zero-rating under this sub-item until the expiration of the transitory
period. Refer also to Chapter 13 of this book (Tax Incentives under Title
Xill_ of the Tax Code as amended by RA 11534 or the CREATE Act) for
additional discussion on this particular topic including the definition of the
different relevant terms such as Registered Business Enterprise (RBE),
Registered Export Enterprise (REE), as well as direct and exclusive use.
Sale of VAT-registered suppliers to Registered Export Enterprises (REEs)

enjoying fiscal incentives under the CREATE Act shall be treated as VAT zero-
rated. However, it shall only apply to goods and/or services directly and
exclusively used in the registered project or activity of said registered export
enterprise, for a maximum period of seventeen (17) years from the date of
registration, unless otherwise extended under the Strategic Investment Priority
Plan (SIPP).
The enjoyment of VAT and duty incentives is reckoned from the registered
export enterprise's date of registration and throughout the period as indicated
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in its Certificate of Registration.

/
The term "date of registration” mentioned herein where the 17-year maximum
period shall be reckoned from shall refer to the date of registration of the
registered project or activity of the registered export enterprise as reflected in
the Certificate of Registration issued by-the concemed Investment Promotion
Agency (IPAJ. .
4. Services rendered to persons engaged in international shipping or air

transport operations, including leases of property for use thereof:
Provided, that these services ‘shall be exc‘iusively for international
shipping or: air transport operations. Thus, the services referred ‘to
here.in shall not pertain to those made to’common carriers by air and
sea relative to their transport of passengers, goods or cargoes from
one place in the Philippines to another place in the Philippines, the
same being subject to twelve percent (12%) VAT under Sec. 108 of the
Tax Code;
5. Transport of passengers and cargo by domestic air or sea vessels

from the Philippines to a foreign country. Gross receipts of
intemational air or shipping carriers doing business in the Philippines
derived from transport of passengers and cargo from the Philippines
to another country shall be exempt from VAT; however, they are still
liable to a percentage tax of three percent (3%) based on their gross
receipts derived from transport of cargo from. the Philippines to
another country as provided for in Sec. 118 of the Tax Code; and ©
6. Sale of power or fuel generated through renewable sources of energy

such as, but not limited to, biomass, solar, wind, hydropower,
geothermal and steam, ocean energy, and other emerging sources
using technologies such as fuel cells and hydrogen fuels: Provided,
however, that zero-rating shall-apply strictly to the sale of power or fuel
generated through renewable sources of energy, and shall not extend
to the sale of services related to the maintenance or operation of
plants generating said power. Refer also to Chapter 13 of this book
(Tax Incentives under Title xIll_of the Tax Code as amended by RA
11534 or the CREATE Act) for additional discussion on this particular
topic.
DEFINITION OF TERMS (Based on RMC 24-2021 dated Feb. 24, 2022)

Registered Export Enterprise (REE)
0 As defined under Section 4(M), Rule 1 of the CREATE IRR, an export
enterprise refers to any individual, partnership, corporation, Philippine
branch of a foreign corporation, or other entity organized and existing
under Philippine laws and registered with an Investment Promotion Agency
(IPA) to engage in manufacturing, assembling or processing activity, and
services such as information technology (IT) activities and business
process outsourcing (BPO), and resulting in the direct exportation, and/or
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Sale of its manufactured, assembled or processed product or IT/BPO

services to another registered export enterprise that will form part of the
final export product or export service of the latter, of at least seventy
(70%) of its total production or output. Provided, however, that the export
enterprise is also a registered business enterprise as defined in Section
4(W) of the same IRR. .
Registered Business Enterprise (RBE)
> Refers to any individual, partnership, corporation, Philippine branch of a

foreign corporation, or other entity organized and existing under Philippine
laws and registered with an Investment Promotion Agency (IPA) excludi ing
service enterprises such as those engaged in customs brokerage, trucking or
forwarding services, janitorial services, security services, insurance, banking,
and other financial services, consumers’ cooperatives, credit unions,
consultancy services, retail enterprises, restaurants, or such other similar
services, as may be determined by the Fiscal Incentive Review Board (FIRB),
itrespective of location, whether inside or outside the zones, duly accredited
or licensed by any of the investment promotion agencies and whose income
delivered within the economic zones shall be subject to taxes under the
National Intemal Revenue Code oe of 1997 (or the Tax Code), as
\ amended.
Direct and Exclusive use in the registered project or activity
®: Direct and exclusive use in the registered project or activity refers to raw
materials, supplies, equipment, goods, packaging materials, services,
including provision of basic infrastructure, utilities, and maintenance, —
repair and overhaul of equipment, and ‘other expenditures directly
attributable to the registered project or activity without which the registered
project or activity cannot be carried out.
Only the. portion of the expense directly and exclusively used by a

registered export enterprise for its registered project or activity shall qualify
for VAT zero-rating on local purchases, excluding those used for
administrative purposes. The registered export enterprise concerned
should adopt a method to best allocate goods or services purchased, e.g.
for utilities, use of separate water and power meters for its registered
project or activity or any method that may determine the allocation such
as area usage or ratio of utility expenses between cost of sales and
administrative expenses as reflected in the prior year Audited Financial
Statements, If the, goods or services are used in both the registered
project or activity and administration purposes and the proper allocation
could not be determined, the purchase of such goods and services shall
be subject to 12% VAT.
For this purpose, services for administrative purposes, such as legal,

accounting, and such other similar services, are not considered expenses
directly attributable to and eatueNely used in the registered project or
activity.
f
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BINPUT:VATioeea chitosan ane ueye as 2|

Input vat means the vat due on or paid by a VAT-registered
taxpayer 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.
SOURCES of input vat. INPUT vat may come from:
Local purchases of goods and services

Acquisition of Capital Goods
Importation
Presumptive input vat
Transitional input vat
Creditable withholding vat
1. Local Purchase of goods or services such as purchase of:

a) Goods forsale
b) ‘Goods for conversion into finish product (including packaging
materials).
c) Goods for use as supplies
d) Goods for use as materials supplied in the sale of services
e) Goods for use in trade or business for which depreciation or
amortization is allowed (Capital Goods).
f) Real properties for which vat has actually been paid
g) Services for which vat has actually been paid
INPUT VAT ON CAPITAL GOODS (Depreciable Goods)
Capital goods refer to goods or properties with estimated useful life of

greater than 1 year and which are treated as depreciable assets under the
tax code, used directly or indirectly in the production or sale of taxable
goods or services. Under RR 16-2005, input taxes on the purchase of
Capital goods by a vat registered person shall be allowed as a tax credit
against output vat based on the following rules:
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INPUT VAT ON CAPITAL GOODS PRIOR TO 2022
IF AGGREGATE Purchase Price during the month, exclusive of vat is:
MORE than P1M NOT more than P1M
The input tax shall be spread or

allocated or amortized evenly during the Input tax is not
estimated useful life of the depreciable asset but allocated. The total
it shall not exceed 60 months. Allocation shall: amount of input vat
commence ‘in the calendar month when the shall be treated as tax
capital good was acquired. If the capital good is credit against output
sold within the five (5) year period or prior to
vat in the month of
exhaustion of input vat thereon, the entire
acquisition.
unamortized input vat on the capital goods sold
can be claimed as input tax credit during the
month or quarter when the sale is made.
If the life of the capital good or

depreciable asset is not more than one (1) year
or twelve (12) months, the asset is not treated
as a Capital good subject to depreciation.
Hence, allocation or amortization of input vat is
not applicable. The total amount of input vat
shall be claimed in the month of acquisition.
INPUT VAT. ON CAPITAL’ GOODS BEGINNING JAN: eyAy74
The rule of amortizing the input vat on capital goods with aggregated
purchase price of more than P1,000,000 during the month shall only be
allowed for those purchased up to until December 31, 2021. Thus,
amortization of input vat on capital goods purchased/imported beginning
January 1, 2022 shall no longer be allowed. Consequently, purchase of
Capital goods, beginning January 1, 2022 shall be treated as an ordinary
purchase of goods for purposes of recognizing input vat.
Taxpayers with unutilized input vat as of December 31, 2021 shall be

allowed to apply the same as scheduled until fully utilized.
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ILLUSTRATION 16 (Input vat on purchase of Capital Goods):
CASE A:
A manufacturer purchased capital goods on several occasions as follows:
No. of Last month of
Month of ; ATOLL amortization
ee cet) Amount seal USSU AIG amortization
Jan. 2018 P8.500,000 1,020,000 6 years Dec. 2022
Feb. 2018 8,500,000 1,020,000 4 years 48 Jan. 2022
Mar. 2018 750,000 90,000 3 years is Outright claim

on Mar. 2018
Dec. 2021. 10,000,000 ~— 1,200,000 5 years 60 Nov. 2026
10,000,000 1,200,000 5years’ : Outright claim

‘on Jan. 2022
NIE (As provided under the TRAIN Law):
For purchase made on January 2018, the amortization un be for a shorter period of 5
years only or up to December 2022.
« For purchases made on February 2018, the amortization shall be up to its useful life
since it is shorter than 5 years or up to January 2022.
=» For purchases made on December 2021, the amortization shall be up to its useful life
since it is not more than 5 years or up to November 2026. Taxpayers with unutilized
input vat as of December 31, 2021 shall be allowed shall be allowed fo apply the same as
scheduled until fully utilized.
« For purchases made on January 2022, NO AMORTIZATION SHALL BE MADE. The
TRAIN Law provides that for capital goods acquired beginning January 1, 2022, the
entire related input vat shall be claimed during the month the capital good is purchased,
irrespective of acquisition cost.
CASE B:
Alpha Corporation, a vat registered taxpayer made the following acquisition of capital
goods from VAT registered suppliers (net of vat) during 2021:
PURCHASE ACQUISITION ESTIMATED -
DATE - COST LIFE (Yrs.)
dan. °4°** P1,000,000 10
15 500,000 2
Mar. 2 . 200,000 6
20 300,000 , ow
Oct. 6 600,000 4
30 . 800,000 6
Dec. 25 3,000,000 1
*** The asset was sold in December 2021
Lene
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— ‘
Question 1: How much is the creditable input vat in January 2021?
“> Answer: P4500

The aggregate acquisition cost for the month of January exceeds P1M, hence,
amortize the Input vat as follows:
Jan. 1 (P1,000,000 x 12%/60 mos.) P2,000

Jan. 15 (P500,000 x 12%)/24 mos, 2,500
Tofal allocated input vat for January —P4,500
Question 2: How much is the creditable input vat in February 2021?

“+ Answer: P4500
Question 3: How much is the creditable input vat in March 2021?

“ Answer: P64,500
The aggregate acquisition cost for the month of March is not more than
P1,000,000. . Accordingly, the related input vat should not be spread or allocated
during the estimated useful life of the assets. The entire input vat for these assets
should be claimed as tax credit during the month of March.
_ The total input tax credit for the month of March is computed as follows:
From January Acquisition:
Jan. 1 (P1,000,000 x 12%/60 mos.)
Jan. 15 (P500,000 x 12%)/24 mos.
Acq. for the month of March: (P300,000 + P200,000) x 12%
TOTAL input tax credit for March. : “P64,500_
Question 4: How much is the creditable input vat in April 2021?

From January Acquisition: :
Jan. 1 (P1,000,000 x 12%/60 mos.) P2,000
Jan. 15 (P500,000 x 12%)/24 mos. 2,500
March Acquisition sty —
TOTAL input tax credit forApril P4,500
Question 5: ‘How much is the creditable input vat in October 2021?

From January Acquisition;
| Jan. 1 (P1,000,000 x 12%/60 mos. )
Jan, 15 (P500,000 x 12%)/24 mos.
R2,000
2,500
March Acquisition --
From October Acquisition: :
| Oct. 6 (P600,000x 12%/48 mos.) 1,500
| Oct.'30 (P800,000 x 12%)'60 mos. 1,600 _
I
TOTAL input tax credit for October __P7,600
fF oh Et 281
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Question 6: How much is the creditable input vat in November 2021?
«+ Answer: P7,600
Question 6: How much is the creditable input vat in December 2021?

“+ Answer: P463,600
From January Acquisition:

“Unclaimed Input vat for January 1 acquisition: _, p98,000
[1M x 12% - (2,000 x 11 months)]
Jan. 15 (P500,000 x 12%)/24 mos. 2,500
March Acquisition -—
From October Acquisition:

Oct.6 (P600,000 x 12%/48 mos.) 1,500
Oct. 30 (P800,000 x 12%)/60 mos. 1,600
December Acquisition (P3M x 12%) (Not a capital asset; 360,000

life is not more than 4 year)
TOTAL input tax credit for December Paes. 600
es Unclaimed Input vat for January 1 acquisition
If the capital good is sold or disposed within the five (5) year period or prior to exhaustion of input vat
thereon, the entire unamortized input vat thereon can be claimed as input tax credit during the month or
quarter when the sale/disposal is made.
CASE C:
Alpha Corporation purchased additional capital goods on October 1, 2022 amounting to
P2,500,000 (net of vat).
Question: How much is the creditable input vat in October 2022?
“+ Answer: P305,600
From 2021 Acquisitions:

Jan. 15 (P500,000 x 12%)/24 mos. R2,500
Oct. 6 (P600,000 x 12%/48 mos.) 1,500
Oct. 30 (P800,000 x 12%)/60 mos, 1,600
From October 2022 Acquisition:
(P2,500,000 x 12%) 300,000
TOTAL input tax credit for October 2022 R305,600
a8 Taxpayers with unutilized input vat as of December 31, 2021 shall be allowed shall
be allowed to apply the same as scheduled until fully utilized.
me For purchases made beginning January 2022, no amortization shall be made.
The TRAIN Law provides that for capital goods acquired beginning January 1, 2022, the
entire related input vat shall be claimed during the month the capital goods is
purchased, irrespective of acquisition cost.
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CASE D:
Alpha Corporation, a vat registered taxpayer made the following acquisition of capital
goods from VAT registered suppliers (net of vat) DURING 2023:
PURCHASE — ACQUISITION ESTIMATED

DATE COST LIFE (Yrs.)
Jan. 1 1,000,000 10
15 500,000 2
| Mar. 2 200,000 6
20 300,000 2
Oct. 6 600,000 4
30 800,000 g
Dec. 25 3,000,000 {
Question 1: How much is the creditable input vat in January 2023?

“+ Answer: P180,000 ,
The aggregate acquisition cost for the month of January exceeds P1M, hence,
amortize the Input vat as follows:
Jan. 1 (P1,000,000 x 12%) P120,000

Jan. 15 (P500,000 x 12%) 60,000
Total allocated input vat for January ?180,000
© For purchases of capital goods made beginning January 2022, no more

amortization shall be made. Purchase or acquisition of capital goods beginning
January 1, 2022 shall be treated as an ordinary purchase of goods for purposes of
recognizing input vat. Consequently, the entire related input vat shall be claimed
during the month the capital goods is purchased, irrespective of acquisition cost.
Question 2: How much is the creditable input vat in February 2023?
«* Answer: NONE.
There was no acquisition of capital goods in the month of February.
Question 3: How much is the creditable input vat in March 2023?

“+ Answer: P60,000
March 2 (P200,000 x 12%) — -P24,000

March 20 (P300,000 x 12%) 36,000
ie oe Total allocated input vat for January 60,000
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“CONSTRUCTION IN PROGRESS |
Construction in progress (CIP) is the cost of construction work which
js not yet completed. CIP is considered, for purposes of claiming input tax,
as a purchase of service, the value of which shall be determined based on
the progress billings. Until such time the construction has been completed,
it will not qualify as capital goods; as herein defined, in which case, input
tax credit on such transaction can be recognized in the month the
payment was made: Provided, that an official receipt of payment has been
issued based on the progress billing (RR 13-2018). - ;
In case of contract for the sale of service where only the labor will be
supplied by the contractor and the materials will be purchased by the
contractee from other suppliers, input tax credit on the labor contracted
shall still be recognized on the month the payment was made based on a
progress billings while input tax on the purchase of materials shall be
recognized at the time the materials were purchased. Once the input tax
has already been claimed while the construction is still in progress, no
additional input tax can be claimed upon completion of the asset when it
has been reclassified as a depreciable capital asset and depreciated.
Normally, upon completion, a CIP item is reclassified and the

reclassified asset is capitalized and depreciated.
2. IMPORTATION
Value added tax is a tax on the value added by every seller to the
purchase price or cost in the sale or lease of goods, properties 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. Vat is a business tax, hence, it should only be imposed
to transactions arising from the ordinary course of trade or business
(Chapter 7). The only exception to this rule under the Tax Code is the
imposition of vat on importation.
Vat on importation is imposed regardless of whether such

importation is for personal or business use. Although importation is
not a sale of goods, or sometimes not even a business activity, vat is
imposed because vat is a consumption tax levied on sales to be borne
by consumers with sellers acting simply as tax collectors. Thus, as
the origin of importation is from a foreign seller, the vat (consumption
tax) is instead paid directly by the importer.
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\
PERSONS LIABLE/COVERED:
1. Any person, entity or agency who bring goods into the Philippines,
whether or not made in the ordinary course of trade or business.
-2. Non-exempt persons or entities who acquire tax-free imported

goods from exempt persons, entities or agencies. The non-
exempt person, purchaser, transferee shall be considered as the
importer for vat purposes.
IMPORTATIONS OF GOODS BY TAX EXEMPT PERSONS
In the case of goods imported into the Philippines by VAT-

exempt persons, entities or agencies which are subsequently sold,
transferred or exchanged in the Philippines to non-exempt persons or
entities, the latter shall be considered the importers thereof and shall
be liable for the VAT due on such importation.
ILUSTRATION 17:
Chris imported a brand new car in 2023. The importation was valued by the |
Bureau of Customs (inclusive of other charges and taxes, except vat) at |
P3,000,000 |
Question 1: |
Assume Chris imported the car for personal use, how much is the input vat on
importation?
“* Answer: P360,000
Question 2:
Assume Chris aia the car for business use, how much is the input vat on
importation?
“+ Answer: P360,000
Question 3:
Assume Chris imported the car as a birthday gift for his mother, how much is
the input vat on importation?, |
“* Answer: P360,000
Question 4:
Assume Chris was able to secure vat exemption from an appropriate regulatory
body, how much is the input vat on importation?
“+ Answer: PO
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Question 5:
Assume Chris is exempt from vat on importation. iow much is the input vat if
the intention of Chris is to sell the car to ABC Company, a non-exempt entity?
“+ Answer: P360,000
Question 6:
Who is the importer (liable for the input vat) in Question #5?
** Answer: ABC Company

2
COMPUTATION OF VAT ON IMPORTATION
The input vat on importation may be computed in two ways:
1) If the customs duties are determined by the BOC based on the

value of the imported article (also known as “ad-valorem” tax):
Value for tariff and customs duties PXxx

(as determined by the BOC)
ADD:
Customs duties XXX
Excise taxes, if applicable XXX
Other legitimate charges prior to release by the BOC XXX
TAX BASE Pxxx
Vat Rate 12%
VAT ON IMPORTATION PXXX
Unless stated otherwise, this method is generally used for

purposes of determining the vat on importation. Other charges by
the BOC shall pertain only to legitimate charges. Hence, illegal
payments such as facilitation fee/expense (bribe) should be
excluded in computing the tax base for vat purposes.
Legitimate charges may include, among others, the following:

* Customs duties
» Brokerage
» Wharfage
« Arrastre
« Stamps
« Processing Fee
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2) If the customs duties are determined by the BOC based on the

quantity or volume of the imported article (also known as
“specific” tax):
INVOICE AMOUNT PXxXx

Add: .
Customs duties XXX
Freight XXX
Insurance ' XXX
Other legitimate charges prior to release by the BOC XXX
LANDED COST : PXxx
Add: Excise Tax, if applicable XXX
TAX BASE . PXxxx
Vat Rate 12%
VAT ON IMPORTATION PXXX
ILLUSTRATION
18:
CASE A:
Nirvana cigar, classified as non-essential article was imported for sale. The particulars of
which are as follows: |
Value of importation as determined by the BOC for $15,000 |

purposes of computing tariff and customs duties (assume |
exchange rate is $1 : P50)
Customs duties - P20,000
Excise tax ; 35,000
Other BOC charges prior to the release of goods from 10,000
customs custody
Facilitation expense 5,000
Shipping costs from customs to the importer's warehouse 25,000
Selling price of the goods imported 2,000,000
Question 1: How much is the vat on importation?

Valuation determined by BOC P750,000
($15,000 x 250)
Customs duties 20,000
Excise tax 35,000
Other BOC charges 10,000
Total P815,000
x vat rate 12%
Input vat on importation P97,800
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_ NOTE:
* — Facilitation expense is illegitimate payment (bribe), hence excluded in the

computation.
» — Shipping costs from BOC to the importer's warehouse may be subject to vat.
However, it is not subject to “vat on importation” because the charges were
incurred after release of goods from BOC. ' The input vat on importation is
computed separately from the input vat on transfer costs from Bureau of
Customs to the importers warehouse.
Question 2: How much is the vat payable?
“* +,
Answer: P139,200 computed as follows:
Output vat (22,000,000 12%) P240,000.

Less: ,
Input vat on importation (Q#1) (97,800)
. Input vat on shipping costs (P25,000 x 12%) (3,000).
Vat Payable P139,200
NOTE: The input vat on:importation is computed separately’ from the input
vat on transfer costs from Bureau of Customs to the Importer's warehouse.
CASE B:
}
{
Taxpayer is a VAT registered person. Importations were for sale in the ordinary course
of trade or business and for personal use (amounts are vat exclusive).
ForSale ForPersonal Use

Invoice cost (exchange rate is $1 : P40) $150,000 $2,000
Eapenses based on invoice cost:

Freight and insurance ' 5% 5%
"+ Other expenses up to the point of 5% 5%
removal from customs house
Transfer expense from custom's house * 5% 5%
to warehouse in Isabela
** Proceeds from the sale of goods imported amounted to P10,000,000.
Question 1: How much is the Input vat on importation?

“+ Answer: P802,560
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Solution: je ay
VAT ON IMPORTATION
| For Sale Personal Use
Invoice cost (exchange rate is $1 : P40) $150,000 $2,000
x Exchange rate P40 P40
Invoice cost at peso amounts P6,000,000 P80,000
ADD:
Expenses based on cost:
Freight and insurance (5%) Plus Other expenses 600,000 8,000
up to the point of removal from customs house
(5%) = 10%
_ TAX BASE P6,600,000 P88,000
Vatrate 12% “12%
INPUT VAT P792,000 P10,560
TOTAL INPUT VAT (PAYABLE TO BOC) P802,560
Question 2:
How much is the Vat Payable on sale?
“+ Answer: 2372,000 computed as:
OUTPUT VAT (P10M x 12%) . P1,200,000 -

INPUT VAT on importation
(On imported goods intended for sale only) (792,000)
INPUT VAT on transfer costs
(On imported goods intended for sale only) .
(From BOC to the importer’s warehouse in Isabela) (36,000)
(P6,000,000 x 5%) x 12%
VAT PAYABLE (BIR) P372,000
“NOTE: For purposes of determining the amount of vat payable to the BIR, ignore the
input vat paid on importation of goods intended for personal use.
3. PRESUMPTIVE INPUT TAX OF 4% ON SALE OF GOODS
Persons or firms engaged in the processing of sardines, mackerel

and milk, and in manufacturing refined sugar cooking oil and and
packed noodle-based instant meals, shall be allowed\a presumptive
input tax, creditable against the output tax, equivalent to four percent
(4%) of the gross value in money of their purchases of primary
“agricultural products” which are used as inputs to their production.
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.
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ENTITLED TO PRESUMPTIVE VAT: Persons or firms engaged in the

Processing of: Manufacturing of:
e Sardines e Refined sugar
‘e Mackerel e Cooking oil
e Milk ; e Packed noodle based instant meals
CASE A:
Minola Company, manufacturer cooking oil mace of corn, has the following Het for the
month:
Sales, (net) P10,000,000
Purchases, corn . 2,000,000
Purchases, tin . 250,000 |
Purchase of wrapping supplies, (net) 200,000
Purchase of labels, (net) 125,000
Required: Determine the vat payable of Minola

“+ Answer: P1,051,000 computed as follows:
Output vat (P10M x P12%) P1,200,000
LESS: Input vat from purchase of:
Com (presumptive vat: P2,000,000 x 4%) P80,000
Tin (P250,000 x 12%) 30,000
Wrapping supplies (P200,000 x 12%) 24 000
Purchase of labels (P125,000 x 12%) - 15,000 (149,000)
VAT PAYABLE P1,051,000
» — Presumptive vat is applicable only to “agricultural” products used as inputs.
CASE B:
Freshko, a manufacturer of sardines has the following data for the month of June:
Sales, sardines, (net) P12,000,000
Purchases, fresh fish 3,000,000
Purchases, fresh tomatoes ' 500,000
Purchases, fresh carrots 500,000
Purchases, tomato paste (processed), (net) 1,000,000
Purchases, cans (net) 1,000,000
Purchase of wrapping supplies, (net) 200,000
Purchase of labels, (net) 200,000
Required: Determine the vat payable of the company

“+ Answer: P1,112,000
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Tage
Solution:
Output vat (P12M x P12%) P1,440,000

LESS: Input vat from:
Presumptive (tomatoes P500, 000 x 4%) P20,000
Presumptive (carrots P500,000 x 4%) ~ 20,000
. Processed tomato paste (PIM x 12% ‘e 120,000
Cans (P1, 000,000x 12%) 120,000
Wrapping supplies (P200,000 x 12% re 24,000
‘Purchase of labels (P200,000 x 12%) 24,000 (328,000)
VAT PAYABLE ; P1,112,000
“+ For purposes of presumptive vat, purchase of marine products used as input in the
manufacture or processing of products enumerated in the preceding page (i.e., sardines) is
not subject to presumptive input vat. Obviously, marine products are not “agricultural”
products for presumptive vat purposes.
4. TRANSITIONAL INPUT VAT (TIV)
Person who becomes liable to value-added tax or any person who

elects to be a VAT-registered person shall, subject to the filing of an
inventory according to rules and regulations prescribed by the
Secretary of finance, upon recommendation of the Commissioner, be
allowed input tax on his beginning inventory of goods, materials and
supplies equivalent to two percent (2%) of the value of such inventory
or the actual value-added tax paid on such goods, materials and
supplies, whichever is higher, which shall be creditable against the
output tax.
TAXPAYERS WHO CAN AVAIL TRANSITIONAL INPUT VAT (TIV):

a) Taxpayers who becomes liable to vat
b) ‘Taxpayers who are elects to be vat registered
ILLUSTRATION 20:
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, 2024. The following
data were taken from records of the company for the 1st quarter ending March 31, 2024:
Sales, net P5,000,000

: January - March, 2024 Purchases (net) 2,000,000
Inventory, Jan. 1, 2024:
f From vat registered suppliers, net 500,000
From non-vat registered suppliers, net 3,000,000
|
b
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Required: Determine the vat payable of the company for the 1st quarter of 2024,
Output Vat (P5M x 12%) : P600,000

Input Vat:
Purchases for the quarter (P2M x 12%) (240,000)
Transitional Input vat . (70,000)
(Actual: P500,000 x 12% = 60,000) versus
(2%: **P3,500,000 x 2% = 70,000)
VAT PAYABLE R290,000
**From vat registered and non-vat registered suppliers, 5

The allowable TIV is the higher between (2%) of the value of beginning inventory or the actual vat
paid on such goods. The actual vat paid on the beginning inventory will always be higher than the
2% of the beginning inventory if the latter excludes those acquired from non-vat registered
suppliers. Moreover, the Tax Code did not distinguish the source of beginning inventory to which
the 2% should be multiplied.
5. CREDITABLE WITHHOLDING VAT
Sale of Goods and‘Services:to

the Government
Section 114(C) of the Tax Code as amended by the TRAIN law

provides, that beginning January 1, 2021, the vat withholding
system shall shift from final to a creditable vat system wherein
the payor shall be considered the withholding agent. Therefore,
the five percent (5%) vat withheld by the government or’any of its
political subdivisions, -instrumentalities or agencies, including
government-owned or controlled corporations (GOCCs) shall be
creditable against the output vat of the seller. Moreover, the amount
of input vat to be recognized by the seller on ‘its sale to the
government shall be the actual amount of vat on purchases. Standard
input vat is no longer computed. Consequently, there is no need to
account the difference between standard input vat and actual input
vat. RMC 36-2021 was issued by the BIR on January 15, 2021 to
provide the guidelines on the shifting from Final to a Creditable
' System on the Value-Added Tax (VAT) withheld on Sales to
Government or Any of Its Political Subdivisions, Instrumentalities or |
Agencies, Including Government-Owned or -Controlled Corporations
(GOCCs).
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Chapter JS - Vile All’ Tae:
PRIOR TO 2021
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/or services taxed at twelve
percent (12%) vat pursuant to Sections 106 and 108 of the Tax
Code, deduct and withheld a Final VAT due at the rate of five
percent (5%) of the gross payment (RR 4-2007 and RR 13-2018). .
The five percent (5%) final VAT withholding ‘rate shall

represent the net VAT payable of the seller. The remaining seven
percent (7%) effectively accounts for the STANDARD INPUT VAT
for sales of goods or services to government or any of its political
subdivisions, instrumentalities or agencies including GOCCs in lieu
of the actual input VAT directly attributable or ratably apportioned to
such sales. Should actual input VAT attributable to sales to
government exceeds seven percent (7%) of gross payments, the
excess may form part of the sellers' expense or cost. On the other
hand, if actual input VAT attributable to sale to. government is less
than seven percent (7%) of gross payment, the difference must be
closed to income.
VAT: Withheld from: Nonresidents

Section 114 (C) of the Tax Code as amended, provides:
The payment for lease or use of properties or property rights to

nonresident owners shall be subject to twelve percent (12%)
withholding tax at the time of payment.
Provided, finally, however, that payments for purchase 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/Creditable Withholding
Taxes.
For purposes of this Section, the payor or person in control. of

the payment shall be considered as the withholding agent.
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ILLUSTRATION 21
Omega Company, a vat registered trader had the following transactions for the 1st quarter
of 2024:
Sale of office supplies to the City of Manila, net of vat P1,250,000
Sale of office supplies to private entities 2,800,000
Purchases of office supplies sold to the city of Manila, inclusive of vat 560,000
_ Purchases of office supplies sold to private entities, net of vat 1,400,000
Question 1: How much is the OUTPUT VAT for the ist quarter of 2024?
“+ Answer: P486,000
Solution:
Sale to City of Manila P1,250,000
Sale to private entities 2,800,000
Total Sales P4,050,000
Multiply by the vat rate 12%
Outputvat P486,000
Question 2: How much is the amount of vat to be withheld by the City of Manila?
“+ Answer: P62,500
o Withholding vat = P1,250,000 x 5% = P62,500
Question 3: How much is the VAT PAYABLE of Omega for the 1st quarter of 2024?
“+ Answer: P195,500
Solution:
Output vat 486,000
LESS:
Input vat on purchases [(P560,000 x
12/112) + (P1,400,000 x 12%)] (228,000)
5% withholding vat (62,500)
VAT Payable __ 195,500 .
Question 4: How much is the amount to be received by Omega from the City of Manila?
“+ Answer: 1,337,500
* Solution:
Sales, net of vat (to City of Manila) P1,250,000
Add: Output vat (P1,250,000 x 12%) 150,000
Less: 5% Creditable withholding vat (62,500) _
Net proceeds from City of Manila P1,337,500
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CARRY-OVER of Excess Input Vat /

RR 2-2007 provides that, if the input tax inclusive of the 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 taxpayer, may at his option be refunded or applied for a tax
credit certificate which may be used in the payment of internal revenue
taxes. The Tax Code, as amended, also provides the following
provisions: .
Section 110(B): Excess Output or Input Tax
lf 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. :
Section 110(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.
LEASE OF REAL PROPERTY
As a tule, all forms of lease of properties held primarily for lease to

customers in the ordinary course of trade or business, whether real or
personal, shall be subject to vat, unless the gross annual receipts of the
lessor do not exceed P3,000,000, as amended and is non-vat registered.
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1) Lease of Commercial Units
Gross receipts from lease of commercial units are subject

to 12% vat if the property subject to lease is located in the
Philippines, regardless of the place where the contract of lease
was executed. :
\ Advance payment by the lessee is subject to vat if the

payment is applied to rentals such as prepaid rent. On the other
‘hand, advance payment is not subject to vat if the advance
payment is not a rental payment but:
= A loan to the lessor from the lessee
« An option money for the property
* Asecurity deposit to insure the faithful performance of
certain obligations of the lessee to the lessor.
2) Residential Units Z
Refer to discussions on vat exempt sales in Page 257.
SALE OF REAL PROPERTY
Generally, sale of real property primarily held in the normal course

of business is subject to value added tax. Output vat shall be based on
the higher amount between selling price and fair market value. FAIR
MARKET VALUE (FMV) shall refer to the higher between:
(1) Fair Market Value as determined by the BIR (zonal value); and
(2) Fair Market Value as shown in the schedule of values of the Provincial and City Assessors
(also known as “assessed value” or FMV for real property tax declaration)
The sale of real property subject to vat may be classified as cash

basis, installment basis, or deferred payment basis. Classifying the type
of sale is important for purposes of determining the percentage or amount
of output vat to be reported by the seller.
Installment Payment Basis
In case of sale of real properties on the installment plan, the rea/

estate dealer shall be subject to VAT on the installment payments,
including interest and penalties, actually and/or constructively received by
the seller. The sale is considered “Installment Sale” if the -“Initial
Payments” does not exceed 25% of the selling price, - Correspondingly,
the buyer of the property can claim the input vat in the same period as the
Seller recognizes the output tax (RR 4-2007).
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Initial Payments pertain to all payments.which the seller receives
on or before the execution of the instrument of sale, including cash or
property received, other than the purchaser's evidence of indebtedness
(exclude notes or other evidence of indebtedness issued by the purchaser to seller at the
time of sale) during the taxable year when the real property was sold. Also
excluded from the initial payment is the amount of mortgage on the real
property sold except when such mortgage exceeds the cost or other basis
of the property to'the seller, in which case, the excess shall be considered
part of the initial payments.
INITIAL PAYMENTs:
Down payment ; Pxx
Collections (Yr. of sale) XX
Add: :
Interest : Pxx
Penalties & other charges XX
Excess of mortgage over cost, if any XX XX
Initial Payments | Pxx
RR 4-2007 further provides that if the sale of real property is on

installment plan where the zonal value/fair market value is higher than the
consideration or selling price, exclusive of the vat, the vat shall be based
on the ratio of actual collection of the consideration, exclusive of the vat,
against the agreed consideration, exclusive of the vat applied to the
zonal/fair market value of the property at the time of the execution of the
Contract to Sell or Contract of Sale at the inception of the sale. Thus,
since the output vat is based on the market value of the property which is.
higher than the consideration in the sales document exclusive of the vat,
the input vat that can be claimed by the buyer shall be separately-billed
output vat in sales document issued by the seller. Therefore, the output
vat which is based on market value must be billed separately by the seller
in the sales document with specific mention.that the vat billed separately
is based on the market value of the property.
OUTPUT VAT under Installment Sale:

Year of Sale = Initial Payment X Higher between GSP or FMV *
GSP 7
Subsequent = Collections X Higher between GSP or FMV *

Year(s) GSP .
* FMV is the higher between the FMV as determined by the Commissioner (also known
as zonal value) and FMV as shown in the schedule of values of the Provincial and City
Assessors (as provided in the real property tax declaration)
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Deferred Payment Basis
In case of sale of real properties on the Deferred-Payment Basis

[Initial payments of which in the year of sale exceed twenty-five percent
(25%) of gross selling price, not the installment plan], the transaction shall
be treated as cash sale which makes the entire selling price taxable in the
month of sale. Output tax shall be recognized by the seller and input tax
shall accrue to the buyer at the time of the execution of the the instrument
of sale.
The exchange of real estate properties held for sale or for lease,
for shares of stocks, whether resulting to corporate control or not, is
subject to vat. On the other hand, if the transferee of the transferred real
property by a real estate dealer is another real estate dealer, in an
_ exchange where the transferor gains control of the transferee corporation,
no output vat is imposable on the said transfer
‘The tax implication of cash sale, installment sale and deferred

payment basis as regards the payment of vat payable is summarized in
Table 8-9 below:
TABLE 8-9: VAT on Sale of Real Pro

Payment Terms « Payment of Output Vat
“| CASH SALE If total selling price is paid Output vat shall be reported
immediately by the buyer during the month of sale
DEFERRED IF the buyer only paid: Same effect with cash sales.
SALE (1) portion of the selling price, and Output vat shall be reported
(2) INITIAL PAYMENT exceeds - during the month of sale
- 25% of the S.P.
INSTALLMENT _ IF the buyer only paid: The seller or the real estate
SALE (1) portion of the selling price, and —_—_dealer shall be subject to vat
(2) INITIAL PAYMENT do not on installment payments,
exceed 25% of the S.P. _ + inclusive of interest and:
penalties
PRE-SELLING OF REAL ESTATE PROPERTIES
Pre-selling of real estate properties by real estate dealers shall be

subject to value added tax in accordance with rules as discussed above.
Real Estate Dealer includes any person engaged in the business of
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buying, developing, selling, exchanging real properties as principal and
holding himself out as a full or part-time dealer in real estate
PROPERTY IN-TRUST AND TRANSACTION DEEMED SALE
Transmission of a property to a trustee shall not be subject to vat if

the property is to be merely held in trust for the trustor and/or beneficiary.
However, if the property transferred is one for sale, lease or use in the
course of trade or business and the transfer constitutes a completed gift,
the transfer is subject to vat as a deemed sale transaction. The transfer is
a completed gift if the transferor divests himself absolutely of control over
the property (i.e. irrevocable transfer of corpus and/or irrevocable
designation of beneficiary). ,
ILLUSTRATION 22:
CASE A (Cash Sale):

AVAT subject real estate dealer sold a residential lot in October 2023. The following
information was made available on the terms of the sale: —
Lot area 1,000 sq. m.

Zonal Value P25,000/ sq. m.
Selling Price P20,000,000
_ Terms Cash basis
Question: How much was the output vat due?

“* Answer: P3,000,000 (P25,000x 1,000 s.q.m x 12%)
CASE B (Deferred Sale):
AVAT subject real estate dealer sold a residential lot in October 2023. The following
information was made available on the terms of the sale:
Gross selling price P5,000,000
Down payment and installments in 2023 2,000,000
Balance - Payable in three (3) equal annual installments of 3,600,000
P1,200,000 starting January 2024
*** The zonal value of the residential lot was P4,500,000.
Question 1: How much was the output vat due for the month of October 2023?
‘+ Answer: P600,000 (P5,000,000 x 12% = P600,000)
Initial payment exceeds 25% of selling price (P2M/SM = 40%), therefore,
installment payment of vat is not allowed. The sale is considered sale on
deferred-payment which is treated as cash sale.
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Question 2: How much was the output vat due on January 2024?
“+ Answer: PO
The applicable output vat on the entire selling price was already reported in
the month of October, 2023. Consequently, payments subsequent to the
initial payments shall no longer be subject to vat.
CASE C (installment Sale):.

Alpha Realty, vat registered real estate dealer sold a residential lot on October 2023. The
following information was made available on the terms of the sale:
Down payment and installments in 2023 4,000,000
Balance- (Payable in four (4) equal annual installments of 4,800,000
P1,200,000 starting January 2024
Zonal Value upon sale : :5,000,000
Question 1: How much was the output vat due for the month of October 2023?
“* Answer: P120,000 (P1,000,000x 12% = P120,000)
Initial payment S$ 25% of selling price (P1M/5M = 20%), hence, the sale is
considered ‘installment sale”.
Question 2: Assume the amount due on January was not paid on time by the customer.
Consequently, Alpha charged interest and surcharges amounting to P50,000. How much
was the output vat due of Alpha for January 2024?
“+ Answer: P150,000 [(P1,200,000 + 50,000) x 12%] = P150,000)
The seller is subject to vat on installment collections inclusive of applicable interest
and penalties.
VAT ON SALE OF SERVICES
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.
‘The “sale or exchange of services” is subject to 12% vat based on

“gross receipts” derived by any person engaged in the sale of such
services or lease of properties.
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Section 108(A) of the Tax Code as amended by 10963 (TRAIN
Law), the term “sale or or exchange of services” means performance of
all kind of services in the Philippines for others for a fee, remuneration or
consideration, including those performed by:
a. Construction and service contractors
Stock, real estate, commercial, customs and immigration brokers
aos
Lessors of property, whether personal or real

Warehousing services : ?
Lessors or distributors of cinematographic films
~o
Persons engaged in milling, processing, manufacturing or repacking of

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 person who transport goods or cargoes for hire and other
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 by any
entity and distribution companies, including electric cooperatives
Services of franchise grantees of electric utilities, telephone and
telegraph, radio/and or television broadcasting and all other franchise
grantees, except franchise grantees of radio/and or television
broadcasting, and all other franchise grantees except those under
Section 109 of the Tax 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 of of use of the physical
and mental faculties.
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The term “sale or or exchange of service” shall likewise include:

1. The lease or use of or the right or privilege to use any copyright,
patent, design or model, plan, secret formula or process, goodwill,
trademark, trade brand or other like property or right.
2. The lease of or 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
subparagraph (2) or any such knowledge or information as is
mentioned subparagraph (3).
5. The supply of services by a non-resident person or his employee
in connection with the use of property or rights belonging to, or the
installation or operation of any brand, machinery, or other
apparatus purchased from such non-resident person.
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, tapes and discs; and
8. The lease of or use of, or the right to use radio, television, satellite
transmission and cable television time.
“Lease of properties” shall be subject to vat 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” as provided for under the TRAIN Law,
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 and constructively received during the
’ taxable period for services performed or to be performed for another
person, excluding value added tax.
NON-LIFE INSURANCE
Only the transactions entered into by persons in the course of non-life insurance
business are subject to value added tax. They include marine, fire and casualty
insurance, surety, fidelity, indemnity, bonding companies and mutual benefit associations.
They are not subject to Premiums Tax under Section 123 of the Tax Code. Nonresident
foreign persons rendering non-life insurance services in the Philippines are also subject to
12% vat.
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“Non-life insurance companies’ including surety, fidelity, indemnity and bonding

companies, shall include all individuals, partnerships, associations, or corporations
including professional reinsurers defined in Section 280 of PD612, otherwise known as
The Insurance Code of the Philippines", mutual-benefit associations and government
owned or controlled corporations, engaging in the business of property insurance, as
distinguished from insurance on human lives, health, accident and insurance appertaining
thereto or connected therewith which shall be subject to Percentage Tax under Section
123 of the Tax Code (RR 4-2007).
The gross receipts from non-life insurance shall mean total premiums collections
whether paid in money, notes, credits or any substitute for money. Non-life reinsurance
premiums are subject to vat. Insurance and reinsurance commissions, whether life or
non-life, are subject to vat. Vat due from the foreign reinsurance company shall be
withheld by the local insurance company and to be remitted to the BIR by filing the
Monthly Remittance Return of Value Added Tax Withheld (BIR Form1600).
PRE-NEED COMPANIES
Pre-need companies are companies registered with the Securities and Exchange
Commission and authorized/icensed to sell or offer for sale pre-need plans, whether a
single plan or multi-plan. They are engage in business as a seller of services providing
services to plan holders by managing the funds provided by them and making payments
at the time of need or maturity of the contract. As service providers, the compensation for
their services is the premiums or payments received from the plan holders.
HEALTH MAINTENANCE ORGANIZATIONS (HMOs)

HMOs are entities, organized in accordance with the Corporation Code of the
Philippines and licensed by the appropriate government agency, which arranges for
coverage or designated managed care services needed by plan ‘holders/members for
fixed prepaid membership fees and for a a specified period of time.
HMOs’ gross receipts shall be the amount of money or its equivalent representing the
service fee actually or constructively received during the taxable period for the services
performed for another person, excluding the vat. The compensation for their services
representing their service fee, is presumed to be the total amount received as enrollment
fee from their members plus other charges received.
FRANCHISE GRANTEEs
The following services of franchise grantees are subject to vat
a) Onelectric utilities :
b) Ontelephone andtelegraph |
c) On toll road operations
d) Onradio and television broadcasting, except franchise grantees of radio and
television broadcasting companies whose annual gross receipts of the preceding
year do not exceed R10M because they are subject to a Franchise Tax of 3%.
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DEALERS IN SECURITIES AND LENDING INVESTORS
Dealer in securities means a merchant of stocks or securities (RR 7-95):

a) With an established place of business.
b) Regularly engaged in the purchase of securities and their resale to customers, that
is, one who as merchant buys securities and sells them to customers,
c) With a view to the gains and profits that may be derived therefrom.
MILLERS
The millers subject to VAT are those engaged in milling for others,
EXCEPT millers of:
= Palay into rice
= — Corn into corn grits
= — Sugar cane into raw sugar
= — Ifthe miller is paid in cash, vat shall be based on gross receipts for services
during the month or quarter.
= Ifthe miller received a share of milled products instead of cash, the vat shall be
based on the actual market value of his share in the milled products. Sale by
the owner of the miller of his share in the milled product (except rice, com grits,
and raw sugar) shall be subject to Vat.
CONSTRUCTION AND SERVICE CONTRACTORS
Input VAT on construction in progress (CIP) shall be recognized and claimed in the
’ month of purchase for. goods or payment for services, if supported by a proper VAT
invoice or official receipt. The P1,000,000 threshold on purchase of capital goods:
requiring an amortization of the input taxes shall not apply on CIP (RR 4-2007).
Construction in Progress shall refer to.the cost of construction work which is not yet
completed. It is considered purchase of services. Input taxes will be recognized in the
month payment was made on the progress billing. In the case where labor will be
furnished by the contractor and materials will be purchased by the contractee from other
suppliers, input taxes will be recognized on labor when payment is made on the progress
billings while input taxes will be ee on materials at the time the materials are
purchased.
RECREATIONAL CLUBS
Gross receipts of recreational clubs or clubs which are organized and operated
exclusively for pleasure, recreation, and other non-profit purposes including but not limited
to membership fees, assessment dues, rental income, and service fees are subject to vat
(RMC 35-2012).
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VAT Exemption and Discounts to Senior Citizen
and PWDs .
Under RA 9994, otherwise known as the Expanded Senior Citizens
Act of 2010, Senior Citizens are entitled to the following benefits:
1. Vat exemption and 20% discount on certain items; and

2. 5% special discount on basic necessities and prime commodities
Persons with Disability (PWDs), are likewise entitled to the

aforementioned 20% and 5% discounts as provided under RA 7277,
otherwise known as the Magna Carta Law for PWDs, as amended.
DEFINITION OF TERMS:
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 RR 7-2010, 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.
Persons 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).
VAT Exempt Sales and 20% Discount to Senior Citizens and PWDs
The following items sold to a senior citizen (SC) or PWD are vat-
exempt and will entitle the SC/PWD to a minimum discount of 20%:
Se EAS ISH ater 4 LL) ) = edie MEPS AU

1. Medicine and Drug Purchases including |. 1. On the fees and charges relative to the utilization of
influenza and pneumococcal vaccines and all. services in hotels and similar lodging
such other essential. medical . supplies, establishments; restaurants and recreation centers;
accessories and equipment. 2. On admission fees charged by theaters, cinema
houses, concert halls, circuses, carnivals and other
2. _ Professional fees of attending physicians similar places of culture, leisure and amusement;
in all private hospitals, medical facilities, On the purchase of medicines in all drugstores;
=o
outpatient clinics and home health care On medical and dental services including diagnostic
services. and laboratory fees such as, but not limited to, x-
: rays, computerized tomography scans and blood
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-Professional fees of licensed health tests, and professional fees of attending doctors
in |
‘workers providing home health care all government facilities, subject to the guidelines to
services in all private hospitals, medical be issued by the Department of Health (DOH), in
facilities, outpatient clinics, and home coordination with the Philippine Health Insurance
health care services Corporation (PhilHealth);
Medical and dental services, diagnostic | 5. On medical and dental services including diagnostic
and laboratory fees and laboratory fees, and professional fees of
attending doctors in all private hospitals and
On actual fare for land transportation medical facilities, in accordance with the rules and
travel regulations to be issued by the DOH, in coordination
Toll fees are not the same as ‘fares’. with the PhilHealth;
Hence, it is not subject to the 20% Senior | 6. On fare for domestic air and sea travel; :
Citizen Discount. 7. On actual fare for land transportation travel such as,
but not limited to, public utility buses or jeepneys
In actual fare for domestic air transport (PUBs/PUJs), taxis, asian utility vehicles (AUVs),
and sea shipping vessels and the like shuttle services and public railways, including light
Rail Transit (LRT), Metro Rail Transit (MRT) and
On the utilization of services in hotels and Philippine National Railways (PNR); and
similar lodging establishments, | 8. On funeral and burial services for the death of the
restaurants, recreation centers PWD: Provided, That the beneficiary or any person
who shall shoulder the funeral and burial expenses
On admission fees charged by theaters, of the deceased PWD shall claim the discount
cinema houses and concert halls, under this rule for. the deceased PWD upon
circuses, camivals and other similar presentation of the death certificate. Such expenses
places of culture, leisure and amusement. shall cover the purchase of casket or um,
embalming, hospital morgue, transport of the body
On funeral and burial services of senior . to intended burial site in the place of origin, but shall
citizens. exclude obituary publication and the cost of the
memoria! lot.
RULE FOR RESTAURANTS (RR 7-2010)
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.
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NOTE:
> 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 of 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 singlé 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.
Sample Computation of Discount and Amount Due
VAT on the sale of goods and services with sales discounts granted
by business establishments to senior citizens and PWDs shall be
computed in accordance with the following formula:
Sales (inclusive of vat)

Less: 12% vat (P1,120 x 12/112) (120)
Sales, net of vat
_ Less: 20% discount (200)
Total amount due
The amount of gross sales or gross receipts to be reported by the

seller shall be the undiscounted amount of P1,000 (as provided in the
illustration above). The discount granted shall be reported as deduction
from the gross income of the seller instead of deducting the same to the
amount of gross sales and/or receipts. The journal entries in the books of
the seller shall be as follows:
| Cash
Senior Citizen/PWD discount expense
Sales
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Chapter S- Va ue Added’Tage
SELLER IS NOT SUBJECT TO VAT |
The 20% sales discounts granted by non-vat sellers (i.e., subject to

Percentage Tax under Sec. 116) shall be computed in accordance with
the following formula:
Sales (without vat) fie PI 000

Less: 20% discount Nags (200)
Sales, net of discount . P800
' Percentage Tax (P1,000 x 1%) P10

The amount of gross sales or gross receipts to be reported by the
seller shall be the undiscounted amount of P1 ,000 (as provided in the
illustration above). The discount granted shall be reported as
deduction from the gross income of the seller instead of deducting the
same to the amount of gross sales/receipts.
The journal entries in the books of the seller shall be as follows:
Cash | P800 \
Senior Citizen/PWD discount expense 200
Sales P1,000
Percentage tax due expense P10

Cash/Percentage due payable P10
INPUT VAT ATTRIBUTABLE TO SALE TO SCs and PWDs
The input tax attributable to the vat exempt sale is considered as cost
" or an expense account by business establishments and shall not be
allowed as input tax credit’
EXEMPTION FROM PERCENTAGE TAX
While the Magna Carta Law for Senior Citizens and PWDs expressly
provide for vat exemption on their purchase of certain goods and services,
the law does not include exemption from the payment of Percentage Tax.
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Chapter os Vhs J) ded’ Tae
GRANT OF 5% SPECIAL DISCOUNT for Senior Citizens

(RR 7-2010 as amended by RR 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 refer to goods “vital to the needs of consumers, for

their sustenance and existence” while prime commodities are goods that
are “essential” to them.
= Basic Necessities
e Rice; Com; 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 oe
Firewood; Charcoal; Candles
= Prime Commodities
e 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
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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
P100,000, public and private wet markets, talipapa and cooperative stores.
Purchase of basic necessities and prime commodities are not exempt from
vat (unless expressly provided as exempt under the law) such as:
Subject to
Basic or Prime commodity VAT 5% disct.
1.Sugar, coffee Yes Yes
2.Fresh fruits No ~ Yes
3.Rice, com No Yes
4 Bread Yes Yes
4 Electrical supplies Yes Yes
The total amount of purchases shall not exceed P1,300 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.
5% Special Discount to PWDs (RR 9-2019).
Every PWD shall enjoy a special discount of five percent (5%) of

the regular retail price, without exemption from the value-added tax
(refer to the illustration in the preceding paragraph) of “basic necessities
and prime commodities”. The discount is limited to purchases not
exceeding to P1,300 “per calendar week without carry-over of the unused
amount”. Provided that said amount shall be spent on basic necessities
and prime commodities commensurable to his/her personal exclusive
consumption and or enjoyment within the calendar week. Provided, further
that said amount shall be spent on at least four kinds of items listed as
basic necessities and prime commodities.
Basic necessities shall include:

All kinds and variants of rice
eFweNr
Com
All kinds of bread (pastries and cakes not included)
Fresh, dried and canned fish and other marine products (including frozen and in
various modes of packaging)
Fresh pork, beef and poultry meat
All kinds of fresh eggs (excluding quail eggs)
$0.03" SO
Potable water in bottles and containers

Fresh and processed milk (excluding milk labelled as food supplement)
Fresh vegetables including root crops
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Chapter o'- Va aS Added 1Tae
10. Fresh fruits

ii. Locally manufactured instant noodles
12. Coffee and coffee creamer
13. All kinds of sugar (excluding sweetener)
14. All kinds of cooking oil ,
15. Salt
16. Powdered liquid, bar laundry and detergent soap
17. Firewood
18. Charcoal
19. All kinds of candles
20. Household liquefied petroleum gas, not more than 11kgs, LPG content once very
five (5) months bought for:LPG dealers
21. Kerosene, not more than 2 liters per month
Prime commodities shall include:

Flour
Dried, processed and canned pork, beef and poultry meat
Dairy products not falling under the definition of basic necessities
Onions and garlic
Vinegar, patis and soy sauce
Toilet/ bath soap.
Fertilizer
Pesticides
Herbicides
. Poultry feeds, livestock feeds and fishery feeds
. Veterinary products
Paper, school supplies
. Nipa Shingle
Sawali
. Cement, clinker, GI sheets
Hollowblocks
. Plywood
Plyboard
Construction nails
. Batteries (excluding cellphone and automotive batteries)
, Electrical supplies and light bulbs
. Steel wires
Deduction from the Gross Income of the Seller
The seller/establishment may claim the discounts granted (20% and/or

5%) to SCs and PWDs as deduction from gross. income 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,
shall be included in their gross sales receipts for tax purposes and shall
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.be subject to proper documentation and to the provisions of the cel

Internal Revenue Code (NIRC), as amended. .
Prohibition on the availment of double discounts
A senior citizen who is at the same time a PWD can only claim a
single 20% discount on a particular transaction. Same rule shall apply to
the 5% discount on basic necessities and prime commodities.
The 20% and the 5% discounts may not also be claimed if the:SC
and 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. In the purchase of goods and services which
are on promotional discount, the SC/PWD shall avail of either the
promotional discount or the 20%/5% discount, whichever is higher.
However, the discount that must be given to the SC/PWD shall in no case
be less than 20%/5%.
VAT Exemption and Discount to SOLO PARENTS

(RA 11861 and RR 1-2023)
Solo Parents that meet all the following conditions under RA 11861,
otherwise known as the Solo Parents Welfare Act, and its implementing
rules, RR 1-2023 shall be qualified for the ten percent (10%) discount and
vat exemption:
1. Solo Parents has a child/children with the age of six (6) years or
under; and
2. Solo Parents is earning less than P250,000 annually.
The 10% discount and VAT exemption shall apply to a qualified Solo
Parent's purchase of the following goods from drug stores, pharmacies.
grocery stores, and similar establishments, and subject to the guidelines
- that shall be issued by the Department of Health (DOH), in coordination
with the Food and Drug Administration (FDA), PhilHealth, and the
Department of Interior and Local Government (DILG):
Baby's milk;
o 9
Food supplements and Micronutrient supplements;

O20:
Sanitary diapers;
Medicines;
Vaccines; and
Other medical supplements.
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Chapter 8 - Valte Added, Tae
To avail of the 10% discount and-vat exemption, the Solo Parent shall
present his/her Solo Parent Identification Card (SPIC) and Solo Parent
Booklet. The SPIC should show that the Sdlo Parent is entitled to the
10% discount and vat exemption by indicating that the Solo Parent is
eaming less than P250,000 annually, and the dorsal side of the SPIC
indicates the name/s, birth date/s, and relation to the Solo Parent of the
qualified children and/or dependent/s with the age of six (6) years or
under.
Tax Treatment of the Discount Granted to Solo Parents
All establishments supplying any of the goods identified in the Act may
claim discounts granted to Solo Parents as “deduction” based on the cost
of goods sold. By way of example, if a vat-registered grocery store°
similar Infant Milk at an undiscounted selling price of P200.00, the cost of
the discount is computed 4s follows:
Selling price (exclusive of vat) P200.00

Less: Discount, 10% x P200.00 (20.00)
Amount Payable by the Solo Parent _P180.00 *
The selling price to be charged must be exclusive of vat because it is

_an. exempt-transaction (sale of Infant/Baby’s Milk to a qualified Solo
Parent). The discount granted shall be allowed as a deduction from gross
income of the seller (treated: as an. ordinary and necessary business
expense falling under the category of itemized deduction) for-the same
taxable year that the discount was granted, provided that, the total
- amount of the claimed tax claimed deduction net of vat, if applicable, shall
be included in the gross sales for tax purposes and shall be subject to
proper documentation in accordance with the provisions of the Tax Code,
as amended. The entry to record the transaction in the books of the seller
should be as follows:
Cash ~ P180,00
Solo Parent Discount — 20.00
Expense
Sales P200.00
The input tax attributable to the exempt sale shall not be allowed as_
an input tax credit and must be closed to the cost or expense account of
the seller. '
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VAT and Discount granted to National Athletes and

Coaches under RA 10966, as amended
Under RR 13-2020 dated May 27, 2020, Qualified National Athletes
and Coaches shall be entitled to twenty percent (20%) sales discount, on
sales exclusive of vat, on the following establishments relative to the sale
of goods and services for their actual and exclusive use or enjoyment:
1. Transportation services such as:
« Domestic air and sea transportation
« National land transportation privilege
Hotels, resorts and other similar lodging establishments
NOORWPN
Restaurants
Medicine and drug purchases
Recreation centers
Sports equipment purchase
Admission fees privilege
All other goods and services sold by the foregoing establishments

not otherwise included in the enumeration, as provided by law, shall
not be granted with a discount privilege, notwithstanding that such
goods and services are in relation to the sale of goods and services
for the actual and exclusive use or enjoyment of the qualified National
Athletes and Coaches.
VAT on the sale of goods and services with sales discounts

granted by business establishments shall be computed in accordance
with the following formula:
Amount of sale (inclusive of vat) P1,120
Less: 12% vat; (P1,120 x 3/28) (120)
Total amount exclusive of vat** P1,000
Less: 20% discount** (200)
Total amount net of discount and vat R800
Add: 12% VAT; (P1,000 x 12%)**** 120
TOTAL AMOUNT DUE P920
**The amount of sales to be reported shall be the undiscounted amount

**The discount granted shall not be deducted from sales or gross receipts of the seller but as
an itemized deduction from the gross income.
****The VAT is computed based on undiscounted sales.
Establishments granting discounts to qualified National Athletes

and Coaches on their sale of goods or services shall be entitled to
deduct the said sales discount from their gross income, subject to
conditions provided under RR 13-2020.
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For percentage tax sellers, the amount of sales discounts shall

be included for the purposes of computing the Percentage Tax and
shall be included as part of the gross sales and/or receipts for income
taxation purposes. However, the sales discount granted shall be
accounted as deduction from the gross income of the establishment
for the same taxable year that the discount was granted.
Computation of discount on non-vat seller:
Sales/Receipts (non-vat) P1,000

Less: 20% discount : (200)
Total amount due net of discount P800
Percentage Tax Due (P1,000 x 1%) P10
The amount of sales discount granted shall be allowed as itemized

deduction from gross income for the same taxable year that the
discount was granted provided that the taxpayer is not availing
Optional Standard Deduction (OSD).
The gross selling price and the sales discount must be separately
indicated. in the official receipt or sales invoice issued by the
establishment for the sale of goods or services to qualified National
Athletes and Coaches.
Only the actual amount of sales discount not exceeding 20% of

the gross selling price or gross receipts can be deducted from the
gross income, net of vat if applicable, and shall be subject to proper
documentation. Provided, however, that if the establishment granting
the discount availed of the OSD or opted to be taxed at 8% income tax
rate, if applicable, the sales discount given cannot be claimed as
allowable deduction from the gross income.
Prohibition on the availment of double discounts

The foregoing privileges shall not be claimed if the National
Athletes and Coaches claims a higher promotional discount as may be
granted by the commercial establishment ’and/or under other existing
laws or in combination with other discount program(s).
National Athletes and Coaches who are at the same time a senior
citizen or PWD can only claim a single 20% discount on a particular
Sale transaction. 4
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Okepler 8 - Value Added Tie
MIXED BUSINESS TRANSACTIONS
‘A. Vat registered person may be engaged in a combination of
sales subject to vat, zero-rated vat, and vat exempt transactions. For vat
purposes, this is known as mixed business transactions. The main
concern in mixed business transaction is the allocation or apportionment
of input Vat.
‘A vat registered person who is also engaged in transactions not

subject to vat shall be allowed of Input tax credit as follows:
a. Total input tax which can be directly attributed to transactions subject

to vat; and
b. Ratable Portion of any input tax which cannot be directly attributed to

either activity (allocation shall be on. the basis of sales volume)
TABLE 8-11: VAT PAYABLE ON MIXED TRANSACTIONS

Output vat : PXXX
Less: Input vat :
= Directly attributed to vatable transactions - (xxx)
« Not directly attributed (mixed transactions) to vatable

transactions computed as follows per RR 14-2005:
Taxable sales private entities x input tax** (xxx)
Total Sales* ih
Exempt sales X input tax** NA**

Total Sales*
Balance . PXxx
Less: 5% withholding vat on sales made to the government (Xxx)
VAT Payable : PXxxx
*** The allocated input vat on exempt sales shall be treated as operating expense of the
seller. It is not deductible from output vat.
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kaple JS - Velho Ale 61 Lae
ILLUSTRATION 23: Sa ae al ete

A taxpayer is engaged in the sale of VAT taxable goods and at the same time is also engaged
in non-VAT business, in the same business establishment. The following data for the taxable
year were provided for purposes of determining the correct amount of vat payable:
Sales (subject to vat;net) P15,000,000
Sales (Subject to other percentage taxes, net) 5,000,000
Purchase of services directly attributable to vatable sales (net) 2,000,000
Purchase of supplies directly attributable to vatable sales (net) 2,000,000
Purchase of supplies from non-vat suppliers, directly attributable to 800,000
vatable sales
‘ Purchase of services attributable to both vatable and non-vatable sales 1,120,000
(gross of vat)
Purchase of supplies attributable to both vatable and non-vatable sales 1,000,000
(net of vat)
REQUIRED: DETERMINE THE VAT PAYABLE.

“+ Answer: P1,140,000
Output vat (P15M x 12%) P1,800,000
Input vat: |
Directly attributable to vatable sales (P4M x 12%) (480,000)
Input vat on purchase of goods/services used in both types (180,000)
of businesses [(P1,120,000 x 3/28)+ Mm x 12%)] x 15/20**
VAT PAYABLE _P 1,140,000
*ratio of sales subject to vat over total sales
FILING
OF VAT RETURNS —
Beginning January 1, 2023, every person liable to pay the value
added tax imposed under the Tax.Code shall file and pay a “quarterly”
vat return (in triplicate copies; 2 for BIR and 1 for the taxpayer) based on
the amount of his gross sales or receipts, as the case may be. _
The term “taxable quarter’ shall mean that quarter that is

synchronized with the income tax quarter of the taxpayer (i.e., the
calendar or fiscal quarter). The quarterly
filing and payment required
- under the Tax Code shall be done within twenty-five (25) days following
the close of each taxable quarter (RR 13-2018).
Prior to January 1, 2023, filing and payment of vat return is required

ona monthly and quarterly basis.
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Beginning January 1, 2023— Quarterly Filing/Payment
a) Beginning January 1, 2023, the filing and payment required under the
Tax Code shall be done within twenty-five (25) days following the
close of each taxable QUARTER (RR 13-2018).
b) OPTIONAL Filing of Monthly vat return and Payment of Monthly Vat

Due under RMC 52-2023 dated and effective May 10, 2023.
While the Tax Code mandates the filing of vat return and payment of
vat due on a quarterly basis, vat-registered persons may continue to
file and pay the vat on a monthly basis. In this regard, the procedures
and guidelines set forth in RR 16-2005, 6-2014, RMC 68-2005, and
other related issuances regarding the use of BIR Form No. 2550M .
(monthly vat return) shall continue to apply.
DUE DATES beginning January 1, 2023:-
> OPTIONAL: Filing and payment of monthly vat return - no due

date.
> MANDATORY: QUARTERLY filing of vat return - within

twenty-five: (25) days following the close of each taxable
QUARTER using BIR Form No. 2550Q.
PENALTY from switching to monthly filing to quarterly filing of

vat return or vice versa: NONE (RMC 52-2023).
> PRIOR to January 1, 2023, filing and payment of monthly vat

return [for the first two (2) months of the Quarter] is also
required. The filing and payment shall be made on or before
the 20“ day following the end of the month using BIR Form
No. 2550M.
CANCELLATION OF VAT REGISTRATION
Any person, whose registration has been cancelled in accordance with _

Section 236 of the Tax Code shall file a return and pay the tax due
thereon within twenty-five (25) days from the date of cancellation of
registration: Provided, That only one consolidated:-return shall be filed by
the taxpayer for his principal place of business or head office and all
branches.
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Chapter Ps are Ma ve Added. Toe
ILLUSTRATION 24: ie
CASE A: .
Determine the filing date of the vat returns for ABC Corporation (using calendar year
basis) for the first three months of 2022.
“> Answers:
«For the month of January — Not later than February 20, 2022
« For the month of February — Not later than March 20, 2022 .
» For the month of March — The vat return to be filed shall be for the 1st quarter of
2022. The amounts to be included in the return shall be for the 3-month period
(January to March) and it shall be filed not later than April 25, 2022.
CASE B:
Determine the filing date of the vat returns for DEF Corporation (using fiscal year basis;
April to March) for the first three months of 2022.
«* Answers:
= For the month of April — Not later than May 20, 2022
= — For the month of May - Not later than June 20, 2022
= For the month of June - The vat return to be filed shall be for the 15 quarter of |
j
2022. The amounts to be included in the return shall befor the 3-month period
(April to June) and it shall be filed not later than July 25, 2022.
CASE C:
Determine the filing date of the vat returns for ABC Corporation (using calendar year
basis) for the first three months of 2023 taxable year.
“* Answers:
_ ® Forthe month of January 2023 - Not required but ABC, Corporation may choose
'
t
to file vat return for the month of January (optional filing only).
r
= For the month of February 2023 - Same answer with January 2023
= For the month of March - The Vat return to be filed shall be for the 1s‘ quarter of
2023. The amounts to be included in the return shall be for the 3-month period
' (January to March) and it shall be filed not later than April 25, 2023.
|
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Chapter S - Value AY” Ta
PLACE OF FILING OF VAT RETURNS [Sec. 114(B)]
If Payment is Involved
The returns together with the required attachments, shall file and pay
the vat due thereon to any Authorized Agent Bank (AAB) located in the
Revenue District Office (RDO)/Large Taxpayers District Office (LTDO)
where such taxpayer is required to register (head office of the business
establishment). The bank teller shall machine validate as evidence that
payment was received by the AAB. The AAB receiving the tax-return shall
stamp mark the word "Received" on the return and machine validate the
return as proof of filing the retum and payment of the tax.
In the absence of accredited bank, the returns together with the

required attachments, should file and pay with the Revenue Collection
Officer (RCO). The RCO shall issue a Revenue Official Receipt upon
payment of the tax. -
‘If No Payment is Involved
The monthly/quarterly return should be filed with the RDO/LTDO/

Large Taxpayer District Office (LTDO)/ Large Taxpayer Assistance
Division, Collection Agent having jurisdiction over the registered address of
the taxpayer (head office of the business establishment).
5% CREDITABLE VAT WITHHELD BY THE GOVERNMENT

(RMC 36-2021)
« Filing and Payment. - The government or any of its political

subdivisions, instrumentalities or agencies, including GOCCs who are
required to withhold creditable VAT shall use the "Monthly Remittance
Return of Value-Added Tax Withheld' (BIR Form No. 1600-VT) for
filing and remittance of the amount withheld. However, for those using
the eFPS, they shall still use BIR Form No 1600 due to unavailability
of BIR Form No. 1600-VT.
» The government or any of its political subdivisions, instrumentalities or

agencies, including GOCCs who are required to withhold creditable
VAT shall issue the Certificate of Creditable Tax Withheld at Source
(BIR Form No. 2307) using Alphanumeric Tax Code (ATC) No.
WV010 for purchases of goods or WV020 for purchases of services.
Thus, the Certificate of Final Tax Withheld at Source (BIR Form No.
2306) shall no longer be issued for this purpose.
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Ce or S - Vel Added Tage
The BIR Form No. 2307 shall be used as proof by VAT taxpayers in
claiming for VAT credit in their monthly and. quarterly VAT
declarations. Erroneous use of the same (i.e.; reflected as tax credit in
the quarterly and annual Income Tax Return) shall result in
disallowance of the withheld amount and forfeiture of the same in
favor of the Government.
WITHHOLDING OF VAT RETURNS

Filing and remittance of vat withheld shall be made on or before the
10" day following the end of the month.
INVOICING and ACCOUNTING REQUIREMENTS (Sec. 113)
Section 113(A) of the Tax Code, as amended, provides that a vat-

registered person shall issue:
=" AVAT INVOICE for every sale, barter or exchange of goods or

properties; ane
»" AVAT OFFICIAL RECEIPT for every lease of goods or properties

and for every sale, barter or exchange of services.
Single invoice/ receipt involving VAT and Non-VAT transactions
A Vat registered taxpayer may issue a single invoice/ receipt involving

VAT and non-VAT transactions provided that the invoice or receipt shall
clearly indicate the break-down of the sales price between its taxable,
exempt and zero-rated components and the calculation of the value added
tax on each portion of the sale shall be shown on the invoice or receipt.
Separate invoices/ receipts involving VAT and Non-VAT transactions
A VAT registered person may issue separate invoices/ receipts for

the taxable, exempt, and zero-rated component of its sales provided that if
the sales is exempt from value-added ‘tax, the term "VAT-EXEMPT SALE”
shall be written or printed:prominently onthe invoice or receipt and if the
sale is subject to zero percent (0%) VAT, the term "ZERO-RATED SALE"
- Shall be written or printed prominently on the invoice or receipt.
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ec Os Whe Added Cig
- Information Contained in the VAT Invoice or VAT Official Receipt

[Sec. 113(B)]
The following information shall be indicated in the VAT invoice or VAT

official receipt:
1) A-statement that the seller is a VAT-registered person, followed by his

Taxpayer's Identification Number (TIN);
2) The total amount which the purchaser pays or is obligated to pay to

the seller with the indication that such amount includes the value-
added tax: Provided, That:
(a) The amount af the tax shall be shown as a separate item in the
invoice or receipt;
(b) If the sale is exempt from value-added tax, the term ‘VAT-exempt
sale’ shall be written or printed prominently on the invoice or receipt;
(c) If the sale is subject to zero percent (0%) value-added tax, the
term ‘zero-rated sale’ shall be written or printed prominently on the
invoice or receipt;
(d) If the sale involves goods, properties or services some of which

are subject to and some of which are VAT zero-rated or VAT-
exempt, the invoice or receipt shall clearly indicate the breakdown
of the sale price between its taxable, exempt and zero-rated
components, and the calculation of the value-added tax on each
portion of the sale shall be shown on the invoice or receipt:
Provided, That the seller may issue separate invoices-or receipts
for the taxable, exempt, and zero-rated components of the sale.
3) The date of transaction, quantity, unit cost and description of the

goods or properties or nature of the service; and
4) In the case of sales in the amount of one thousand pesos (PhP 1,000)
or more where the sale or transfer is. made to a VAT-registered
person, the name, business style, if any, address and Taxpayer's
Identification Number (TIN) of the purchaser, customer or client.
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Chapter 5 - Vile ’ Added Tae
Accounting Requirements [Sec. 113(C)]

Notwithstanding the provisions of Section 233 of the Tax Code, as
amended, 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.
Consequence(s) of issuing an erroneous invoice or official receipt

[Sec. 113(D)]
* By a Non-Vat registered person:
_ Ifa person who is not a VAT registered person issues an invoice

or receipt showing his TIN followed by the word VAT, the non-VAT
person shall be liable to:
= The percentage taxes applicable to his transactions.

« The VAT due on the transactions without the benefit of any tax
* creditand —
« 50% surcharge.
“By a Vat registered person:
lf a VAT registered person issues a VAT invoice or official receipt

for a VAT-exempt transaction but fails to display prominently on the
invoice or receipt the term “vat exempt sale”, the transaction shall
become taxable and the issuer shall be liable to pay the VAT
thereon.
In both cases, if the invoice/receipts contain the required

information, the purchaser shall be allowed to recognize an input tax
credit.
Power of the Commissioner to Suspend the Business Operations of

a Taxpayer (Sec. 115)
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) Inthe case of a VAT-registered Person
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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.
WB OS ied cede WO)
Juan Dela Cruz , non-vat registered lessor of residential and commercial
units, had the following date for the 1St and 2" quarters of 2021:
_. Gross Receipts
1**\Quarter 2 Quarter
Lease of Residential Units
«= Monthly rental of P13,000/unit P2,500,000 P2,300,000
= Monthly rental of P18,000/unit 1,000,000 1,200,000
Lease of commercial units 2,300,000 2,400,000
Input vat from vat suppliers 150,000 120,000
(attributable to commercial units)
1. How much is the business tax due for the 1* quarter 2021 of Mr. Dela
Cruz?
a. P99,000 c. P396, 000
b. P174,000 _ d, P246,000
“+ Answer: C
© — Business tax (vat)= P3,300,000 x 12%= P396,000
© The total gross receipts from lease of residential units with monthly rental of
- P18,000 per unit and from commercial units exceeded the vat threshold of P3M,
hence, subject to vat.
© — The taxpayer is non-vat registered, consequently, input vat credit is not allowed.
324
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Chapter 8 - Value Added, Tae
2. How much is the business tax due for the 2" quarter 2021 of Mr. Dela
Cruz?
a. P432,000 c. P708,000 .
b. P312,000 d. P108,000
“+ Answer: A
Business tax (vat) = P3,600,000 x 12% = P432,000
3. Assuming Mr. Dela Cruz is a vat registered taxpayer, how much is his
business tax due for the 1° Quarter of 2021?
a. P246,000 c. P696,000
b. P546,000 d. P396,000
“ Answer: A
© Vat Payable = (P3.3M x 12%) — P150,000 = P246,000
4. How much is the business tax due for the 2™ quarter 2021 of Mr. Dela
Cruz, assuming he registered as a VAT taxpayer at the start of the 2"
Quarter 2021?
a. P432,000 c. P708,000
b. P312,000 d. P108,000
* Answer: B
Vat Payable = (P3.6M x 12%) — P120,000 = P312,000
© There is no need to allocate the input vat because the entire amount
is directly attributable to vatable transactions.
oe : 325
The
Chapter ro Va Ul Adbded Te
(To be filed uo by the BIR}
@ ee Quarterly Valulue-Added 2AFF50

Retur
turn
Kawanihan ng Rentas Intemas Cumulative
cal
re Pereeiiscel ALS =F ne is
e112 0
eo 017,2,3114,56 117,.89110,0.0) | cx ete eae
',| DELA CRUZ, JUAN

ie eS Sade LES sais
| BLK 81 SAN NICOLAS ST.,BRGY. PALAR,MAKATI CITY
3 Sar Tot (Sam of tam 204 208,206 200 8206) : Nie:

Current Transactions :
TIAIB Purchase of Capit! Goods not excceding PiMilen see sch 2 Sta - i
24C/D Purchase of Capita! Goods exceeding ihtion (use scn 3) 2c - |24iD
| 21E/F Domestic Purchasss of Goods Oter tas Capt Geos 2 1B. _2iF -
21GIH Importation of Goods Other than Capital Goods. 2G __ Rin Z
211.3 Domestic Purchase of Services : 24 - ty =
* 21KAL Sennces rendered by Non-residents 2K ~ 24k =
- - 21M Purchases
Not Qualified for Input Tax * 72am = c
24n/0 Others ~~ 238
Pip toh Clark Pacheaee Grew ane tance Ssaanreimarer | 21P =
2 Total Available Input Tax (Sum of tiem 20F, 21B.210.21F 21.215 .21L8270)
Less: Deductions from Input Tex
234A input Tax on Purchases of Capital Goods exceeding PiMiltion
deferred for the succeedingperiod (Sch.3)
23B input Tax on Sale to Govt. closed to expensa (Sch 4)
23C input Tax allocable to Exempt Sales (Sch 5}
23D VAT Retund/TCC claimed
23E Oners
*. $3F Total (Sum of ttem 23A, 23B,23C.25D
& 236) ©
Total Allowable Input Tax {hem 22 fess ttem 23F) _
Net VAT Payabie (hem 188 less tiem 24)
Credits/Payments
; 6A Monthly VAT Payments - previous two months
Tax Withheld (Sch. 6)
~ 268 Credtabie Value-Added
- 260 Advance Payments for Sugar and Flour Industries (Sch.7}
26D VATwahheld
on Sales to Government (Sch.8)
See VAT paid vi vobuen previously Ged, if this is an amended return
2 20F Advance Payments mode {please atach proof f payments - - BIR Farm No. 0605)
26H Total Tax Credits/Payments (Sum
of tiem 28A.268,26C 260; 28E, 26F & 26S)
Tex SiB PayatieOverpayment)(tiem 25 less tiem 26H)
Aad: Penaties = - interest 2 c
; 28a zB | } 28 [
Tee eater Pevetteleroe im o Ne 27 8 00) : i
petpry. m. m ain, verit meé, ani
is true and ‘Correct. pureustl to the provisions of the National internal Revenue Code. as amended, and the requlations jawed under authorky thereof
30 DELA CRUZ, JUAN Hu :
ie ‘ax "Treasur Assaiam Treasurerer
Authorzed
( Representabve/T
Gor axpayer
} (Signature Over Pr Printed Name)
LESSOR 123-456-789
lax Pent Ace No jai Fall No 1d poole abs x i le 0 = —TrTn say

Pe ______ otal of Pays
Stamp of
eceiving v
and Date of Receipt
{RO's Signature’
Bank Telor's inal)
(- 326
The
The Book
Chapter & - Vike AML Lage
{To ba fied ud by he BIR)

x
re Papas Quarterly Value-Added SRBC

;
Kosenihies a6 Rentas Internas ax Returu rm
Cumulative
SITS R
fal
fc eae: : "Peace wa
; mei .2] 2,0,2,1 baer S| Pete
".14,2,3114,56117.89110,0.0] |. 5
Fh Lndantbet
Yate Satara Prva (Seh1) 5

Se rcoumcorer rts
i Ta Soeapcng tO ToD
ees aA beat tux Catan hos Faas CLs
L, 3 Sor Tota (Siim'ol tom 20, 208 20¢:200 &20€)

‘Current Transactions ~ Purchases ; :
: SAS Pascaen of Ceri Gooch vat vicsacig Pumsenfesl GAT" 2A 1248 ©
<=" 2101 Purchase of Capital Goods exeesrs Prtscian san e233}. 210 a :
_ -B1EJF Domestic Purchases of Goose Omer thon Capt! Govds 21e ~ ae :
21GIH Imporiaton of Goods Other than Capital Goods 21 > tH : =
_ 210J Domestic Purchase of Services 2e = ig :
21K/L Serices rendered by Non-residents -. 21K tt
21M Purchases Not Qualied for Input Tax = 2M = en ES 7
| 21N/0 Others 24K -_ of -
dete Comal Pikes «oc. ike eccaen 21Pp =. begs ae a
feo Total Available input Tax (Sum of item 20F, 218,.210,21F 214, BidZ LSS) fe Gon phe Sra] 432,000 00
23 Less: Deductions from Input Tex : jetely Pepe mace Pate oe rane 3
‘23A InputTax on Purchases of Capita: Goods excaoding PIMtition
rf Gelerred for the succeeding
period (Sch.3) |
238 input Tax on Sale lo Gov. closed to exsense (Sch 4) RANTS © 28 =
tr ertheless Ae esas 236 .
23D VAT Refund/TCC claimed : 230 :
Z3E Others . \ feats Be >
23F Total {Sum of ttem 23A, 236,230,230 4 236) z + 23F -
Pes pacuatae Input Tax (Item 22 less heat 23F) ‘ ‘ ; 24 r
Net VAT Payabie (tam 198 less Item 24) ; : 25 432,000.00
Less: Tax Credits/Payments ; : ; ;
~ 268A Monthly VAT Payments - previous
two month¢ 266A =
_ 26B Creditable Value-Added
Tax Withheld (Sch. 6) : ; Ee 268 =
26C Advance Payments for Sugar and Flour industries (Sch. 7) Naat 2c =
26D VATwahheld on Sales to Government (Sch.6) 280 ~
28E VAT paid in return previously filed, if this is an amended re‘urn | 26E a
(" te er BIR Form No. 0605) +. 26F =
> 26H Total Tex Credts/Payments (Sum of tem 25A 268,26 260 266, 20F & 266) ‘ 26H -
“Tax ol poyadielOverpayment\iem 25 less em 26H) z a RN ae 432,000 00
Aad; Penatties Sen Interest ekg :
: 2A eae 8 :
eat ar Poiel Ovsaed (a tt 27 8D) € 432,000.00
; an st ol my . .
ts true and ‘correct, pursuant 5to the provisions of the National internal(Revenue Code. a8 amended, and the requiations issued under authority thereof,
20 DELA CRUZ, JUAN u
———— Fresdent Vice PressienuPracipal OlicerAccredied Yax Agen —TreasurevAssaianl
Vreasuer
Authonzed Representatve/Taxpayer (Signature
Over Printed Name)
{SignatureOver Printed Name)
LESSOR 123-456-789
—WieFainn aSgnaloy S~SCSC*SIN Sitar ———"TieFoslion
ol Signatoy
eT
5 Pees [BE 2 so SPs Stamp of
Recewing Office/AAB
1 and Date of Recespt
a (RO's Signature!
1 Bank Tellers bebal)
ee
ef
The
Ohepee $ - Value Adled’ Lag
‘0 be filed uo by the BIR)
Rertiara Papas vel

Quarteey Value- Added 9 55 0
Kagawaran ng ng cum aX%R ‘or3 Months)
eturn February 2007 (ENCS)
Kawanihan faeries Internas
. = me oP 1 10.112 4 ae ate
11,2] 2,0,2 ae os los esi T) ' :
~, =| 1,2,31]4,56 11 7.89]10,0,0}. »10,5,0 Ske:
< DELA CRUZ, JUAN
: PET
GF I Se AO SUN Ee oe eetra
»| BLK 81 SAN NICOLAS ST., BRGY. PALAR, MAKATI CITY
Pee pie
cAks Paseese
ol Capial Good nei cacondirg >
2 gy mafiaenssnedrd crear deat prs eeeetaate 2c
e
ey sag tioned Pocchoes Gmina Honcseinin keen m 24P

“Total Avatabie top Tex (Sum of tem 20F, 218,210-25F,214.214 218210) Keay
Less! Deductions
from Input Tex _ ok
bes "21A Input Tex on Purchaves of Cais Gaoas exceeding PtMton ‘
SERS deferred for the succeeding pasod (S2h.2) i
vod scan bboy tne eh ea aa
-EovATeanateccanes
f
* ESF Total (Sum of em 23A 738,230 230 & 236)

‘Toral Allowable Input Tax {item 22 less Kem 23F)
Net VAT Payable (Rem YOR less them 24) +e
ebebebedededeteD
> 26G Others

saat foun Ts) Claires Ceci nok 254 268,286 280 26,26F 8266)
Tax Su Payatie(Overpeymertter 25 ess Nem 25),
2 nee: Pees sn a a
.
“To Ao
“wea
al ray Sam tom 77D)
i 246,000.00
Derry, $s return jal s ‘s my know!
is true end correct. pursuant to the p of the Finternal R Code, es the requi, issued under auihority Drereot
0 DELA CRUZ, JUAN 3s
‘a Pres: y ax Treasured Assuianl Vieasurer
Representative/Taxpayer (Signature Over Printed Name)
(Signature Over Printed Name)
LESSOR 123-456-769
Tile ostion A Saralory TINA Signatory Tiesto
ol Signal
328
The
attr 8 Vales Ad
329
The
Oapter S - Valee Added’ Lage
|
{To be filled uo by the BIR}
5 5 50 Q
3 a Bi Fonte
Republika ng Pikpinas Quarterly Value-Adde

Kagawaran ng Pananalapt rm
i eae |
Kawanihan ng Rentas Internas cunt ar, rNetul
U February 2007 (ENCS
aay DELA ‘CRUZ, JUAN

soe
B1 SAN NICOLAS S ST., BRGY. PALAR, MAKATI CITY
Sales/Receipta :
13 Taal Sooo and Our Tex Gon x
20A Input Tax Caried Over from Previous Cuarter 20A H
#0 at ft Dern dog Co eng Pilon fon Pe a 208 |
206 Transitional Input Tax qi 306 = t
200 Presumpiive Input Tax. SS er ate sc 200 =)
20€ Others oe e a 2 39] =]
20 Total (Sum of tem 20A, 208,200,200 8206) RBar ho. eae cae ail “20k
24 Current Transactions : 2
Purchases he | ==] J
: S1N/8 Porches cf Caphsl Garon aol exceeding Priston isu sad * 21a! ~_j218 —_}}
2ICID Purchase of Capital Goods sceosing Prumon isco ach) 21 =~ 24D :
" 21E/F Domestic Purchases of Gooos Orw tan Cantal Goods 24E -__|2iF axe
_ 21G/H importation of Goods Other then Capital Goods =i (ss. j2iH =“
21UJ Domestic Purchase of Services » 2u 1,009,000 00|215 | 420,000.00}
21KAL Services rendered by Non-residents -. 21K = ny -
214M Purchases
Not Quaiified for input Tax 21M - ae}
24N/O Others 21N =__jatol
24P Tota! Current Purchases eo tem PANCZE
DG TIKI -21P +e
i Total Available Input Tax (Sum of tem 20F, 218.210,24F,21H,24),21L86210) c selec e
Less: Deductions from Input Tax ‘ EAS sees se saehuiaen ys
234A input Tax on Purchases of Capital Goods exceeding PIMillion eg Wie ko Net a ne
deterred for the succeeding period (Sch. 3) Sait DAA
238 input Tex on Sale to Govt. closed to expense (Sch 4) 238
» © 23C Input Tax allocable to Exempt Sales (Sch. 5) 5 2 TS
23D VAT Refund/TCC claimed BD
23E Others RE
23F Total (Sum of ttem 23A, 238,230,230 & 232) : ; 2F
Total Atiowatile Input Tax (rem 22 less Rem 23) 24°
eee vay Ceyerse Years 196 fans Hrs 24) 2g 312,000.00
Less: Tax Credits/Payments , - =e
26A Monthly VAT Payments - previous two months + 264 | =
»- 268 Credituble Value-Added Tax Withheld (Sch. 6) 260 si
“-26C Advance Payments for Sugar and Flour Industries (Sch 7) 2sc Sl
26D VATwithheid on Sales to Government (Sch.8) * 269 ~—_|
2SE VAT paid in return previously filed, if this is an ameriied return } 26E = |
26F Advance Payments made (please attach proof of payments - BIR Form No. 0605) 26F | = o§
26G Others. page 266 | - |
26H Total Tex Credis’Payments (Sum of item 26A.26B 26C 260.256. 26F & 250) ; f 26H e |
J GE PayabtetOverpeemsct (lent 25 lees Remo 2041) S i ee ae 000 00
Aad: Penstties iets Interest : Compromise
28A ] 286 } 2ec[ } 28D . ;
Teal amon Pete Ovepopmet Go ten 27820) Su Mag 312,000.00}
us ff faith, ver y Mme, an of my knowiedae, and beet,
is true and correct. pursuant to the provisions of the National intemal Revenue Code. as . and the issued under ith thereof.
30 . DELA CRUZ, JUAN " Py
ne fi y ax ————"TreasurenAssaiamt Teaser
(Signature Over Printed Name) Sgeure Over net
, LESSOR 123-456-789
Thain oF Signaioy TING Signatory — Talla Postion of Signatory
am a ——
zorapcss ; : mou Here Stamp of
. ‘ . Receiving Office/AAB
Debit Me 4 leetlectesteeedand § and Date
of Receipt
5
ter ~
a Se oeRO's of
fis prekis JA PAE

oe rere pres ital
330
The
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CHAPTER EXERCISES
PROBLEMS
P8-1.
For 2024 taxable year, determine the applicable business tax
of the following:
Lease of Residential Units.

Case Monthly Rental —_ Aggregate annual rental _ Answer
A P14,000 3,200,000
B 16,000" 2,800,000
C 16,000 3,000,000
D 18,000 3,200,000
Lease of Commercial Units

Case Monthly Rental Aggregate annual ene Answer
E P12,000 P3,200,000
E 16,000 2,800,000
G 16,000 3,000,000
H 10,000 3,500,000
P8-2.
Determine whether or not the transaction described below is subject to VAT.
Write “V" in the space provided if the transaction is subject to vat., Write "X” if
the transaction is vat exempt or subject to other types of tax.
Case Transaction Answer
A _ Sale by agricultural cooperatives of their produced to
members and non-members.
B ~ Receipts from lending activities by credit multipurpose
cooperatives duly registered and in good standing with
Cooperative Development Authority.
C Importation by non- -agricultural, non-electric, non-credit
cooperatives of machineries and equipment to be used
by them.
D Publication of magazines devoted principally togihe
publication of paid advertisements
E Sale of parking lots ina condominium (SP is not more
. that 23,000,000)
F . Isolated sale of good or service for a gross selling price
LOO
331
TT a
Teas
The
CamScanner
: Chapter 3 - WS AL ae
. of 2,800,000
Export sale by a vat registered exporter not exceeding’
GS
the vat threshold of P3,000,000
Transport of passengers and cargo by air or sea vessels
Sale of drugs and medicines
ree
Services of banks; non-bank financial intermediaries

performing quasi-banking functions, and other non-
bank financial intermediaries such as money changers
and pawnshops
P8-3. 3
For 2024 taxable year, determine whether the followingis subject to vat.
Write “V" in the space provided if the transaction is subject to vat. Write “E” if
the transaction is vat exempt. .
Case Transaction Answer
A Sale by a real estate dealer of residential lot with a a
selling price of 2800,000.
B Sale by a real estate dealer of residential lot witha
selling price of 23,500,000.
C Sale by a real estate dealer of commercial lot with a
selling price of P2,800,000.
Sale of residential lot classified as capital asset.
moO
Sale by a real estate dealer of residential house and lot

with a selling price of P3,000,000)
F Sale by a real estate dealer of condominium unit with a
selling price of 23,250,000)
G Sale by a real estate dealer of parking lot ina
condominium unit with a selling price of P850,000)
H Sale of residential house and lot classified as capital
asset with a selling price’
of 28,000,000)
P8-4,
Assume the following transactions with the corresponding invoice cost,
inclusive of vat, if applicable: :
Apol, non-vat taxpayer, sells to LJ, Vat taxpayer ~ P89,600

LJ, vat taxpayer, sells to Chris, Vat taxpayer 134,400
Chris, vat taxpayer, sells to Abi 201,600
Abi, nonvat taxpayer, exported the goods to Canada 300,000
REQUIRED; DETERMINE THE FOLLOWING:

a. Vat payable of Apol
b. Vat payable of LJ
c. Vat payable of Chris
d. Vat payable of Abi
332
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Okapler Oo - Vehe JAA bed’ Lage
P8-5. .
Omega Corporation is a vat registered taxpayer. It had the following data for
the month of December (vat inclusive):
~ Cashsales,invoiceamount | P660,800
Sales on account 246,400
Purchases , 291,200
Consignment shipments:
Less than 60 days 38,500
More than 60 days so 22,400
Goods paid to creditors (dacion en pago) 16,800
Goods given as Christmas gift to employees 19,040
Property dividend to stockholders 8,960
REQUIRED: DETERMINE THE VAT PAYABLE FOR THE MONTH.
Pe 6.
ABC Corporation (vat reg.a) has the following data for the month of March
2024: -°
Gross Sales (vat exclusive) P8,000,000
Sales Returns 400,000
Goods shipped on SOEs (net)
Units Unit Price
March 25 40 P10,000
February 14 30 10,000
January 8 20 10,000
Goods withdrawn for use by the company P50,000

‘Goods taken as payment to creditor 30,000
Purchases for the month of (net of vat):
Goods ° P600,000
Supplies \ 75,000
Capital goods (U.Life= 4 years) 1,100,000
Freight and insurance 8,500
Salaries of employees : 385,000

* Received cash representing payment for ten (10) units delivered
on February 14. The amount received was net of ten percent
(10%) commission,
« A consignee reported and remitted P200,000 (gross of 10%
commission) representing 20 units sald from goods consigned in
~ March.
REQUIRED: Determine the Vat Payable for the month of March.
333
econ
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Chapter S - Vale Adil 7le
P8-7. (MIXED TRANSACTIONS)

Bobs Bookstore, vat registered, is engaged in the business of selling books,
school supplies and gift items. The following were provided to you during the
month of October (inclusive of vat, if applicable):
Sale of school supplies P.1,680,000
Sale of books 1,200,000
Sale of gift items 1,008,000
Purchase of school supplies and gift items for sale “. 1,344,000
Purchase of books 600,000
Purchase of computers used in vatable and non- alee ' 448,000
transactions
Purchase of office supplies used in vatable ahd non- 200,000
vatable transactions from non-vat registered suppliers. .
REQUIRED: DETERMINE THE VAT PAYABLE FOR THE MONTH OF OCTOBER.
P8-8. (M/XED TRANSACTIONS)

Omega Corporation is engaged in a business subject to value added tax and
another business which is not subject to value added tax. Omega’s business
data for the current year were provided as follows:
Sales, vat business, invoice amount P896,000
Sales, non-vat business 200,000
Purchases of goods, vat business, invoice amount 224,000
Purchases of goods for nonvat business, inclusive of input vat 33,600
Purchase of depreciable asset for common use, vatincluded 112,000
Purchases of supplies for common use, vat included _ 2,240
Rental of premises for both types of business. The lessor is 22,400
non-vat registered
REQUIRED: DETERMINE THE VAT PAYABLE FOR THE YEAR
P8-9,
The following data during the month relates to William Company, a VAT
registered person (amounts are vat inclusive, if applicable):
Domestic sales P330,000
Other domestic sales (sales to export traders) 274,996
Export sales 200,000
Purchases of goods for domestic sales 374,000
Purchases of supplies on domestic sales 69,848 ©
Purchase of service 154,000
Purchase of goods for export 55,000
REQUIRED: ;
a) Determine the total input tax
- b) Determine the value added tax payable if excess input taxes on
exports are claimed as tax credit
‘
334
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Chapter e's Vhs Added’ Lage
P8-10. (PUT TAX ON IMPORTATION)

ABC Company imported merchandise for resale. Using the following
information, determine the value added tax on the importation before the
same can be release from customs custody.
CIF (cost, insurance, freight) value: P229,195
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 (vat exclusive) 5,000

a) Vat on importation
b) The value added tax payable assuming the goods were
subsequently sold for P350,000.
P8-11. (/VPUT TAX ON CAPITAL GOODS)

The following data (vat exclusive) are available for the first two (2)
quarters of 2021:
1* Quarter Sales P3,000,000
Purchases other than capital goods 1,200,000
Purchase of machinery on Jan. 1 with - 2,500,000
useful life of 3 yrs.
Unused input yat as of end of 2020 125,000
24 Quarter Sales 4,800,000
: Purchases other than capital goods 3,000,000
The machinery bought on January 1 was
ae sold on June 30.
REQUIRED:
a) Determine the vat payable/excess input tax for the 1 quarter
b) Determine the value added tax Payable/excess input tax for the
second quarter.
/
c) Determine the vat payable/excess input tax for the 1* quarter
assuming the taxable year is 2022 onwards.
d) Determine the value added tax payable/excess input tax for the
second quarter assuming the taxable year is 2022 onwards.
335
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CamScanner
Chapter &-V he Addl’ Lae
P8-12. (TRANSITIONAL INPUT VAT)
An owner of warehouse, which used to be vat avai because its annual
receipts never exceeded the vat threshold, decided to register under the vat
system on January 2, 2024. The following data were from the 1* quarter
ending March 31, 2024:
Rental.from warehousing services, net of vat P336,000
Purchases of supplies in February, gross of vat 112,000
Inventory of supplies, January 1, 2024 100,000
Vat on inventory of supplies, January 1, 2024 10,000
REQUIRED; DETERMINE THE VAT PAYABLE FOR THE QUARTER

ENDING MARCH 31, 2024
P8-13. (PRESUMPTIVE INPUT VAT)
JJ is a vat registered processor of sardines: The following data were provided

for purposes of determining the taxpayer's vat payable:
SALES (processed sardines, exclusive of vat) P800,000
PURCHASES/PAYMENTS: oi L
_ Sardines purchased from fish dealers (invoice arent 200,000
Tomatoes purchased from farmers 85,000
Purchased of olive oil (invoice amount) 67,200 ©
Purchased of can containers (excl. of vat) 25,000
Payments for paper labels (excl. of vat) 12,000
Purchased of cardboard for boxes (inclusive of vat) 8,960! —
Payments for hauling services from non-vat registered 100,000
forwarders
REQUIRED:
a) Determine the presumptive input vat
b) Determine the value added tax payable/excess input tax of y
P8-14. (PRESUMPTIVE INPUT VAT)

JJ is a vat registered processor of fruits. The following data were provided for
purposes of determining the taxpayer's vat payable:
SALES (processed fruits, inclusive of vat) P672,000
PURCHASES/PAYMENTS:
Purchased of fruits from farmers , 200,000
Purchased of raw sugar from millers 60,000
Purchased of bottles (invoice amount) 22,400
Purchased of can containers (excl. of vat) 50,000
Payments for paper labels (incl. of vat) 5,600
Purchased of cardboard for boxes (incl. of vat) 3,360
Payments for hauling services from vat registered . 60,000
forwarders (excl. of vat)
6.2 Me? 836
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Chapter 8 - Vbe Added’ Lage
REQUIRED:
a) . Determine the presu mptive input vat
b) Determine the value added tax payable/excess input tax of JJ
P8-15.
A vat registered hotel offers different services to its guests. The following
data were taken from the books of the taxpayer for the 1% quarter of 2024
(exclusive of tax): ;
Revenues Collections
Hotel rooms . P2,000,000 P1,800,000
Dining Halt: ee
Sale of food and refreshments 2,500,000 2,200,000
Sale of wine, beer and liquor 1,000,000 950,000
Disco:
Sale of food and refreshments 1,600,000 1,600,000
Sale of wine, beer and liquor 1,200,000 1,200,000
Other revenues (rentals, massage, spa) 800,000 700,000
REQUIRED: Determine the correct business tax due for the quarter
P8-16.
Omega Construction Company (vat registered) provided the following data
for the 1% quarter of 2024 (net of vat):
Contract with Bobads Hotel

* Contract Price, 225,000,000
* Collections, P15,000,000
* Construction started in 2020 and finished during the 1* quarter of
the current year
Contract with City Condo

« Contract Price, 220,000,000
«" Collections, P10,000,000
« — Construction was completed in 2023
Contract with Urban Development

* Contract Price, 230,000,000
nero peepee oneness
* Collections, P5,000,000
* Construction will begin in the last quarter of the current year
Payments to suppliers and subcontractors (net of vat):

*_ Payments for the purchase of construction materials from Alpha
Corporation (vat registered supplier), P12,000,000
~~ ye
ty nme rrr
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= Payments for the purchase of construction materials from Bravo,
Incorporated (non-vat registered supplier), 2500,000
» Payments to Charlie Company (subcontractor) for services
rendered, P4,000,000
» Advances to Delta Corporation (subcontractor), P2,000,000
» Operating expenses, P3,000,000
= 10% of purchases from Alpha were returned during the quarter
= Payments made to Charlie Corporation was overstated by
P1,000,000
REQUIRED:
DETERMINE THE VAT PAYABLE FOR THE 157 QUARTER OF THE 2024
P8-17.
A dealer in securities has the following for the year 2024:
Sale of securities held for sale in the course of business P4,000,000
Cos of securities held for sale in the course of business ' 2,500,000
Supplies expense, net of vat 300,000
Rent expense, net of vat .500,000
REQUIRED: DETERMINE THE VAT PAYABLE
P8-18.
Delta is a real estate dealer, sold three (3) lots on November 2023 with the
following terms (net of vat):
Lot A Lot B LotC
Selling Price P250,000 P200,000 P300,000
Cost 150,000 130,000 175,000
Terms:
Down payment, Nov. 5 25,000 50,000 40,000
Due: :
December 5, 2023 - 25,000 20,000 . 20,000
Jan. to Dec. 2024 200,000 130,000 240,000

a. Vat payable - November 2023
b. Vat payable - December 2023
P8-19,
A VAT registered real estate dealer sold a residential lot on September 2023.
The following information was made available on the terms of the sale:
Gross selling price (zonal value, P2,800,000) P3,000,000
~ Initial payments consisting of down payment and 900,000
installments in the year of sale.
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Balance to be paid in equal installments of P700,000 2,100,000
starting January 2024

a. Output Vat - September 2023 -
b, Output Vat - January 2024
P8-20. (HOTEL SERVICES)

Rest With Me Hotel, a UK based Motel and Restaurant, had the following
collections from its customers during the month:
Room charges P1,000,000
Laundry services 25,000
Food and beverages 1,500,000
Corkage a aibesit 15,000
Handling charges for providing telephone, telex, cable 4,500
or fax services
Actual cost of long distance and overseas calls 35,000
collected by the establishment for PLDT
Cake shop sales 80,000
Vat passed on to customers 125,000
Local taxes charged to customers 18,000
REQUIRED: DETERMINE THE OUPUT VAT of the taxpayer
TRUE OR FALSE - Set A
1. Agricultural and marine food products are 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.
2. Polished and/or husked rice, corn grits, raw cane sugar and molasses,
ordinary salt, and copra shall be not considered in their original state,
hence, subject to vat.
3. Sale of flowers, in its original state is exempt from vat.
4. Sale of drugs and medicines of a pharmacy run by the hospital to

outpatients are subject to VAT.
5. Pharmacy items ‘used in the performance of medical procedures in

hospital units such as in the operating and delivery rooms and by other
departments are considered part of medical services rendered by the
hospital, hence, not subject to vat.
6. Agricultural contract growers are subject to vat

ene
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GB
Gross receipts of duly registered credit/multi -purpose cooperatives from

lending activities to non-members are subject to value added tax.
Non-stock, non-profit private organizations which sell exclusively to their

members in the regular conduct or pursuit of commercial or economic
activity are exempt from value added tax.
Government entities engaged in commercial or economic activity are

generally exempt from value added tax. 8
10. The term “goods” for value added tax purposes shall mean all tangible
and intangible objects which are capable of pecuniary estimate and shall
include, but not limited to radio, television, satellite transmission and
cable television time.
11. Export sale by a vat registered entity is exempt from vat.
Export sale by a non-vat registered entity is subject to vat
13. The input taxes attributable to zero-rated sales may be refunded or

credited against any other internal revenue taxes due from the taxpayer.
14. The input taxes attributable to the purchase of capital goods may be
refunded or credited against any other internal revenue taxes due am
the taxpayer.
15. For vat purposes, condominiums, including its alloted parking space, are
classified as other dwellings.
TRUE OR FALSE- Set B

A; Transactions treated as sales due to the absence of actual pal arias are
subject to value added tax.
2. The Output value-added tax is computed by multiplying the gross selling

‘price by 12%, or multiplying the total amount indicated in the invoice by
12/112 if vat inclusive,
An importation of goods by a non-profit charitable organization shall not

. be subject to the value-added tax,
In the case of importation, the importer is.not the one liable for the VAT
but the person who shall buy the inperied goods,
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Input vat for the acquisition of capital goods with aggregate acquisition
cost of not more than P1,000,000 for the year should be allocated based
on the life of the related asset but not to exceed sixty (60) months.
Vat on importation is imposed regardless of whether such importation is

for personal or business use.
Facilitation expense shall be included in the determination of applicable

input vat on importation. 7
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 of two percent (2%) of the gross value in money
of their purchases of primary agricultural products which are used as
inputs to their production
Gross receipts from lease of commercial units are subject to 12% vat
regardless of the place where the property is located.
10. Withholding of vat is done when the buyer is the government or any of its
political subdivisions. :
11. On installment sale by a real estate dealer, the installment VAT is allowed
only if the initial payments on the sale do not-exceed twenty-five percent
(25%) of the gross selling price.
12. Initial payments do not include notes or other evidences of indebtedness

issued by the purchaser to the seller at the time of sale.
13. Services subject to other percentage taxes are also subject to vat.
14. A nonresident foreign lessor or licensor who is not vat registered is

subject to vat.
1BF Persons whose transactions are exempt from value added tax under
Section 109 because their gross sales/and or receipts do not exceed
P3,000,000, as amended, may voluntarily apply for registration under the
- VAT system. ?
MULTIPLE CHOICE.
VAT Exempt Transactions
1, Which of the following shall not be subject to vat? |
|. MP Promotions, vat registered, but gross sales for the year do not
ree on
exceed P3,00,000.
Senn
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Ne Mayweather Corporation, a foreign licensor or nonresident lessor
who is not vat registered
lll. | Mailag Company, a domestic corporation requires to register
under vat system but failed to register -
MP Promotions and Mayweather Corporation

ao oo
MP Promotions and Mailag Company
All of the above
None of the above
2. Alessor of residential units shall be exempt from vat when:

|. Annual gross receipts do not exceed P3,000,000
ll. Monthly rental per unit does not exceed P15,000
a. | only c. Either | and Il
b. Il only d. Both | and Il
3. Alessor of commercial units shall be exempt from vat when:

a. Annual gross receipts do not exceed P3,000,000
b. Monthly rental per unit does not exceed P15,000
a. | only c. Either | and II
b. Il only d. Both | and II
4. Which of the following is subject to vat?

a. Sale of vegetables
. b. Sale of fruits
-c. Sale of copra
d. Sale of olive oil
5. One of the following goods is not in its original state

a. Salted eggs c. Polished or husked rice
b. Corn grits d. Refined brown sugar
6. One of the following is not a poultry for VAT purposes

a. Duck c. Goose
b. Fowl d. Fighting Cock
7. One of the following is not a livestock for VAT purposes

a. Rabbit c. Pig
b. Cow d, Race horse
8. JJ owns:a mango plantation. He sold his ripe mangoes to Paul, a fresh

fruit vendor. Paul sold the ripe mangoes he bought from JJ to Francis.
Who shall be subject to vat? _
a. JJ c. Francis
b. Paul d. None of the above
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9. Arturo owns Fternal Gardens. He harvested fresh flowers and sold them
to Leo. Leo sold the flowers in their original state to Raymund. The sale
_ of flowers by Leo to Raymund shall be:
a. Subject to vat
b. Exempt from vat
c. Exempt or subject to vat at the option of Leo
10. Which of the following is the benefit of a vat registered taxpayer if he is

subject to zero percent (0%) vat rate?
a. Exclusion from tax audit by tax examiner.
b. Not required to file VAT return whether monthly or quarterly.
c.. He does not have any output tax although he may have an input
tax credit which can be claimed for refund.
d. Heis entitled to tax discount equivalent to 20%.
11. Which of the following transactions is subject to value-added-tax?

a. Services subject to other percentage tax.
b. Educational services duly approved by Department of Education,
CHED and TESDA or those operated by the Government.
c. Sale of coal and natural gas.
12. Which of the following shall be exempt from value-added tax?

|. Sales by agricultural cooperatives, duly registered with the
Cooperative Development Authority to their members as well as
sale of their products, whether in it’s original state or processed
form, to non-members
Il. Gross receipts from lending activities by credit or multi-purpose
cooperatives duly registered with the Cooperative Development
Authority
lll. Sales by non-agricultural, non-electric and non-credit
cooperatives duly registered with the Cooperative Development
Authority.
a. | and Il only c. ll and Ill only
b. | only d. |, land tl
13, Which of the following transactions is exempt from value-added-tax?

a. Sale of books, newspaper and magazines.
b. Sale of literary works
c. Sale of musical composition
d. All ofthe above
14. All of the following except one, are subject to Vat

a. Importation of radio and television equipment by broadcasting and
television stations.
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b. _ Lease of cold storage rooms in ice plants and cold storage
c Sale of paintings ,
15. Which of the following transactions is exempt from value-added-tax?

a. Medical services such as dental and veterinary services rendered by .
professionals.
b. Legal services.
C. ~ Services arising from employee-employer relationship.
d. Services rendered by domestic air transport companies.
16. Which of the following is not subject to’ VAT?

a. Importation of goods in the ordinary course of business
b. Importation. of items for personal use
G Franchise grantees of radio broadcasting whose gross receipt for the
preceding year was P9,000,000.
d. VAT-registered person, whose annual gross receipt is less than
P3,000,000.
17. Which af the following is not correct?

a. Non-stock, non-profit private organizations are not subject to vat if
their income from sales is used for non-profit purposes.
b. A vat registered taxpayer can pass on the vat even to non-vat
registered buyers.
Cc. Any business pursued by an individual where the aggregate gross
sales or receipts do not exceed P100,000 during any 12-month
period, shall be considered principally for subsistence or livelihood
and not in the course of trade or business.
18. One of the following is not subject to vat on importation

a. Goods brought into the Philippines in the course of trade or business
by vat registered person.
b. Goods brought into the Philippines not in the course of trade or
business by a person who is not vat registered.
c. Tax free goods imported by tax-exempt importer who transferred
them to a person who does not enjoy exemption from vat on
_ importation.
Goods exempt from customs duties classified. as personal and
household effects belonging to residents of the Philippines returning
_ from abroad.
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Computation of Vat Due
19. Gross selling price includes all of the following, except
a. Total amount which the purchaser pays to the seller.
b, Total amount which the purchaser is abligated to pay to the
seller.
c. Excise tax
d. Value-added tax
20. Villamin Grill, a Vat registered business in Cavite, has the following data
(exclusive of vat) for the third quarter of the current year.
Sales, food and beverages. P2,805,500
Sales, wines and beer , 1,524,000
Purchases, food and beverages — vat business 1,102,200
Purchases, wines and beer— vat business ». 1,012,500
The vat payable due for the third quarter is |
a. P201,340 c. P221,480
b. P211,470 d. P265,780
21. Hananiah Corporation has the following sales and purchases for the
quarter ending December 31, 2023:
October Sales P50,000
Purchases 40,000 -
Nov.& Dec. | Sales 100,000
Purchases 80,000
Carry-over input tax from previous quarter 6,000
-How much is vat payable (carry-over) for the quarter ending
December 31, 2023?
a. P5,000 c. (P2,400)
b. P3,500 . d. (P5,000)
Zero Rated Sales

22..Which of the following statements is correct?
a. Export sale by a vat registered person is subject to 0% vat
b. Export sale by a non-vat. registered person is subject to 3%
percentage tax.

a. Under RA 7916, while an economic zone registered under PEZA is
geographically within the Philippines, it is deemed a separate
customs territory and is. regarded i in law as foreign soil.
b, Sale of services, including provision of basic infrastructure, utilities,
and maintenance, repair and overhaul of equipment, to a Registered
Export Enterprise (REE), to be used directly and exclusively in its
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registered project or activity shall be considered export sale subject to

zero percent (0%) vat.
d. Neither “a”.nor “b”
24. Which among the following is subject to zero percent vat?

a. Sale, importation or lease of passenger or cargo vessel and
aircraft including engine, equipment and spare parts thereof for
domestic or international transport operations.
b. Importation of fuel, goods, and supplies by persons engaged in
international shipping or transport operations.
c. Transport of passengers and cargo by a domestic carrier (air or
sea) from the Philippines to a foreign country.
d. All of these.
25. One of the following is a zero-rated sale under the TRAIN Law
Export sale of a person who is vat registered
~ Sale of nonfood agricultural products
aon 7
Sale of gold to Bangko Sentral ng Pilipinas

Sale of cotton and cotton seeds
26. Under the TRAIN Law, which of the following is nota zero-rated sale?
a. Export sales
b. Foreign currency denominated sales
c. Both “a” and “ee
d. Neither“a” nor “b"
Sale or Lease of Properties

27. In the lease contract, which of the advance payment by the lessee is
subject to output VAT
A loan to the lessor from the lessee
op
Prepaid rental
An option money for the property
an
A security deposit to insure the faithful performance of certain

obligations of the lessee to the lessee to the lessor
28. Which of the following shall be subject to vat?

a. Sale of residential house and lot by the owners for P5,000,000
b. Sale of a private car byitsowner
c. Sale of commercial property by a real estate dealer for P1,500,000
d. Allof the above
29. On January 1, 2023, Pedro purchased a condominium: unit worth

P2,000,000 from Maxima Realty Corporation. The purchased of the
condominium unit is
a. Exempt from vat
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Chapter 3 - Value Added Tage
b. Subject to vat
C. Subject to zero percent (0%) vat
30. On January 1, 2023, Pedro purchased a condominium unit including a

parking space worth P4,200,000 from Maxima Realty Corporation. The
value of the condominium unit, as stated in the contract of sale was
P3,200,000 while the parking space was worth P1,000,000. The
transactions are
Exempt from vat
Subject to vat
aoof
Subject to zero percent (0%) vat’

None of the above
31. Which statement is correct? Leasing of property shall be subject to value

added tax on sale of services:
a. If the property is in the Philippines and the lease agreement was
executed in the Philippines;
b, If the property is in the Philippines and the lease agreement was
executed outside the Philippines;
€ If the property is in the Philippines and the lease agreement was
executed within or outside the Philippines;
d. All of the above
32. Which of the following receipts for 2023 current year from lease of
residential unit is subject to vat?
Monthly rental per unit-P14,000; Aggregate.annual rent-
P3,150,000.
Il. Monthly rental per unit-P18,000; Aggregate annual rent-
P3,800,000.
Monthly rental per unit-P18, 000; Aggregate annual rent-
P3,000,000
IV. | Monthly rental per unit-P20,000; Aggregate annual rent-
P4,000,000.
a. Il and IV only c. All of the above
b. Ill and IV only d. None of the above
Sale of Services
33. Which is true? On sale of service, the tax base in computing for the VAT is"
a. Gross selling price
b, Gross receipts
Cc, Amount per invoice
d. Amount shown in the official receipt
34. In the value-added tax on sale of services, the output tax is computed:
a. On billings of the month
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Ohepter 8 - Value Ali Lae
b. On collections of the month on all billings made

c. On the contract price of contracts completed during the taxable
period
‘d. Only and strictly on labor performed under the contract for
services
‘35. Which of the following statements is false?

a. Construction in progress is not depreciated until the asset is placed in
service. —
b. For purposes of claiming input tax, as a purchase of service, the value
of which shall be determined based on the progress billing.
c. The input tax credit on the labor contracted shall be recognized on
the month the payment was made based on the progress billing.
d. Once:the input tax has already been claimed while the construction is
still in progress, no additional input tax can be claimed upon. °
completion of the asset when it has been reclassified as depreciable
capital asset and depreciated.
36. The following information and data (net of vat) are from the records of
Fantastic 4 Corporation, a vat taxpayer in connection with its construction
contracts for the third quarter of 2023.
= Accounts receivable: July 1-P180,000; Sept. 30-P120,000
» Retention receivable: July 1-P90,000; Sept. 30-P85,000
= Purchases of materials: July to Sept. — P480,000
» Total billings for completed works: July to Sept. — P850, 000
Vat payable for the quarteris
a. P43,000 c. P37,000
b. P51,600 ~ d. P82,500
37. GJ is a contractor. He entered into a contract on September 1, 2023 which

was completed on September 30, 2023. On the same date, he received the
total value of the contract amounting to P5,500,000. Gj spent forthe
materials used in the contract which he acquired from value added
_ registered suppliers costing P1,500,000. All amounts are exclusive of VAT.
The vat payable by GJ for the month of September is
a.P150,000_ , c. P400,000
b, P480,000_ d. P595,000
38. JJ Contractors entered into a construction contract on October 2023 to

build a warehouse for Francis Corporation. The total contract price
amounting to P10,000,000 was received by JJ upon completion of the
project on June 30, 2024. ‘Additional materials were purchased during
construction for P4,000,000 on June 1,’ 2024 and a construction
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Chapter e - Value Added. Tae
equipment worth P3, 000, 000 (net of vat) was purchased on June 10, 2024.
The equipment was estimated to last for six (6) years,
How much is the vat payable of JJ for June 30, 2024?

a. P360,000 c. P684,000
b. P690,000 d. PO»
39. ABC Corporation, a vat registered taxpayer made the following acquisition of
equipment from vat registered suppliers (net of vat) during 2021 and 2022:
DATE PURCHASE PRICE _ USEFUL LIFE (yrs)

2021 | |
Oct. 1 P2,000,000 6
2022 |
April 1 - 1,500,000 1G
The equipment acquired on October 2021 was sold on April 2022. How
- much is the creditable input vat on April 2022?
a. P24,000 c. P216,000
b. P180,000 d. P396,000
Dealer in Securities .
40. A merchant of stock or securities, whether individual, partnership, or

corporation, with an established place of business, regularly engaged in
the purchase of securities and the resale thereof to customers, and who,
as a merchant, buys securities and resells them to customers with a view
to the gains and profits that may be derived there from.
a. Dealer in securities c. Underwriters
b. Stock brokers d. Stock merchants
41. A dealer in securities has the following for the year 2023:
Sales, shares held for sale in the ordinary course _P5,000,000
of trade or business ;
Sales, shares held as capital asset 1,500,000
Cos of shares, held for sale in the ordinary course = —- 2,000,000
of trade or business
Cos of shares, held as capital asset 500,000
Supplies expense, net of vat F 100,000
Rent expense, net of vat _, 200,000
How much iis the vat payable?
a. P470,000 c, P270,000
b, P324,000 _ d. vatexempt
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Ohepte S - Vile Added lage
_ Transactions Deemed Sale

|. Certain transactions which are not actually sale because of the
absence of actual exchange between the buyer and the seller, are
considered sale for vat purposes.
Il. Output vat should be imposed on certain transactions which are
not actually sale to avoid a’ situation where a vat registered
taxpayer avail of input vat ‘credit without being liable for the
corresponding output vat.
a. | only c. Both| and Il
b. Il only d. Neither| nor Il
43. Which statement is correct? The output value added tax on goods or
properties sold:
a. Is based on gross sales and not on net sales
b. Is not imposed on goods exported
c. Is imposed on actual sale only
“ d. Maybe due even in the absence of actual sale
44. Which of the following is not a sale and nese is not subject to the
value-added tax?
a. Transfer, use or consumption not in the ordinary course of business of
goods or properties ordinarily intended for sale or use in the course
_ of business.
b. Distribution or transfer to shareholders or investors of share in the
profits of a VAT-registered person.
c. Distribution or transfer to creditors in payment of debt.
d. Consignment sales.
45. One of the following is a transaction deemed sale under value added tax.
a. Transfer, use or consumption in the course of business of goods or
properties intended for sale or for use in the course of business. '
b. Distribution or transfer to creditors in payment of debt.
c. Consignment of goods if actual sale is not made within forty (40) days
from the date the goods were consigned.
d. Retirement from or cessation of business with respect to beginning
inventories of taxable goods existing as of such retirement or
cessation.
46. “Deemed sak" for VAT purposes includes inventories of taxable goods
existing at the time of:
a. Change of control of a corporation thru the acquisition of the
controlling interest.
b. Change in the trade name or corporate name ofthe business. -
c. Merger or consolidation,
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d. Dissolution of a partnership and the creation of a new
partnership.
47. Choose the correct statement(s) from the following:

a. Anon-vat registered person could not claim the input vat on its
purchases as tax credit against its business taxes.
b. In the books of a vat registered person, the input vat is an asset
account.
c. Purchases on account from vat registered supplier is a source of
creditable input vat. ;
d. Allofthe above
48, Which statement is not correct?

a, The excess input taxes of a taxable month arising from domestic sales
may be carried over to the succeeding month.
b. The excess input taxes of a taxable quarter arising from domestic
~ sales may be carried over to the succeeding quarter.
c. The excess input taxes of a taxable period arising from domestic sales
may be refunded.
d. The excess input taxes of a payable period arising from exports sales
may be refunded.
49. Serbesa.Company is a manufacturer of local beer. During a particular

quarter, it had the following transactions (net of VAT):
Jan. 2 :Consigned beer to a retailer in Quezon City amounting
to P200,006
Feb.14 —: Exported P1,000,000 worth of beer to UK.
Feb.27 —:President of Serbesa Company celebrated his birthday,
consuming P50,000 worth of. beer gwen to him by the
company as a birthday gift.
-Mar.20 — :Declared property dividend of one case of beer for
every 10 shares amounting to P150,000.
Additional Information. From January to March, domestic sales to wholesalers

amounted to:P600,000. No beer was returned by the consignee until the end
of the quarter. The output tax for the quarter is:
a. P48,000 c. P120,000
b. P72,000 d. P192,000
: Vat on Importation
50. Which of the following importation is subject to value added tax?
te _ @ Importation for personal use of the importer
b, Importation intended for resale
c. Importation of machinery for the importers factory
d. Allof the above
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51. Lester, not a vat registered taxpayer, was sent a package of goods by his
friend, Clifford who was abroad. The package was claimed by Lester. The
Bureau of Customs required him to pay vat on importation. Lester refused
to pay the vat claiming that since he is a non-vat registered person and
that the package sent to him is intehded for personal use only, he should
be exempt from paying input vat on importation. Was Lester’s ground in
refusing to pay vat correct?
a. Yes, because only vat registered importers should be subject to
vat.
b. No, because importations, unless exempted, should be subject to
vat.
c. Yes, because the package was intended for personal use, and
therefore, he was not an importer.
d. No, because Lester may actually sell the package, depriving the
BOC to collect the applicable input vat.

|. | An importation of goods by a non-profit charitable organization
shall not be subject to the value added tax.
ll. In the case of importation, the importer is not the one liable for
the VAT but the person who shall buy the imported goods.
Ill. | Non-exempt persons or entities who acquire tax free imported
goods -from exempt persons, entities or agencies shall be’
considered the importer for Philippine VAT purposes.
a. | only SY c. Ill only
53. Which statement is correct? Vat on importation

a. Should be paid by the tax-exempt importer, if he subsequently
sells the goods to a non-tax-exempt purchaser.
b. Should be paid by the non-tax-exempt purchaser to whom the
tax-exempt importer sells it.
‘c. Isa liability shall either of the tax-exempt importer or the non-tax
exempt purchaser.
d. Shall not pay the value added tax because the transaction was
exempt at the point of importation.
54. One of the following is not subject to vat on importation

a. Goods brought into the Philippines in the course of trade or
business by vat registered person.
- b. Goods brought into the Philippines not in the course of trade or
_ business by a person whois not vat registered. ,
c. Tax free goods imported by tax-exempt importer who'transferred
them to a person who does not enjoy exemption from
importation tax.
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d. Goods exempt from customs duties classified as personal and

household effects belonging to residents of the Philippines
returning from abroad.
55. Which of the following is not a proper inclusion for the computation of
VAT on imported items?
a. Custom duties on importation
b, Excise tax on importation
c. Invoice price of the imported items
d. Facilitation expense
Input Vat on Capital Goods
56. Input vat on purchases of capital assets prior to 2022 taxable year shall be
spread (amortized over 60 months or useful lives of the capital assets if
shorter than 60 months) when:
a. Capital assets have been acquired from enterprises registered with
and located at the export processing zones
b. Value of asset, excluding VAT, exceeds P1,000,000
c. Aggregate monthly purchases of capital assets, excluding VAT,
exceeds P1,000,000
d. VAT taxpayer has secured prior approval for him to amortized input
tax on purchases of capital assets.
57. Statement I: The input value-added-tax on purchase of capital goods

prior to 2022 taxable year valued at P1,000,000 shall be spread over 60
- months if the life of property is equivalent to 5 years or more.
Statement2. The input value-added tax on purchase of capital goods
~ prior to 2022 taxable year valued at P1,000,000 shall be spread over the
life of property if the life of property is less than 5 years..
a. Statements 1 and 2 are false -
c. Statement 1 is false but statement 2 is’true
d. Statements 1 and 2 are true’
58. For purposes of claiming input vat on depreciable assets purchased prior
to 2022 taxable year, the aggregate acquisition cost of a depreciable asset
in any calendar month refers to the:
a. Total price agreed upon for one or more assets acquired during
the calendar month.
b, Payments actually made during the calendar month,
c. Total price agreed upon for one asset only acquired during the
calendar month.
d. Initial payments made if purchased on installment plan.
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59. A taxpayer has excess credit as a result of input taxes paid on purchases of
capital goods. He may:
a. Have his excess tax credit refunded to a VAT registered person,
b. Make his application for refund in the subsequent period following
the period during which the purchases were made.
c. Carry-over and apply his excess tax credit against output taxes in the
subsequent period or periods.
d. Use it in payment of any internal revenue tax of a VAT registered
person.
60. If the depreciable capital good purchased prior to 2022 taxable year is
sold or transferred within a period of 5 years or prior to the exhaustion of
the amortizable input tax thereon, the unamortized input tax on the —
capital goods sold or transferred can be:
a. Claimed as input tax credit in its entirety during the month or
quarter when the sale or transfer was made.
b. Amortized over the remaining life of the capital good.
c. Claimed as input tax credit in its entirety or amortized over the
remaining life of the capital good at the option of the taxpayer.
d. Expensed outright in the month or quarter the sale or transfer
,. Was made.
Presumptive Input Vat

61. Persons or firms engaged in the processing of sardines, mackerel and
milk, and in manufacturing refined sugar and cooking oil shall be allowed.
|. . Creditable input tax
ll. Transitional input tax
lll. | Presumptive input tax
IV. Refundable input tax
a. | only c. |, ll and Ill only
b. | and Il only d. |, Il, Ill and IV
62. Which of the following businesses is allowed a presumptive input vat?

a. Manufacturer of canned goods.
b. Manufacturer of packed noodles
c. Manufacturer of packed juices
d. Manufacturer of dried fish
Transitional Input Vat

63. Who may claim transitional input tax as tax credit against output tax?
Processor or manufacturer of cooking oil or refined sugar.
Those whose transaction is subject to zero percent VAT.
ang
VAT taxpayer from being VAT exempt or non- -VAT taxpayer.

‘Those who sell goods or services to persons or entities whose
exemption from tax is provided by special law or by international
agreement to which the Philippines is a signatory.
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64. One of the following shall not be entitled to transitional input tax
a. Taxpayers who become liable to vat for the first time under a new
legislation.
b. Jaxpayers who are already vat registered person and also deal in
goods or property, the sale of which is exempt but becomes vatable
transaction under a new amendatory law.
c. Taxpayers whose taxable transactions exceeded the vat registration
threshold of P3,000,000.
d. Taxpayers who elect to revert to being a vat exempt from being vat
subject.
65. Once optionally registered as a vat person, the taxpayer shall be liable to
output tax and be entitled to input tax credit beginning on the
a. First day of the month following the registration
b. First day of the month following the close of the first quarter after
registration.
c. Tenth day of the month following the close of the first quarter after
registration.
d. Twenty fifth day following the close of the quarter.
Use the following data for the next two (2) questions:
A Vat taxpayer had the following data on its operations for the month of
January:
Sales, total invoice price P592,480
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
From persons subject to percentage taxes ~ 10,000
Salaries of employees 60,000
Other operating expenses 12,000
This is the first month of being liable to the value added tax.. Data on
inventories at the beginning of the period bought from VAT registered
persons follow:
Inventory at cost P44,800
_ Inventory at net realizable value 49,000
Value added tax paid on beginning inventory 4,800
66. Input taxes are |

a. P24,800 c, P19,200
b. P20,400 d. P19,650
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Caper S - Valve Added. Cae
67. The value added tax payable is

a. P43,830. c. P46,680
b. P44,280 . °d, P59,248
68. Statement 1: 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/or services subject to VAT; deduct and withhold a
creditable VAT due at the rate of five percent (5%) of the gross payment
thereof beginning 2021 taxable year.
Statement 2: Beginning 2021 taxable year, the five percent (5%)
withholding vat shall shall be creditable against the output vat of the
seller.
Statements 1 and 2 are false
Statement 1 is true but statement 2 is false
anoo
Statement 1 is false but statement 2 is true

Statements 1 and 2 are ie
69. Empleo Construction Company entre into a ‘contract with the

government to construct an edifice for a total contract price of 25,000,000
in 2023. During December 2021, the government paid P10,000,000 of
which it withheld 5% vat. How much is the output vat of the company on”
the government contract?
a. PO c. P1,800,000
b. P1,200,000 d. P3,000,000
Installment Sales/Deferred Payment

70. Statement 1: On a sale of real property on installments by a real estate
dealer, the seller shall be subject to VAT on the installment payment
received, including interests and penalties for late payment.
Statement 2: On sale of real property on installments by real estate dealer,
where the Vat is computed not on the consideration in the deed of sale
but on the higher fair market value, the Vat must be billed separately with
a specific mention that it is based on the market value of the property.
a. Statements 1 and 2 are false (
a Statement 1: \n the case of sale on deferred payment basis not qualifying

under the installment plan, the transaction shall be treated as cash sale
and the Vat is payable on the month of sale.
Statement 2. \n the case of a sale on deferred payment basis not
qualifying under the installment plan, payments subsequent to the initial
payments shall no longer be subject to vat. '
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b, Statement 1 is true but statement 2 isfalse
Use the following data for the next.two (2) questions:

Ivan, vat registered real estate dealer sold a residential lot on October 2023.
The following information:was made available on the terms of the sale:
Initial payments consisting of down payment afd. m4 900,000
installments in the year of sale.
‘Balance to be paid in equal installments of P700,000 2,100,000
starting January 2024
The zonal value of the resi atial lot was P2,800,000.
72. How much was the output tax due on Odtaber 2023?
a. P360,000 c. P108,000
b. P300,000 . | dP) <=
73. How much was the SuIpubtetax on January 2024?

a. P252,000 c. P108,000
b.. P84,000 : s ve PO
74. Premier Realty Corporations sells real property in the course of its
business. During the last quarter of 2023, it had sold a parcel of land
under the following terms (vat inclusive):
Total contract price ~P1,120,000
Downpayment, 10/05/2023 112,000
1* installment (12/31/2023) 112,000
2" installment (2/1/20224) 560,000
The output vat in the last quarter of 2023 is

a. P12,000 c.. P26,000
-b. P24,000 d. PO
75. Alex is engaged in trade selling real property. During the month of
February, it had the’following data (per sales document, inclusive of vat)
Cash sales ; P560,000
Sales on deferred payment basis (initial payments 336,000:
exceeds 25% of selling price)
The real property sold for cash had a zonal value of P600,000
exclusive of vat and the property sold under deferred payment basis
had a fair market value of P200,000, exclusive of vat. How much is the
output vat on the sale of real property?
a, P84,000 ° c, P108,000
b, P96,000 » | d, P112,320
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Chapter J - Valee Added’ Lage
Mixed Transactions
76. Which of the following is not correct pertaining to the transactions of a

~ business which is engaged in vat and non-vat transactions?
a. Vat invoice shall be issued for vat transactions.
b. Non-Vat invoice shall be issued to non-vat transactions.
c. Separate Vat invoice for the taxable transactions and non-vat
invoice for the Vat exempt transactions.
d. Only one invoice for both Vat.and non-vat transactions shall be
issued.
77. Which of the following statements is wrong? When a purchase from a

VAT-registered person is for use both in the VAT and Non-VAT business of
purchaser, the VAT component of the total amount paid for the purchase:
a. May be debited at the time of purchase to the Input Taxes
account,
b. May be debited at the time of purchase to the Purchases account.
c. Must be allocated immediately and at the time of purchases
between the VAT and Non-VAT business.
d. Must be allocated between the VAT and Non-VAT business at the
end of the taxable period.
Use the following data for the next two (2) questions: .
A VAT-registered person is-engaged in the sale of VAT taxable goods and
at the same time is also engaged in non-VAT business, in the same
business establishment. During the quarter, the taxpayer made sales of
goods in the amount of P336,000 inclusive of vat. The sales of the non-
VAT business amounted to P200,000 with a separate percentage tax of
P6,000 fora total of P206,000. During the same quarter, repairs in the
building amounted to P56,000 inclusive of vat. Supplies purchased for
common use amounted to P11,200 inclusive of vat.
78. The creditable input tax is:

a. P6,000 c. P1,200
b. P5,000 d. P4,320
79. The vat payable is

a. P25,000 c, P31,680
-b. P30,000 d, P34,800
80. Data for a trader with one line of business subject to value added tax and
another line of business not subject to value added tax:
Sales, vat business, vat included P896,000
Sales, non vat business 200,000
Purchases of goods, vat business, vat included 224,000
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Purchases of goods, nonvat business, vat included 33,600
Purchase of depreciable asset, for use in vat and non vat 112,000
business, vat included
Purchases of supplies, for vat and non vat business, vat 2,240
included
Rental of premises, for vat and non vat business, from 22,400
non vat registered person
The value added tax payable shall be:

a. P59,808: c. P82,608
b. 62,208 d. P86,208
The following data during the month relates to William Company, a VAT
registered person:
Domestic sales, invoice amount P330,000
Domestic sales to export traders 274,996
Export sales 200,000
Purchases of goods for domestic sales 374,000
‘Purchases of supplied on domestic sales 69,848
Purchase of service 154,000
Purchase of goods for export. 55,000
81. Total input tax is

a. P20,650 c. P54,350
b. P40,350 d. P69,948
82. Value added tax payable/excess tax if input taxes on exports are claimed
as tax credit
a. (P5,127) c. P19,446
b. P4,350 d. P20,650
83. A VAT-registered person has the following data:

Export sales, total invoice amount P400,000
. Domestic sales, total invoice amount 672,000
Purchase of raw materials, used to manufacture goods for 560,000
export and domestic sales, VAT inclusive
Supplies used. for both export and domestic sales, VAT 448,000
inclusive .
Purchase of equipment used in the manufacture of goods 300,000
for export and domestic sales, VAT exclusive
The amount of input tax which can be refunded or converted into tax credit
certificates at the option of the VAT-registered person is:
a. P50,400 .c, P144,000
b. PS7,600 d, P86,400
ae
aaa
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| Chapter 8 - Value Added. Tie
84. In order that an invoice will qualify as a VAT invoice or receipt for
purposes of claiming tax credit for input tax, it must contain:
l. | The vat registration number.
Il. | The total amount which the purchaser pays or is obligated to pay
the seller with the indication that such amount includes the vat.
a. Only Il » ¢ Both! and Il
b. Neither I’nor Il d. Only |
85. Quarterly VAT return is filed on or before the: lt

a. 15‘ day fromthe end of each quarter,
b. 20° day from the end of each quarter
c. 25" day from the end of each quarter
d. 30" day from the end of each quarter
86. Mr. Juan Dela Cruz, VAT-exempt, issued VAT invoice to Pedro, VAT -
registered trader. As a consequence, Mr. Juan Dela Cruz would:
a. Be liable to VAT without the benefit of input'tax credit;
b. Not be liable to Vat because he is VAT- exempt;
c. Be liable to percentage'tax, VAT, and a surcharge of 50%
d. Not be liable to any business tax but may be liable to income tax.
87. Statement 1: \f the sale involves goods, properties or services some of

which are subject to and. some of which are VAT zero-rated or VAT-
exempt, the invoice or receipt shall clearly indicate the break-down of the
sales price between its taxable, exempt and zero-rated components, and
the calculation of the VAT on each portion of the sale shall be shown on
the invoice or receipt.
Statement 2: The seller has the option to issue separate invoices or

receipts for the taxable, exempt, and zero-rated components of the sale.
a. Statements.1 and 2 are false
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Other Percentage Taxes
Generally, vat is imposed on every sale, barter, or exchange of
goods or services and on importations. However, there are instances
where the same does not apply because the transaction is subject to
Other Percentage Taxes (OPT) under Sections 116 to 127 of the Tax
Code, as amended. As discussed in Chapter 7, a “transaction” that is
subject to vat is no longer subject to percentage tax. Consequently, if the
“transaction” is subject to Percentage tax, it is no longer subject to vat.
Nonetheless, other percentage taxes as well as value aqded tax may be
imposed together with excise tax.
Percentage tax is a tax imposed onsale, barter or exchange of

goods, or sale of services based upon gross sales, value in money of
receipts derived by the manufacturer, producer, or seller measured by
certain percentage of the gross selling price or receipts. The Percentage
taxes are provided in the Tax Code under Sections ue to 127, as
amended.
KINDS OF PERCENTAGE TAXES:

1) Tax on person exempt from value-added tax (Sec. 116);
2) Percentage tax on domestic carriers and keepers of garages (Sec. 117);
3) Percentage tax on international carriers (Sec: 118);
4) Tax on franchises (Sec. 119);
5) Tax.on overseas dispatch, message or conversation originating from
Philippines (Sec. 120);
6) Tax on banks and non-bank financial intermediaries (Sec. 121);
7) Tax on other non-bank financial intermediaries (Sec, 122);
8) Tax on life insurance premiums (Sec..123); .
9) Tax on agents of foreign insurance companies (Sec, 124);
10) Amusement taxes (Sec. 125); x
11) Percentage Tax on POGOs under Sec, 125-A (ew provision)
12) Tax on winnings (Sec. 126); and ,
13) Tax on sale, barter or exchange of shares of stock listed and traded
through the local stock exchange (Sec. 127).
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Chapter 9 - Labia a Tes
- TAX ON PERSONS EXEMPT FROM VALUE-ADDED TAX

Section 116 of the Tax Code, as amended by CREATE Law provides:
Any person whose sales or receipts are exempt under Section 109(1)(CC) of the Tax
Code from the payment of value added tax AND who is not a VAT-registered person
shall pay a tax equivalent to three percent (3%) of his gross quarterly sales or
receipts: Provided, that cooperatives, shall be exempt from the three’ percent (3%)
gross receipts tax herein imposed: Provided, further, that effective July 1 2020
Until June 30, 2023, the rate shall be one percent (1%).
PERSONS LIABLE:
1) Persons, who are not VAT-registered, who sell goods, properties or
services, whose annual gross sales and/or receipts do not exceed
three million pesos (Php3,000,000.00) and are exempt from value-
added tax (VAT) under Section 109(1)(CC) of the National Internal
Revenue Code, as amended by Republic Act (RA) No. 11534
(CREATE Law).
2) Persons who lease residential units where the monthly rental per unit
exceeds fifteen thousand pesos (Php15,000.00) but the aggregate of
such rentals of the lessor during the year’ does not exceed three
million pesos (Php3,000,000.00)
EXEMPT PERSON (CREATE Law; RR 4-2021):

1) Cooperatives |
2) Self-employed individuals and professionals availing of the 8% tax on
gross sales and/or receipts and other non-operating income.
REQUISITES:
To following are the requirements be subjected to Percentage Tax

under this Section of the Tax Code as amended under RA 11534
(CREATE Act):
1) Not VAT registered person
2) The annual gross sales or receipts do not exceed

P3,000,000; and
3) Not exempt from vat under Section 109(1)(A) to 109(1)(BB) of

the Tax Code, as amended.
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Chapter 9 - Percentage Druas
A taxpayer -with annual gross sales and/or receipts not
exceeding the vat threshold is NOT automatically subject to Percentage
Tax under this Section of the Tax Code. If the taxpayer is engaged in any
of the activities or transactions exempt from vat under Sections 109(1)(A)
to 109(1)(BB), as amended by the CREATE Law, s/he is not subject to
percentage tax under this Section, regardless of the amount of gross
sales and/or receipts, such as those engaged in the sale of agricultural or
marine food products in their original state. To be subjected to
percentage tax under this section (Sec. 116), the taxpayer must not also
be subject to other percentage tax under Sections 117 to 127, such as a
domestic common carrier engaged in the transport of passengers by land.
TAX BASE:
Sale of goods : Gross sales
Sale of services : Gross receipts
FORMULA:
Tax base (gross sales or receipts) PXxx
Multiply: Tax Rate:
= — Prior to July 1, 2020 3%
« — From July 1, 2020 to June 30, 2023 (CREATE law) 1%
= Beginning July 1, 2023 (CREATE law) 3%
Percentage tax due PXxx
OPTION TO REGISTER UNDER THE VAT SYSTEM
Persons subject to the above tax shall have the option to apply for
vat registration not later than ten (10) days before the beginning of the
taxable quarter (optional vat registration is discussed in Chapter 7). Any
person under this section who elects to register under the vat system shall
not be allowed to cancel his registration for a period of three (3) years.
** Summary Rules
Annual Gross Sales/Receipts | _ Business Tax
More than P3M | VAT (generally, unless exempt)
P3M and below Generally subject to OPT under Sec.

116. However, if the taxpayer opted to
register under the vat system, it shall be
irrevocable for 3 consecutive years.
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VAT Threshold for Married Individuals
ef, * For purposes of the threshold of R3M, the husband and 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(s), 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. (Sec. 3, RR 16-2011).
ILLUSTRATION 1: Determine the correct business tax of the following:
| 1. Meat dealer with annual gross sales of P2,000,000

= None. Exempt from business tax under Sec. 109(1)(A) regardless of the
amount of gross sales.
2. Dealer of poultry feeds with annual gross sales of P8,000,000

= None. Exempt from business tax under Ses. 109(1)(B) regardless of the
amount of gross Sales.
3. Dealer of specialty feeds with snap gross sales of: (a)P2.5M; (b)P2.5M and vat
registered; (c)P5M
= A: Percentage tax under Sec. 116

« B: Vat because the taxpayer is vat registered and the item sold is not vat
exempt under the Tax Code.
= — C: Vat because the taxpayer's annual gross sales exceeded the vat threshold
and the item sold is not vat exempt under the Tax Code. ;
4. Restaurant operator with annual gross sales of (a)P2.5M; (b)P2.5M and vat
registered; (c)P5M
=» Same answers with #3.
5. Taxi operator
= _ Percentage tax under Sec. 117 (common carier’s tax on domestic common
carrier) regardless of the amaunt of gross receipts. To be subjected to
Percentage tax under Sec. 116, the transaction shall not be subject to
percentage tax under Sec, 117 to 127 and shall not be exempt from vat under
Sec. 109(A) to 109(AA).
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Chapter GY afseceaheay Tasees
6.CPA practitioner whose annual gross receipts amounted to: (a)P2.5M; (6)P2.5M |
and vat registered; (c)P5M_ ° |
. = A: Percentage tax under Sec. 116

| » B: Vat because the taxpayer is vat registered
i | » : Vat because the taxpayer's annual gross receipts exceeded the vat
threshold and the transaction is not vaf exempt under the Tax Code. |
ILLUSTRATION 2.(Corporate Taxpayers):
CASE A
ABC Trading Corporation (non-vat registered) is a trader of electronic products. Data for
the year 2024 were provided as follows:
Gross receipts P1,800,000
Purchases on account from vat suppliers (net). 1,200,000
Payments made to vat suppliers 4 800,000
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 business tax and the amount due for the year?
ANSWER:
« Applicable business tax: 3% OPT onivat exempt sales under Section 116
because:
a) The taxpayer is not vat registered; +
b) The transaction is not a vat-exempt transaction; +
c) The amount of sales is $ P3M; +
d) The transaction is not subject to OPT under Sections 117 to 127
= Amount of business tax due: 254,000 computed as P1.8M x 3%
Question 2: .
What is the applicable business tax and the amount due assuming the taxable year is
2023 (Transition year)? Assume further that the gross receipts for the 1s and 24 haft of
the year were P800,000 and P1,000,000, respectively.
-ANSWER: o
" Applicable business tax:
> January to June 2023; 1% OPT
> Beginning July 1, 2023: 3% OPT
= Amount of business tax due; P38,000 computed as:

Jan,fo June (P800,000 x 1%) P8,000
Input vat (P1M x 3%) __30,000
Total Percentage Tax, 2023 R38,000
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Question 3:
Assuming ABC opted to register under the vat system, what is the applicable business tax
and the amount due for the year?
Answer: P72,000
= — Applicable business tax: 12% VAT (optional vat registration)
= Amount of business tax due: P72,000 vat
Output vat (P1.8M x 12%) P216,000
. Input vat (P1.2M x 12%) (144,000)
Vat Payable ___P72,000_
CASE B
Omega Corporation (non-vat registered entity) is engaged i in trading consumer products.
It generated total sales of P3,200,000 for the taxable year.
Question: What is the applicable business tax and the amount due for the year?
. Answer:
= Applicable business tax: 12% VAT; (gross sales > 3,000,000)
= — Amount of business tax due: P384,000 computed as R3.2M x 12%
NOTE: Although Omega is a non-vat registered entity, it is still liable to 12% vat
because the sales exceeded the vat threshold of R3M. However, as a
consequence of its failure to register under the vat system, it cannot pass to
customers the applicable output vat and is not entitled to input vat credit.
SELF-EMPLOYED/PROFESSIONAL (SEP) under the TRAIN Law
The applicable taxes of a Self-employed and/or Professional is

also extensively discussed in our other textbook, “Income Taxation”.
Self-employed is defined under RA10963 (TRAIN Law) as “a sole
proprietor or an independent contractor who reports income earned from
self-employment. He/she controls who he/she works for, how the work is
done and when it is done. It includes professionals whose income is
derived purely from the practice of profession and not under an employer
— employee relationship”.
Professional is defined under RA10963 (TRAIN Law) as a “person

formally certified by a professional body belonging to a specific profession
by virtue of having completed a required course of studies and/or practice,
whose competence can usually be measured against an established set
of standards. It also refers to a person who engages in some art or sport
for money, as a means of livelihood, rather than as a hobby. It includes
but is not limited to professional entertainers, professional athletes,
directors, producers, insurance agents, insurance adjusters, management
and technical consultants, bookkeeping agents, and other recipients of
professional, promotional and talent fees”.
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SEP is subject both to income tax and business tax as follows:
APPLICABLE TAXES OF SELF-EMPLOYED AND/OR PROFESSIONAL (SEP)
Inéome Tax Business Tax
Graduated 8% Tax Percentage

; Rate (if applicable) Tax
8% Preferential Tax Rate for SEP
Beginning 2018 or upon the effectivity of RA 10963 [Tax Reform

for Acceleration and Inclusion Law (TRAIN Law)], regular income of SEP
amounting to more than P250,000 in a taxable year but with a gross
sales/receipts and other non-operating income not exceeding the revised
vat threshold of P3,000,G00 shall have the option to avail of 8% tax on
gross sales/receipts and other non-operating income in excess of
P250,000 in LIEU of the graduated income tax rate and business tax
under Section 116 of the Tax Code, as amended.
REQUIREMENTS TO AVAIL THE 8% TAX:
The option to be taxed at 8% is available only to SEPs who are:

1) Non-vat registered; :
2) Not engaged in vat exempt-sales/transaction(s);
3) Not subject to other Percentage Taxes other than Section 116 of
the Tax Code, as amended; and
4) The SEP signified in his/her 1% Quarterly Return of his/her
intention to elect the 8% income tax. Unless the SEP signified
his/her intention to avail the 8% tax, s/he shall be considered as
having availed of the graduated rates under Section 24(A) of the
Tax Code, as amended, and such election shall be irrevocable.
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Chapter Hs Romer Tawes
Summary of Taxes applicable to SEP '

1. The gross sales and/or receipts is NOT: more than P3M and the SEP is NOT vat
registered
Income Tax Business Tax

« — In General Graduated rate. Percentage Tax under
Sec. 116 of the Tax Code
« Option to choose 8% Tax 8% Tax None. ;

(if qualified and availed) The 8% tax is in LIEU of the
' graduated income tax rate
and Percentage Tax under
Sec. 116 of the Tax Code,
2. The gross sales and/or receipts is MORE than P3M, and/or the SEP is VAT registered
Income Tax - Business Tax
= In General é Graduated rate 12% value added tax

; (vat) |
NOTE: The option to be taxed at 8% Preferential tax is NOT APPLICABLE Jif the
Gross Sales and/or receipts of the SEP is more than P3,000,000.or is vat
registered.
Ne) PVG WE vee aaastapelege cues
. ( INDIVIDUAL TAXPAYER Bay |

I
| Self-Employed & Professionals (SEP) | pe —— mee me
_Earner
Compensat lion
Income
on
Gross Gross Gross
Sales/Receipts Sales/Recelpts
>P3M ‘Ss Pam > P3M
BP { Subject to
rece - Graduyat
8% Preferential Tax t
COMPUTATION OF 8% TAX
* PURELY SEP: B% of gross sales/receipts and other non-operating Income in excess of (OR after deducting) P250,000.
* MIXED INCOME EARNER: 8% of gross sales/receipts and other non-dperating Income,
ven The 1* P250,000 of gross sales/receipts and other non-operating Income is not deducted fo mised cae arr baie sun at
iON was already applied in computing the tax of income durived from employment,
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ILLUSTRATION 3 - INDIVIDUAL TARP AYERS: Purely SEP:
CASE A:
Pedro is engaged in the following during 2024 taxable year; Trucking business (Gross
receipts-P1,600,000), Lease of apartments (monthly rental is 214,500 per unit, annual
gross receipts P1,200,000), Practice of accountancy, gross receipts P900,000.
Question: What is the applicable business tax of Pedro in 2024?

Answer:
* Applicable business tax. 3% OPT under Section 116 of the Tax Code, as
amended.
NOTE:
If a professional, aside from the practice of his profession, also derives revenue
from other lines of business which are otherwise subject to VAT (trucking
business and practice of profession with aggregate amount of R2.5M), the same
shall be combined for purposes of determining whether the vat threshold of P3M
has been exceeded. The lease of apartment is exempt from business tax, as
discussed in the previous chapter, hence, shall not be included in determining
the threshold (Sec. 3, RR 16-2011).
CASE B:
Pedro is a big time fish dealer. His gross receipts during 2024 taxable year amounted to
P5,000,000.
Question 1: What is the applicable business tax and the amount due that Pedro should
pay for the year?
Answer:
= Applicable business tax: None. Pedro is engaged in a vat exempt sale.
NOTE: Under Section 109(A) of the Tax Code, sale of agricultural and marine
food products in their original state is exempt from vat.(refer also to discussions
in Chapter 8),
Section 116 of the tax code is applicable only to taxpayers who are not subject
to vat because their gross sales or receipts do not exceed the vat threshold of
P3M and the transaction ‘is not, included in the list of vat exempt
salesitransactions under Sec. 409(1)(A) to 109(1)(BB), Since the sale is vat-
exempt under Section 109(1)(A), Pedro is likewise exempt from Percentage Tax
under Section 116, regardless of the amount of gross sales and/or receipts.
Although Pedro is exempt from business tax, he is stil abled to income tax
using the graduated tax rate.
ERETEE
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Question 2:
Assume Pedro is also engaged in leasing-out its delivery trucks to other fish dealers,
Assume further that his total gross receipts from such transaction amounted to
1,500,000, what is the applicable business tax and the amount due for the year 2024?
Answer:
= Applicable business tax: 3% OPT (from lease of delivery trucks only)
under Section 116 of the Tax Code, as amended. His sales as a fish dealer
remains to be exempt from business tax.
‘NOTE:
(a) income from lease of property (real or personal) is not a vat exempt
transaction
(b) Pedro is not a vat registered person
(c) Pedro's gross receipts from leasing is not more than the vat threshold
(d) Pedro is not engaged in a transaction subject to other Percentage Tax other
than Section 116
= Business tax due: P45,000; (P1,500,000 x 3%)
Question 3:
Assume the same data in Question #2 except that Pedro opted to be taxed at 8%. How
much is the amount of business fax that Pedro should pay under Section 116?
= Answer: None
NOTE: The 8% tax is in LIEU of income and business tax under Section
116. The 8% tax is computed as follows:
Gross receipts P1,500,000

Less: (250,000)
Amount subject to 8% tax 1,250,000
Tax rate 8%
8% Tax P100,000
£2 This amount represents two taxes, income tax in lieu of the graduated
income tax table and business tax under Section 116.
Question 4: \
Assume the same data in Question #2 except that Pedro is vat registered, what should be
the applicable business tax and the amount due that he should pay for the year?
= Answer: ;
Applicable business tax: 12% vat (from lease of delivery trucks only)
Business tax due: 180,000 computed as = P1,500,000 x 12%
NOTE: /f the SEP is vat registered, the option to be taxed at 8% is not applicable. As
provided under TRAIN Law, the option to be taxed at 8% is available only to taxpayers
who are (a)non-VAT registered; and (b)liable for 3% percentage tax under Section 116 of
the NIRC. As such, the following shall have no other option than to be taxed using the
graduated rates (for income tax) and Vat or OPT other than Section 116 (for business
tax): (1)VAT-registered taxpayers; and
(2) those liable for OPT under Title V of the NIRC (Sec. 117 to Sec, 127).
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CASE C: ; :
Pedro is a taxi operator. His gross receipts during the taxable year amounted to
P5,000,000.
Question: What is the applicable business tax and the amount due for the year?
Answer:
= Applicable business tax: 3% Common Carrier's Tax under Section 117.
NOTE: As explained in Case B #4, the option to be-taxed at 8% is not applicable to

Pedro as a taxi operator because he is taxable under Section 117 of the Tax Code.
In addition to Section 117, Pedro is also liable to income tax using the graduated tax
rate.
ILLUSTRATION 4 (SEP earning mixed income):

Pedro (non-vat registered) is self-employed involved in trading electronic veal anda
part-time Professor of May Pag-asa College. Data for 2024 taxable year were provided as
follows:
Compensation income - P800,000
Gross sales ‘ 2,800,000
Purchases on account from vat suppliers (net) 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 that Pedro should pay for the
year?
Answer:
= Applicable business tax: 3% OPT ie Section 116
= Amount of business tax due: P84,000 computed as P2,800,000 x 3%.
NOTE: The compensation income is not subject to a business tax.
Question 2:
- Assume the same data in Question #1 except that Pedro opted to be taxed at 8%. How
much is the amount of business tax that Pedro should pay under Section 116?
= Answer: None
NOTE: The 8% tax is in LIEU of income and business tax under Section 116.
This amount represents two taxes, income tax in lieu of the graduated income
tax table and business tax.under Section 116. The R250,000 deduction
presented in Illustration 2, Case B, Question #3 is not applicable to SEP eaming
mixed income. ° }
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ILLUSTRATION 5 (SEP exceeded the vat threshold during the year):
Ana is a non-vat registered CPA practitioner. She indicated her intention to be —

taxed at 8% in her 1st quarterly income tax retum. Her gross receipts in 2024 were as
follows; January to September, P3,000,000; October to December, P1,000,000.
Question 1:
How much should be her total business tax for the year 2024?
~ Answer: P210,000 computed as follows:°
Jan. to Sept.: Percentage Tax under Sec. 116, (P3M x 3%) P90, 000
- Oct. to Dec.: VAT, PIMx 12% 120,000
Total business tax. tie Ege P210,000
Question 2:
When should Ana register under the vat system?. _
Answer: Not later than November 30, 2024 (as provided under RR 13-2018)
NOTE:
> The taxpayer shall be allowed an income tax credit of quarterly payments
initially made under the 8% income tax option.
> Taxpayer is likewise liable for business tax(es), in addition to income tax. A
percentage tax pursuant to Section 116 of the Tax Code, as amended, shall be
imposed on the first P3,000,000.00. The excess of the threshold shall be subject
to VAT.
> Percentage tax due on the P3,000,000.00 shall be collected without penalty, if
timely paidon the due date immediately following the month the threshold was
breached. Pi pet
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Chapter
t Wo de ew 6 , Lawes
Senile) Nas - PERCENTAGE TAX ON DOMESTIC COMMON

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. °
\
Percentage Tax under this Section of the Tax Code is also known
as 3% common carriers tax (CCT), which shall apply to the quarterly
gross receipts of operators of:
Cars for rent (rent-a-car business)
" Cars for hire driven by the lessee
« Transportation contractors including those’ who _ transport
passengers such as tourist buses for hire
= Other domestic carriers by land for transport of passengers; and
« Keepers of garages
TAX RATE AND BASIS: 3% OF GROSS RECEIPTS
Common carriers tax (CCT) under this provision pertains to

percentage taxes of domestic common carriers by land for the transport of
passengers only. However, CCT shall not apply to:
(1) owners of bancas, and
(2) animal drawn two- wheeled vehicles.
Likewise, Republic Act No, 7160 (Local Government Code of

1991) provides that gross receipts of common carriers derived from their
incoming and outgoing freight shall not be subject to the local taxes.
Domestic common carriers by air or sea are subject to vat on their

gross receipts from their transport of passengers, goods or cargoes from
One place in the Philippines to another place in the Philippines (RR 16-
2005). International flights or shipments of domestic carriers by air or sea
rere
Shall either be subject to 0% vat (zero rated) or vat exempt, depending on

whether the entity is vat registered. Zero-rated vat shall apply only to vat
<n
registered domestic carriers while non-vat registered domestic carriers are

eyes
exempt from value added tax (Refer to Chapter 8).

emrm re
ee
.
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Chapter ID - Pe ventage. Ua
TRANSPORTATION NETWORK COMPANIES (TNCs)- RMC 70-2015

TNC or Transportation Network Vehicle System (TNVS) is a pool of land transportation
vehicles whose accessibility to the riding public is facilitated through the use of common point of contact
which may be in the form of text, telephone and/or cellular calls, email, mobile applications or by other
means. The vehicles used in transporting passengers and/or goods. in the TNC may be owned by other
people and/or entities other than the TNC, and shall be referred herein as “Partners”.
Applicable Business Taxes for TNCs and “Partners”

= TNCs/Partners with valid “Certificate of Public Convenience (CPC)" engaged in the transport of
passengers are subject to 3% CCT under Section 117 of the Tax Code.
... ®-» TNCs/Partners without valid CPC are classified as land transportation Conia subject to either
12% VAT or 3% OPT under Sec. 116 of the Tax Code.
TABLE 9-1: Minimum monthly or quarterly gross receipts Per Unit Carrier
Jeepney for hire P2,400
1. Manila and other dies - 1,200 -
2. Provincial
Public Utility bus ;
a. Not exceeding 30 passengers 3,600
b. Exceeding 30 but not exceeding 50 passengers — . 6,000
c. Exceeding 50 passengers 7,200
Taxis —
d. Manila and other cities 3,600
e. - Provincial 2,400
Cars for hire
f. With chauffeur 3,000
g. Without chauffeur 1,800 ‘
Senate Committee Report No. 37 (dated:11 February 2008) suspended the implementation of the revised -
minimum gross receipts under RR No. 9-2007. Consequently, the old minimum gross receipts shown in
the table above shall still apply.
Art. 1732 (NCC) Section 117 of the Tax Code refers to domestic
Common carriers common carriers engaged in the transport of passengers by
are persons, land. Hence, domestic common carriers by land transporting
corporations, firms or
cargoes or goods shall be Subject. to value added tax instead
associations
engaged in the
of the 3% common carrier's tax. However, the 3%
business of carrying percentage tax on vat exempt entities based on Section 116
or transporting shall be applicable if the domestic carrier transporting
passengers or goods cargoes or goods js not vat registered and gross receipts do
or both, by land, not exceed the vat threshold of P3,000,000.. This rule shall
water, or air, for also apply to domestic carriers by air.and sea. The’ 3%
compensation, = common carriers tax under this section (Section 117) shall be
offering their distinguish from the 3% percentage tax on entities or persons
services to the
public.
exempt from vat under Section 116.
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Oly: 9. L2creentage. Tadees
The different applicable business taxes of “domestic” common carriers are

shown in Table 9-2 below:
TABLE 9-2 BUSINESS TAXES OF DOMESTIC COMMON CARRIERS
_Transportof
...-—=«—»-_ Bussiness Tax
4 Passengers ~ Ls 3% CCT (Sec. 117) regardless of gross receipts
A
N , -
D Goods/Cargoes >} VAT or Sec. 116 if GRSP3M* & not vat reg.
ae Passengers ie VAT or Sec. 116 if GRSP3M* & not vat reg.
or
SE Goods/Cargoes [|—>| VAT or Sec. 116 if GRSP3M* & not vat reg.
: .
Int'l flights/shipments of p»| 0% VAT if vat registered, otherwise vat

“domestic” carriers " exempt
NOTE:
* — Vatis imposed on sale of goods or services rendered in the Philippines only. As such, transport of
passengers and goods from international flights of domestic common carriers are not subject to vat.
* — Transport operations of common carriers originating abroad is not subject to business tax in the
Philippines.
ILLUSTRATION 6:
Victory Express i is a domestic common carrier by land engaged mainly in the transport of
passengers in Luzon areas. Due to the increasing demand to 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 2023
are as follows:
Gross receipts — transport of passengers P50,000,000
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: P1,500,000. (P50M x 3%)
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Question 2: What amount should be recognized as output vat?

“+ Answer: P1,800,000. (R15M x 12%).
The gross receipts for the transport of goods or cargoes exceeds the vat threshold
of 23M. However, being a non-vat registered entity, Victory Express cannot pass-on
"fo customers (on transport of goods/cargoes) the applicable output vat and is not '
entitled to input vat credit.
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: P1,545,000 under Section 116 computed as follows:
Common carers tax under Sec. 117; (50Mx 3%) P1,500,000

3% OPT under Sec. 116; (P1.5Mx 3%) 45,000
Total business taxes P1,545,000
ILLUSTRATION
7:
Philippine Air, a vat registered domestic air carrier provided the following data for ile
current taxable year:
Gross receipts— transport of passengers P50,000,000
Gross receipts— transport of goods 10,000,000
Purchases (supplies net of vat)“ 20,000,000
Question 1: How much is the applicable business tax dueassuming the revenues were
derived from its domestic operations?
“> “Answer: P4,800,000 (vat)
Output vat (P50M + 10M) x 12% P7,200,000
Input vat (P20M x 12%) (2,400,000)
_ Vat Payable _ P4,800,000
Question 2: How much is the business tax duel(refundable) assuming the revenues were
derived from its international operations originating in the Philippines.
“+ Answer: Vat refundable of P2,400,000
Output vat (P60M x 0%) i PO
Input vat (P20M x 12%) (2,400,000)
Vat Payable (Refundable) "_(P2,400,000)
Question 3; How much is the business tax due/(refundable) assuming the revenues were
derived from its international operations with the following breakdown; 50% originating in
the Philippines and 50% originating abroad.
“* Answer: Vat refundable of P1,200,000
Output vat (P6OM x 50% x 0%) a)

Input vat (P20M x 50% x 12%) (1,200,000)
Vat Payable (Refundable) (P1,200,000)
_ ED. The revenues on its flights originating abroad is not subject to business tax.
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Question 4: Same assumption in question #2 except that the company is a non-vat

registered entity. How much is the business tax due?
“+ Answer: PO
The company is vat exempt being a non-vat registered entity and the flights pertain
to international flights of “domestic” common carriers.
Seale) at) - PERCENTAGE TAX ON INTERNATIONAL CARRIERS
-(A). Intemational 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) Intemational 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 taxequivalent to three percent Cs ) of their quarterly gross receipts.
Percentage Tax under this Section is also known as Common Carriers

Tax (CCT) on International Carriers.
RA10378 implemented. under RR 15-2013 provides that

international air and shipping carriers shall be subject to common carriers
. tax at 3% based on gross receipts derived from their transport.of goods
from Philippines to other countries. .International carriers shall refer to
foreign international air carriers and international shipping cartiers. doing
business in the Philippines (resident foreign corporations).
“Gross Receipts” shall include, but shall not be limited to, the total
amount of money or its equivalent representing the contract, freight/cargo
fees, mail fees, deposits applied as payments, advance payments and -
other service charges and fees actually or constructively received during
the taxable quarter from cargo and/or mail, originating from the Philippines
in a continuous and uninterrupted flight, irrespective of the place of sale or
issue and the place of payment of the passage documents. In cases
when the Gross Philippines Billings Tax (2.5% income tax based on GPB)
provided for in Section 28(A)(3) of the NIRC, as amended, is not
applicable, the Common Carrier's Tax herein imposed under Section 118
of the NIRC, as amended, shall still apply.
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EXEMPTION FROM VALUE ADDED TAX

International air carriers and international shipping carriers shall
not be subject to 12% value added tax (passengers and cargo) for the
reason that vat is applicable only on sale of goods or services rendered in
the Philippines. ‘International flights or shipments of international carriers
are not considered sale of services rendered in the Philippines.‘
International carriers exempt from VAT under Section 109(1)(E) and (S)
are not allowed to.register for VAT purposes.
Foreign Intemational Carriers without flights/\voyage starting from. or

passing through any point in the Philippines (OFF-LINE CARRIER)
An off-line international carrier having a branch office or a sales

agent in the Philippines which sells passage documents for compensation
or commission to cover off-line flights/voyage of its principal or head
office, or for other airline/sea carrier covering flights/voyage originating
from Philippine ports or off-line flights, is not considered engaged in
business as an international air carrier in the Philippines and is, therefore,
not subject to Gross Philippine Billings Tax nor to the three percent (3%)
common carrier's tax under Section 118(A) of the Tax Code.
Off-line flights or voyages refer to flight or voyage operations

carried out or maintained by an international carrier between ports-or
points outside the territorial jurisdiction of the Philippines, without touching
a port or point situated in the Philippines, except when in distress or due
to force majeure.
ILLUSTRATION 8:
CASE A:
An international air carrier provided the following data for the current year:
Gross receipts — transport of passengers (Philippines to Canada) P42,000,000
Gross receipts — transport of passengers (Canada to Philippines) ° P8,000,000
Gross receipts — transport of goods/cargoes (Philippines to Canada) 6,000,000
Gross receipts — transport of goods/cargoes (Canada to Philippines) 4,000,000
Purchases (supplies net of vat) 7,500,000
‘ Question 1; How much is the applicable business?

“+ Answer: P180,000 (P6M
x 3%)
_ Under the new law (RA10378) as implemented under RR15-2013,
international carriers (resident foreign corporations) are subject to 3%
common carriers tax on gross receipts from transport of goods/cargoes
originating in the Philippines, Prior to ine implementation of RA10378,
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Chapter 9- Le ventage: Uaaes
; intemational carriers are subject to 3% percentage tax on their gross

i receipts from the transport of passengers and goods/cargoes.
Question 2: What is the applicable income tax rate?

‘> Answer: In general, international carriers are subject to 2.5% income tax
based on gross Philippine billings unless “exempt” or subject to a
“preferential income tax rate” on the basis of reciprocity or applicable tax
treaty/international agreement to which the Philippines is a signatory.
Question 3: How much is the income tax due assuming the international carrier is neither
subject to a preferential tax rate nor exemption from income tax?
% Answer. P450,000 -(Pt8M x 2.5%)
Question 4: How much is the income tax due assuming the intemational carrier is subject
to a preferential tax rate of 1.5% on Gross Philippine Billings under an existing tax treaty or
intemational agreement?
“Answer: P270,000 = (P18M x 1.5%)
Question 5: How much is the income tax due assuming the international carrier is exempt
from income tax based on reciprocity?
“+ Answer: PO
Seg tle) ak) - TAX ON FRANCHISES
Any provision of general or special law to the contrary notwithstanding, there shall be
levied, assessed and collected in respect to all franchises on radio and/or television
broadcasting companies whose annual gross receipts of the preceding year does not
exceed Ten million pesos (PhP10,000,000), subject to Section 236 of this Code, a ~
tax of three percent (3%) and on gas and wafer 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
_feferred to in this Section shall have an option to be registered as a value-added
taxpayer and pay the tax due. thereon: Provided, further, That once the option is
exercised, said option shall be irrevocable.
The grantee shall file the return with, and pay the tax due thereon to the
Commissioner or his duly authorized representative, in accordance with the
provisions of Section 128 of this Code, and the return shall be subject to audit by the
Bureau of Internal Revenue, any provision of any existing law to the contrary
notwithstanding.
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Percentage Tax under this Section is also known as Franchise

Tax. A percentage tax of 3% shall be levied, assessed and collected in
respect to all “franchises on radio and/or television broadcasting
companies” whose annual gross receipts’ of the preceding year does not
exceed -P10,000,000. Radio and television broadcasting companies
referred to in this section shall have an option to be registered as a vat
taxpayer, provided, that once the option is exercised, it shall not be
revoked.
A percentage on franchises granted to gas and water utilities at a

rate of two percent (2%) shall be levied, assessed and collected on the
gross receipts derived from the business covered by the law granting the
franchise. Other franchise holders shall be subject to either 12% value
added tax or 3% other percentage tax, as the case may be.
TABLE 9-3 SUMMARY of BUSINESS TAXES FOR FRANCHISE GRANTEES

GRANTOR _ TYPE OF FRANCHISE . BUSINESS TAX
G
.
pete :
Radio/Telev.Broadcasting Co.'s. |
. 3%gpsOPTp40Mor 12% vatif vat reg, g. oror if
for the preceding year**
E =
: Gas and water utilities 2% OPT regardless of gross receipts
M -
5 ae 12% vat OR 3% OPT under Sec.116

t All other types of franchises if NV reg. & GRSP3M
Cg
Private All types of 12% vat OR 3% OPT under

Co’s franchises _ Sec.116 if NV reg. & GRSP3M
**: Radio and television broadcasting companies referred to in’this Section shall have an option to be
registered asz a value-added taxpayer and pay the tax due Heromn, provided, that once the option is
exercised, it shall not be revoked.
FRANCHISE TAX FOR THE NATIONAL GRID CORPORATION ;
RA 9511 imposed a 3% franchise tax on all gross receipts derived by the National Grid
Corpotation from its transmission operation.
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ILLUSTRATION 9:
K.R. TV is a franchise grantee and the leading television broadcasting company in the
country. The gross receipts for the preceding eh current years amounted to P12,000,000
and P11,000,000, respectively.
Question 1: How much is K.R. TV's business tak due?
. &% Answer: P1,320,000 vat; (P11Mx 12%)
Question 2: Assume revenues for the preceding year amounted to P9,000,000 only, |
_ determine K.R. TV's business tax due?
+ Answer: P330,000 OPT; © (P11Mx 3%)
The basis as to whether a radio/television network is subject to vat is the gross receipts
for the preceding year. ’
ILLUSTRATIONS
“> _K.R. TV is a non-vat registered television broadcasting franchise grantee in
2018 whose annual gross receipts for 2018 amounted to P8,000,000. The
company opted to register under the vat system in starting 2018. However,
the entity's gross receipts for the next three years never exceeded the vat
threshold of P10,000,000. Consequently, it decided to revert back to being
a non-vat registered entity in 2021. Gross receipts for 2021 amounted to
P9,000,000. Determine K.R. TV's business tax due in 2021?
“+ Answer: P1,080,000 VAT; (P9M x 12%)
Once radio and/or television broadcasting companies whose gross receipts do not
exceed the vat threshold of P10,000,000 exercised their option to be iene under
such system, their vat registration shall no longer be revoked.
ILLUSTRATION 11:
WATER NATIN is a water utility franchise ee for the past ten (10) years operating in
Quezon City. Its gross receipts derived from the business covered by the franchise
amounted to P10,000,000 while receipts from renting out its facilities amounted to
P5,000,000.
Required: Determine the total business tax due.
“* Answer: P800,000 computed as follows:
OPT on gross receipts covered by the franchise (P10M x 2%) P200,000
_* VAT on receipts not covered by the franchise (P5M x 12%, hoe 600,000
Total Business Taxes Due . P800,000 ~
ILLUSTRATION 12: -
KURYENTE NATIN is a franchise grantee engaged in the distribution of electricity in Metro
Manila. Its gross receipts derived from the business covered by the franchise amounted to
P20,000,000 while receipts from renting out its facilities amounted to P8,000,000.
~ Required: How much is the total business tax due of KURYENTE NATIN?
> Answer: P3,360,000 computed as follows:
Vat on gross receipts covered by the franchise (P20M x 12%) P2,400,000
VAT on gross receipts not covered by the franchiseos 000,000 x 12%) 960,000
Total Business Taxes Due P3, 360,000
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& _ TAX ON OVERSEAS DISPATCH, MESSAGE OR

CONVERSATION ORIGINATING FROM THE PHILIPPINES
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 [Sec. 120(A)].
Percentage Tax under this Section is also known as Overseas

Communication Tax (OCT). A percentage tax of ten percent (10%) 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 on the
amount paid for such services. The tax imposed in this Section shall be
payable by the person paying forthe services rendered and shall be paid
to the person rendering the services.
EXEMPT FROM OCT. ;

The tax imposed on this section SHALL NOT APPLY to [Sec. 12018);
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 an

- embassy and consular offices of a foreign government.
3. International Organizations. Amounts paid for messaged transmitted

- by a public international organization or any of its agencies based in
the Philippines enjoying privileges, exemptions, and immunities which
the Philippine Government is committed to Peodniee pursuant to an
International Agreement.
4. News services. Amounts paid for messages from any newspaper,

press association, radio or television newspaper, broadcasting
- agency, or news ticker service or to: 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 service furnishing a general news service
similar to that of a public press.
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ILLUSTRATION 13:
WITTY Communications provided the following data from its 2024 operations:
Gross receipts— local calls ‘ P50,000,000
Gross receipts — overseas calls : 20,000,000
Purchases (supplies, net) attributed to local calls 10,000,000
Purchases (supplies, net) attributed to both local and overseas calls 10,000,000
"Question 1: How much is the overseas communications tax (OCT)?
“- Answer: P2,000,000 (P20M x 10%)
Guaston 2: What should be the responsibility of Wilty Communication with respect to the
payment of OCT as computed in Question # 1?
“+ Answer: Withheld the amount from its customers (overseas calls) and remit
the same within 20 days after the end of the taxable quarter.
Question 3: What amount should Witty recognized as vat payable?

¢ Answer: P3,942,857 computed as follows:
Output vat (P50M x 12%) P6,000,000
Input Vat
Attributed to local calls (P10M x 12%) (1,200,000)
Attributed to local and overseas calls (857, 143)
(P10M x 12%) x 50M/70M
Vat Payable P3,942,857
Ssegile) ral — TAX ON BANKS AND NON-BANK FINANCIAL

INTERMEDIARIES PERFORMING QUASI-BANKING OPERATIONS
There shall be a collected tax on gross receipts derived from sources within the
Philippines by all banks and non-bank financial intermediaries (performing quasi banking
functions) in accordance with the following schedule:
Kind of Income Tax Rate

a. Interest, commissions and discounts from lending activities and
financial leasing on the basis of remaining maturities of instruments
from which such interests are derived**: 5%
(a) Maturity period is 5 years or less*** 1%
(b) Maturity period is more than 5 years****
b. Dividends and equity shares in net income of subsidiaries 1° 0% ©
c. Royalties, rentals of property, real or personal, profits from exchange 1%
and all other items treated as gross income under Sec. 32 of the Tax
Code
erties oe
d. Net trading gains within the taxable year on foreign currency, debts
;
SECURES, derivative and other similar financial instruments 7%

ercpreenrevn ng mee
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* ***short-term; — ****also known as long-term

* — "Provided, however, that in case the maturity period referred to in paragraph (A) of Sec, 121
is shortened thru pre-termination, then the maturity period shall be reckoned to end as of the
date of pre-termination for purposes of classifying the transaction and: the correct rate of tax
" shall be applied accordingly.
‘» Provided, finally, That the generally accepted accounting principles as may be prescribed by
the Bangko Sentral ng Pilipinas for the bank or non-bank financial intermediary performing
quasi-bahking functions shall likewise be the basis for the calculation of gross receipts. ‘
¢ Nothing in this Code shall preclude the Commissioner from imposing the same. tax herein
provided on persons performing similar banking activities.
Percentage Tax under this Section is also known as Gross Receipts

Tax (GRT). The term “BANK” means every banking institution, as defined
in Sec. 2 of R.A. No. 337, as amended, otherwise known as The General
Banking Act. It refers to persons and entities engaged in the lending of
funds obtained from the public through the receipt of deposits or the sale
_of bonds, securities, or obligations of.any kind, and all entities regularly
conducting such operations. A bank may either be a commercial bank, a
thrift bank, a development bank, a rural bank or a specialized government
bank (RR 8-2008).
NON-BANK FINANCIAL INTERMEDIARY (RR 8-2008)
Means a financial intermediary, as defined in Sec. 2 (D) (c) of R.A.

No. 337, as amended, otherwise known as The General Banking Act,
authorized by the Bangko Sentral ng Pilipinas (BSP) to perform quasi-
banking activities.
FINANCIAL INTERMEDIARIES (RR 8-2008)
Persons or entities whose principal functions include the lending,

investing or placement of funds or evidences of indebtedness or equity .
deposited with them, acquired by them, or otherwise coursed through
them, either for. their own account or for the account ’of others [Sec. 3.2,
RR 8-2008]. _
QUASI BANKING ACTIVITIES (RR 8--2008)
Shall refer to the Berean: of funds from twenty (20) or more

personal or corporate lenders at any one time, through the issuance,
endorsement, or acceptance of debt instruments of any kind other than
deposits for the borrower's own account, or through the issuance of
certificates of assignment or similar instruments, with recourse, or of
repurchase. agreements for the purposes of relending or purchasing
receivables: and other similar obligations. Provided, however, that
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commercial, industrial and other non-financial companies, which borrow

funds through any of these means for the limited purpose of financing their
own needs or the needs of their agents or dealers, shall not be considered
as performing quasi-banking functions.
DETERMINING THE CORREC T AMOUNT OF NET TRADING GAIN
In computing the net trading gain within the taxable year, the
figure to be reported in the percentage tax return shall be the cumulative
total of the net trading gain or loss since the first months of the same
taxable year. Provided, that the net trading loss may only be deducted
from net trading gain, but not from any other items of gross receipt to
arrive at the total monthly gross receipts due (RR 8-2008).
Sean iy} - TAX ON OTHER NON-BANK FINANCIAL

INTERMEDIARIES
‘There shall be collected a tax of 5% on the gross receipts derived by all finance
companies, as well as by other financial intermediaries doing business in the Philippines
from interests, commissions, discounts and all other items treated as gross income under
the fax code.’ Provided, that interest, commissions and discounts from lending activities,
as well as income from financial leasing, shall be taxed on the basis of remaining
maturities of the instruments from which such receipts are derived, in accordance with the
following schedule’:
- Tax Rate
Remaining maturity period in 5 years or less*** 5%
Remaining maturity period is more than 5 years**** “1%
= — **Also known as short-term

* — ****Also known as long-terrm
= Provided, however, that in case the maturity period is shortened thru pre-termination,
then the maturity period shall be reckoned to end as of the date of pre-termination for
purposes of classifying the transaction and the correct rate of tax shall be applied.
accordingly.
* — Provided, finally, that the generally accepted accounting principles as may be prescribed
by the Securities and Exchange Commission for other non-bank financial
intermediaries shall likewise be the basis for the calculation ofgross receipts.
=. Nothing in this Code shall preclude the Commissioner from imposing the same tax herein
provided on persons performing similar financing activities.
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MONEY CHANGERS AND PAWNSHOPS

Other non-bank financial intermediaries, such as money changers
and pawnshops, subject to percentage tax under Sections 121 and 122,
respectively,.of the Tax Code. [Sec. 4.109-1 (B)(w), RR 4-2007]
ILLUSTRATION 14: alot it

CASEA
NoyPi Bank has the following data for January 2023:
Interest income with a remaining maturity of 5 years P120,000 -
Rentals (gross of 5% expanded withholding tax) 80,000
Net trading loss (30,000)
Question 1: How much isthe gross receipts tax for. the month of sanuaye
GRT on interest income (P120,000

x 5%) P6,000
GRT on rental income (P80,000 x 7%) 5,600
Total Business Taxes Due P11,600
Question 2: Assume that NoyPi Bank has the following data for the month of February:
Interest income with a remaining maturity of 7 years P150,000
Rentals (net of 5% expanded withholding tax) 95,000
Net trading gain 50,000
Required: Determine the gross receipts tax for the month of February
«+ Answer: P9,900 computed as follows:
GRT on interest income (P.150,000 x 1%) P1,500

GRT on rental income (P95,000/95% x 7%) 7,000
‘ GRT on Net Trading Gain (P50,000-30,000) x 7% 1,400
Total Business Taxes Due P9,900
CASE B
Pedro, a lending investor, has the following data for Jana 2023:
Interest income from lending activities PS0,000
Rentals (net of 5% creditable withholding tax) ‘20,000 .
Question: How much is the gross receipts tax for the month of January?
“Answer: None. —
A lending investor is subject to vat, not GRT \
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Gross Receipt Tax (GRT) on Lending Investors (RR 16-2005)
Under Section 4.108-3(G) of. RR. 16-2005, Lending investors as
well as dealers in securities are subject to 12% value added tax on the
basis of their gross receipts. “Lending investor’ includes all persons other
than banks, non-bank financial intermediaries, finance companies and
other financial intermediaries not performing quasi-banking functions who
make a practice of lending money for-themselves or others at interest.
Imposition of Gross Receipt Tax (GRT) on Non-Stock Saving and

Loan Associations (NSSLAs)
Under Section 3 of RA 8367, otherwise known as “Revised Non-

Stock Saving and Loan Association (NSSLA) Act of 1997”, NSSLA shall
mean non-stock, non-profit corporation engaged in the business of
accumulating the savings of its members and using such accumulations
for loans to members to service the needs of households by providing
long term financing for home building and development and for personal
finance. They are regulated by the Bangko Sentral ng Pilipinas (BSP) and
are Classified as Non-Bank Financial Intermediaries (NBFls) under the
BSP Manual of Regulations. Under. RMC 9-2016, NSSLAs are classified _
as Other Non-Bank Financial intermediaries not performing quasi-banking
operations, hence, subject to GRT under Section 122 of the Tax Code.
For income taxation purposes, NSSLAs shall be exempt from

income tax with respect to income it receives, including interest on its
deposits with any bank. However, any income derived by it from any of its
properties, real or personal, or any activity conducted for profit, regardless
of the disposition thereof, is subject to the applicable income tax and other
- internal revenue taxes imposed under the Tax Code.
Microfinance NGOs
Republic Act (RA) No.. 10693 (An Act Strengthening Non-

Government Organizations (NGOs) Engaged in Microfinance Operations
for the Poor), otherwise known as the “Microfinance NGOs Act’ was
signed into law on November 3, 2015. The Act is in pursuance to the
policy of the, State to pursue a program of poverty eradication wherein
poor Filipino families shall be encouraged to undertake entrepreneurial
activities to meet their minimum basic needs including income security. To
achieve this policy, the State shall support and work in partnership with
qualified NGOs in promoting financially inclusive and pro-poor financial
and credit policies ‘and mechanisms since the State recognizes the
indispensable role of NGOs in fostering local enterprise development and
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social entrepreneurship, including the provision of microf nance services

to microenterprises (RMO 2-2018).
The following policies and guidelines shall be observed by all concerned

in the implementation of RA No. 10693:
1. Microfinance NGOs with duly issued Certificate of Accreditation

from the Microfinance NGO Regulatory Council (or “Council”) shall
be eligible to avail of the 2% gross receipt tax on income from
microfinance operations in lieu of.all national taxes;
Preferential tax treatment shall be accorded only to NGOs whose

primary purpose is microfinance and only on their. microfinance-
operations catering to the poor and low-income individuals
-in
alignment with the main goal of the Act to alleviate poverty;
Certificate of Accreditation issued by the .Council shall be an

essential requirement for granting the 2% preferential tax
treatment of Microfinance NGOs;
The word “Microfinance” shall be included in the corporate and
trade name of the Microfinance NGO;
The preferential rate of 2% tax based on gross receipts’ from

microfinance operations should only refer to lending activities and
~ insurance commission which are bundled and forming integral part
of the qualified lending activities of the Microfinance NGOs;
All other income by the. Microfinance NGOs which are not

generated from the lending activities and insurance commissions,
shall be subject to all applicable taxes;
Duly registered and accredited Microfinance NGOs, as well as
their clients, shall be required to have a Taxpayer Identification
Number (TIN); .
Microfinance NGOs already registered with the BIR shall update

their registration with the concerned Revenue District Office
(RDO) using BIR Form No. 1905 to ratlest their accreditation as
Microfinarice NGOs;
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9. Every Microfinance NGO shall maintain books of accounts and

other pertinent records and shall be subject to periodic .
examination by revenue enforcement officers of the BIR. In case
Microfinance NGO engages in other businesses, it shall maintain
separate books of accounts for the same;
10. Every Microfinance NGO shall apply for Authority to Print (ATP)
Receipts/Invoices (BIR Form No. 1906). In case Microfinance
NGO engages in other ‘business, it shall apply for ATP for use of
the other business.
11. Microfinance NGOs shall use BIR Form No. 2551M (Monthly
Percentage Tax Return) in filing and paying the 2% preferential
_ tax rate; and
12. Microfinance NGOs shall be constituted as a withholding agent for

the government if they act as an employer and that any of their
employees received compensation income subject to withholding
taxon compensation, or if they make payments to individuals or
corporations subject to withholding taxes at source.
SECTION 123 °= TAXON 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
, ff 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 vanable
contract workers.
‘Cooperative companies or associations' are such as are honcuctéd by the members

thereof with the money collected from among themselves and solely for their own protection
and not for profit.
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The following shall NOT be included in the taxable receipts:

1. Premiums refunded within six (6) months after payment on account of
rejection of risk or returned for other reasons to the insured.
2. ‘Reinsurance premiums where tax has previously been paid.
3. Premiums collected or received by any branch of a domestic
corporation, firm, of association doing business outside the Philippines
on account of ANY LIFE insurance of a‘NON-RESIDENT insured, if
any tax on such premium is imposed by a foreign country where the
branch is established.
4. Premiums collected or received on account of RE-INSURANCE, if the
insured, in case of personal insurance resides outside the Philippines,
if any tax on such premiums is imposed by a foreign country where
the original insurance-has been issued or perfected.
5. Portion of the premiums collected or received by the insurance
companies on variable contracts in excess of the amounts necessary
to insure the lives of the variable contract workers.
SECTION 124- TAX ON AGENTS OF metal ISSA

COMPANIES ie Se SR eas
Every fire, marine or'miscellaneous insurance agent authorized under the Insurance
Code fo procure policies of insurance as he may have previously been legally
authorized to transact on risks located in the Philippines for companies not
~authorized to transact business in the Philippines shall pay a tax equal to twice the
tax imposed in Section 123: Provided, That the provision of this Section shall not
apply to reinsurance: Provided, however, That the provisions of this Section shall not
affect the right of an owner of property to apply for and obtain for himself policies in
foreign companies in cases where said owner does not make use of the services of
any agent, company or corporation residing or doing business in the Philippines. In
all cases where owners of property obtain insurance directly with foreign companies,
it shall be the duty of said owners to reportto 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.
TAX RATES
« Agents of nonresident foreign insurance companies — 4% (twice

the rate of tax imposed on Sec, 123 of the Tax Code)
= Owners of Property who obtain insurance. alrectly from foreign

companies — 5%
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ILLUSTRATION 15:
‘CASE A:
ABC Company, a domestic insurance company gave the following data for the month:
Gross receipts from its i insurance policies

Premium on life insurance | - P2100,000
Premium on non-life insurance : 1,500,000
Gross receipts as agent of a foreign insurance company
Premium on property insurance ss P4,000,000
Premium on other non-life insurance: 1,000,000
Question 1: How much is the premiums tax payable of ABC. Company?

Gross receipts from its insurance policies
~ Premium on life insurance (P2.1M x 2%) P42,000
"Gross receipts as agent of a foreign insurance company
Premium on non-life insurance (P4M x 4%) 160,000
. Premium on property insurance (P1M x 4%) 40,000
Total Premiums Payable sot tes 2 OA ODD
Question 2: How much is the total business taxes of ABC Company?

’ VAT on Premium from its non-life insurance (P1.5M x 12%) P180,0000

OPT (Premiums Tax) on:
Gross receipts from its insurance policies
Premium on life insurance (P2.1M x 2%) 42,000
Gross receipts as agent of aforeign insurance company
Premium on non-life insurance (P4M x 4%) 160,000
Premium on property insurance (P1M x 4%) 40,000
Total Business Taxes - P422,000
CASE B:
Paeng wants to procure fire insurance for His Mansion in Dasmarinas Village from ABC
Insurance Co., a non-resident foreign corporation, through Mr. Jones, its agent in the
Philippines. He paid premiums amounting to P200,000.
- Question 1: How much is the premiums tax payable on the transaction?

“+ Answer: PEDO (P200,000 x 4%)
Question 2: Aaéuing Paeng directly obtained the insurance policy from ABC Insurance
Co., how much is the premiums tax payable on the transaction?
“+ Answer: Pio, 000 200. 000 x 5%)
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SECTION 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, a
and racetracks, a tax equivalent to:
AmusementPlace = ~ OPT Rate

Jai-alia and racetracks 30% ;
Cockpits, cabarets, night or day clubs 18%
Professional basketball games (PD ony 15%
Boxing exhibitions . 10%
Gross receipts embraces all receipts: of the proprietor, lessee or

operator of the amusement place irrespective of whether or not any
amount is charged for admission. It is also inclusive of 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 neceipts
derived by him/it.
“Night and Day Clubs” .as provided in RMC 18-2010 are drinking,
dancing and entertainment venues which oftentimes. serve food and
provide entertainment. “Cabarets”, on the other hand, are restaurants or
clubs where liquor and food are served, with a stage provided for”
performances by musicians, dancers or comedians, including a venue for
dancing by patrons/customers, similar to that of nightclubs. With the
advent of modern interactive entertainment, along with recorded music
(and/or music video) using a microphone and public address system, the
proprietors/lessees. or operators of these amusement places have
pursued a new form of lounge and club entertainment. Most of these
establishments provide facilities to allow patrons to sing with the
expectation that sufficient revenue will be made selling food and drinks to
customers. The “terms” nigh and day clubs and cabarets have become
passe’. Amusement places which offer the same pleasurable diversion
entertainment and function now include videoke bars, karaoke bars,
karaoke televisions, karaoke boxes and music lounges. As such, the
proprietors, lessees, or operators of the aforementioned. establishments
~ are deemed also subject to.18% amusement tax under Section 125 of the
Tax Code, and not to the 12% value added tax (RMG 18-2010), a
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The 15% percentage ‘tax for professional basketball games shall
be in lieu of all other percentage taxes of whatever nature and description.
Boxing exhibitions wherein World: or Oriental _Championships in

any division is at stake shall be exempt from amusement tax provided that
at least one of the contenders is a citizen of Philippines, and said
exhibitions are promoted by citizen(s) of the Philippines or by a
corporation or association at least 60% of the capital is owned by such
-citizen(s).
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
concemed, as well as any party liable, 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.
ILLUSTRATION 16:
CASEA: — s
Apol B is the operator of Golden Apol Coliseum. During the month it had the following
gross receipts from various activities:
Income from the concert of Isang Direksyon : ~ 2,000,000
Professional basketball game ~ . 3,000,000
Ka Emong Super Derby (cockfighting) 5,000,000
Question: ‘How much is the amusement tax payable of Apol B?

+ Answer: P1,350,000 computedas follows: = -
Professional basketball (P3M x 15%) P450,000
Cockfighting (P5Mx 18%) 900,000
- Total amusement tax P1,350,000
= — The income from the concert of Isang Direksyon is subject to vat.
= The tax code providés that a person or entity or association conducting any
activity subject to amusement taxes under Section 125 of the tax code shall
be similarly liable to such taxes.
CASE B:
The much awaited boxing bout between Pac (Filipino champion) and Floyd (American
citizen) finally materialized during the current taxable yéar, The bout was promoted by
Apol B Promotions (75% owned by Filipino citizens). Gross receipts for the featured bout
were as follows:°
Gatereceipis . | P5,000,000
Gross receipts, sale of food and refreshments 1,000,000
Income from live TV coverage 1,500,000
Gross receipts from sale of caps and t-shirts ~ $00,000
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; : (
Question 1: How much is the amusement tax — assuming the bout is for a
Philippine boxing championship belt?
“+ Answer: P800,000 (P8,000 000 x 10%),
Question 2: How much is the amusement tax payable assuming the bout is for the vacant
WBA world boxing championship? !
-¢ Answer: None. The bout is tax exempt
' Question 3: How much is the amusement tax payable assuming the bout is for the vacant
Oriental boxing championship?
«+ Answer: None. The bout is tax exempt .
SECTION 125A— GAMING TAX on et INTIA SS mace pes SA bs

Gaming Licensees (OGLs) 5 sas
This is a new provision in the Tax Code as amended by RA

11590, otherwise known as “An Act Taxing Philippine Offshore Gaming
Operations (POGOs)” amending for the purpose, Sections 22, 25, 27, 28,
106, 108, and adding Néw Sections 125-A and i (G) of the Tax Code of
1997.
Section 125-A of the Tax Code (GAMING TAX), provides:
Any provision of existing laws, rules or regulations to the contrary notwithstanding, the
entire gross gaming revenue (GGR) or receipts or the agreed predetermined
minimum monthly revenue or receipts from gaming, whichever is higher, shall be
levied, assessed, and collected a GAMING TAX equivalent to five percent (5%), IN.
LIEU of all other direct and indirect internal revenue taxes and local taxes, with
respect to gaming income.
Provided, That the gaming tax shall be directly remitted to the Bureau of Internal Revenue
not later than the 20th day following the end of each month: Provided, further, That the
Philippine Amusement and Gaming Corporation or any special economic zone authority
or tourism zone authority or freeport authority may impose regulatory fees on offshore
gaming licensees (OGLs) which shall not cumulatively exceed two percent (2%) of the
gross gaming revenue or receipts derived from gaming operations and similar related
activities of all offshore gaming licensees or a predetermined minimum guaranteed fee,
whichever is higher. ; a,
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¢ INCOME FROM GAMING OPERATIONS

-In LIEU of ALL other direct and indirect internal revenue
taxes and local taxes, there shall be levied, assessed and
collected from OGLs (whether Philippine-based or Foreign-based)
‘a GAMING TAX equivalent to (whichever is higher) between: _
® 5% of Gross Gaming Revenue (GGR)

® 5% of the Agreed Pre-determined minimum monthly revenue
(APMMR) from gaming operations
Income from Gaming Operations refers to income or earnings

realized or derived from operating online games of chance or
‘sporting events via the internet using a network and software or
program.
FORMULA based on RR 20-2021 dated December 1, 2021:

Gross wagers Pxx' |
Less: Payouts Bete (Xxx)
Gross Gaming Revenue (GGR) . Pxx |
? |
Vs. APMMR a PKK
HIGHER amount bet. GGR and APMMR Pxx

Gaming Tax rate © 5%
GAMING TAX i . Be
o Gross Wagers refer-to the total amount of money that offshore gaming
customers. ;
o Payouts refer to the total amount paid out to offshore gaming customers
for winning. .
o Agreed Pre-determined Minimum Monthly Revenue from gaming

| operations refers to the amount that is derived after dividing the minimum
monthly fee or its equivalent, as imposed by a Philippine Offshore Gaming
Operation (POGO) ‘Licensing Authority, by the rate of prescribed
regulatory fee. ’ :
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ets ¢ PAYMENT OF GAMING TAX

The Gaming Tax shall be directly remitted to the BIR not later
than the 20th day following the end of each month. }
¢ INCOME FROM NON-GAMING OPERATIONS
The non-gaming revenues of operations of all OGLs shall

be subject value added tax (vat) or. percentage tax, whichever is
applicable. Income from Non-Gaming Operations refers to any
other income or earnings realized or derived by OGLs that are not
classified as income from gaming operations.,
‘ DEFINITION OF TERMS (Based on RR 20-2021 dated November 26, 2021)
© — Philippine Offshore Gaming Operation (POGO)

> Refers to the operation .by an Offshore Gaming Licensee (OGL) on online
games of chance or sporting events via the internet using a network or
software or program exclusively for offshore customers/players who-are non-
Filipinos.
> The ferm POGO shall also refer OGLs and Accredited Service Providers
' © Offshore Gaming Licensee (OGL)

> Refers to an offshore gaming operator, whether organized in the Philippines
(Philippine-based) or abroad (Offshore or Foreign-based), duly licensed or
authorized through a gaming license issued by a POGO Licensing Authority to
conduct offshore gaming operations including the acceptance of bets from _
offshore customers. ;
OGLs, also known as Interactive Gaming Licensees, shall be considered
Vv
engaged in doing business in the Philippines.
& | POGO Licensing Authority-

> Refers to Philippine Amusement and Gaming Corporation (PAGCOR) or any
“other special economic zone authority, tourism zone authority or freeport
authority authorized by their respective charters to issue gaming licans9s and
accreditation to Peay entities.
396
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Chapter Diss Pereaelge Lapees
SECTION 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 fax shall be ten percent (10%) of the prizes.
The tax herein prescribed shall be deducted from the ‘dividends’ corresponding
fo each winning ticket or the ‘prize’ of each winning. race horse owner and
withhetd 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.
ELVA
Taxpayer Winnings from - Rate ' Basis
Bettor Regular bet 10% | Winning or dividends
. less cost of ticket
Bettor | Double, forecast/quinella 4% _ |. Winning or dividends
and trifecta bets ! less cost of ticket
Horse owners : = + 10% | Gross Winnings _
ILLUSTRATION 17:
Mr. Mananaya had the following records of his winnings from horse races for the month:
: ae
Type of Winnings Gross Winnings _. Cost.of Winnings
» Trifecta P100,000 P50,000
Ordinary 300,000 100,000
Double 50,000 10,000
Ordinary ° - ~~ 79,000 25,000
How much is the business tax on winnings?

** Answer: P28,600
397
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Colapter 9 - Le i Tages
Solution:
Type of Net !
Winnings Winnings OPT rate OPT
Trifecta P50,000 4% P2,000
Ordinary 250,000 ° 10% 25,000
Double 40,000 4% 1,600
Total business taxes on winnings P28,600
SECTION 127 — TAX ON SALE, BARTER OR EXCHANGE OF SHARES

OF STOCK LISTED AND TRADED THROUGH THE LOCAL STOCK
=e is
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 secutities, a tax at the rate of six-
tenths of one percent (6/10 9f.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 theseller or transferor.
The following sellers or transferors of stock are liable to this tax (RR 6-
2008):.
a. Individual taxpayer, whether citizen or alien.
b. ' Corporate taxpayer, whether domestic or foreign.
c. Other taxpayers not falling under (a) and (b) above, such as estate,
trust, trust funds, and pension funds, among others.
The seller shall not be a dealer in securities. Since the basis of the
tax is gross selling price or gross value in money, any gain or loss from
sale or exchange shall therefore be ignored. For this reason, the
‘percentage tax paid herein is also referred to as STOCK TRANSACTION
TAX.
Any gain derived from the sale, barter, exchange or - other disposition
of shares of stock under Sec. 127 shall be exempt from capital gains tax
and from the regular individual or corporate income tax. .
Every stockbroker who effected the sale shall collect the tax and
remit the same to the Bureau of Internal Revenue (BIR) within five (5)
banking days from the date of collection thereof. The said stockbroker is
also required to submit on Mondays of each week to the secretary of the
stock exchange, of which, he/she is a member, a true and complete return
which shall contain a.declaration of all the transacticns’ effected though
him/her during the preceding week and of taxes collected by him/her, and
turned over to the BIR.
398
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Chapter Lg Pemeieate Taes
DEFINITION OF TERMS
Shares of Stock : (
Shall include shares of stock of a corporation, warrants and/or options to
purchase shares of stock; as well as units of participation in a partnership ,
(except. general professional’ partnership), joint stock companies, joint:
accounts, joint ventures taxable as corporation, associations and recreation
or amusement clubs (such as golf, polo or similar clubs), and mutual fund
certificates (RR 6-2008).
boy Stock Exchange

Refers to any domestic organization, association, or group of persons,
whether incorporated or unincorporated, licensed or unlicensed, which
constitutes, maintains, or provides a market place or facilities for bringing
together purchasers and sellers of stocks, and includes the market place
and the market facilities maintained by such exchenge (RR 6-2008).
Shares Listed and Traded through the Local Stock Siahunse

Refers to all sales, trades or transactions of listed Shares of Stock exicited
through the trading system and/or facilities of the Local Stock Exchange.
This term includes block sale or other types of sales, trades or transactions
in the Local Stock Exchange and executed through the trading system
and/or facilities of the Local Stock Exchange in accordance with the rules of
the Local Stock Exchange as approved by the Securities and Exchange
Commission (RR 6-2008).
. Stockbroker
Includes all persons whose business is, for other brokers, to negotiate
purchases or sales of stocks, or engaged in the business of effecting
transactions in securities for the account of others but does not include a
bank or underwriters for one or more investment companies.as defined in
the Investment Company Act. [Sec. 2 (f), RR 6-2008]
:Dealer in securities
Means a merchant of stocks or securities, whether an individual, partnership
or corporation, with an established place of business, regularly engaged in
the purchase of securities and the resale thereof to customers; that is one,
who as merchant buys securities and re-sells them to customers with a view
to the gains and profi ts that may be derived therefrom. [Sec. 2 (b), RR 6-
2008]
¥
f
!
Ee.
399
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Cher Ler 9 - eeelieg: One
Under RR 6-2008, the taxes iniposed under Section 127 shall NOT
APPLY to the following:
1. Dealers in securities
2. Investor in shares of stock in a mutual fund company, as defined
in Section 22 (BB) of the Tax Code, as amended, in connection
with the gains realized by said-investor upon redemption of said
shares of stock in a mutual fund company ; and
3. All other persons, whether natural or juridical, who-are specifically
exempt from national internal revenue taxes under existing
investment incentives and other special laws.
ILLUSTRATION 18:
In 2023, George sold 2,000 shares of a domestic corporation in a local stock exchange at
110 per share. The shares were acquired at P100 per share three years ago.
een: How much is the final income tax (capital gains tax) on the sale of shares?
‘Answer. P0; The transaction is not subject to capital ae tax.
Question2: How much is the income subject to basic or ae tax?

“ Answer: PO; The ASST is exempt from income tax (both CGT and basic income tax)
Question3: How much isbins tax due?

+ Answer: Percentage tax (stock transaction tax)of P1,320
’ SOLUTION:
Selling price (2,000 sh. x Pt 10) P220,000 .
x Percentage tax rate .006
Percentage/Transaction Tax P1,320 :
The transaction is subject to OPT of 6/10 of 1% of gross selling price beginning Jan. 1, 2018
(previously % of 1%), regardless of whether the transaction resulted to a gain or loss.
Question4: Assume George is a dealer of securities, how ‘euch is the applicable business
tax due? .
“+ Answer: P2,400 VAT due computed as follows:
Selling price (2,000 sh.x P110) P220,000

Cost (2,000 sh. x P100) (200,000)
Gross income Jog i to basic income tax) P20,000
xX vat rate 12%
Output Vat (BUSINESS TAX) P2,400
2 As discussed in Chapter 7 and 8, the VAT rate in case of a dealer in securities is based
On gross income, not on gross sales/receipts.
400
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Che ter 9 ~ Pu neta Ta s
EEN PN Wa heey PERCENTAGE TAXES

Section 128(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 ina 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.
Section 128(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, asthe case may be.
401
MTT
Serr
The
+
pa hapler Fi Metehiatf Ta (tes
aati AAtaW ION OF TAX.RETURN

Floyd (self-employed) is a non-vat registered taxpayer: who Operates
convenience store. The following data were provided for 2022 taxable
year: ; , )
' Sale of processed food items P1,800,000

Sale of non-food items 750,000
Purchases - processed food items —_. 925,000
Purchases - nonfood items 360,000
Salaries of helpers 380,000
Compute the correct percentage tax due and prepare the

percentage tax return.
a.. .P25;500. : : c. P216,000

b.. P76,500 _ d. P306,000 |
Answer: A
© The taxpayer is non-vat registered + his gross sales did not exceed the vat
threshold + the transactions are not exempt from vat. Consequently, he is .
subject to 1% OPT under Section 116 of the Tax Code, as amended.
9 OPT 2022 = (P1,800,000 + 750,000) x 1% = P25,500 :
402
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Chapter 9 ~ dasa a Lapees
Republic of the Philippines

Department of Finance
Bureau of Internal Revenve
2551Q) .qvQuaareny Percentage Tax Return, | MPS. all

January 2018 (ENCS)| doxes with an Two copies MUST
be filed with the BIR end one held by the Taxpayer
Page 1 25510 ON/1BENCS Pt
ryForthe = [X] Calendar Fiscal | 3 Quarter _ | 4 Amended Return? 15 Number
of Steet/s
2vearEnded amr | 121 2,0, 2,2] Cd * C1 OC) x C4 Cyes [Xo | M2 [0.0
6 Taxpayer Identification Number (TIN) 1 [TROOCede | 0,4,9
3 's Name (Last Name, FistName, Middle
Name for Individual OR Registered
Name for Non-Inai dual] ;
MAG BAIN UAL VF i LOYD). |MAIN JOU RN GMpAy yy tt
3 d Address nicer sdcbeas Uteanch beikate the branch ethos. I chet is Seed Porn Pe aarect these gp toe ROO % acne | BA Foe Ns
23, MAPS ALY Ay 1 ST) BRGY) |MAPIAIG PIAINIG GAP.) |p pt yy
MAN HCAS OUT) py yp pt yy yy yy | SAZIP
Code | 1,7 1254
flo Contact Number (LandineX: dighone No] 11 Email Address
0, 9,457, 7;8)7,5,3,4,8) | CU @agemail. cyom , ys ppp yy yy

Are ava! Of lax rehef under , ‘i
H2 Special sw or eterasonal Tax Treaty? [] Yes [x] No |12Aityes, specity fisttebicy hep ole Le Pepa oy
H3 Only for individual taxpayers whose sales/ ipts are subject to Pi ge Tax under Section 116 of the Tax Code, as amended:
What income tax rates are you availing? (choose one) }
{To be filled out only on the inibal Graduated income tax rate on net 5 oe
ouarter of the taxable year) GJ taxable income a} 8% income tax rate on gross sales/receipts/others
; Part ll - Total Tax Payable
44 Total Tax Due (From Schedule 1 Item 7) De Po ee eae
Less. Tax Credi/Payment (atlach
45 Creditable Percentage Tax Withheld per BIR Form No. 2307 Lepper vip p10 feqo10
46 Tax Paid in Return Previousty Filed, if this is an Amended Return Pay pi ty 10 FG40 0
: eS e. S
47 Other Tax Credit/Payment (specify)
Vet eae ee ie Pa
48 Total Tax Credits/Pa(Sum of items 15 to 17)
yments
14 Less ‘tem 18) E . ae 1 2)5) 5) 0, Of
49 Tex Still Payable/(Qverpayment) (item
‘Add: Penstties ,
ae Sucene yp e
pep 0
See : fate
et Oe
ae ee : a
23 Total Penalties (Sum of Items 20 to 22) Li bpprtpipies os
of Items 19 and 23) 40,0
24 TOTAL AMOUNT PAYABLE/ Overpayment) (Sum peppy yp dye 99
if overpayment, mark
one box only To be refunded To be tssued a Tax Credit Cerificate
Wie deere under he penmbes of pequry hat Tas rear) wd al fs aiodhynerda, have Beun rade n good bth, veoied Bymelve, nd lo Bre bea olrmpbur Wnowedge and belo, abue and cxred |
purus to he prodsone of the National Internal Revanws Code, es amended, and the mguiatons eoued under athorty therack Further, | give my consent to the processing of my infumeton as
_contarnglaied under the Data Prvacy Act of 2012 (RA No. 10173) for legtmmate and lawl purposes Lt Astorized Reprosentetve,
sentetve attach mshorzaton
muthon zat bBey 0
For indwiduat For Non-Individual
FLOYD M. MAGBANUA
Signature over Oicet
Printed Name of PreskienlV ceAgere
ox ReprsentaneTax President!
mamagics Ua pentane es
Ss
peer oh her glpren i our
aera
Authonzed
ere Part ill — Details of Payment

Particulars ne Number Date (MM/DONYYY) Amount
J2SCastBankDedtemo} ) yy) | yy pp tt tay ta tira tpt tt tt el
26 Check PRB od col PVN ey ar Wee ad Vy (Od ne Ed Pe esas Beh Pca es el ra
27 Tex Debit Memo z eye Pep dee eee ea
[28 Others (Specty beiow a
! Pye ee ee ae pipet
Dae Disko (7 rod Wiad Wh an Aucricecd Aged Bard eee RISE oni bole of cael
NOTE: Please read the BIR Data Privacy Policy found in the BIR website (www ber gov ph)
403
arr
Ree
The
Ohepter 9 - reeks Le kes
2561 Q!| quarterly Percentage Tax Return |
2 9,4,2,3)6 0,0,0 M,A,G) BAN ,ULA
a Taxable Amount. 0).

a]P,7,0,1,0
~P27P,T 041 3,7,5,0,0
FY
4
§
6
7 Total Tax Due Suma fens 4 to Gi7o Part i Rem 14
mterest, Commnssions and activites as 25 income
ae 404
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Paya eh Ce
PROBLEMS
P9-1. ;
Determine the appropriate business tax ofeach of the following types of
transaction/business described below. If the transaction/business is
subject to: | :
» 12% vat, write, "V”

« - Percentage Tax, write “PT”
« Exempt from business tax, write “E” ‘
TRANSACTION/BUSINESS
Sale of cotton.
fs
Importation of fertilizers.
Trader of fresh fruits whose gross receipts exceeds P3,000,000.
Ta
Trader of goods whose gross receipts exceeds P3,000,000.

OP: Si
A seller of service whose gross receipts exceeds P3,000,000.

A practicing Certified Public Accountant whose gross receipts
during the year amounted to P3,800,000.
Domestic common carriers transporting passengers by land.
Gross receipts for the year amounted to P2,800,000.
A. ee
PTTL
Domestic common carriers transporting passengers by land.

i, as;
Gross receipts for the year amounted to P4,000,000.

Domestic common carriers transporting goods or cargoes. Gross
receipts for the year amounted to P2,600,000.
. Domestic common carriers (vat registered) transporting goods or
cargoes. Gross receipts for the year amounted to P2,250,000.
. Domestic common carriers transporting goods or cargos. Gross
receipts for the year amounted to P6,000,000.
. Lhazadha, an online shopping company.
DWN
. Dormitories
om nn
. Legal fees ©
MET TA
. Review schools for government licensure examinations.

a2
=OOAOANDNA
. International air carriers on their transport of passengers.

|= |= a
. International air carriers on their transport of goods.

. International carriers transporting passengers and goods.
. Nonresident foreign licensors. '
NM Ph oS
. Night clubs
. Aradio television broadcasting franchisee. Gross receipts for the
preceding year amounted to P12,000,000.
. A vat registered radio television broadcasting franchisee. Gross
Nh
Nh
receipts for the preceding year amounted to P8,000,000,

.A telephone franchise grantee offering local and overseas
ho
w
405
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The
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Chapter 9 _ ee Capes
communication services. Gross receipts for the year amounted to
| BS
Nh
_A
P25,000,000.
telephone franchise grantee
communication services: ' Gross receipts
operations amounted only to P2,500,000.
offering local and overseas
for its first year of
. Philippine commercial banks.

OO
NN
Lending/Financing companies.
. Interest income derived by a credit cooperative from its lending
~J
nN
activities to non-members.
. Sale of low-cost housing by vat registered real estate companies.
. Lease of commercial spaces.
SGSVSARSRSESSS
. Pilipinas Basketbol Association, a professional basketball league.

. Operator of Jai Alai.
LEE
. Saint Claire Dormitory

. The Pear Hotel
. New wave resort
. Vat registered exporter.
WWW
. Hog dealers
. MERALCO
. Non-vat registered exporter.
BWW
. Gasoline stations
. Sale of wines by a dealer.
P9-2. (Purely Self Employed; Transition Year)

Ana, a self-employed resident citizen provided the following data for the
1° quarter of 2023 taxable year:
Sales P1,275,000
Cost of sales 625,000
Business Expenses 350,000
Royalty from books 40,000
Gain on direct sale to buyer of shares of stock of a
domestic corporation held as capital asset 70,000
Loss on sale of land in the Philippines held as
capital asset with cost of 21,500,000 when the
zonal value is 21,200,000 500,000
REQUIRED: |
1. Determine the total business tax due and payable for the first
_ quarter.
quarter, if applicable, assuming Ana opted to be taxed at 8%.
3. Assume the amounts provided is for the 3"? quarter of 2023,
determine the. business tax due and payable for the gi
quarter.
406
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Okepter 9 — La
Ss Tages
p9-3. (Purely Self-employed)

Pedro is a CPA practitioner. His gross receipts, expenses and other data
for 2024 taxable year are provided below:
Gross receipts R1,800,000
Cost of direct services .* 1,075,000
Operating expenses 425,000
Rental income (net) _ 570,000
Dividend income from a closely held domestic 50,000
corporation
Interest income from peso bank deposit 80,000
Interest income from FCDS deposit — is 20,000
REQUIRED:
1. Determine the total hneineae tax due and payable for 2024
assuming Pedro is non-vat registered.
2. Determine the total business tax due and payable for 2024
assuming Pedro opted to be taxed at 8%.
3. Determine the total business tax due and payable for 2024
assuming Pedro is vat registered.
P9-4. (Mixed Income Earner)

Ana (resident citizen), earning compensation income™ and from self-
employment, provided the following data for the 1% quarter of 2024
taxable year:
Compensation income P780,000
Sales 1,275,000
: Cost of sales 625,000
Business Expenses 350,000
Royalty from books 40,000
Gain on direct sale to buyer of shares of stock of a
domestic corporation held as capital asset 70,000
Loss on sale of land in the Philippines held as capital
asset with cost of 21,500,000 when the zonal value is
P1,200,000 500,000
REQUIRED:
. quarter.
Q)- Determine the total business ae due and payable for the first
quarter, if applicable, assuming Ana opted to be taxed at 8%.
407
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Chapter 9 — eae Cases
P9-5.
Star Bus Company (a domestic common carrier) has the following’ data for
the first quarter of the current year:
Gross receipts, passenger operations P8,000,000
Gross revenue from cargo operations 5,000,000
Expenses, passenger operations 4,750,000 :
Expenses, cargo operations 2,500,000
Gross receipts-rental of facilities — 2,000,000
25% of its gross revenue from cargo operations were still
outstanding as of the end of the quarter.
REQUIRED: Determine the total business tax due for the first
quarter.
P9-6.
Fast Track Company, a domestic common carrier engaged in the
transport of goods and cargoes provided the following data for 2024
taxable year:
Gross receipts, 2024 P2,400,000
Receivables, January 1, 2024 500,000
Receivables, December 31, 2024 600,000
Operating expenses 1,250,000

1. The business tax due of Fast Track assuming the company is: a
non-vat registered entity.
2. The business tax due of Fast Track assuming the company is a
vat registered entity.
P9-7.
Fly Away Air Lines (a resident intefratioral carrier) has the following data
for the current year:
Gross receipts, Philippines (passenger operations) P10,000,000
Gross receipts, Philippines (cargo operations) 6,000,000.
Gross receipts, Japan (passenger operations) 8,000,000
Gross receipts, Japan (cargo operations) | 5,000,000
Expenses, Philippines (passenger operations) 4,000,000
Expenses, Philippines (cargo operations) 2,000,000
Expenses, Japan (passenger operations) 4,500,000
Expenses, Japan (cargo operations) 1,250,000
408
| i il
The
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Chapter 9 ie eee Tagees

1. The income tax due for the year.
2. The income tax due assuming the company is subject to a
preferential income tax rate of 2% under an existing international
agreement or treaty.
3. The business tax due for the year.
P9-8.
Determine the applicable business tax due of the following:
1. Juan invested 10,000 shares for P400,000 in the shares of stock
of Panatag Corporation, a closely-held corporation. During the
year, Juan sold 50% of his shares to Pedro for P50 per share.
2. Mark invested 5,000 shares for P250,000 in the shares of stock of
Amscor Corporation, a closely-held corporation. During the year,
Mark sold all his shares to Villar for P35 per share.
3. Assume the same data in #1 except that Juan is a registered
dealer of securities.
4. George is a shareholder of GJ Corporation, a listed entity. During
2021, he sold his 5,000 shareholdings for P120,000 which he
purchased for P20 per share.
5. Assume the same data in the preceding number except that
George sold the shares for P18 per share.
P9-10. !
Mr. Talion operates a cockpit. Results of operations in 2024 were
provided as follows:
Gross receipts:
~ Cockpit operations P4,000,000
Restaurant operations 1,850,000
Purchases:
Supplies for cockpit Seeistions (ret of vat) i ES 750,000
Supplies for restaurant operations (invoice amount) ‘ 224,000
©
Required: Determine the following:

1. Total business tax due of Mr. Talion
2. Amusement tax due of Mr. Talion assuming the restaurant is
operated by.GJ Company, a non-vat registered entity whose
annual gross receipts is lower than the vat threshold.
3. Using the assumption in the preceding number, how much is
the business tax due of GJ Company
4. Assuming GJ is a’vat-registered entity, how much is its vat
payable for the year?
409
hi ;
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Olepter an i aieatiaage Cages
P9-11.
Prosperous Bank has the following data for the first half of 2023:
1 Quarter 2 Quarter
Interest and commission income from lending 4,000,000 2,800,000
activities with maturity of 3 years
Interest and commission income from lending — 3,500,000 3,300,000
Interest and commission income from lending 6,000,000 7,200,000
Other income from rentals of facilities and 775,000 825,000
other assets
Income from financial leasing (remaining. 1,200,000 950,000
maturity is more than 5 yrs)
Dividends and equity shares in net income of 500,000 400,000
subsidiaries
Net trading gain (loss) (150,000) 325,000
Required: Determine the following: —

1. Gross receipts tax for the 1st quarter of 2023
2. Gross receipts tax for the 2nd quarter of 2023
TRUE OR FALSE
1. Persons not Subject to vat are likewise exempt from other percentage
tax.
2. Persons subject to Percentage tax on vat exempt sales or receipts
under Sec. 116 shall have the option to register under the vat system
which shall not be revoked for a period of three (3) years.
3. Domestic common carriers by air or sea are subject to vat on their
gross receipts from their transport of passengers, goods or cargoes
from one place in the Philippines to another place in the Philippines.
4. International flights or shipments of domestic carriers by air or sea
shall either be subject to 0% vat, vat exempt, or 3% common carrier's
. tax depending on whether or not the entity is vat registered.
5. The gross receipts of domestic common carriers derived from their
incoming and outgoing freight shall be subject to the local taxes
_ imposed under the Local Government Tax Code.
6. The 3% common carrier's tax for domestic common carriers is based
on the actual quarterly gross receipts or minimum quarterly receipt
whichever is lower.
7. International: air and shipping carriers, shall be subject to 3%
percentage tax based on gross receipts derived from Philippines
sources.
410
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Chapter ¥ = ore Tages
8. International air carriers and international shipping carriers shall not

be subject to 12% value added tax (passengers and cargo) for the
reason that vat is applicable only on sale of goods or services
rendered in the Philippines.
International flights. or shipments of international carriers are not
considered sale of services rendered in the Philippines.
10. International carriers are exempt from vat under the tax’ code.
However, they have the option to register, under the vat system which
shall be irrevocable for a period of three (3) years.
11. The 3% percentage tax for international carriers is in addition to
income tax.
12. Reciprocity may be invoked by an international carrier as basis for
exemption from 3% common carrier's tax.
13. A franchise is a privilege to serve the public acquired by special grants
from private organizations.
14. There are franchise holders whose gross receipts are subject to 12%
vat even if not vat registered.
15. Radio and television broadcasting companies shall have an option to
be registered as vat taxpayers, provided, that once the option is
exercised, it shall not be revoked.
16. Percentage tax on overseas dispatch, message or conversation
_ originating from the Philippines shall be payable by the person paying
for the services rendered and shall be paid to the person rendering the
services.
17. A domestic telephone company is required to collect and pay the
applicable overseas communication tax within twenty (30) days after
the end of each quarter.
18. For purposes of computing the gross receipts tax, the net trading loss
shall be deducted from other gross receipts regardless of source.
19. In computing the net trading gain within the taxable year for gross
receipts tax, the figure to be reported in the monthly percentage tax
return shall be the cumulative total of the net trading gain or loss since
the first months of the same-taxable year.
20. Non-life reinsurance premiums shall not be subject to vat.
21. Like value-added tax, percentage taxes are paid on a quarterly
(cumulative) basis.
22; Generally, every person liable to pay the percentage taxes shall file a
quarterly return within 25 days after the end of each taxable quarter.
23. Large taxpayers shall file a consolidated return and pay the tax
accordingly. ,
24. Large taxpayers are classified based on'tax payments and as to
financial condition
25. All boxing exhibitions held in the Philippines shall be subject to
amusement tax. |
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‘ Principles
‘41. Percentage tax is
|. A business tax.
ll. Atransfer tax. .
ill. Ad valorem tax.
IV. Progressive tax.
a. | and Ill only c. |, Ill and IV only
b. |, ll and Ill only prdeih.t, (UI and IV
2. The percentage tax is

a. Ataxonasale of services
b. .lmposed on sale of goods
c. May be imposed together with the excise tax
d. All of the above
3.. Statement 1: Other percentage taxes (OPT) are indirect taxes that can
_ be passed on by person required to pay to another person who shall
bear the burden of the tax.
Statement 2: Persons and transactions that are subject to the other
percentage taxes are no longer subject to the value-added tax but
may be subject to excise tax.
d. Statements 1 and 2 are true >
4. Which statement is wrong?

‘a. The percentage taxes are basically on sales of services.
b. The percentage taxes are paid on a monthly or quarterly basis.
c. The percentage taxes are not allowed by law to be shifted to the
customers or clients. |
d. Anisolated transaction not in the course of business will not result
in a liability for a percentage tax
~ Section 116— Vat Exempt

5. Which of the following is subject to percentage tax under Section 116
‘ ' of the Tax Code as amended under TRAIN Law?
|, Fruit dealer whose gross receipts for the year amounted to
P2,500,000 only.
ll. | An individual taxpayer whose gross sales for the year
amounted
to P100,000.
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lll. | School bus operator whose gross receipts for the year
amounted to P3,000,000.
b. | and Ill only d.. None of the above
6. Binay, non-vat-registered, has the following data in 2024:

Sale of fresh fruits P500,000
Sale of fresh vegetables 500,000
Sale of dried fish 500,000
Sale of refined sugar 500,000
Sale of cooking oil =; ~ 500,000
Only 50% of the above sales were collected.

How much is the VAT or percentage tax for the year?
a. P75,000 c. P10,000
b. P45,000 d. 30,000
7. JJ, non-vat registered taxpayer, operates a convenience store from

which the gross receipts from sales, and payments on purchases from
VAT registered suppliers during the 2° quarter of 2023 were as
follows (net of taxes):
Sales of processed food items. P280,000
Sales of non — food items : 220,000
Purchases of processed food items 100,000
Purchases of non-food items: |- 80,000
Salaries of helpers 48,000
The percentage tax due is

a. P5,000 c. P50,000
b. P15,000 d. P27,200
In the second quarter of 2024, a non-vat registered taxpayer engaged
in the sale of services and whose annual gross receipts do not exceed
the vat threshold has the following data:
Accounts receivable, beginning of quarter P50,000
Sales during the quarter ‘400,000
Accounts receivable, end of quarter 75,000
Purchase of supplies, total invoice amount ‘ ° 11,200
8. The percentage tax due for the quarter is:

a. P750 c. P1,914
b. P2,250 d. P2,664
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9. Assume the taxpayer is VAT-registered, the VAT payable for the

quarter is:
a. P2,250 c. P7,656
'b. P9,000 d, P7;800
10. Pedro owns/operates the following businesses:

Annual Gross Annual
Receipts Gross Sales
Restaurant P1,350,000 1,000,000
Barbershop 625,000 600,000
Distribution/sale
of marine food 1,875,000 2,000,000
products in their original state
Purchases of goods from VAT suppliers totaled R1,200,000 (related to ©

VAT business if applicable).
How much is the VAT payable or. percentage tax for the year?
a. 93,000 ~. ¢. P318,000
b. 48,000 d. P108,000
Section 117 — Domestic Common Carriers

11. This refers to persons, corporations, firms or associations engaged in
the business of carrying of transporting passengers or goods or both,
by land, water, and air, for compensation, offering their services to the
public and shall include transportation contractors.
a. Common carriers
b. Dealers in securities
c. Lendinginvestors .
d. Franchise grantees
12. A person whose business is to keep automobiles for hire or keep them
stored for use or order,
a. Keepers of garage
b. Common carrier
c. Taxicab operator
d. Tourist bus operator
13.A keeper of garage whose gross receipts’ for the year exceeds
P3,000,000 is subject to:
a. Value-added tax
b. Garage sales tax
c. Common carrier's tax
d. Franchise tax.
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1 Which of the following is subject to the 3% common carrier's tax?
a. Transportation contractors .on ne transport of goods or
cargoes.
b. Common carriers by air and sea relative to their transport of
passengers
c. Owners of animal-drawn two-wheeled vehicle.
d. Domestic carriers by land for the transport of passengers.
15. One of the following statements is wrong. Operators of transport |

facilities by land are:
a. Subject to the value-added tax on gross receipts from
" transporting passengers
b. Subject to the value-added tax on gross receipts from
transporting goods and cargoes:
c. Subject to percentage tax on gross receipts from transporting
passengers. .
d. Subject to the value-added tax on gross receipts from renting
out its transportation facilities.
16. Operators of transport facilities by land are:

_ |. Subject to the value-added tax on. gross — from
transporting passengers.
ll. Subject to the value-added tax on gross receipts from
transporting goods and cargoes.
lll. | Subject to percentage tax on gross receipts from transporting
passengers.
IV. Subject to the value-added tax on gross receipts from renting
out its transportation facilities.
a. | and Il only c. |, Ill and IV only
b. Il, Ill and IV only d. |, Il, Illand IV
Use the following data for the next:two (2) questions

A domestic transportation contractor by land is engaged in the transport of
passengers, goods and cargoes.
_ 17. \f the transportation contractor is not vat registered, what business
taxes is he liable?
a. 12% value-added tax.
b. 3% common carrier's tax,
c. 3% tax on VAT-exempt persons on gross receipts from
transport of goods and cargoes and 3% common carrier's tax
on gross receipts from transport of passengers.
d. 12% VAT on gross receipts from transport of goods and
cargoes and 3% common carrier's tax on gross receipts from
transport of passengers.
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18. If the transportation contractor is vat-registered, what business taxes

is he liable?
a 12% value-added tax;
b. 3% common carrier's tax;
c. 3% tax on VAT-exempt persons on gross receipts from
transport of goods and cargoes and 3% common carrier's tax
on gross receipts from transport of passengers.
d. 12% VAT on gross receipts from transport of goods and
cargoes and 3% common carrier’s tax on gross receipt from
transport of passengers.
19. Supercat is a common carrier by sea. During the second quarter of

2023, its gross receipts (exclusive of taxes) were as follows:
Transport of passengers — P2,000,000
Transport of goods * 3,000,000
Transport of cargoes 1,500,000
The output VAT and.OPT due for the quarter should be:
Output Vat OPT Due
a. P780,000 ~P195,000
b. P780,000 ‘PO
G: P540,000 P60,000
d. P540,000 PO
Use the following data for the next two (2) questions -
Isarog is a common. carrier with passenger buses and cargo trucks. For
the month of June 2023, it had the following data on gross revenues and
receipts (exclusive of taxes):
For transporting passengers (receipts) P660,000
For transporting cargoes (revenues). 440,000
Actual receipts amounted only to P400,000.
For renting out to the MMDA its towing trucks (receipts) 100,000
P20,000 represents revenue from the. first quarter
and the balance of P80,000 represents receipts
from income earned in June.
20. The percentage tax is:

a. P34,800 c. P3,000
b. P19,800 - d. P31,800
21. The output vat is: -
a. P48,000 c. P50,000
b. P57,600 d. P60,000
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92. Masbate Liner Co. is a common carrier with passenger buses and
cargo trucks. For the month, it had the following data on receipts,
taxes not included:
From transport of passengers P800,000
From transport of cargoes 200,000
From bus rentals for school fieldtrips 400,000
Common carrier's tax is:

a. P36,000 c. P24,000.
b. P12,000 d. nil
23. Milagros Lines, a vat-registered person, has the following gross

receipts in February:
Bus 1 (carriage of goods, 218,000) P100,000
Bus 2 (carriage of goods, P:13,500) 165,000
Taxi 90,000
Jeepney 35,500
Cargo truck 45,000
Sea vessel 250,000
- Additional Information:
Y Salaries of drivers and conductor P125,000
Y Cost of oil and gasoline 175,000
During the month, Bus 1 was bumped by another bus owned by

Mandaon Lines and paid Milagros Lines R.120,000 for the damage.
The percentage tax due on Milagros Line in February is:

a.P10,770 c.P11,715
b.P14,370 d.P0
Section 118 — International Carriers

24. The: 3% common carrier's tax on international carriers on their
transport of cargoes from Philippines to other countries is imposed
upon:
International air carrier International shipping
doing business in the doing business in the
Philippines Philippines
a, Yes Yes
b. No No
Yes No
C.
d. No Yes
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25. An international air carrier doing business in the Philippines shall be

subject to
I. - 3% percentage tax on gross receipts in the Philippines only,
from their passenger and cargo operations.
ll. | 3% common carrier's tax on gross receipts from transport of
cargoes in the Philippines only
a. l only c. Either | or Il
b. Il only d. Both | and Il
Use the following data for the next five (5) questions
Japan Air Lines (a resident international carrier) has the following data for
the current year:
Gross receipts - Philippines P10,000,000
Gross receipts — Japan 15,000,000
Expenses - Philippines 4,000,000
Expenses - Japan . 8,000,000
« 60% of its gross receipts from Philippine sources were derived
from transport of passengers while 50% of its gross receipts
from Japan were derived from its cargo operations.
«= 50% of its expenses (Philippines and.Japan) are related to
passenger operations.
26. How much is the income tax due of Japan Air Lines:
a.P250,000. c. P100,000
b. P150,000 d. PO
- 27. How much is the income 3 tax due assuming Japan Air Lines is subject
to a preferential income tax rate of 1 % % under an existing
international agreement or treaty?
a. P250,000 c. P100,000
b. P150,000 d. PO
28. How much is the income tax due assuming Japan Air Lines is exempt
from income tax under reciprocity rule?
a. P250,000 c. P100,000
b. P150,000 d. PO
29. What is the applicable business tax of Japan Air Lines

a. 3% percentage tax on gross receipts derived from-sources
within the Philippines.
b. 3% common carrier's tax on gross receipts derived from the
transport of cargo from Philippines to another country.
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c. 12% value added tax

d. All of the above
30. How much is the business tax due of Japan Air Lines?
a. P300,000_ c. P120,000
b. P180,000 — d. PO

a. The gross revenue for freight or cargo and mail shall be
determined based on the revenue realized from the carriage
thereof.
b. The amount realized for mails, shall, on the other hand, be
determined based on the amount as reflected in the cargo
manifest of the carrier.
c. Both ‘a” and “b”.
32. Statement 7: International air carriers and international shipping

carriers shall not be subject to 12% value added tax but to 3%
common carrier's tax based on gross receipts derived from their
transport of passengers and goods from Philippines to other countries.
Statement 2: In cases when the Gross Philippines Billings Tax of
2.5% for international carriers is not applicable (i.e., tax exempt based
on reciprocity or treaty), the common carrier's tax under Section 118
of the NIRC, as amended, shall still apply.
A. B. Ge 4B;
Statement 1 True True False False
Statement 2 True False True False
Section 119 - Franchises

33. A right or privilege granted by the State to a person, individual or
corporation, to operate a public utility such as radio broadcasting,
television station, electric light system, telephone company, gas, and
water utilities.
a. Franchise
b. . Common carriers
c. Dealers in securities
d. Lending investors
34. Which of the following franchise Giantess is subject to the franchise

tax? ;
a. Radio and/or television kpeadbasting companies the annual
gross receipts in the preceding year exceed P10,000,000.
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b. Franchise on gas and water utilities.

c. Franchise on toll road operations.
d. All of the above
35. One of the following is not subject to the 3% percentage tax.

a. International air carrier doing business in the Philippines
b. International shipping carrier doing business in the Philippines
c. Domestic carriers by land and keepers of garage.
d. Franchise grantees of city gas and water utilities.
36. Meralco is a holder of franchise to sell electricity. It also nr its first-

class auditorium and theatre. In a particular month, its gross receipts
from sale of electricity amounted to R10,000,000. The gross receipts
from the lease of its auditorium and theatre amounted to R2,000,000.
How much is the franchise tax due for the month?
a. P1,440,000 ; c.' P300,000 .
b. P1,200,000 d. PO
As franchisee, the taxpayer had the. following Gata on revenues and
receivables (exclusive of taxes):
Recoilables
Quarter ended 3/31/2018 Revenues Beginning _End
Covered by the franchise P4,000,000 600,000 800,000
Not covered by the franchise 1,000,000 ~ 160,000.
37. Assume that the taxpayer is generating and selling electricity, what is
the correct business taxes for the quarter?
a. P456,000 c. P200,800
b. P624,000 d. P556,800 \
38: Assume that the taxpayer is generating and selling gas and water,
what is the correct business taxes for the quarter?
a. P456,000 ~ c, P200,800
'b. P624,000 d. P176,800
39. Tomasino Broadcasting Company, a non-vat holder of a franchise to

operate a radio and television newark reported the following gross
receipts (net of any tax):
Year Gross Receipts
2020 - P9,000,000
2021 12,000,000
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The business tax liability is

2020 . 2021
‘-P270,000. . 360,000:
@ 1,080,000 1,440,000
270,000. ~ 4,440,000
ao
1,080,000 ». 360,000
Section 120 ~ Overseas Communications Tax

40. A telephone company, VAT-registered, provides services for domestic
and overseas calls. What business eee are due from the services
offered?
' a, Value-added tax for domestic calle.
_b. Overseas communications tax for overseas Calls.
41. Which of the following statements

is false?
a. BBC, an international news agency is required to pay 10%
percentage tax from messages originating from the Philippines
by telephone or telegraph. .
b. Amounts paid for messages transmitted by an embassy and
consular offices of'a foreign government is not subject to 10%
_ overseas Communications tax.
c. Overseas communications initiated by a resident citizen not
engaged. in trade or business is subject to overseas
communication tax.
42. Which of the following items is not percentage tax-exempt?

|. _ Businesses with annual gross sales of P1,000,000 and below.
ll. | Overseas calls made by the Philippine government.
lll. Overseas messages’. transmitted by any embassy and
consular offices of a foreign government.
a. | only cI, land Ill
43. Which of the following overseas call is not subject to percentage tax?
a. Overseas calls transmitted by the City Government of Surigao
b. Overseas calls by Pedro, a minimum wage earner
c. Overseas calls transmitted by Teleperformance Company,a
call center company located in Makati City.
d. Overseas calls transmitted by the board of directors of PLDT
Group of companies.
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44. One of the following statements is incorrect.
a. Overseas communications tax is imposed on overseas
communications originating from the Philippines.
b. The person liable to overseas communications tax may or may
not be engaged in any trade or business.
c. The overseas communications tax is imposed whether the
overseas communications are made in the course of trade or
business or not.
d. The overseas communications tax is imposed on the owner of
the communications facilities used to make overseas
communications.
45. LBC Express Padala-Espafia branch also offer local and overseas
communication services to its customers in addition to other services
offered. It has the following data for a particular month:
Gross receipts, domestic calls P5,000,000
Gross receipts, overseas calls (originating in the 3,000,000
Philippines)
Purchase of supplies used in connection with 300,000
domestic calls net of VAT
Purchase of equip: used in connection with both 800,000
domestic calls and overseas calls, net of VAT
Business expense 1,000,000
How much was the overseas communications tax collected from

persons who used the communications facilities?
a. P800,000 c. P300,000
b. P500,000 - jd; PO
46. Red Mobile Communications has the following data for a particular
month:
Gross receipts, domestic calls P5,000,000
Gross receipts, overseas calls (originating in the 3,000,000
Philippines)
Purchase of supplies used in connection with 300,000
domestic calls net of VAT
Purchase of equip. used in connection with both 800,000
domestic calls and overseas calls, net of VAT
Business expenses 1,000,000
How much is the VAT payable, ifany?
a. P504,000 c. P420,000
b. P470,000 d. PO
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47. Statement 1: The tax on insurance premiums applies to every person,

company or corporation doing life insurance business of any sort in
the Philippines, except purely cooperative companies and
associations.
Statement 2: A person engaged in non-life insurance business is
subject to value-added tax.
d. Statements.1 and 2 are true
48. Statement 1: The tax on life insurance premiums is 2% based upon

the total premiums collected whether such premiums are paid in
money, notes, credits, or any substitute for money.
Statement 2: The tax on agents of foreign insurance companies is
10% based upon the total premiums collected.
49. Which of the following is subject to 2% percentage tax?

a. Life insurance policy premiums collected by a resident foreign
insurance company.
b. ‘Life insurance policy premiums colleen by agent of resident
foreign insurance company.
c. Insurance policy . premium ‘ollected by an agent of a
nonresident foreign insurance company.
d. Premium on insurance policy taken directly by the owner of
the property insured.
Section 121 and 122 — Banks and Nonbanks Financial Intermediaries

50. Banks and non-bank financial’ intermediaries’ performing quasi-
banking functions are subject to:
a. Value-added tax
b. Gross receipts tax
c. Franchise tax
d. Amusement tax
51. The taxpayer is a vat registered lessor of residential units. Monthly .

rent per unit is P16,000 while his gross rental income for the year
amounted to P2,500,000. Determine the applicable business tax on
his rental income.
a. Subject to 12% vat
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b. Subject to 3% OPT under Section 116:

c. 12% vat or 3% OPT under Section 116, at his option
d. . Exempt from 12% vat and OPT
52. Banko Natin sold a repossessed car to JJ at P1,000,000,; P300,000

higher than the cost of P700,000. The sale is:
|. Subject to value added tax
ll. |. Subject to gross receipts tax of 7%
lll. | Subject to regular-corporate income tax
a. Ill only c. Il and Ill only
b. | and Ill only id. None of the above
-53. Rentals of property, real or personal, received by bank and non-bank

financial intermediaries performing quasi-banking functions are:
Subject to 12% vat
Subject to gross receipts tax of 5%
aooM
Subject to gross receipts tax of 7%

Subject to 3% OPT if annual gross receipts do not exceed the vat
threshold ;
54. Banco de Makati, Inc. has the following data for the first month of the
current year:
. Interest, commissions and discounts from 5,000,000
lending activities(remaining maturity is 5 yrs)
Income from financial leasing (remaining 3,000,000
maturity is more than 5 yrs)
Dividends and equity shares in net income of 1,000,000
subsidiaries
Rentals of properties 500,000
Net trading gains within the taxable year on 300,000
foreign currency
How much is the gross receipt tax?

a. P490,000 _-c. P336,000
b. P400,000 d. P290,000
55. Metro Bank is a domestic bank operating in Santiago City. The

following are its data ina month:
Rentals from safety deposit boxes and real property 880,000
acquired through foreclosure procesdings for bad
loans
Net foreign exchange gains (difference between the 220,000
‘value of foreign currencies sold and purchased) ;
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Net trading gains from trading of securities, 660,000

commercial papers and other financial instruments
(difference between the yield or selling price and the
cost of obtaining the same)
Trust fees 110,000
Dividends from domestic corporations 30,000
Other service fees 220,000
Interest income from lending activities from
instruments with remaining terms of:
Five years and less 700,000
More than five years 800,000
The percentage or gross receipts tax (GRT) for the month is:
a. P36,200 | c. P181,000
b. P189,300 d. P179,500
56. Banco De Oro has the following income (loss) for the month of
October 2023:
Interest income with maturity of less than 5 years P500,0000
Rentals 500,0000
Net trading loss (100,000)
For the month of Guiiet 2022, how much is the gross receipts
tax?
a. P80,000 c. P25,000
b. P60,000 » d. 5,000
57. Based on the preceding number, assuming BDO has the following
income for November 2023:
Interest income with maturity of less than 5 years §P1,000,0000
Rentals 500,0000 ~
Net trading gain 200,000
How much is the gross receipt tax for November?

a. P92,000 _c. P50,000
b. P80,000 : d. P25,000
58. Tita Ghore executed on November 10, 2019 a long-term loan from
Security Bank UST branch in the: amount of P5,000,000 payable
| within 10 years with the first installment due on or before November
10, 2020 and the succeeding yearly installment on the same date of
the subsequent years. Assume that on November 10, 2024, the loan
—
was pre-terminated and that the interest paid and other fees revenue
from 2020 up to year 2024, amounting to P100,000 annually were
ee
- declared by the bank correctly and the applicable gross receipt taxes
.
.
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paid. How much is the additional gross receipts tax still payable as
recomputed on November 10, 2024, if any, because of the loan
reclassification due to pre-termination?
a. P9,000 c. P20,000
b. P16,000 d. P25,000
Section 123 — Life Insurance Premiums

Section 124 — Insurance Agents
59. Tax base of percentage tax on agent of a foreign insurance not
allowed to do business in the Philippines
a. Gross sales
b. Remittances to the foreign insurance company by the agent
Cc. Premiums received from within the Philippines for the foreign
insurance company
d. Gross receipts
60. Pro-Life Insurance is engaged in business. It also serves as an agent

of a nonresident marine foreign insurance company. It has the
following data for the current month:
Total premium collected as an agent of a nonresident
foreign marine insurance company P2;000,000
Total premiums collected from non-life insurance
business in the Philippines ; 500,000
Purchase of supplies for use in non-life business 300,000
How much is the tax for total premiums collected as an agent of a
foreign insurance company?
a. P200,000 c. P40,000
b. P100,000 d. P80,000
61. Using the same data in the preceding problem, how much is vat
payable?
a. P24,000 c. P40,000
b. P52,800 ‘ d. P20,000
62. A domestic insurance company has the following data for 2022:
Premiums collected on life insurance policies P2,000,000
Premiums returned within 6mos. After the payment on 500,000
account of rejection of risk (part of the total premiums
collected) .
Reinsurance premium (tax has already been paid) 200,000
Premiums collected by branch doing business outside 300,000
the Phil. from non-resident policy holders
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How much is the tax on life insurance premiums?

a. P50,000 c. P40,000
b. P46,000 d. P30,000
Section 125 — Amusement Places

Section 126 — Tax on Winnings
63. A tax on the right or privilege to enter places of amusement

a. Value added tax c. Amusement tax
b. Franchise tax d. Income tax
64. The operator of one of the following places is subject to amusement

tax. '
a. Cockpits c. Fitness gym
b. 4x4 Car racetracks d. None of the above
65. One of the following is a correct amusement tax rate:

a. 30% on jai-alai and racetracks
b. 15% on cockpits, cabarets, night and day clubs
c. 18% on boxing exhibitions
d. 0% on professional basketball games
66. One of the following is an incorrect amusement tax rate:

a. Jai-alai and racetracks — 30%
b. Cockpits, cabarets, night and day clubs — 18%
c. Professional basketball games — 15%
d. . Boxing exhibitions — 12%
Use the following data for the next three (3) questions:
Pedro is an operator of cockpit arena in Bacolod. He also operates a
restaurant and a convenience store inside the cockpit. Data for a
particular quarter follow:
Gross receipts:
Cockpit operations P5,000,000
Restaurant operations 300,000
Convenience store operations 125,000
67. The amusement tax due of Pedro is:

a. P54,000 c. P900,000
b. P76,500 d. P976,500
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68. Assume that the restaurant and convenience store are Owned by
another taxpayer, JC, who is not vat-registered and whose annual
gross receipts never exceeded the vat threshold. The correct
amusement tax due of JC is:
a. PO c. P54,000
b. P12,750 _.d. P76,500
69. The percentage tax due of JC is:

a. PO . ¢. P54,000
b. P12,750 d. P76,500
70. One of the following is subject to amusement tax on gross receipts

Owners of winning racehorses.
2907p
Proprietors of karaoke KTV houses.

Owners of winning cocks in the cockpits |
Lessees of bowling alleys
71. Which of the following taxpayers shall be: liable to the amusement
taxes under Section 125 of the Tax Code?
a. Patrons of amusement places
b. Lessors of amusement places
c. Proprietors, lessees, or operators of amusement places
d. None of the choices
Use the following data for the ‘new two (2)questions:

Toribio Promotions is a promotional company owned by Filipino ciiizens.
The company promoted a world boxing championship in Manila featuring
Budoy, a Filipino champion and national sports icon. Gate receipts
amounted to P5,000,000 and additional receipts from television coverage
was P3,000,000.
72. The amusement tax due is:

a. nil cc; P500,000
b. P800,000 d. P300,000
73. Assume that the bout was not a world championship bout but an
elimination bout for the right to be the number 1 challenger of the
reigning world champion Clifford Ramos; “The Greatest Pretender’.
‘How much, if any, should be reported as amusement tax?
a. PO c. P500,000
b. P800,000 d, P300,000
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74. Which of the following issublect to percentage tax?

a. Overseas communication into the Philippines.
b. Domestic common carrier for the transport of goods and
cargoes.
G; Boxing exhibition where at stake is a Philippine Championship
in. the bantamweight division and the fight is promoted by a
Filipino. citizen.
d. Holder of franchise for the supply of electricity.
75. A race track bettor won the following bets:

« On double, a bet of R200 and dividend of P200 per P20 ticket.
«= Onwinner take all, a bet of P500 and a dividend of P1,000 per
P50 ticket
« On forecast, a bet of P1,000 and dividend of P100 per P20
ticket
The total percentage tax due from the winnings is:

a. P682 ; c... P1280):
b. P1,182 d. P1,530
76. The Percentage Tax on Winnings is imposed on the winnings of

bettors in:
a. Cockfighting
b. Horse race
c. Jai-alai
d. Boxing
Section 127 — Shares of Stock
77. Shares of stock held as investment when sold through the local stock
exchange beginning January 1, 2018 shall be subject to:
a. Percentage tax — 6/10 of 1% based on gross selling price or
gross value in money.
b. Value-added tax — 12% based on gross income.
c. Capital gains tax — 15% of capital gain
d. ‘Percentage on IPO— 4%, 2%, 1% based on 1 gross selling price
or gross value in money.
78. Shares of stock held as investment when sold not through the local
stock exchange beginning January 1, 2018 shall be subject to:
a. Percentage tax — 6/10 of 1% based on gross selling price or
gross value in money. :
b. Value-added tax — 12% based on gross income. '
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c. Capital gains tax — 15% of capital gain
d. Percentage on IPO —4%, 2%, 1% based on gross selling price
or gross value in money.
£3. One of the following statements is incorrect.

a. The 6/10 of 1% tax shall be collected by the broker who made the
sale and shall be remitted within 5 banking days from the date of
collection
b. The 6/10 of I% stock transaction tax is a final withholding tax on
income.
c. The 6/10 of 1% stock transaction tax is collected whether there is
an income or a loss and is a percentage tax.
80. Noynoy invested P500,000 in the shares of stock of Villar Corp. The
corporation’s shares are listed and are traded in the local stock
exchange. Noynoy sold the shares for P350,000 through the local
stock exchange. The percentage tax on the sale is:
a. P2,100 c.. P1,750
b. P3,500 d. P2,500
81. Assume the shares are nonlisted and Noynoy sold the shares to Gibo,
a direct buyer, the percentage tax on the sale is:
a. P6,000 c. P1,750
b. P3,500 d. PO
82. Gordon, a dealer in securities, sold 21,500,000 (tax excluded) worth

of shares it held as inventory to Bayani. The shares sold were
acquired for P1,000,000 (tax excluded) and were listed and traded in
the local stock exchange. The tax due on the sale is:
a. PO c. P45,000 capital gains tax
b. P7,500 OPT d. P60,000 vat
Section 125-A : GAMING TAX ON OFFSHORE GAMING LICENSEES
83. It refers to the operation by an Offshore Gaming Licensee on online

games of chance or sporting events via the internet using a network or
software or program exclusively for offshore customers/players who
are non-Filipinos.
a. Philippine Offshore Gaming Operation
b. Offshore Gaming Licensee
c. Accredited Service Provider —
d. POGO Licensing Authority
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84, Which of the following may grant a license to a POGO entity?

a. Philippine Amusement and Gaming Corporation (PAGCOR)
b. Special Economic Zone Authority
c. Tourism or Freeport Zone Authority
d. All of the above
85. Income from gaming operations of a POGO entity is:

a. Exempt from income tax ,
b. Subject to 25% RCIT
c. Subject to 5% Franchise tax
86. The 5% Franchise Tax of a POGO entity is:

a. An income tax
b. In addition to income tax
c. In addition to all other direct and indirect internal revenue
taxes and local taxes such as value added tax
d. In lieu of Il other direct and indirect internal revenue taxes and
local taxes
- 87. The 5% Franchise Tax of a POGO entity is based on:

a. Gross wagers
b. Gross gaming revenue
c. Agreed Pre-determined minimum monthly revenue (APMMR)
from gaming operations
d. Whichever is higher of gross gaming revenue and agreed pre-
~ determined minimum monthly revenue from gaming
operations

a. Gross Wagers refer to the total amount of money that offshore
gaming customers.
b. Payouts refer to the total amount paid out to offshore gaming
customers for winning.
c. Agreed Pre-determined Minimum Monthly Revenue from
gaming operations refers to the amount that is derived after
dividing the minimum monthly fee or its equivalent, as
imposed by a Philippine Offshore Gaming Operation (POGO)
Licensing Authority, by the rate of prescribed regulatory fee.
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| Olapler 9 -- fiat Tapes
Operation refers to income o,
89: Statement 1: Income fro m Gaming
chance o-
_earnings réalized or derived from operating online games of tware o-
sporting events via the internet using a network and sof
program.
Statement 2: Income from non-gaming operation refers to any other

d by OGLs that are not classifieg
income or earnings realized or derive
as income from gaming operations.
a. Only statement 1 is correct ~

90. Income from non-gaming operations of an Offshore Gaming Licensee |

(OGL) is:
a. Exempt from income tax
b. Subject to 5% Franchise tax
c. Subject to value added tax or percentage tax, whichever is
applicable ;
Gaming Licensees (OGLs) shall be

91. The gaming tax of Offshore
remitted directly with the BIR:
a. Not later than the 10th day following the end of each month
b. Not later than the 20th day following the end of each month
c. Not later than the 20th day following the end of each quarter
d. Not later than the 25th day following the end of each quarter
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Chapt 10
Excise Tax
‘INTRODUCTION,
An excise tax is a tax imposed on specific goods or services such as

tobacco, fuel and alcohol. Excise Tax is also known as tax on the production,
sale or consumption of a commodity in a country, including certain services. It
is imposed on:
1. Certain goods manufactured or produced in the Philippines for

domestic sale or consumption or for any other disposition;
2. Certain goods imported; and
3. Certain services performed in the Philippines
jon 129, NIRC-G nd Services Subject to Excise Taxes

Excise taxes apply to.goods manufactured or produced in the Philippines for domestic
sales or consumption or for any other disposition and to things imported as well as
services performed in the Philippines. Excise tax shall be in addition to the value-added
tax imposed under Title IV of the Tax Code, as amended.
TYPES OF EXCISE TAX
1. Specific Tax — refers to the excise tax imposed which is based on weight
or volume capacity or any other physical unit of measurement.
COMPUTATION:
Specific Tax = No, of Units or other measurements x Specific Tax Rate
2. Ad Valorem Tax— refers to the excise tax imposed which is based on .

Selling price or other specified value of the goods/articles.
COMPUTATION:
Ad Valorem Tax = No, of Units or other measurements x Selling Price of any specific
value per unit x Ad Valorem Tax Rate
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Chapter 7O - Evcise Laue
MAJOR CLASSIFICATION OF EXCISABLE ARTICLES
1. Alcohol Products (Sections 141-143 of the Tax Code, as amended)

a. Distilled Spirits (Section 141)
b. Wines (Section 142)
c. Fermented Liquors (Section 143)
2. Tobacco Products (Sections 144-146 of the Tax Code, as amended)

a. Tobacco Products (Section 144)
b. Cigars & Cigarettes (Section 145)
c. Inspection Fee (Section 146)
3. Petroleum Products (Section 148 of the Tax Code, as amended)
4. Miscellaneous Articles (Section 149-150 of the Tax Code, as amended)

a. Automobiles (Section 149)
b. Non-essential Goods (Section 150)
c. Non-essential Service (Section 150-A) - RA 10963 [TRAIN Law))
d. Sweetened Beverages (Section 150-B)-(RA 10963 [TRAIN Law])
5. Mineral Products (Sections 151 of the Tax Code, as amended)
PERSONS LIABLE TO EXCISE TAX
1. IN GENERAL:
a) On Domestic or Local Articles
« Manufacturer or Producer
= Owner or person having possession of articles removed from
the place of Production without the payment of the tax
b) on Imported Articles
Importer
= Owner
» Person who is found in possession of atticles which are
exempt from excise taxes other than those legally entitled to
exemption
2. OTHERS: |
On Indigenous petroleum; natural gas or liquefied natural gas
" Local Sale, Barter or Transfer
® First buyer, purchaser or transferee
= Exportation
> ei lessee, concessionaire or operator of the mining
claim
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Chapter 70 - Eveise Tan
Alcohol Products
Sections 141 — 143 of the Tax Code, as amended
DEFINITION OF TERMS Under RR Nos. 7-2021
Alcohol Products shall refer to fermented liquors, proof spirits, wines, and/or spirits
or distilled spirits, as defined in RR 7-2021. ,
Fermented Liquors, under RR 7-2021, shall refer to beer, lager beer, ale, porter and
other fermented liquors regardless if manufactured in factories or sold and brewed at
microbreweries Or small establishments such as pubs and restaurants, except tuba, basi,
tapuy and similar fermented liquors
Proof Spirits shall refer to liquor containing one-half (1/2) of its volume of alcohol of
a specific gravity of seven thousand nine hundred and thirty-nine ten thousandths
(0.7939) at fifteen degrees centigrade. A proof liter means a liter of proof spirits.
Distilled Spirits shall refer to the substance known as ethyl alcohol, ethanol or spirits
of wine, including all dilutions, purifications and mixtures thereof, from whatever
source, by whatever process produced, and shall include whisky, brandy, rum, gin and
vodka, and other similar products or mixtures.
Net Retail Price shall mean the price at which alcohol products and tobacco products
are sold on retail in at least five (5) major supermarkets in Metro Manila, excluding the
amount intended to cover the applicable excise tax and the value-added tax. For alcohol
products and tobacco products which are marketed outside Metro Manila, the “net retail
price” shall mean the price at which the alcohol products, tobacco products, heated
tobacco products, or vapor products are sold in at least five (5) major supermarkets in
the region excluding the amount intended to cover the applicable excise tax and the
value-added tax. This shall initially be provided by the manufacturer or importer through
a sworn statement and shall be validated ny the BIR through a biannual price survey
under oath.
EXCISE TAXES ON ALCOHOL PRODUCTS

1. DISTILLED SPIRITS
Excise Tax Due = Ad valorem tax + Specific Tax

Date of Effectivity | Ad Valorem Tax (Based on net Specific Tax
retail price per proof (excluding (per proof liter)
excise tax and vat)] :
Jan. 1, 2020 20% P24.34
23, 2020 ee : me
Jan, :
22% | é
Jan. 1, 2021
1, 2022 22% P§2.00
Jan.
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Chapter 10~ Excise

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Jan. 1, 2023 22% P59,00 ci
Jan. 1, 2024 22% P66.00
2025 onwards 22% Specific tax rate shall be
increased by 6% and
every year thereafter
2. WINES
Date of Effectivity Specific Tax (per liter)
January 1, 2020
Sparkling wines/champagnes where the NRP.
(excluding the excise and VAT) per bottle of 750 ml
volume capacity, regardless of proof is:
a. Php 500 or less ie P328.98
b. More than i 500 P921.15
Still wines and carbonated wines eave 14% of P39.48

alcohol by volume or less
Still wines and carbonated wines containing more than P78.96 ©

14% of alcohol by volume but not more than 25% of
alcohol by volume
Fortified wines containing more than 25% of alcohol Taxed as distilled spirits
by volume
Jan. 23, 2020** P50.00
Jan.-1, 2021 P53.00
Jan. 1, 2022 P56.18
Jan. 1, 2023 P59.55
Jan. 1, 2024 P63.12
2025 onwards Specific tax rate shall be
increased by 6% and
every year thereafter
Note; *Beginning January 23, 2020, the classification of wines was removed pursuant to
RA No. 11467. All types of wines are subject to specific excise tax rates per liter,
3. FERMENTED LIQUORS
Date of Effectivity Specific Tax (per liter
Jan, 1, 2020 P26.43
Jan. 23, 2020** P35.00
Jan. 1, 2021 P37.00 en
Jan. 1, 2022 P39,00° a]
Jan, 1, 2023 P41,00 aan
Jan. 1, 2024 P43.00 "
2025 onwards . Specific tax rate shall be|
increased by 6% and
every year thereafter__J
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Chapter 10 ~ Excise Te
Nicotine: and, i Noe-Nicdbve Lrvdach
Sections 144 — 146 of the Tax Code, as amended
RR Nos. 14-2022, amending certain Sections of RR Nos. 18-2021 and 7-2021
There shall. be levied, assessed and collected an excise tax on

Vaporized Nicotine and Non- Nicotine Products at the rate of tax prescribed
under RA Nos. 11346 and 11467, and Novel Tobacco Products under Section
144 (A)(b) of the Tax Code, as implemented by RR No. 7-2021 as amended by
RR 14-2022. The rates of tax imposed herein shall apply to any substance in
solid, liquid, or gel form, regardless of nicotine content, including nicotine-free
substance or any similar product.
A. TOBACCO PRODUCTS, HEATED TOBACCO PRODUCTS, VAPOR PRODUCTS, AND

NOVEL TOBACCO PRODUCTS ;
1, HEATED TOBACCO PRODUCTS

Effectivity | Quantity | Excise Tax
Jan. 1, 2020 Per pack of 20 units Php 10.00
Jan. 23, 2020 or any packaging Php 25.00
Jan. 1, 2021 combinations of not Php 27.50
Jan. 1, 2022 more than twenty. Php 30.00
Jan. 1, 2023 (20) units Php 32.50
» Specific tax rate shall be increased
_ by 5% every year
effective Jan. 1, 2024
HEATED TOBACCO PRODUCTS (HTPs), also referred to as Heated Tobacco Products

(HTP) Consumables or Heat-Not-Bum Product Consumables shall refer to tobacco
products that are intended to be consumed through heating tobacco either electronically
or through other means, sufficient to release an aerosol that:can be inhaled, without
combustion of the tobacco. HTP Consumables or Heat-Not-Bum Product Consumables
may also include liquid solutions and gels that are’ part of the product and are heated to
generate an aerosol. HTPs may or may not operate by means of an HTP Device (RR 14-
2022).
2. VAPOR PRODUCTS
a. Nicotine Salt or Salt Nicotine

Jan, 23, 2020 Php 37,00
Jan. 1, 2021 Per millimiter or a Php 42.00
Jan,-1, 2022 fraction thereof Php 47.00
Jan. 1, 2023 ? Php 52,00
2024 onwards _ Rate shall be increased by 5% every
year effective Jan. 1, 2024
VAPOR PRODUCTS, also referred to as Vapor Product Refills, shall refer to the liquid, solid, or
transformed
gel, or any combination thereof, which may or may not contain nicotine, that is
into an aerosol without combustion by a Vapor Product Device (RR 14-2022).
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b. Conventional 'Freebase' or ‘Classic’ Nicotine

Jan. 23, 2020 Php 45.00
Jan. 1, 2021 Per millimiter or a Php 50.00
Jan. 1, 2022 . fraction thereof Php 55.00
Jan. 1, 2023 Php 60.00
2024 onwards Rate shall be increased by 5% every
VAPORIZED NICOTINE OR NON-NICOTINE PRODUCTS shall refer to’ both Heated
Tobacco Products and Vapor Products, as defined herein, which are novel consumer
goods that generate a nicotine-containing or non- pcre scomalnps aerosol without
combustion (RR 14-2022),
NICOTINE shall refer to nicotinic alkaloids, including any salt or complex of nicotine,
whether derived from tobacco or synthetically produced.
3. NOVEL TOBACCO PRODUCTS

Aug. 10, 2022 Php 2.50
Jan. 1, 2023 Per kilogram Php 2.60
2024 onwards . Rate shall be increased by 4% every
NOVEL TOBACCO PRODUCTS shall refer to all non-combusted substances in solid or
liquid form, and innovations, either made partly of tobacco leaf as raw material or
~ containing nicotine from tobacco, intended to be used as a substitute for cigarettes or
other combusted tobacco products (RR 14-2022).
B. INSPECTION FEES
RR 14-2022 provides that there shall be collected inspection fees on

Vaporized Nicotine and: Non-Nicotine Products as prescribed under RA
Nos. 11346 and 11467 as implemented by RR No. 7-2021, and Novel
Tobacco Products under Section 146 of NIRC of 1997, as amended,
detailed as follows:
Effectivity | Inspection Fee | Unit of Measure
Heated Tobacco Php 0.10 1,000 sticks
Vapor Products Php 0,01 1 mi.
Novel Tobacco Products Php 0,03 1 kg.
FLOOR PRICE
Floor Price is the minimum retail price setby the BIR at which Vaponzed
Nicotine and Non-Nicotine Products or Novel Tobacco Products may be sold,
taking into account the sum of their excise tax, value-added tax, and a
reasonable production cost.
"MINIMUM FLOOR PRICE = Total production cost/expenses/landed

cost of the cheapest brand per tobacco product + excise tax + VAT
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Che ter 10 -&Eveise Tage
MANUFACTURER'S OR IMPORTER'S OF SWORN STATEMENT

Every local.manufacturer or importer of Vaporized Nicotine and Non-Nicotine
Products and Novel Tobacco Products shall submit a duly notarized
Manufacturer's or Importer's Sworn Statement for Vaporized Nicotine and Non-
Nicotine Products and Novel Tobacco Products showing among others, the
following information:
4. Name, address, TIN and assessment number of the manufacturer or

importer;
2. Complete root name of the brand as well as the complete brand name
with modifiers, if any;
Complete specifications of the brand detailing the specific measurements,
weights, manner of packaging, etc.;
Name(s) of the region(s) where the brand is/are to be marketed;
Wholesale price per case, gross and net of VAT and excise tax;
Ce
Suggested retail price, gross and net of VAT and excise tax, per pack, per
pod, or per bottle/container, as the case may be;
Detailed production/importation costs and all other expenses incurred or
ri
to be incurred until the product is finally sold (e.g. material, labor,

overhead, Selling and administrative expenses) per case;
8. Applicable excise tax rates; and
9. Corresponding excise and value-added taxes per pack, per pod, or per
bottle/container, as the case may be.
The manufacturer's or importer's sworn statement shall be submitted as a

supporting document to the prescribed application for the initial registration
of Vaporized Nicotine and Non-Nicotine Products and Novel Tobacco
Products and thereafter submit an updated sworn statement on or before
the end of the months of June and December of the year. If there is any
change i in the cost to manufacture, produce and sell the brand or change
in the actual selling price of the brand, an updated sworn statement shall
be submitted at least five (5) days before the actual removal of the product
from the place of production or release from the customs’ custody, as the
Case may be.
MANUFACTURER’S AND IMPORTERS’ SURETY BOND

Manufacturers and importers of articles subject to excise tax shall pos a
- Surely bond subject to the following conditions:
Initial Bond
In case of initial bond, the amount shall be equal to One Hundred Thousand
pesos (P1,00,000.00). However, after six (6) months of operation, if the amount
Of initial bond is less than the amount of the total excise tax paid during the said
period, the amount of the bond shall be adjusted to twice the tax actually paid
for the period.
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Chapter 70 - Eveise Lage
Bond for the Succeeding Years of Operation

The bond for the succeeding years of operation shall be based on the actual
total excise tax paid during the year immediately preceding the current year.
‘However, for taxpayers availing of the tax prepayment, advance deposit, or
similar schemes, the amount of bond shall be based on schedule provided in
RR 14-2022.
Section 148 of the Tax Code, as amended by the TRAIN Law, entitled, Manufactured Oils _
and Other Fuels, provides:
There shall be collected on refined and manufactured mineral oils and motor
fuels, the following excise taxes which shall attach to the goods hereunder
enumerated as soon as they are in existence as such:
| EFFECTIVITY (RA 10963-TRAIN Law)

PRODUCTTYPE
| gan.1,2018 | “Jan. 1, 2019 | Jan. 1, 2020
(a) Lubricating oils and greases, including but not
limited to base stock for lube oils and greases, high
vacuum distillates, aromatic extracts and other
similar preparations, and additives for lubricating Php8.00 Php9.00 Php10.00
oils and greases, whether such additives are
petroleum based or not,per liter and kilogram
respectively, of volume capacity or weight
(a.1) Locally produced or imported oils previously

taxed but are subsequently reprocessed, re-refined
or recycled, per liter and kilogram of volume
capacity or weight.
(b)Processed gas, per liter of volume capacity

(c)Waxes and petrolatum, per kilogram
(d)Denatured alcohol to be used for motive power
, per liter of volume capacity .
(e)Asphalt, per kilogram

(f)Naphtha, regular gasoline, pyrolysis gasoline and
other similar products of distillation, per liter of
volume capacity
Php7.00 - Php9.00 Phpi0.00
(g)Unleaded premium gasoline, per liter of volume
capacity
(h)Kerosene, per liter of. volume capacity Php3.00 . Php4,00 Php5.00

(i)Aviation turbo jet fuel,aviation gas, per liter of |
volume capacity
(j)Kerosene when used as aviation fuel, per-liter of |: Php4.00 Php4.00 * Php4.00

volume capacity i
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HT Chapter 70 - Evcise Lage
(k)Diesel fuel oll, and on similar fuel oils having

more or less the same generating power, per liter
of volume capacity ‘
: Php2.50 Php4.50 _ Php6.00
()Liquified petroleum gas used for motive power,
per kilogram
(m)Bunker fuel oil, and on similar oils having more

or less the same generating power, per liter of
volume capacity
(n)Petroleum coke, per metric ton
(o)Liquified petroleum gas, per kilogram As, Php1.00 | Php2.00 Php3.00
(p)Naphtha and pyrolysis gasoline, when used as

raw material inpia ee of petrochemical
ucts or in the refining of petroleum products, Php0.00
ees replacement fuel for natural-gas-fired- Pe Php0.00 Php0.00
combined cycle power plant, in lieu of lacally-
extracted natural gas during the non-availability
thereof, per liter of volume capacity
(q)Liquified petroleum gas, when used as raw

material in the production of petrochemical
products, per kilogram
| (r)Petroleum coke when used as feedstock to any

power generating facility, per metric ton
Autonobiles
Section 149 of the Tax Code, as amended by the TRAIN Law provides:
There shall be levied, assessed and collected an ad valorem tax on
automobiles based on the manufacturer’s or importer’s selling price, net of
excise and value-added taxes, in accordance with the following schedule
effective January 1, 2018:
NET MANUFACTURER'S PRICE/IMPORTER'S SELLING | TAX RATES (RA 10963 (TRAIN

PRICE Law)
OVER . | UP TO RATE
0 | Php600,000 4%
Php600,000 | Php1,000,000 “10%
Php1,100,000 _ Php4,000,000 20%
Php4,000,000 over - 50%
Provided, That hybrid vehicles shall be, subject to fifty percent (50%) of the
applicable excise tax rates on automobiles under this Section: Provided,
further, That purely electric vehicles and pick-ups shall be exempt from excise
tax on automobiles.
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Ohepter 10 - Eecise Te
As used in this Section —
i. | Automobile shall mean any four (4) or more wheeled motor vehicle
: regardless of seating capacity, which is propelled by gasoline, diesel,
electricity or any other motive power: Provided, That for purposes of this
Act, buses, trucks, cargo vans, jeepneys/ jeepney substitutes, single cab
chassis, and special-purpose vehicles shall not be considered as
automobiles.
ii. | Truck/cargo van shall meana motor vehicle of any configuration that is
exclusively designed for the carriage of goods and with any number of
wheels and axles: Provided, That pick-ups shall be considered as trucks.
iii. | Jeepney/jeepney substitutes shall mean as ‘Philippine jeep or jeepney’

which are of the jitney type locally designed and manufactured generally
from surplus parts and components: It shall also include jeepney
substitutes that are manufactured from brand-new single cab chassis or
cowl chassis and locally customized rear body that has continuous sideway
row seats with open rear door and without retractable glass windows.
-iv. _ Bus shall mean a motor vehicle of any configuration with gross vehicle
weight of 4.0 tons or more with any number of wheels and axles, which is
generally accepted and specially designed for mass or public
transportation.
V. Single cab chassis shall mean a motor vehicle with complete engine power
train and chassis equipped with a cab that has a maximum of two (2) doors
and only one (1) row of seats.
vi. Special purpose vehicle shall mean a motor vehicle designed for specific
applications such as cement mixer, fire truck, boom truck, ambulance
and/or medical unit, and off-road vehicles for heavy industries and not for
recreational activities.
vii. | Hybrid electric vehicle shall. mean a motor vehicle powered by electric
energy, with or without provision for off-vehicle charging, in combination
with gasoline, diesel or. any other motive power: Provided, That, for
purposes of this Act, a hybrid electric vehicle must be able to propel itself
from a stationary condition using solely electric motor
Provided, That in the case of imported automobiles not for sale, the tax imposed
herein shall be based on the total landed value, including transaction value,
customs duty and all other charges.
Automobiles used exclusively within the freeport zone shall be exempt from
excise tax.
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Chapter 70 - Eveise Tage
Now-Essential Goods
Section 150 of the Tax Code, as amended by the TRAIN Law provides:
There shall be levied, assessed and collected a tax equivalent to twenty-
percent (20%) based on the wholesale price or the value of importation
used by the Bureau of Customs in determining tariff and customs duties, net of
excise tax and value-added tax, of the following goods:
a. All goods commonly or commercially known as jewelry, whether real or

imitation, pearls, precious and semi-precious stones and imitations thereof;
goods made of, or ornamented, mounted or fitted with, precious metals or
.imitations thereof or ivory (not including surgical and dental instruments,
silver-plated wares, frames or mountings for spectacles or eyeglasses, and
dental gold or gold alloys and other precious metals used in filling, mounting
or fitting the teeth); opera glasses and lorgnettes. The term ‘precious
metals’ shall include platinum, gold, silver and other metals of similar or
greater value. The term ‘imitations thereof’ shall include platings and alloys
of such metals;
b. Perfumes and toilet waters;
cc. Yachts and other vessels intended for pleasure or sports.
Ahe-cntnticl. Service-/uvasive Cosmetic Pr

Service Tax Rate
Performance of Services on Invasive Procedures 5%
Section 150-A of the Tax Code, as amended by the TRAIN Law provides:
There shall be levied, assessed, and collect a tax equivalent to five percent
(5%) based on the gross receipts derived from the performance of
services, net of excise tax and value-added tax, on invasive cosmetic
procedures, surgeries, and body enhancements directed solely towards
improving, altering, or enhancing the patient's appearance and do not meaning
fully promote the proper function of the body or prevent or treat. illness or
disease: Provided, That this tax shall not apply to procedures necessary to
ameliorate a deformity arising from, or directly related to, a congenital or
developmental defect ‘or abnormality, a personal injury resulting from an
accident or trauma, or disfiguring disease, tumor, virus or infection: Provided,
further, That cases or treatments covered by the National Health Insurance
Program shall not be subject to this tax.
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Surcetened tmeeaye
Sec. 150(B) of the Tax Code, as amended by the TRAIN LAW
PRODUCT TAX RATE

Per Liter of Volume Capacity
Using purely caloric sweeteners, and purely non-caloric sweeteners, Php6.00
lor a mix of caloric and non-caloric sweeteners
Using purely high fructose com syrup or in combination with any Phpi2.00
'
caloric or non-caloric sweetener
Using purely coconut sap sugar and purely evel glycosides Exempt
DEFINITION OF TERMS
1. Sweetened beverages (SBs) refer to non-alcoholic beverages of any

constitution (liquid, powder, or concentrates) that are pre-packaged and
sealed in accordance with the Food and Drug Administration (FDA)
standards, that contain caloric and/or non-caloric sweeteners added by the
manufacturers, and shall include, but not be limited to the following, as
described in the Food Category System from Codex Alimentarius Food
Category Descriptors (Codex Stan 192- 1995, Rev. 2017 or the latest) as
adopted by the FDA:
a) Sweetened juice drinks;
-b) Sweetenedtea;
c) All carbonated beverages;
d) Flavored water;
e) Energy and sports drinks;
f) Other powdered drinks not classified as milk, juice, tea, and coffee;
g) Cereal and grain beverages; and
h) Other non-alcoholic beverages that contain added sugar.
2. Caloric sweetener refers to a substance that is sweet and includes

sucrose, fructose, and glucose that produces a certain sweetness;
3. High fructose corn syrup refers to a sweet saccharide mixture containing

fructose and glucose which is derived from corn and added to provide
sweetness to beverages, and which includes other similar fructose syrup
preparations; and
4. Non-caloric sweetener refers to a substance that are artificially or

chemically processed that produces a certain sweetness. These are
substances which can be directly added to beverages, such as aspartame,
sucralose, saccharin, acesulfame, potassium, neotame, cyclamates .and
other non-nutritive sweeteners approved by the Codex Alimentarius and
adopted by the FDA.
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Sections 151 of the Tax Code, as amended
PRODUCT TYPE ; TAX RATES (RA 10963-TRAIN Law)
Coal and coke (Domestic and Imported) _ | January 1, 2018 - Php50.00

January 1, 2019 - Php100.00
January 1, 2020 - Php150.00 and onwards
Nonmetallic Minerals and Quarry Resources | Four percent (4%) based on the actual market value of the
(Locally extracted or produced) gross output thereof at the time of removal
Nonmetallic Minerals and Quarry Resources | Four percent (4%) based on the value used by the Bureau of
(Imported) Customs (BOC) in determining tariff and customs duties, net
of excise tax and value-added tax
Locally-extracted natural gas and liquefied | Exempt
natural gas
All Metallic Minerals (locally extracted or Four percent (4%) based on the actual market value of the -
produced copper, gold, chromite and other | gross output thereof at the time of removal °
metallic minerals)
Imported copper, gold, chromite and other | Four percent (4%) based on the value used by BOC in
metallic minerals determining tariff and customs duties, net of excise tax and
value added tax
On indigenous petroleum Six percent (6%) of the fair international market price thereof,
on the first taxable sale, barter, exchange or such similar
transaction, such tax to be paid by the buyer or purchaser
before removal from the place of production. The phrase "first
taxable sales, barter, exchange or similar transaction” means
the transfer of indigenous petroleum in its original, state to a
first taxable transferee. The fair international market price shall
be determined in consultation with appropriate government
agency.
For the purpose of this Subsection, “indigenous petroleum”

shall include locally-extracted mineral oil, hydrocarbon gas,
bitumen, crude asphalt. mineral gas and all other similar or
naturally associated substances with the exception of coal,
peat, bituminous shale and/or stratified mineral deposits."
: :
NOTE:
In the case of mineral concentrates not traded In commodity exchanges in the Philippines or abroad, such as
mineral
copper concentrate, the actual market value shall be the world price quotations of the refined
products content thereof prevailing in the sald commodity exchanges, after deducting the smelting, refining
and other charges Incurred in the process of converting the mineral concentrates into refined metal traded
in those commodity exchanges.
On minerals and mineral products sold or consigned abroad, the actual cost of ocean freight and Insurance| -
shall be deducted from the tax base.
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Chapter 70 + Evcise Taie
Abcnitratine Dedvisions
A. Filing of Return and Payment of Excise Tax on Domestic Products
(Sec. 130)
(1) Persons Liable to File a Return

Every person liable to pay excise tax shall file a separate return for each
place of production setting forth, among others:
« Description and quantity or volume of products to be removed
= The applicable tax base; and
= The amount of tax due °
Provided, however, That in the case of indigenous petroleum, natural gas

or liquefied natural gas, the excise tax shall be paid by the first buyer,
purchaser or transferee for local sale, barter or transfer, while the excise
tax on exported products shall be paid by the owner, lessee,
concessionaire or operator of-the mining claim. Should domestic products
be removed from the place of production without the payment of the tax,
the owner or person having possession thereof shall be liable for the tax
due thereon.
(2) Time for Filing of Return and Payment of the Tax

a) IN GENERAL
= The excise tax return shall be filed and paid by the manufacturer
or producer BEFORE removal of domestic products from
place of production, such as, locally manufactured Petroleum
products and indigenous Petroleum/levied under Sections 148
and 151(A)(4), respectively, of the Tax Code, as amended.
b) Nonmetallic mineral or mineral products or quarry resources

* The excise tax return shall be filed and paid URON REMOVAL of
such products from the locality where mined or extracted.
c) Locally produced or extracted metallic mineral or mineral products

« The excise tax return shall be filed and paid WITHIN FIFTEEN (15)
DAYS after the end of the calendar quarter when such products
were removed . For this purpose, the taxpayer shall file a bond in
an amount which approximates the amount of excise tax due on
the removals for the said quarter.
d) For imported mineral or mineral products, whether metallic or

nonmetallic
= The excise tax due shall paid BEFORE Their removal from
customs custody.
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(3) PLACE OF FILING OF RETURN AND PAYMENT OF THE TAX
Except as the Commissioner otherwise permits, the return shall be filed

with and the tax paid to any authorized agent bank or Revenue Collection
Officer, or duly authorized City or Municipal Treasurer in the Philippines.
EXCEPTIONS:
The Secretary of Finance, upon recommendation of the Commissioner

may, by rules and regulations, prescribe:
_ (a) The time for filing the return at intervals for a particular class or classes
of taxpayers after considering factors such as volume of removals,
adequate measures of security and such other relevant information
required to be submitted under the pertinent provisions of the Tax Code,
as amended; and
(b) The manner and time of payment of excise taxes other than as herein
prescribed, under a tax prepayment, advance deposit or similar schemes.
In the case of locally produced of extracted minerals and mineral products
or quarry resources where the mine site or place of extraction is not the
same as the place of processing or production, the return shall be filed with
and the tax paid to the Revenue District Office having jurisdiction over the
locality where the. same are mined, extracted or quarried: Provided,
however, That for metallic minerals processed abroad, the retum shall be
filed and the tax due thereon paid to the Revenue District Office having
jurisdiction over the locality where the sare are mined, extracted or
quarried.
B. OTHER ADMINISTRATIVE PROVISIONS
(1) Determination of Gross Selling Price of Goods (GSP) Subject to Ad

Valorem Tax [Section 130(B)]
| Unless otherwise provided, the price, excluding the value-added tax, at

which the goods are sold at wholesale in the place of production or through
their sales agents to the public shall constitute the gross selling price.
GSP subject to ad valorem tax = Selling price** (excluding vat)

**at whole sale price in the place of production or through sales agents the public
If the manufacturer also sells or allows such goods to be sold at wholesale in

another establishment of which he is the owner or in the profits of which he has an
interest, the wholesale price in such establishment shall constitute the gross selling
price. Should such price be less than the cost of manufacture plus expenses
incurred until the goods are finally sold, then a proportionate margin of profit, not
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less than ten percent (10%) of such manufacturing cost and expenses, shall be
added to constitute the gross selling price.
(2) Manufacturer’s or Producer’s Sworn Statement [Sec. 130(C)]
Every manufacturer or producer of goods or products subject to excise

taxes shall file with the Commissioner on the date or dates designated by
the latter, and as often as may be required, a sworn statement showing,
among other information, the different goods or products manufactured or
produced and their corresponding gross selling price or market value,
. together with the cost of manufacture or production plus expenses incurred
or to be incurred until the goods or products are finally sold.
(3) Credit for Excise tax on Goods Actually Exported [Sec. 130(D)]
When goods locally produced or manufactured are removed and actually

exported without retuming to the Philippines, whether so exported in their
original state or as ingredients or parts of any manufactured goods or
products, any excise tax paid thereon shall be credited or refunded upon
submission of the proof of actual exportation and upon receipt of the
corresponding foreign exchange payment: Provided, That the excise tax on
mineral products, except coal and coke, imposed under Section 151 shall
not be creditable or refundable even if the mineral products are ect
exported
EXCISE TAXES ON IMPORTED ARTICLES

Excise taxes on imported articles shall be paid by the owner oreienden to the
Customs Officers, conformably with the regulations of the Department of
Finance and before the release of such articles from the customs house, or by
the person who is found in possession of articles which are exempt from excise
taxes other than those legally entitled to exemption.
Rate and Basis of the Excise Tax on Imported Articles —

Unless otherwise specified, imported articles shall be subject to the same
rates and basis of excise taxes applicable to locally manufactured articles.
Tax Free Articles Brought or Imported in the Philippines (Sec. 131)

In the case of tax-free articles brought or imported into the Philippines by
persons, entities, or agencies exempt from tax which are subsequently sold,
transferred or exchanged in the Philippines to non-exempt persons or entities,
the purchasers or recipients shall be considered the importers thereof, and shall
be liable for the duty and internal revenue tax due on such importation.
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Chapter 70). - Eveise Tae
QUIZZER
1. Statement 1: An excise tax is a tax imposed on specific goods or services such as tobacco, fuel and
alcohol.
Excise Tax: Excise Tax is a tax on the production, sale or consumption of a commodity in a country,
including certain services.
a. Only statement / is correct
b. - Only statement 2 is correct
2. Excise tax is imposed on:

a. _ Certain goods manufactured or produced in the Philippines for domestic sale or consumption or
_ ’ for any other disposition
b. Certain goods imported
c. Certain services performed in the Philippines
d. Allof the above
3. — Excise tax shall be paid by

a. The manufacturer or producer of excisable product
b. The seller of distributor of excisable product
c. The buyer or consumer of excisable product
4. Unless expressly provided by law or regulations, the payment of excise tax due shall be made
a. Before removal of domestic products from place of production
b. Ten (10) days after removal of domestic products from place of production
c. Fifteen (15) days after removal of domestic products from place of production
d. Thirty (30) days after removal of domestic products from place of production
5. _ Itrefers to the excise tax imposed which is based on weight or volume capacity or any other physical
unit of measurement.
a. Ad valorem tax c. Value added tax
b. Specific tax d. None of the above
6. It refers to the excise tax imposed which is based on selling price or other specified value of the
goods/articles. ;
a. Ad valorem tax '_ ¢, Value added tax
b. Specific tax d, None of the above
7. — Which of the following is the correct formula in computing specific tax?

a. — Specific Tax = Selling Price of any specific value per unit x Ad Valorem Tax Rate
b. — Specific Tax = No. of Units or other measurements x Ad Valorem Tax Rate
C. — Specific Tax = No. of Units or other measurements x Specific Tax Rate
d. — Specific Tax = No. of Units or other measurements x Selling Price of any specific value per unit
X Specific Tax Rate
| 8. — Which of the following is the correct formula in computing ad valorem tax?

i a. Ad Valorem Tax = Selling Price x Ad Valorem Tax Rate
b. Ad Valorem Tax = No. of Units or other measurements x Ad Valorem Tax Rate
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¢. Ad Valorem Tax = No. of Units or other measurements x Specific Tax Rate ;

d. .Ad Valorem Tax = No, of Units or other measurements x Selling Price of any specific value per
unit x Specific Tax Rate
Which of the following persons is not liable for excise tax?

a. Manufacturer or producer of domestic or local articles
b. Owner or person having possession of articles removed from the place of production without the
payment of the tax of domestic or local articles
c. _ Importer or owner of imported articles
10. Which of the following persons is not liable for excise tax?
a. Person who is found in possession of articles which are exempt from excise taxes on imported
articles other than those legally entitled to exemption
b.. First buyer, purchaser or transferee on local sale, barter or transfer of indigenous petroleum,
natural gas or liquefied natural gas
c. Owner, lessee, concessionaire or operator of the mining claim on exportation of indigenous
petroleum, natural gas or liquefied natural gas
11. The following information was provided on heated tobacco product (HTP). How much is correct floor
price?
Unit 4 Pack
Stick 20
Production cost/landed cost, net of excise tax and vat P95.00
Excise tax P30.00
Value added tax P15.00
a. P95.00 c. P140.00
b. P125.00 d. P150.00
12. Assume that in 2022, there was a removal of 50 cases of Heated Tobacco Product from place of
production in which 1 case contains 50 reams while 1 ream contains 10 packs. How much is the
excise tax due assuming the taxable year is 2022?
a. P687,500 c. P812,500
b. P750,000 d, P853,125
13. Assume that in 2022, there was a removal of 50 cases of Heated Tobacco Product from place of
production in which 1 case contains 50 reams while 1 ream contains 10 packs. How much is the
inspection fee assuming the taxable year is 2022?
a. P10.00 c. P50.00
b. P25.00 . d. P100.00
14, How much is the correct excise tax of Nicotine Salt or Salt Nicotine with volume content of 1.9 ml, 500
packs of vapor products with 2 pods per pack?
a. P60,000 c, P84,000
b. P74,000 d. P94,000
15. How much is the correct inspection fee in the preceding number?
a. P19.00 c, P21.00
b, P20.00 d. P25.00
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Documentary stamp Tax (DST)
DST Defined
DST is an excise tax levied on. documents, instruments, loan

agreements and papers evidencing the acceptance, assignment, sale or
transfer of an obligation, rights, or property incident thereto. The amount of tax
is either fix or based on par or face value of the document or instrument.
Liability to pay DST (Sec. 173 NIRC)
DST is paid by the person making, signing, issuing, accepting or

transferring the documents. However, whenever one party to the taxable
document enjoys exemption from the tax, the other party thereto who is not
exempt shall be the one directly liable for the tax.
Filing and Payment (RMC 1-98 as amended by RR 6-2001)

The tax return shall be filed and the tax due shall be paid at the same
time within 5 days after the close of the month when the taxable document was
signed, issued, accepted or transferred. In lieu of the foregoing, the tax may be
paid either through purchase of DST stamp and actual affixture, or by imprinting
a secured stamp on the taxable document through the web-based Electronic
Documentary Stamp Tax (eDST) System.
The return shall be filed in triplicate by the following:

1. Inthe case of constructive affixture of documentary stamps, by the person
making, signing, issuing, accepting, or transferring documents,
instruments, loan agreements and papers, acceptances, assignments,
sales and conveyances of the obligation, right or property incident thereto
wherever the document is made, signed, issued, accepted or transferred
when the obligation or right arises from Philippine sources or the property
is situated in the Philippines at the same time such act is done or,
transaction had;
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2. In.the case of Electronic Documentary Stamp Tax (eDST) System user, by
. the taxpayers belonging to.the industries mandated to use the web-based
eDST System in the payment/remittance of DST liabilities and the affixture
of the prescribed documentary stamp on taxable documents and taxpayers
who, at their option, choose to pay the DST liabilities thru the eDST System
pursuant to Revenue Regulations (RR) No. 7-2009; and
3. By a revenue collection agent for remittance of sold loose documentary
_ Stamps.
The return shall be filed with the Authorized Agent Bank (AAB) within the
territorial jurisdiction of the Revenue District Office where the residence or place
of business of the taxpayer is located or where the collection agent is assigned.
In. places where there are no AABs, the return shall be filed directly with the
Revenue Collection Officer (RCO) within the Revenue District Office which has .
jurisdiction over the residence or place of business of the taxpayer or where the
collection agent is assigned.
Effect of Failure to pay DST (Sec. 201, NIRC)
Failure to stamp a taxable document shall not invalidate the same.

However, it shall not be recorded (i.e. in the Registry of Deeds) or admitted or
used as evidence in any court until the requisite stamp is affixed thereto and
cancelled. Furthermore, no notary or other officer authorized to administer
oaths shall add his jurat or acknowledgment to the document unless ine proper
documentary stamp is affixed thereto and cancelled.
THE DOCUMENTARY STAMP TAXES PAYABLE ON DOCUMENTS OR

INSTRUMENTS ARE AS FOLLOWS:
Document/ Instrument Tax Due / Rate
1. Original issue of shares of stock (Sec. 174) P2.00 per P200 or fraction thereof, or 1% of:
= With Par value. The par value

= — Without par value The actual consideration
Stock dividend The actual value sepienntoa by each share
2. Sales, agreements to sell, memoranda of sales,

deliveries or transfer of shares or certificates of
stock (Sec.175) P1.50 per P200 or fraction thereof, or 0.75%
= — With Par value of the par value
50% of the DST paid on the original issue of
= — Without par value the stock
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3. Bonds, debentures, certificates of stocks or | -PO.75 per P200 or fraction thereof, or 0.375%
indebtedness issued in foreign countries (Sec. of par value
176) nme
4. Certificates of profits or interest in property or P1.00 per P200 of fraction thereof, or 0.5% of
accumulations (Sec. 177) face value Bs
5. Bank checks, drafts, certificates of deposit not | P3.00 per check, draft or certificate
bearing interest and other instruments (Sec. 178)
6. All Debt instruments1 (Sec. 179) P4.50 per P200 or fraction thereof or 0.75% of
the issue price
7. Bills of exchange or drafts (Sec. 180) “P0.60 per P200 or fraction thereof or 0.30% of
the face value
8. Acceptance of bills of exchange and others P0.60 per P200 or fraction thereof or 0.30% of
(Sec. 181) : the face value
9. Foreign bills of exchange and letters of credit P0.60 per P200 or fraction thereof or.0.30% of
(Sec. 182) the face value
10. Life Insurance Policies (Sec. 183)
: a. If the amount of insurance does not exceed exempt

-P100,000.00
b. If the amount of insurance exceeds P20.00

P 100,000.00 but does not exceed P300,000.00
c. If the amount of insurance exceeds

P300,000.00 but does not exceed P500,000.00 P50.00
d. If the amount of insurance exceeds P100.00

P500,000.00 but does not exceed P750,000.00
e. If the amount of insurance exceeds P150.00

P750,000.00 but does not exceed P1,000,000.00
f. ff the amount of insurance exceeds P200.00

P1,000,000.00
11. Policies of insurance upon property (Sec. 184) | P0.50 on each P4.00 or fraction thereof or
12.5% of the amount of premium charged
12. Fidelity bonds and other insurance policies P0.50 on each P4,00 or fraction thereof or
(Sec. 185) 12.5% of the premium charged
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13. Policies of annuities and pre-need plans (Sec.
186) P1.00 per P200 or fraction thereof or 0.5% of
= — Annuities the premium or installment payment or
contract price collected
P0.40 per P200 or faction thereof or 0.20% of

the premium or contribution collected
= Pre-need plans
P0.30 on each P4.00 or fraction thereof or

7.5% of the premium charged
14. Indemnity bonds (Sec. 187)
P30.00 each certificate
15. Certificates (Sec. 188) P30.00 each receipt
16. Warehouse receipts (Sec. 189) ‘| P0.20/ticket worth P1.00 and additional
P0.20 for each P1.00 in excess of P1.00 cost
17. Jai-alai and horse race tickets, lotto or other of ticket
authorized numbers games (Sec. 190)
; P2.00
18. Bills of Lading or receipts (Sec. 191)
a. Value exceeding P100 but not over P1,000 P20.00
b. Value exceeding P1,000 | Exempt
c. Freight tickets covering goods, merchandise or

effects carried as accompanied baggage of
passengers on land and water carriers primarily
engaged in the transportation of passengers
| 19. Proxies (Sec. 192) P30.00 each proxy

20. Powers of attorney (Sec. 193) P10.00 each document
21. Leases and other hiring agreements (Sec. P6.00 for the first P2,000, or fraction thereof,
194) and additional P2.00 for every P1,000 or
fraction thereof, in excess of the first P2,000
per year
08, Mortgages, pledges, and deeds of trust (Sec.

195).
a. P5,000 or less P40.00 or 0.8% of amount secured
b. On each P5,000 or fraction thereof in excess of P20.00 or 0.4% of amount secured

P5000 ~-
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23. Deeds of sale and conveyances of real
property (Sec. 196)
a. Consideration is P1,000 or less P15.00 or 1.5% of consideration or FMV,

whichever is higher (if government is a party,
basis shall be the consideration)
P15.00 or 1.5% of consideration or FMV,

b. On each P1,000 or fraction thereof in excess of | whichever is higher (if goverment is a party,
P1,000 basis shall be the consideration)
24. Charter parties and similar instruments (Sec.

197)
a. Registered gross tonnage of vessel does not " P4,000 and additional P100/month in excess
exceed 1,000 tons and duration of charter does of 6 months
not exceed 6 months
P2,000 and additional P200/month in excess

b. Registered gross tonnage of vessel exceeds of 6 months ores
1,000 tons but not over 10,000 and duration of the
charter does not exceed 6 months
c. Registered gross tonnage of vessel exceeds P3,000 and additional P300/month in excess
P10,000 tons and duration of charter does not of 6 months
exceed 6 months
25. Stamp Tax on Assignments and renewals of At the same rate as that of the original
certain instruments (Sec. 198) instruments
Debt instrument shall mean instruments representing borrowing and

lending transactions including but not limited to debentures, certificate of
indebtedness, due bills, bonds, loan agreements, including those signed
abroad wherein the object of the contract is located or used in the Philippines,
instruments and securities issued’ by the government or any of its
instrumentalities, deposit substitute debt instruments, certificates or other
evidences of deposits that are either drawing interest significantly higher than
the regular savings deposit taking into consideration the size of the deposit and
the risks involved or drawing interest and having a specific maturity date, orders
for payment of any sum of money otherwise than at sight or demand,
promissory notes, whether negotiable or non-negotiable, except bank notes
issued for circulation.
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EXEMPT FROM DST: .
The following instruments, documents and papers shall be exempt from
documentary stamp tax (Sec. 199):
1.’ Policies of insurance or annuities made or granted by a fraternal or
beneficiary society, order, association or cooperative company, operated
on the lodge system or local cooperation plan and organized and
conducted solely by the members thereof for the exclusive benefit of each
member and not for profit.
2. Certificates of oaths administered to any government official in his offi cial
Capacity or of acknowledgment by any government official in the
performance of his official duties, written appearance in any court by any
government official, in his official capacity; certificates of the administration
of oaths to any person as to the authenticity of any paper required to be
filed in court by any, person or party thereto, whether the proceedings be
civil or criminal; papers and documents filed in courts by or for the national,
provincial, city or municipal governments; affidavits of poor persons for the
purpose of proving poverty; statements and other compulsory information
required of persons or corporations by the rules and’ regulations of the
national, provincial, city or municipal governments exclusively for statistical
purposes and which are wholly for the use of the bureau or office in which
. they are filed, and not at the instance or for the use or benefit of the person.
filing them; certified copies and other certificates placed upon documents,
instruments and papers for the national, provincial, city or municipal
.governments, made at the instance and for the sole use of some other
branch of the national, provincial, city or municipal governments; and
certificates of the assessed value of lands, not exceeding Two hundred
pesos (PhP200) in value assessed, furnished by the provincial, city or
municipal Treasurer to applicants for registration of title to land.
3. Borrowing and lending of. securities executed under the Securities
Borrowing and Lending Program of a registered exchange, or in
accordance with regulations prescribed by the appropriate regulatory
authority: Provided, however, that any borrowing or lending of securities
agreement as contemplated hereof shall be duly covered by a master
securities borrowing and lending agreement acceptable to the appropriate
regulatory authority, and which agreement is duly registered and approved
by the Bureau of Internal Revenue (BIR).
4. Loan agreements or promissory notes, the aggregate of which does not
: exceed Two hundred fifty thousand pesos (PhP250,000), or any such
‘amount as may be determined by the Secretary of Finance, executed by
an individual for his purchase on installment for his personal use or that of
his family and not for business or resale, barter or hire of a house, lot, motor
vehicle, appliance or furniture: Provided, however, that the amount to be
set by the Secretary of Finance shall be in accordance with a relevant price
index but not to exceed ten percent (10%) of the current amount and shall
remain in force at least for three (3) years.
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Sale, barter or Sitchance of shares of stock listed and traded through the
. local stock exchange:
Assignment or transfer of any mortgage, lease or policy of insurance, or
the renewal or continuance of any agreement, contract, charter, or any
evidence of obligation or indebtedness, if there is no change in the maturity
date or remaining period of coverage from that of the original instrument.
Fixed income and other securities traded in the secondary market or
through.an exchange.
Derivatives; Provided, that for burdeees of this exemption, repurchase
agreements and reverse repurchase agreements shall be treated similarly
as derivatives.
Interbranch or interdepartmental advances within the same legal entity.
10. All forbearances arising from sales or service contracts including credit
card and trade receivables; Provided, that the exemption be limited to those
executed by the seller or service provider itself.
TH Bank deposit accounts without a fixed term or maturity.
12. All contracts, deeds, documents and transactions related to the conduct of
business of the Bangko Sentral ng Pilipinas.
13. Transfer of property pursuant to Section 40(C)(2) of the National Internal
Revenue Code of 1997, as amended.
14. Interbank call loans with maturity of not more than seven (7) days to cover
deficiency in reserves against deposit liabilities, including those between or
among banks and quasi-banks.
15. Remittances of all overseas Filipino workers (OFWs), upon showing of the
same proof of entitlement by the OFW’s beneficiary or recipient.
ILLUSTRATION:
Shares of stock
Alpha Corporation; a newly formed corporation organized under Philippine laws,
issued on March 8, 2021 shares of stocks to one ofits incorporators, Mr. Dela Cruz,
for 250,000. The par value of the shares issued is P200,000.
Question 1: How much is the documentary stamp tax due?

“+ Answer: P2,000
Par value of issued shares P200,000
Divide by 200 }
R4,000
x DST rate Ed tw ee
DST Due R2,000
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Olapter Wt - DST’
“Question 2) How much is the documentary stamp tax due assuming the shares
are without par value?
“Answer: P2,500
Issue price ofissued shares. — R-250,000
Divide by fe
ON
R1,250
x DST rate 2
DST Due P2,500
Question 3: If the shares (with par value) were subsequently soldby Mr. Dela Cruz
for P400,000, how much is the documentary stamp tax due?
“+ Answer: P1,500
Par value of issued shares R200,000
Divide by 200
P1,000,
x DST rate 1.5 \
DST Due P1,500
Question 4: If the shares (without par value) were subsequently sold by Mr. Dela
Cruz for P400,000, how much is the documentary stamp tax due?
_ % Answer: P1,250_
DST on original issue (from Q#2) P2,500

X . 50%
DST Due P1,250
Section 175 of the Tax Code, as amended provides:

“_.....In the case of stock without par value the amount of the documentary stamp .tax
herein prescribed shall be equivalent to fifty percent (50%) of the aKiaeey stamp
tax paid upon the original issue of said stock."
Sale of Real Property

Pedro sold one of his vacant lots in his hometown in Pampanga acquired by him
five years ago for P6,000,000. He sold the same to Juan for P15,000,000,
equivalent to the fair market value at the time of sale.
Question 1: How much is the documentary stamp tax due?

“+ Answer: P225,000
Consideration received P15,000,000

Divide by 1,000
R15,000
x DST rate 15
DST Due R225,000
458
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Chapter fe
Preferential Taxation
» Senior Citizens (SC)
= Persons With Disability (PWD)
» Solo Parents (SP)
= Barangay Micro Business Enterprise (BMBE) '
=» Double Taxation Agreement
Background
’ As provided in the Constitution of the Republic of the Philippines, it is the declared policy
of the State to promote a just and dynamic social order that will ensure the prosperity and
independence of the nation and free the people from poverty through policies that provide
adequate social services, promote full employment, a rising standard of living and an improved
quality of life: In the Declaration of Principles and State Policies in Article II,.Sections 10 and 11, it
is further declared that the State shall provide social justice in all phases of national development
and that the State values the dignity of every human person and guarantees full respect for human
rights.
Article XIII, Section 11 of the Constitution provides that the Sate shall adopt an
integrated and comprehensive approach to health development which shall endeavor to make
essential goods, health and other social services available to all the people at affordable cost. There
shall be priority for the needs of the underprivileged, sick, elderly, disabled, women and children.
of the family to take
Article XV, Section 4 of the Constitution Further declares that it is the dutysecurity
care of its elderly members while the State may design programs of social for them.
459 .
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Chapter (2 = Pre
Definition of Terms
Senior Citizen (SC) refers to any Filipino citizen who is a resident of the Philippines
and who is 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.
A resident citizen, for this purpose, shall refer to a Filipino citizen with permanentlegal
residence in the Philippines, and shall include one, who, having migrated to a foreign
country, has retumed to the Philippines with a definite intention to reside therein, and
whose immigrant visa has been surrendered to the foreign government.
Person With Disability (PWD) shall refer those who have /ong-term physical, mental,
intellectual or sensory impairments which in interaction with various barriers may hinder
. their full and effective participation in society on.an equal basis with others i 5-2017).
’ IMPAIRMENT is any loss, diminution or aberration of peteies, ahiyelclogical or

anatomical structure of function;
DISABILITY shall mean (1) a physical or mental impairment thatsubstantially limits one
or more psychological, physiological or anatomical function of an individual or activities of
such individual; (2) a record of such an impairment; or (3) being regarded as having: Such
an meee.
Solo Parent is defined under RA 8972 as any individual who falls under any of the
following categories:
is A woman who gives birth as a result of rape and other crimes against chastity even
without a final conviction of the offender: Provided, That the mother keeps and
raises the child;
Parent left solo or alone with the responsibility of parenthood due to death of
spouse;
Parent left solo or alone with the responsibility of parenthood while the spouse is
detained or is serving sentence for a criminal conviction for at least one (1) year;
Parent left solo or alone with the responsibility of parenthood due to physical and/or
mental incapacity of spouse as certified by a public medical practitioner;
Parent left solo or alone with the responsibility of parenthood due to legal
separation or de facto separation from spouse for at least one (1) year, as long as
he/she is entrusted with the custody of the children;
Parent left solo or alone with the responsibility of parenthood due to declaration of
nullity or annulment of marriage as decreed by a court or by a church as long as
he/she is entrusted with the custody of the children;
Parent left solo or alone with the responsibility of parenthood due to abandonment
of spouse for at least one (1) year;
Unmarried mother/father who has preferred to keep and rear her/his child/children
instead of having others care for them or give them up to a welfare institution;
Any other person who solely provides parental care and support to a child or
children; and
10. Any family member.who assumes the responsibility of head of family as a result of
the death, abandonment, disappearance or prolonged absence of the parents or
solo parent.
A change in the status or circumstance of the parent claiming benefits under the law,
such that he/she is no longer left alone with the responsibility of parenthood, shall
terminate his/her eligibility for the benefits accorded by law.
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‘ Chepter 72 — Px bial’ Tagation
_ Income Tax of Senior Citizens, PWDs, and Solo Parents

Generally, qualified Senior Citizens, PWDs, and Solo Parents deriving returnable income
during the taxable year, whether from compensation or otherwise, are required to file their income
tax returns and pay the tax as they file the return.
If the returnable income ofa Senior Citizen, PWD, or Solo Parent is in the nature of
compensation income but he qualifies as a minimum wage earner under RA No. 9504, he shall be
exempt from income tax on the said compensation income subject to the rules provided under RR
10-2008 applicable to minimum wage earners. Therefore, Senior Citizens, PWDs, and Solo Parents
are taxable just like an ordinary individual taxpayer as discussed in Chapter 2 of this book, “Income
tax on Individual Taxpayers”. However, unlike other ordinary individual taxpayers, Senior Citizens,
PWDs and Solo Parents are exempt from value added tax (vat) on their certain purchases. In
addition, Senior Citizens and PWDs are also entitled to a twenty percent (20%) discount on their
certain purchases as well as five percent (5%) discount on their purchases of primary and basic
commodities. On the other hand, Solo Parents are entitled to exemption from vat and ten percent
(10%) discount on their certain purchases of goods.
Vat exemption and discounts for Senior Citizens, PWDs, and Solo'Parents are extensively
discussed in Chapter 11 of this book.
Moreover, if the sgnregste amount of gross income earned by. the Senior Citizen, PWD,
or Solo Parent during the taxable year does not exceed P250,000 as provided under RA No. 10963
(TRAIN Law), s/he shall be exempt from income tax and shall not be required to file income tax
return (unless engaged in business). Hence, a Senior Citizen, PWD, and Solo Parent, just like an
ordinary individual taxpayer, can still be liable for other taxes discussed in Chapter 2 of this book,
such as:
1. The 20% final withholding tax on interest income from any currency bank deposit
2. The 15% final withholding tax on interest income from a depository bank under the expanded
foreign currency deposit ae (Sec. 24(B)(1), NIRC, as amended.
3. Pre-termination of long-term deposit or investment under Section 24(B)(1) of the Tax Code:
Four years to less than five years 5%
Three years to less than four years : 12%
Less than three years 20%
4. The 10% final withholding tax:

* On cash and/or. property dividends actually or constructively received from a domestic
‘corporation or from a joint stock company, insurance or mutual fund company and a
regional operating headquarters of a multinational company; or
= — On the share of an individual in the distributable net income after tax of a partnership
(except a general professional partnership) of which he is a partner; or
* — Onthe share of an individual in the net income after tax of an association, a joint account,
or a‘joint venture or consortium taxable as a Corporation of which he Is a member or a
co-venturer (Sec. 24(B)(2), Tax Code).©
5. The Capital gains tax from sales of shares of stock not traded in the stock exchange (Sec.
24(C), Tax Code); and
6. The 6% final withholding tax on presumed capital gains from sale of real property, classified
as capital asset, except capital gains presumed to have been realized from the sale_or
disposition of principal residence (Sec, 24(D), Tax Cae
461
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The
Ohepte 72 — Pe enter Cavation
7. OTHER TAXES. A Senior Citizen, PWD, and Solo Parent shall also be subject to the following
internal revenue taxes, among others, imposed under the Tax Code:
a). Value Added Tax or Other Percentage Taxes
® _ If s/he is self-employed or engaged in business or practice of profession, and his
gross annual sales and/or receipts exceeds the revised vat threshold of P3,000,000
(TRAIN Law) or such amount to which this may be adjusted pursuant to Sec. 109(1)
of the Tax Code, he shall be subject to VAT. Otherwise, s/he shall be subject to the
Percentage Tax under Section 116 of the Tax Code, as amended.
b) Donor’s Tax on all donations made by a Senior Citizen, PWD, or Solo Parent during any
calendar year, unless exempt under a specific provision of law.
c) Estate Tax. In the event of death, the estate of the Senior Citizen, PWD, and Solo Parent
may also be subject to Estate Tax following the rules enunciated under Title III of the
Tax Code and its implementing Regulations.
d) Excise Tax on certain goods
e) Documentary stamp tax
Benefits for Senior Citizens (SC), PWDs and Solo Parents (SP)
Senior Citizens, Persons With Disability (PWD), and Solo Parents are entitled to the
following benefits:
1. Vat exemption on certain purchases.
2. 20% (SC and PWD) or 10% (SP) discount, as the case may be, on their certain
Purchases
3. 5% discount on purchase of primary and basic commodities for Senior Citizens (SC)
and PWDs
For a more detailed discussion on the foregoing benefits, refer to the discussion in Chapter
11 of this book.
Additional Compensation Expense for Private Entities
Private. entities that will employ senior citizens as employees shall be entitled to an
additional deduction from their gross income, equivalent to fifteen percent (15%) of the total
amount paid as salaries and wages to senior citizens, subject to the following conditions:
«= Employment shall continue for a period of at least six (6) months; and
= That the annual income of the senior citizen does not exceed the latest poverty
threshold as determined by the National Statistical Coordination Board (NSCB) of
the National Economic and Development Authority (NEDA) for that year.
Private_entities that employ disabled persons who meet the required: skills or
qualifications, either as regular employee, apprentice or learner, shall be entitled to an additional
deduction from their gross income equivalent to 25% of the total amount paid as salaries and
wages to disabled persons.
Treatment of Input vat attributable to sale to Senior Citizens, PWDs and Solo Parents
The input tax attributable to the vat exempt sale is considered as cost or an expense
account by business establishments and shall not be allowed as input tax credit.
462
The
Oepter 72 — Preferential Taation
The Negosyo Centers shall be responsible for. promoting ease of doing business and
facilitating access to services for MSMEs within its jurisdiction. The MSMED Council through the
regional offices of the Department of Trade and Industry (DTI) shall perform oversight functions
and shall assign personnel to fulfill the functions of the Negosyo Centers.
FUNCTIONS OF NEGOSYO CENTERS

Enforcement of BMBE provisions
Business registration assistance
Business advisory services
Business information and advocacy
Monitoring and evaluation
Perform such other functions that may be assigned by the MSMED Council as germane to RA
10644 and other related laws.
Who are Eligible to Register as BMBE?

Any person, natural or juridical, ar cooperative, or association, having the qualifications
provided under the law may apply for registration as BMBE.
Incentives of BMBEs
REGISTERED BMBES CAN AVAIL OF THE FOLLOWING INCENTIVES:
1. Income tax exemption from income arising from the operations of the enterprise.
To avail of the benefits and privileges of a BMBE, an applicant must secure a certificate
of authority to operate and be registered as a BMBE from the Office of the Treasurer of the
City or Municipality that has jurisdiction. Once the Certificate of Authority is secured, the
applicant must submit the same to the BIR and apply for Income Tax Exemption.
Generally, the income of BMBE from their operations is exempt, hence, excluded from
gross income subject to regular income tax. Only those income from related activities are
exempted. In lieu of ITR, BMBE files Annual Information Return. For self-employed individuals,
use BIR Form 1701-AlIF. For corporations and partnerships, as well as cooperatives, use BIR
Form 1702-AIF.
While BMBEs are generally exempt from income tax, it is subject, however, to business
taxes (3% percentage tax or vat, as the case may be) and other internal revenue taxes such
as documentary stamp taxes and other registration fees.
REVOCATION OF BMBE TAX EXEMPTIONS

« — Change of business address
» Value of assets exceeds P3,000,000
« — Voluntary surrender of the Certificate of Authority
« Death of the sole proprietor
= Merger or consolidation with an entity not registered as BMBE ‘
Sale or transfer of the BMBE enterprise
Falsification of documents
Retirement from business, or cessation/suspension of operations for one year
2. - Exemption from the coverage of the Minimum Wage Law, BMBE employees will still
receive the same social security and health care benefits as other employees).
3. Ac toa special credit window set up specifically for the financing requirements of
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Cha fer 12 — Lr ential Tapation
Barenpey Micro Business Enterprise

(BMBE ) |
RA 9178, otherwise known as the “Barangay Micro Business Enterprises Act (BMBEs) of
2002”, encourages the formation and growth of barangay micro business enterprises by granting
them incentives and other benefits. The Act primarily aims to integrate micro enterprises in the
informal sector into the mainstream of the economy. Strengthening BMBEs would mean more jobs
and livelihood, and a better quality of life for Filipinos. The Act was signed into law by President
Gloria Macapagal-Arroyo on November 13, 2002. Its Implementing Rules and Regulations (IRR)
which was issued on February 7, 2003.
To strengthen MSME and integrate BMBE as one of its tools for inclusive growth on local
level, RA 10644, otherwise known as the “Go Negosyo Act” was enacted on July 15, 2014.
Definition
A BMBE is defined as any business enterprise engaged in production, processing, or
manufacturing of products, including agro-processing, as well as trading and services, with total
assets of not more than P3 million. Such assets shall include those arising from loans but not the
land on which the plant and equipment are located. “Services” shall exclude those rendered by
any one, who is duly licensed by the government after having passed a government licensure
ee in connection with the exercise of one’s profession (e.g., Accountant, Lawyer, Doctor,
etc.). :
The DOF Department Order No. 17-04 also provides that, an enterprise can only qualify
for registration if it is not a branch, subsidiary, division or office of a large-scale enterprise and its
policies and business modus operandi are not determined by a large-scale enterprise or by persons
who are not owners or employees of the enterprise (i.¢., franchises).
‘BARANGAY-BASED means:
1) Majority of its employees are residents of the municipality where its principal place
of business is located;
2) Its principal activity consists in the application/use of skill peculiar to the locality or
of raw materials predominantly sourced from the.area
3) Its business operations are confined within the territorial jurisdiction of the
municipality or LGU in which its principal place of business is located.
MICRO-ENTERPRISE IN NATURE AND SCOPE means:
1) Its principal activity is primarily for livelihood, determined by the MSMED

Council or DTI as.a priority area for development or government assistance;
2) The enterprise is not a branch, subsidiary, division or office of a large scale
* enterprise; and
3) Its policies and business modus operandi are not determined by a large
enterprise or by persons who are not owners or employees of the enterprise.
Registration and Fees

There shall be establishment under the supervision of the Micro, Small and Medium
Enterprise Development (MSMED) Council, a “Negosyo Center” in all provinces, cities and
municipalities. The MSMED shall encourage public-private partnerships in establishment and
management of Negosyo Centers. In applicable areas, the existing MSME Centers shall continue
to operate as Negosyo Centers.
463
The
Chapter 72 — Pre tential’ Tagation
FUNDING AGENCIES designated to set-up special credit window for BMBEs
* — Land Bank of the Philippines;
* Development Bank of the Philippines;
«Small Business Guarantee and Finance Corporation;
« People’s Credit and Finance Corporation;
* Quedan and Rural Credit Guarantee Corporation;
« Government Service Insurance System (for members only); and Social Security
. System (for members only)
4, Technology transfer, production and management training, and ‘}:marketing

’ assistance programs for BMBE beneficiaries.
Agencies mandated to provide assistance in the areas of technology transfer, production and
management training, marketing assistance .
* Department of Trade and Industry (DTI) __.
Department of Science and Technology (DOST)
University of the Philippines Institute for Small Scale Industries (UP-ISSI)
Cooperative Development Authority (CDA)
Technical Education and Skills Development Authority (TESDA)
Tenoegy and Livelihood Resource Center (TLRC)
_ 5, TheLGUsare nes encouraged to either reduce the amount of local taxes, fees, and
, charges imposed or exempt the BMBEs from local taxes, fees, and charges.
Double Taeation Agreement (DTA)

When businesses are conducting transactions and activities across multiple jurisdictions,
there is always the potential to apply tax, twice for the same transaction or activity, hence, resulting
to double taxation. Double Taxation is an issue that can arise for businesses across many types of
cross-border transactions and activities including receipt of business profits, dividends, interest,
royalties, capital gains, and others.
In the Philippines, the Bureau of Internal Revenue have issued several revenue issuances
to address the impact of double taxation and provide specific tax treaty relief procedures when
paying dividends, interest, and royalties to nonresidents. The most recent issuance of the BIR is
RMO 14-2021 issued on March 31, 2021.
Types of Double Taxation
1. Direct double taxation

This is objectionable and legally objectionable for being oppressive and inequitable. It
violates the concept of equal protection, uniformity and equitableness of taxation in the
Constitution.
Direct double taxation means (Elements of direct double Kaxacion):

- Taxing twice;
- Of the same object or subject matter
- By the same taxing authority;
- Within the same jurisdiction
- Forthe same purpose;
- — During the same taxable period; and
- The same kind or character :
465
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Olapter 72 — Pr orvintial' Laeation
CIR vs. Bank of Commerce, G.R. No. 149636, June 8, 2005

CIR vs. S.C. Johnson & Son, Int., et al, G.R. No. 127105, June 25, 1999
2. Indirect double taxation
It is NOT legally objectionable. It extends to all cases in which there is a burden of two
or more pecuniary impositions but imposed by different taxing authorities, such as in the
case of intemational double taxation. There is indirect double/duplicate taxation if any of
the elements described above is not present.
Methods to Eliminate or Mitigate International Double Taxation
International double taxation may be eliminated or mitigated unilaterally (a domestic law is

enacted by one state by unilateral withdrawal or concession to impose taxes on a particular subject
or object within its jurisdiction) or bi/ateral/y (countries enter into tax treaties or accession to
conventions to grant relief or allocate exclusive taxing rights of particular items of income).
1. Tax Exemption (i.e.; through tax treaties)

© A State may exempt from taxation certain items of income derived by its residents in
another state. Tax exemption of certain subject or object through tax treaties may also
entered into by contracting states to reconcile the. national fiscal legislations of the
contracting parties and, in turn, help the taxpayer avoid simultaneous taxations in two
different jurisdictions (CZR vs. S.C. Johnson and Son, Inc.).
The primary purpose of a Tax Treaty is commonly stated or understood to be for the
avoidance of double taxation of income arising from cross-border transactions or for the
purpose of avoiding simultaneous taxation in two different jurisdictions.
Tax Exemption under Tax Treaties, Sec. 32(B)(5) of the Tax Code, provides:
Income Exempt under Treaty. — Income of any kind, to the extent required by
any treaty obligation binding upon the Government of the Philippines.
Sec. 28(A)(3) of the Tax Code, provides:
International Carrier — An international carrier doing business in the

Philippines shall pay a tax of two and one half percent (2 1/2 %) on its
‘Gross Philippine Billings’ as defined hereunder...
"..e Provided, That international carriers doing business in the Philippines may
avail of a preferential rate or exemption from the tax herein imposed on
their gross revenue derived from the carriage of persons and their excess
baggage on the basis of an applicable tax treaty or international
agreement to which the Philippines is a signatory or on the basis of
reciprocity such that an international carrier, whose home country grants
income tax exemption to Philippine carriers, shall likewise be exempt from the
tax imposed under this provision”.
-2, Tax Credit (i.e., deductible from the tax due)

0 The State treats foreign income tax payments by its residents from another State as if it
were an income tax paid to it. The tax paid abroad is deductible from the tax due of the
taxpayer,
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ALND.
Chapter Z2 — Fre Cuidinl Tagation
Sec. 34(C)(3) of the Tax Code, provides:

"In General. — Taxes paid or incurred within the taxable year in connection with the
taxpayer's profession, trade or business, shall be allowed as deduction, except..."
"(3) Credit Against Tax for Taxes of Foreign Countries. — If the taxpayer
signifies in his return his desire to have the benefits of this paragraph, the tax imposed
by this Title shall be credited with...”
Sec. 86(D) of the Tax Code, provides:

Tax Credit for Estate Taxes Paid to a Foreign Country. ~
(1) In General. — The tax imposed by this Title shall be credited with the amounts of any
estate tax imposed by the authority of a foreign country.
Sec. 101(C) of the Tax Code, provides:

Tax Credit for Donor’s Taxes Paid to a Foreign Country. -
(1) In General. - The tax imposed by this Title upon a donor who was a citizen or a
resident at the time of donation shall be credited with the amount of any donor's tax of
any character and description imposed by the authority of a foreign country.
3. Deduction (as part of operating expense)

0 The State treats foreign income tax payments by its residents from another State as part
of operating expenses or costs of the taxpayer. The tax paid abroad is decicHibie from
the gross income of the taxpayer.
Sec. 34(Deductions from Gross Income) of the Tax Code, provides:

"(C) In General. - Taxes paid or incurred within the taxable year in connection with the
taxpayer's profession, trade or business, shall be allowed as deduction, except...”
a. The income tax provided for under Title II of the Tax Code, as amended;
b. Income taxes imposed by authority of any foreign country; but this deduction shall
be allowed in the case of a taxpayer who does not signify in his return his desire ‘to
have to any extent the benefits of paragraph (3) of Sec. 34(C) (relating to credits
for taxes of foreign countries);
Estate and donor’s taxes; and
an
Taxes assessed against local benefits of a kind tending to increase the value of the
property assessed,
*
Provided, That taxes allowed under this Subsection (Sec. 34C), when refunded or
credited, shall be included as part of gross income in the year of receipt to the extent of
the income tax benefit of said deduction.
4. Reciprocity (i.e., reciprocity on international carriers; reciprocity on dividend income

received by NRFCs)
0 The State grants tax benefits to foreign nationals upon proof that in the country where
they reside, Filipinos residing therein are given an equal tax benefit.
Sec. 28(A)(3) of the Tax Code, provides:

International Carrier — An international carrier doing business in the Philippines shall
pay a tax of two and one half percent (2 1/2 %) on its ‘Gross Philippine Billings’ as
defined hereunder....
. Provided, That international carriers doing business in the Philippines may avail of
Be ay pa ht from the tax herein imposed on their gross revenue
eee” from the. carriage of persons and their mas baggage on the basis of an
licable_tax-treaty or international agreement to lippines is
Or te tha feasts of recioractv ich that an inleriational en whose home country
467
The
Ohepte 72 — Pe nial Taeation
grants income tax exemption to Philippine carriers, shail likewise be exempt from the tax
imposed wee this provision’.
Sec. 104 i
Tax Credit for See Taxes Paid tot a Foreign Country, -
(1) In General. - The tax imposed by this Title upon a donor who was a Citizen or a
resident at the time of donation shall be credited with the amount of any donor's tax of
any character and description imposed by i authority of a foreign country.
. Provided, still further, that no tax shall be een under this Title in respect of
Fess personal property:
(a) if the decedent at the time of his death or the donor at ihe time of the donation was
a citizen and resident of a foreign country which at the time of his death or donation did
not impose a transfer tax of any character, in respect of intangible personal property of
atizens of the Philippines not residing in that foreign country, or
(b) if the laws of the foreign country of which the decedent or donor was a aitizen and
resident at the time of his death or donation allows a similar exemption from transfer or
death taxes of every character or description in respect of intangible personal property
owned by citizens of the Philippines not residing in that foreign country.”
Tax Treaty Benefits

RMC 77-2021 provides that only persons, natural or juridical, who are residents of me
or both of the Contracting States may avail of treaty benefits (i.e., preferential rate
tax
exemption). To establish the fact of residency in a contracting state, the nonresident iicoine
recipient should submit a Tax Residency Certificate (TRC) duly issued by the tax authority of the
Country of residence.
The Double Taxation Conventions or tax treaties contain a standard provision that "the
Convention shall apply to persons who are residents of one or both of the Contracting States". In
other words, the intention of the tax treaties is to limit or restrict the granting of its benefits to
those who are entitled thereto, i.e., the residents of the contracting states only.
The benefit of a tax treaty does not extend to a taxpayer.who fails to prove his/her/its
residency in either or both of the contracting states. The best proof of residency is the TRC duly
issued by the competent authority of the treaty partner. Failure to submit the same would result
in the denial of the nonresident's claim. as
Only one original and authenticated TRC shall be submitted to each income payor per
year. In the alternative, a certified true copy of the original may be submitted to other payors of
income if the original copy is no longer available, with a notation as to whom the original copy was
previously submitted. The same rule applies to the proof of establishment or incorporation,
Certificate of Non-registration or License to Do Business in the Philippines duly issued by the
Securities and Exchange Commission, and Certificate of Business Registration/Presence duly issued
by the Department of Trade and Industry.
Philippine income that may be subject to a preferential tax treaty rate and/or
tax exemption under the valid and effective Philippine Double Tax Agreements
(DTAs)
1. Preferential rates:
° Dividends;
e Interests;
© Royalties;
468
The
Chapter 02— Pre Lo pall Tageation
e Profits of shipping and air transport in international traffic; and

e — Branch profit remittances,.
Exemption:
e _ Business profits;
e Capital gains; ;
e Income from employment;
e Income from independent professional services;
e Income of athletes and performers supported by Beek funds;
e Income from government service;»
e Pensions;
e Income of visiting teachers and researchers;
e Allowances and remuneration of visiting students and trainees; and
e Other income. ;
EGU E UND E CODE VS E S
‘If the regular tax rates under the Tax Code, as amended, were used on an item of
income of a nonresident, instead of the treaty rate(s), the nonresident or its authorized
representative should file a Tax Treaty Relief Application (TTRA) to International Tax Affairs
Division (ITAD) of the BIR with complete documentary requirements and claim for refund at
" any time after the payment of the withholding tax.
On the other hand, when an item of income was subjected to taxation in accordance
with the provisions of the relevant tax treaty; the withholding agent/income payor shall file
with ITAD a Request For Confirmation (RFC) that the tax treatment of such income was
proper. The nonresident shall submit a TRC and the appropriate | BIR Form No. 0901 prior to
the payment of income.
The income payor may apply the provisions of the applicable treaty; provided that
all the conditions for. the availment thereof, other than residency, have been
satisfied. Otherwise, the regular rates imposed under the Tax Code should be applied.
FILING OF REQUEST FOR CONFIRMATION (RFC)
All TTRAs or RFCs shall only be submitted to the International Tax Affairs Division
(ITAD). Depending on the type of income, the request for confirmation with complete
documentary requirements shall be filed by the withholding agent, domestic or foreign, on or
before the dates prescribed below:
Type of Income _ Date of Filing

Capital gains At any time after. the transaction but not later than the last day
of the fourth month following the close of the taxable year
when the income is paid or when. the transaction is
,| consummated,
Other income At any time after the close of the taxable year but not later than
‘ the last day of the fourth month following the close of the
taxable year when the income is paid or becomes payable, or
when the expense/asset is accrued or recorded in the books,
whichever comes first.
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One consolidated request for confirmation per nonresident income recipient,

regardless of the number and type of income payments made during the year, shall be
filed. The case folder shall, however, be pre-arranged by the filer per type of income following
the sequence of documents as stated in the list of requirements.
Pursuant to Revenue Memorandum Circular No. 20-2022, however, taxpayers. who

were already issued with Certificate of Entitlement (COEs), the tenor thereof allows the
ruling to be applied to subsequent or future income payments, shall no longer file
an RFC or TTRA every time an income of similar nature is paid to the same
nonresident. In applying the confirmed treaty benefit to future income payments, the income
payor or withholding agent shall always be guided by the requisites mentioned in the COE.
DOCUMENTARY REQUIREMENTS
The following are the requirements to be submitted when filing a TTRA or RFC:
® . The non-resident individual or corporation must first secure a Taxpayer Identification
Number (TIN) from Revenue District Office (RDO) No. 39- South Quezon City;
© Duly accomplished TTRA BIR Form No, 0901
© General and Specific Documentary Requirements enumerated ‘ides RMO No. 14-2021.
International Tax Affairs Division (ITAD) of the BIR

Pursuant to Revenue Administrative Order No. I -20L9, the International Tax Affairs
Division (ITAD) of the Bureau of Internal Revenue (BIR)is tasked to formulate policies, work
programs, standards, guidelines and procedures, including forms for the proper and effective
implementation of tax treaties and to prepare rulings on applications for tax treaty relief and on
questions involving the proper interpretation of the provisions of tax treaties and other international
tax-agreements, among others. Therefore, rulings involving the application and interpretation of
tax treaties should originate from the ITAD.
PROCEDURES IN AVAILING RELIEF: FROM DOUBLE: TAXATION

The guidelines and procedures in availing relief from double taxation were laid down in Section 4 of RMO {4- 2021,
as follows: .
» . The withholding agent or income payor may rely on the submitted BIR Form No. 0901
or Application Form for Treaty Purposes (Hereinafter referred to as Application Form),
Tax Residency Certificate (TRC) duly issued by the foreign tax authority, and the relevant
provision of the applicable tax treaty on whether to apply a reduced rate of, or exemption
from, withholding at source on the income derived by a nonresident taxpayer from all
sources within the Philippines. Therefore, it is imperative for nonresident taxpayers
intending to avail of treaty benefits to always submit said documents to each withholding
agent or income payor prior to the payment of income for the first time.
o Failure to provide the said documents when requested may lead to withholding
using the regular rates prescribed under the Tax Code, as amended, for
nonresident foreign corporations or nonresident aliens not engaged in trade’
Or business, as the case may be, and not the treaty rate.
« When the treaty rates have been applied by the withholding agent on the income earned
by the nonresident, the former shall file with ITAD a request for confirmation
(RFC) on the propriety of the withholding tax rates applied on that item of income. On
the other hand, if the regular rates have been imposed on the said income, the
nonresident shall file a TTRA with ITAD, In either case, each requestfor confirmation
and TTRA shall be supported by the documentary requirements set out hereunder.
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° uest for Confirmatio C) vs. Ta elle catlo

. = Ifthe withholding agent/income payor outright applies the exemption or preferential rate based on
the documents provided by the payee (BIR Form 0901, Tax Residency Certificate, and a copy of the Tax
Treaty indicating the applicable preferential rate or exemption), the withholding agent shall file a Request for
Confirmation (RFC) with supporting documents on the propriety of the withholding tax applied.
» If the withholding agent/iincome payor uses the regular rate, the nonresidnt shall file a TTRA with
supporting documents.
* The request for confirmation shall be filed by the withholding agent at any time after the
‘. payment of withholding tax. but shall in no case be later than the last day of the fourth
month following the close of each taxable year.
© The filing of TTRA largely depends upon the nonresident who must invoke and
. prove his/her/its entitlement to treaty benefit. The nonresident may, at any
time after the receipt of income, filea TTRA to prove its entitlement to treaty
benefits. Failure to prove the same may result in the confirmation of the tax
rate previously applied on the income, and in the eventual denial of the TTRA.
« If the BIR determines that the withholding tax rate applied is lower than the rate that
should have been applied on an item of income pursuant to the treaty, or that the
nonresident taxpayer is not entitled to treaty benefits, it will issue a BIR Ruling denying
the request for confirmation or TTRA. Consequently, the withholding agent shall pay the
deficiency tax plus penalties.
o On the contrary, if the withholding tax rate applied is proper or higher

than therate that should have‘been applied, the BIR will issue a certificate
confirming the nonresident income recipient's entitlement to treaty benefits.
In the latter case, thetaxpayer may apply for a refund of excess withholding
tax. ae
= Generally, one TTRA or request for confirmation shall be filed for each transaction
except for long-term contracts (e.g. contracts for services or loanagreements, license
agreements, etc.) i.e., those which are effective for more thana year, where an annual
updating shall be made until the termination of the contract. To ensure that the proper
rate is applied until the end of the contract, the nonresident taxpayer shall file an updated
Application Form, a new TRC [if the validity period of the previously submitted TRC has
already lapsed], and other relevant documents not later than the last day of the fourth
month following the close of each taxable year. Thus, for instance, if a contract for
‘consultancy services has a term of five (5) years starting from January 1, 2020 until
December 31, 2024, five (5) TTRAs shall be filed on or before April 30 of the following
year to determine at the earliest possible time whether or not the nonresident taxpayer
already has a permanent establishment in the Philippines.
* New TTRAs shall be processed within four (4) months from the submission of complete
documents or as soon as practicable provided that the ITAD has addressed all its
backlogs. —
Documentary Requirements
The original or certified true copy of documents (general and specific) required under
Section 5 of RMO 14-2021 shall be submitted to ITAD when claiming relief from double
taxation. The BIR, however, reserves the right to request additional documents which are
deemed necessary for the proper disposition of the case, as well as the right to require the
presentationof the original copy of the documents to verify the authenticity of the submitted
copies thereof.
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Requirement of Authentication
All documents executed in a foreign country must either be authenticated ‘by the
Philippine Embassy stationed therein or apostilled if the said foreign country is a signatory to
‘the Convention Abolishing the Requirement of Legalization for Foreign Public Documents
’ (HCCH 1961 Apostille Convention) in order to be acceptable in the Philippines.
Manner of Granting and Denying Treaty Benefits |

To streamline the process of confirming entitlement to treaty benefit or confirming
thecorrectness of the withholding tax rates applied on a particular item of income, the BIR shall
issue a Certification duly signed by the Assistant Commissioner for Legal Service in lieu of the
usual BIR Ruling and Compliance Check Report. The ITAD shall always ensure that a loose
documentary stamp provided by the applicant is affixed on the Certificate before Kees it.
In cases of denial or a ruling of first impression, a BIR Ruling signed by the

Commissioner or his/her authorized representative, which shall contain the factual and legal
bases that led to the conclusion, shall instead be issued. ITAD shall only issue the certification
or BIR Ruling to the filer (nonresident income recipient or withholding agent) or his/her/its
authorized representative(s) as mentioned in the Application Form. Any representative not
mentioned in the said form shall be allowed to receive the certification or ruling provided he/she
is equipped with a notarized Special Power of Attorney.
Appeals :
All adverse rulings are appealable to the Department of Finance (DOF) within
thirty (30) days from receipt thereof pursuant to existing rules and regulations. Any request
for certified true copy of the complete case docket in support of such appeal shall only be
processed upon presentation of proof of payment of certification fee of P10.00 per page.
Within five (5) days from the date of payment of the certification fee, the complete case docket,
i.e., each and every page of the records of the case including a copy of the subject BIR Ruling,
shall be sequentially numbered, photocopied, stamped and signed by the Division Chief of the
ITAD as an attestation that the said copies are authentic and true copy of the original and
complete records on file.
Evaluation of Pending TTRAs for Income Earned in Prior Years

o While the Court held in the case of Deutsche Bank AG Manila Branch vs. Commissioner of
Internal Revenue that the TTRA should merely operate to confirm the entitlement of the
taxpayer to the relief, it did not give a blanket authority upon the taxpayerto request for
such confirmation whenever it/he/she deems appropriate.
o ‘Therefore, by virtue of this Order, taxpayers with pending TTRAs for income earned in 2020
‘and prior years, including those with Notice of Archiving, are given three (3) months from
. the receipt of a Final Notice to Submit Additional Documents (Final Notice), or fromthe
effectivity of this Order, whichever is later, to submit the lacking documents. Taxpayers
who were issued a Notice of Archiving will no longer receive a Final Notice,
o Failure to submit the requested documents would result in the automatic denial of the TTRA
for failure of the nonresident income recipient to substantiate or prove his/her/its
entitlement to treaty benefits.
Filing a Claim for Refund “i *f

If the income of the nonresident taxpayer has been subjected to regular rates,
he/she/it may subsequently file a claim for refund of the difference between the amount of
withholdingtax actually paid in the Philippines and the amount of tax that should have been’
paid underthe treaty after obtaining a certificate confirming his/her/its entitlement to
treaty benefits.For this purpose, a an accomplished BIR Form No, 1913 shall be filed together
with the letter-request.
/
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The claim for refund may be filed independently of, or simultaneously with, the TTRA.
If the claim was not filed simultaneously with the TTRA, the office where it was filed shall
coordinate with, and defer to, ITAD the resolution of the nonresident’s entitlement to treaty
benefit. If, on the other hand, the claim was filed simultaneously with the TTRA, it shall be the
responsibility of the ITAD to endorse the claim for refund to the proper office that handles
the processing of tax refunds after the resolution of the TTRA. At any rate, all issues relating
to the application and implementation of treaty provisions shall fall within the exclusive
jurisdiction of the ITAD. All claims for refund shall be filed within the two-year prescriptive
period provided under Section 229 of the Tax Code, as amended.
Responsibilities of the Assessment Arms of the BIR

The ITAD evaluates all requests for confirmation and TTRAs based on the documents
submitted by withholding agent or nonresident taxpayer. If, in the course of audit, the tax
auditor finds any inconsistencies in the facts and the representations made as bases of the
previously issued certificate or ruling, it shall be the responsibility of the tax auditor to inform
the ITAD of such findings. In turn, the ITAD shall re-evaluate the case and accordingly issue
an amendatory certificate or ruling, whichever is applicable. -
Other Applicable Taxes -, .

In processing requests for confirmation and TTRA, the BIR may likewise determine
whether the subject transaction is subject to other internal revenue taxes under the Tax Code,
including, but not limited to, the following:
1. Value-added tax (VAT);
2. Other percentage taxes;
3. Documentary stamp tax (DST); and
4. Donor’s tax. ~ ,
Penalties for Late Filing of Requests for Confirmation

Any violation of the provisions of this Order, including the failure to file a’ request for
confirmation within the period herein prescribed shall be subject to penalties provided in
Sections 250 and 255, and other pertinent provisions, of the Tax Code.
The taxpayer may likewise be charged with the crime of perjury under Article 183 of
the Revised Penal Code and with other appropriate crimes or offenses as may be warranted
under existing laws, in addition to the payment of deficiency taxes for failure to supply correct
and accurate information in the Application Form and other documents submitted in support
of such application.
OECD Model Tax Convention
The Organisation for Economic Co-operation and Development (OECD) developed a

Model Tax Convention, a model for countries concluding ‘bilateral tax conventions, plays a crucial
role in removing tax related barriers to cross border trade and investment. It is the basis for
negotiation and application of bilateral tax treaties between countries, designed to assist business
while helping to prevent tax evasion and avoidance. :
The OECD Model also provides a means for settling on a uniform basis the most common
problems that arise in the field of international double taxation.
The 2017 edition of the OECD Model mainly reflects a consolidation of the treaty-related
measures to equip governments with domestic and international rules and instruments to address
tax avoidance, ensuring that profits are taxed where economic activities generating the profits are
_ performed and where the value is created.
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The OECD Model requires constant review to address the new tax issues that arise In
connection with the evolution of the global economy. Working Party No. 1 of the OECD's Committee
on Fiscal Affairs meets this need and its work results in regular changes to the Model, Updates
. were published in 1994, 1995, 1997, 1998, 2000, 2003, 2005, 2008, 2010, 2014, and 2017.
In the relevant commentary on Article 1 of the Organization for Economic Co-operation

and Development (OECD) Model Tax Converition, the OECD made mention that a state can
automatically limit the tax it levies in accordance with the relevant provisions of the double taxation
convention (Aereinafter referred to as tax treaty), subject to possible prior verification of treaty
entitlement, or it can impose the tax provided for under its domestic law and subsequently refund
the part of the tax that exceeds the amount that it can levy under the provisions of the tax treaty.
In the Philippines, availment of treaty benefits has always been an issue and has been subjected
to varying interpretations. Thus, to settle all issues related to the availment of treaty benefits and
to deliver efficient service to the taxpayers in compliance with the Ease of Doing Business Act, RMO
14-2021 dated March 31, 2021 was issued with the following objectives: ’
To update the guidelines and procedures in availing tax treaty relief;
ae ONES
To streamline the processing of 7ax Treaty Relief Application (TTRA);

To reformat the manner of confirming entitlement to treaty benefits;
To address pending TTRAs for income earned in prior years and before the effectivity of
this Order;
To define the respective functions of the concerned offices of the Bureau in regard to
ui
the assessment and collection of the withholding tax due on the income.payments to
nonresident taxpayers as well as refund of withholding taxes paid in excess of the treaty
rates; and ;
6. To prescribe the penalties for the late filing of requests for confirmation andTTRAs.
RMO 14-2021 shall cover all items of income derived by nonresident taxpayers from
Philippine sources that are entitled to relief from double taxation under the relevant tax treaty.
he United Nations Model! Double Taxation Convention
The United Nations Model Double Taxation Convention between Developed and
Developing Countries (the United Nations Model Convention) forms part of the continuing
international efforts aimed at eliminating double taxation. These efforts were begun by the League
of Nations and pursued in the Organisation for European Economic Co-operation (OEEC) (now ~
known as the Organisatidn for Economic Co-operation and Development (OECD)) and in regional
forums, as well as in the United Nations, and have in general found concrete aa in a series
of model or draft model bilateral tax conventions,
These Models, particularly the United Nations Model Convention and the OECD Model
Tax Convention on Income and on Capital (the OECD Model Convention) have had a profound
influence on international treaty practice, and have significant common provisions. The similarities
between these two leading Models reflect the importance of achieving consistency where possible.
» On the other hand, the important areas of divergence exemplify, and allow a close focus upon,
some key differences in approach or emphasis as exemplified in country practice. Such differences
relate, in particular, to the issue of how far one country or the other should forego, under a bilateral
tax treaty, taxing rights which would be available to it under domestic law, with a view to avoiding
double taxation and encouraging investment.
The United Nations Model Convention generally favors retention of greater so called —
“source country” taxing rights under a tax treaty—the taxation rights of the host country of
investment—as compared to those of the “residence country” of the investor. This has long been
regarded as an issue of special significance to developing countries, although it is a position that
some developed ‘countries also seek in their bilateral treaties,
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The United Nations Model Double Taxation Convention stated that, broadly, the
general objectives of bilateral tax treaties therefore include the protection of taxpayers against
double taxation with a view to improving the flow of international trade and investment and
the transfer of technology. They also aim to prevent certain types of discrimination as between
foreign investors and local taxpayers, and to provide a reasonable element of legal and fiscal
certainty as a framework within which international operations can confidently be carried on.
With this background, tax treaties should contribute to the furtherance of the development
aims of developing countries. In addition, the treaties seek to improve cooperation between
taxing authorities in carrying out their functions, including by the exchange of information with
a view to preventing avoidance or evasion of taxes and by‘assistance in the collection of taxes.
QUIZZER©
Senior Citizens and PWDs
1. refers to any Filipino citizen who is a resident of the Philippines and who issixty (60) years
old or above.
a. persons with disability c. benefactor
b. senior citizens _ d. self-employed
2. Statement 1: A resident citizen in the preceding number shall refer to'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.
Statement 2: A senior citizen referred to in the preceding number 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.
3. are those who have long-term physical, mental, intellectual or sensory impairments which
in interaction with various barriers may hinder their full and effective participation in society on an
equal basis with others.
a. persons with disability c. benefactor
b. senior citizens d. self-employed

a. Double discount to a PWD/SC is not allowed.
b. | PWDs/SCs will have the option to choose either promotionaVother forms of discounts or the
PWD discount provided that only the PWD discount is exempted from vat.
c. Incase that the PWD is also a SC, the PWD may opt to use either the SC or PWD discount.
d. Allof the above
| 5. ° Statement 1: While the 20% senior citizen discount and vat exemption shall not apply. to “children’s
meals” as these are primarily prepared and intentionally marketed for children, if the PWD is a child,
the 20% PWD discount will be applicable as long as it is for his personal consumption.
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Statement 2: The 20% discount on purchase of food and drinks, beverages, dessert and other
consumable items served by establishments includes value meals and other similar food counters,
fast food, cooked food and short orders including take outs.
-6. Which of the following statements regarding discounts allowed to PWDs is incorrect?
a. In case the seller provides promotional discounts, the PWD will have the option to choose
either the promotional discount or the PWD discount.
b. Only the PWD discount is exempted from vat.
‘c. . In cases where the PWD is also a senior.citizen (SC), the PWD shall also be entitled to SC
discount in order to maximize the discounts granted under Magna Carta for PWDs and SCs.
7. Statement 1: The 5% discounts on electric and water consumption of senior citizens also provides vat
exemption.
Statement 2: The vat exemption granted to Senior Citizens (SCs) and PWDs will not cover other
indirect taxes that may be passed on by the seller to a SC/PWD buyer, such as percentage tax, excise
tax, etc.
a. Only statement‘ is correct -
c. Only statement 3 is incorrect
d. ‘None of the statements is correct
8. If the returnable income of a PWD is in the nature of compensation income and he qualifies as a
minimum wage eamer (MWE), he shall be exempt from income tax. This income tax exemption is
a/an:
\ a. Tax privilege granted only to PWDs.
b. Exemption which will be lost if the PWD loses his status as PWD.
c. _ Privilege that will not extend to a PWD with dual citizenship status.
d.' General income tax exemption without regard to the status of the taxpayer.
9. Statement 1: If a taxpayer, classified as PWD, is unable to make his own retum, the retum may be .
made by his duly authorized agent or representative or by the guardian or other person charged with
the care of his person or property.
Statement 2: The principal (PWD) and his representative or guardian shall assume the responsibility
of making the retum and incurring penalties provided for erroneous, false, fraudulent retums.
Statement 3: The privilege in statement 1 and transfer of responsibility in statement 2 is likewise
available to a senior citizen, if he is under some form of disability and unable to make his own retum.
c. Only statement 3 is incorrect
d. None of the statements is incorrect

a. The sales discount granted to a SC or PWD shall be treated as ordinary and —
expense duly deductible from the gross income of the seller falling under the category of
itemized deductions.
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Chapter C2 — Prferatial Tawation
b. The sales discount shall not be accounted as deductible expense for taxpayers availing the
* — Optional Standard Deduction (OSD).
c. The sales discount shall only be allowed as itemized deduction from gross income for the same
taxable year that the discount is granted.
d. Allofthe above
Mabuhay Services Corporation (MSC) provides 20% discoUnt to senior citizens. It Cone the following
during the year.
; Customers
_ Regular Senior Citizen Total
Receipts P8,000,000 P1,000,000 P9,000,000
Cost of services ae 5,000,000
Other deductible expenses 2,000,000
11. The amount of gross receipts to be reported is

a. P1,000,000 c. P9,000,000
b. P1,250,000 , d. P9,250,000
12. The regular and special itemized deductions deductible from gross income of MSC is:
a. P2,000,000 c. P5,250,000
~ b.P2,250,000 d. P7,000,000
13. The taxable net income of MSC is:

a. P750,000 _ .P1,750,000
b. P1,000,000 d. P2,000,000
14. The correct amount of MSC's business tax should be:

a. P270,000 c. P1,080,000
b. P960,000 d. nil
Mabisa Drugs Incorporation had the following during the year:
Customers
Senior Citizen
: Regular Total
Gross Sales P8,000,000 P2,000,000 P10,000,000
Cost of Sales 5,000,000 1,000,000 6,000,000
Other deductible expenses - 2,000,000
Mabisa adopts a policy of giving senior citizens 25% discount. As a result, it granted P500,000 “et senior
citizens’ discount during the year.
15. The amount of gross sales to be reported is

a. P8,000,000. c. P9,600,000
b. P9,500,000. * — d. P10,000,000
16. The amount of other deductible expenses to be reported is

a. P400,000 c. P2,400,000
b. P500,000 d, P2,500,000
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17. The taxable net income is:

a. P1,500,000 c. P1,800,000
b. P1,600,000. © d. P2,000,000
a. The input tax attributable to vat exempt sale to a PWD or SC is considered as cost or an
expense account by business establishments and shall not be allowed as input tax credit.
b. The vat exemption of aSCor PWD shall not cover other indirect taxes that may be passed on
by the seller to a SC or PWD buyer, such as percentage tax, excise tax, etc.
c. _ Incase of letter “b’, the discount must be on the total cost of the goods or services charged by
the seller, exclusive of vat.
d. Allofthe above
Bobads Corporation employs both regular and senior citizen employees and paid the following
compensation:
Regular employees P800,000
Senior citizen employees:

With salary grade above poverty level 200,000
With salary grade below poverty level 100,000
19. The deductible compensation expense is:

a. P1,100,000 c. P1,120,000
b. P1,115,000 - d. P1,145,000
20. Using the above information, except that 20% of the regular employees are persons with disability
receiving a total compensation of P160,000, the deductible compensation expense of the corporation
is “ e
a. P1,152,000 c. P1,178,000
b. P1,155,000 aP 1,192,000
21. Which of the following statements is not a requirement in order for private establishments employing
senior citizens to be entitled to additional deduction from their. gross income equivalent to fifteen
percent (15%) of the total amount paid as salaries and wages to senior citizens? :
a. Theemployment shall have to continue for a period of at least one (1) year.
b. The annual taxable income of the senior citizen does not exceed the poverty level as
_ determined by NEDA.
c. Both statements “a” and “b”
22. . Private entities that employ disabled persons who meet the required skills or qualifications, either as
regular employee, apprentice or leamer, shall be entitled to an additional deduction from gross income
equivalent to:
a. 15% of the total amount paid as salaries and wages to PWDs.
b. 25% of the total amount paid as salaries and wages to PWDs.
c. 50% of the total amount paid as salaries and wages to PWDs.
d. 100% of the total amount paid as salaries and wages to PWDs.
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93. Lola Lita, a senior citizen, bought a medicine with a selling price of P9,520 ae of VAT. How
much is the net amount to be paid by Lola?
a. P8500 c. P6916
b. P7,616 d. P6,800
24. Lolo Sot, a senior citizen went to Jollibee to treat’his 4 grandchildren on account of his retirement.
They consumed foods and beverages with gross amount of P41, 12) inclusive of VAT. How much is
amount to be paid by lolo Sot? ,
a. P896 c. P1,056
b. P920 d. P1,100
25. Gabriana Clinic, a VAT-registered entity, performed a prosthetic surgery on the legs of Loyd, a person
with disability. The total cost of medical operation was P500,000. Being a disabled person, Loyd
received 20% discount from Gabriana. How much is the total amount to be paid by Loyd?
a. P400,000 c. P500,000
b. P448,000 d. P560,000
Toothful Dental Clinic rendered dental services to a PWD. The professional fee amounted to P1,120
inclusive of vat.
26. How much is the amount to be paid by the PWD?

a. P800 c. P1,000
b. P896 d. °P1,120
27. How much is the business tax due of the clinic on its services rendered to the PWD?
a. P26.88 c. P120
b. P96 d. nil
28. Assume the dental clinic is non-vat registered and its annual gross receipts never exceeded the vat
threshold. How much is the amount to be paid by the PWD?
a. P800 c. P1,000
b. P896 d. P1,120
. 29. Based on the assumption in the immediately preceding number, how much is the business tax due of
_the clinic on its services rendered to the PWD?
a. P26.88 c. P120
b. P96 d. nil
30. Statement 1: The 20% discount granted to a Senior Citizen carries with it an exemption from vat.
Statement 2: The 5% special discount granted to a Senior Citizen carries with it an exemption from
vat. ,
a. Only statement 1 is correct’
31. Statement 1: The 20% discount granted to a PWDS carries with it an exemption from vat.
Statement 2: The 5% special discount granted to a PWD carries with it an exemption from vat.
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/
32. refer to goods “vital to the needs of consumers, for their sustenance and existence”
: while prime commodities are goods that are “essential" to them.
: a. Basic necessities
b. Prime commodities
c. Non-essential goods
d. Any of the above e
33. are goods not considered as basic necessities but are essential to consumers.
a, Basic necessities c. Non-essential goods —
b. Prime commodities d. Any of the above
34. The 5% special discount granted to senior citizens on basic and prime commodities is limited to
purchases not exceeding_____—_—s “per calendar week without carry-over of the unused amount”.
a. P1,000 c. P1,300
b. P1,200 d. P1,500
35. The 5% special discount granted to PWDs on basic and prime commodities is limited to purchases
not exceeding “per calendar week without carry-over of the unused amount”.
a. P1,000 c. P1,300
b. P1,200 d. P1,500
36. Qualified Solo Parents are entitled to the following tax benefits for their purchase of certain goods:
Vat exemption 10% discount
a. Yes Yes
b. Yes - s No
Cc. No Yes
d. No No
37. Baby's World, a VAT-registered entity, sold medicines for infant to a qualified Ana, a Solo Parent. The
total cost of the medicines was P5,600 inclusive of vat. Being a qualified Solo Parent, Ana received
ten percent (10%) discount from Baby's World. How much is the total amount to be paid by Ana?
a. P4,000 c. P5,000
b. P4,500 . d. P5,600
BMBEs
38. A is defined as any business enterprise engaged in production, processing, or

manufacturing of products, including agro-processing, as well as trading and services, with total
assets of not more than P3 million, Such assets shall include those arising from loans but not the land
on which the plant and equipment are located.
a. Ecozones
b. RHQs/ROHQs of MNCs
c. PEZA registered entities
d. Barangay Micro Business Enterprises (BMBEs)
39. Statement 1: “Services” offered by BMBEs shall exclude those rendered by any one, who is duly
licensed by the govemment after having passed a government licensure examination, in connection
with the exercise of one’s profession such as those rendered by accountants, lawyers, and doctors.
Statement 2: An enterprise can only qualify for registration as BMBE if it is not a branch, subsidiary,
division or office of a large-scale enterprise and its policies and business modus operandi are not
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determined by a large-scale enterprise or by persons who are not owners or employees of the
enterprise (i.e., franchises).
Statement 1: The enactment of RA 10644, otherwise known as the “Go Negosyo Act’, paved the way
for the tationalization of bureaucratic restrictions, the active intervention of the government specially
in the local level, and the granting of incentives and benefits to generate much needed employment
and alleviate poverty.
Statement 2: Negosyo Center in all provinces, cities and municipalities shall be established under
the supervision of the LGU concemed. :
b. _Only statement 2 is correct
41. Which of the following business entities is not allowed to register as BSME?
a. Sole proprietorship
b. Domestic corporation
c. Partnership
42. Which of the following business entities may register as BSME?

a. Coopérative
b. Association
c. One person corporation
d. All ofthe above
Which of the following is not allowed to register as BMBE?

Resident foreign corporation
op
A branch of a large-scale enterprise

c. Amicro small domestic corporation whose business modus operandi are determined BY a
large-scale enterprise.
d. Allof the above
Which of the following are the following incentives may be granted to BMBEs?
a. Income tax exemption from income arising from the operations of the enterprise.
b. Exemption from the coverage of the Minim Wage Law.
c. Technology transfer, production and management training, and marketing assistance
programs for BMBE beneficiaries.
d. Allofthe above
45. Statement1: Any person, cooperative, or association owning an enterprise that fits the description
of a BMBE may register for the first time or renew its registration with the Oils of the Treasurer of
the city or municipality where the business is located.
Statement 2: For BMBEs, registration as a business entity or enterprise fis the appropriate
govemment agency such as SEC, CDA, DTI as well as securing business permit from city/municipality
is still required.
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Statement 3: Local goverment units (LGUs) are encouraged to either reduce the amount of local
taxes, fees, and charges imposed or exempt BMBEs from local taxes, fees, and charges.
a. Only statements 1 and 2 are correct
b. Only statements 1 and 3 are correct
c. All statements are correct
d. All statements are incorrect
46. For-BMBE purposes, the concemed officer shall cancel the registration of a euee for the following
cause, except!
a. When the BMBE transfers its place of business to another locality.
b. When the value of its total assets as determined exceeds P3,000,000.
c. When the BMBE voluntarily surrenders its certificate to the issuing ra
d. Whenit establishes warehouse outside the locality
47. One can register as a BMBE if it is a business entity or enterprise, whether operated as a sole
proprietorship or a corporation, partnership, cooperative or association, organized/incorporated and
existing under Philippine laws, engaged in, which activities are barangay-‘based and micro-business
in nature and scope, except
a. Production of products/commodities
b. Agro-processing ~
c.. Trading and services
d. Professional services
Double Taxation Agreement

a. Double taxation is the multiple imposition of tax burden on the same object or subject.
b. Direct double taxation is prohibited.
c. Indirect double taxation is not prohibited.
d. Allofthe above
49. The primary purpose of is commonly stated or understood to be “for the avoidance of double
taxation” of income arising from cross-border transactions or “for the purpose of avoiding
simultaneous taxation in two different jurisdictions’.
a. Reciprocity
b. Tax treaty
c. Double taxation
50. Which of the following are methods used to eliminate or ria the effect of indirect double taxation?
a. Tax exemption (i.e. based on treaties)
b. Tax credit (i.e. deductible from tax due)
c. Deduction from the tax base
d. All of the above
51. Statement 1: Cross border transactions encompasses transfer of goods, services, capital and
technology resulting in an income where more than one country has a taxation claim, resulting in
double taxation due to differences in tax. imposition principles.
Statement 2. Intemational double taxation cannot be eliminated unilaterally by a State.
a. Only statements 1 is correct
b. Only statements 2 is correct
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Chapter 13
Tax Incentives under Title XIII of the Tax Code
The discussions on this Chapter of this book is in Pursuant to Section 21 of Republic Act No.
11534 (CREATE ACT), entitled "AN ACT REFORMING THE CORPORATE INCOME TAX AND
INCENTIVES SYSTEM, AMENDING FOR THE PURPOSE SECTIONS 20, 22, 25, 27, 28, 29, 34, 40,
57, 109, 116, 204 AND 290 OF THE NATIONAL INTERNAL REVENUE CODE OF 1997 (or. The Tax
Code), AS AMENDED, AND CREATING THEREIN NEW TITLE XIII, AND FOR OTHER PURPOSES.
SCOPE AND COVERAGE

Section 291 of the Tax Code (as amended) and IRR of Art. XIIT
The scope and coverage of this Chapter, as provided for under the Implementing Rules and
Regulations (IRR) of Title XIII of the Tax Code created under CREATE ACT, are as follows:
1. All existing Investment Promotion Agencies (IPAs) as defined in the Act or related laws
with respect to the administration and grant of tax incentives unless otherwise
specifically exempted from the coverage thereof.
INVESTMENT PROMOTION AGENCIES [Section 293(h) of the Tax Code, as amended]

; Refer to government entities created by law, executive order, decree or other issuance, in charge of
promoting investments, granting and administering tax and non-tax incentives, and overseeing the
operations of the different economic zones and Freeport in accordance with their respective special laws.
These include the Board of Investments (BOI), Regional Board of Investments Autonomous Region in
Muslim Mindanao (RBOI-ARMM), Philippine Economic Zone Authority (PEZA), Bases Conversion and
Development Authority (BCDA), Subic Bay Metropolitan Authority (SBMA), Clark Development Corporation
(CDC), John Hay Management Corporation (JHMC), Poro Point Management Corporation (PPMC),
Cagayan Economic Zone Authority (CEZA), Zamboanga City Special Economic Zone Authonty (ZCSEZA),
Phividec Industrial Authority (PIA), Aurora Pacific Economic Zone and Freeport Authority (APECO),
Authority of the Freeport Area of Bataan (AFAB), Tourism Infrastructure and Enterprise Zone Authority
(TIEZA), and ALL OTHER SIMILAR EXISTING AUTHORITIES or that may be created by law unless
otherwise specifically exempted from the coverage of this Code.
2. All newly registered projects or activities including qualified expansion projects or

activities of export enterprises and domestic market enterprises, under the Strategic
Investment Priority Plan (SIPP). Section 4(DD)‘of the IRR of the Tax Incentives
under Title XIII of the Tax Code as amended by the CREATE Act defined SIPP as follows:
"Strategic Investment Priority Plan /SIPP)" refers to the plan prepared_by the BOI, in coordination with
the FIRB, IPAs, and OGAs administering tax incentives, and the private sector, which is approved by
the President, and contains the priority projects or activities, scope and coverage of location
and industry tiers, recommendations for non-fiscal support and corresponding specific activities
wherein investments are to be encouraged, and other information, analyses, data, guidelines, or
criteria, as the BOI may deem appropriate.
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3, Registered Enterprises [or Registered Business Enterprises (RBEs)], projects, or activities

currently registered with IPAs and enjoying incentives prior to the effectivity of the Act,
_REGISTERED BUSINESS ENTERPRISE Sectio 293{m) of the Tax Code, as amended

Refers to any individual, partnership, corporation, Philippine branch of a foreign corporation, or other entity
organized and existing under Philippine laws and registered with an investment promotion agency excluding
service enterprises such as those engaged in customs brokerage, trucking orforwarding services, janitorial
Services, security services, insurance, banking, and other financial services, consumers’ cooperatives, credit
unions, consultancy services, retail enterprises, restaurants, or such other similar services, as may be
determined by the FIRB, irrespective of location, whether inside or outside the zones, duly accredited or
licensed by any of the investment promotion agencies and whose income delivered within the economic
zones shall be subject to taxes under the national intemal revenue code ‘of 1997, as amended.
4. Other government agencies administering tax, incentives with respect to the

administration and grant of tax incentives and other registered enterprises availing of tax
incentives. Section 4(R) of the IRR of the Tax Incentives under Title XIII of the Tax Code
as amended by the CREATE Act defined Other COvErTiney Agencies:
_ “OTHER GOVERNMENT AGENCIES (OGA), ADMINISTERING TAX INCENTIVES” refer to

government agencies or instrumentalities other than IPAs which register or administer tax incentives
of any kind to any specific entities or class of persons pursuant to any law. .
5. Government-owned and/or controlled corporations (GOCCs), government

’ instrumentalities (GIs), government commissaries, and state universities and colleges
(SUCs) that were granted tax subsidies under the tax expenditure fund of the Annual
General Appropriations Act.
EXTENT OF AUTHORITY TO GRANT. INCENTIVES
The Fiscal Incentives Review Board (FIRB) or the Investment Promotion Agencies
(IPAs) under a delegated authority from the FIRB, shall grant tax incentives to Registered
Business Enterprises (RBE) only to the extent of their approved registered project or activity
. under the Strategic Investment Priority Plan (SIPP). -
SUMMARY OF TAX AND DUTY INCENTIVES and PERIOD OF AVAILMENTS

Section 294 and 296; IRR of Title XII circularized under RMC 82-2021
_ Subject to the conditions and period of availment in sections 295 and 296, respectively, the
following types of tax incentives may be granted to registered projects or activities:
“INCENTIVES SeasaE
ITH eae Sa Sd
v v
5% SCIT :
10 years** *
ED ==
:
; v
10 years** = years
DUTY Exemption
/ : v
VAT Exemption and Zero-rating
5 3 Jv skal
_ “At the option of the export enterprise, the 5% SCIT rate or ED shall be granted (refer to the next page)
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Chapter 7S - Lite Incentives wider CREATE Act
1. INCOME TAX HOLIDAY (ITH)

EXPORT ORIENTED ENTERPRISES or Registered Export Enterprises (REEs)
> May be granted an ITH offolit (4) to seven (7) years depending on location and
industry priorities; and followed by ‘
> 5% Special Corporate Income Tax (SCIT) OR Enhanced Deduction (ED) for a period
of ten (10) years
At the option of the export enterprise, the SCIT rate or ED shall be granted:
provided, that in no case shall the ED be granted simultaneously with the SCIT. The
conditions set forth under Section 295 for the availment of each ED shall be complied
with.
The option to avail of either SCIT or enhanced deductions after the ITH period
shall be exercised by the Registered Business Enterprise (RBE) at the time of
application for registration of the project with the concerned IPA. Such option (SCIT or
ED) shall be srrevocable for the entire duration of entitlement to such incentives.
Section 4(M) of the IRR of thé Tax Incentives under Title XIII of the Tax Code as "
amended by the CREATE Act defined Export Enterprise as follows:
"Export enterprise or Registered Export Enterprise (REE)” refers to any

individual, partnership, corporation, Philippine branch of a foreign corporation, or
‘other entity organized and existing under. Philippine laws and registered with an
Investment Promotion Agency (IPA) to. engage in manufacturing, assembling or
processing activity, and services such as information technology (IT) activities and
business process outsourcing (BPO), and resulting in the direct exportation, and/or
sale of its manufactured, assembled or processed product or IT/BPO services to
another registered export enterprise that will form part of the final export product
or export service of the latter, of at least seventy percent (70%) of its total production
or output.
DOMESTIC MARKET ENTERPRISES
> May be granted an ITH of four (4) to sevén (7) years depending on location and
industry priorities; and followed by
> Enhanced Deduction (ED) for a period of five (5) years
NOTE:
‘a, The option to choose SCIT instead of ED is NOT APPLICABLE to Domestic
Market Enterprises; and .
b. For Domestic Market Enterprises, Enhanced Deduction (ED) is applicable
only for a period of five (5) years instead of ten (10) years.
Section 4(L) of the IRR of the Tax Incentives under Title XIII of the Tax Code as
amended by the CREATE Act defined Export Enterprise as follows:
"Domestic market enterprise” refers to any enterprise registered with an IPA other
than an export enterprise.
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COVERAGE OF ITH (PEZA MC 2004-024 and Art. 78 of E.0. 226)

RCIT (20% or 25% under CREATE Act)
VVVV MCIT (1% or 2% under CREATE Act)
Local taxes, licenses, imposts, and fees
Real Property Tax (RPT) on MACINERY and Squire within three (3) years from
acquisition
@ The aforementioned taxes and fees shall not be imposed during the
effectivity of the ITH.-
-€Q The ITH shall be limited to the income generated from a registered project
vit
OUT OF COVERAGE OF ITH (PEZA MC 2004-024 and Art. 78 of E.O. 226)

Income Tax on UNREGISTERED ACTIVITY
Value Added Tax (VAT)
VVVVVV
Final Withholding Tax (FWT) on Passive Income

Withholding Tax Agent obligations
RPT on non-exempt machineries
Documentary Stamp Tax (DST)
© The aforementioned taxes (VAT, FWT, DST, etc.) shall be imposed even
during the effectivity of the ITH period: These taxes, including
RCIT/MCIT for unregistered activities, are beyond the coverage of
ITH.
PROJECTS OR ACTIVITIES LOCATED IN AREAS RECOVERING FROM ARMED

CONFLICT OR A MAJOR DISASTER
In addition to the incentives provided in the preceding Section, projects or

activitiesof registered business enterprises located in areas recovering from armed
conflict or a major disaster shall be entitled to two (2) additional years of ITH,
subject to the following:
a. Declaration of the President or his/her authorized representatives of the

existence of an armed conflict or a major disaster, including pandemic,
epidemic, super typhoon, or other analogous circumstances; OR
b. The issuance of a presidential directive for the implementation of recovery

programs of the affected area or areas.
PROJECTS OR PROJECTS OR ACTIVITIES RELOCATING FROM THE NATIONAL

CAPITAL REGION
A project or activity registered prior to the effectivity of the CREATE Act or registered
under CREATE Act that will comp/etely relocate from NCR during the period of their
incentives, shall be entitled to three (3) additional years of ITH to commence at the
completion of the relocation of operations:
a. For an existing project or activity registered under this Act, the additional
three (3) years of 1TH shall commence after the expiration of the period of
incentives granted under the Certificate of Registration issued to the RBE.
b. For an existing project or activity under the transition period of this Act, the
additional three (3) years of ITH shall commence after the expiration of the
transition period.
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Complete relocation shall mean the total physical relocation of the facilities outside
of NCR, including the transfer of the full-operations of the registered project or
activity to the new area of operation.
CERTIFICATE OF ENTITLEMENT TO TAX INCENTIVES (CETI)
The concerned IPA shall issue a Certificate of Entitlement to Tax Incentives (CETI) to
the concerned RBE as proof of its entitlement to the additional three (3) years of ITH.
Prior to the filing of Income Tax Return (ITR), a registered business enterprise (RBE)
shall apply for a CETI to confirm whether its registered project is entitled to either the
Income Tax Holiday (ITH) or the 5% Special Corporate Income Tax (5% SCIT) for the
taxable period. Each registered activity shall be issued a separate CETI.
REVIEW AND REVISION
The industry and locational prioritization specified herein shall be subject to review and
revision every three (3) years in accordance with the SIPP, or in exceptional
circumstances, to attract substantial investment to respond to a situation or crisis or
to target specific industries during a national emergency, state of calamity, public
health emergency, or other crisis of analogous circumstances.
2. SPECIAL CORPORATE INCOME TAX (5%SCIT) or 5% Gross Income Tax (GIT)

This incentive is applicable only to Export Oriented Enterprises. A Special Corporate
Income Tax (SCIT) rate equivalent to five percent (5%) effective July 1, 2020, based on the
gross income earned IN LIEU of all national and local taxes. ‘
Section 2, Part II, of the IRR of for Title XII of the Tax Code as amended by CREATE Act
provides that the SCIT shall be equivalent to a tax rate of five percent (5%) based on
the gross income earned (GIE) or 5% SCIT/GIT, IN LIEU OF ALL NATIONAL
AND LOCAL TAXES. The 5% Special Corporate Income Tax (SCIT) in lieu of all national
and local taxes shall NOT include fees and charges as defined under Section 131(I) and (q) of
the Local Government Code of 1991.
SCIT incentive
is available only after ITH period and applicable only to export
oriented enterprises. This incentive is also known as the 5% tax regime or 5% Gross
Income Tax (GIT).
The 5% SCIT is income tax in nature and a national internal revenue tax in character.
“Gross Income” refers to gross sales or gross revenues derived from the registered activity,
net of sales discounts, sales returns and allowances and minus cost of sales or direct costs
but befofe any deduction is made for administrative expenses or incidental losses during a
given taxable period. However, as discussed in the previous paragraphs, the 5% SCIT or 5%
AND LOCAL TAXES.
NATIONAL
Tax on GIE is IN LIEU OF ALL ,
NATIONAL TAXES shall refer to taxes enforced by a national government agency such as the
following internal revenue taxes:
« — Regular corporate income taxes (RCIT)
« — Minimum Corporate income tax (MCIT)
» Transfer taxes
» Vat and Other Percentage Taxes
» Excise taxes
PEZA registered companies are exempt from creditable withholding tax, except for
unregistered operations. However, PEZA registered companies are not exempted from being
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: lester I$ 3 Tag Jucentives under CREA TE Act
a withholding agent. There may be deficiency withholding tax to be assessed by BIR, if there
will be failure to-withhold (e.g. Fringe Benefit Tax, Withholding Tax on Wages, Expanded
Withholding Tax from local suppliers) on the part of PEZA registered enterprise.
Section 2, Part II, Existing rules on the allocation of the 5% SCIT among the national
government, LGUs, and the IPAs under special laws governing the latter shall be observed,
For export enterprises governed by special laws which do not provide for Seu the
5%SCIT based on the gross income shall be paid and remitted as follows:
a. Three percent (3%) to the National Government;
b. Two percent (2%) which shall be directly remitted by the registered enterprises
to thetreasurer's office of ‘the municipality or city wiiere the enterprise is
located.
In case the Special Economic Zone (ECOZONE) is situated and encompasses the
territorial jurisdiction of more than one (1) city or municipality, the share of each city or
municipality from the 2% SCIT paid by registered enterprises shall be determined in
accordance with the implementing PEZA regulations on the subject. PEZA shall issue
certification as to the exact share of the concerned cities/municipalities from the two percent
(2%) tax as allocated under the implementing rules and regulations oF PEZA (RR 12-97 as
amended by RR 1-2000).
"Gross Income Earned", for this purpose, refers to gross sales or gross revenues
derived from the registered project or activity, net of sales discounts, sales returns and
allowances and minus costs of sales or direct costs but before any deduction is made for
administrative expenses or incidental losses during a given taxable period. Only the
following shall be considered as direct costs for purposes of computing the gross income
earned to be imposed the five percent (5%) SCIT rate:
Direct salaries, wages or labor expenses;

Production supervision salaries;
omoanogm
Raw materials used in the manufacture of products;

Goods in process (intermediate goods);
Finished goods;
Supplies and fuels used in production; .
Depreciation of machinery, equipment, and building directly and exclusively
used in the rendition/production of registered activity, and of that portion of
the building owned-or constructed that is directly and exclusively related in the
- rendition/production of the registered activity;
h. Rent and utility charges associated with building, equipment, and warehouses,
or handjing of goods used directly and exclusively in the rendition/production
of registered activity;
i. Financing charges associated with fixed assets used directly and exclusively in
the registered activity the amount of which were not previously capitalized;
j. Service supervision salaries; and
k. Direct materials and supplies used.
’
Exemption of PEZA Registered Enterprises from Local Taxes, Licenses and Fees
(PEZA Memorandum Circular 2004-024)
PEZA registered enterprises, availing of ITH incentive are exempted from payment of all
local taxes, licenses, imposts and fees; except real estate taxes; provided that these
enterprises shall also be exempted from payment of real property taxes on machineries and
equipment they acquire for use in their production operations during the first 3 years of use
of such machinery and equipment. PEZA registered enterprises, availing of the 5% GIT
incentive are exempted from payment of all national and local taxes, except real property tax
owned by developers:
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REGISTRATION FROM VAT TO NON-VAT
RMC 152-2022 dated December 7, 2022 requires Registered Export Enterprises (REEs)
who have completed their ITH and now under the 5% GIT/SCIT regime or those already
enjoying the 5% GIT/SCIT upon the effectivity of CREATE Act but remained VAT-registered
to change thei istratio to non-VAT within two (2) months
from the expiration of the ITH
incentive. :
3. ENHANCED DEDUCTIONS (ED)
Section 3, Part II, of the IRR of for Title XII of the Tax Code as amended by CREATE Act
provides that: Registered business enterprises may be granted enhanced deductions in
addition to the allowable ordinary and necessary deductions under Section 34(A) to
(3) of the tax Code, as amended ’
Export enterprises or Registered Export Enterprises (REEs) may, ‘at their option, avail
of the enhanced deductions or the SCIT rate. In no case, however, shall enhanced
deductions be granted simultaneously with the special corporate income tax.
The following may be allowed as deductions:
A. Additional depreciation allowance of the assets acquired for the

production of goods and services (qualified capital expenditure). From the
total depreciable cost of the assets that are directly related to the registered enterprise's
production of goods andperformance of services (qualified capital expenditure), a
registered businessenterprise may be allowed to claim an additional depreciation
allowance of:
1) Ten percent(10%) for buildings; and
2) Twenty percent (20%) for machinery and equipment.
B. Additional Deduction on Labor Expense. Registered business enterprises shall

be entitled to an additional deduction from the taxable income of fifty percent (50%)
of the total labor expense in the taxable year. The additional deduction shall not include
salaries, wages, benefits, and other personnel costs incurred for managerial,
administrative, indirect labor, and support services. ,
C. Additional Deductions on Research and Development Expenses. Registered

business enterprises shall be allowed to claim an additional deduction of one hundred
percent (100%) on the research and development expense that are directly related.
to the registered project or activity of the entity and shall be limited to local
expenditure incurred for salaries of Filipino employees and consumables and
payments to local research and development organizations.
D. Additional Deduction on Training Expense. Registered business enterprise shall

'. bé*entitled to an additional deduction from the taxable income of one hundred
, percent (100%) of the total expense on trainings conducted, ‘as approved by the IPAs
based on the SIPP, given to the Filipino employees engaged directly in the registered
business enterprise's production: of goods and services, To ensure that only
technical trainings required by the registered project or activityare covered, the
‘following are not eligible for additional training expense deduction:
1) Onboarding workshops for newly-hired employees;
2) Team building activities, field trips and tours;
ment and
3) Executive education and leadership programs for senior manage
c-suite;
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4) . Professional and legal trainings such as sexual harassment, discrimination
and fraud;
5) Safety trainings such as evacuation plans, fire drills, workplace violence
and first aid, Other safety trainings that are directly related to the
performance of core job functions may be covered by the incentives as
long as it is part of a technical training program; and
6) Quality trainings such as ISO processes and standards that are not
related to theperformance of an employee's core job functions.
E. Additional Deduction on Domestic Input Expense. The registered business

enterprise shall be allowed to claim an additional deduction of fifty percent (50%)
on domestic inputs that are directly related to and actually used in the registered
project or activity of the registered business enterprise:
F. Additional Deduction on Power Expense. From the total power costs incurred
in the production of the registered project or activity, the registered business
enterprise shall be allowed to claim an additional deduction equal to fifty percent
(50%) of the total power costs utilized for the registered project or activity.
G. Deduction for reinvestment allowance to manufacturing industry. The

reinvestment of undistributed profit or surplus of a registered business. enterprise
engaged in manufacturing, in any of the projects or activities’ listed in the SIPP shall
be allowed as a deduction, to a maximum of fifty percent (50%), from its taxable
income within a period of five (5) years from the time of such reinvestment.
H. Enhanced Net Operating Loss Carry Over (NOLCO). Net operating loss of the
registered project or activity during the first three (3) years from start of commercial
operations which had not been previously offset as deduction from gross income
may be carried over as deduction from gross income within the next five (5)
consecutive taxable years, immediately following the year of such loss.
The SIPP shall provide the requirements and conditions for a registered project or activity
to be granted the ED from the start of commercial operations under Rule 3 of the IRR:
Provided, That, the Secretary of Finance, upon recommendation of the Commissioner of
Internal Revenue, shall issue revenue rules and regulations on the process to avail of
enhanced deductions.
AVAILMENT OF ITH, SCIT AND ED
The start of the period of availment of the foregoing income tax-based incentives shall
commence from the actual Start of Commercial Operations (SCO) with the RBE
availing of the tax incentives within three (3) years from the date of registration, unless
otherwise provided in the Strategic Investment Priority Plan (SIPP) and its corresponding
guidelines: Provided, that after the expiration of the transitory period under section 311(c),
export enterprises registered prior to the effectivity of this Act shall have the option
to reapply
and avail of the incentives granted under section 294(b) for the same period provided under
this section; subject to the conditions and qualifications set forth in the strategic investment
priority plan and performance review by the FIRB.
PRIORITIZATION AND TIERING
The determination of the category shall be based on both location and industry of the
registered project or activity, and other relevant factors as may be defined in the Strategic
Investment Priority Plan (SIPP).
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The location of the registered project or activity shall be prioritized according to the level
of the development as follows:
1. National Capital Region (NCR); :
2. Metropolitan areas or areas contiguous and adjacent to the National Capital
Region (NCR); and
3. All other areas.
The Metropolitan areas shall be determined by the National Economic Development

Authority (NEDA).
The industry of the registered project or activity shall be prioritized according to the
national industrial strategy specified in the SIPP. The SIPP shall define the coverage of the
TIERS and provide the conditions for qualifying the activities:
Tier I shall include activities that (1) have high potential for job creation; (2) take place in sectors
with market failures resulting in under provision of basic goods and services; (3) generate value
creation through innovation, upgrading or moving up the value chain; (4) provide essential support
for sectors that are critical to industrial development; or (5) are emerging owing to potential
comparative advantage.
Tier II shall include activities that produce supplies, parts and components, and intermediate
services that are not locally produced but are critical to industrial development and import-substituting
activities, including crude oil refining.
Tier ITT activities shall include (1) research and development resulting in demonstrably significant
value-added, higher productivity, improved efficiency, breakthroughs in science and health, and high
paying jobs; (2) generation of new knowledge and intellectual property registered and/or licensed.in
the Philippines, (3) commercialization of patents, industrial designs, copyrights and utility models
owned or co-owned by a registered business enterprise; (4) highly technical manufacturing; or (5) are
critical to the structural transformation of the economy and require substantial catchup efforts.
The period of availment of incentives based on the combination of both location and industry
priorities, as determined in the Strategic Investment Priority Plan (SIPP), shall be as follows:
FOR EXPORT ORIENTED ENTERPRISES (Section 296 and Sec. 6 of the IRR
Location/Industry tiers Tier I TierII — Tier III

National capital region 4 ITH + 10 ED/SCIT 5 ITH + 10 ED/SCIT 6 ITH + 10 ED/SCIT
Metropolitan areas or areas
contiguous and adjacent to 5 ITH + 10 ED/SCIT 6 ITH + 10 ED/SCIT 7 ITH + 10 ED/SCIT
the national capital region
All other areas 6 ITH + 10 ED/SCIT 7 ITH + 10 ED/SCIT 7 ITH + 10 ED/SCIT
FOR DOMESTIC MARKET ENTERPRISES (Section 296 and Sec. 6 of the IRR
Location/Industry tiers Tier I Tier II : Tier III

National capital region 41TH +5ED 5ITH +5 ED 6 ITH + 5 ED
Metropolitan areas or areas
contiguots’and adjacent t 5TTH+5€ED 6ITH+5ED 7ITH+5ED
the national capital region ;
All other areas 6ITH+5ED 7ITH+5€ED 7TTH+5ED
© NOTE:
> The option to choose 5% SCIT is not applicable to Domestic Market Enterprises
> "Metropolitan areas” refer to Metro Cebu and Metro Davao or those local government units
Economic and
(LGUs) which are later qualified or grouped as such by the National
Development Authority (NEDA) or through laws or executive Issuances;
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| 4. VALUE-ADDED TAX WA) ZERO-RATING AND EXEMPTION
The VAT exemption on importation and VAT zero-rating on /oca/ purchases shall only
apply to goods and services directly and exclusively used _in the registered project or
achvity of EXPORT ENTERPRISES, during the period of registration of the said
registered project or activity with the concerned IPA; Provided, That transactions falling
under Section 106(A)(2)(a)(3), (4), and (5) and Section 108(B1(1) and (5) of the Code,
as amended, shall be subject to the twelve percent (12%) VATpursuant to Revenue
Regulations 09- 2021. Provided, further, that excess input taxes attributable to zero-rated
sales by VAT-registered RBEs, may at the RBEs option, be refunded or applied for a tax
credit, subject to the guidelines provided under Revenue Regulations No, 13-2018, as
amended.
- Meaning of Direct and Exclusive Use
The direct and exclusive use in the registered project or activity refers to raw
materials, inventories, supplies, equipment, goods, services and other expenditures
necessary for the registered project or activity without-which the registered project or
activity cannot be carried out. RMC 24-20222 provides the following examples of “other
expenditures” for this purpose:
a. Insurance costs required to be Ee by the IPA before the facility can start
operations.
b. Freight costs necessary to bring the raw materials or equipment to be used in the
production area.
c. Telecommunication expenses of registered export enterprises engaged in IT/BPO
services or other registered project or activity, without the telecommunication
services, such registered project or activity.cannot be carried out. This, however,
does not include telecommunication expenses incurred for administration purposes.
Any costs incurred prior to the registration of a project or activity with the IPA sha//NOT
be allowed for this purpose. Refer also to Chapter 11 (Value Added Tax) of this book for
additional discussion on vat, zero rating, specifically in relation to RR 3-2023.dated April
20, 2023.
Only the portion of the expense directly and exclusively used by 2 registered export
enterprise for its registered project or activity shall qualify for VAT zero-rating on local
purchases, EXCLUDING those used for administrative purposes. The REGISTERED EXPORT
ENTERPRISE concerned should adopt a method to best allocate goods or services purchased,
e.g. for utilities, use of separate water and power meters for its registered project or activity
or any method that may determine the allocation such as area usage or ratio of utility
expenses between cost of sales and administrative expenses as reflected in the prior year
Audited Financial Statements. If the goods or services are used in both the registered project
or activity and administration purposes and the proper allocation could not be determined,
the purchase of such goods and services shall be subject to 12% VAT.
For this purpose, services for administrative purposes, such as legal, accounting, and
such other similar services, are NOT considered expenses directly attributable to and
exclusively used in the registered project or activity.
Further, RMC 137-2022 provides that the list “other expenditures” provided above based
on RMC 24-2022 is not "exclusive", hence expenditures not listed therein may be allowed for
VAT zero-rating, provided the same can be attributed directly to the registered activity of the
REEs. This is true in the case of HMO plans acquired by REEs for employees directly involved
in the operations of their registered projects or activities and forming part of their
compensation package, for their health maintenance. Providing health benefits Is not only an
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indispensable tool for: building a competitive workforce but also ensures continuous and
smooth operation of the registered project or activity, However, the VAT zero-rating shall not
extend to HMO plans procured for employees' dependents, as well as HMO plans for
employees not directly involved in the operations of the registered projects or activities of the
REEs.
In this regard, all REEs availing of the VAT zero-rate on their acquisition of HMO plans
for employees directly involved in their registered project or activity shall provide their
suppliers a detailed information on the HMO plans acquired using the format in Annex "A" to
ensure that only HMO expenses for qualified employees are given VAT zero rating. This shall
also be part of the documents to be submitted by the suppliers in filing the application for
VAT zero-rate. ’
RMC 84-2022 prescribed the template of Sworn Declaration to be executed by the duly
registered RBE stating that the goods and/or services being purchased shall be used directly
and exclusively in the registered project or activity. The said sworn declaration shall then be
provided to the RBE's supplier prior to the sale transaction to avail. of the VAT’ zero-raté
incentives (Refer to the attached format of the Sworn Declaration in Page 834 of this Chapter).
VAT on Local Purchases of Domestic Market Enterprises
As clarified under RMC 24-2022, Registered Business Enterprises (RBEs) which are categorized
as Domestic Market Enterprises are- NOT ENTITLED TO VAT ZERO-RATING on local purchases.
Sale of goods or services to a registered domestic market enterprise ‘shall be subject to VAT at
12%. ;
In addition, the following service enterprises, though duly accredited or licensed by any of the
IPAs, are not entitled to VAT zero-rating on their local purchases of goods and/or services:
Customs brokerage; :
Trucking services;
sesmmansD
Forwarding services;
Janitorial services;
Security services;
Insurance;
Banking and other financial services;
Consumers’ cooperatives;
Credit unions;
Consultancy services;
30 eT
Retail enterprises;
Restaurants; and
. Such other similar services as may be determined by the Fiscal Incentives Review Board
(FIRB). ;
Sales by registered Non-Export Enterprises or DMEs located in Ecozones and Freeport
Zones to Registered Export Enterprises (REEs) and non-RBEs
Q&A No. 17 of RMC 24-2022, provides that a DME under the 5% Gross Income Tax (GIT) or
Special Corporate Income Tax (SCIT) regime, registered as a VAT exempt entity, shall treat its
revenues as VAT exempt. The VAT passed on to it by its VAT-registered local suppliers shall form
part of its cost or expenses (Note that:5% SCIT/GIT is in LIEU of all National and Local Taxes).
Sales made by Registered Export Enterprise (REE) to another REE

‘Q&A No, 18 of RMC 24-2022 provides that the following rules shall apply:
a. If the seller is VAT-registered while enjoying ITH, the sale of goods and services to
"another registered export enterprise Is subject to VAT at zero-rate, provided, the goods
and services are directly and exclusively used in the latter's registered project or activity.
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b. If the seller is enjoying the 5% GIE incentive, the sale of goods and services, such as
manufactured, assembled or processed product or IT/BPO services to another registered
export enterprise that will form part of the final export product or export service of the
latter, of at least seventy (70%) of its total production‘or output, shall be VAT-exempt.
Same rule above applies to the sale of a DME to a registered export enterprise.
Sales by Non-RBE Export-oriented enterprises
Non-RBE export-oriented enterprises are NOT accorded with the benefits under Title XIII of
the Tax Code, as introduced in the CREATE Act. Incentives of non-RBE exporters shall be limited
-only to VAT at zero rate on its direct export sale of goods or services pursuant to Sections
106(A)(2)(a)(1) and 108(B)(2) of the Tax Code, as amended. However, if the non-RBE exporter is
VAT-registered and sells goods and services to a registered export enterprise, the rule under the
Q&A No. 18(A) of RMC 24-2022 as illustrated in the preceding paragraphs shall apply.
VAT Zero Rating of REEs and Other Enterprises covered by Special Laws
Q&A No. 22 of RMC 24-2022 clarifies that aside from REEs, enterprises registered with the
Board of Investments (BOI), and enterprises located in the Ecozones and Freeport zones, salesto
enterprises covered by special laws such as renewable energy developers under R.A. No. 9513
(Renewable Energy Act of 2008, International Rice Research Institute (IRRI), Asian Development
Bank (ADB), etc. are still subject to VAT at zero percent rate (0%) pursuant to Sec. 4.106-
5(b) for goods and Sec. 4.108-5(b)(2) for services, of RR No. 16-2005, as amended by RR No. 21-
2021.
Sale of Goods and Services by VAT-registered suppliers
The sale of goods and services by VAT-registered suppliers to registered export enterprises
enjoying the fiscal incentives under CREATE shall be treated as VAT zero-rated, provided that the
goods and services are directly and exclusively used in the registered projects/activities.
The VAT zero-rating shall be enjoyed for a maximum period of seventeen (17) years from
the date of registration, unless extended under the Strategic Investment Priority Plan (SIPP).
5. CUSTOMS DUTY EXEMPTION on Importation of Capital Equipment, Raw Materials, Spare Parts,
and Accessories made by RBEs shall be exempt from customs duties, provided, that the following
conditions are complied with:
A. DIRECT AND EXCLUSIVE USE. The duty exemption shall only apply to the importation of
Capital equipment, raw materials, spare. parts, or accessories directly and exclusively
used in the registered project or activity by RBEs.
B. The capital equipment, raw materials, spare parts, or accessories:

1. are directly and reasonably needed by the RBE;
2. will be used exclusively in and as part of the direct cost of the pesniaies project or
activity of the RBE; and
3. | are not produced or manufactured domestically in sufficient quantity or of comparable
quality and at reasonable prices. Provided, That for a period of one year from the
issuance of the IRR, the Certificate of Authority to Import (CAI) or Admission
Entry shall be used to satisfy this condition. The IPA shall furnish the DTI with
copies of the issued CAl/admission entry every 5th day of the month. After the
expiration of the one year period, the IPAs shall secure from the DTI the Certificate of
Non-Local Availability in compliance with this condition.
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PRIOR APPROVAL. The approval of the IPA through the CAI/admission entry must
be obtained by the RBE prior to the importation of the goods,
SALE, TRANSFER, OR DISPOSITION. Within the first five (5) years from date of
importation, the RBE shall secure the approval of the concerned IPA before the sale,
transfer, or disposition of the capital equipment, raw materials, spare parts, or
accessories which were granted custom’s duty exemption hereunder. Provided That
the sale, transfer, or disposition of the capital -equipment, raw. materials, spare
parts, Or accessories within (5) years from date of importation shall require the
payment of duties based on the net book value of the capital equipment, raw
materials, spare parts, or accessories. The sale, transfer, or disposition thereof shall
be allowed only under the following circumstances:
1. If made to another enterprise availing customs duty exemption on imported

capital equipment, raw materials, spare parts, or accessories for its direct and
exclusive use;
2. If made to another enterprise not availing of duty exemption on imported capital
equipment, raw materials, spare parts, or accessories, upon payment of any
taxes and duties due on the net book value of the capital equipment, raw
materials, spare parts, or accessories to be sold;
3. Exportation of capital equipment, raw materials, spare, parts, accessories,
source documents, or those required for: pollution abatement and control;
4. Proven technical obsolescence of the capital equipment, raw materials, spare
parts or accessories; or
5. If donated to the Technical Education and Skills Development Authority (TESDA),
sues, or the Department of Education (DepEd) and Commission on Higher Education
(CHED)-accredited schools; provided, that the donation shall be exempt from
import duties and taxes, including donor's tax. After five (5) years from date of
importation, the RBE shall notify the concerned IPA prior to the sale, transfer, or
disposition of the capital equipment, raw materials, spare parts, or accessories.
SOLIDARY LIABILITY. If the RBE sells, transfers, or disposes the aforementioned

imported items without prior approval of the concerned IPA, the RBE and the vendee,
transferee, or assignee shall be solidarity liable to pay twice the amount of the duty
exemption that should have been paid during its importation, without prejudice
to
- any penalties or sanctions the concerned IPA may impose.
UTILIZATION IN NON-REGISTERED PROJECT OR ACTIVITY. In the event that the

aforementioned imported items will be used for a non-registered project or activity of
the RBE at any time within the first five (5) years from date of importation, the RBE shall
secure prior approval of the concerned IPA and pay the amount corresponding to the
exempt duties on importation thereof.
For part-time utilization ina non-registered project or activity, the amount corresponding
to the duties exempt on a specific capital equipment, raw materials, spare parts, or
accessories shall be paid in proportion to its utilization for the non-registered project or
activity, A report on the amount corresponding.to the customs duty exemption on the
specific capital equipment, raw materials, spare parts, or accessories utilized in a non-
registered project or activity shall be submitted to the BIR.
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a : “Transitory Provistons )
INVESTMENTS PRIOR TO THE EFFECTIVITY OF CREATE LAW (SEC. 311)
Registered business enterprises with incentives granted prior to the effectivity of CREATE
Law shall be subject to the following rules:
1. Registered business enterprises whose projects or activities were granted only an income tax
holiday prior to the effectivity of this act shall be allowed to continue with the availment of
the income tax holiday for the remaining period of the income tax holiday as specified in the
terms and conditions of their registration: provided, that for those that have been granted
the income tax holiday but have not yet availed of the incentive upon the effectivity of this
act, they may use the income tax holiday for the period specified in the terms and conditions
of their registration. —
2. Registered business enterprises whose projects or activities were granted an income tax
holiday prior to the effectivity of this act and that are entitled to the five percent (5%) tax on
gross income earned incentive after the income tax holiday shall be allowed to avail of the
five percent (5%).tax on gross income earned incentive and registered business enterprises
B currently availing of the five percent (5%) tax on gross income earned granted prior to the
effectivity of this act shall be allowed to continue availing the said tax incentive at the rate of
five percent (5%) for ten (10) years.
TRANSITORY PROVISIONS FOR ACTIONS HA COME SUBJECT To V;

(From 0% vat) under RR 21-2021
_ RR 21-2021 as darified RMC 24-2022 and RMC 152-2022 provides that Registered Export
Enterprises (REEs) whose incentives period have already expired are already subject to VAT. Thus,
such entities are no longer qualified for VAT zero-rating on their local purchases starting from the
effectivity of RR No. 21-2021 on December 10, 2021.
TpeationAe Espinctiow of Incentives

TAXATION AFTER EXPIRATION OF INCENTIVES and NON-REGISTERED PROJECT OR
ACTIVITY
Section 8, Part II of IRR for Title XIII of the Tax Code as amended by CREATE Act provides
that ALL registered business enterprises sha// pay all applicable taxes at the reguiar rates under
the Code and other laws after the expiration ‘of the period of incentives of their registered
projector activity.
.Notwithstandingthe provisions in the preceding paragraph, sales receipts and other
income derived from'non-registered project or activity shall be subject to appropriate taxes
imposed under the Tax Code, as amended,
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FISCAL INCENTIVES FOR RENEWABLE ENERGY (RE) PROJECTS AND

ACTIVITIES
Section 4 of RR 7-2022 provides the following tax incentives and treatments on the DOE-
certified existing and new RE developers of RE facilities in consultation with BOI, /ncluding hybrid
systems. in proportion to and to the extent of the RE component, for both Nes and non-power
applications:
A. Income Tax Holiday (ITH) — The duly-registered RE Developer shall be exempt from
income taxes levied by the National Government for the period as follows:
1. Existing RE Projects — Shall be entitled to ITH for. seven (7) years from start of
commercial operations which is when the RE Project has been issuéd a Certificate of
Compliance (COC) by the ERC under RA No. 9136 (Electric Power Industry Reform Act
of 2001 or the EPIRA) and is ready to inject power tb the grid. All RE Developers that
acquire, Operate and/or administer existing RE facilities that were or have been in
commercial operations for more than seven (7) years, upon the effectivity of the Act,
shall not be entitled to ITH, except for any additional investment in RE resources.
2. New investment in RE Resources — Shall be entitled to ITH for seven (7) years from the
start of commercial Operations resulting from new investments. RE Developers
undertaking discovery and development of new RE resources distinct from their
registered operations may qualify as new projects, subject to the setting up of separate
books of accounts to be registered and approved by the BIR office where the RE
developer is required to be registered. In such cases, a fresh package 2g ITH from the
staff of commercial operations shall apply.
3. Additional investments in the RE Project Availment of ITH for additional investments in

RE project shall not be more than three (3) times the period of the initial availment by
the existing or new RE Project or covering new or additional investments.
The ITH for additional investments in an existing RE project shall be applied only to the
income attributable to the additional investment.’ Additional investment may cover
investments for improvements, modernization, or rehabilitation duly registered with the
DOE, which may or may not result in increased capacity. Subject to the issuance of
appropriate guidelines by the DOE and/or.the BOI, the DOE and the BOI shall issue a
certification as to the amount or percentage of additional income generated by the
additional investment in an existing project to be attached to the annual Income Tax
Return (ITR) to be filed with the BIR.
B. Net Operating Loss Carry-over (NOLCO) - The NOLCO of the RE Developer during the
first three (3) years from the start of commercial operation shall be carried over as a
deduction from gross income for the next seven (7) consecutive taxable years immediately
following the year of such loss, subject to the following conditions:
1. ’The NOLCO had not been previously offset as a deduction from gross income; and
2.. The loss should be a result from the operation and not from the availment of incentives
provided for in the Act.
Other than the express provisions cited above specifically for persons engaged in RE, the
guidelines and procedures set forth in Revenue Regulations (RR) No. 14-2001 shall be
strictly followed in the availment of the NOLCO. ’
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C.. Corporate Tax Rate — After availment of the ITH, all registered RE Developers shall pay
a corporate tax of ten percent (10%) on their net taxable income as defined in the
National Internal:Revenue Code (NIRC) of 1997, as amended: Provided, That the RE
Developers shall pass on the savings to the end-users in the form of lower power rates,
All RE Developers that acquire, operate, and/or administer existing RE facilities that were or
have been in commercial operation for more than seven (7) years, upon the effectivity of
the Act, shall pay a corporate tax rate of 10% on their net taxable income, upon registration
with the DOE.
For purposes of the availment of this incentive, the RE developer shall submit to the BIR the
following: .
1. Copy of the Certificate of Endorsement issued by the DOE prior to the first year of its
* availment of the 10% corporate income tax rate;
2. Valid and subsisting renewable energy service/operating contract and the
corresponding Certificate of Registration; and
3. In addition. the RE Developer shall attach to its ITR, a Sworn Undertaking stating that
for the year of its availment of the 10% corporate income tax rate incentive, it has not
been found to have breached its obligations under the Renewable Energy
Service/Operating Contract and that it shall pass on the savings derived from this
incentive in the form of lower power rates.
In the years succeeding its initial availment of the 10% corporate income tax rate incentive,
following the effectivity of these Regulations, the RE Developer shall attach to the ITR, in
addition to the above requirements, proof of submission to the DOE and ERC of the Report,
supported by technical and financial documents, as required in Section (F) of DOF
Department Circular No. DC2021-12-0042.
To further prove that the RE Developer has, during, the previous year, passed on the
savings derived from this incentive to the end-users in the form of lower power rates, the
RE Developer shall submit to the BIR the rates approved by the ERC.
D: Accelerated Depreciation
— If an RE project fails to receive an ITH before full operation,
the RE developer may apply for accelerated depreciation in its tax books and be taxed on
the basis of the same.
If an RE Developer applies for accelerated depreciation, the project or its

expansions shall no longer be eligible to avail of the ITH.
Plant, machinery and equipment that are reasonably needed and actually used for the
exploration, development and utilization of RE Resources may be depreciated using a rate
not exceeding twice the rate which would have been used had the annual allowance been
computed. Any of the following methods of accelerated depreciation may be adopted:
1. Declining balance method; and :
2. Sum-of-the years digit method.
The RE developer shall inform the BIR, through the Revenue District Office (RDO) where
it is registered, that it is availing of the accelerated depreciation instead of the ITH.
E. Zero Percent Value-Added Tax Rate — The 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, shall be subject to zero percent (0%) value-added tax (VAT)
pursuant to the National Internal Revenue Code (NIRC) of 1997, as amended; Provided, that
ancillary.services generated through renewable sources of energy shall also be subject to
zero percent (0%) VAT.
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On the other hand, the purchase by an RE Developer of local goods, properties, and services
needed for the development, construction, and installation: of the plant facilities of RE
Developers; and the whole process of exploration and development of RE sources up to its
conversion into power, including, but not limited to, the services performed by
subcontractors and/or contractors shall also subject to zero percent (0%) VAT.
Accordingly, local suppliers/sellers of goods, properties, and services of duly-registered RE

developers should not pass on the 12% VAT on the latter's purchases of goods, properties
and services that will be used for the development, construction and installation of their
power plant facilities. This includes the whole process of exploring and developing renewable
energy sources up to its conversion into power, including but not limited to the services
performed by subcontractors and/or contractors.
The local suppliers of goods, properties, and services shall require from the RE Developer a
copy of the latter's BOI Registration and DOE Registration for purposes of availing the zero
percent (0%) VAT incentive.
F. Tax Exemption of Carbon Credits— A\l proceeds from the sale of carbon emission credits
shall be exempt from any and all taxes.
HYBRID AND CO-GENERATION SYSTEMS
The tax exemptions and/or incentives provided for in Section 4 of RR 7+2022 as illustrated
above shall be availed of by a registered RE Developer of hybrid and cogeneration systems
utilizing both RE sources’and conventional energy but only in proportion to and to the extent of
the RE component. Moreover, the tax exemptions and incentives for hybrid and cogeneration
systems shall apply only to the equipment, machinery, and/or devices utilizing RE Resources.
In this regard, the RE Developer shall secure with the DOE a certification to distinguish the
equipment, machinery, and/or devices utilizing RE Resources, Only RE Facilities shall be entitled
to the RE incentives. For "common facilities", the DOE shall certify the capacity of RE in megawatts
to determine the ratioof the tax exemption privileges to be granted to RE Developers employing
hybrid and co-generation systems. Moreover, a CE shall also be secured from the BOI should the
RE Developer avail of the ITH and attach the same to the annual ITR to be filed with the BIR.
INCENTIVES FOR RE-COMMERCIALIZATION
Section 6 of RR 7-2022 provides that ALL manufacturers, fabricators, and suppliers of locally
produced RE equipment and components duly recognized and accredited by the DOE and upon
registration with the BOI, shall be entitled to. the privileges set forth below on their sale of RE
equipment to RE Developers: ;
A. Value-Added Tax (VA Importation of Components, Parts, and Materials.A\l

shipments necessary for the manufacture and/or fabrication of RE equipment and
components shall be exempt from VAT on importation: Provided: That the said
components, parts, and materials are:
1. Not manufactured domestically in reasonable quantity and quality at competitive

prices, as Certified to by the DTI;
2. Directly and actually needed and shall be used exclusively in the
manufacture/fabrication of RE equipment;
3. Covered by shipping documents in the name of the duly registered manufacturer
fabricator to whom the shipment will be directly delivered by customs authorities; and
4. Prior approval of the DOE is obtained before the importation of such components,
parts and materials.
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The importation of components, parts, and materials as allowed herein shall not be
subject to the issuance of an Authority to Release Imported Goods (ATRIG) under Revenue
Memorandum Order (RMO) No. 35-2002, as amended; and may be released by the Bureau
of Customs (BOC) without need of an ATRIG. The BIR, however, may conduct a post
investigation/audit on the importations released by the BOC without ATRIG pursuant to
these Regulations.
B. Income Tax Holiday and Exemption — For seven (7) years starting from the date of
registration and accreditation with the appropriate government agencies, such as the DOE a
d the BOL an RE manufacturer. fabricator. and supplier of RE equipment shall be fully exempt
from income taxes levied by the National Government on net income derived only from the
sale of RE equipment, machinery, pate and services. ’
C. Zero-Rated Value-Added Tax Transaction— A\l manufacturers, fabricators, and

suppliers of locally-produced RE equipment shall be subject to zero-rated VAT on their
transactions with local suppliers of goods, properties, and services needed in the
manufacture/fabrication of RE equipment; Provided, that the local suppliers of goods,
properties, and services shall require the manufacturers, fabricators, and suppliers of
locally-produced RE equipment the following documents for purposes of future tax
audit/refund:
1. BOI Registrations of the manufacturer/fabricator/supplier and of the recipient RE
Developer; and
2. DOE Registration/Accreditation of the manufacturer/fabricator/supplier and of the
recipient RE Developer.
INCENTIVES FOR FARMERS ENGAGED IN THE. PLANTATION OF BIOMASS RESOURCES
Section 7 of RR No. 7-2022 provides that All individuals and entities engaged in the plantation
of crops and trees used as Biomass Resources shall be exempt from payment of VAT on ali types
of agricultural inputs, equipment, and machinery within ten (10) years from the effectivity of the
Act, subject to the certification by the DOE and the following conditions:
a. That the crops and trees such as, but not limited to, jatropha, coconut, and sugarcane
shall be actually utilized for the production of Biomass resources; and
b. That the agricultural inputs, equipment and machinery such as, but not limited to,
fertilizers, insecticides, pesticides, tractors, trailers, trucks, farm implements and
“machinery. harvesters, threshers, hybrid seeds, genetic materials, sprayers, packaging
machinery and materials, bulk handling facilities, such as conveyors and mini-loaders,
weighing scales, harvesting equipment, and spare parts of all agricultural equipment
shall be used actually and primarily for the production of the said Biomass Resources.
TAX REBATE FOR PURCHASE OF Renewable Energy (RE) COMPONENTS
Purchasers of RE equipment for residential, industrial or community use shall be entitled to a

rebate equivalent to the VAT passed on to the said purchasers. The rebate shall only be available
to purchasers who are not VAT-registered and shall be in the form of a tax credit from the income
tax liability of the purchasers during the yor of yee Any unutilized rebate or tax credit shall
be forfeited.
PROHIBITION AGAINST DOUBLE AVAILMENT OF INCENTIVES
_Unless otherwise provided by law, the registration/accreditation to avail of incentives under

this Act shall. disqualify the availment of other tax and non-tax incentives under the National
Internal Revenue Code. as amended by RA No. 1 1534, otherwise known as the Corporate
Recovery and Tax Incentives for Enterprises (CREATE) Act.
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ANNUAL FILING AND REPORTORIAL REQUIREMENTS
Renewable Energy (RE) Developers and manufacturers, fabricators, and suppliers of locally-
produced RE equipment availing the incentives provided for in the Act shall comply with the filing
and reportorial requirements under RA No. 11534 or the CREATE Act. Non-compliance with the
filing and reportorial requirements shall be meted with the penalties under the law.
The FISCAL INCENTIVES REVIEW BOARD (FIRB

The functions and powers of the FIRB created under Presidential Decree No. 776 (Modifying
ALL laws, Acts, Orders and Ordinances Granting Subsidies, Exemptions from Taxes, Duties, Fees,
Imposts and Other Charges under certain exceptions and creating a Fiscal Incentive Board), as
amended, were expanded under Section 297 of the Tax Code, as amended.
COMPOSITION OF FIRB (Section 298)
® Chairperson - Secretary of Finance

© Co-chairperson - Secretary of Trade and Industry
© Members:
= Executive secretary of the office of the President
» Secretary of Budget and Management ~
= Director General of the National Economic and Development Authority (NEDA)
The Board shall have a technical committee, which shall serve as its main support unit and perform
functions as may be assigned, and shall be composed of the following:
©. Chairperson - Undersecretary of Finance
® Members
» Undersecretary or Assistant Secretary of the Office of the Executive Secretary
» | Undersecretary of Trade and Industry Board Investments Managing Head or
Assistant Secretary of Trade Industry
= Undersecretary or assistant secretary of budget management
= Deputy or assistant director general of the national economic development authority
commissioner or deputy commissioner of internal revenue
* Commissioner or deputy commissioner of customs
» Commissioner of the Philippine competition commission
= Director General or Chairperson or Administrator of the Investment Promotion
Agencies: provided, that the participation of the investment promotion agency
representative in deliberations and decision-making processes of the technical
committee shall be limited to the matters concerning their investment promotion
agency. :
SECRETARIAT - the secretariat shall be headed by an Assistant Secretary of Finance and shall be
staffed by the National Tax Research Center.
STRATEGIC INVESTMENT PRIORITY PLAN (Section 300
The Board of Investments (BOI), in coordination with the FIRB, Investment Promotion
Agencies, other government agencies administering tax incentives, and the private sector, shall
formulate the Strategic Investment Priority Plan (SIPP) to be, submitted to the President for
' . approval, which may contain recommendations for types of non-fiscal support needed ta create
high-skilled jobs to grow a local pool of enterprises, particularly Micro, Small and Medium
Enterprises (MSMEs), that can supply to domestic and global value chains, to increase the
sophistication of products and services that are produced and/or sourced domestically, to expand
domestic supply and reduce dependence on imports, and to attract significant foreign capital or
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Chapter 3 = Tee Jucentives wal CREATE Act
investment. The Strategic Investment Priority Plan shall be valid for a period of three (3) years,
subject to review and amendment every three (3) years thereafter unless there would be a
supervening event that would necessitate its review.
General Principles
The Strategic Investment Priority Plan (SIPP) shall provide for the types of fiscal and non-
fiscal support needed to:
a, ' Create high-skilled jobs to grow a local pool of enterprises, particularly micro, small
and medium enterprises (MSMEs), that can supply to domestic and global value
chains;
= b. Increase the sophistication. of products and services that are produced and/or
sourced domestically;
c. Expand domestic supply and reduce dependence on imports;
d. Attract significant foreign capital or investment; and
e. Promote export diversification and accelerate countryside development (as these are.
consistent with the tier'and locational criteria of the SIPP).
Formulation
The BOI, in coordination with the FIRB, IPAs and OGAs administering tax incentives, shall
formulate and recommend the SIPP for the approval of the President.
Contents
The SIPP shall contain the following:
Priority projects or activities that are eligible or qualified to be granted incentives

under the CREATE Act;
Scope and coverage of location and Industry Tiers;
Terms and conditions on the grant of enhanced deductions;
an
Qualifications for expansion, or entirely new projects or activities, to avail of

incentives; ;
Criteria and conditions for existing registered projects or activities prior to the
effectivity of the CREATE Act to register and avail of the incentives under the Act;
Conditions and qualifications for Export Enterprises registered prior to the effectivity
of the CREATE Act to reapply and avail of SCIT after the expiration of the transitory
period under Section 311 of the Act;
Specific qualification requirements or conditions for a particular sector or industry and
other limitations as set and determined by the BOI and in coordination with the FIRB;
and
h, Export of at least seventy percent (70%) of products and services.
Validity
The SIPP shall be submitted to the President for the sonreial and shall be valid for
three (3) years from its issuance; Provided, That the BOI shall formulate and submit a
new SIPP to the President not later than October 1 of the third year of its effectivity; Provided
further, That all such areas under Memorandum Order No, 50, Approving the 2020
Investment Priorities Plan, signed by the President on 18 November 2020, which took
effect on 6 December 2020, and its General Policies and Specific Guidelines to Implement
the 2020 Investment Priorities Plan shall be open for application until the publication of the
SIPP under the Ad.
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Mandatory Laws
The SIPP shall include sectors or industries that are mandated by special laws to be
listed in the Investment Priority Plan and/or granted incentives,
POWER OF THE PRESIDENT TO GRANT INCENTIVES (Sec. 301)

Notwithstanding the provisions of Sections 295 and 296, the President may, in the interest of
national economic development and upon the recommendation of the FIRB, modify the mix,
period or manner of availment of incentives provided under this Code or craft the appropriate
financial support package for a highly desirable project or a specific industrial activity based on
defined development strategies creating high-value jobs, building new industries to diversify
economic activities, attracting significant foreign and domestic capital investment, and the
requirements of the activity or project, subject to maximum incentive levels recommended by the
FIRB: provided, that the grant of Income Tax Holiday sha// NOT exceed eight (8) years and
thereafter, a Special Corporate Income Tax rate of five percent (5%) may be granted: provided,
further, that the total period of incentive availment shall not exceed forty (40) years.
QUALIFICATIONS OF A REGISTERED BUSINESS ENTERPRISE FOR TAX INCENTIVES

(Sec. 304)
In the review and grant of tax incentives, the registered business enterprise must:
a. Be engaged in a project or activity included in the strategic investment priority plan;
b. Meet the target performance metrics after the agreed time period;
c. Install an adequate accounting system that shall identify the investments, revenues, costs
and profits or losses of each registered project or activity undertaken by the enterprise
separately from the aggregate investments, revenues, costs and profits or losses of the
whole enterprise; or establish a separate corporation for each registered project or activity if
the Investment Promotion Agency should so require;
d. Comply with the e-receipting and e-sales requirement in accordance with sections 237 and
237(a) of Tax Code; and
e. Submit annual reports of beneficial ownership of the organization and related parties.
FILING OF TAX RETURNS AND SUBMISSION OF TAX INCENTIVES REPORTS (Sec. 305)
All Registered Business Enterprises (RBEs) and other registered entities whether taxable or
exempt, are required to file their tax returns and pay their tax liabilities, on or before the
deadline as provide e National Inte. ui fe of 1997, as amended,
using the Electronic System for filing and payment of taxes with the Bureau of Internal
Revenue: provided, that for purposes of complying with their tax obligations, cooperatives and
other registered entities which do not have access to the electronic facilities shall file with their
respective revenue district offices.
For Registered Business Enterprises (RBEs) and other registered enterprises availing of tax
incentives administered by the Investment Promotion Agencies (IPA) and other government
agencies administering tax incentives, they shall file with their respective Investment Promotion
Agencies or other government agencies administering tax incentives a complete annual tax
incentives report of their income-based tax incentives, vat exemptions and zero-rating, custom
duty exemptions, deductions, credits or exclusions from the income tax base, and exemptions
from local taxes, as provided under Section 294 of the Tax Code as amended by CREATE Act and
-in the Special laws of the concerned Investment Promotion Agency or other government agency
administering tax incentives, and respective laws, and a complete annual benefits report which
shall include data such as, but not limited to, the approved and actual amount of investments,
approved and actual employment level and job creation including information on quality of jobs
and hiring of foreign and local workers, approved and actual exports and imports, domestic
purchases, profits and dividend payout, all taxes paid, withheld and foregone within thirty (30)
calendar days from the statutory deadline for filing of tax returns and payment of taxes; provided,
that a copy of the report shall be simultaneously submitted to the fiscal incentives review board
in electronic form.
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The Investment Promotion Agencies and other government agencies administering tax
incentives shall, within sixty (60) calendar days from the end of the statutory deadline for filing
of the relevant tax retums, submit to the Bureau of Internal Revenue, their respective annual tax
incentives reports based on the list of the registered business enterprises and other registered
enterprises which have filed said tax incentives report: provided, that the reportorial requirement
under section 3 of republic act no, 10963 or the "Train Law" shall be covered by this section the
details of the tax incentives reports, as provided in the preceding paragraphs, shall be provided
in the implementing rules and regulations of the CREATE Act. The foregoing provisions shall be
without prejudice to the right of the Bureau of Internal Revenue.and the Bureau of Customs to
‘assess and/or audit tax liabilities, if any, within the prescribed period provided in the National
Internal Revenue Code of 1997 (or Tax Code), as amended, .and Republic Act No. 10863,
otherwise known as the Customs Modernization and Tariff Act, as amended, respectively.
PROHIBITION ON REGISTERED ACTIVITIES (Sec. 309)
A qualified registered project or activity under an Investment Promotion Agency (IPA)’

administering an economic zone or Freeport shall be exclusively conducted or operated within the -
geographical boundaries of the Zone or Freeport being administered by the Investment Promotion
Agency in which the project or activity is registered provided, that a Registered Business
Enterprise (RBE) may conduct or operate more than one qualified registered project or activity
within the same Zone or Freeport under the same. Investment Promotion Agency: Provided,
further, that any project or activity conducted or performed outside the geographical boundaries
of the Zone or Freeport shall not be entitled to the incentives provided under Title XIII of the
CREATE Act, unless such project or activity is conducted or operated under another Investment
Promotion Agency. . tofu!
Concepe of Ecoxenes |
INTRODUCTION
' It is the declared policy of the government to translate into practical realities the following
State policies and mandate in the 1987 Constitution, namely:
1) "The State recognizes the indispensable role of the private sector, encourages private
enterprise, and provides incentives to needed investments.” (Sec. 20, Art. II)
2) The State shall promote the preferential use of Filipino labor, domestic materials and locally
produced goods, and adopt measures that help make them competitive." (Sec. 12, Art. XII)
In pursuance of these policies, the government shall actively encourage, promote, induce and
accelerate a sound and balanced industrial, economic and social development of the couritry in
order to provide’jobs to the people especially those in the rural areas, increase their productivity
and their individual and family income, and thereby improve the level and quality of their living
condition through the establishment, among others, of Special Economic Zones in
_ Suitable and strategic locations in the country and through measures that shall effectively
attract legitimate and productive foreign investments,
: Ecozones and Freeport zones were, by le io e

territories under RMC No. 74-99 and RMC No. 7-2007. Thus, following the “cross border
doctrine”, the sale of goods and services by a VAT-registered seller to registered enterprises
in these economic and freeport zones were treated as constructive export subject to zero-
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percent oe VAT. to the di a of thi: call i
Special Economic Zones were granted special territory various tax and duty incentives such
as under RA 7227 otherwise known as the “Bases Conversion and Development Act of 1992” to
enhance the benefits to be derived from the Subic and Clark military reservations. RA 7227 was
later amended under RA 9400 to effectively extend the same benefits enjoyed in Subic to the Clark
Freeport Economic Zone (Clark FEZ). Under this law, Clark FEZ is considered a customs territory
separate and distinct from the Philippine Customs territory. Thus, as opposed to importations into
and establishments in the Philippines customs territory, which are fully subject to Philippine
customs and tax laws, importations into and establishments located within the Clark FEZ (FEZ
Enterprises) enjoy special incentives, including tax and duty-free importations. More specifically
Clark FEZ enterprises shall be entitled to the Freeport status. of the zone and a 5% preferential
income tax rate on its gross income in lieu of national and local taxes (Secretary of Finance and
CIR vs. Ecozone Plastic Enterprises Corporation, GR No. 210588 dated Nov. 29, 2016 and RMC 38-
2017 dated April 7, 2017).
Business establishments operating within the ECOZONES shall be entitled to the fiscal
incentives as provided for under Presidential Decree No. 66, the law creating the Export Processing
Zone Authority, or those provided under Book VI of Executive Order No. 226, otherwise known as
the Omnibus Investment Code of 1987. Furthermore, tax credits for exporters using local materials
as inputs shall enjoy the same benefits provided for in the Export Development Act of 1994. The
different Fiscal Incentives available to qualified Registered Business Enterprises
(RBEs) shall now be governed by Title XIII of the Tax Code as amended under CREATE
Act.
DEFINITION OF TERMS:
Special economic zones (SEZ) — hereinafter referred to as the ECOZONES, are selected areas with highly
developed or which have the potential to be developed into agro-industrial, industrial, touristrecreational,
commercial, banking, investment and financial centers. An ECOZONE may contain any or all of the
following: industrial estates (IEs), export processing zones (EPZs), free trade zones, and tourist/recreational
centers. The ECOZONE "shall be managed and operated by the PEZA as a SEPARATE CUSTOMS
TERRITORY. The term "Customs Territory” means "the national territory of the Philippines outside of the
proclaimed boundaries of the ECOZONES except those areas specifically declared by other laws and/or
presidential proclamations to have the status of special economic zones and/or free ports."
Industrial estate (IE) — refers to a tract of land subdivided and developed according to a comprehensive
plan under a unified continuous management and with provisions for basic infrastructure and utilities, with
or without pre-built standard factory buildings and community facilities for the use of the community of
industries.
Export processing zone (EPZ) — a specialized industrial estate located physically and/or administratively
outside customs territory, predominantly oriented to export production. Enterprises located in export
processing zones are allowed to import capital equipment and raw materials free from duties, taxes and
other import restrictions.
Free trade zone — an isolated policed area adjacent to a port of entry (as a seaport) and/or airport where
imported goods may be. unloaded for immediate transshipment or stored, repacked, sorted, mixed, or
otherwise manipulated without being subject to import duties. However, movement of these imported goods
from the free-trade area to a non-free-trade area in the country shall be subject to import duties.
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e CREATE Act
BO/ Registered | a
Bureau of Investment (BOI) Registered Enterprises
Executive Order No. 226 — Omnibus Investment Code of 1987
FISCAL INCENTIVES
Just like PEZA Registered Enterprises and other Enterprises registered by an Jnvestment
Promotion Agency (IPA), the available Fiscal Incentives for BOI Registered Enterprises are now
governed by Title XIII of the Tax Code as amended by RA 11534 or the CREATE Act.
STRATEGIC INVESTMENT PRIORITY PLAN (SIPP)

Previously known as the Investment Priorities Plan (IPP)
The Board of Investments (BOI) issues the SIPP annually which is a list of promoted
areas of investments eligible for government incentives. “Strategic Investment Priority Plan
(SIPP)” refers to the plan prepare
_by the BOI,
d in coordination with the FIRB, IPAs, and OGAs
administering tax incentives, and the private sector, which is approved by the President, and
Contains the priority projects or activities, scope and coverage of location and industry tiers,
recommendations for non-fiscal support and corresponding specific activities wherein
investments are to be encouraged, and other information, analyses, data, guidelines, or
criteria, as the BOI may deem appropriate. The Tax Incentives granted by IPAs such as the BOI
is based on a tiered-approach (Tiers I to III) to incentives (Refer to Page 817 of this book).
The SIPP lists activities that qualify for investment incentives under RA 11534 or the
CREATE ACT. The SIPP are areas the government deemed to be priorities for investment
Incentives in the SIPP take the form of income tax holidays (ITH), enhanced deductions (ED), and
a preferential 5 percent special corporate income tax rate (SCIT). Typically, an incentive will have
4-7 years of ITH before transitioning to 5-10 years of either ED or SCIT. Investors can elect whether
to claim ED or SCIT /f engaged in export activities.
The length of the incentive depends on which of the three tiers the relevant activity falls
under, whether the activity is domestic or for export, and whether the investment is in the National
Capital Region, metropolitan areas, or areas contiguous and adjacent to the National Capital
Region, or other regions.
*
APPROVAL OF THE SIPP
The President shall proclaim the whole or part of such plan as in effect; or alternatively, return the
whole or part of the plan to the Board of Investment for revision, Upon the effectivity of the plan
or portions thereof, the President shall issue all necessary directives to all departments, bureaus,
agencies or instrumentalities of the government to ensure the implementation of the plan by the
agencies concerned in a synchronized and integrated manner. No government body shall adopt
any policy or take any course of action contrary to or inconsistent with the plan,
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3 Chapter 73. - Tie Jucentives wader CREATE Act
Amendments to SIPP
Subject to publication requirements and the criteria for investment priority determination, the
Board of Investments may, at any time, add additional areas in the plan, alter any of the terms of
the dediaration of an investment area or the designation of measured capacities, or terminate the
status of preference, In no case, however, shall any amendment of the plan impair whatever rights
may have already been legally vested in qualified enterprises which shall continue to enjoy such
rights to the full extent allowed under this Code. The Board shall not accept applications in an area
of investment prior to the approval of the same as a preferred area nor after approval of its deletion
as a preferred area of investment.
Publication
Upon approval of the plan, in whole or in part, or upon approval of an amendment thereof, the
plan or the amendment, specifying and declaring the preferred areas of investment and their
corresponding measured capacity shall be published in at least one (1) newspaper of general
Circulation and all such areas shall be open for application until publication of an amendment or
deletion thereof, or until the Board approves registration of enterprises which fill the measured
Capacity.
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REPUBLIC OF THE PHILIPPINES _—)
)S.S,
SWORN AFFIDAVIT
. ; |, (Full Name), (Civil Status), (Citizenship), of legal age and with registered business
address at : after being sworn in accordance with law,
do hereby depose and state the following:
lame_o e_Regist Business En or the “Company” Is a

" corporation/partnership/sole proprietorship organized and existing under the
laws of the Philippines, and duly registered with (Name_of Investment
Promotion Agency) with Certificate of Registration Number:
issued on
2. lam the owner of the said company per DTI Certification No. /lam
the (position) and the authorized representative of said “company per mead
Resolution/Partnership Resolution/ dated
3. The Company is engaged in (Primary Registered Business Activity) with VAT

Certification (PEZA Form 97-01/CRTE / CETI Number): issued on
and with the following description:
(Description of the registered business project or activity)
4. The Company will procure the following goods or services which are
indispensable to the registered project or activity and without which the
project or activity cannot be carried out:
(Specify goods or services to be procured with a brief description)
5. The goods or services shall be procured by the Company from (Name of

Supplier), a legitimate provider of the above-mentioned goods or services; °
6. Of the procured goods or service, (mark the applicable box)
[ ] the entire goods or services specified shall be directly and

exclusively used in the Company’s registered business project or
activity.
[ ] only a portion of the goods or services specified shall be directly

and exclusively used in the registered business project or activity, In
this regard, the Company shall adopt (allocation method used) to
properly determine which goods or services are utilized or to be
utilized in the registered business project or activity;
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: Cee, Chapter (Ss - Tae Jucentives nniler CREA TE Ack;
7, The expected date of utilization of the goods to be procured or the date of

performance of services shall be on _. (date of utilization of goods or
performance of service);
8. | hereby declare under the penalty of perjury that the foregoing attestations
are true and correct to the best of my knowledge and belief;
9. This Sworn Affidavit is executed in compliance with the requirements under

Bureau of Internal Revenue (BIR) Revenue Memorandum Circular (RMC) No.
24-2022. eli
IN WITNESS WHEREOF, | have hereunto affixed my signature this at

, Philippines. ;
Affiant
SUBSCRIBED AND SWORN to before me, in on the

day of YYYY affiant exhibiting to me his/her _- with
number issued ‘ as competent proof of identity.
_ Doc. No. ;
Page No. ;
Book No. _ :
Series of YYYY.
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Chapter 73 - Tae /ncentives rll CREATE - Act
ee QUIZZER
Tax Incentives under Title XIll of the Tax Code, as amended by CREATE Act.
1. refer to goverment entities created by law, executive order, decree

or other issuance, in charge of promoting investments, granting and administering tax and non-tax
incentives, and overseeing the operations of the different economic zones and Freeport in accordance
with their respective special laws.
a. Investment Promotion Agencies (IPAs)
b. Registered Business Enterprises (RBEs)
c. Strategic Investment Priority Plan (SIPP)
d. _ Fiscal Incentives Review Board (FIRB)
2. refers to the plan prepared by the Bureau of Investment (BO!)

coordination with the Fiscal Incentives Review Board (FIRB), Investment Promotion Agency (IPA),
and Other Goverment Agencies (OGAs) administering tax incentives, and the private sector, which
is approved bythe President, and contains the priority projects or activities, scope and coverage
of location and Industry Tiers, recommendations for non-fiscal support and corresponding specific
activities wherein investments are to be encouraged, and other information, analyses, data,
guidelines, or criteria, as the BOI may deem appropriate.
a. _ Investment Promotion Agencies (IPAs)
b. _ Registered Business Enterprises (RBEs)
c.” Strategic Investment Priority Plan (SIPP)
d. Fiscal Incentives Review Board (FIRB)
3. The Strategic Investment Priority Plan (SIPP) shall be submitted to the President for the approval
and shall be valid for a period of
a. 2 years c. 5 years
b. 3 years d. 10 years
4. refers to any individual, partnership, corporation, Philippine

branch of a foreign corporation, or other entity organized and existing under Philippine laws and
registered with an investment promotion agency excluding service enterprises such as those engaged
‘in customs brokerage, trucking or forwarding services, janitorial services, security services, insurance,
banking, and other financial services, consumers' cooperatives, credit unions, consultancy services,
retail enterprises, restaurants, or such other similar services, as may be determined by the FIRB,
irrespective of location, whether inside or outside the zones, duly accredited or licensed by any of the
investment promotion agencies and whose income delivered within the economic zones shall be
subject to taxes under the national internal revenue code of 1997, as amended.
a. — Investment Promotion Agencies (IPAs)
b. Registered Business Enterprises (RBEs)
c. Strategic Investment Priority Plan (SIPP)
d. _ Fiscal Incentives Review Board (FIRB)
8 refers to any individual, partnership, corporation, Philippine branch

of a foreign corporation, or other entity organized and existing under Philippine laws and
registered with an Investment Promotion Agency (IPA) to engage in manufacturing, assembling
of, processing activity, and services such as information technology (IT) activities and business
process outsourcing (BPO), and resulting in the direct exportation, and/or sale of its
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Chapter 7S - Tage Incentives ender CREATE Act
~ manufactured, assembled or processed product or IT/BPO services to another registered export
enterprise that will form part of the final export product or export service of the latter, of at least
seventy percent (70%) of its total production or output.
a. Registered Export Enterprise (REE)
b. Domestic Market Enterprise
c. _ Investment Promotion Agencies (IPAs)
d. Registered Business Enterprises (RBEs)
6. Registered Export Enterprise (REE) or on Oriented Enterprise may be granted an Income Tax
Holiday (ITH) for a period of ,
a. Three (3) years
b. Four (4) years
c. Seven (7) years
d. Four (4) to seven (7) years depending on location and industry priorities
7. Domestic Market Enterprise may be granted an Income Tax Holiday (TH) for a period of
a. Three (3) years
b. Four (4) years
c. Seven (7) years
d. Four (4) to seven (7)'years depending on location and industry priorities
8. Five percent (5%) Special Corporate Income Tax (SCIT) may be availed by a Registered Export
Enterprise (REE)
a. Before ITH period
b. After ITH period
c. Simultaneously with ITH
d. _ Either before or after ITH period
9. Five percent (5%) Special Corporate Income Tax (SCIT) may be availed by a Domestic Market
Enterprise
a. Before ITH period
b. After ITH period
d. Not entitled to SCIT
10. Enhanced Deduction (ED) may be availed by a Registered Export Enterprise (REE)
Before ITH period
b. After ITH period
d. Either before or after ITH period
11. Enhanced Deduction (ED) may be availed by a Domestic Market Enterprise

Before ITH period
aoorp
’ After ITH period

Simultaneously with ITH
Not entiled to SCIT
12. Statement 1: After the ITH period, a Registered Export Enterprises (REE) may choose to availeither
SCIT rate of 5% or Enhanced Deduction (ED).
Statement 2: After the ITH period, a Domestic Market Enterprise may choose to avail either SCIT
rate of 5% or Enhanced Deduction (ED).
a. Only Statement 1 is correct
b. Only Statement 2 is correct
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Chapter 13.- Tae Jwientives uniler CREATE Act
‘+c. , Both Statements are correct
'd. Both Statements are incorrect
13, Enhanced Deduction (ED) may be availed by a Registered Export Enterprise (REE) for a period of
b: 3 years d. 10 years
14. Enhanced Deduction (ED) may be availed by a Domestic Market Enterprise for a period of
15. Special Corporate Income Tax (SCIT) may be availed by a Registered Export Enterprise (REE) for a
period of
*16. Enhanced Deduction (ED) may be availed by

a. Registered Export Enterprises
_ b. Domestic Market Enterprises
17. This refers to a tax incentive at a tax rate equivalent to five percent (5%) effective July 1, 2020, based
on the gross income eamed of registered business enterprises, in lieu of all national and local taxes.
a. Income Tax Holiday (ITH)
b. Special Corporate Income Tax (SCIT)
c. Enhanced Deductions (ED)
18. Statement 1: The 5% special corporate income tax (SCIT) rate may be availed by an export enterprise
only after expiration of its Income Tax Holiday (ITH)-
Statement 2: Export enterprises may avail of the Enhanced Deductions and SCIT, anuteneoust
a. Only statements 1 is correct
b. Only statements 2 is correct.
19. Statement 1: Under the CREATE Act, the option to avail of either SCIT or Enhanced Deductions after
ITH period shall be exercised by the RBE at the time of application for registration of the project.
Statement 2: The option to avail of either SCIT or Enhanced Deductions shall be irrevocable for the
entire duration of entitlement to such incentives.
' a. Only statements 1 is correct
c.. Both statements are correct
20. Which of the following Registered Business Enterprise (RBE) may avail of income tax holiday ((TH)
incentive under the CREATE Act?
. |. + Export enterprises
Il. Domestic market enterprises 2
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_ 24, Which of the following Registered Business Enterprise (RBE) may avail of 5% special corpora
income tax (SCIT) incentive under the CREATE Act?
|. Export enterprises
“ll Domestic market enterprises
a. | only a c. Both | and II
b. ll only d, Neither | nor II
22. Which of the following Registered Business Enterprise (RBE) may avail of Enhanced Deduction (ED)
incentive under the CREATE Act?
lL. Export enterprises
il. Domestic market enterprises
b. ll only _d. Neither | nor II
23. All registered business enterprises (RBEs) shall be subject to which types of taxes after the expiration
ofthe period of incentives of their registered projector activity?
I. Regular Corporate Income Tax (RCIT)
Il. Minimum Corporate Income. Tax (MCIT)
Ill. 12% Value Added Tax (VAT)
a. | only c. |, lland Il
b. | and II only d. None of the above
24. refers to gross sales or gross revenues derived from the registered project or activity,
net of sales discounts, sales returns and allowances and minus cost of sales or direct cost.but before
any deduction is made for administrative expenses orcng losses during a given taxable period.
a. Gross sales/receipts
b. Cost of sales or services
c. Operating expenses
d. Gross income
25. For export enterprises governed by special laws which do not provide for allocation, the 5% SCIT
based on the gross income shall be paid and remitted as follows:
I. Three percent (3%) to the National Govemment
Il. Two percent (2%) to the Treasurer's office of the municipality or city where the enterprise is
located
26. Under the Cross-Border Doctrine, no VAT shall be imposed to form part of the cost of goods destined
for consumption outside of the territorial border of the taxing authority. Which of the’ following
statements about cross-border doctrine is correct?
|. Actual export of goods and services from the Philippines to a foreign country must be free of
VAT.
Il. Goods destined for use or consumption within the Philippines shall be imposed VAT. .
27. Inthe review and grant of tax incentives, the registered business enterprise must:
I. Be engaged in a project or, activity included in the strategic investment priority plan.
Il. Meet the target performance metrics after the agreed time period.
lll. Install an adequate accounting system that shall identify the investments, revenues, costs and
profits or losses of each registered project or activity undertaken by the enterprise separately
from the aggregate investments, revenues, costs and profits or losses of the whole enterprise:
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Chapter 13 ~ Tap: Incentives under CREATE Act
of establish a separate corporation for each registered project or activity if the investment
promotion agency should so require.
IV. Comply with the e-teceipting and e-sales requirement in accordance’ with sections 237 and
237(a) of the Tax Code, as amended.
Submit annual reports of beneficial ownership of the organization and related parties.
a. | and Il only c. 1, Il, Ill, and IV only
b. |, Il, and Il only d. All of the above
28. Statement 1: All RBEs shall apply for a Certificate of Entitlement to Tax Incentives (CET!) with their
concemed IPA prior to the filing of Annual income Tax Retum (AITR).
Statement 2: In every case, the applican/RBE shall have the burden of proving that every project
or activity is qualified for the tax incentives applied for.
a Only statements 1 is correct
Which of the following is not one of the scope of income tax holiday from an RBE’s registered
activities?
a. Regular corporate income tax (RCIT)
b. Minimum corporate income tax (MCIT)
c. _ Final withholding taxes on passive incomes
d. Allofthe above
A Registered Business Enterprise (RBE) enjoying Income Tax Holiday (ITH) shall still be subject to
what type of taxes?
L. Regular corporate income tax on income from its unregistered activities
ll. Minimum corporate income tax on income from its unregistered activities
a. | only c. land Il
b. ll only d. Neither | nor Il
31. A Registered Business Enterprise (RBE) enjoying Income Tax Holiday (ITH) shall still be subject to
what type of taxes?
a. Withholding taxes on salaries of employees
b. Withholding taxes on income payments to persons other than a registered ECOZONE
enterprise, subject to withholding tax at source under Section 50(b) of the Tax Code, as
amended
c. Both*a” and “b”
d. Neither
“a” nor “b”
32. Statement 1: The 5% Special Corporate Income Tax (SCIT) or also known as Gross Income Tax
(GIT) is in lieu of all national and local taxes.
Statement 2: Registered Business Enterprises (RBEs) paying the 5% SCIT are not liable for local
business taxes and other charges normally due to the local government unit.
b. Both statements are not correct
c. Only the first statement is correct
d. Only the second statement is correct
33. A Registered Business Enterprise has a registered and an unregistered activity. Minimum corporate
income tax (MCIT) shall apply to:
a. Registered activity
514
The
Chapter aS Lage Jucentives whi CREA fia Act
b. Unregistered activity
c. Both activities
d. Neither registered or unregistered activity
34. Which of the following statements is incorrect?

a. Export and Domestic Market Enterprises may avail of the 5% Special Corporate Income Tax
(SCIT) in lieu of national and local taxes.
b. After the period prescribed for availing Tax Incentives under Title XIII of the Tax Code,
registered business enterprises shall be treated as ordinary corporations for taxation purposes
and consequently subject to regular taxes imposed under the Tax Code, as amended..
35. Registered Export Enterprises (REEs) who have completed their ITH and now under the 5% GIT/SCIT
regime or those already enjoying the 5% GIT/SCIT upon the effectivity of CREATE Act but remained
VAT-fegistered are required to change their registration to non-VAT. Will they be subject to.
Percentage Tax (PT)?
I, 1 Answer: Yes, REEs whose registration status was changed from vat to non-vat is subject
_ _ to Percentage Tax under Section 116 of the Tax Code as amended.
Il. 2" Answer: No. The said requirement to change the registration from “VAT” to “non-VAT” does
not necessarily mean that these REEs are subjectto Percentage Tax (PT). “PT” tax type should
not be registered since these REEs are only subject to eet in lieu of all other intemal
revenue taxes.
lil. 3" Answer: No. These taxpayers are only required to file nd pay the corresponding tax due
in their respective Annual or Quarterly Income Tax Returns (BIR Form No. 1702/I702Q),
subject to regular validation by the RDO or Large Taxpayer Audit Division where the REE is
registered in order to verify whether no project or activity other than those that are registered
under the 5% GIT/SCIT is being carried out by the REE. If found to be in violation, a
corresponding assessment and penalties shall be imposed accordingly.
Only 1: statement is correct
Only 2°¢ statement is correct
aoop
Only 2"4 and 3" statements are correct

None of the above
. Registered Export Enterprises (REEs) who have completed their ITH and now under the 5% GIT/SCIT
regime or those already enjoying the 5% GIT/SCIT upon the effectivity of CREATE Act but remained
VAT-registered are required to change their registration to nan-VAT within: ;
a. One(1) month from the expiration of the ITH incentive.
b. Two (2) months from the expiration of the ITH incentive.
c. One (1) month before the expiration of the ITH incentive.
d. Two (2) months before the expiration of the ITH incentive.
37, Which of the following tax incentives may be availed by DOE-certified existing and new Renewable
euy (RE) developers of RE facilities including hybrid i al
Income Tax Holiday (ITH)
i Corporate Income Tax Rate of 10%
Ill. Zero-rated (0%) Value Added Tax (VAT)
IV. Accejerated Depreciation
a. | and Ill only c. |, land Ill only
b. llandIllonly - d. All of the above
515
The
CamScanner
I elite s CREA fe Act
Olepter 7S - Tae I
wable Energy (RE) developers of RE facilities may be availed
38. The corporate tax rate of 10% for Rene
day (ITH)
a. After availment of Income Tax Holi
b. _ Inlieu of Income Tax Holiday (ITH)
c. Either “a” or “b"
d. Neither “a” nor "b”
Statement 1: Strategic Investment Priority Plan (SIPP) refers to list of promoted areas of investments
eligible for government incentives.
(PEZA)
Seuerett > SIPP is issued by the Philippine Economic Zone Authority
Statement 1: All Registered Business Enterprises (RBEs) and other registered entities whether
taxable or exempt, are required to file their tax retums and pay their tax liabilities, on or before the
- deadline as provided under the National Internal Revenue Code of 1997 or the Tax Code, as
amended, using the Electronic System for filing and payment of taxes with the Bureau of Intemal
Revenue
Statement 2: Registered Business Enterprises (RBEs) and other registered enterprises availing of
tax incentives administered by the Investment Promotion Agencies (IPA) and other government
agencies administering tax incentives, they shall file with their respective Investment Promotion
Agencies or other goverment agencies administering tax incentives a complete annual tax incentives
report.
41. Statement 1: Allregistered business enterprises shall pay all applicable taxes at the regular rates
under the Code and other laws after the expiration of the period of incentives of their registered
projector activity.
Statement2: Sales receipts and other income derived from non-registered project or activity shall
be subject to appropriate taxes imposed under the Tax Code, as amended, even during the
effectivity of the RBE’s tax incentives.
42. Upon approval of the Strategic Investment Priority Plan (SIPP), whether in whole or in part, or upon
approval of an amendment thereof, the plan or the amendment, specifying and declaring the
- preferred areas of investment and their corresponding measured capacity shall be published in/ at
least:
a. One (1) newspaper. of general circulation
b. Two-{2)t newspapers of general circulation
a,” ; Three 43) fnewspapers of general circulation
Oe (4) to Aves @ cic of general circulation, at the option of the BO!
43. Sean iniastrient Priority Planan (SIPP) shall be valid

for a period of
ya. 1year: aS c. 3 years
"by ER Se oP ee d. 5 years
: = Lew :
Poe 516
The
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The Authors
ENRICO D. TABAG, CPA, MBA

Managing Partner, EDT & Co., CPAs
Asst. Prof., University of Santo Tomas — AMV College of Accountancy
Chairman and CPA Reviewer for Taxation, PRIA-ARC CPA Review School Inc.
Former:
Program Chair, BSMA, UST AMV College of Accountancy
CPA Reviewer, Professional Review and Training Center (PRTC)
CPA Reviewer, Center for Training and Development, Inc. (CTDI)
Faculty Member/Special Lecturer:
Far Eastern University Manila (FEU)
University of the East Manila (UE)
Colegio de San Juan de Letran
Miriam College Foundation
Jose Rizal University
EARL JIMSON GARCIA, CPA, MBA

Asst. Professor, University of Santo Tomas — AMV College of Accountancy
CPA Reviewer in Taxation - Philippine Accountancy Review for Excellence (PAReX)
Member, CPA Board Syllabus Revision Task Force
Former Chairperson, University of Santo Tomas — AMV College of Accountancy
Former Reviewer in Taxation, Review School of Accountancy (ReSA)
Former Faculty/Special Lecturer
Far Eastern University
Miriam College Foundation
Colegio de San Juan de Letran
St. Paul University
Jose Rizal University
Angeles University Foundation
College of the Holy Spirit
Saint Mary’s University (Nueva Vizcaya)
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TABAG - Transfer & Business Taxation (2023 Edition)

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This book entitled Transfer and | Business Taxation, is primarily intended to

Chapter TOPIC Page

1 Succession and Teanafeh TENGS ici ee nciiencwsescqueetiasive

CAUSES TOF GISINGTHANCE siievcccen titre

2 Gross Estate .... 33

Deductions from the Gross Estate ..:...0.:.....sscssesseeeerees 89

Property Relations ee ta Jasnapeaeateal toucthud yeaxtus 129

Estate Tax Credit and Net Distributable Estate 159

6 Dom's Tax .......cssesseseseeeseneeneneenes gaseabegee sfaseaupessasicaie 169

ROSS GETS sack Sean baeacarsrattanens cornchassinisle 178

7 Introduction to Business Taxes.............0:csesesetesseeeeeeees 223

Value Added Tax .......ssssesscssessssseesseeessseess spe ial 243

‘COMPUTATION OF VAT PAYABLE ......... rade lepesinit 264

Other Percentage Taxes .........2......00cscsecessessesseseseeseeere 361

1 0 EENGIGO THROS Ay bacesGhaceccccacecdncccsacvedeisiestinesdasatiesteceiss 433

1 4 Documentary Stamp Taxes (DST)...........::sssseeereeeeeeees 451

The modes and mechanics of acquiring ownership and other real

Under the Civil Code (CC),

Transfer taxes are taxes imposed upon the gratuitous disposition of

Types of Transfer Taxes |

Gratuitous transfer or donation may take effect at the time of death of

Since donation mortis causa .takes effect upon the death of a

Decedent's Estate** To ry Pe elisa ct by the Heir(s)

**Cut-off Period: The amount of obligation acquired/inherited by

Nature of transfer taxes

Transfer taxis an excise tax. The subject matter of a transfer tax is

The Law that Governs the Imposition of Estate Tax

It is a well settled rule that estate taxation is governed by the

Answer the following:

0 The estate tax accrues immediately at the time of death, irespective of

“> Answer: P10,000,000 —

0 — Art.774 of the Civil Code provides:

Kinds of Succession (Art. 778 CC):

Whenever a person dies leaving property (inheritance), a question

A person is normally said to have died testate if he left a will (refer to

1. Testamentary or testate succession. A type of succession that results

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

Mixed succession. A type of succession which is effected partly by

Case A: Testamentary Succession

Case B: Intestate or Legal Succession

Case C: Mixed Succession

CAUSES OF LEGAL SUCCESSION OR INTESTACY:

CASE A: VOID WILL , |

CASE B: “WILL” WHICH HAS SUBSEQUENTLY LOST ITS VALIDITY

2. When the “Will” does not institute an heir.

Pedro D. Magiba (signed) |

Assume further that Pedro has five (5) children.

3. Partial institution of heir. Consequently, intestacy takes place as

ILLUSTRATION 5 (Partial Institution):

4. Other causes of legal succession or intestacy:

b. Non-fulfillment of the suspensive condition attached to the

c. Preterition (omission in the testator’s will of one, some or all of

d. Fulfillment of “resolutory condition’. A resolutory condition

e. Expiration of term or period of institution.

f. Non-compliance or impossibility of compliance with the will.

g. Repudiation of the instituted heir.

1. Decedent is the general term applied to the person whose property ig

Executor is.a person designated in the last will and testament to

2. Inheritance (Estate) - Include all the property, rights and obligations

a. COMPULSORY HEIRS — those who succeed by force of law to some

Kinds of compulsory heirs:

« Secondary— those who ‘succeed only in the absence of the

= ‘Concurring — those who succeed together with the primary or

Thee uid alee

b. VOLUNTARY HEIRS —- those instituted by the testator in his will to

c. LEGAL OR INTESTATE HEIRS — those who succeed to the estate of

COMPOSITION OF GROSS ESTATE: