REPUBLIC OF THE PHILIPPINES DEPARTMENT OF FINANCE BUREAU OF INTERNAL REVENUE Quezon City Bureau of Internal Revenue Ruling 85;

97; 98 000-00 010-2003 Person to Contact: Chief, Law Division Tel. Nos. 926-55-36 / 927-09-63 September 08, 2003 Date: ___________________ ISHIWATA GATMAYTAN & ASSOCIATES No. 12, ADB Avenue, Ortigas Center 1550 Mandaluyong City, Metro Manila Attention: Atty. Ma. Cecilia Salazar-Santos Partner Gentlemen: This refers to your letter dated June 18, 2001 requesting on behalf of your client, Banco de Oro Universal Bank, for a confirmation of your opinion that a Survivorship Agreement executed by the joint depositors under a joint deposit account expressly stipulating that upon death of any one of the joint depositors, the entire remaining balance of the deposit shall belong to the surviving depositor/s and, in effect, may be forthwith withdrawn by the latter notwithstanding the provisions of Section 97 of the 1997 Tax Code. In reply, please be informed that the second paragraph of Section 97 of the 1997 Tax Code, which provides to wit: 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 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. (Emphasis supplied) As can be readily gleaned from the Survivorship Agreement, the funds deposited in the joint deposit account are under co-ownership because the ownership or right over the same belong to different persons, the joint depositors. The share or portion belonging to the joint depositors in the joint deposit account shall be presumed equal and the benefits as well as the charges in the joint account shall be proportional to their respective shares. [Arts. 484 and 485, Civil Code] In the Survivorship Agreement, the joint depositors cannot withdraw any portion of

the said deposit account without the consent of the other. However, upon death of any of 2 010-2003 September 08, 2003 them, the whole amount of the funds shall belong to the surviving co-depositor/s, and may forthwith be withdrawn by the latter. The said provision contained in the agreement is valid and binding between the joint depositors but it has an effect of a gift or donation morits causa made by the deceased co-depositor during his lifetime but effective upon death because the acquisition by the survivor of the share of the decedent in the joint account is considered to be acquired by bequest and hence subject to estate tax under Section 84 of the 1997 Tax Code. Considering that the joint account is co-owned by the depositors, there is a presumption that they owned it equally or in 50/50 shares, in which case, the transfer of the remaining balance of the whole deposit to the surviving co-depositor/s upon death of the other co-depositor pursuant to their Survivorship Agreement is a transfer made by the said depositor in contemplation of death, as provided under Section 85(B) of the 1997 Tax Code, viz: (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 bona fide sale for an adequate and full consideration in money or moneys worth. Thus, upon the death of the co-depositors, the 50% share of the deceased co-depositor in the deposit shall be included in computing the value of his gross estate. Hence, the funds in the joint deposit account cannot be withdrawn by the surviving co-depositor/s unless the Commissioner has certified that the taxes imposed thereon by Title III of the 1997 Tax Code have been paid; Provided, however, That the administrator of the estate or any one (1) of the heirs of the deceased co-depositor may, upon the authorization by the Commissioner, withdraw an amount not exceeding Twenty thousand pesos (P20,000.00) without the said certification. Very truly yours, (Original Signed) GUILLERMO L. PARAYNO, JR. Commissioner of Internal Revenue L-1

G.R. No. 82027 March 29, 1990 VITUG vs.CA Facts: Dolores left a will appointing Rowena as coadministrator of her estate together with her(Dolores) husband Romarico. Romarico asked the court to sell certain property of the estate to cover the advances he made on a savings account which was used as payment of estate tax. Rowena opposed saying that the funds withdrawn from the savings account were conjugal partnership properties (of Dolores and Romarico) and part of the estate, and thus, there is no ground for reimbursement. Romarico insisted that the bank deposit is his exclusive property saying that he acquired the same by virtue of a survivorship agreement executed with his wife Dolores and the bank. Issues: a. b. c. Held: The conveyance in question is not, first of all, one of mortis causa, which should be embodied in a will. A will has been defined as "a personal, solemn, revocable and free act by which a capacitated person disposes of his property and rights and declares or complies with duties to take effect after his death." In other words, the bequest or device must pertain to the testator. In this case, the monies subject of the savings account were in the nature of conjugal funds. Neither is the survivorship agreement a donation inter vivos, for obvious reasons, because it was to take effect after the death of one party. Secondly, it is not a donation between the spouses because it involved no conveyance of a spouse's own properties to the other. It is also our opinion that the agreement involves no modification petition of the conjugal partnership, as held by the Court of Appeals, by "mere stipulation" and that it is no "cloak" to circumvent the law on conjugal property relations. Certainly, the spouses are not prohibited by law to invest conjugal property, say, by way of a joint and several bank account, more commonly denominated in banking parlance as an "and/or" account. In the case at bar, when the spouses opened the savings account, they merely put what rightfully belonged to them in a money-making venture. They did not dispose of it in favor of the other, which would have arguably been sanctionable as a prohibited donation. And since the funds were conjugal, it can not be said that one spouse could have pressured the other in placing his or her deposits in the money pool. The validity of the contract seems debatable by reason of its "survivor-take-all" feature, but in reality, that contract imposed a mere obligation with a term, Whether the survivorship agreement constitutes a conveyance mortis causa Whether the survivorship agreement constitutes a donation inter vivos Whether the survivorship agreement is valid

the term being death. Such agreements are permitted by the Civil Code. Under Article 2010 of the Code: ART. 2010. By an aleatory contract, one of the parties or both reciprocally bind themselves to give or to do something in consideration of what the other shall give or do upon the happening of an event which is uncertain, or which is to occur at an indeterminate time. Under the aforequoted provision, the fulfillment of an aleatory contract depends on either the happening of an event which is (1) "uncertain," (2) "which is to occur at an indeterminate time." A survivorship agreement, the sale of a sweepstake ticket, a transaction stipulating on the value of currency, and insurance have been held to fall under the first category, while a contract for life annuity or pension under Article 2021, et sequentia, has been categorized under the second. 25 In either case, the element of risk is present. In the case at bar, the risk was the death of one party and survivorship of the other. However, as we have warned: But although the survivorship agreement is per se not contrary to law its operation or effect may be violative of the law. For instance, if it be shown in a given case that such agreement is a mere cloak to hide an inofficious donation, to transfer property in fraud of creditors, or to defeat the legitime of a forced heir, it may be assailed and annulled upon such grounds. No such vice has been imputed and established against the agreement involved in this case. There is no demonstration here that the survivorship agreement had been executed for such unlawful purposes, or, as held by the respondent court, in order to frustrate our laws on wills, donations, and conjugal partnership. The conclusion is accordingly unavoidable that the wife, having predeceased her husband, the latter has acquired upon her death a vested right over the amounts under the account. Insofar as the respondent court ordered their inclusion in the inventory of assets left by Mrs. Vitug, we hold that the court was in error. Being the separate property of petitioner, it forms no more part of the estate of the deceased.

Note: Please read BIR Rev. Ruling No. 010-2003, where the BIR Ruled that a Survivorship Agreement constitutes, for tax purposes, a transfer in contemplation of death and therefore, subject to estate tax under Section 85 (B) of the National Internal Revenue Code. For the complete text of the ruling, please visit www.bir.gov.ph Value-added tax (VAT) is a tax on consumption. It is imposed on every sale of goods or services, or importation of goods. As its name suggests, it is a tax

limited to the value added. Therefore, VAT applies only to the value added by the seller at each stage as the goods or services pass along the distribution chain. VAT is also an indirect tax since the seller who is directly and legally liable for the payment of VAT is not necessarily the person who ultimately bears the burden of the tax. By adding or including the tax to the selling price, the seller shifts the burden of the tax to the immediate buyer and, ultimately, the final consumer. Hence, it is actually the final purchaser or consumer of such goods and services who bears the burden of tax. The current VAT rate is 12 percent which applies to all transactions subject to VAT, including sales to the government. Although subject to 12 percent VAT, what makes the VAT on sales to government unique is the requirement under Revenue Regulations (RR) No. 16-2005 for the government or any of its political subdivisions, instrumentalities or agencies, including government-owned or -controlled corporations (GOCCs), to withhold 5 percent VAT on its payments for purchases of goods and services. It may be noted that while the usual manner of collecting VAT is through tax credit method where the input VAT (i.e., the VAT paid on purchases) is credited against the output tax (i.e., VAT on sales) to arrive at the net VAT payable (effectively the tax on value added), in case of sales to government, the 5 percent final withholding VAT represents already the net VAT payable of the seller. Therefore, the effect of this 5 percent final withholding VAT essentially limits the amount of input tax that the seller may credit against the 12 percent output VAT to only 7 percent (12 percent output - 5 percent net VAT payable = 7 percent standard input VAT). The difference between the actual input VAT related to sales to government and the 7-percent standard input VAT shall be adjusted to the sellers cost or expense. Hence, the seller may incur additional cost if the actual input VAT exceeds the 7-percent standard input VAT. On the other hand, if actual input VAT is less than the said standard input VAT, the seller, in effect, recognizes additional income. To illustrate: If the seller sells goods at P 100, the total invoice price inclusive of 12 percent output tax is P112. If the seller incurred a cost of P100.80, inclusive of VAT, to purchase the goods sold, the actual input tax that he may claim is P10.80. However, the revenue regulation limits the input tax to 7 percent to arrive at the 5 percent final withholding VAT (P12 output tax - P7 input tax = P5 withholding vat) which is essentially the net VAT payable of the seller. The difference between the actual input tax of P10.80 and the standard input tax of P7, which is P 3.80, shall be recorded as a cost or expense account. On the other hand, if the actual cost incurred by the seller for the purchase of the

goods is P56, inclusive of VAT, the input tax therein is P6. In this case, the standard input tax is greater than the actual input tax. Hence, the difference of P1 (P7 - P6) must be credited against cost or expense which effectively results in additional income. Since not all input taxes can be claimed against the output tax related to the sales to government, it is important to evaluate the costs incurred related to such sales. In this respect, it is worthy to note the timing in recognizing input VAT on sales of goods to the government and withholding of VAT therein. For sales of goods, VAT is reported as of the time of sale while the withholding of VAT will be made upon payment. Under such scenario, when should the seller properly claim the VAT credit? Is it at the time of sale or time of receipt of payment? In practice, the VAT on sales to government is reported at the time of sale of goods. This is consistent with the Tax Code provision where sale of goods is required to be reported at the time of sale. Effectively, when the seller reports the sales to government at the time of sale, the VAT due on the seller must be zero since the law provides for the standard allowable input tax. Hence, the net VAT payable of the seller must equal the VAT withheld by the government. However, timing issue arises when the payment of the government happens on a different quarter, and accordingly, the VAT will be withheld on such quarter. In this respect, may the seller claim the 5 percent withholding VAT at the time he reports the sales of goods notwithstanding that the VAT has not yet been withheld? The existing revenue regulations and circulars are not clear on this matter. As discussed above, since the timing of the recognition of input VAT credit will create a significant impact on the cost or expense of the seller, it is but proper that the Bureau of Internal Revenue (BIR) issue a definitive ruling on this issue. We hope that the BIR will address the issue promptly and provide a clarificatory circular to answer this practical question. Value-added tax (VAT) is a tax on consumption. It is imposed on every sale of goods or services, or importation of goods. As its name suggests, it is a tax limited to the value added. Therefore, VAT applies only to the value added by the seller at each stage as the goods or services pass along the distribution chain. VAT is also an indirect tax since the seller who is directly and legally liable for the payment of VAT is not necessarily the person who ultimately bears the burden of the tax. By adding or including the tax to the selling price, the seller shifts the burden of the tax to the immediate buyer and, ultimately, the final consumer. Hence, it is actually the final purchaser or consumer of such goods and services who bears the burden of tax.

The current VAT rate is 12 percent which applies to all transactions subject to VAT, including sales to the government. Although subject to 12 percent VAT, what makes the VAT on sales to government unique is the requirement under Revenue Regulations (RR) No. 16-2005 for the government or any of its political subdivisions, instrumentalities or agencies, including government-owned or -controlled corporations (GOCCs), to withhold 5 percent VAT on its payments for purchases of goods and services. It may be noted that while the usual manner of collecting VAT is through tax credit method where the input VAT (i.e., the VAT paid on purchases) is credited against the output tax (i.e., VAT on sales) to arrive at the net VAT payable (effectively the tax on value added), in case of sales to government, the 5 percent final withholding VAT represents already the net VAT payable of the seller. Therefore, the effect of this 5 percent final withholding VAT essentially limits the amount of input tax that the seller may credit against the 12 percent output VAT to only 7 percent (12 percent output - 5 percent net VAT payable = 7 percent standard input VAT). The difference between the actual input VAT related to sales to government and the 7-percent standard input VAT shall be adjusted to the sellers cost or expense. Hence, the seller may incur additional cost if the actual input VAT exceeds the 7-percent standard input VAT. On the other hand, if actual input VAT is less than the said standard input VAT, the seller, in effect, recognizes additional income. To illustrate: If the seller sells goods at P 100, the total invoice price inclusive of 12 percent output tax is P112. If the seller incurred a cost of P100.80, inclusive of VAT, to purchase the goods sold, the actual input tax that he may claim is P10.80. However, the revenue regulation limits the input tax to 7 percent to arrive at the 5 percent final withholding VAT (P12 output tax - P7 input tax = P5 withholding vat) which is essentially the net VAT payable of the seller. The difference between the actual input tax of P10.80 and the standard input tax of P7, which is P 3.80, shall be recorded as a cost or expense account. On the other hand, if the actual cost incurred by the seller for the purchase of the goods is P56, inclusive of VAT, the input tax therein is P6. In this case, the standard input tax is greater than the actual input tax. Hence, the difference of P1 (P7 - P6) must be credited against cost or expense which effectively results in additional income. Since not all input taxes can be claimed against the output tax related to the sales to government, it is important to evaluate the costs incurred related to such sales. In this respect, it is worthy to note the timing in recognizing input VAT on sales of goods to the government and withholding of VAT therein. For sales of goods, VAT is reported as of the time of sale while the withholding of VAT will be made upon payment. Under such scenario, when should the

seller properly claim the VAT credit? Is it at the time of sale or time of receipt of payment? In practice, the VAT on sales to government is reported at the time of sale of goods. This is consistent with the Tax Code provision where sale of goods is required to be reported at the time of sale. Effectively, when the seller reports the sales to government at the time of sale, the VAT due on the seller must be zero since the law provides for the standard allowable input tax. Hence, the net VAT payable of the seller must equal the VAT withheld by the government. However, timing issue arises when the payment of the government happens on a different quarter, and accordingly, the VAT will be withheld on such quarter. In this respect, may the seller claim the 5 percent withholding VAT at the time he reports the sales of goods notwithstanding that the VAT has not yet been withheld? The existing revenue regulations and circulars are not clear on this matter. As discussed above, since the timing of the recognition of input VAT credit will create a significant impact on the cost or expense of the seller, it is but proper that the Bureau of Internal Revenue (BIR) issue a definitive ruling on this issue. We hope that the BIR will address the issue promptly and provide a clarificatory circular to answer this practical question.