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

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

Properties in the Estate

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

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

SEC. 104. Definitions. - For purposes of this Title, the terms "gross estate" and "gifts" include real and personal
property, whether tangible or intangible, or mixed, wherever situated: Provided, however, That where the
decedent or donor was a nonresident alien at the time of his death or donation, as the case may be, his real and
personal property so transferred but which are situated outside the Philippines shall not be included as part of his
"gross estate" or "gross gift": Provided, further, That franchise which must be exercised in the Philippines; shares,
obligations or bonds issued by any corporation or sociedad anonima organized or constituted in the Philippines in
accordance with its laws; shares, obligations or bonds by any foreign corporation eighty-five percent (85%) of the
business of which is located in the Philippines; shares, obligations or bonds issued by any foreign corporation if
such shares, obligations or bonds have acquired a business situs in the Philippines; shares or rights in any
partnership, business or industry established in the Philippines, shall be considered as situated in the Philippines:
Provided, still further, that no tax shall be collected under this Title in respect of intangible personal property: (a) if
the decedent at the time of his death or the donor at the time of the donation was a citizen and resident of a
foreign country which at the time of his death or donation did not impose a transfer tax of any character, in respect
of intangible personal property of citizens of the Philippines not residing in that foreign country, or (b) if the laws of
the foreign country of which the decedent or donor was a citizen and resident at the time of his death or donation
allows a similar exemption from transfer or death taxes of every character or description in respect of intangible
personal property owned by citizens of the Philippines not residing in that foreign country.
For residents and citizens, gross estate includes ALL properties, real or personal,
tangible or intangible, WHEREVER situated.
For non-resident aliens, gross estate includes only properties those situated in the
Philippines.
o Except with respect to INTANGIBLE personal property, its inclusion to the gross
estate is the subject to the rule of reciprocity.
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If the foreign country of the non-resident alien does not impose a transfer
tax of any character on the IPP of Filipinos not residents of that foreign
country; or
The foreign country of the non-resident alien allows a similar exemption
from transfer tax in respect of IPP owned by Filipinos not residents of that
foreign country,
Then IPPs of the non-resident alien here are exempt from the
estate tax.
o Reciprocity must be total. If any of the two states or countries collects or imposes
and does not exempt any transfer, death, legacy, or succession tax of any
character, reciprocity does not apply. (CIR v Fisher)
o Reciprocity in exemption does not require the foreign country to possess
international personality. (CIR v Campos Rueda)
The following, among others, are intangible personal properties located in the
Philippines:
1. Franchise which must be exercised in the Philippines
2. Shares, obligations or bonds issued by any corporation or sociedad anonima
organized or constituted in the Philippines in accordance with its laws
3. Shares, obligations or bonds issued by any foreign corporation 85% of the business
of which is located in the Philippines
4. Shares, obligations or bonds issued by ay foreign corporation if such shares,
obligations or bonds have acquired a business situs in the Philippines, and
5. Shares or rights in any partnership, business or industry in the Philippines.

Properties not in the estate

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

Transfers in contemplation of death

(B) Transfer in Contemplation of Death. - To the extent of any interest therein of which the decedent has at
any time made a transfer, by trust or otherwise, in contemplation of or intended to take effect in possession or
enjoyment at or after death, or of which he has at any time made a transfer, by trust or otherwise, under which he
has retained for his life or for any period which does not in fact end before his death (1) the possession or
enjoyment of, or the right to the income from the property, or (2) the right, either alone or in conjunction with any
person, to designate the person who shall possess or enjoy the property or the income therefrom; except in case of
a bonafide sale for an adequate and full consideration in money or money's worth.

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A transfer in contemplation of death is a transfer motivated by the thought of death,
although death may not be imminent.
The following are examples of circumstances which may be taken into consideration in
determining whether the transfer was made in contemplation of death:
o We can look at the age and state of health of the decedent at the time of the
transfer (is he terminally ill?)
o Length of time between the transfer and the date of the death.
o Concurrent making of a will or making of a will within a short time after the
transfer.
But again, in the case of a bona fide sale for an adequate and full consideration in
money or moneys worth, the value of the property transferred will not be considered in
determining the gross estate.

Revocable transfers
(C) Revocable Transfer. -
(1) To the extent of any interest therein, of which the decedent has at any time made a transfer (except in case of
a bona fide sale for an adequate and full consideration in money or money's worth) by trust or otherwise, where
the enjoyment thereof was subject at the date of his death to any change through the exercise of a power (in
whatever capacity exerciseable) by the decedent alone or by the decedent in conjunction with any other person
(without regard to when or from what source the decedent acquired such power), t o alter, amend, revoke, or
terminate, or where any such power is relinquished in contemplation of the decedent's death.
(2) For the purpose of this Subsection, the power to alter, amend or revoke shall be considered to exist on the date
of the decedent's death even though the exercise of the power is subject to a precedent giving of notice or even
though the alteration, amendment or revocation takes effect only on the expiration of a stated period after the
exercise of the power, whether or not on or before the date of the decedent's death notice has been given or the
power has been exercised. In such cases, proper adjustment shall be made representing the interests which would
have been excluded from the power if the decedent had lived, and for such purpose if the notice has not been
given or the power has not been exercised on or before the date of his
death, such notice shall be considered to have been given, or the power exercised, on the date of his death.
A revocable transfer is a transfer where the terms of the enjoyment of the property may
be altered, amended, revoked or terminated by the decedent.
It is sufficient that the decedent had the power to revoke, though he did not exercise the
power to revoke.
Again, the same rule with bona fide sales applies.

Transfers under a General Power of Appointment

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

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In order that property passing under a power of appointment may be included in the
gross estate of the transferor, the power of appointment must be a general power of
appointment.
Again, the bona fide sale rule applies.

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

(G) Transfers of Insufficient Consideration. - If any one of the transfers, trusts, interests, rights or powers
enumerated and described in Subsections (B), (C) and (D) of this Section is made, created, exercised or
relinquished for a consideration in money or money's worth, but is not a bona fide sale for an adequate and full
consideration in money or money's worth, there shall be included in the gross estate only the excess of the fair
market value, at the time of death, of the property otherwise to be included on account of such transaction, over
the value of the consideration received therefor by the decedent.
In the transfers in contemplation of death, revocable transfer, or transfer under a GPA,
the value to include in the gross estate will be determined under the following rules:
o If the transfer was in the nature of a bona fide sale for an adequate and full
consideration in money or moneys worth, no value will be included in the gross
estate;
o If the consideration received on the transfer was less than adequate and full, the
value to include in the gross estate will be the excess of the fair market value at
the time of the decedents death over the consideration received;
o If there was no consideration received on the transfer (donation mortis causa),
the value to include in the gross estate will be the fair market value of the
property at the time of the decedents death.
When looking at transaction, ask yourself, was the consideration insufficient?
a. If yes, then add the balance of the FMV at the time of death and the
consideration.
b. If no, then it was a bona fide sale. Dont add the value to the gross estate.

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

Voluntary/Compulsory Time between Will? Remarks

Heir transfer and
death
Zapanta Compulsory None Yes Not considered
advances.
Tuason Voluntary 3 years Yes Considered as
advances,
because the
donees became
legatees in the
will.
Dizon Compulsory 1 day No Considered
advances. The
donee is a
compulsory heir.
Vidal de Roces Voluntary 9 months Yes Considered
advances.
Donees were
legatees in the
will

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Taxation Two
When it comes to transfers done during the lifetime of a decedent, there is a disputable
presumption that the transfers are in contemplation of death if the recipients are
compulsory heirs.
o The government presumes that one is transferring property beforehand to escape
the estate tax, and instead pay the lower donors tax.
o The case of Zapanta showed that the presumption is disputable. There, the Court
considered the gifts as not advances even if the recipients were compulsory
heirs. The reason for this was the condition imposed upon the recipients by the
decedent (they had to pay the decedent a certain amount of rice and money
during his lifetime). It showed that the transfer was not in contemplation of
death, because the decedent in fact, would benefit from the transfer.
o The presence of a will also plays a part. In the cases of Tuason and Vidal de
Roces, the Court considered the transfers as advances because a will was made
making the transferees legatees. This played a part in the Courts impression that
there was an intention of the decedent to minimize his gross estate.
o Thus, when looking at cases like these, the totality of all the factors and facts
must be taken into consideration.
Does the government always want to consider a transfer an advance (to be covered by
the estate tax)? Not necessarily. There are instances where they will argue for it to be
considered under the donors tax.

Life Insurance Proceeds

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

So, gross estate is made up of:

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

Valuation of the gross estate

SEC. 88. Determination of the Value of the Estate. -
(A) Usufruct. - To determine the value of the right of usufruct, use or habitation, as well as that of annuity, there
shall be taken into account the probable life of the beneficiary in accordance with the latest Basic Standard
Mortality Table, to be approved by the Secretary of Finance, upon recommendation of the Insurance Commissioner.
(B) Properties. - The estate shall be appraised at its fair market value as of the time of death. However, the
appraised value of real property as of the time of death shall be, whichever is higher of:
(1) The fair market value as determined by the Commissioner, or
(2) The fair market value as shown in the schedule of values fixed by the Provincial and City Assessors.

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The properties comprising the gross estate shall be valued based on the FMV as of the
time of death.
In case of real property, the fair market value shall be:
1. The FMV as determined by the Commissioner; or
2. The FMV as shown in the schedule of values fixed by the Provincial and City
Assessors
o Whichever is HIGHER
In case of personal property recently acquired by the decedent, the purchase price may
indicate the FMV.
o In case of personal property not recently acquired, there should be some
evidence of the FMV.
For shares of stock, the FMV shall depend on whether the shares are isted or unlisted in
the stock exchange.
o If unlisted
Common shares based on their book value
Preferred shares based on their par value
o If listed
The mean between the highest and lowest quotation on the date of death;
If none, then the date nearest the death.
For use of usufruct, there be taken into account the probable life of the beneficiary in
accordance with the latest basic standard mortality table, to be approved by the
Secretary of Finance.

Computation for the net estate

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

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

Ordinary deductions
Funeral expenses
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(A) Deductions Allowed to the Estate of Citizen or a Resident. - In the case of a citizen or resident of the
Philippines, by deducting from the value of the gross estate -
(1) Expenses, Losses, Indebtedness, and taxes. - Such amounts:
(a) For actual funeral expenses or in an amount equal to five percent (5%) of the gross estate, whichever is lower,
but in no case to exceed Two hundred thousand pesos (P200,000);
The deduction of funeral expenses is the
o Amount of actual funeral expenses, or
o An amount equal to 5% of the gross estate, whichever is LOWER,
But not to exceed P200,000.
Funeral expenses includes:
1. Mourning apparel of the surviving spouse and the unmarried minor children of the
deceased bought and used on the occasion of the burial
2. Expenses for the deceased wakes
3. Publication charges for death notices
4. Telecommunication expenses incurred in informing relatives of the deceased
5. Cost of burial plot, tombstones, monument or mausoleum (BUT NOT THEIR UPKEEP)
6. Interment and/or cremation fees and charges, and
7. All other expenses incurred for the performance of the rites and ceremonies incident
to interment
These arent deductible:
o Expenses incurred AFTER the interment
o Expenses borne or defrayed by relatives and friends
The cut-off point is interment. Thus, the expenses for the 9th day, thank you cards, 40th
day arent included.
When some of the items which are actual funeral expenses are covered by a memorial
plan, the value of the memorial plan must be included in the gross estate.
o The value of the memorial plan plus other actual funeral expenses will give an
aggregate which will be compared with the 5% limitation and with P200k.

Judicial expenses of the testamentary/intestate proceedings

(b) For judicial expenses of the testamentary or intestate proceedings;
These are the expenses incurred during the settlement of the estate,
o BUT not beyond the last day prescribed by law for the filing of the estate tax
return (within 6 months from the date of death), or the extension period allowed.
These judicial expenses include
1. Fees of the executor or administrator
2. Attorneys fees
3. Court fees
4. Accountants fees
5. Appraisers fees
6. Clerk hire
7. Costs of preserving and distributing the estate
8. Costs of storing or maintaining property of the estate
9. Brokerage fees for selling property of the estate
Expenses on extrajudicial settlement of the estate are allowed as deductions. They come
within the meaning of administration expenses.
o The notarial fee paid for the extrajudicial settlement is deductible since such
settlement effected a distribution of the decedents estate to his lawful heirs.
(CIR v CA & Pajonar)
In that case, the notarial fees and the guardianship fee of the attorney
were considered deductibles.

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Expenditures incurred for the individual benefit of the heirs, devisees or legatees are not
deductible.
Expenses for the improvement and renovation of the decedents residential house were
allowed as a deductible. (Testate Estate of Felix de Guzman v de Guzman-Carillo)
o Admin expenses should be those which are necessary for the management of the
estate, for protecting it against destruction or deterioration, and possible for the
production of fruits.
Attorneys fees paid by the heirs to their respective lawyers arising from conflicting
claims are not deductible as judicial expenses. These shall be separately borne by them.

Claims against the estate

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

Claims against insolvent persons

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

Unpaid mortgage or indebtedness on property

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

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

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

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

Transfers for public use

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(3) Transfers for Public Use. - The amount of all the bequests, legacies, devises or transfers to or for the use of the
Government of the Republic of the Philippines, or any political subdivision thereof, for exclusively public purposes.
Transfers for public use mean dispositions in a last will and testament, or a transfer to
take effect after death, in favor of the Government of the Philippines, or any political
subdivision thereof, for exclusively public purposes.
You can deduct the value of the property transferred to the government.

Vanishing deductions
(2) Property Previously Taxed. - An amount equal to the value specified below of any property forming a part of
the gross estate situated in the Philippines of any person who died within five (5) years prior to the death of the
decedent, or transferred to the decedent by gift within five (5) years prior to his death, where such property can be
identified as having been received by the decedent from the donor by gift, or from such prior decedent by gift,
bequest, devise or inheritance, or which can be identified as having been acquired in exchange for property so
received:
One hundred percent (100%) of the value, if the prior decedent died within one (1) year prior to the death of the
decedent, or if the property was transferred to him by gift within the same period prior to his death;
Eighty percent (80%) of the value, if the prior decedent died more than one (1) year but not more than two (2)
years prior to the death of the decedent, or if the property was transferred to him by gift within the same period
prior to his death;
Sixty percent (60%) of the value, if the prior decedent died more than two (2) years but not more than three (3)
years prior to the death of the decedent, or if the property was transferred to him by gift within the same period
prior to his death;
Forty percent (40%) of the value, if the prior decedent died more than three (3) years but not more than four (4)
years prior to the death of the decedent, or if the property was transferred to him by gift within the same period
prior to his death;
Twenty percent (20%) of the value, if the prior decedent died more than four (4) years but not more than five (5)
years prior to the death of the decedent, or if the property was transferred to him by gift within the same period
prior to his death;
These deductions shall be allowed only where a donor's tax or estate tax imposed under this Title was finally
determined and paid by or on behalf of such donor, or the estate of such prior decedent, as the case may be, and
only in the amount finally determined as the value of such property in determining the value of the gift, or the
gross estate of such prior decedent, and only to the extent that the value of such property is included in the
decedent's gross estate, and only if in determining the value of the estate of the prior decedent, no deduction was
allowable under paragraph (2) in respect of the property or properties given in exchange therefor. Where a
deduction was allowed of any mortgage or other lien in determining the donor's tax, or the estate tax of the prior
decedent, which was paid in whole or in part prior to the decedent's death, then the deduction allowable under said
Subsection shall be reduced by the amount so paid. Such deduction allowable shall be reduced by an amount which
bears the same ratio to the amounts allowed as deductions under paragraphs (1) and (3) of this Subsection as the
amount otherwise deductible under said paragraph (2) bears to the value of the decedent's estate. Where the
property referred to consists of two or more items, the aggregate value of such items shall be used for the purpose
of computing the deduction.
Property may change hands within a very short period of time by reason of the early
death of the owner who received it by inheritance or by donation (gift).
To provide relief to the burdened taxpayer, vanishing deductions are allowed to reduce
the gross estate.
Vanishing deductions are allowed when:
1. The present decedent died within 5 years from receipt of the property from a
prior decedent or donor;
2. The property on which the vanishing deduction is being claimed must be located
in the Philippines
3. The property must have formed part of the taxable estate of the prior decedent,
or of the taxable gift of the donor
4. The estate tax on the prior succession or the donors tax on the gift must have
been finally determined and paid
5. The property must be identified as the one received from the prior decedent or
donor, or something acquired in exchange therefore
6. No vanishing deduction on the property was allowable to the estate of the prior
decedent
How do we compute?
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Step 1: Get the basis. Either the value of the property in the prior estate/value used for
donors tax purposes OR the value of the property in the present estate, whichever is
LOWER.
Step 2: The Step 1 value will be reduced by any payment made by the present decedent on
any mortgage or lien on the property (when such mortgage/lien was used as a
deduction on the prior dead guys estate, or gift of the donor)
Step 3: The Step 2 value shall be further reduced by:
Step 2 value x Expenses, losses, indebtedness, taxes and transfers for
Gross Estate public use

This is done to prevent double deduction.

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

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

Special deductions
Family Home
(4) The Family Home. - An amount equivalent to the current fair market value of the decedent's family home:
Provided, however, That if the said current fair market value exceeds One million pesos (P1,000,000), the excess
shall be subject to estate tax. As a sine qua non condition for the exemption or deduction, said family home must
have been the decedent's family home as certified by the barangay captain of the locality.
The deduction is an amount equivalent to the current FMV of the decedents family
home.
o BUT the maximum is P1m only.
Do not forget to add the amount of the family home to the gross estate. Kasama yan!
o Zero-sum? Yes, but only to the extent of P1m. Lugi yung rich folk.
The deduction will be allowed when the famly home is certified to be as such by the
barangay captain of the locality where it is located.
For a person married at the time of death, and who was under a system of conjugal
partnership or absolute community, the deduction for the family home is of the FMV,
but should not exceed P1m, if such family home was conjugal property or community
property. (Remember this!)

Standard deduction

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

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

Amounts receivable under RA 4917

(7) Amount Received by Heirs Under Republic Act No. 4917. - Any amount received by the heirs from the decedent
- employee as a consequence of the death of the decedent-employee in accordance with Republic Act No. 4917:
Provided, That such amount is included in the gross estate of the decedent.
Retirement benefits received by employees of private firms in accordance with a
reasonable benefit plan maintained by the employer are EXEMPT from all taxes, provided
that the retiriing employee has been in the services of the same employer for at least 10
years and is not less than 50 years old at the time of his retirement.
The amount must:
o have been received by the heirs of the decedent-employee as a consequence of
the latters death, and
o included in the gross estate of the descendent. (important!)

Deductions from the gross estate with ceilings

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

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

(B) Deductions Allowed to Nonresident Estates. - In the case of a nonresident not a citizen of the Philippines,
by deducting from the value of that part of his gross estate which at the time of his death is situated in the
Philippines:
(1) Expenses, Losses, Indebtedness and Taxes. - That proportion of the deductions specified in paragraph (1) of
Subsection (A) of this Section which the value of such part bears to the value of his entire gross estate wherever
situated;
(2) Property Previously Taxed. - An amount equal to the value specified below of any property forming part of the
gross estate situated in the Philippines of any person who died within five (5) years prior to the death of the
decedent, or transferred to the decedent by gift within five (5) years prior to his death, where such property can be
identified as having been received by the decedent from the donor by gift, or from such prior decedent by gift,
bequest, devise or inheritance, or which can be identified as having been acquired in exchange for property so
received:
One hundred percent (100%) of the value if the prior decedent died within one (1) year prior to the death of the
decedent, or if the property was transferred to him by gift, within the same period prior to his death;

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Eighty percent (80%) of the value, if the prior decedent died more than one (1) year but not more than two (2)
years prior to the death of the decedent, or if the property was transferred to him by gift within the same period
prior to his death;
Sixty percent (60%) of the value, if the prior decedent died more than two (2) years but not more than three (3)
years prior to the death of the decedent, or if the property was transferred to him by gift within the same period
prior to his death;
Forty percent (40%) of the value, if the prior decedent died more than three (3) years but not more than four (4)
years prior to the death of the decedent, or if the property was transferred to him by gift within the same period
prior to his death; and
Twenty percent (20%) of the value, if the prior decedent died more than four (4) years but not more than five (5)
years prior to the death of the decedent, or if the property was transferred to him by gift within the same period
prior to his death.
These deductions shall be allowed only where a donor's tax, or estate tax imposed under this Title is finally
determined and paid by or on behalf of such donor, or the estate of such prior decedent, as the case may be, and
only in the amount finally determined as the value of such property in determining the value of the gift, or the
gross estate of such prior decedent, and only to the extent that the value of such property is included in that part
of the decedent's gross estate which at the time of his death is situated in the Philippines; and only if, in
determining the value of the net estate of the prior decedent, no deduction is allowable under paragraph (2) of
Subsection (B) of this Section, in respect of the property or properties given in exchange therefore. Where a
deduction was allowed of any mortgage or other lien in determining the donor's tax, or the estate tax of the prior
decedent, which was paid in whole or in part prior to the decedent's death, then the deduction allowable under said
paragraph shall be reduced by the amount so paid. Such deduction allowable shall be reduced by an amount which
bears the same ratio to the amounts allowed as deductions under paragraphs (1) and (3) of this Subsection as the
amount otherwise deductible under paragraph (2) bears to the value of that part of the decedent's gross estate
which at the time of his death is situated in the Philippines. Where the property referred to consists of two (2) or
more items, the aggregate value of such items shall be used for the purpose of computing the deduction.
(3) Transfers for Public Use. - The amount of all bequests, legacies, devises or transfers to or for the use of the
Government of the Republic of the Philippines or any political subdivision thereof, for exclusively public purposes.
A non-resident decedent who was not a citizen of the Philippines at the time of death,
with properties within and outside the Philippines, is subject to tax only on his estate
within the Philippines.
Due to this, the estate in the Philippines is allowed deductions for:
1. Expenses, losses, indebtedness, taxes, etc, computed by:
Gross Estate, Philippines x World expenses, losses, indebtedness,
Gross Estate, World taxes, funeral expenses, judicial
expenses, etc
It does not matter where the expenses are paid or incurred. On the total of
the items, the formula provided by law will be applied.
Moreover, it also doesnt matter if you can pinpoint specifically where the
expenses were incurred, you have to use the formula.
2. Transfers for public use of property in the Philippines
3. Vanishing deduction on property in the Philippines
A non-resident, not citizen is NOT allowed:
1. Deduction for family home
2. Standard deduction
3. Deduction for medical expenses
4. Deduction for amount receivable under RA 4917

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

Net Estate Computation of Married Persons

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

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

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

Step 0: Know which are community/conjugal and which are exclusive
Step 1: Get the net conjugal estate (gross conjugal estate conjugal deductions)
Step 2: Get the decedents share (net conjugal estate/2)
Step 3: Get the gross estate of the decedent (decedents share + exclusive properties)
Step 4: Get his net estate (gross estate of the decedent exclusive & special deductions)
Step 5: Once you reach step 4, yun na yon! Thats the decedents taxable estate.
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Mao, a citizen and resident of the Philippines, was married under the system of absolute
community of property during the marriage. He died leaving the following properties and
obligations:
Real properties inherited from his father 10 years ago and before the marriage P200k
Real property received as a gift from the mother 7 years ago,
during the marriage P1.115m
Cash income from the property received as gift P5k
Real property owned by Mrs. Mao before the marriage P300k
The family home P500k
Medical expenses P70k
Funeral expenses P50k
Judicial expenses for settlement of estate P100k
Obligations incurred during the marriage P150k
Debt of Mao before the marriage P120k

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

Step 1: Get the net conjugal estate (gross conjugal estate conjugal deductions)
(P200k1 + P300k2 +500k3) - (P50k4 + P100k5 + P150k6) = P700k

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

P700k/2 = P350k

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

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

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

Tips:
Do not forget the limitations and ceilings imposed by the general rule of deductions.
o Family home only up to P1m.

1
Real property inherited from the father
2
Real property owned by Mrs. Mao before the marriage
3
Value of the family home
4
Funeral expenses
5
Judicial expenses
6
Obligations incurred during the marriage
7
Real property gift from mom during marriage
8
Income from the gift
9
debt before marriage
10
the value of the family home
11
Medical expenses
12
Standard deduction! Dont forget!
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o Funeral expenses only up to P200k whatevers lower of the actual expense and
5% of the gross estate (exclusive + conjugal)
o Medical expenses not to exceed P500k
Remember that only of the family home is counted as a special deduction (since half
belongs to the still living spouse).
o And also remember that if the value of the family home (once halved) is above
P1m, the deduction allowed is still P1m because of the ceiling imposed by law.
Dont forget to subtract the standard deduction. Its not usually given as part of the facts
but you still have to deduct that.
Medical expenses are special deductions and are deducted from the gross estate of the
decedent. Funeral deductions are conjugal deductions and are deducted from the gross
conjugal/community estate.

Exemption from Estate Tax

SEC. 87. Exemption of Certain Acquisitions and Transmissions. - The following shall not be taxed:
(A) The merger of usufruct in the owner of the naked title;
(B) The transmission or delivery of the inheritance or legacy by the fiduciary heir or legatee to the
fideicommissary;
(C) The transmission from the first heir, legatee or donee in favor of another beneficiary, in accordance with the
desire of the predecessor; and
(D) All bequests, devises, legacies or transfers to social welfare, cultural and charitable institutions, no part of the
net income of which insures to the benefit of any individual: Provided, however, That not more than thirty percent
(30%) of the said bequests, devises, legacies or transfers shall be used by such institutions for administration
purposes.
The following are exempt from estate tax:
1. Merger of usufruct in the owner of the naked title
2. Transmission or delivery of the inheritance or legacy by the fiduciary heir or legatee
to the fideicommisary
3. Transmission from the 1st heir, legatee or donee in favor of another beneficiary in
accordance with the desire of the predecessor, and
4. All bequests, devises, legacies or transfers to social welfare, cultural and charitable
institutions, no part of the net income inures to the benefit of any individual,
provided that not more than 30% of the said bequests, devises, legacies or transfers
shall be used by such institutions for the administration purposes

Tax Credit for Foreign Estate Tax

E) Tax Credit for Estate Taxes paid to a Foreign Country. -
(1) In General. - The tax imposed by this Title shall be credited with the amounts of any estate tax imposed by the
authority of a foreign country.
(2) Limitations on Credit. - The amount of the credit taken under this Section shall be subject to each of the
following limitations:
(a) The amount of the credit in respect to the tax paid to any country shall not exceed the same proportion of the
tax against which such credit is taken, which the decedent's net estate situated within such country taxable under
this Title bears to his entire net estate; and
(b) The total amount of the credit shall not exceed the same proportion of the tax against which such credit is
taken, which the decedent's net estate situated outside the Philippines taxable under this Title bears to his entire
net estate.
To minimize the onerous effect of taxing the same property twice, a tax credit against
Philippine estate tax is allowed for estate taxes paid to foreign countries.

One foreign country

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

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

If tax is paid to 2 or more foreign countries:

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

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

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

SEC. 90. Estate Tax Returns. -

(A) Requirements. - In all cases of transfers subject to the tax imposed herein, or where, though exempt from tax,
the gross value of the estate exceeds Two hundred thousand pesos (P200,000), or regardless of the gross value of
the estate, where the said estate consists of registered or registrable property such as real property, motor vehicle,
shares of stock or other similar property for which a clearance from the Bureau of Internal Revenue is required as a
condition precedent for the transfer of ownership thereof in the name of the transferee, the executor, or the
administrator, or any of the legal heirs, as the case may be, shall file a return under oath in duplicate, setting
forth:
(1) The value of the gross estate of the decedent at the time of his death, or in case of a nonresident, not a citizen
of the Philippines, of that part of his gross estate situated in the Philippines;
(2) The deductions allowed from gross estate in determining the estate as defined in Section 86; and
(3) Such part of such information as may at the time be ascertainable and such supplemental data as may be
necessary to establish the correct taxes.
Provided, however, That estate tax returns showing a gross value exceeding Two million pesos (P2,000,000) shall
be supported with a statement duly certified to by a Certified Public Accountant containing the following:
(a) Itemized assets of the decedent with their corresponding gross value at the time of his death, or in the case of
a nonresident, not a citizen of the Philippines, of that part of his gross estate situated in the Philippines;
(b) Itemized deductions from gross estate allowed in Section 86; and
(c) The amount of tax due whether paid or still due and outstanding.
(B) Time for Filing. - For the purpose of determining the estate tax provided for in Section 84 of this Code, the
estate tax return required under the preceding Subsection (A) shall be filed within six (6) months from the
decedent's death.
A certified copy of the schedule of partition and the order of the court approving the same shall be furnished the
Commissioner within thirty (30) after the promulgation of such order. (C) Extension of Time. - The Commissioner
shall have authority to grant, in meritorious cases, a reasonable extension not exceeding thirty (30) days for filing
the return. (D) Place of Filing. - Except in cases where the Commissioner otherwise permits, the return required
under Subsection (A) shall be filed with an authorized agent bank, or Revenue District Officer, Collection Officer, or
duly authorized Treasurer of the city or municipality in which the decedent was domiciled at the time of his death
or if there be no legal residence in the Philippines, with the Office of the Commissioner.
An estate tax return is required to be filed when the estate is:
1. Subject to estate tax,
2. Exempt from estate tax, but the gross estate exceeds P200,000
3. Regardless of the amount of the gross estate, where the said gross estate consists of
registered or registerable property, motor vehicle or shares of stock, or other similar
property for which clearance from the BIR is required as a condition precedent for
the transfer of ownership thereof in the name of the transferee.
The return shall be under oath and shall include the following:

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1. Value of the gross estate at the time of the decedent (for non-resident aliens, the
value of the gross estate here in the Philippines)
2. Deductions allowed from the gross estate
3. Whatevers necessary to establish the correct estate tax
If the estate tax return shows that the gross estate exceeds P2,000,000, it should be
accompanied by a statement certified by a CPA. See codal.
The estate tax return should be filed within 6 months after the decedents death.
o The BIR can extend this, but not more than 30 days.
A return need not be complete in all particulars. It is sufficient if it complies substantially
with the law. There is substantial compliance when:
o The return is made in good faith and is not false or fraudulent;
o It covers the entire period involved; and
o It contains information as to the various items of income, deductions and credits
with such definiteness as to permit the computation and assessment of the tax.
(CIR v Gonzales)
Where the return was made on the wrong form, it was held that the filing
thereof did not start the running of the period of limitations, and where
the return was very deficient, there was no return at all. (same case)

SEC. 91. Payment of Tax. -

(A) Time of Payment. - The estate tax imposed by Section 84 shall be paid at the time the return is filed by the
executor, administrator or the heirs.
(B) Extension of Time. - When the Commissioner finds that the payment on the due date of the estate tax or of
any part thereof would impose undue hardship upon the estate or any of the heirs, he may extend the time for
payment of such tax or any part thereof not to exceed five (5) years, in case the estate is settled through the
courts, or two (2) years in case the estate is settled extrajudicially. In such case, the amount in respect of which
the extension is granted shall be paid on or before the date of the expiration of the period of the extension, and the
running of the Statute of Limitations for assessment as provided in Section 203 of this Code shall be suspended for
the period of any such extension.
Where the taxes are assessed by reason of negligence, intentional disregard of rules and regulations, or fraud on
the part of the taxpayer, no extension will be granted by the Commissioner.
If an extension is granted, the Commissioner may require the executor, or administrator, or beneficiary, as the
case may be, to furnish a bond in such amount, not exceeding double the amount of the tax and with such sureties
as the Commissioner deems necessary, conditioned upon the payment of the said tax in accordance with the terms
of the extension.
(C) Liability for Payment. - The estate tax imposed by Section 84 shall be paid by the executor or administrator
before delivery to any beneficiary of his distributive share of the estate. Such beneficiary shall to the extent of his
distributive share of the estate, be subsidiarily liable for the payment of such portion of the estate tax as his
distributive share bears to the value of the total net estate.
For the purpose of this Chapter, the term "executor" or "administrator" means the executor or administrator of the
decedent, or if there is no executor or administrator appointed, qualified, and acting within the Philippines, then
any person in actual or constructive possession of any property of the decedent.
Estate tax shall be paid at the time the return is filed.
The Commissioner may extend the payment of such tax.
o It should not exceed 5 years in case of judicial settlement, and 2 years if
extrajudicial settlement.
o The running of the period of limitation for assessment shall be suspended for the
period of such extension.
The estate tax shall be paid by the executor or administrator before delivery to any
beneficiary of his distributive share of the estate.
o Where there are two or more executors, all of them are severally liable for the
payment of the estate tax. (CIR v Gonzales)
o The inheritance tax, although charged against the account of each beneficiary,
should be paid by the executor or administrator.
o Such beneficiary shall be subsidiarily liable for the payment of such tax to the
extent of his share
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Claims for income tax need not be filed with the committee on claims and appraisals in
the course of testate proceedings, and the amount thereof may be collected after the
distribution of the decedents estate among his heirs, who shall be liable in proportion to
their share in the inheritance. (Government v Pamintuan)
The government, in collecting unpaid taxes accruing before the death of the decedent,
has two ways of collecting the said taxes. (CIR v Pineda)
1. By going after all the heirs and collecting from each one of them the amount of the
tax proportionate to the inheritance received.
2. By subjecting said property of the estate which is in the hands of an heir or
transferee to the payment of the tax due the estate. (or, go against one heir for the
entire tax, subject to the heirs right of contribution from his co-heirs.)

Miscellaneous Provisions
SEC. 92. Discharge of Executor or Administrator from Personal Liability. - If the executor or administrator
makes a written application to the Commissioner for determination of the amount of the estate tax and discharge
from personal liability therefore, the Commissioner (as soon as possible, and in any event within one (1) year after
the making of such application, or if the application is made before the return is filed, then within one (1) year
after the return is filed, but not after the expiration of the period prescribed for the assessment of the tax in
Section 203 shall not notify the executor or administrator of the amount of the tax. The executor or administrator,
upon payment of the amount of which he is notified, shall be discharged from personal liability for any deficiency in
the tax thereafter found to be due and shall be entitled to a receipt or writing showing such discharge.
SEC. 93. Definition of Deficiency. - As used in this Chapter, the term "deficiency" means:
(a) The amount by which the tax imposed by this Chapter exceeds the amount shown as the tax by the executor,
administrator or any of the heirs upon his return; but the amounts so shown on the return shall first be increased
by the amounts previously assessed (or collected without assessment) as a deficiency and decreased by the
amount previously abated, refunded or otherwise repaid in respect of such tax; or
(b) If no amount is shown as the tax by the executor, administrator or any of the heirs upon his return, or if no
return is made by the executor, administrator, or any heir, then the amount by which the tax exceeds the amounts
previously assessed (or collected without assessment) as a deficiency; but such amounts previously assessed or
collected without assessment shall first be decreased by the amounts previously abated, refunded or otherwise
repaid in respect of such tax.
SEC. 94. Payment Before Delivery by Executor or Administrator. - No judge shall authorize the executor or
judicial administrator to deliver a distributive share to any party interested in the estate unless a certification from
the Commissioner that the estate tax has been paid is shown.

SEC. 95. Duties of Certain Officers and Debtors. - Registers of Deeds shall not register in the Registry of
Property any document transferring real property or real rights therein or any chattel mortgage, by way of gifts
inter vivos or mortis causa, legacy or inheritance, unless a certification from the Commissioner that the tax fixed in
this Title and actually due thereon had been paid is show, and they shall immediately notify the Commissioner,
Regional Director, Revenue District Officer, or Revenue Collection Officer or Treasurer of the city or municipality
where their offices are located, of the non payment of the tax discovered by them. Any lawyer, notary public, or
any government officer who, by reason of his official duties, intervenes in the preparation or acknowledgment of
documents regarding partition or disposal of donation inter vivos or mortis causa, legacy or inheritance, shall have
the duty of furnishing the Commissioner, Regional Director, Revenue District Officer or Revenue Collection Officer
of the place where he may have his principal office, with copies of such documents and any information whatsoever
which may facilitate the collection of the aforementioned tax. Neither shall a debtor of the deceased pay his debts
to the heirs, legatee, executor or administrator of his creditor, unless the certification of the Commissioner that the
tax fixed in this Chapter had been paid is shown; but he may pay the executor or judicial administrator without
said certification if the credit is included in the inventory of the estate of the deceased.
SEC. 96. Restitution of Tax Upon Satisfaction of Outstanding Obligations. - If after the payment of the
estate tax, new obligations of the decedent shall appear, and the persons interested shall have satisfied them by
order of the court, they shall have a right to the restitution of the proportional part of the tax paid.
SEC. 97. Payment of Tax Antecedent to the Transfer of Shares, Bonds or Rights. - There shall not be
transferred to any new owner in the books of any corporation, sociedad anonima, partnership, business, or
industry organized or established in the Philippines any share, obligation, bond or right by way of gift inter vivos or
mortis causa, legacy or inheritance, unless a certification from the Commissioner that the taxes fixed in this Title
and due thereon have been paid is shown.
If a bank has knowledge of the death of a person, who maintained a bank deposit account alone, or jointly with
another, it shall not allow any withdrawal from the said deposit account, unless the Commissioner has certified that
the taxes imposed thereon by this Title have been paid: Provided, however, That the administrator of the estate or
any one (1) of the heirs of the decedent may, upon authorization by the Commissioner, withdraw an amount not

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exceeding Twenty thousand pesos (P20,000) without the said certification. For this purpose, all withdrawal slips
shall contain a statement to the effect that all of the joint depositors are still living at the time of withdrawal by any
one of the joint depositors and such statement shall be under oath by the said depositors.

Donors Tax
SEC. 98. Imposition of Tax. -
(A) There shall be levied, assessed, collected and paid upon the transfer by any person, resident or nonresident, of
the property by gift, a tax, computed as provided in Section 99.
(B) The tax shall apply whether the transfer is in trust or otherwise, whether the gift is direct or indirect, and
whether the property is real or personal, tangible or intangible.
Gifts and donors tax will be levied, assessed, collected and paid upon the transfer by
any person, resident or nonresident, of property by gift
o The property can be real or personal, tangible or intangible
o The transfer can be in trust or otherwise
o The gift can be direct or indirect
The donors tax shall not apply unless and until there is a completed gift. The transfer of
property by gift is perfected from the moment the donor knows of the acceptance by the
donee; it is completed by the delivery, either actually or constructively, of the donated
property to the donee. Thus, the law in force at the time of the perfection/completion
of the donation shall govern the imposition of the donors tax. (RR 02-03)

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

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

Also to be considered as gifts are the following:

1. Transfers for insufficient consideration
2. Cancellation of indebtedness

Transfers for insufficient consideration

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

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

Value of the gifts

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SEC. 102. Valuation of Gifts Made in Property. - If the gift is made in property, the fair market value thereof at
the time of the gift shall be considered the amount of the gift. In case of real property, the provisions of Section
88(B) shall apply to the valuation thereof.
The fair market value of the property donated/given at the time of the donation shall be
the value of the gross gifts.

Deductions from gross gifts

SEC. 101. Exemption of Certain Gifts. - The following gifts or donations shall be exempt from the tax provided
for in this Chapter: (A) In the Case of Gifts Made by a Resident. -
(1) Dowries or gifts made on account of marriage and before its celebration or within one year thereafter by
parents to each of their legitimate, recognized natural, or adopted children to the extent of the first Ten thousand
pesos (P10,000):
(2) Gifts made to or for the use of the National Government or any entity created by any of its agencies which is
not conducted for profit, or to any political subdivision of the said Government; and
(3) Gifts in favor of an educational and/or charitable, religious, cultural or social welfare corporation, institution,
accredited nongovernment organization, trust or philanthropic organization or research institution or organization:
Provided, however, That not more than thirty percent (30%) of said gifts shall be used by such donee for
administration purposes. For the purpose of the exemption, a 'non-profit educational and/or charitable corporation,
institution, accredited nongovernment organization, trust or philanthropic organization and/or research institution
or organization' is a school, college or university and/or charitable corporation, accredited nongovernment
organization, trust or philanthropic organization and/or research institution or organization, incorporated as a
nonstock entity, paying no dividends, governed by trustees who receive no compensation, and devoting all its
income, whether students' fees or gifts, donation, subsidies or other forms of philanthropy, to the accomplishment
and promotion of the purposes enumerated in its Articles of Incorporation.
These exemptions of certain gifts should be taken to mean the deductions allowed by
law to arrive at the taxable net gifts.
The deductions allowed for a resident or citizen donor:
1. Dowries or gifts made on account of marriage and before its celebration, or within
one year thereafter, by parents to each of their legitimate, recognized natural or
adopted children
a. Only to the extent of P10,000
b. Remember, this article only covers gifts of a parent to his/her child, not a
parent to his future son-in-law/daughter-in-law. If the gift is given to a future
son-in-law/daughter-in-law, no deductions will be allowed because the latter
are considered strangers. (ouch naman!)
2. Gifts made to or for the use of the National Government or any entity created by any
of its agencies which is not conducted for profit
3. Gifts in favor of educational and/or charitable, religious, cultural or social welfare
corporations, institutions, accredited NGOs, trust or philanthropic organizations,
research institutions or organizations, provided that not more than 30% of said gifts
shall be used by such donee for administration purposes

Deductions from the gross gifts by husband and wife

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

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

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

Mother Son P100k P10k Non- 90k exempt 90k

P200k stranger
Daughter-in- none Stranger 100k 30% 30k
law P100k

Deductions for a non-resident, not citizen donor

(B) In the Case of Gifts Made by a Nonresident Not a Citizen of the Philippines. -
(1) Gifts made to or for the use of the National Government or any entity created by any of its agencies which is
not conducted for profit, or to any political subdivision of the said Government.
(2) Gifts in favor of an educational and/or charitable, religious, cultural or social welfare corporation, institution,
foundation, trust or philanthropic organization or research institution or organization: Provided, however, That not
more than thirty percent (30%) of said gifts shall be used by such donee for administration purposes.
Same as the resident or citizen donor EXCEPT that they arent allowed deductions for
gifts on account for marriage

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

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

Tax rates Payable by Donor

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

(A) In General. - The tax for each calendar year shall be computed on the basis of the total net gifts made during
the calendar year in accordance with the following schedule:
If the net gift is:
Over But not over The tax shall be Plus Of Excess over
P100k Exempt
P100k 200k 0 2% P100k
200k 500k 2k 4% 200k
500k 1m 14k 6% 500k
1m 3m 44k 8% 1m
3m 5m 204k 10% 3m

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5m 10m 404k 12% 5m
10m 1.004m 15% 10m
(B) Tax Payable by Donor if Donee is a Stranger. - When the donee or beneficiary is stranger, the tax payable by
the donor shall be thirty percent (30%) of the net gifts. For the purpose of this tax, a "stranger", is a person who is
not a:
(1) Brother, sister (whether by whole or half-blood), spouse, ancestor and lineal descendant; or
(2) Relative by consanguinity in the collateral line within the fourth degree of relationship.
(C) Any contribution in cash or in kind to any candidate, political party or coalition of parties for campaign
purposes shall be governed by the Election Code, as amended.
The tax rate for donors are illustrated in the table above.
However, if donee or beneficiary is a stranger, the tax payable by the donor shall be
30% of the net gifts.
A stranger is a person who is NOT a:
1. Brother, sister (whether by whole or half-blood), spouse, ancestor and lineal
descendant, or
2. Relative by consanguinity in the collateral line within the 4th degree of relationship.
Donation made between business organizations and those made between an individual
and a business organization shall be considered as donation made to a stranger. (RR 02-
03)
The basic tax formula is as follows:
On the first donation of a calendar year
Gross gifts
Less: Deductions from these gross gifts
Net Gifts
X Donors tax rate
Donors tax due on the net gifts

On a subsequent donation in the same calendar year

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

Donors tax on aggregate net gifts

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

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

Mr. Lumbat Mrs. Lumbat

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

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(use (use 30%) (use (use 30%)
schedule) schedule)

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

Donors Tax Return

SEC. 103. Filing of Return and Payment of Tax. -
(A) Requirements. - any individual who makes any transfer by gift (except those which, under Section 101, are
exempt from the tax provided for in this Chapter) shall, for the purpose of the said tax, make a return under oath
in duplicate. The return shall se forth:
(1) Each gift made during the calendar year which is to be included in computing net gifts;
(2) The deductions claimed and allowable;
(3) Any previous net gifts made during the same calendar year;
(4) The name of the donee; and
(5) Such further information as may be required by rules and regulations made pursuant to law.
(B) Time and Place of Filing and Payment. - The return of the donor required in this Section shall be filed within
thirty (30) days after the date the gift is made and the tax due thereon shall be paid at the time of filing. Except in
cases where the Commissioner otherwise permits, the return shall be filed and the tax paid to an authorized agent
bank, the Revenue District Officer, Revenue Collection Officer or duly authorized Treasurer of the city or
municipality where the donor was domiciled at the time of the transfer, or if there be no legal residence in the
Philippines, with the Office of the Commissioner. In the case of gifts made by a nonresident, the return may be
filed with the Philippine Embassy or Consulate in the country where he is domiciled at the time of the transfer, or
directly with the Office of the Commissioner.
The donors tax return must be filed within 30 days after the date of the donation.
On all donations of one date, only one donors tax return is required.
In case of husband and wife as donors the donors tax return of the husband will be
apart of the donors tax return of the wife.
Where to file? See codal.
When and where to pay? The donors tax will be paid at the time the return is filed, and
with the office where the return is filed.

Donors tax credit

(C) Tax Credit for Donor's Taxes Paid to a Foreign Country. -
(1) In General. - The tax imposed by this Title upon a donor who was a citizen or a resident at the time of
donation shall be credited with the amount of any donor's tax of any character and description imposed by the
authority of a foreign country.
(2) Limitations on Credit. - The amount of the credit taken under this Section shall be subject to each of the
following limitations:

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(a) The amount of the credit in respect to the tax paid to any country shall not exceed the same proportion of the
tax against which such credit is taken, which the net gifts situated within such country taxable under this Title
bears to his entire net gifts; and
(b) The total amount of the credit shall not exceed the same proportion of the tax against which such credit is
taken, which the donor's net gifts situated outside the Philippines taxable under this title bears to his entire net
gifts.
Only resident or citizen donors are allowed donors tax credit.
Why? Because they are the only ones taxed worldwide. A non-resident non-citizen is not
taxed for his donations in foreign jurisdictions.
For a foreign donors tax paid to a foreign country, a credit is allowed to reduce the
Philippine donors tax to pay, under the formula:

Foreign donors tax paid = xxxx

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

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

Foreign donors tax paid = P10k

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

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

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

If two foreign countries

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

Limitation B (by totals)

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

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

Value-Added Tax

TITLE IV
VALUE-ADDED TAX

CHAPTER I

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IMPOSITION OF TAX
SEC. 105. Persons Liable. - Any person who, in the course of trade or business, sells barters, exchanges, leases
goods or properties, renders services, and any person who imports goods shall be subject to the value-added tax
(VAT) imposed in Sections 106 to 108 of this Code.
The value-added tax is an indirect tax and the amount of tax may be shifted or passed on to the buyer, transferee
or lessee of the goods, properties or services. This rule shall likewise apply to existing contracts of sale or lease of
goods, properties or services at the time of the effectivity of Republic Act No. 7716.
VAT is imposed on any person who:
1. Sells, barters or exchanges goods or properties in the course of trade or business; or
2. Sells services in the course of trade or business; or
3. Imports goods, whether or not in the course of trade or business.
The VAT is a tax on consumption, levied on the sale, barter, exchange or lease of goods
or properties and services in the Philippines and the importation of goods into the
Philippines.
o The seller is the one statutorily liable for the payment of the tax, but the amount
of the tax may be shifted or passed on to the buyer, transferee or lessee of the
goods or properties or services.
Is VAT really a tax on the value-added?
o Yes. Consider this:
A sells to B a piece of wood.
Price: P100
Tax (10% for this example): P10.
Total: P110.

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

Price: P150.
Tax: P15
Total: P165.

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

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

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In his comment, Sir said that Comaserco would have escaped liability from
VAT if they pressed the point that they were doing the services not in the
course of business.

Ordinary course of trade or business

Sec. 105
The phrase "in the course of trade or business" means the regular conduct or pursuit of a commercial or an
economic activity, including transactions incidental thereto, by any person regardless of whether or not the person
engaged therein is a nonstock, nonprofit private organization (irrespective of the disposition of its net income and
whether or not it sells exclusively to members or their guests), or government entity.
The rule of regularity, to the contrary notwithstanding, services as defined in this Code rendered in the Philippines
by nonresident foreign persons shall be considered as being course of trade or business.
It means the regular conduct or pursuit of a commercial or an economic activity.
o It also includes transactions incidental thereto.
o It covers any person regardless whether or not the person engaged therein is a
nonstick, nonprofit organization (irrespective of the disposition of its net income
and whether or not it sells exclusively to members or their guests), or a
government entity.
There should be
o a commercial or economic activity, and
o regularity in the action.
Regular involves more than one isolated transaction. It requires repetition
and continuity of action.
However, if the taxpayer is a non-resident alien, there is no need for the regularity of
conduct. Services rendered by them in the Philippines are considered as being in the
course of trade or business, and thus, subject to the VAT.
o This is an exception to the regularity requirement.
Any sale, barter or exchange of goods or services not in the course of trade or business
is not subject to VAT. (CIR v Magsaysay)
When determining if this element/requisite exists, be mindful of the following:
o Was the transaction done regularly? Or isolated?
o Was it incidental thereto?
o Is the taxpayer a non-resident alien? (Because if he is, the transaction need not
be regular.)
Between an automobile shop who sells 5 parcels of land and a real estate dealer who
sold a parcel of land, both will be subject to VAT. The automobile shop because of its
regular conduct, and the real estate dealer because of the nature of his business
(pursuit of a commercial or economic activity, which takes the quantitative approach.)
This provision notwithstanding, an importation of goods for personal use is still subject
to VAT because of Section 107.
o This is an exception to pursuit of a commercial or economic activity
requirement

For the next part, well go by tax rates.

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

Sale, lease, etc of goods or rendering of services

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

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

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

(D) Determination of the Tax. -

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

(1) The term goods or properties shall mean all tangible and intangible objects which are capable of pecuniary
estimation and shall include:
(a) Real properties held primarily for sale to customers or held for lease in the ordinary course of trade or
business;
(b) The right or the privilege to use patent, copyright, design or model, plan, secret formula or process, goodwill,
trademark, trade brand or other like property or right;
(c) The right or the privilege to use in the Philippines of any industrial, commercial or scientific equipment;
(d) The right or the privilege to use motion picture films, tapes and discs; and
(e) Radio, television, satellite transmission and cable television time.
Goods or properties include:
a. Real properties held primarily for sale to customers, or held for lease in the ordinary
course of trade or business;
b. The right or privilege to use patent, copyright, design or model, plan, secret formula
or process, goodwill, trademark, trade brand or other like property or right;
c. The right or the privilege to use in the Philippines of any industrial, commercial or
scientific equipment;
d. The right or the privilege to use motion picture films, tapes and discs; and
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e. Radio, television, satellite transmission and cable television time.
This is not an exclusive list.

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

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

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

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

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

The phrase "sale or exchange of services" means the performance of all kinds or services in the Philippines for
others for a fee, remuneration or consideration, including those performed or rendered by construction and service
contractors; stock, real estate, commercial, customs and immigration brokers; lessors of property, whether
personal or real; warehousing services; lessors or distributors of cinematographic films; persons engaged in milling
processing, manufacturing or repacking goods for others; proprietors, operators or keepers of hotels, motels,
resthouses, pension houses, inns, resorts; proprietors or operators of restaurants, refreshment parlors, cafes and
other eating places, including clubs and caterers; dealers in securities; lending investors; transportation
contractors on their transport of goods or cargoes, including persons who transport goods or cargoes for hire
another domestic common carriers by land, air and water relative to their transport of goods or cargoes; services
of franchise grantees of telephone and telegraph, radio and television broadcasting and all other franchise grantees
except those under Section 119 of this Code; services of banks, non-bank financial intermediaries and finance
companies; and non-life insurance companies (except their crop insurances), including surety, fidelity, indemnity
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and bonding companies; and similar services regardless of whether or not the performance thereof calls for the
exercise or use of the physical or mental faculties. The phrase 'sale or exchange of services' shall likewise include:
(1) The lease or the use of or the right or privilege to use any copyright, patent, design or model, plan secret
formula or process, goodwill, trademark, trade brand or other like property or right;
(2) The lease of the use of, or the right to use of any industrial, commercial or scientific equipment;
(3) The supply of scientific, technical, industrial or commercial knowledge or information;
(4) The supply of any assistance that is ancillary and subsidiary to and is furnished as a means of enabling the
application or enjoyment of any such property, or right as is mentioned in subparagraph (2) or any such knowledge
or information as is mentioned in subparagraph (3);
(5) The supply of services by a nonresident person or his employee in connection with the use of property or
rights belonging to, or the installation or operation of any brand, machinery or other apparatus purchased from
such nonresident person.
(6) The supply of technical advice, assistance or services rendered in connection with technical management or
administration of any scientific, industrial or commercial undertaking, venture, project or scheme;
(7) The lease of motion picture films, films, tapes and discs; and
(8) The lease or the use of or the right to use radio, television, satellite transmission and cable television time.
Lease of properties shall be subject to the tax herein imposed irrespective of the place where the contract of lease
or licensing agreement was executed if the property is leased or used in the Philippines.
The term "gross receipts" means the total amount of money or its equivalent representing the contract price,
compensation, service fee, rental or royalty, including the amount charged for materials supplied with the services
and deposits and advanced payments actually or constructively received during the taxable quarter for the services
performed or to be performed for another person, excluding value-added tax.
Any sale or exchange of services in the course of trade or business, including the use or
lease or properties, shall be subject to the VAT.
To be defined as sales of services, the services:
o Should be rendered in the Philippines,
o Can be any and all kinds of services rendered to others (provided there is no
employer-employee relationship);
o There is a fee, remuneration or consideration.
Sale of services in the course of trade or business includes those performed or rendered
by:
a. construction and service contractors
b. stock, real estate, commercial, customs and immigration brokers
c. lessor of property, whether personal or real
d. warehousing services
e. lessor or distributors of cinematographic films
f. persons engagedin milling, processing, manufacturing or repacking of goods for
others
g. proprietors, operators, or keepers of hotels, motels, resthouses, pension houses,
inns, resorts
h. proprietors or hoperators of restaurants, refreshment parlors, cafes and other eating
places, including clubs and caterers
i. dealers in securities
j. lending investors
k. transportation contractors on their transport of goods or cargoes, including persons
who transport goods or cargoes for hire and other domestic common carriers by
land, relative to their transport of goods or cargoes (keep this in mind for when we
take up percentage tax)
l. common carriers by air and sea relative to their transport of passengers, goods or
cargoes from one place in the Philippines to another place in the Philippines (same
here)
m. sales of electricity by generation companies, transmission and distribution companies
n. services of franchise grantees of electric utilities, telephone and telegraph, radio and
television broadcasting and all other franchise grantees, except those under Section
119 of the NIRC

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

VAT on Importation of Goods

SEC. 107. Value-Added Tax on Importation of Goods. -
(A) In General. - There shall be levied, assessed and collected on every importation of goods a value-added tax
equivalent to ten percent (12%) based on the total value used by the Bureau of Customs in determining tariff and
customs duties plus customs duties, excise taxes, if any, and other charges, such tax to be paid by the importer
prior to the release of such goods from customs custody: Provided, That where the customs duties are determined
on the basis of the quantity or volume of the goods, the value-added tax shall be based on the landed cost plus
excise taxes, If any.

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

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

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

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In normal VAT transactions, the VAT paid to A can be recovered by selling it to C. We
are talking about B.

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

VAT TAXABLE (lets use VAT TAXABLE he recovered the P10 by
10% to simplify things) selling the product to C.
P100 P150 In his sale to C, he
P10 (VAT) P15 received P15 which
P110 P165 covered the P10 he paid
A. So, in essence, he
recovered the P10 he
paid A.
What if the transaction of B to C is VAT ZERO-RATED?
A sells to B B sells to C B paid A P10 as VAT. But,
VAT TAXABLE (lets use VAT ZERO-RATED his transaction to C was
10% to simplify things) zero-rated. So he didnt
P100 P150 receive anything from C
P10 (VAT) P0 to offset his VAT payment
P110 P150 to A.
He has an output of O,
and an input of 10.
He can use the 10 as a
tax credit by applying for
a tax credit certificate
with the BIR.

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

A sells to B B sells to C B paid A P10 as VAT. But,
VAT TAXABLE (lets use VAT EXEMPT his transaction to C was
10% to simplify things) exempt. So he didnt
P100 P150 receive anything from C
P10 (VAT) P0 to offset his VAT payment
P110 P150 to A.
He has an output of O,
and an input of 10.
However, unlike a zero-
rated transation, he can
NOT use the excess of 10
to offset his VAT payment
to A. He cant recover.

So, if we were B, and we had a choice what should our next sale transaction be
normal VATable, zero-rated, or exempt?
o Clearly, we wont go for exempt, because we wont recover the VAT we paid to
our suppliers (A).
o Its a toss-up between going for normal VATable transactions and zero-rated
transactions.
In both these cases, we will recover the VAT we paid to our suppliers. It
will just depend on different factors.

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If we go for a zero-rated transaction, do we want to go through the
hassle of having to deal with the BIR and paying the fees?
If we go for the normal VATable, the recovery would be quicker.
But this would mean wed have to keep track of the VAT paid to us
and then have to pay the net VAT payable to the government. And
what if our line of business is really engaged in exporting (zero-
rated), should we go to the trouble of looking for buyers here in
the Philippines if thats not our main line of business anyway?

Zero-rated/Effective zero rated transactions

For goods
Sec 106 (2) The following sales by VAT-registered persons shall be subject to zero percent (0%) rate:
(a) Export Sales. - The term "export sales" means:
(1) The sale and actual shipment of goods from the Philippines to a foreign country, irrespective of any shipping
arrangement that may be agreed upon which may influence or determine the transfer of ownership of the goods so
exported and paid for in acceptable foreign currency or its equivalent in goods or services, and accounted for in
accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP);
(2) Sale of raw materials or packaging materials to a nonresident buyer for delivery to a resident local export-
oriented enterprise to be used in manufacturing, processing, packing or repacking in the Philippines of the said
buyer's goods and paid for in acceptable foreign currency and accounted for in
accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP);
(3) Sale of raw materials or packaging materials to export-oriented enterprise whose export sales exceed seventy
percent (70%) of total annual production;
(4) Sale of gold to the Bangko Sentral ng Pilipinas (BSP); and
(5) Those considered export sales under Executive Order NO. 226, otherwise known as the Omnibus Investment
Code of 1987, and other special laws.
(6) The sale of goods, supplies, equipment, and fuel to persons engaged in international shipping or international
air transport operations (added by RA 9337)

(b) Foreign Currency Denominated Sale. - The phrase "foreign currency denominated sale" means sale to a
nonresident of goods, except those mentioned in Sections 149 and 150, assembled or manufactured in the
Philippines for delivery to a resident in the Philippines, paid for in acceptable foreign currency and accounted for in
accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP).

(c) Sales to persons or entities whose exemption under special laws or international agreements to which the
Philippines is a signatory effectively subjects such sales to zero rate.
For goods, a rate of 0% of the gross selling price will be applied if:
1. Export sale; or
2. Foreign currency denominated sale; or
3. Sales to persons or entities whose exemption under special laws, or international
agreements to which the Philippines is a signatory (effective zero rated sales)
Export sales means:
o the sales and actual shipments or exportations of goods from the Philippines to a
foreign country, irrespective of any shipping arrangement that may be agreed
upon which may influence or determine the transfer of ownership of the goods so
exported, and
o paid for in acceptable foreign currency or its equivalent in goods or services, and
accounted for in accordance with the rules and regulations of the BSP.
The following are within the meaning of export sales:
a. sales of raw materials or packaging materials to a non-resident buyer for delivery to
a resident local export-oriented enterprise to be used in manufacturing, processing,
packing or repacking in the Philippines of said buyers goods and paid for in
acceptable foreign currency and accounted for in accordance with BSP rules and
regulations

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

For services
Sec 108 (B) Transactions Subject to Zero Percent (0%) Rate. - The following services performed in the
Philippines by VAT- registered persons shall be subject to zero percent (0%) rate.
(1) Processing, manufacturing or repacking goods for other persons doing business outside the Philippines which
goods are subsequently exported, where the services are paid for in acceptable foreign currency and accounted for
in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP);
(2) Services other than those mentioned in the preceding paragraph, the consideration for which is paid for in
acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral
ng Pilipinas (BSP);
(3) Services rendered to persons or entities whose exemption under special laws or international agreements to
which the Philippines is a signatory effectively subjects the supply of such services to zero percent (0%) rate;
(4) Services rendered to vessels engaged exclusively in international shipping; and
(5) Services performed by subcontractors and/or contractors in processing, converting, of manufacturing goods for
an enterprise whose export sales exceed seventy percent (70%) of total annual production.
(6) Transport of passengers and cargo by air or sea vessels from the Philippines to a foreign country (RA 9337)
(7) Sale of power or fuel generated through renewable sources of energy such as, but no limited to, biomass, solar,
wind, hydropower, geothermal, ocean energy, and other emerging energy sources using technologies such as fuel
cells and hydrogen cells. (RA 9337)
For services performed in the Philippines, a rate of 0% of the gross receipts will be
applied in the following instances:
1. From processing, manufacturing or repacking of goods,
a. For other persons doing business outside the Philippines,
b. The goods are subsequently exported,
c. The services are paid for in acceptable foreign currency and accounted for in
accordance with the rules and regulations of the BSP
2. Services other than processing, manufacturing or repacking of goods, rendered to a:
a. Person engaged in business conducted outside the Philippines, or
b. non-resident person not engaged in business who is outside the Philippines
when the services are performed
i. the consideration is paid in acceptable foreign currency and accounted
for in accordance with the blah blah blah of the BSP
3. Services rendered to persons or entities whose exemption under special laws or
international agreements to which the Philippines is a signatory effectively subjects
such services to zero rate;
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4. Services rendered to persons engaged in international shipping or international air
transport operations, including leases of property for use thereof;
5. Services performed by subcontractors and/or contractors in processing, converting,
or manufacturing goods for an enterprise whose export sales exceed 70% of total
annual production;
6. Transport of passengers and cargo by air and sea vessels from the Philippines to a
foreign country, and
7. Sale of power or fuel generated through renewable sources of energy
Services other than processing, manufacturing, or repacking of goods must likewise be
performed outside the Philippines. (CIR v Bumeister and Wain, wherein the recipient of
the services was the Consortium who was deemed doing business within the Philippines)
The VAT system generally follows the destination principle (exports are zero-rated
whereas imports are taxed). However, there is an exception in the form of services
performed in the Philippines for a recipient doing business outside the Philippines. (CIR v
Wain)
To be exempt from the destination principle under Section 108(b)(1) and (2), the
service must be
o Performed in the Philippines,
o For a person doing business outside the Philippines, and
o Paid in acceptable foreign currency accounted for in accordance with BSP rules.

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

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

Exempt Transactions
SEC. 109. Exempt Transactions. (1) Subject to the provisions of Subsection (2) hereof, the following
transactions shall be exempt from the value added tax:
(a) Sale or importation of agricultural and marine food products in their original state, livestock and poultry of a
kind generally used as, or yielding or producing foods for human consumption; and breeding stock and genetic
materials therefor.
Products classified under this paragraph shall be considered in their original state even if they have undergone the
simple processes of preparation or preservation for the market, such as freezing, drying, salting, broiling, roasting,
smoking or stripping. Polished and/or husked rice, corn grits, raw cane sugar and molasses, ordinary salt and copra
shall be considered in their original state;
(b) Sale or importation of fertilizers; seeds, seedlings and fingerlings; fish, prawn, livestock and poultry feeds,
including ingredients, whether locally produced or imported, used in the manufacture of finished feeds (except
specialty feeds for race horses, fighting cocks, aquarium fish, zoo animals and other animals generally considered
as pets);
(c) Importation of personal and household effects belonging to the residents of the Philippines returning from
abroad and nonresident citizens coming to resettle in the Philippines: Provided, That such goods are exempt from
customs duties under the Tariff and Customs Code of the Philippines;
(d) Importation of professional instruments and implements, wearing apparel, domestic animals, and personal
household effects (except any vehicle, vessel, aircraft, machinery other goods for use in the manufacture and
merchandise of any kind in commercial quantity) belonging to persons coming to settle in the Philippines, for their
own use and not for sale, barter or exchange, accompanying such persons, or arriving within ninety (90) days
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before or after their arrival, upon the production of evidence satisfactory to the Commissioner, that such persons
are actually coming to settle in the Philippines and that the change of residence is bona fide;
(e) Services subject to percentage tax under Title V;
(f) Services by agricultural contract growers and milling for others of palay into rice, corn into grits and sugar cane
into raw sugar;
(g) Medical, dental, hospital and veterinary services except those rendered by professionals;
(h) Educational services rendered by private educational institutions, duly accredited by the Department of
Education, Culture and Sports (DECS) and the Commission on Higher Education (CHED), the Technical Education
and Skills Development Authority (TESDA) and those rendered by government educational institutions
(i) Services rendered by individuals pursuant to an employer-employee relationship;
(j) Services rendered by regional or area headquarters established in the Philippines by multinational corporations
which act as supervisory, communications and coordinating centers for their affiliates, subsidiaries or branches in
the Asia-Pacific Region and do not earn or derive income from the Philippines;
(k) Transactions which are exempt under international agreements to which the Philippines is a signatory or under
special laws, except those under Presidential Decree 529;
(l) Sales by agricultural cooperatives duly registered with the Cooperative Development Authority to their members
as well as sale of their produce, whether in its original state or processed form, to non-members; their importation
of direct farm inputs, machineries and equipment, including spare parts thereof, to be used directly and exclusively
in the production and/or processing of their produce;
(m) Gross receipts from lending activities by credit or multi-purpose cooperatives duly registered with the
Cooperative Development Authority;
(n) Sales by non-agricultural, non- electric and non-credit cooperatives duly registered with the Cooperative
Development Authority: Provided, That the share capital contribution of each member does not exceed Fifteen
thousand pesos (P15,000) and regardless of the aggregate capital and net surplus ratably distributed among the
members;
(o) Export sales by persons who are not VAT-registered;
(p) Sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade
or business or real property utilized for low-cost and socialized housing as defined by Republic Act No. 7279,
otherwise known as the Urban Development and Housing Act of 1992, and other related laws, residential lot valued
at One million five hundred thousand pesos (P1,500,000) and below, house and lot and other residential dwellings
valued at Two million five hundred thousand pesos (P2,500,000) and below: Provided, That not later January 31,
2009 and every three years thereafter, the amounts herein stated shall be adjusted to their present value using
the Consumer Price Index, as published by the NSO;
(q) Lease of a residential unit with a monthly rental not exceeding Eight thousand pesos (P10,000); Provided, That
not later January 31, 2009 and every three years thereafter, the amounts herein stated shall be adjusted to their
present value using the Consumer Price Index, as published by the NSO;
(r) Sale, importation, printing or publication of books and any newspaper, magazine review or bulletin which
appears at regular intervals with fixed prices for subscription and sale and which is not devoted principally to the
publication of paid advertisements;
(s) Sale, importation or lease of passenger or cargo vessels and aircraft, including engine, equipment and spare
parts thereof for domestic or international transport operations;
(t) importation of fuel, goods and supplies by persons engaged in international shipping or air transport operations
(u) services of banks, non-bank financial intermediaries performing quasi-banking functions, and other non-bank
financial intermediaries; and
(v) Sale or lease of goods or properties or the performance of services other than the transactions mentioned in
the preceding paragraphs, the gross annual sales and/or receipts do not exceed the amount of One million five
hundred thousand pesos (P1,500,000): Provided, That not later January 31, 2009 and every three years
thereafter, the amounts herein stated shall be adjusted to their present value using the Consumer Price Index, as
published by the NSO.

(2) A VAT-registered person may elect that subsection (1) not apply to its sale of goods or properties or services,
Provided, that an election made under this Subsection shall be irrevocable for a period of three (3) years from the
quarter the election was made. (RA 9337)
VAT-exempt transactions refer to the sale of goods or properties and/or services and the
use or lease of properties that is not subject to VAT (output tax) and the seller is not
allowed any tax credit of VAT (input tax) on purchases.
The person making the exempt sale of goods, properties or services shall not bill any
output tax to his customers because the said transaction is not subject to VAT.
A VAT-registered person may elect that the exemptions shall not apply to his sales of
goods or properties or services.
o But one the election is made, it shall be irrevocable for a period of three years
counted from the quarter when the election was made.

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

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Re (s): the exemption from VAT on the importation and local purchase of passenger
and/or cargo vessels shall be limited to those of 150 tons and above, including engine
and spare parts of said vessels.
o Importation of life-saving equipment, safety and rescue equipment and
communication and navigational safety equipment, steel plates and other metal
plates including marine-grade aluminum plates, used for shipping transport
operations shall be exempt. It will be subject to the Domestic Shipping
Development Act of 2004.
o Same thing with the importation of capital equipment, machinery, spare parts,
life-saving and navigational equipment, steel plates and other plates to be used
in the construction, repair, etc of any merchant marine vessel operated or to be
operated in the domestic trade.
Re (t): said fuel, goods and supplies should be used exclusively or should pertain to the
transport of goods and/or passenger from a port in the Philippines directly to a foreign
port, or vice versa, without docking or stopping at any other port in the Philippines
unless the docking or stopping at any other Philippine port is for the purpose of
unloading passenger and/or cargoes that originated from abroad, or to load passengers
and/or cargoes bound for abroad.
o If any portion of such fuel, goods or supplies is used for purposes other than that
mentioned, such shall be subject to 12% VAT. (yari ka boy!)
Re (u): services of such, like money changers or pawnshops, are subject to percentage
tax.
Re (v): for purposes of the P1.5m threshold, the husband and the wife shall be
considered separate taxpayers. However, the aggregation rule for each taxpayer shall
apply, for instance, if a professional, aside from the practice of his profession also
derives revenue from other lines of business which are otherwise subject to VAT, the
same shall be combined for purposes of determining whether the threshold has been
exceeded. Thus, the VAT-exempt sale shall not be included in determining the threshold.

SEC. 110. Tax Credits. -

(A) Creditable Input Tax. -

(1) Any input tax evidenced by a VAT invoice or official receipt issued in accordance with Section 113 hereof on
the following transactions shall be creditable against the output tax:
(a) Purchase or importation of goods:
(i) For sale; or
(ii) For conversion into or intended to form part of a finished product for sale including packaging materials; or
(iii) For use as supplies in the course of business; or
(iv) For use as materials supplied in the sale of service; or
(v) For use in trade or business for which deduction for depreciation or amortization is allowed under this Code,
except automobiles, aircraft and yachts.
(b) Purchase of services on which a value-added tax has been actually paid.
(2) The input tax on domestic purchase of goods or properties shall be creditable:
(a) To the purchaser upon consummation of sale and on importation of goods or properties; and
(b) To the importer upon payment of the value-added tax prior to the release of the goods from the custody of the
Bureau of Customs.

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

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

Rule on capital goods

Section 110 (A) proviso. Provided, that the input tax on goods purchases or imported in calendar month for use on
trade or business for wich deduction is allowed under this Code, shall be spread evenly over the month of
acquisition and the 59 succeeding months if the aggregate acquisition cost for such goods, excluding the VAT
component thereof, exceeds One million pesos (P1,000,000): Provided, however, that if the estimated useful life of
the capital good is less than 5 years, as used for depreciation purposes, then the input VAT shall be spread over
such a shorter period: Provided, finally, That, in the case of purchase of services, lease or use of properties, the
input tax shall be creditable to the purchaser, lessee or licensee upon payment of the compensation, rental, royalty
or free.
Capital goods or properties refer to goods or properties
o with estimated useful life of more than one year and
o which are treated as depreciable under the income tax law,
o used directly or indirectly, in the production or sale of taxable goods or services.
If the input tax on capital goods purchased or imported in a calendar month does NOT
exceed P1m, the input tax will be allowed in the month of purchase.
If the aggregate acquistion cost of such goods in a calendar month, excluding the VAT,
exceeds 1m:
o If the estimated life is 5 years or more, the input tax will be evenly spread over
the month of acquisition and the 59 succeeding months.

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o If the estimated life is less than 5 years, the input tax will be spread evenly on a
monthly basis by dividing the input tax by the actual number of months
comprising the estimated useful life of the asset.
For construction in progress (CIP)
o CIP is the cost of construction which is not yet completed. It is considered a
purchase of services, the value of which will be determined based on the
progress billins.
o Input taxes on such transaction will be recognized in the moth that payment was
made.
o In case of contract for the sale of service where only labor will be supplied by the
contractor and the materials will be purchased by the contractee from other
suppliers,
input tax on the labor will be recognized in the month that payment was
made based on progress billings.
Input tax on the purchase of materials will be recognized at the time when
the materials were purchased.
An asset acquired in installment for an acquisition cost of more than P1m, excluding the
VAT, will be subject to the amortization of input tax despite the fact that the monthly
payments/installments may not exceed P1m.
o When an asset with an unamortized input tax is retired from business, the
unamortized input tax will be closed against the output taxes on the taxable
period in which it is retired.

Input tax allocation and mixed transactions

(3) A VAT-registered person who is also engaged in transactions not subject to the value-added tax shall be
allowed tax credit as follows:
(a) Total input tax which can be directly attributed to transactions subject to value-added tax; and
(b) A ratable portion of any input tax which cannot be directly attributed to either activity.
The term "input tax" means the value-added tax due from or paid by a VAT-registered person in the course of his
trade or business on importation of goods or local purchase of goods or services, including lease or use of property,
from a VAT-registered person. It shall also include the transitional input tax determined in accordance with Section
111 of this Code.
The term "output tax" means the value-added tax due on the sale or lease of taxable goods or properties or
services by any person registered or required to register under Section 236 of this Code.
In crediting input tax, you have to look at three things:
1. Those which can be directly attributed to transactions subject to VAT, and
2. Those which cannot be directly attributed to either a VAT taxable or VAT-exempt
transaction. For these cases, the input tax shall be pro-rated to the VAT taxable and
VAT-exempt transactions and only the ratable portion pertaining to transactions
subject to VAT may be recognized for input tax credit.
3. Sales to the Government because you cant credit input tax arising from sales to the
Government since sales to the Government is subject to final withholding VAT.
RR 16-2005 states:
o All the input taxes that can be directly attributed to transactions subject to VAT
may be recognized for input tax credit; provided, that input taxes that can be
directly attributable to VAT taxable sales of goods and services to the
Government (or any of its political subdivisions, etc) shall not be credited against
output taxes arising from sales to non-Government entities.
o If any input tax cannot be directly attributed to either a VAT taxable or VAT-
exempt transaction, the input tax shall be pro-rated to the VAT taxable and VAT-
exempt transactions and only ratable portion pertaining to transactions subject to
VAT may be recognized for input tax credit.

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

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

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

Specific transaction13 X Amount of input tax not directly

Total Sales attributable to any activity

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

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

(B) Excess Output or Input Tax. - If at the end of any taxable quarter the output tax exceeds the input tax, the
excess shall be paid by the VAT-registered person. If the input tax exceeds the output tax, the excess shall be
carried over to the succeeding quarter or quarters: Provided, however, that any input tax attributable to zero-rated
sales by a VAT-registered person may at his option be refunded or credited against other internal revenue taxes,
subject to the provisions of Section 112. (RA 9361)
(C) Determination of Creditable Input Tax. - The sum of the excess input tax carried over from the preceding
month or quarter and the input tax creditable to a VAT-registered person during the taxable month or quarter shall
be reduced by the amount of claim for refund or tax credit for value-added tax and other adjustments, such as
purchase returns or allowances and input tax attributable to exempt sale.
The claim for tax credit referred to in the foregoing paragraph shall include not only those filed with the Bureau of
Internal Revenue but also those filed with other government agencies, such as the Board of Investments the
Bureau of Customs.

13
Either the VATable, export, exempt or the govt
14
Math column. Output Tax Creditable Tax
15
Law column. Sec 112
16
Total input Creditable Tax
17
Why 7? Because 5% has been withheld by the Govt.
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If at the end of any taxable quarter the output tax exceeds the input tax, the excess
shall be paid by the VAT-registered person. (Known as the Net VAT payable)
If the input tax inclusive of input tax carried over from the previous quarter exceeds the
output tax, the excess input tax shall be carried over to the succeeding quarter or
quarters,
o Provided, that any input tax attributable to zero-rated sales by a VAT-registered
person may at his option be refunded or applied for a tax credit certificate which
may be used in the payment of internal revenue taxes. (this is where you can get
input tax credit or refunds)
o In other words, any input tax, attributable to zero-rated sales may be:
Refunded, or
Credited against other internal revenue taxes of the VAT taxpayer.

Transitional and Presumptive Input Tax Credits

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

(B) Presumptive Input Tax Credits. -

(1) Persons or firms engaged in the processing of sardines, mackerel and milk, and in manufacturing refined sugar
and cooking oil and packed noodle-based instant meals, shall be allowed a presumptive input tax, creditable
against the output tax, equivalent to four percent(4%) of the gross value in money of their purchases of primary
agricultural products which are used as inputs to their production.
As used in this Subsection, the term "processing" shall mean pasteurization, canning and activities which through
physical or chemical process alter the exterior texture or form or inner substance of a product in such manner as to
prepare it for special use to which it could not have been put in its original form or condition.
Presumptive input tax credits are given for those engaged:
o In the processing of sardines, mackerel and milk; and

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o In manufacturing refined sugar, cooking oil and packed noodle-based instant
meals
The rate is 4% of the gross value in money.
They are given this 4% presumptive input tax because the goods used in the said
enumeration are VAT-exempt.

Refunds or Tax Credits on Input Tax

SEC. 112. Refunds or Tax Credits of Input Tax. -
(A) Zero-Rated or Effectively Zero-Rated Sales. - Any VAT-registered person, whose sales are zero-rated or
effectively zero-rated may, within two (2) years after the close of the taxable quarter when the sales were made,
apply for the issuance of a tax credit certificate or refund of creditable input tax due or paid attributable to such
sales, except transitional input tax, to the extent that such input tax has not been applied against output tax:
Provided, however, That in the case of zero-rated sales under Section 106(A)(2)(a)(1), (2) and (B) and Section
108 (B)(1) and (2), the acceptable foreign currency exchange proceeds thereof had been duly accounted for in
accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP): Provided, further, That where
the taxpayer is engaged in zero-rated or effectively zero-rated sale and also in taxable or exempt sale of goods of
properties or services, and the amount of creditable input tax due or paid cannot be directly and entirely attributed
to any one of the transactions, it shall be allocated proportionately on the basis of the volume of sales: Provided,
finally, that for a person making sales that are zero-rated under Section 108(B)(6), the input taxes shall be
allocated ratably between his zero-rated and non-zero-rated sales.

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

(C) Period Within Which Refund or Tax Credit of Input Taxes Shall be Made. - In proper cases, the Commissioner
shall grant a refund or issue the tax credit certificate for creditable input taxes within one hundred twenty (120)
days from the date of submission of compete documents in support of the application filed in accordance with
Subsection (A) hereof.

In case of full or partial denial of the claim for tax refund or tax credit, or the failure on the part of the
Commissioner to act on the application within the period prescribed above, the taxpayer affected may, within thirty
(30) days from the receipt of the decision denying the claim or after the expiration of the one hundred twenty day-
period, appeal the decision or the unacted claim with the Court of Tax Appeals.-

(D) Manner of Giving Refund. - Refunds shall be made upon warrants drawn by the Commissioner or by his duly
authorized representative without the necessity of being countersigned by the Chairman, Commission on audit, the
provisions of the Administrative Code of 1987 to the contrary notwithstanding: Provided, That refunds under this
paragraph shall be subject to post audit by the Commission on Audit.
There are three instances where one can avail of a VAT refund:
1. When there is excess input VAT versus output VAT;
2. Zero-rated and effectively-zero rated sales
3. Cessation of business
For zero-rated and effectively zero-rated sales of goods, properties or services, the
application should be filed within 2 years after the close of the taxable quarter when
such sales were made.
o The two year period is reckoned from the close of the taxable quarter when the
relevant sales were made pertaining to the input VAT regardless of whether said
tax was paid or not. (CIR v Mirant Pagbilao Corp)
o Thus, when a zero-rated VAT taxpayer pays its input VAT a year after the
pertinent transaction, said taxpayer only has a year to file a claim for refund or
tax credit of the unutilized creditable input VAT.
For cessation of business, a VAT-registered person whose registration has been
cancelled due to retirement from or cessation of business, or due to changes in or
cessation of status under Sec. 106 (C), may within 2 years from the date of cancellation,
apply for the issuance of a tax credit certificate for any unused input tax which he may
use in payment of his other internal revenue taxes.
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o Provided, that he shall be entitled to a refund if he has no internal revenue tax
liabilities against which the tax credit certificate may be utilized.
More on cessation of business or change of status as VAT-registered person (RR 16-
2005):
o Subject to output tax:
Change of business activity from VAT taxable to VAT-exempt status.
Approval of a request for cancellation of registration due to reversion to
exempt status.
o Not subject to output tax:
Change of control of a corporation by the acquisition of the controlling
interest of such corporation by another stockholder or group of
stockholders. The goods or properties will not be considered sold,
bartered, etc.
Change in the trade or corporate name of the business.
Merger or consolidation of corporations. The unused input tax of the
dissolved corporation shall be absorbed by the surviving or new
corporation.

Withholding of creditable value-added tax

(C) Withholding of Creditable Value-Added Tax. - The Government or any of its political subdivisions,
instrumentalities or agencies, including government-owned or -controlled corporations (GOCCs) shall, before
making payment on account of each purchase of goods from sellers and services rendered by contractors which are
subject to the value-added tax imposed in Sections 106 and 108 of this Code, deduct and withhold the value-added
tax due at the rate of five percent (5%) of the gross thereof: Provided, That the payment for lease or use of
properties or property rights to nonresident owners shall be subject to ten percent (12%) withholding tax at the
time of payment. For this purpose, the payor or person in control of the payment shall be considered as the
withholding agent.
The value-added tax withheld under this Section shall be remitted within ten (10) days following the end of the
month the withholding was made.
The VAT is withheld in two instances:
1. In sales of goods and services to the Govt (5% withheld by the government)
2. In payment for lease or use of properties to nonresident owners (12% withheld by
the lessee)
In transactions with the government, the 5% final withholding VAT shall represent the
net VAT payable for the seller. The remaining 7% accounts for the standard input VAT
for sales of goods or services to the government or any of its political subdivisions, in
lieu of the actual input VAT directly attributable or ratably apportioned to such sales.
o Should actual input VAT attributable to sales to government exceed 7% of gross
payments, the excess may form part of the sellers expense or cost.
o If the actual input VAT attributable to sale to government is less than 7%, the
difference should be counted as income.
Kaka sells to the Government something for P100. The VAT is P12. The P5
is withheld by the government, so the Government only pays him P107.
o In this scheme, the government assumes that your input VAT will be 7%. If it is
7%, then all is well.
But if the input VAT is higher than 7 (in Kakas case, for example it was
P10), then the excess of P3 will be treated as an expense. It will form part
of the expense column in the income statement.
But if the input VAT is smaller than 7% (for example, Kaka only spent P5),
then there is income on Kakas side, this will form part of his income.
In both instances, Kaka will lose or be benefited only by 35% (rate of
income tax) because it will form part of his income and subject to the
income tax.

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In transactions with non-residents, 12% will be withheld with respect to the following
payments:
1. Lease or use of properties or property rights owned by non-residents, and
2. Other services rendered in the Philippines by non-residents.
o The government did this as a matter of enforcement. How will the Government
run after the VAT of a non-resident, right? So, they just make the payors
withholding agents.
Jhunabhel lives in the condo owned by non-resident Tevez. Jhunabhel will
withhold P12 of the total amount of the lease of P112. Jhunabhel will only
pay Tevez P100.
o The one who remits the 12% to the government, when he files his return can
state that he is entitled to an input tax credit.
In Jhunabhels case, she can ask for the input tax credit of P12.

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

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

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

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

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

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

Cancellation of VAT registration

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

Read codal na lang. Hehe.

Compliance Requirements
SEC. 113. Invoicing and Accounting Requirements for VAT-Registered Persons. -
"(A) Invoicing Requirements. - A VAT-registered person shall issue:
"(1) A VAT invoice for every sale, barter or exchange of goods or properties; and
"(2) A VAT official receipt for every lease of goods or properties, and for every sale, barter or exchange of services.
"(B) Information Contained in the VAT Invoice or VAT Official Receipt. - The following information shall be indicated
in the VAT invoice or VAT official receipt:
"(1) A statement that the seller is a VAT-registered person, followed by his taxpayer's identification number (TIN);
"(2) The total amount which the purchaser pays or is obligated to pay to the seller with the indication that such
amount includes the value-added tax: Provided, That:
"(a) The amount of the tax shall be shown as a separate item in the invoice or receipt;
"(b) If the sale is exempt from value-added tax, the term "VAT-exempt sale" shall be written or printed
prominently on the invoice or receipt;
"(c) If the sale is subject to zero percent (0%) value-added tax, the term "zero-rated sale" shall be written or
printed prominently on the invoice or receipt;
"(d) If the sale involves goods, properties or services some of which are subject to and some of which are VAT
zero-rated or VAT-exempt, the invoice or receipt shall clearly indicate the breakdown of the sale price between its
taxable, exempt and zero-rated components, and the calculation of the value-added tax on each portion of the sale
shall be shown on the invoice or receipt: "Provided, That the seller may issue separate invoices or receipts for the
taxable, exempt, and zero-rated components of the sale.
"(3) The date of transaction, quantity, unit cost and description of the goods or properties or nature of the service;
and
"(4) In the case of sales in the amount of one thousand pesos (P1,000) or more where the sale or transfer is made
to a VAT-registered person, the name, business style, if any, address and taxpayer identification number (TIN) of
the purchaser, customer or client.
"(C) Accounting Requirements. - Notwithstanding the provisions of Section 233, all persons subject to the value-
added tax under Sections 106 and 108 shall, in addition to the regular accounting records required, maintain a
subsidiary sales journal and subsidiary purchase journal on which the daily sales and purchases are recorded. The
subsidiary journals shall contain such information as may be required by the Secretary of Finance.
A VAT-registered person shall issue:
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1. A VAT invoice for every sale, barter or exchange of goods or properties; and
2. A VAT official receipt for every lease of goods or properties, and for every sale,
barter or exchange of services
If the sale is exempt from VAT, the term VAT-exempt sale shall be written or printed
prominently on the invoice or receipt
If the sale is subject to 0%, the term zero-rated sale shall be written or printed
prominently on the invoice or receipt
If the sale involves some which are subject to VAT and some which are zero-rated or
VAT-exempt, the invoice or receipt shall clearly indicate the break-down of the sale price
between the taxable, exempt and zero-rated components
o The calculation of the VAT on each portion of the sale shall be shown on the
invoice or receipt.
o But the seller may issue separate invoices or receipts for the taxable, exempt and
zero-rated components of the sale
The date of the transaction, quality, unit cost and description of the goods or properties
or nature of the services must also be indicated.
o Input tax cannot be credited against output tax when supported by an undated
official receipt or invoice. (Nesic Philippines Inc v CIR, May 6, 2010)
When the sale is P1000 or more to a VAT-registered person, the name, business style,
address and TIN of the purchaser, customer or client must also be placed in the receipt
or invoice.

Issuing Erroneous VAT invoice or VAT official receipt

Section 113(D) Consequence of Issuing Erroneous Vat Invoice or Vat Official Receipt.
(1) If a person who is not a VAT-registered person issues an invoice or receipt showing his Taxpayer Identification
Number (TIN), followed by the word VAT:
(a) The issuer shall, in addition to any liability to other percentage taxes, be liable to:
(i) The tax imposed in Section 106 or 108 without the benefit of any input tax credit; and
(ii) A 50% surcharge under Section 248 (B) of this code;
(b) The VAT shall, if the other requisite information required under Subsection (B) hereof is shown on the invoice
or receipt, be recognized as an input tax credit to the purchaser under Section 110 of this Code.
(2) If a VAT-registered person issues a VAT invoice or VAT official receipt for a VAT-exempt transaction, but fails
to display prominently on the invoice or receipt the term VAT-exempt Sale", the issuer shall be liable to account
for the tax imposed in Section 106 or 108 as if Section 109 did not apply.
"(E) Transitional Period. - Notwithstanding Subsection (B) hereof, taxpayers may continue to issue VAT invoices
and VAT official receipts for the period July 1, 2005 to December 31, 2005, in accordance with Bureau of Internal
Revenue administrative practices that existed as of December 31, 2004.
If a person is NOT a VAT-registered person issues an invoice or receipt showing his TIN
followed by the word VAT, the issuer shall be:
1. Liable for the percentage tax due on his transaction
2. Liable for the VAT, without credit for any input tax, and
3. Subject to a 50% surcharge.
o VAT shall be recognized as an input tax credit to the purchaser under Section
110, provided the requisite information required in invoices or receipts are shown
on the invoices or receipts.
If a VAT-registered person issues a VAT invoice or official receipt for a VAT-exempt
transaction, but fails to display prominently on the invoice or receipt the term VAT-
exempt sale, he shall be subject to the VAT, as if Section 109 on exempt transactions
did not apply.
o Meaning, he has to pay the VAT.
If the VAT is erroneously billed in the invoice, the total invoice amount shall be
presumed to be comprised of the gross selling price/gross receipts plus the correct
amount of the VAT.

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o The output tax shall be computed by multiplying the total amount in the invoice
by a fraction using the rate of VAT as the numerator and 100% plus the rate of
the VAT as the denominator.

Return and Payment of VAT

Sec. 114. Return and Payment of Value-Added Tax. -
"(A) In General. - Every person liable to pay the value-added tax imposed under this Title shall file a quarterly
return of the amount of his gross sales or receipts within twenty-five (25) days following the close of each taxable
quarter prescribed for each taxpayer: Provided, however, That VAT-registered persons shall pay the value-added
tax on a monthly basis.
"Any person, whose registration has been cancelled in accordance with Section 236, shall file a return and pay the
tax due thereon within twenty-five (25) days from the date of cancellation of registration: Provided, That only one
consolidated return shall be filed by the taxpayer for his principal place of business or head office and all branches.
"(B) Where to File the Return and Pay the Tax. - Except as the Commissioner otherwise permits, the return shall be
filed with and the tax paid to an authorized agent bank, Revenue Collection Officer or duly authorized city or
municipal Treasurer in the Philippines located within the revenue district where the taxpayer is registered or
required to register.
Every person liable to pay VAT shall file a quarterly return of the amount of his quarterly
gross sales or receipts within 25 days following the close of the taxable quarter using the
latest version of Quarterly VAT Return.
The VAT-registered persons shall pay the VAT on a monthly basis.

Power of the Commissioner

SEC. 115. Power of the Commissioner to Suspend the Business Operations of a Taxpayer. - The
Commissioner or his authorized representative is hereby empowered to suspend the business operations and
temporarily close the business establishment of any person for any of the following violations:
(a) In the case of a VAT-registered Person. -
(1) Failure to issue receipts or invoices;
(2) Failure to file a value-added tax return as required under Section 114; or
(3) Understatement of taxable sales or receipts by thirty percent (30%) or more of his correct taxable sales or
receipts for the taxable quarter.

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

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

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

Three percent (3%) percentage tax

SEC. 116. Tax on Persons Exempt From Value-Added Tax (VAT). - Any person whose sales or receipts are
exempt under Section 109(v) of this Code from the payment of value-added tax and who is not a VAT-registered
person shall pay a tax equivalent to three percent (3%) of his gross quarterly sales or receipts: Provided, That
cooperatives shall be exempt from the three percent (3%)gross receipts tax herein imposed. (RA 9337)
What are the requisites to be considered under the 3% Percentage Tax?
1. Gross annual sales or receipts do NOT exceed P1.5,
2. Transaction is NOT under Section 109 (A)-(U),
3. NOT VAT-registered, and
4. NOT under any specific percentage tax.

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The 3% percentage tax is imposed on persons who are exempt from the VAT because
their gross annual sales or receipts do not exceed P1.5m.
It is based on gross sales or receipts, without any deduction.
Persons who are otherwise subject to the 3% percentage tax may opt to be under the
VAT system by registering with the BIR as a VAT taxpayer.
o When so registered, they shall be subject to the rules on VAT on their domestic
and export sales.
Why register?!
The VAT system has input credit. Percentage tax does not.

Tax on domestic carriers

SEC. 117. Percentage Tax on Domestic Carriers and Keepers of Garages. - Cars for rent or hire driven by
the lessee, transportation contractors, including persons who transport passengers for hire, and other domestic
carriers by land, air or water, for the transport of passengers, except owners of bancas and owner of animal-drawn
two wheeled vehicle, and keepers of garages shall pay a tax equivalent to three percent (3%) of their quarterly
gross receipts.
The gross receipts of common carriers derived from their incoming and outgoing freight shall not be subjected to
the local taxes imposed under Republic Act No. 7160, otherwise known as the Local Government Code of 1991.
In computing the percentage tax provided in this Section, the following shall be considered the minimum quarterly
gross receipts in each particular case:
Jeepney for hire -
1. Manila and other cities P 2,400
2. Provincial 1,200

Public utility bus -

Not exceeding 30 passengers 3,600
Exceeding 30 but not exceeding 50 passengers 6,000
Exceeding 50 passengers 7,200

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

Car for hire (with chauffer) 3,000

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

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3. Common carriers by air and sea relative to their transport of passengers, goods or
cargoes from one place in the Philippines to another place in the Philippines.
The transport of passengers and cargo by air or sea vessels from the Philippines to a
foreign country is subject to 0% VAT.
Under the law, certain common carriers have statutory minimum quarterly gross
receipts (jeepneys, etc).

VAT or Percentage Tax on DOMESTIC Carriers

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

Percentage tax on International carriers

SEC. 118. Percentage Tax on International Carriers. -
(A) International air carriers doing business in the Philippines shall pay a tax of three percent (3%) of their
quarterly gross receipts.
(B) International shipping carriers doing business in the Philippines shall pay a tax equivalent to three percent
(3%) of their quarterly gross receipts.
International air carriers and international shipping carriers doing business in the
Philippines shall pay a tax equivalent to 3% of their gross receipts from shipping
outgoing from the Philippines.

Franchise tax
SEC. 119. Tax on Franchises. - Any provision of general or special law to the contrary notwithstanding, there
shall be levied, assessed and collected in respect to all franchises on radio and/or television broadcasting
companies whose annual gross receipts of the preceding year does not exceed Ten million pesos (P10,000.00),
subject to Section 236 of this Code, a tax of three percent (3%) and on electric, gas and water utilities, a tax of
two percent (2%) on the gross receipts derived from the business covered by the law granting the franchise:
Provided, however, That radio and television broadcasting companies referred to in this Section shall have an
option to be registered as a value-added taxpayer and pay the tax due thereon: Provided, further, That once the
option is exercised, said option shall be irrevocable.
The grantee shall file the return with, and pay the tax due thereon to the Commissioner or his duly authorized
representative, in accordance with the provisions of Section 128 of this Code, and the return shall be subject to
audit by the Bureau of Internal Revenue, any provision of any existing law to the contrary notwithstanding.
The franchise tax is:
1. On gross receipts covered by the law granting the franchise;
2. At the following rates:
a. On radio and/or television broadcasting companies whose annual gross
receipts of the preceding year did not exceed P10m: 3%
b. On gas and water utilities: 2%
Those whose annual gross receipts of the preceding year exceeded P10m shall be
subject to the VAT.
o If the gross receipts do not exceed P10m, they may opt to be registered under
VAT, but once they choose to, it cannot be revoked.

Overseas communications tax

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SEC. 120. Tax on Overseas Dispatch, Message or Conversation Originating from the Philippines. -
(A) Persons Liable. - There shall be collected upon every overseas dispatch, message or conversation transmitted
from the Philippines by telephone, telegraph, telewriter exchange, wireless and other communication equipment
service, a tax of ten percent (10%) on the amount paid for such services. The tax imposed in this Section shall be
payable by the person paying for the services rendered and shall be paid to the person rendering the services who
is required to collect and pay the tax within twenty (20) days after the end of each quarter.
(B) Exemptions. - The tax imposed by this Section shall not apply to:
(1) Government. - Amounts paid for messages transmitted by the Government of the Republic of the Philippines or
any of its political subdivisions or instrumentalities;
(2) Diplomatic Services. - Amounts paid for messages transmitted by any embassy and consular offices of a foreign
government;
(3) International Organizations. - Amounts paid for messages transmitted by a public international organization or
any of its agencies based in the Philippines enjoying privileges, exemptions and immunities which the Government
of the Philippines is committed to recognize pursuant to an international agreement; and
(4) News Services. - Amounts paid for messages from any newspaper, press association, radio or television
newspaper, broadcasting agency, or newstickers services, to any other newspaper, press association, radio or
television newspaper broadcasting agency, or newsticker service or to a bona fide correspondent, which messages
deal exclusively with the collection of news items for, or the dissemination of news item through, public press,
radio or television broadcasting or a newsticker service furnishing a general news service similar to that of the
public press.
Franchise grantees of telephone and telegraph are subject to the VAT on their gross
receipts from their telephone, telegraph, telewriter exchange, wireless and other
communication equipment services. (ingoing messages)
BUT amounts received from overseas dispatch message or conversation originating form
the Philippines (outgoing messages) shall be subject to the overseas communications
tax.
The OCT is based on the amount paid by the user to the provider of the communication
facility, imposed on the person paying for the services rendered, and not on the person
rendering the service.
o The person rendering the service is merely considered as a tax collector.
The OCT is 10% of the amount paid.
The OCT shall not apply to:
1. The government of the Philippines or any of its political subdivisions,
2. Diplomatic services,
3. International organizations, and
4. News services.

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

SEC. 121. Tax on Banks and Non-Bank Financial Intermediaries. - There shall be a collected tax on gross
receipts derived from sources within the Philippines by all banks and non-bank financial intermediaries in
accordance with the following schedule:
(a) On interest, commissions and discounts from lending activities as well as income from financial leasing, on the
basis of remaining maturities of instruments from which such receipts are derived:
Maturity period is 5 years or less - 5%
Maturity period is more than 5 years - 1%
(b) On dividends and equity shares in net income of
subsidiaries 0%
(c) On royalties, rentals of property, real or personal, profits,
from exchange and all other items treated as gross income
under Section 32 of this Code 7%
(d) On net trading gains within the taxable year on foreign currency, debt
securities, derivaties and other similar financial instruments 7%
Provided, however, That in case the maturity period referred to in paragraph (a) is shortened thru pretermination,
then the maturity period shall be reckoned to end as of the date of pretermination for purposes of classifying the
transaction as short, medium or long-term and the correct rate of tax shall be applied accordingly.
Provided, finally, that the generally accepted accounting principles as may be prescribed by the BSP for the bank or
non-bank financial intermediary performing quasi-banking functions shall be likewise be the basis for the
calculation of gross receipts.
Nothing in this Code shall preclude the Commissioner from imposing the same tax herein provided on persons
performing similar banking activities.

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The tax base is the gross receipts from sources within the Philippines.
Tax rates are:
On interest, commissions and discounts from
lending activities as well as income from
financial leasing, on the basis of remaining
maturities of instruments from which such
receipts are derived: 5%
Maturity period is 5 years or less 1%
Maturity period is more than 5 years
On dividends and equity shares in net 0%
income of subsidiaries
On royalties, rentals of property, real or 7%
personal, profits from exchange and all other
items treated as gross income under the
income tax law
On net trading gains within the taxable year 7%
on foreign currency, debt securities,
derivaties and other similar financial
instruments
In case the maturity period is shortened thru pretermination, then the maturity period
shall be reckoned to end as of the date of pretermination
Financial intermediaries are persons or entities whose principal functions include the
lending, investing, or placement of funds or evidence of indebtedness or equity
deposited with them, or otherwise coursed through them, either for their own account or
for the account of others.
Quasi-banking activities refer to borrowing funds from twenty or more lenders at any
one time, through issuance, indorsement or acceptance of debt instruments, or through
the issuance of certificates of assignments for the purpose of relending or purchasing
receivables and other similar obligations.

Tax on other non-bank financial intermediaries

SEC. 122. Tax on Other Non-bank Financial Intermediaries. - There shall be collected a tax of five percent
(5%) on the gross receipts derived by other non-bank financial intermediaries doing business in the Philippines,
from interest, commissions, and discounts from lending activities, as well as income from financial leasing, shall be
taxed on the basis of remaining maturities of the instruments from which such receipts are derived, in accordance
with the following schedule:
Maturity period is 5 years or less 5%
Maturity period is more than 5 years 1%
Provided, however, That in case the maturity period is shortened thru pretermination, then the maturity period
shall be reckoned to end as of the date of pretermination for purposes of classifying the transaction as short,
medium or long-term and the correct rate of tax shall be applied accordingly.
Provided, finally, that the generally accepted accounting principles as may be prescribed by the SEC for other non-
bank financial intermediaries shall likewise be the basis of the calculation of gross receipts.
Nothing in this Code shall preclude the Commissioner from imposing the same tax herein provided on persons
performing similar financing activities. (RA 9238)
Tax base is the gross receipts from sources within the Philippines
Tax rates are:
On interest, commissions and discounts from
lending activities as well as income from
financial leasing, on the basis of remaining
maturities of instruments from which such
receipts are derived: 5%
Maturity period is 5 years or less 1%
Maturity period is more than 5 years

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On interests, commissions, discounts and all 5%
other items treated as gross income under
the Income Tax Law
A pawnshop is a non-bank financial intermediary not performing quasi-banking
functions. (Tambunting v CIR)

Tax on insurance companies

SEC. 123. Tax on Life Insurance Premiums. - There shall be collected from every person, company or
corporation (except purely cooperative companies or associations) doing life insurance business of any sort in the
Philippines a tax of five percent (5%) of the total premium collected, whether such premiums are paid in money,
notes, credits or any substitute for money; but premiums refunded within six (6) months after payment on account
of rejection of risk or returned for other reason to a person insured shall not be included in the taxable receipts;
nor shall any tax be paid upon reinsurance by a company that has already paid the tax; nor upon doing business
outside the Philippines on account of any life insurance of the insured who is a nonresident, if any tax on such
premium is imposed by the foreign country where the branch is established nor upon premiums collected or
received on account of any reinsurance , if the insured, in case of personal insurance, resides outside the
Philippines, if any tax on such premiums is imposed by the foreign country where the original insurance has been
issued or perfected; nor upon that portion of the premiums collected or received by the insurance companies on
variable contracts (as defined in section 232(2) of Presidential Decree No. 612), in excess of the amounts
necessary to insure the lives of the variable contract workers.
Cooperative companies or associations are such as are conducted by the members thereof with the money
collected from among themselves and solely for their own protection and not for profit.
Insurance companies may be divided into two classes:
1. Non-life insurance companies, and
2. Life insurance companies
Non-life insurance companies are subject to VAT.
Life insurance companies are subject to a percentage tax called the premium tax, as
follows:
o Tax base: total life insurance premiums collected (gross receipts), whether in
money, notes, credits, or any substitute for money
o Tax rate: 5%
The follow are exempted from the premium tax:
1. Premiums refunded within 6 months after payment on account of rejection of risk or
returned for other reasons to a person insured;
2. Reinsurance premiums paid by a company that has already paid a tax;
3. Premiums collected or received by an y branch of a domestic corp, firm or
association doing business in the Philippines on account of any life insurance of an
insured who is a non-resident, if any tax on such premiums is imposed by the foreign
country where the branch is established;
4. Reinsurance premiums, if the insured of personal insurance resides outside the
Philippines, if any tax on such premium is imposed by the foreign country where the
original has been issued or perfected;
5. Portion of the premiums collected or received by insurance companies on variable
contracts in excess of the amount necessary to insure the lives of variable contract
owners.

Tax on agents of foreign insurance companies

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

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has been so effected, and shall pay the tax of five percent (5%) on premiums paid, in the manner required by
Section 123.
Every fire, marine or miscellaneous insurance agent authorized under the Insurance
Code to procure insurance as he may have previously been authorized to transact on
risks located in the Philippines, for companies not authorized to transact business in the
Philippines, shall pay a tax equal to twice the tax imposed on life insurance companies.
o So, 10%.
An owner of property can obtain directly for himself policies in foreign companies but he
must report to Insurance Commissioner and to the CIR, and pay a tax of 5% on
premiums paid.

Amusement taxes
SEC. 125. Amusement Taxes. - There shall be collected from the proprietor, lessee or operator of cockpits,
cabarets, night or day clubs, boxing exhibitions, professional basketball games, Jai-Alai and racetracks, a tax
equivalent to:
(a) Eighteen percent (18%) in the case of cockpits;
(b) Eighteen percent (18%) in the case of cabarets, night or day clubs;
(c) Ten percent (10%) in the case of boxing exhibitions: Provided, however, That boxing exhibitions wherein World
or Oriental Championships in any division is at stake shall be exempt from amusement tax: Provided, further, That
at least one of the contenders for World or Oriental Championship is a citizen of the Philippines and said exhibitions
are promoted by a citizen/s of the Philippines or by a corporation or association at least sixty percent (60%) of the
capital of which is owned by such citizens;
(d) Fifteen percent (15%) in the case of professional basketball games as envisioned in Presidential Decree No.
871: Provided, however, That the tax herein shall be in lieu of all other percentage taxes of whatever nature and
description; and
(e) Thirty percent (30%) in the case of Jai-Alai and racetracks of their gross receipts, irrespective, of whether or
not any amount is charged for admission.
For the purpose of the amusement tax, the term "gross receipts" embraces all the receipts of the proprietor, lessee
or operator of the amusement place. Said gross receipts also include income from television, radio and motion
picture rights, if any. A person or entity or association conducting any activity subject to the tax herein imposed
shall be similarly liable for said tax with respect to such portion of the receipts derived by him or it.
The taxes imposed herein shall be payable at the end of each quarter and it shall be the duty of the proprietor,
lessee or operator concerned, as well as any party liable, within twenty (20) days after the end of each quarter, to
make a true and complete return of the amount of the gross receipts derived during the preceding quarter and pay
the tax due thereon.
Tax base: gross receipts
o Embraces all the receipts of the proprietor, lessee or operator of the amusement
place.
o It also includes income from TV, radio and motion picture rights, if any.

Amusement Place Tax

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

Tax on Winnings
SEC. 126. Tax on Winnings. - Every person who wins in horse races shall pay a tax equivalent to ten percent
(10%) of his winnings or 'dividends', the tax to be based on the actual amount paid to him for every winning ticket

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after deducting the cost of the ticket: Provided, That in the case of winnings from double, forecast/quinella and
trifecta bets, the tax shall be four percent (4%). In the case of owners of winning race horses, the tax shall be ten
percent (10%) of the prizes.
The tax herein prescribed shall be deducted from the 'dividends' corresponding to each winning ticket or the "prize"
of each winning race horse owner and withheld by the operator, manager or person in charge of the horse races
before paying the dividends or prizes to the persons entitled thereto.
The operator, manager or person in charge of horse races shall, within twenty (20) days from the date the tax was
deducted and withheld in accordance with the second paragraph hereof, file a true and correct return with the
Commissioner in the manner or form to be prescribed by the Secretary of Finance, and pay within the same period
the total amount of tax so deducted and withheld.
Tax base:
o If a person wins in horse races and jai-alai, based on his winnings or dividends
(tax to be based on the actual amount paid to him for every winning ticket, after
deducting the cost of the ticket),
o If a person owns a winning race horse, based on the price.
The tax shall be withheld from the dividends or prize by the operator, manager or
person in charge of the horse races or jai-alai.

Tax on Winnings Tax

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

Tax on Stock Transactions (Stock Transaction Tax)

SEC. 127. Tax on Sale, Barter or Exchange of Shares of Stock Listed and Traded Through the Local Stock Exchange
or Through Initial Public Offering. -
(A) Tax on Sale, Barter or Exchange of Shares of Stock Listed and Traded Through the Local Stock Exchange. -
There shall be levied, assessed and collected on every sale, barter, exchange, or other disposition of shares of
stock listed and traded through the local stock exchange other than the sale by a dealer in securities, a tax at the
rate of one-half of one percent (1/2 of 1%) of the gross selling price or gross value in money of the shares of stock
sold, bartered, exchanged or otherwise disposed which shall be paid by the seller or transferor.
(B) Tax on Shares of Stock Sold or Exchanged Through Initial Public Offering. - There shall be levied, assessed and
collected on every sale, barter, exchange or other disposition through initial public offering of shares of stock in
closely held corporations, as defined herein, a tax at the rates provided hereunder based on the gross selling price
or gross value in money of the shares of stock sold, bartered, exchanged or otherwise disposed in accordance with
the proportion of shares of stock sold, bartered, exchanged or otherwise disposed to the total outstanding shares
of stock after the listing in the local stock exchange:
Up to twenty-five percent (25%) 4%
Over twenty-five percent (25%) but not over thirty-three
and one third percent (33 1/3%) 2%
Over thirty-three and one third percent (33 1/3%) 1%
The tax herein imposed shall be paid by the issuing corporation in primary offering or by the seller in secondary
offering.
For purposes of this Section, the term "closely held corporation" means any corporation at least fifty percent (50%)
in value of outstanding capital stock or at least fifty percent (505) of the total combined voting power of all classes
of stock entitled to vote is owned directly or indirectly by or for not more than twenty (20) individuals.
For purposes of determining whether the corporation is a closely held corporation, insofar as such determination is
based on stock ownership, the following rules shall be applied:
(1) Stock Not Owned by Individuals. - Stock owned directly or indirectly by or for a corporation, partnership, estate
or trust shall be considered as being owned proportionately by its shareholders, partners or beneficiaries.
(2) Family and Partnership Ownerships. - An individual shall be considered as owning the stock owned, directly or
indirectly, by or for his family, or by or for his partner. For purposes of the paragraph, the 'family of an individual'
includes only his brothers and sisters (whether by whole or half-blood), spouse, ancestors and lineal descendants.
(3) Option. - If any person has an option acquire stock, such stock shall be considered as owned by such person.
For purposes of this paragraph, an option to acquire such an option and each one of a series of options shall be
considered as an option to acquire such stock.
(4) Constructive Ownership as Actual Ownership. - Stock constructively owned by reason of the application of
paragraph (1) or (3) hereof shall, for purposes of applying paragraph (1) or (2), be treated as actually owned by
such person; but stock constructively owned by the individual by reason of the application of paragraph (2) hereof
shall not be treated as owned by him for purposes of again applying such paragraph in order to make another the
constructive owner of such stock.
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(C) Return on Capital Gains Realized from Sale of Shares of Stocks. -
(1) Return on Capital Gains Realized from Sale of Shares of Stock Listed and Traded in the Local Stock Exchange. -
It shall be the duty of every stock broker who effected the sale subject to the tax imposed herein to collect the tax
and remit the same to the Bureau of Internal Revenue within five (5) banking days from the date of collection
thereof and to submit on Mondays of each week to the secretary of the stock exchange, of which he is a member, a
true and complete return which shall contain a declaration of all the transactions effected through him during the
preceding week and of taxes collected by him and turned over to the Bureau Of Internal Revenue.
(2) Return on Public Offerings of Share Stock. - In case of primary offering, the corporate issuer shall file the
return and pay the corresponding tax within thirty (30) days from the date of listing of the shares of stock in the
local stock exchange. In the case of secondary offering, the provision of Subsection (C)(1) of this Section shall
apply as to the time and manner of the payment of the tax.
(D) Common Provisions. - Any gain derived from the sale, barter, exchange or other disposition of shares of stock
under this Section shall be exempt from the tax imposed in Sections 24(C), 27(D)(2), 28(A)(8)(c), and 28(B)(5)(c)
of this Code and from the regular individual or corporate income tax. Tax paid under this Section shall not be
deductible for income tax purposes.
On the sale, barter, exchange or other disposition of shares listed and traded thru a local
stock exchange, other than by a dealer in securities
o Tax base: gross selling price or gross value in money of the shares sold,
bartered, exchanged or otherwise disposed of,
o Tax rate: of 1%
o Paid by: the seller
On the sale, barter, exchange or other disposition thru initial public offering of shares of
stock in a closely held corporation, in accordance with the proportion of the shares sold,
bartered, exchanged or otherwise disposed of to the total outstanding shares of stock
after the listing in the local stock exchange
o Up to 25% 4%
o 25% - 33.33% 2%
o over 33.33% 1%
o Paid by: the issuing corporation in primary offering, and the seller in the
secondary offering
For purposes of tax on initial public offerings, the term closely-held corporation means
any corporation at least 50% in value of the outstanding capital stock or at least 50% of
the total combined voting power of all classes of stock entitled to vote, is owned directly
or indirectly by or for not more than 20 individuals.

Return and payment of percentage taxes

SEC. 128. Returns and Payment of Percentage Taxes. -
(A) Returns of Gross Sales, Receipts or Earnings and Payment of Tax. -
(1) Persons Liable to Pay Percentage Taxes. - Every person subject to the percentage taxes imposed under this
Title shall file a quarterly return of the amount of his gross sales, receipts or earnings and pay the tax due thereon
within twenty-five (25) days after the end of each taxable quarter: Provided, That in the case of a person whose
VAT registration is cancelled and who becomes liable to the tax imposed in Section 116 of this Code, the tax shall
accrue from the date of cancellation and shall be paid in accordance with the provisions of this Section.
(2) Person Retiring from Business. - Any person retiring from a business subject to percentage tax shall notify the
nearest internal revenue officer, file his return and pay the tax due thereon within twenty (20) days after closing
his business.
(3) Exceptions. - The Commissioner may, by rules and regulations, prescribe:
(a) The time for filing the return at intervals other than the time prescribed in the preceding paragraphs for a
particular class or classes of taxpayers after considering such factors as volume of sales, financial condition,
adequate measures of security, and such other relevant information required to be submitted under the pertinent
provisions of this Code; and
(b) The manner and time of payment of percentage taxes other than as hereinabove prescribed, including a
scheme of tax prepayment.
(4) Determination of Correct Sales or Receipts. - When it is found that a person has failed to issue receipts or
invoices, or when no return is filed, or when there is reason to believe that the books of accounts or other records
do not correctly reflect the declarations made or to be made in a return required to be filed under the provisions of
this Code, the Commissioner, after taking into account the sales, receipts or other taxable base of other persons
engaged in similar businesses under similar situations or circumstances, or after considering other relevant
information may prescribe a minimum amount of such gross receipts, sales and taxable base and such amount so
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prescribed shall be prima facie correct for purposes of determining the internal revenue tax liabilities of such
person.
(B) Where to File. - Except as the Commissioner otherwise permits, every person liable to the percentage tax
under this Title may, at his option, file a separate return for each branch or place of business, or a consolidated
return for all branches or places of business with the authorized agent bank, Revenue District Officer, Collection
Agent or duly authorized Treasurer of the city or municipality where said business or principal place of business is
located, as the case may be.
The taxpayer may file a separate return for each branch or place of business, or a
consolidated return for all.
General rule: every person liable to pay a percentage tax shall file a monthly return of
the amount of his gross receipts and pay the tax thereon, within 20 days after the end
of each taxable month.
Except:
1. 3% tax within 20 days after the end of the month, except when the tax was a final
tax through the withholding tax system
2. Overseas communications tax within 20 days after the end of the quarter
3. Amusement tax within 20 days after the end of the quarter
4. Tax on winnings remitted to the BIR within 20 days from the date withheld
5. Stock transaction tax of of 1% remitted to the BIR within 5 banking days from
the date withheld by the broker
6. Stock transaction tax of 4%, 2% and 1% on primary offering, within 30 days from
the date of listing in the local stock exchange

Summary of the percentage taxes

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

Dividends 0%

Tax on other non-bank Gross receipts from 1% and 5%

financial intermediaries lending/financial leasing

Gross receipts from other 5%

gross income items
Tax on life insurance Premiums collected 5%

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

Excise Taxes
SEC. 129. Goods 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. The excise tax
imposed herein shall be in addition to the value-added tax imposed under Title IV.
For purposes of this Title, excise taxes herein imposed and based on weight or volume capacity or any other
physical unit or measurement shall be referred to as "specific tax" and an excise tax herein imposed and based on
selling price or other specified value of the good shall be referred to as "ad valorem tax".
Excise taxes are applicable only to
1. Manufacturers, or
2. Importers
There are two kinds of excise taxes, namely:
1. Specific tax, and
2. Ad valorem tax
Specific taxes are those based on weight or volume capacity or any other physical unit
of measurement. Those subject to specific taxes are:
1. Alcohol products - proof liter (Sec 141-143)
2. Tobacco products - kilogram (Sec. 144)
3. Petroleum products - liter and kilogram (Sec. 148)
4. Coal and coke - metric ton (Sec. 151)
Ad valorem taxes are those based on the selling price or other specified value of the
article.
1. Automobiles importers/manufacturers selling price(Sec. 149)
2. Non-essential goods wholesale price or value of importation (Sec. 150)
Jewelry (real or imitation), opera glasses, lorgnettes
Perfumes and toilet waters
Yachts and other vessels intended for pleasure or sports

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3. Other minerals, mineral products and quarry resources actual market value of
gross output (Sec. 151)
4. Cigars net retail price (Sec. 145)
5. Cigarettes packed by hand or machine net retail price per pack(Sec. 145)
For cigarettes pack by hand or machine, it is actually a hybrid because it is ad valorem
to the extent of selling price, but specific in its imposition (per pack)

"New brands, as defined in the immediately following paragraph, shall initially be classified according to their
suggested net retail price.
"'New brand' shall mean a brand registered after the date of effectivity of R.A. No. 8240.
"'Suggested net retail price' shall mean the net retail price at which new brands, as defined above, of locally
manufactured or imported cigarettes are intended by the manufacturer or importer to be sold on retail in major
supermarkets or retail outlets in Metro Manila for those marketed nationwide, and in other regions, for those with
regional markets. At the end of three (3) months from the product launch, the Bureau of Internal Revenue shall
validate the suggested net retail price of the new brand against the net retail price as defined herein and determine
the correct tax bracket under which a particular new brand of cigarette, as defined above, shall be classified. After
the end of eighteen (18) months from such validation, the Bureau of Internal Revenue shall revalidate the initially
validated net retail price against the net retail price as of the time of revalidation in order to finally determine the
correct tax bracket under which a particular new brand of cigarettes shall be classified: Provided, however, That
brands of cigarettes introduced in the domestic market between January 1, 1997 and December 31, 2003 shall
remain in the classification under which the Bureau of Internal Revenue has determined them to belong as of
December 31, 2003. Such classification of new brands and brands introduced between January 1, 1997 and
December 31, 2003 shall not be revised except by an act of Congress.
"'Net retail price', as determined by the Bureau of Internal Revenue through a price survey to be conducted by the
Bureau of Internal Revenue itself, or the National Statistics Office when deputized for the purpose by the Bureau of
Internal Revenue, shall mean the price at which the cigarette is sold on retail in at least ten (10) major
supermarkets in Metro Manila (for brands of cigarettes marketed nationally), excluding the amount intended to
cover the applicable excise tax and the value-added tax. For brands which are marketed only outside Metro Manila,
the 'net retail price' shall mean the price at which the cigarette is 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.
"The classification of each brand of cigarettes based on its average net retail price as of October 1, 1996, as set
forth in Annex 'D', including the classification of brands for the same products which, although not set forth in said
Annex ID', were registered and were being commercially produced and marketed on or after October 1, 1996, and
which continue to be commercially produced and marketed after the effectivity of this Act, shall remain in force
until revised by Congress.

Suggested net retail price apply to new brands to be introduced. Its the net retail
price at which new brands are intended to be sold on retail in major supermarkets or
retail outlets in Metro Manila.
Net retail price apply to those brands already in the market. It is the price at which the
goods are sold on retail in at least 10 major supermarkets in Metro Manila.
The classification freeze provision in Sec 145 was the main issue in the case of British
American Tobacco v CIR.
o To the issues raised by British American Tobacco, the Supreme Court stated All
in all, the classification freeze provision addressed Congress's administrative
concerns in the simplification of tax administration of sin products, elimination of
potential areas for abuse and corruption in tax collection, buoyant and stable
revenue generation, and ease of projection of revenues. Consequently, there can
be no denial of the equal protection of the laws since the rational-basis test is
amply satisfied.
o The Court, in answering the claim of unfair competition created by the
classification freeze, merely stated that the it wasnt conceived in a hostile
attitude against newer brands compared to older brands. And, respecting the
wisdom of the Congress as a co-equal branch of the government, the Court could
not strike down the provision as unconstitutional, even if it were imperfect.
Excise tax is basically an indirect tax imposed on the consumption of a specified list of
goods or products.

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The tax is directly levied on the manufacturer upon removal of the taxable goods from
the place of production but in reality, the tax is passed on to the end consumer as part
of the selling price of the goods sold.
o The main difference with VAT (which is also an indirect tax) is the ability of the
buyer to claim a refund.
In VAT, zero-rated buyers have express statutory basis which allows them
to claim refunds.
In excise tax, buyers cannot claim refunds because there is no statutory
basis. Hence, it is only the statutory taxpayer who can claim a refund (as
in the case of Silkair v CIR)

Those exempt from excise taxes or conditional tax-free removal

EXEMPTION OR CONDITIONAL TAX-FREE REMOVAL OF CERTAIN ARTICLES
SEC. 133. Removal of Wines and Distilled Spirits for Treatment of Tobacco Leaf. - Upon issuance of a permit from
the Commissioner and subject to the rules and regulations prescribed by the Secretary of Finance, manufacturers
of cigars and cigarettes may withdraw from bond, free of excise local and imported wines and distilled spirits in
specific quantities and grades for use in the treatment of tobacco leaf to be used in the manufacture of cigars and
cigarettes; but such wines and distilled spirits must first be suitably denatured.
SEC. 134. Domestic Denatured Alcohol. - Domestic alcohol of not less than one hundred eighty degrees (180O)
proof (ninety percent [90%] absolute alcohol) shall, when suitably denatured and rendered unfit for oral intake, be
exempt from the excise tax prescribed in Section 141: Provided, however, That such denatured alcohol shall be
subject to tax under Section 106(A) of this Code: Provided, further, That if such alcohol is to be used for
automotive power, it shall be taxed under Section 148(d) of this Code: Provided, finally, That any alcohol,
previously rendered unfit for oral intake after denaturing but subsequently rendered fit for oral intake after
undergoing fermentation, dilution, purification, mixture or any other similar process shall be taxed under Section
141 of this Code and such tax shall be paid by the person in possession of such reprocessed spirits.
SEC. 135. Petroleum Products Sold to International Carriers and Exempt Entities or Agencies. - Petroleum
products sold to the following are exempt from excise tax:
(a) International carriers of Philippine or foreign registry on their use or consumption outside the Philippines:
Provided, That the petroleum products sold to these international carriers shall be stored in a bonded storage tank
and may be disposed of only in accordance with the rules and regulations to be prescribed by the Secretary of
Finance, upon recommendation of the Commissioner;
(b) Exempt entities or agencies covered by tax treaties, conventions and other international agreements for their
use or consumption: Provided, however, That the country of said foreign international carrier or exempt entities or
agencies exempts from similar taxes petroleum products sold to Philippine carriers, entities or agencies; and
(c) Entities which are by law exempt from direct and indirect taxes.
SEC. 136. Denaturation, Withdrawal and Use of Denatured Alcohol. - Any person who produces, withdraws, sells,
transports or knowingly uses, or is in possession of denatured alcohol, or articles containing denatured alcohol in
violation of laws or regulations now or hereafter in force pertaining thereto shall be required to pay the
corresponding tax, in addition to the penalties provided for under Title X of this Code.
SEC. 137. Removal of Spirits Under Bond for Rectification.- Spirits requiring rectification may be removed from the
place of production to another establishment for the purpose of rectification without prepayment of the excise tax:
Provided, That the distiller removing such spirits and the rectifier receiving them shall file with the Commissioner
their joint bond conditioned upon the payment by the rectifier of the excise tax due on the rectified alcohol:
Provided, further, That in cases where alcohol has already been rectified either by original and continuous
distillation or by redistillation, no loss for rectification and handling shall be allowed and the rectifier thereof shall
pay the excise tax due on such losses: Provided, finally, That where a rectifier makes use of spirits upon which the
excise tax has not been paid, he shall be liable for the payment of the tax otherwise due thereon.
SEC. 138. Removal of Fermented Liquors to Bonded Warehouse. - Any brewer may remove or transport from his
brewery or other place of manufacture to a bonded warehouse used by him exclusively for the storage or sale in
bulk of fermented liquors of his own manufacture, any quantity of such fermented liquors, not less than one
thousand (1,000) liters at one removal, without prepayment of the tax thereon under a permit which shall be
granted by the Commissioner. Such permit shall be affixed to every package so removed and shall be cancelled or
destroyed in such manner as the Commissioner may prescribe. Thereafter, the manufacturer of such fermented
liquors shall pay the tax in the same manner and under the same penalty and liability as when paid at the brewery.
SEC. 139. Removal of Damaged Liquors Free of Tax. - When any fermented liquor has become sour or otherwise
damaged so as to be unfit for use as such, brewers may sell and after securing a special permit from the
Commissioner, under such conditions as may be prescribed in the rules and regulations prescribed by the Secretary
of Finance, remove the same without the payment of tax thereon in cask or other packages, distinct from those
ordinarily used for fermented liquors, each containing not less than one hundred seventy-five (175) liters with a
note of their contents permanently affixed thereon.

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SEC. 140. Removal of Tobacco Products Without Prepayment of Tax. - Products of tobacco entirely unfit for
chewing or smoking may be removed free of tax for agricultural or industrial use, under such conditions as may be
prescribed in the rules and regulations prescribed by the Secretary of Finance. Stemmed leaf tobacco, fine-cut
shorts, the refuse of fine-cut chewing tobacco, scraps, cuttings, clippings, stems, or midribs, and sweepings of
tobacco may be sold in bulk as raw material by one manufacturer directly to another without payment of the tax,
under such conditions as may be prescribed in the rules and regulations prescribed by the Secretary of Finance.
"Stemmed leaf tobacco", as herein used, means leaf tobacco which has had the stem or midrib removed. The term
does not include broken leaf tobacco.
The following are exempt from paying excise taxes, or articles which can be removed,
without paying the excise tax, subject to a condition:
1. Wines and distilled spirits for treatment of tobacco leaf, but with prior approval of the
Commissioner and with corresponding bond
2. Domestic alcohol of not less than 180 degree proof (or 90% absolute alcohol), when
suitably denatured and rendered unfit for oral intake
3. Petroleum products sold to the following are exempt:
a. International carriers of Philippine or foreign registery on their use or consumption
outside the Philippines, provided that the petroleum products sold to these
international carriers shall be stored in a bonded storage tank, or
b. Exempt entities or agencies covered by tax treaties, conventions and other
international agreements for their use or consumption, provided that the country of
said foreign international carrier exempts from similar taxes petroleum products sold
to Philippine carriers, or
c. Entities which are by law exempt from direct and indirect taxes
4. Spirits requiring rectification upon filing of a bond
5. Fermented liquors removed by brewers from brewery to a bonded warehouse used
exclusively for the storage or sale in bulk of fermented liquors, not less than 1000 liters
at one removal
6. Damaged fermented liquor unfit for use removed by brewers upon approval by the
Commissioner. The damaged fermented liquor must be in distinct packages different
from those used for fermented liquors.
7. Tobacco products entirely unfit for chewing or smoking
The proper party to question, or seek a refund of, an indirect tax is the statutory
taxpayer, the person on whom the tax is imposed by law and who paid the same even if
he shifts the burden thereof to another.
o In the case of Silkair v CIR, the excise tax was imposed upon Petron as the
manufacturer of petroleum products. Silkair was claiming for the refund on the
basis of a tax exemption. However, the Court ruled that it was Petron, the
statutory taxpayer who was the propert party to claim the tax refund, not Silkair.
o The Court noted that even if Petron passed on to a tax-exempt airline the burden
of the tax, the additional amount billed to the latter for jet fuel is not a tax but
part of the price which the airline had to pay as a purchaser.

Credit for excise tax on goods exported

(D) Credit for Excise Tax on Goods Actually Exported. - When goods locally produced or manufactured are
removed and actually exported without returning 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 actually exported.
When goods locally produced or manufactured (except coal and coke under sec 151) are
removed and actually exported without returning to the Philippines, whether exported in
their original state or as ingredient or part of any manufactured goods or products, any
excise tax paid on such goods shall be credited or refunded upon submission of actual
exportation and upon receipt of the corresponding foreign exchange payment.

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Who should pay? (Sec 130-131, didnt paste the codal, haba eh.)
For manufactured goods, the manufacturer or producer.
o But, if they are removed without paying the tax, the owner or person having
possession thereof shall be liable.
For imported goods, the importer or the owner.
o But, for tax-free articles brought or imported by persons exempt from tax which
are subsequently sold in the Philippines to non-exempt persons, the purchasers
shall be considered the importers and will have to pay the duty and tax due on
such importation.

When should the excise taxes be paid?

For locally manufactured goods, pay prior to the removal of the article from the place of
production.
For imported goods, pay prior to the release of the article from customs custody.

Documentary Stamp Taxes

SEC. 173. Stamp Taxes Upon Documents, Loan Agreements, Instruments and Papers. - Upon documents,
instruments, loan agreements and papers, and upon acceptances, assignments, sales and transfers of the
obligation, right or property incident thereto, there shall be levied, collected and paid for, and in respect of the
transaction so had or accomplished, the corresponding documentary stamp taxes prescribed in the following
Sections of this Title, by the person making, signing, issuing, accepting, or transferring the same 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, and the same time such act is done or transaction had:
Provided, That whenever one party to the taxable document enjoys exemption from the tax herein imposed, the
other party who is not exempt shall be the one directly liable for the tax.
Documentary stamp taxes are paid by the person making, signing, issuing, accepting or
transferring the document.
o Whenever one party to the taxable document enjoys an exemption from the tax,
the other party who is not exempt shall be the one directly liable for the tax.

SEC. 200. Payment of Documentary Stamp Tax. -

(A) In General. - The provisions of Presidential Decree No. 1045 notwithstanding, any person liable to pay
documentary stamp tax upon any document subject to tax under Title VII of this Code shall file a tax return and
pay the tax in accordance with the rules and regulations to be prescribed by the Secretary of Finance, upon
recommendation of the Commissioner.
(B) Time for Filing and Payment of the Tax. - Except as provided by rules and regulations promulgated by the
Secretary of Finance, upon recommendation of the Commissioner, the tax return prescribed in this Section shall be
filed within ten (10) days after the close of the month when the taxable document was made, signed, issued,
accepted, or transferred, and the tax thereon shall be paid at the same time the aforesaid return is filed.
(C) Where to File. - Except in cases where the Commissioner otherwise permits, the aforesaid tax return shall be
filed with and the tax due shall be paid through the authorized agent bank within the territorial jurisdiction of the
Revenue District Office which has jurisdiction over the residence or principal place of business of the taxpayer. In
places where there is no authorized agent bank, the return shall be filed with the Revenue District Officer,
collection agent, or duly authorized Treasurer of the city or municipality in which the taxpayer has his legal
residence or principal place of business.
(D) Exception. - In lieu of the foregoing provisions of this Section, the tax may be paid either through purchase and
actual affixture; or by imprinting the stamps through a documentary stamp metering machine, on the taxable
document, in the manner as may be prescribed by rules and regulations to be promulgated by the Secretary of
Finance, upon recommendation of the Commissioner.

SEC. 201. Effect of Failure to Stamp Taxable Document. - An instrument, document or paper which is required by
law to be stamped and which has been signed, issued, accepted or transferred without being duly stamped, shall
not be recorded, nor shall it or any copy thereof or any record of transfer of the same be admitted or used in
evidence in any court until the requisite stamp or stamps are affixed thereto and cancelled.
When and how to pay?

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o Return should be filed and the payment made within 10 days after the close of
the month when the taxable document was made, signed, issued, accepted or
transferred;
o In lieu of the above, by buying the required documentary stamp, affixing the
stamp on the document and canceling the stamp with indication of the date of
cancellation, or imprinting the amount of the required documentary stamp tax on
the document with the use of a special machine.
What if I fail to stamp the taxable document?
o An instrument, document or paper which is required by law to be stamped and
which has been signed, issued, accepted or transferred without being duly
stamped, shall
NOT be recorded, or
Any record of transfer of the same be admitted or used in evidence in any
court
until the requisite stamps shall have been paid.
o No notary public or officer authorized to administer oaths shall add his jurat or
acknowledgment to any document subject to the DST unless the proper
documentary stamps are paid.

DST on Original Issue of Shares of Stock

SEC. 174. Stamp Tax on Original Issue of Shares of Stock. - On every original issue, whether on
organization, reorganization or for any lawful purpose, of shares of stock by any association, company or
corporation, there shall be collected a documentary stamp tax of One peso (P1.00) on each Two hundred pesos
(P200), or fractional part thereof, of the par value, of such shares of stock: Provided, That in the case of the
original issue of shares of stock without par value the amount of the documentary stamp tax herein prescribed
shall be based upon the actual consideration for the issuance of such shares of stock: Provided, further, That in the
case of stock dividends, on the actual value represented by each share.
For every original issue of shares of stock, P1 DST is paid for every P200 (or fraction
thereof) of the par value of such shares of stock
o If without par value, base will be the actual consideration
o If stock dividends, the base will be the actual value represented by each share

Example A stock certificate was issued by Safari, Inc with a par value of P500. With the
rate of P1.00 on each P200 or fractional part thereof, the tax is P3.00. (500/2 = 250,
round up to 3. Multiply 3 x P1.)

For other rates and exempt instruments, check codal, Sections 173-199.

Mickey Ingles 66
2A (2C)
Atty. Montero