CHAPTER 1-INTRODUCTION TO CONSUMPTION TAXES

THE CONCEPT OF CONSUMPTION AND CONSUMPTION TAX

 A tax upon acquisition or utilization of goods or services by any person. The utilization of goods or services may be
through purchase, exchange or other means. This utilization is subject to a tax called consumption tax.
 Consumption is levied without regard to the purpose of the purchaser or consumer whether it is for business, personal or
charity use.

Rationale of Consumption Tax

 Savings formation
 Rationalization of the Benefit Received Theory
 Wealth redistribution to society

Income tax vs. consumption tax

Income tax Consumption

Nature Tax upon receipt of income Tax upon usage of income or capital
Scope/coverage A tax to the capable A tax to all
Theoretical basis Ability to pay theory Benefit received theory

Types of consumption Purchaser Status

1. Domestic consumption Resident Taxable
2. Foreign consumption Non-resident Exempt/Effectively non-taxable

*Destination principle- only goods and services destined for consumption in the Philippines are subject to consumption tax while
those destined for consumption abroad are not subject to consumption tax.
TYPES OF DOMESTIC CONSUMPTION AS TO SOURCE
1. Domestic sales - purchases from resident sellers
2. Importation - purchases from abroad by non-residents

CONSUMPTION TAX ON DOMESTIC SALES

 The domestic consumption of resident buyers from resident sellers commonly known as purchase is subject to a
consumption tax called a business tax. It is called business tax because the consumption tax is indirectly imposed upon
sellers which are businesses.

BUSINESS TAX VS. VAT ON IMPORTATION: A DIFFERENTIATION

VAT on importation Business Tax

Imports from business or non- Purchases from businesses
Scope of tax business only
Type of consumption tax Pure form Relative form
Statutory taxpayer Buyer Seller
The economic taxpayer Buyer Buyer
Nature of imposition Direct Indirect
Basis of tax Total purchase cost Sales or receipts

 Border control on goods is managed by the Bureau of Customs (BOC). Goods have to be cleared through the BOC first
before they are allowed to enter the Philippines. With this in-placed control mechanism, the VAT on importation is
conveniently collectible through the BOC. Thus, the law tasked the BOC to collect the tax in behalf of the BIR.

Business tax rules on domestic sales

 The seller must be engaged in business to be subject to business tax.

Value Added Tax rules on importation

 The vat on importation is imposable whether the buyer (importer) or seller is engaged or not engaged in business.
 TYPES OF CONSUMPTION TAXES
1. Percentage Tax - tax of various rates from 0.60% to 30%
2. Value Added Tax - a consumption tax of 12%
3. Excise Tax - an ad valorem or specific tax, which is imposed in addition to VAT or percentage tax, only on certain goods
or services

TYPES OF DOMESTIC CONSUMPTION AS TO TAXABILITY

1. Exempt consumption
These are consumption of goods or services that are not subject to consumption taxes.
2. Consumptions specifically subject to percentage tax
This includes consumption of services that are not subject to VAT but are imposed with a specific percentage tax.

3. Vatable consumption
This includes all other consumption that are neither exempted nor subject to percentage tax.

Types of Consumption Per Type of Domestic Consumption

Importation Domestic Sales/Receipts

Exempt consumption Exempt importation Exempts sales/receipt
Service specifically subject to a Services specifically subject to a %
Services subject to a % tax % tax tax
Vatable consumption Vatable importation Vatable sales or receipt

Exempt Consumption
 Exempt consumptions are neither subject to percentage tax nor value added tax. If they are sourced from abroad, they
are exempt from VAT on importation. If sourced from within, they are exempt from business tax.

Basis of exemption from consumption tax

Basis of exemption VAT on importation Business Tax

The goods imported is a human The goods, services or property
Human necessity necessity sold is a human necessity
The importation does not
constitute a domestic The seller is not engaged in
Out of scope of tax consumption business
The importation is exempted as
a tax incentive to certain The sales or receipt is exempted
Tax incentive importers as a tax incentive to certain sellers
The importation is exempted by The sales or receipt is exempted
International comity treaty by treaty

SERVICES SPECIFICALLY SUBJECT TO PERCENTAGE TAX

 Services specifically subject to percentage tax are taxable consumption of services but subject only to a specific
percentage tax rate set by the NIRC. Consumption of these services are not subject to VAT.

VATABLE IMPORTATION OR SALES

All other importation or sales of either goods or services that are not exempted or specifically imposed a percentage tax is vatable.

The structure of the VAT on Importation

VAT on importation
Import of service Import of goods
Exempt Exempt Exempt
% tax Percentage tax -
VAT Final withholding VAT VAT on importation

 The import of services by certain VAT-exempt person is exempt from VAT. Currently, there is only one import of service
that is subject to a percentage tax. The import of other services is subject to VAT called the "final withholding VAT." The
VAT is computed as 12% of the contract price of the services and is paid to the BIR.

 If the import of goods is not exempted, the importation is subject to VAT on importation. The VAT on importation is
computed as 12% of the landed cost of the goods and is paid to the BOC.

The Structure of the Business Tax

Business Tax
Sales of services Sales of goods
Exempt Exempt receipt Exempt sales
Receipt specifically
% tax subject to a % tax -
VAT Vatable receipts Vatable sales

 Vatable sales or receipts are subject to 12% VAT if the taxpayer is a VAT taxpayer and to a 3% general percentage tax if
the taxpayer is a non-VAT taxpayer.

To sum up, readers must note the following:

Terminology Meaning
Exempt to VAT and percentage
a. Exempt sales or receipts tax
Subject to a particular
percentage tax and is exempt
b. Services specifically subject to % tax from VAT
Subject to either VAT or 3%
c. Vatable sales or receipts percentage tax

VAT on Importation vs. VAT on Sales in Business Tax

 The VAT on importation is directly computed on the landed costs or total purchase costs of importation without any
deduction or tax credit.
 The VAT imposed on sales or receipt in business taxation is unique as it is theoretically imposed on the value added -
the amount of mark-up imposed by sellers on their purchase costs. The VAT on sales or receipt follows a tax credit
method wherein a VAT of 12% is imposed on sales and is reduced by VAT paid by the business on its purchases.

The tax due is computed as:

Output VAT (12% of sales or receipts) P xxx,xxx
Less: Input VAT (12% VAT paid on purchases) xxxxxxx
VAT due Pxxxxxx

Input VAT is claimed as tax credit against output VAT when due or paid not when goods are sold. The VAT does not require a
perfect matching approach; hence, it is not imposed on the gross profit.

This feature of the VAT on sales or receipts is unique compared to Percentage taxes which is merely computed as a fixed
percentage of sales or receipts.

The Excise Tax

Excise tax is imposed on the consumption of commodities such as:
a. sin products such as alcohol and cigarettes
b. non-essential commodities, such as automobiles and jewelry
c. non-essential services, such as cosmetic surgery
d. products which are environmentally degrading in their production or consumption, such petroleum and minerals
 Excise tax is an additional imposition to VAT or percentage tax. Unlike business taxes such as percentage taxes and VAT
on sales or receipts which are levied at the point of sales, excise tax levied at the point of production or importation. The
excise tax on excisable goods is normally imposed before the goods are sold by domestic producers or upon their
importation by importers.
Chapter 2-VALUE ADDED TAX ON IMPORTATION

IMPORTATION
 Importation refers to the purchase of goods or services by the Philippine residents from non-resident sellers.
Type of Consumption Tax on importation
1. VAT on importation – for the import of goods
2. Final withholding VAT – for the purchase of services from non-residents

Comparison between the consumption Tax on importation

VAT on importation Final withholding VAT
Object consumption Goods Services
Imposed upon Importers/buyers Foreign service providers
Statutory taxpayer Importers/buyers Resident purchaser of the
service*
Nature Direct consumption tax Indirect business tax
Tax basis Landed cost Contract price
Collecting agency BOC BIR
Timing of payment Before withdrawal of goods After the month of payment

*Individuals engaged in business and corporations

*The final withholding VAT is 12% of the contract price for services rendered by non-residents. It is remitted to the BIR

The import of goods is either:

 Exempt importation
 Vatable importation

EXEMPT IMPORTATION
A. Importation of exempt goods
Certain goods considered basic necessities are not subject to the VAT on importation, such as:
 Agricultural and marine food products in their original state

 Fertilizers, seeds, seedlings and fingerlings, fish, prawn, live stocks and poultry feeds, including ingredients used in the
manufacture of finished feeds

 Books and any newspaper, magazine, review, or bulletin which appear at regular intervals with fixed prices for
subscription and sale and which is not devoted principally to the publication of paid advertisements

 Passengers or cargo vessels and aircrafts, including engine, equipment and spare parts thereof for domestic or
international transport

B. Importation by VAT-exempt persons

 International shipping or air transport operators on their import of fuel, goods, and supplies

 Cooperatives 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

 PEZA locators on their import of goods

C. Quasi-importation
 Personal and household effects belonging to residents of the Philippines returning from abroad and non-resident citizens
coming to resettle in the Philippines.

 Professional instruments and implements, wearing apparel, domestic animals, and personal household effects belonging
to persons coming to settle in the Philippines, for their own use and not for sale, barter or exchange

D. Importation which are exempt under special laws and international agreement

BASIC HUMAN FOOD AND RELATED PRODUCTS

Agricultural or marine food products in original state
  Import exemption is limited to agricultural or marine food products in their original state or those which undergone simple
processing. Good that underwent advanced processing are vatable.

Examples of exempt agricultural or marine food products in original state:

1. Grapes, apples, oranges and other fruits
2. Vegetables, tea, ginseng
3. Rice, corn, coffee beans and other edible farm products
4. Marine foods such as fish and crustaceans
5. Milk, eggs, and meat for human consumption

Livestock includes cow, bulls, calves, pigs, sheep, goats, and rabbits. Poultry shall include fowls, ducks, geese and turkey. Marine
food shall include fish and crustaceans such as, but not limited to eels, trout, lobster, shrimps, prawns, oysters, mussels and clams.

The term simple processing includes:

a. Acts of preparation for the market
b. Acts of preservation or
c. Acts of packaging including advanced technological means of packaging

Hence, the following agricultural or marine food products which underwent processing are also exempt:
With simple act of With simple act of With acts of packaging
preparation preservation
Husked rice Sundried fruits Tetra-packed fresh fruit juice
Corn grits Salted meat Shrink wrapped meat
Raw sugar cane sugar Smoked fish
Roasted beans Dried fish
Ordinary salt Frozen meat or fish
Ground meat
Copra
Boiled eggs
Lechon

 Processed agricultural or marine food products pertain to those which have undergone changes in their chemical
compositions or have undergone complex processing or treatment or are utilizing advanced technologies in their
processing.

Example of vatable processed agricultural or marine food products:

Refined sugar Canned sardines Flour
Wine or Vinegar Butter Marinated milk fish
Vegetable or coconut oil

*The importation of processed products and those considered not in their original state shall be subject to VAT on importation.

Use or purpose dictates vatability

Cockfighting chickens are vatable since they are primarily intended for human amusement. They are only food when they lose.
However, chicken produced for meat or eggs are VAT-exempt human foods.

Farm or fishery inputs

 Marine or agricultural inputs intended for the production of marine or agricultural food products which are ultimately
intended for human consumption are also VAT-exempt.

 The importation of farm or fishery inputs such as seeds, seedlings, breeding stocks and genetic materials are exempt.
Likewise, foods of these inputs such as fertilizers and feeds including ingredients manufacture of finished feeds are also
VAT-exempt.

 Products intended as, maintenance of crops, livestock or poultry and supplemental implements of agricultural or inputs
such as pesticides, herbicides, animal medicines, fishing equipment, fishing boats, tractors, plows, driers threshers and
harvesters are vatable.

 Zoo animals, race horse, aquarium fish, fighting cocks and pets are not intended for human consumption; hence, vatable.
Feeds of these non-food animals called “specialty feeds” is likewise vatable.
  Ingredients of feeds for animal food intended for ultimate human consumption is VAT-exempt but ingredients for the
processing of human food is vatable.

Rules on VAT taxation of poultry and feeds

 Livestock Poultry Pets
Importation of X X ✓
Importation of feeds for X X ✓
Importation of feed X X ✓
Ingredients for

*The importation of the ingredients for the processing of foods for human consumption is vatable because processed human foods
are vatable.

BOOKS, NEWSPAPERS, MAGAZINE, REVIEW BULLETINS

Conditions for exemption of newspaper, magazine review or bulletin:
 They must appear at regular intervals with fixed prices for subscription.
 The sale must not be devoted principally to the publication of paid advertisements.

PASSENGER OR CARGO VESSELS AND AIRCRAFTS

The VAT exemption covers the import of passenger or cargo vessels and aircrafts, including engine, equipment and spare parts
thereof for domestic or international transport operations.

IMPORTATION BY VAT-EXEMPT PERSONS

International shipping on air transport operators

 The exemption is limited to the importation of fuel, goods, and supplies. Although these goods are supplies are
physically brought into the Philippines, they are not intended to be consumed herein. They will ultimately be used in
international transport. This consumption is a foreign consumption rather than domestic consumption.
Illustration 1
Malaysian Ferries is an international shipping carrier. It imported to the Philippines fuel and supplies to be used in shipping
operations.
Note that the fuel goods or supplies will be consumed in the high seas or in foreign territories outside the country. The importation
is not a domestic consumption but a foreign consumption; hence, it is exempt from VAT.

Illustration 2
Pinoy Airline imported jet fuels from Iraq at a total cost of P50,000,000, 40% of the importation is declared for domestic airline
operations while 60% is declared for international transport operations.
60% of the P50,000,000 importation will be consumed in foreign airspaces. This is not for domestic consumption; hence, it is
exempt from VAT. Only the 40% portion which will be used domestically will be subject to the VAT on importation.

Agricultural cooperatives
The states of Agri-coop as VAT-exempt person is limited to importation of direct farm inputs, machineries and equipment, including
their spare parts (RA 9337)
Conditions for exemption:
 The cooperative must be an agricultural cooperative duly registered and in good standing with the Cooperative
Development Authority (CDA).
 The importation involves direct farm inputs, machineries, equipment and their spare parts to be used directly and
exclusively in the production or processing of their produce.

Illustration 1
Abra Farmer’s Cooperative imported the following equipment:
Tax Treatment
Tractors and threshers to be used by the cooperative Exempt
Plows and water pumps to be resold to members Vatable
Fertilizers and hybrid seeds to be sold by the cooperative Exempt
Herbicides and pesticides to be used by the cooperative Exempt
Cars for the use of cooperative directors and officers Vatable

Illustration 2
Assume that fertilizers and herbicides in the foregoing illustration is subsequently sold by Abra Farmer’s cooperative to Jon Juan,
member farmer. What is the tax consequence of the sale?
Jon Juan shall be treated as importer and shall be subject to VAT but only on vatable goods such as herbicides. Since the fertilizer
is a VAT-exempt goods, Jon Juan shall not pay VAT on importation thereon.

Ecozone-locators
 Ecozone are designated places of economic activity for the production of goods or services for the export market. By legal
fiction, economic zones are considered foreign countries and are deemed outside Customs territory. Thus, the importation
of goods into the economic zones by locators is exempt not only from VAT on importation but also from custom duties.
The exemption from VAT covers any goods, supplies or machineries brought into the ecozones by locators.

Customs territory refers to the portion of the Republic of the Philippines outside of designated special economic zones (Ecozone)

“Technical importation” refers to the purchase of non-Ecozone Philippine residents from the Philippine Ecozone-registered
enterprises. By legal fiction ecozones are considered foreign territories.

Illustration 1
Winshield Corporation, a PEZA locator, sold scrap metals to Recycle Industries Corporation, a customs territory buyer (I.e., buyer
outside the ecozone).
Recycle Industries shall pay the VAT on importation directly to the Bureau of Customs (BOC). Winshield Corporation is not
required to impose the VAT on its sales. However, it must be furnished a copy of the receipt issued by the BOC for the VAT
payment.

QUASI-IMPORTATION
1. Import of personal and household effects belong to residents of the Philippines returning from abroad or non-resident
citizens coming to resettle in the Philippines
2. Professional instruments and implements, wearing apparel, domestic animals, and personal household effects belonging
to persons coming to settle in the Philippines, for their own use and not for sale, barter or exchange
Condition for exemption:
 The personal and household effects belong to Philippine residents or non-resident intending to resettle in the Philippines
 The goods are exempt from Custom duties
*Note that these goods are past consumptions which have been previously subjected to consumption tax herein.

Illustration 1
Mr. Siman was employed abroad as an OFW. He went abroad taking with him personal effects such as clothes, piece of personal
jewelry and gadgets aggregating P300,000 in value. When his contract ended, he returned to the Philippines bringing with him the
same effects which now have an aggregate value of P280,000.
The importation (i.e., return) of the personal effects will not be subject to VAT since these are past purchases which had been
subjected to consumption tax when purchased in the Philippines.

Illustration 2
While employed abroad, Mr. Siman purchased an iPhone 6 worth P30,000 for selfie purposes. Mr. Siman brought the iPhone to the
Philippines when his employment contract ended.
The importation of the iPhone shall not be subject to VAT on importation for the same reason that it is not a present consumption of
household effects when it was brought into the Philippines. Furthermore, purchases abroad by non-residents are not subject to
consumption tax in the Philippines. Their subsequent importation to the Philippines is exempt from VAT on importation.

Importation of professional instruments and implements, wearing apparel, domestic animal and personal household
effects

Conditions for exemption:

 The goods belong to the persons who come to settle in the Philippines.
 The goods must accompany the person upon arrival or withing 90 days before or after his/her arrival.
 There must be evidence to show that the change of residence is bona fide.
 The importation is not a vehicle, machinery or the equipment used in the manufacture of merchandise of any kind in
commercial quantity.

Illustration 1
Mr. Marquez, a professional boxer, applied for an application to migrate in the Philippines and was granted by the Philippine
government. He brought his boxing gears and household effects including his personal car to the Philippines.
The importation of professional instruments and household effects are exempt but the importation of the car is subject to VAT.

Illustration 2
Mr. Kung Fu, a Chinese martial arts master, arrived in the Philippines with an immigration visa. He brought with him the following
which he declared as his personal effects:

10 pieces of brand new iPhone 6 P 150,000 each

10 pieces of brand new IBM laptops P80,000 each
5 desktop computers P40,000 each
1 piece of used laptop P 30,000
1 piece of used iPhone 4S 20,000
1 piece of used calculator 400
Used clothes, apparel and travelling bag 7,000

The used laptop, iPhone 4S, calculator and apparel are apparently personal effects which are past consumptions; hence, these are
exempt from VAT.
The nature and quantity of the iPhone 6, IBM laptops and desktop computers is clearly inconsistent with the concept of personal
effects. These items are unquestionably for domestic consumption; hence, subject to VAT.

IMPORTATION EXEMPT UNDER SPECIAL LAWS AND TREATIES

 Import that are exempted by special laws, treaties and international agreements to which the Philippine government is a
signatory is not subject to the VAT on importation.

THE VAT ON IMPORTATION

Other importation of goods is subject to VAT regardless of whether the:
1. Importer is engaged or not engaged in the trade business.
2. Importer is a VAT or non-VAT business
3. Importation is for business or personal use
4. Non-resident seller is engaged or not engaged to business

The basis of the VAT on importation

The VAT on importation is computed as 12% of the total landed cost of the importation.
Composition of landed cost:
A. Dutiable value
B. Other in-land costs
1. Custom duty
2. Excise tax, if nay
3. Other in-land costs, such as:
a. Bank charge
b. Brokerage fee
c. Arrastre charge
d. Wharfage due
e. Documentary stamp tax
f. Import processing fees

The dutiable value, also called transaction value, refers to the total value used by the Bureau of Customs in determining
customs duties, such as:
1. Cost of the goods
2. Freight
3. Insurance
4. Other charges and costs to bring goods herein

 The dutiable vale encompasses all costs incurred in bringing the goods up to the Philippine port and prior t any other in-
land costs of import

*The customs duty is computed as: Dutiable value x Exchange rate x Rate of Duty

Illustration 1
MRS Trading Corporation imported goods from abroad for domestic Sale. Shown below are the details of the importation.
Peso value of supplier’s invoice P2,000,000
Other costs incurred to bring goods to Philippine port 70,000
Other charges before withdrawal of goods, including 85,000
P5,000 facilitation fee paid to a fixer
Custom duties 10%
Freight of goods from BOC warehouse to 20,000
MRS warehouse in Makati City

The customs duties shall first be computed as

Peso value of supplier’s invoice P2,000,000
Other costs to bring goods to Philippine 70,000
Dutiable value P2,070,000
Rate of duty 10%
Customs duties P 207,000

The VAT on importation shall be computed as:

Dutiable value P2,070,000
Other official costs paid before withdrawal of goods
From the BOC 80,000
Customs duties 207,000
Total landed cost P2,357,000
Multiply by: VAT rate 12%
VAT on importation P282,840

IMPORT OF SERVICES
The purchase of services from non-residents may be:
1. VAT-exempt
2. Subject to specific percentage tax
3. Subject to final withholding VAT

 Our current tax law views the final withholding VAT as a business tax. The VAT is deemed imposed upon non-resident
service providers. For this purpose, the law conclusively presumes that the non-resident sellers are engaged in business
even if their sales transactions are merely casual,
 Since non-residents cannot be obligated to file tax returns due to territorial consideration, the resident buyer is obligated to
“withhold” the VAT and to remit the same to the government, thus, the term “final withholding VAT”. The VAT is deemed
passed-on by the non-resident service provider which, in turn, is withheld by the resident purchaser of the service.

As the withholding tax, the obligation to withhold the VAT technically exists only if:
1. The service is rendered within the Philippines; and
2. The payor-purchaser of the service is an individual engaged in business or a corporation

Illustration 1
Eagle Company sought the help of Mr. Putin, a repairman doing business in Australia, to fix its malfunctioning machinery in the
Philippines. The contract price was P1,000,000. Eagle Company shall pay P120,000(12%x P1M) final withholding VAT to the BIR.
Query:
1. What if Mr. Putin is not engaged in business in Australia? The contract price is still subject to the12% final withholding VAT. Mr.
Putin is conclusively presumed engaged in business.
2. What if Eagle Company is a non-profit institution? The contract price is still subject to the 12% final withholding VAT. Even non-
profit corporations are required to withhold.
3. What if Eagle Company is an ecozone locator? The contract price will not be subjected to the 12% final withholding VAT
because ecozone locators are outside the country (i.e. non-residents) by legal fiction.

VAT-EXEMPT IMPORT OF SERVICES

The following are exempt from the final withholding Vat:
a. Purchase of services from non-residents when the service is rendered abroad
b. Purchase of services from non-residents when the individual purchaser is not engaged in business
c. Purchase of services from non-residents by VAT-exempt persons such as ecozone locators

IMPORT OF SERVICES SPECIFICALLY SUBJECT TO PERCENTAGE TAX

  The only import of service that is currently subject to a percentage is the direct acquisition of insurance cover from abroad.
The premium payment on insurance policies directly sourced abroad is subject to 5% percentage tax. The policyholder
shall pay the same to the BIR.

VATABLE IMPORT OF SERVICES

 All other import of services is subject to final withholding VAT. The final withholding VAT is computed as 12% of the
contract price.

Examples of vatable import of services:

1. Lease or use of properties or property rights owned by non-residents
2. Services rendered to local insurance companies, with respect to reinsurance premiums payable to non-residents
3. Other services rendered in the Philippines by non-residents.

Illustration 1
Session Food Corporation is licensed franchise of Ronald Inc., a non-resident foreign franchisor. During the month, Session is due
to pay P800,000 royalties.

The final withholding VAT shall be:

Royalties P 800,000
VAT tax rate 12%
Amount due Ronald Inc. P 96,000

The amount to be remitted to Ronald, Inc., abroad shall be:

Royalties P 800,000
Less: Final income tax (P800,000 x 30%) 240,000
Amount due Ronald Inc. P 560,000

Illustration 2
Phil Mines imported a customized ozone generator from Chen Company in China. Before shipment, Phil Mines had the machine
customized by Guangzu Industries in China for P500,000. The generator has a total landed cost of P1,200,000 on importation.
Chen Company installed the generator at Phil Mine’s processing plant in the Philippines for P220,000.
Phil Mines shall pay the following VAT on importation to the BOC:
Import landed cost P 1,200,000
Multiply by: 12%
VAT om importation P 144,000

Phil Mines shall likewise pay the following final withholding VAT to the BIR:
Installation service contract price P 220,000
Multiply by: 12%
Final Withholding VAT P 26,400

 Using BIR Form 1600, the withholding VAT is remitted monthly on or before the 10 th day of the following month after the
withholding was made, except for taxes withheld for December which shall be files or paid on or before January 25 of the
following year.

Treatment of the VAT on importation and the Withholding VAT

1. If the resident purchaser is a VAT-registered business, it can claim the VAT on importation or withholding VAT as input
VAT creditable against its output VAT.
2. If the resident purchaser is a non-Vat business, The VAT on importation or final withholding VAT shall be part of the cost
of purchase of goods or services and shall be treated as asset or expense.
3. If the purchaser is not engaged in business, the VAT on importation is merely added to the costs of the goods imported.
 CHAPTER 3: INTRODUCTION TO BUSINESS TAXATION
Nature of Business Tax
1. Relative Consumption Tax- Business tax is a tax on the consumption of
goods and services and is imposable only when the seller is a business.
2. Indirect Tax- The tax is collected from the seller rather than from the buyer-
consumer.
3. Privilege Tax- Business tax is also viewed as a tax on the privilege of
business.
4. National Tax- Business tax is imposed by the national government.
Types of Business Tax
1. Percentage Tax
2. Value Added Tax
3. Excise Tax
Comparison of Business Taxes
Point of VAT % tax Excise tax
differences
Timing of Sale Sale Production/ Import
imposition
Nature Primary tax Primary tax Additional tax
Subject businesses Any business, in Any business, in Only producers or
general general importers of
excisable products
or services
Taxpayers Business only Business only Business or non-
business
Usual taxpayers Big businesses Small businesses Big or small
businesses
Accounting Liability Expense Asset or Liability
treatment

Procedures of Business Taxation

1. Evaluate if the sales activity qualifies as a business.
a. If not, the activity is exempt from business tax.
b. If yes, the business must register for business tax. Proceed to the succeeding
procedures.
2. Identify the taxable person.
a. If individual - include all proprietorship businesses
including branches of the individual taxpayer
b. If juridical - include all branches of the corporate taxpayer.
 3. Determine the activity type:
a. If sale of goods - determine the sales
b. If sales of services - determine the receipts
4. Classify the sales or receipts whether they are:
a. Exempt sales or receipts - pay no business tax
b. Sales or receipts subject to specific percentage tax - pay specific percentage tax
c. Vatable sales or receipts
5. Determine taxpayer registration type.
a. If taxpayer is VAT registered, pay VAT on vatable sales or receipts. r
b. If taxpayer is non-VAT registered, pay the 3% general percentage tax then
determine the magnitude of 12-month vatable sales at the end of every month:
- If it exceeds P3,000,000 - the person shall register as VAT taxpayer; pay VAT
prospectively effective on the succeeding monthly vatable sales or receipts.
- If it does not exceed P3,000,000 - the person shall continue paying the 3 %
general percentage tax on the vatable sales or receipts.
6. Determine if the goods or service offered is excisable.
a. If yes, pay the applicable excise tax in addition to VAT and or percentage tax.
b. If not, pay only VAT and or percentage tax.
Note:
1. Businesses normally register initially as non-VAT taxpayers, except when their projected
operation is expected to exceed the 3M annual VAT threshold
2. For non-VAT registered taxpayer, the evaluation of the magnitude of vatable sales or
receipts is done continuously every month over a 12-month period. The taxpayer remains
a non-VAT taxpayer for as long as its 12-month rolling sales or receipts do not exceed
the 3M annual VAT threshold.
3. Once the taxpayer becomes or registered as a VAT taxpayer, he remains as such paying
VAT on vatable sales or receipts until the cancellation of his VAT registration.

WHAT IS A BUSINESS?
Business refers to a habitual engagement in a commercial activity involving the sale
of goods or services
Elements of business:
1. Habitual engagement
2 Commercial activity
HABITUAL ENGAGEMENT
There must be regularity in transactions to construe the presence of a business.
Isolated or casual sales are not regular activities; hence, these are presumed not made
in the ordinary course of business.
Habitual engagement is normally manifested by registration with the appropriate
government agencies as a dealer or as a service provider in a particular trade or
vocation but non-registration is not an excuse to business taxation.
A casual sale transaction is not a business even if profit is derived from the
transaction. On the other hand, the regular selling of goods or services for a profit is a
business despite the absence of actual profit from such activity.

Illustration 1
Mrs. Ellerton, a medical practitioner, sold his principal residence for P10M.
The sale of real properties by a non-realty dealer is a casual sale not made in the
course of business; hence, it is exempt from business tax.
Illustration 2
Mang Merto, a realty dealer, purchased shares of stocks as investment and sold
them at a profit.
The acquisition and sale of stocks investments by a realtor are not made in the
course of the realty business and are not subject to business tax. If Merto were a
security dealer, the transaction would be considered made in the course of
business and hence, subject to business tax.
Illustration 3
Joshua is a proprietor regularly engaged in trading merchandise. During the month, he
reported the following:
Sales of merchandise 800,000
Sale of personal car 1,200,000
The 800,000 sales is subject to business tax. The 1,200,000 sales is outside the
merchandising business. The same shall not be subjected to business tax since Joshua
is also not a car dealer
Privilege Stores
Privilege stores (most commonly known as “tiangge”) are stalls or outlets not
permanently fixed to the ground which are put up during special events such as
festivals or fiestas (RR16-2013).
To be considered a privilege store, the store should engage in a business activity for a
cumulative period of not more than 15 days. Otherwise, they shall be considered
regular taxpayers subject to business taxes and income tax. (Ibid)
"Privilege store operators" shall not be considered habitually engaged in business
considering their limited activity. They are exempt from business tax but is subject to
income tax.
Illustration 1
Mang Andro makes key chains and wood art for sale to tourists during the annual
Panagbenga Festival. He rented a booth from the City of Baguio, the tiangge
organizer, and recorded sales of P350,000 over the weeklong festivities.
Mang Andro is not considered habitually engaged in business. His P350,000 sales
is not subject to business tax but is subject to income tax.
Illustration 2
Danes Bakeshop, an established business enterprise, also rented a booth from the
organizer, City of Baguio, to sell its cakes and pastries during the Panagbenga
Festival. Danes generated P400,000 sales during the event.
Danes Bakeshop is not a privilege store since it is an established and regularly
operating business. The P400,000 sales on the event shall be subject to the usual
business tax.
Exception to the regularity rule
The sales of services by non-resident persons are presumed made in the course of
business without regard as to whether the sale is regular isolated. Our current tax law
views the consumption tax on import services a business tax. The sales of services by
non-residents are subjected to the final withholding tax as previously discussed in
Chapter 2.
COMMERCIAL ACTIVITY
Commercial activity means engagement in the sale of goods or services for profit.
The goods or services must be offered to the public with a motive earn unrestricted
amount of pecuniary gains. However, the actual existence of a profit during the
period is not a pre-condition to business taxation. Even if the business operation
results to a loss, business tax still applies.
The following are not businesses:
1. Government agencies and instrumentalities
2. Non-profit organizations or associations
3. Employment or other
4. Directorship in a corporation
5. Business for mere subsistence
Government agencies and instrumentalities
Agencies and instrumentalities provide essential public services. They may charge
reasonable fees for services rendered but are not intended to profit but are merely
costs reimbursements.
Illustration
The Professional Regulations Commission (PRC) collected P12,000,000 from
professional license fees during the month. It also earned additional P1,000,000 from
rental income on its vacant premises.
The P12M receipt is an income by PRC, a government agency, in rendering essential
government service. This is not a commercial activity and is exempt from business
tax. Leasing, on the other hand, is a commercial activity departing from the nature of
government service; hence, it is subject to business tax
Non-profit or charitable organizations
A charitable or eleemosynary activity regularly pursued by an institution or
organization is not a business because of the absence of the purpose to make profit.
Illustration
Union of Husbands Afraid of Wife (UHAW) is a non-profit social welfare institution
for the assistance of battered husbands. UHAW received P 2,000,000 contributions
from the public and generated P400,000 from the sales of a gift shop in its fund
raising drive.
The receipt of P2M contribution or donation is not subject to business tax since it is
not commercial in nature. However, the selling of the gift shop is a commercial
activity which is subject to business tax. The rule applies regardless of the disposition
made of such fund-raising income.
Employment
The elements of an employer-employee relationship are discussed in detail in Chapter
10 of Income Taxation: Laws, Principles and Applications by the same author.
Employee benefits derived under employment is not subject to business tax but only
to income tax.
Illustration 1
Bernard Bakilan, a certified public accountant, practices his profession in the industry
as the Chief Financial Officer of UHAW. During the month, he received P50,000
compensation plus P10,000 fringe benefits.
Employment is not a commercial activity as it does not involve sales of services to
clients or customers. Hence, the compensation income and the fringe benefits are not
subject to business tax.
Illustration 2
Jones is a job order employee contracted by the government to provide support
services for office job for 6 months. Jones is paid P18,000 a month.
Directorship in a corporation
Although a director may not be an employee, director's fees, per diems, and
allowances are not derived in an economic or commercial activity or rendering of
services to clients for a fee. Hence, these are not subject to business tax (RMC77-
2008).
Illustration 1
Mr. Agua is an independent director of Aga Corporation receiving director's fees, per
diems, and allowances totaling P15,000 per board meeting appearances.
Mr. Agua is not subject to business tax.
Query: What if Mr. Agua is an employee of Aga Corporation?
Mr. Agua's director's fees shall be part of his compensation income and is not
likewise subject to business tax.
Illustration 2
John, a certified public accountant, renders his services to the public for a fee. Is he
subject to business tax?
The exercise of profession by regularly rendering services to clients for a fee is
considered a business subject to business tax and bottom
Business principally for subsistence
Business principally for subsistence or livelihood refers to businesses with gross sales
or receipts not exceeding P100,000 per year.
Marginal income earners - refer to individuals not deriving compensation income
under an employer-employee relationship but who are self- employed deriving gross
sales or receipts not exceeding P100,000 in any 12-month period
Examples of marginal income earners:
 a. Subsistential farmers or fishermen
b. small sari-sari stores
c. small carinderias or "turo-turos"
d. drivers or operators of a single unit tricycle, and
e. others similarly situated.
The term marginal income earners do not include licensed professionals, consultants,
artists, sales agents, brokers, including all others whose income have been subjected
to withholding tax (RMC7-2014).
Although regular in operations, marginal income earners are exempt from business
tax, but are subject to income tax (RR7-2012). These small businesses could not be
considered commercial being merely for personal or family livelihood or subsistence.
Examples of persons considered engaged in business:
1. Consultants
2. Sales agents of insurance or real estate including brokers
3. Television or movie talents and artists
4. Cooking instructors
5. Martial art instructors
BUSINESS TAXPAYERS
The taxable person in business taxation includes any individual, trust, estate,
partnership, corporation, joint venture, cooperative or association.
Rules:
1. Each person, natural or juridical, is a taxable person for purposes of business
taxation.
2. Husband and wife are separate taxpayers.
3. A parent company is a separate taxable person with its subsidiary company and
each subsidiary company is a taxable person.
4. Home office and branch offices of the same business are one, not separate, taxable
person.
5. Proprietorship is not a juridical entity. Its sales and receipts is subject to business
tax to the individual proprietor. Multiple proprietorship businesses of the same
individual are all taxable to that individual as the taxpayer.
Illustration 1
Mr. Ysmael, an accounting practitioner, has two other commercial businesses with
the following receipts and sales:
Mr. Ysmael's practice Business 1 Business 2
P 1,200,000 P 800,000 P 700,000
Business 1, Business 2 and the accounting practice are not taxable persons being
proprietorship businesses. The sales and receipts of these totaling P2,700,000 shall
be taxable to Mr. Ysmael as the taxable person.
Illustration 2
DEF Corporation has its head office in Makati City and two branches in Manila City
and Quezon City. The sales outlet has the following sales:
Makati head office Manila City branch Quezon City branch
P 2,000,000 P 1,800,000 P 1,200,000
The branches are not taxable persons. The sales of the branch offices including the
head office shall be taxable to DEF Corporation. The same shall be reported to the
BIR RDO in the principal place of business - Makati City.
Illustration 3
ABC Company has a branch in Manila City and a subsidiary, XTB Company, in
Davao City.

ABC Company and its branch are one entity while XTB Subsidiary is a separate
entity. The transfer of goods by ABC Company to its Manila City branch is not
subject to business tax. The intercompany sales made between ABC Company and
its subsidiary, XTB Company, is subject to business tax. XTB Company's transaction
with the Manila branch is also a transaction with its parent, hence, taxable.
Illustration 4
Dr. Jones owns a bakery registered as a proprietorship business. He also owns a
clinic, also registered as a proprietorship business. His clinic occasionally
purchases bread from his grocery. Dr. Jones' children also bought breads from
the bakery.

The sales between proprietorship businesses shall not be subject to business tax
since the same does not involved another party. The sales made by the bakery to
Dr. Jones' children shall be subject to tax since they are different persons to Mr.
Jones

Income tax exemption does not equate to business tax exemption

If you still remember, the same concept of a taxable person in income taxation applies
in business taxation but income tax exemption does not necessarily mean business tax
exemption.

Hence, the following persons which are exempt taxpayers from income are subject to
business tax:
1. General professional partnership
2. Joint venture engaged in construction or oil explorations
3. Local water districts
4. Barangay micro-business enterprised

TYPES OF BUSINESS TAXPAYERS

A taxable person shall register either as:
a. VAT taxpayers
b. Non-VAT taxpayers

VAT-registered taxpayers pay 12% VAT while non-VAT registered

taxpayers pay a 3% general percentage tax.

BUSINESS ACTIVITIES
The basis of business tax differs on the activities businesses are engage
Type of business activities:
a. Sales or exchange of goods or properties
b. Sales of exchange of services or lease of properties
Sale of Goods or Properties
Goods or Properties refers to all tangible and intangible objects which
capable of pecuniary estimation and shall include, among others:
1. Real properties held primarily for sale to customers, held for lease or is used in the
ordinary course of trade or business;
2. The right or the privilege to use a patent, copyright, design or model, plan, secret
formula or process, goodwill, trademark, trade brand or other similar properties or
rights;
3. The right or privilege to use in the Philippines any industrial, commercial or
scientific equipment;
4. The right or privilege to use motion picture films, films, tapes and discs;and
5. Radio, television, satellite transmission and cable television time.
Sale or Exchange of Services
Sale or exchange of services shall mean the performance of all kind of services in
the Philippines for others for a fee, remuneration or consideration, whether in
kind or in cash, including those performed or rendered by the following:
1. Construction and service contactors
2. Stock, real estate, commercial, customs and immigration brokers
3. Lessors of property, whether personal or real
4. Persons engaged in warehousing services
5. Lessors or distributors of cinematographic films among
6. Persons engaged in milling processing, manufacturing or repacking goods for
others
7. Proprietors, operators, or keepers of hotels, motels, rest houses, pension
houses, inns, resorts, theaters and movie houses
8. Proprietors or operators of restaurants, refreshment parlors, cafes and other eating
places, including clubs and caterers
9. Dealers in securities
10. Lending investors
11. Transportation contractors in their transport of passengers, goods cargoes from
one place in the Philippines to another place in the Philippine
12. Common carriers by air and sea relative to their transport of passenger goods or
cargoes for hire and other domestic common carriers by land relative to their
transport of goods or cargoes
13. Sales of electricity by generation, transmission and or distribution companies
14. Franchise grantees of electric utilities, telephone and telegraph, radio a
or television broadcasting and all other franchise grantees
15. Non-life insurance including surety, indemnity and bonding companies
16. Similar services regardless of whether or not the performance thereof calls for the
exercise or use of the physical or mental faculties
17. The lease of, 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;
18. The lease or the use of, or the right to use any industrial, commercial scientific
equipment;
19. The supply of scientific, technical, industrial or commercial knowledge
information;
20. The supply of any assistance that is ancillary and subsidiary to and furnished as a
means of enabling the application or enjoyment of any property, or right or any such
knowledge or information;
21. The supply of services by a nonresident person or his employee in connection
with the use of property or rights belonging to, or installation or operation of any
brand, machinery or other apparatus purchased from such non-resident person;
22. The supply of technical advice, assistance or services rendered
connection with technical management or administration of any scientific industrial
or commercial undertaking, venture, project or scheme;
23. The lease of motion picture films, films, tapes and discs; and
24. The lease or the use of or the right to use radio, television, satellite
transmission and cable television time.
BASIS OF BUSINESS TAX PER TYPE OF ACTIVITIES
Sellers of goods or Sellers of services
properties
Basis of business tax Gross Selling Price Gross receipts

Gross selling price

Gross selling price refers to 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 goods or properties. The excise tax, if any,
on such goods or properties shall form part of the gross selling price. It includes sales
made in cash, on credit and on installment basis and analogous to the income taxation
concept of "gross sales” except only on the treatments of contingent discounts.

Allowable deductions from gross selling price:

1. Discounts determined and granted at the time of sale, which are expressly indicated
in the invoice, the amount thereof forming part of the gross sales and are duly
recorded in the books of accounts
To be deductible, discounts must not be dependent upon the happening of a
future event or contingency
2. Sales returns and allowances for which a proper credit or refund was
made during the month or quarter to the buyer on taxable sales

Illustration 1
A business taxpayer had the following transactions during the quarter:
Cash sales P 400,000
Sales on credit (account sales) 600,000
Installment sales (P30,000 collected) 100,000
Sales returns and allowances 20,000
Quota discounts 10,000
Purchase of goods, including P72,000 VAT passed on by the sellers 672,000
The gross selling price shall be
Cash sales 400,000
Account sales 600,000
Installment sales 100.000
Total sales P 1,100,000
Less: Returns and allowances 20,000
Gross selling price P 1,080,000

Note: Quota discounts or rebates are contingent upon future volume purchased by
customer and are not determinable at the date of sale; hence, these are not deductible.

Illustration 2
HTC Corporation sold various specialized equipment to a buyer with the
following terms:
List price 2,000,000
Freight 50,000
Installation fee 20,000
Trade discounts 10%
Cash discounts, 2% /30 net 60 days 36,000

The gross selling price shall be

computed as:
List price 2,000,000
Less: Trade Discounts (20%x 2M) 200,000
Net Price 1,800,000
Freight 50,000
Installation fee 20,000
Gross Selling Price 1,870,000

Gross receipts -
"Gross receipts" refers to the total amounts of money or its equivalent representing
the contract price, compensation, service fee, rental or royalty, including the amount
charged for materials supplied with the services and deposits applied as payments for
services, rendered and advanced payments actually or constructively received during
the taxable period for the services performed or to be performed for another person,
excluding VAT.

Illustration 1
A laundry business had the following transactions during the month:
Cash collection for services done P 400,000
Cash collection for services not yet started (advances) 100,000
Receivables on services rendered 600,000
Purchase of goods and services, including of P48,000
VAT passed on by sellers 448,000
The gross receipt shall be:
Cash fees P 400,000
Advances by customers 100,000
Gross receipts P 500.000

Illustration 2
S2 Tech, Inc. provides PC board repair services. During the month it billed a
total of P4,000,000 out of which clients settled P3,200,000. S2 Tech, Inc. also
collected P8,000 interest on its bank deposits and P 14,000 dividend income
from its stocks investment
The gross receipt is P3,200,000. The interest and dividend income are incidental
income not arising from the activities of the business; hence, excluded.

Constructive receipt
Constructive receipt occurs when the money consideration or its equivalent is placed
at the control of the person who renders the services without restriction by the payor.
This is added as part of gross receipts.

Examples:
1. Deposit in a bank account of the seller made by the buyer in consideration of
services rendered or goods sold
2. Issuance by the debtor of a notice to offset any debt or obligation and acceptance
thereof of the seller as payment for services rendered
3. Transfer of the amounts retained by the payor to the account of the contractor
Illustration
Miss Leah Mado is a pozo negro contractor. She had the following fees for the
month:
 P10,000 from Cipher Company, net of the P30,000 debt of Miss Leah from
Cipher Company
 P 15,000 deposited to Miss Leah's bank account
 P 20,000 cash share from a general professional partnership, P 30,000
undistributed share was credited to her capital account
Miss Leah's gross receipt shall be:
Receipts from Cipher (P10,000+ P30,000) P 40,000
Fees deposited to Leah's bank account 15,000
Gross receipts 55,000

The share from the net income of a general professional partnership (GPP) is
not gross receipt since Miss Leah is not selling services to the GPP.

Agency monies
Amounts earmarked for payment to an unrelated third party or received as
reimbursement for advanced payment on behalf of another which do not redound to
the benefit of the payor are not part of gross receipt (See CIR VS Manila Jockey
Club, 108 Phil. 821 (1960)).

Insurance proceeds on damaged assets

The receipt of insurance proceeds from the destruction of a company's business assets
is not viewed as sales or receipts for purposes of business taxation. The compulsory
or involuntary conversion of property into money such as in the case of insurance
reimbursement is not viewed as a sale in the ordinary course of business (Bir Ruling
No. DA-084-2007, February 12,2007).
PC Repair Company received the following amounts during a month:
Cash collection from clients 400,000
Reimbursements for out-of-pocket costs incurred in 50,000
Reimbursement for client expenses paid by PC Repair 80,000
Proceeds of fire insurance 400,000
Receipt of bank loan 500,000
Receipt of agency money to be remitted to a sister company 100,000
The gross receipts shall be:
Cash collection from clients P 400,000
Reimbursements for out-of-pocket costs incurred to clients 50.000
Gross receipt P450,000
Note:
1 Out-of-pocket expenses of PC Repair which are reimbursed by the client are
actually income which redounds to the benefit of PC Repair. Hence, these are part of
gross receipts.
2 Loans and agency money do not redound to the benefit of the taxpayer. The loan is
a obligation and is not income. The agency money will be paid or remitted to another
party. These are not included in gross receipts.
3. The proceeds of insurance is not a receipt in the ordinary course of business.

Withholding taxes
Amounts withheld form part of gross receipts because these are constructive
possession and not subject to any reservation, the withholding agent being merely a
conduit in the collection process (CIR vs. Citytru Investment Phils., Inc. GR. No.
139786, September 27, 2006).

Illustration
A lessor received P 9,500 rentals from a lessee net of 5% withholding tax evidenced
by BIR Form 2307.
The gross receipt shall be P10,000 computed as (P 9,500 / 95%).

Business with Mixed Activities

A business which is engaged both in the sales of goods or properties a sales of
services shall be subject to business tax on gross selling prices on sales of goods or
properties and on gross receipts on the sales of services.

Sales of goods Sales of services

Exempt sales Exempt Exempt Receipts
Receipts specifically - BICAPFLOW
subject to % tax
Vatable Sales Vatable sales Vatable Receipts
Exempt sales or receipts are not subject to business tax. BICAP FLOW is an acronym
for the list of services specifically subject to percentage tax. There are sales of goods,
properties or services that are exempt from the list of services specifically subject to a
percentage tax. Vatable receipts are the subject to either 3% general percentage tax or
VAT depending on the type of the business.

Exempt sales or receipts

There are sales of goods, properties or services that are exempt from business tax (i.e.
VAT and percentage tax), such as the following:

1. Sales of certain basic necessities, such as:

a. agricultural or marine food products
b. health services of hospitals
c. educational services of schools
d. housing or residential properties within price limits
2. Sales exempt by law, treaty or contracts
a. Sales by cooperatives to members
b. Sales or lease of aircraft or vessels
c. Sales or printing of books, magazines and newspapers
3. Casual sales or sales by non-business sellers
a. Sale of persons not regularly engaged in trade or business
b. Services rendered under an employer-employee relationship
c. Services rendered by a Regional Area Headquarter of multinational company
4. Export sales of non-VAT registered persons

Exempt sales of goods, properties, or services are extensively covered in

detail in Chapter 4.

Receipts from services specifically subject to a percentage tax

There are services that are subject to a specific percentage tax, such as the
following:
1. Banks and non-bank financial intermediaries performing quasi-banking
functions and other non-bank financial intermediaries without quasi-
banking functions
2. International carriers on their outgoing transport of cargoes, baggage or
mails
3. Domestic common carriers on their transport of passengers on land and
keepers of garage
4. Certain amusement places
5. Philippine Stock Exchange (PSE) on the sale, barter or exchange of shares by
investors or corporations conducting initial public offering
6. Franchise grantees of television or radio and gas or water
7. Life insurance companies and agents of foreign insurance companies
8. Franchise grantees of telephone or telegraph on overseas dispatch, message or
conversation originating from the Philippines
9. Winnings from jai-alai and race tracks and

Mnemonics: BICAP FLOW

The specific percentage tax rates imposed on these sales of services or transactions
range from .60% to 30%. These rates apply regardless of the registration type of the
taxpayer as VAT or non-VAT taxpayers. This will be extensively covered in detail in
Chapter 5.
Vatable sales or receipts
Other sales of goods, properties, services or lease of properties, other than those
exempt and specifically subject to percentage tax are vatable.

Vatable sales or receipts are subject to the following:

1. 3% general percentage tax - if the taxpayer is non-VAT registered
taxpayer
2. Value added tax - if the taxpayer is a VAT taxpayer

Types of percentage tax

1. Specific percentage tax - those imposed for BICAP FLOW and apply to any
taxpayer, whether VAT or non-VAT registered
2. General percentage tax - for vatable sales or receipts of non-VAT taxpayers

Mandatory registration as VAT taxpayer

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
to VAT if:
1. His gross sales or receipts for the past 12 months have exceeded P3,000,000
2. There are reasonable grounds to believe that his gross sales or receipts for the next
12 months will exceed P3,000,000

The general threshold: P3,000,000

The P3,000,000 VAT threshold is applicable to all other taxpayers, except franchise
grantees of radio or television.
The special threshold: P10,000,000
Franchise grantees are mandatorily required to register to the VAT system when their
annual receipts exceed P10,000,000.
Optional VAT Registration
A person who is below the VAT threshold may, at his option, register as VAT
taxpayer. Once made, this option shall be irrevocable for 3 years. For TV or radio
franchise grantees, the option shall be perpetually irrevocable.
Type of VAT Taxpayers
a. VAT-registered taxpayer - a taxpayer who registered under the VAT
system
b. VAT-registrable taxpayer - a taxpayer who exceeded the VAT threshold
but did not yet register as a VAT taxpayer

VAT-registered taxpayers are allowed credit for input VAT while non-VAT
registered taxpayers are not allowed to claim input VAT credit.
Illustration
Assume a taxpayer had P600,000 output VAT on its vatable sales and paid
P320,000 VAT on its purchases, the VAT liability shall be computed as follows:
VAT- registered VAT-Registrable
Output VAT 600,000 600,000
Less: Input VAT 320,000 0
VAT due 280,000 600,000

Summary rules on VAT and Percentage Tax

VAT-registered business Non-VAT business

Exempt sales of goods No business tax No business tax
and services
Sales of services Specific % tax rate Specific % tax rate
specifically subject to
percentage tax
Vatable sales of goods 12% VAT 3% percentage tax
and services

Illustration 1
Mrs. Maranao is starting a business with the following projected result
operations within 12 months:
Expected Sales or receipts
Exempt sales 400,000
Receipts from services subject to percentage tax 1,200,000
Other sales and receipts 1,900,000
Total sales and receipts P 3,500,000

Only vatable sales or receipts shall be considered for the purpose of the VAT
threshold. Since the P1,900,000 expected vatable sales or receipts is below the
P3,000,000 VAT threshold, Mrs. Maranao may register as a non-VAT taxpayer.

Note:
1. Mrs. Maranao shall not pay business tax on exempt sales.
2. The receipts from services specifically subject to percentage tax shall be subject to
the particular percentage tax rate that apply to the receipts.
3. Mrs. Maranao shall pay the 3% general percentage tax on the vatable sales and receipts for
as long as her vatable sales or receipts do not exceed the VAT threshold.
If there is a reasonable expectation that vatable sales or receipts in the next 12
months will exceed the VAT threshold, the taxpayer shall register as VAT-taxpayer.
Illustration 2
Assume the same data in the preceding illustration except that those sales
figures were recorded by Mrs. Maranao for the last 12 months and that Mrs.
Maranao is registered as a non-VAT taxpayer.

Mrs. Maranao shall continue paying the 3% general percentage tax. She will only
be required to register to VAT if her vatable sales or receipt exceeded the P3M VAT
threshold.
DIFFERENCE OF THE CONCEPT OF GROSS RECEIPTS AND SALES
BETWEEN VAT AND NON-VAT TAXPAYERS

For non-VAT taxpayers

The amount billed to the customer or client on the sale of goods or service
is respectively the sales or gross receipts.

Illustration 1
A non-VAT taxpayer billed a client P100,000 for professional services render
The client withheld 10% creditable withholding tax (CWT).
The taxpayer will be able to collect the following:
Professional fees billed P 150,000
Less: 10% CWT 15,000
Net professional fee collected 135,000
The gross receipt in this case is the amount billed (i.e., P150,000).

Illustration 2
A non-VAT taxpayer received P98,000 from the sales of goods. He also received
a CWT certificate showing P2,000 tax withheld by the customer.

The sales for purposes of business tax may be computed as:

Net cash received on billing P 98,000
Add: CWT certificate 2,000
Sales P100,000

For VAT taxpayers

The amount billed to the customer or client invoice price) on the sale of goods or
services includes the sales or gross receipts plus the 12% output VAT.

Illustration 1
A VAT taxpayer billed a client P150,000 for professional services rendered. The
client withheld 10% creditable withholding tax (CWT). The amount billed shall be
presumed inclusive of VAT. The gross receipt shall be computed as follows.

Gross receipt (P150,000/112%) P 133,929

Less: Output VAT (P133,929 x 12%) 16,071
Amount billed (invoice price) P150,000

The CWT is computed on the gross receipts or sales, exclusive of the output
VAT. Hence, the taxpayer will receive the following payment:

Professional fees 133,929

Less: 10% CWT 13,393
Net professional fees P 120,536
Plus: Output VAT 16,071
Total cash collected 136,607

Illustration 2
A VAT taxpayer received P102,000 cash plus P10,000 CWT certificate from the sale
of services.
The gross receipt may be computed as:
Cash received P 102,000
Add: CWT certificate 10,000
Invoice price P 112,000
Less: Output VAT (P112,000 x 12/112) 12,000
Gross receipt 100.000

The same procedure is used in computing sales for the sales of goods.

BUSINESS TAX ACCOUNTING PERIOD

The length of accounting period for business taxes is one quarter. (Secs. 114(A) and
128(A)1, NIRC). This is referred to as a taxable quarter.

The taxable quarter is composed of three months which is synchronized with the
taxable year (i.e., calendar or fiscal) of the taxpayer for purposes of income tax.

Illustration 1: Calendar year taxpayers

Atty. Aloe Vera is registering with the BIR as a self-employed law practitioner.

Individuals are limited to use only the calendar accounting period. Hence, the
taxable quarters of Atty. Aloe shall be:
First quarter: January 1 to March 31
Second quarter: April 1 to June 30
Third quarter: July 1 to September 30
Fourth quarter: October 1 to December 31

Illustration 2: Fiscal year taxpayers

ABC Corporation is reporting under income taxation using a fiscal year ending
every August 31.

The taxable quarters of ABC Corporation under its fiscal year shall be:

First quarter: September 1 to November 30

Second quarter: December 1 to February 28 or 29
Third quarter: March 1 to May 31
Fourth quarter: June 1 to August 31

Remember that corporate taxpayers may opt for either the calendar year or fiscal year
accounting period.

BUSINESS TAX REPORTING

Types of Business Tax Returns
VAT taxpayers Non-VAT taxpayers

Monthly tax return BIR Form 2550 M Not applicable

Quarterly tax return BIR Form 2550 Q BIR Form 2551 Q

Reporting of VAT taxpayers

VAT taxpayers are required to report their receipts or sales in two month estimated
VAT returns for the first two months of the quarter and quarterly VAT return on the
third month of the quarter. In effect, VAT taxpayers pay remit VAT monthly.

1st month 2nd month 3rd month

Business tax form 2550M 2550M 2550Q

Deadline Within 20 days Within 20 days Within 25 days
*counted from the end of the month or quarter
The TRAIN law will eventually phase out the monthly estimated VAT payments and
VAT payment will transition into a full quarterly payment effective January 1, 2023.

Reporting of Non-VAT taxpayers (Percentage taxpayers)

The TRAIN law requires percentage taxpayers to file quarterly percentage
tax returns (BIR Form 25510). All percentage taxpayers pay their
percentage taxes on a quarterly basis.
1st month 2nd month 3rd month

Business tax form 2551Q

Deadline Within 25 days
*counted from the end of the month or quarter

Illustration
Assume a business taxpayer had the following gross sales in the first quarter of
2019: January - P220,000, February - P180,000 and March - P260,000.

Assuming the business is a percentage taxpayer:

A percentage taxpayer will report the sales as follows:

January February March

Taxable amount - - 660,000

BIR Form to use - - 2551Q
Assuming the business is a VAT taxpayer:
A VAT taxpayer will report the receipts as follows:
January February March

Taxable amount 220,000 180,000 660,000

BIR Form to use Form 2550M Form 2550M Form 2550Q

Note:
1. The reported figures in each month shall be the basis of the Output VAT.
2. The March figure is the total of the three months (i.e., P220K + P180K + P260K).
The VAT computed for March will be reduced by VAT payments made in the first
two months since they are included in this total.

Short Period Return

Any person who retires from business with due notice to the BIR office where the
taxpayer (head office) is registered or whose VAT registration been cancelled shall
file a final quarterly return and pay the tax due thereon within twenty-five (25) days
from the end of the month when the business ceased to operate or when the VAT
registration had been officially cancelled.
Provided, however, that subsequent monthly declarations/quarterly returns are still
required to be filed if the results of the winding up of the affairs/business of the
taxpayer reveal taxable transactions.

TRANSITION TO THE VALUE ADDED TAX

The following illustrates the tax treatments of the transition of taxpayers to
the VAT system.

Illustration 1: VAT threshold monitoring and VAT transition

Mr. Quezon had the following vatable receipts from his service business since
his start of business in January 1, 2020:

Vatable Cumulative Cost and Input VAT

Receipts Receipts expenses
Jan. 1 - Sept. P 2,250,000 P 2,250,000 1,200,00
30
October 1,000,000 P 3,250,000 500,000
November 1,000,000 P 4,250,000 700,000 74,000
December 1,000,000 P 5,250,000 800,000 62,000

The 12-month totals of monthly receipts from the current month until 12 months back
shall be monitored if it exceeds the P3M VAT threshold.

Since his receipts exceeded P3,000,000 by October 2020, he is subject to VAT

prospectively starting November 2020. He is mandatorily required to update his
registration from a non-VAT to a VAT taxpayer on or before November 30, 2020.

Under the Regular Income Tax Option

Assuming Mr. Quezon opted to the regular tax option for the Year 2020 in his first
quarter 1701Q, she shall separately pay the regular income tax computed per
individual tax table and the 3% percentage tax under 2551Q.

If we compute his regular tax using the income tax table, Mr. Quezon must have
paid P205,000 in estimated income tax as of September 30, 2020 using 1701Q.

On the other hand, Mr. Quezon must have paid his quarterly percentage tax
using Form 2551Q until the end of the quarter ending September 30, 2020.

Required returns

Mr. Quezon shall file his last 2551Q adjustment return and pay the following
October 2020 gross receipts P 1,000,000
Multiply by: 3%
Percentage tax due 30,000

For November and December 2020

Mr. Quezon shall file the following VAT returns and pay the following taxes:
BIR Form 2550M for November 2020

Output VAT (1M x 12%) P 120,000

Less: Input VAT 74,000
VAT still due 46,000

BIR Form 2550Q for the 4th quarter ending December 31, 2020

Output VAT (1M +1M) x 12% 240,000

Less: Input VAT (P74K+P62K) 136,000
VAT due 104,000
Less: Estimated VAT payments - Nov. 2550M 46,000
VAT still due P 58.000

Year 2020 Income tax due

Mr. Quezon's taxable income for 2020 shall be:

Total receipts in 2020 P 5,250,000

Less: Total costs and expenses in 2020 3,200,000
Taxable income 2,050,000

Mr. Quezon shall file and pay the following tax due under Form 1701A:
Tax due on P2,050,000 income, per tax table* 506,000
Less: Estimated income tax payments (Form 1701Q) 205,000
Income tax still due 301,000

Under the 8% Commuted Tax Option

Assuming Mr. Quezon opted to the 8% income tax in the first quarter of 2020 his
option to the 8% income tax shall be invalidated. He shall be subjected regular
income tax for the entire Year 2020 while his payments under the 8% commuted tax
shall be treated as tax credit against his regular income tax due.

He will pay VAT prospectively starting November 2020 and will be assessed
percentage tax for all sales or receipts from January 1, 2020 to October 2020.
As of third quarter 2020, Mr. Quezon must have paid P 160,000 in 8% income tax,
computed as follows:

January to September receipts P 2,250,000

Less: Exempt 250,000
Total 2,500,000
Multiply by: 8%
Income tax due 160,000

Assessment of percentage tax in November 2020

The BIR shall assess Mr. Quezon to pay the following percentage tax under 2551Q
January to October receipts P 3,250,000
Multiply by: 3%
Percentage tax due P 97,500
It must be emphasized that the percentage tax assessment must cover all sales or
receipts realized prior to his VAT registration, not only the first P3,000,000 of sales
or receipts. This is due to the fact that the VAT applies prospectively effective on the
month of registration not on excess of sales above P3,000,000.

For November and December 2020

Mr. Quezon shall file the following VAT returns and pay the following taxes:

BIR Form 2550M for November 2020

Output VAT (1M x 12%) 120,000
Less: Input VAT 74,000
VAT still due P 46.000

BIR Form 2550Q for the 4th quarter ending December 31, 2020
Output VAT (1M +1M) x 12% 240,000
Less: Input VAT (P74K + P62K) 136,000
VAT due 104,000
Less: Estimated VAT payments - Nov. 2550M 46,000
VAT still due 58,000

Year 2020 Income tax due

Mr. Quezon's taxable income for 2020 shall be:

Total receipts in 2020 P 5,250,000

Less: Total costs and expenses in 2020 3,200,000
Percentage tax expense 97,500
Taxable income P 1,952,500

Mr. Quezon shall file and pay the following income tax due for 2020 under Form
1701A:
Tax due on P1,952,500 taxable income, per tax table P 475,750
Less: Estimated income tax payments (Form 1701Q) 160,000
Income tax still due 315,750

Illustrative 2: Non-registration as VAT taxpayer

Assume instead that Mr. Quezon paid P13,500 percentage tax in November and
registered as a VAT taxpayer only on December 2020.

Mr. Quezon shall be subject to VAT in November despite his failure to update his
VAT registration. Registrable persons are subject to VAT without the benefit of input
VAT in the period they are not properly registered.

Hence, Mr. Quezon shall be required to pay the following additional assessment for
November 2020:

Output VAT (P1M x 12%) 120,000

Less: Input VAT 0
VAT due 120,000

Mr. Quezon shall file a claim for refund or credit for the P13,500 percentage tax paid
as it is an erroneous payment of tax considering that VAT should have been paid for
that month.

If claimed as tax credit, the same shall be taken as deduction against the tax due
once approved by the BIR.

Assuming the claim for tax credit is approved, the VAT payable shall be
computed as follows:

Output VAT (P1M X 12%) 120,000

Less: Input VAT 0
VAT due 120,000
Less: Tax credit 13,500
VAT still due 106,500

Timing of VAT registration

1. Persons commencing business with an expectation to exceed the VAT threshold
within 12 months shall simultaneously register as VAT taxpayer with the registration
of their new business or trade with the BIR.
2. Persons exceeding the VAT threshold shall register as VAT taxpayer before the
end of the month following the month the threshold is exceeded.
3. Franchise grantees of radio and television broadcasting, whose gross annual receipt
for the preceding calendar year exceeded P10,000,000, shall register as VAT taxpayer
within 30 days from the end of the calendar year (RR16-2005).
4. Persons who are below the threshold but opt to be registered as VAT taxpayer shall
register not later than 10 days before the beginning of the taxable quarter (Ibid).

VAT treatment of exempt transactions

A VAT-registered taxpayer who enters into a VAT-exempt transaction i.e. (mixed
transactions) may also opt that the VAT apply to his transactions which would have
been exempt under Section 109 of the NIRC.

Essence of voluntary the VAT registration

Other than simplification of sales monitoring and attracting VAT-registered
customers, there may be no other practical advantage of this option for a purely
domestic-based business but there is nothing wrong in giving our progressive country
more than what is required. This option, however, is beneficial for taxpayers who are
into export business so that their export sales would be zero-rated rather than merely
exempt.

The optional vat registration is not allowed to self-employed and or professional

individuals who opted to the 8% commuted tax under income taxation.

VAT taxpayers shall continue to pay VAT until the cancellation or revocation of their
VAT-registration.

Revocability of VAT registration

1. The VAT registration, whether voluntary or mandatory, of franchise grantees of
radio or television is perpetually irrevocable. Thus, the continue to be VAT
taxpayers until the dissolution of their business.

2. Any person, other than franchise grantees of radio or television, who voluntarily
registered as VAT taxpayers shall not be allowed to cancel their VAT registration
for the next 3 years. This is referred to as the year lock-in period.

3. Any person who registered as VAT taxpayers with an expectation exceed the VAT
threshold but failed to exceed the same within 1 months of operations may apply for
cancellation of VAT registration The three-year lock-in period does not apply in this
case.

Businesses whose VAT registration has been cancelled will be registered reverted
back as non-VAT taxpayers. They will be subject to the 3% percentage tax on sales or
receipts.
Penalty for registrable persons
As previously pointed out, failure to register as a VAT-taxpayer is not an excuse.
Registrable persons are still liable to VAT but without the benefit input tax credit in
the periods in which they are not properly registered.
CHAPTER 4: EXEMPT SALES OF GOODS, PROPERTIES AND SERVICES

EXEMPT SALES
➢ Exempt sales are exempt consumption of goods or services from domestic sellers. Exempt sales are not
subject to VAT and percentage tax.
Hence,
• VAT taxpayers making exempt sale of goods, properties, or services shall not bill any output VAT to their
customers because the sale is not subject to VAT.
• A non-VAT person making exempt sales shall not be subject to the 3% percentage tax on the sales or
receipt.

Exempt Sales of Goods or Properties

1. Sale of goods to senior citizens and persons with disability
This covers sale of essential goods only.

2. Sales of exempt goods

• Agricultural and marine food products in their original state
• Fertilizers, seeds, seedlings and fingerlings, fish, prawn, livestock and poultry feeds, including ingredients
used in the manufacture of finished feeds
• Books, newspapers or magazines
• Medicines prescribed for diabetes and hypertension
• Passenger or cargo vessels and aircrafts
3. Sales of goods by cooperatives
Sales by agricultural cooperatives duly registered in good standing with the Cooperative Development Authority
(CDA) to their members, as well as sales 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. Sales by non-agricultural, non-
electric and non-credit cooperatives duly registered and in good standing with the CDA.

4. Sales of residential properties

• Sale of real properties utilized for low-cost housing
• Sale of real properties utilized for socialized housing
• Sale of residential lot valued at P1,919,500 and below and other residential dwelling valued at P3,199,200
and below

5. Export sales by non-VAT persons

6. Treaty-exempt sales of goods
Sales of goods exempt under international agreement to which the Philippines is a signatory or under special laws
7. Tax-free exchange of property
The exchange of properties in pursuant to a plan of merger or consolidation or the transfer of property that resulted
in the initial acquisition of corporate control
8. Sale of gold to the Bangko Sentral ng Pilipinas (BSP)
The sale of gold to the BSP is now a VAT-exempt transaction which is previously considered a zero-rated sale.

(Mnemonic: SECRET Tax-free Gold)

1
Exempt Sales of services
1. Schools
Educational services rendered by private educational institution duly accredited by the Department of Education,
the Commission on Higher Education and Technical and Skills Development Authority and those rendered by
government educational institutions

2. Employees
Services performed by individuals in pursuant to an employer and employee relationship

3. Agricultural contract growers and millers

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

4. Residential leasing
Lease of residential unit with monthly rental not exceeding P15,000

5. Cooperative services
Gross receipts from lending activities by credit or multi-purpose cooperatives duly registered and in good standing
with the Cooperative Development Authority

6. Hospitals
Medical, dental, hospitals, and veterinary services except store, those rendered by professionals and sales of
drugs by a hospital drug store.

7. Home owner's association or condominium corporations

Association dues, membership fees, and other assessments and charges collected by homeowner's associations
and condominium corporations

8. Lease passenger or Cargo vessels and aircrafts, including engine, equipment and spare parts thereof
for domestic or international transport operations

9. Treaty-exempt services
Transactions which are exempt under international agreement to which the Philippines is a signatory or under
special laws

10. Regional area headquarters

Services rendered by regional or area headquarters established in the Philippines by multinational corporations
which acts as supervisory communications, and coordinating centers for their affiliates, subsidiaries or branches
in the Asia Pacific Region and do not or derive income from the Philippines

11. International carriers

Transport of passengers by international carriers (RA 10378)

12. Printers or publishers

Sale, 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

13. Senior citizens and persons with disability

2
Sales of basic essential services to senior citizens and persons with disability by service establishments such
as:
a. Restaurant
b. hotels and lodging establishments
c. recreation centers, such as theater, cinema houses, concert halls, carnivals and such other places
of leisure or amusement
(Mnemonic: SEARCH2 VA TRIPS)

Other exempt sales of goods or services

1. Sales of goods or services taxed by special laws
• Sales of goods or services by Ecozone locators
• Sale of amusement service by theaters and cinemas
These are subject to tax by special laws and are not subject to national business taxes such as VAT or percentage
tax.
2. Sales by persons not engaged in businesses
The sale goods, real properties or services by persons not engaged in business is not subject to business taxes.
3. Sale of assets held for use
The sale of assets held for use such as supplies and items of property, plant and equipment such as: land and building,
machineries, office furniture and fixture, and office equipment is normally exempt from business tax. For VAT-registered
taxpayers, however, the sale of these ordinary assets is considered "incidental transactions" subject to VAT.

EXEMPT SALES OF GOODS OR PROPERTIES, IN DETAIL (SECRET Tax-free Gold)

➢ SALE OF GOODS TO SENIOR CITIZENS AND PERSONS WITH DISABILITY

The sale of essential goods to senior citizens (SC) and persons with disability (PWD) such as the following:

Sale of goods SC PWD

a. Drugs, vaccines and foods for special medical purpose / /
b. Vitamins and mineral supplements / X
c. Accessories and equipment by or for senior citizens, such as
eyeglasses, hearing aid, dentures, prosthetics, artificial bone
replacements, walkers, crutches, wheelchairs, quad canes,
geriatic diapers, and other essential medical supplies,
accessories and equipment / X
d. Casket or urn / /

*Aside from VAT exemption on the sales, senior citizens and PWDs are also legally mandated to be given 20% discount
on the sales of these goods.

Illustration
Special Care Store, is a business catering for the needs of seniors and persons with disabilities. It had the following
sales of goods during the month:
Senior citizens PWDs
Vitamin supplements 300,000 100,000
Medical drugs 100,000 140,000

3
 Eye glasses and wheelchairs 80,000 120,000
Household and kitchen supplies 200,000 100,000
Caskets and urns 240,000 120,000
Memorial lot 300,000 200,000

Only the following sales are VAT-exempt:

Senior citizens PWDs

Vitamin supplements 300,000 -
Medical drugs 100,000 140,000
Eye glasses and wheelchairs 80,000 -
Household and kitchen supplies - -
Caskets and urns 240,000 120,000
Memorial lot - -
720,000 260,000

➢ SALE OF EXEMPT GOODS

Agricultural or marine products and inputs

a. Sale 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 therefore;
b. Sale 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;
Sale of Agricultural or Marine Food Products in Original State
The sale of agricultural and marine food products in their original state including those that have undergone the simple
process of preparation or preservation for the market including advanced technological means of packaging is exempt.

*The conditions for exemption to the VAT on importation of agricultural or marine food products in Chapter 2 likewise
apply to the exemption of sales herein from business tax.

Illustration 1: Fruit and vegetable dealer

Mang Pandong owns a meat and fish outlet in the Baguio City public market. He had the following sales during the
month:

Sale of live hogs P 120,000

Sale of frozen carcass and meat 240,000
Sales of fresh fishes 150,000
Sales of dried and/or smoked fish 80,000

Mang Pandong is not subject to business tax on all of these sales.

Illustration 2: Farmer
Agricorp is engaged in the farming and horticulture business. It earned the following during a quarter:

Sale of palay and rice 1,000,000

Sale of banana mushrooms 100,000
Sale of firewood and charcoal 150,000
Sale of orchids, flowers, and bonsai 250,000

4
Palay, rice, banana, and mushrooms are exempt agricultural food products. The sale of firewood, charcoal, orchids,
flowers, and bonsai are vatable because they are non-food agricultural products.

Note: It must be emphasized again that the term "vatable" means that the sale is subject to VAT if the taxpayer is
VAT-registered or a VAT registrable person but to a 3% percentage tax if the taxpayer is non-VAT taxpayer.
Illustration 3: Poultry operator
The following relates to the sales of Mr. Birdie, a poultry operator:
Sales of chicken 400,000
Sale of one-day old chicks 120,000
Sales of eggs for penoy and balot 180,000
Sales of chicken manure 100,000

All of these are exempt from business tax. Obviously, chicken manure is intended for human consumption but it is
actually a vegetable fertilizer similar to guano; thus, it is also exempt.

Illustration 4
Raymund, a veterinarian, operates a pet shop. The following were his sales and receipts during the month:
Sales of pets 600,000
Sales of animal vitamins, medicines, and feeds 200,000
Receipts from veterinary services 200,000

All of these are subject to business tax. Feeds for pets are vatable. Note also that services provided by professionals
are vatable.

The meaning of "in original state"

As discussed in Chapter 2, the phrase "in original state" means unprocessed.
Illustration 1
Monte Rey had the following sales in his store:

Sales of meat cuts 400,000

Sales of hotdogs 100,000
Cup noodles 10,000
Canned sardines and beans 40,000

The sale of meat cuts is exempt. The sales of hotdogs, cup noodles, and canned goods which are processed foods
are vatable.

Illustration 2
Juan, a dealer of sugar made P400,000 worth of muscovado sugar and P600,000 worth of refined sugar.

The sale of muscovado sugar which is considered raw cane sugar is exempt from business tax. Only the sale of refined
sugar is subject to business tax.

Sale of certain farm or fishery Inputs

Exemption is qualified and limited:
For plants or fruit cultivation- fertilizers, seeds and seedlings
For animal husbandry - livestock, feeds and ingredients for livestock and poultry feeds

5
 For fishery operations- fingerlings, fish and prawn
Illustration
A farm supply dealer sold the following items:
a. Tractors and water pumps
b. Seeds
c. Organic and inorganic fertilizers
d. Pesticides and herbicides
The sales of seeds and fertilizers are exempt. The sale of farm or fishery equipment such as tractors, water pumps
and other farming inputs such as pesticides and herbicides are vatable by virtue of the lack of express legal exemption.

Livestock/poultryfeeds or ingredients in the manufacture of feeds

The sale of livestock or poultry feeds and ingredients used in the manufacture of finished feeds is exempt.

However, the sale of ingredients which may also be used for the production or processing of food for human
consumption is vatable.

Thus, for the sale (including importation) of livestock and poultry feeds or ingredients used in the manufacture of
finished feeds to be exempt from VAT, it must be proven that the same is unfit for human consumption or that the
ingredient cannot be used for the production of food for human consumption as certified by the Food and Drug
Administration (FDA).

Books, newspapers and magazines

The sales of books, newspapers and magazines are exempt from VAT. Remember the criteria for exemption of
magazines under VAT-exempt importation. The same criteria apply here.

Illustration
Jet Bookstore sold the following goods:
Novels 100,000
Textbooks 300,000
School supplies and notebooks 200,000
Office supplies 180,000
Advertising magazines 20,000

Only the sale of novels and textbooks (i.e. books) are VAT-exempt. The sale of office supplies, school supplies other
than books and advertising magazines are vatable.

Medicines for diabetes, high cholesterol or hypertension

Starting January 1, 2019, the TRAIN law provides for the VAT-exemption on the sale of medicines prescribed for
diabetes, high cholesterol or hypertension, as determined by the Department of Health (DOH), by manufacturers,
distributors, wholesalers and retailers.

Examples:
1. Insulins and analogues
2. Blood glucose lowering drugs, such as biguanides, sulfonylureas, alpha glucosidase inhibitors, thiazolidinediones,
dipeptidyl peptidase 4 inhibitors, glucagon-like peptide-1 analogues and sodium-glucose transporter 2 inhibitors; and
others
Illustration
St. Joseph Medical Store made the following sales during the quarter:

6
 Senior citizens PWDs Others
Vitamins and minerals 300,000 20,000 500,000
Insulin 200,000 100,000 400,000
Other medicines 100,000 140,000 300,000
Medical monitoring devices 50,000 20,000 150,000
Medical therapy equipment 80,000 10,000 210,000
Total 730,000 290,000 1,560,000

The following are exempt:

Senior citizens PWDs Others
Vitamins and minerals 300,000 - -
Insulin 200,000 100,000 400,000
Other medicines 100,000 140,000 -
Medical monitoring devices 50,000 - -
Medical therapy equipment 80,000 - -
Total 730,000 240,000 400,000

Note that the medicines prescribed for diabetes, high cholesterol or hypertension is exempt regardless of the buyer.
The exemption on medical accessories or equipment is limited to senior citizens.

Passenger or Cargo Vessels and Aircrafts

The sale of passenger or cargo vessels and aircrafts including engines, equipment, and spare parts thereof for
domestic or international transport operations is exempt from VAT.

For ease of discussion, we classify these as exempt goods because, just like other exempt goods, their VAT
exemption applies both on their importation and sales. Readers must note, however, that the import of medicine for
diabetes, high cholesterol or hypertension has no legal exemption on importation.

➢ SALE OF COOPERATIVES
With the exception of electric cooperatives, cooperatives of any kind are exempt from business tax if they transact
business only with members. Cooperatives which transact business with non-members are subject to business tax
on their sales to non-members if their accumulated reserves exceed P10,000,000.

However, regardless of the type of cooperative, their transactions from unrelated activities are subject to business
taxes just like other entities not considered as business.

Illustration 1: Cooperative transacting business only with members

A credit cooperative which transacts business only with members reported the following sales during the month:
Related activities Unrelated activities
Sales from members P 200,000 P 100,000
Sales from non-members - 20,000
Total 200,000 120,000

The cooperative shall be exempt from business tax on the sales from related activities. However, it shall be subject to
business tax on the P120,000 sales from unrelated activities.

Illustration 2: Cooperative transacting business with non-members

A farming cooperative which transacts business with members and non. members had the following sales during the
month:

7
 Related activities Unrelated activities
Sales from members P 200,000 P 100,000
Sales from non-members 300,000 20,000
Total 500,000 120,000

If the accumulated reserves of the cooperative do not exceed P10,000,000, the total P500,000 sales from related
activities is exempt from business tax, but the P120,000 sales from unrelated activities is taxable.

If the accumulated reserves of the cooperative exceeds 10,000,000, only the P200,000 sales from members from
related activities is exempt from business tax while all the other sales are taxable.

➢ SALE OF REAL PROPERTIES UNDER CERTAIN CONDITIONS

Categories of exempt transactions on real properties
A. By a person not engaged in the realty business (non-dealer)
B. By a person engaged in the realty business which complies with statutory price ceilings (dealer)

Sale by a non-dealers of realty

Sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of business is
exempt from business tax. The reason is that the seller is not engaged in business of selling properties.
However, the sale of properties held for use classified as ordinary asset by VAT taxpayers is an incidental transaction
subject to VAT.

The VAT exemption applies to:

a. Real property classified as capital assets of VAT taxpayers
b. Any real properties of non-VAT taxpayers
c. Any real properties of persons not engaged in business
Illustration 1
Dr. Atoei, a VAT-registered medical doctor, sold his principal residence for P12,000,000 and his medical clinic building
for P50,000,000 to purchase a bigger building for his medical practice.
The sale of the principal residence being a capital asset is not subject to VAT even if Dr. Atoei is a VAT-registered
taxpayer. The sale of his medical clinic building is subject to VAT as it is an ordinary asset to his medical practice.
Illustration 2
Mr. Lee Mado, is a non-VAT registered lawyer. He disposed of his law office building for P8,000,000 to pursue his
dream of establishing a beauty parlor.
The sale of Mr. Mado of his office building, despite being an ordinary asset, is not subject to VAT because he is a non-
VAT taxpayer.

Illustration 3
Mr. Kannaway, a farmer, sold his rice farm land for P4,000,000 to finance his acquisition of a fish pond.

Mr. Kannaway is not engaged in business. His sale of farm land, a capital asset, is not subject to VAT.

Sale by a realty dealer, developer or lessor

8
The sale by businesses engaged in the real estate business is normally subject to business tax. However, their sales
of the residential properties, being essential goods, are exempt if they comply with the statutory or regulatory price
ceilings:
1. Sale of real properties utilized for socialized housing units:
a. House and lot package - P450,000
b. Residential lots only – 180,000
(Per HUDCC Memorandum Circular No. 1 s. 2013, October 16, 2013)
2. Sale of real properties utilized for low-cost housing wherein the price ceiling per unit is P750,000
3. Sale of residential lot valued at P1,919,500/unit and below
4. Sale of residential dwelling valued at P3,199,200/unit and below
Socialized housing -- a housing program and project covering houses and lots only undertaken by the Government
or private sector for the underprivileged and homeless Citizens which shall include sites and services development,
long-term financing, liberated terms on interest payments and such other benefits under the Urban Development and
Housing Act of 1992, RA735 and RA 8763.

Socialized housing shall also refer to projects intended for the underprivileged and homeless wherein the housing
package selling price is within the lower interest rate under the Unified Home Lending Program (UHLP) or any
equivalent housing program of the Government, the private sector or non-government organizations.

Low-cost housing- refers to housing projects intended for the homeless low-income family beneficiaries, undertaken
by the Government or private developers, which may either be a subdivision or a condominium registered and licensed
by the HLURB.

Illustration 1
ABC Realty Corporation sold a residential lot at a price of P1,800,000.
This sale is exempt from business tax since the sale conforms to the P1,919,500 sales price ceiling on sales of
residential lot under the law.

Illustrative 2
ABC Realty Corporation sold a house and lot at a price of P3,200,000.

The sale is subject to business tax (i.e., VAT) since the sale is above the P3,199,200 price ceiling on the sale of
residential dwellings. Note that because of their volume of sales, realtors are usually registered as VAT taxpayers.
Illustration 3
Don Pedro, an employee, sold a residential lot for P2,000,000.
The sale is exempt from business tax even if made above the P1,919,500 price limit because Don Pedro is not regularly
engaged in the realty business.
The residential lot is a capital asset exempt from VAT. It must be emphasized that the sale of real property classified
as a capital asset is subject to the 6% capital gains tax and will not be subject to the business tax.

Illustration 4
The National Housing Authority, a government agency, sells "low-cost housing unit" with a price of P 1,000,000 per
unit to qualified applicants.
The sale of the housing units shall be subject to tax despite being described as "low-cost housing units" because it
does not comply with the price limit set by law.

9
Sale of adjacent lots
For the purpose of the ceiling, the sale of adjacent residential lots, house and lots, and other residential dwellings
within the 12-month period in favor of one buyer shall be treated as one. (RR13-2012) This rule is intended to counter
unwarranted partition of the sale into several deeds to evade the business tax.
Illustration
A realty developer was supposed to sell a 100m2 lot at a price of P2,000,000. However, the lump sum sale of the lot
would make it subject to business tax. The developer proposed to sell the first 50 m2 lot for P1,000,000 then later the
other 50 m2 for another P1,000,000 so that the sale of the lot would be tax free.

This tax minimization technique is no longer allowed. The sale of the adjacent lots to the same buyer shall be
aggregated for purposes of the threshold. Since the aggregate selling price of the lots exceeds the price ceiling, both
sales are subject to business tax (i.e., VAT). The VAT will be recognized on the second sale.

This aggregation rule does not apply to sale of parking lots which may or may not be included in the sale of
condominium units because parking lots are not residential in nature. The sale of parking lot is vatable.
Illustration
Cevar Realty sold a residential house and lot for P1,800,000 together with an adjacent parking lot separately priced
for P200,000 to a buyer.

The P200,000 sales of the parking lot is vatable. The P1.8M sale of the residential lot is exempt. The aggregation rule
does not apply.

➢ EXPORT SALES OF NON-VAT TAXPAYERS

The export sales of non-VAT taxpayers are exempt from percentage tax. Under the law, however, the export sale of
VAT taxpayers is taxable to the value added tax but at 0% rate.

Illustration 1
Ina Bangunan is a non-VAT registered corporate producer of high value crops and agricultural products for export and
domestic sales. It had the following sales during the quarter:
Domestic sales Export sales Total
Sales of banana 400,000 1,200,000 1,600,000
Sales of kalinga oranges 500,000 1,800,000 2,300,000
Sale of wine and vinegars 40,000 400,000 440,000
Total 940,000 3,400,000 4,340,000

The following sales are exempt:

Domestic sales Export sales Total
Sales of banana 400,000 1,200,000 1,600,000
Sales of kalinga oranges 500,000 1,800,000 2,300,000
Sale of wine and vinegars 400,000 400,000
Total 900,000 3,400,000 4,300,000

Remember that the domestic sales of agricultural products in original state is exempt. The export sales by non-VAT
taxpayer is also exempt. The domestic sales of processed agricultural product such as the wine and vinegar is subject
to 3% percentage tax.

Illustration 2

10
Assume the same information in Illustration 1, except that Ina Bangunan is a VAT-registered taxpayer but did not opt
to subject its exempt sales to VAT.

The following sales are exempt:

Domestic sales Export sales Total

Sales of banana 400,000 400,000
Sales of kalinga oranges 500,000 500,000
Sale of wine and vinegars
Total 900,000 900,000

The P 40,000 domestic sales of vinegar is subject to 12% VAT. The P3,400,000 total export sales are foreign
consumption subject to 0% VAT.

Illustration 3
Assume the same information in Illustration 1, except that Ina Bangunan is a VAT-registered taxpayer and opted to
subject his exempt sale to VAT.

There is no exempt sales. The P940,000 total domestic sales would be subject to 12% VAT while the total P 3,400,000
export sales is subject to 0% VAT.

➢ SALES EXEMPT UNDER TREATIES, INTERNATIONAL AGREEMENTS OR SPECIAL LAWS

There are entities that are granted VAT exemption under special laws or international agreements to which the
Philippines is a signatory. Sales to exempt entities are exempt from VAT. Likewise, they are also exempt from the
scope of the 3% percentage tax.
Examples of exempt parties under special laws or international agreements:
1. PEZA registered enterprises
2. Asian Development Bank (ADB)
3. International Rice Research Institute (IRRI)
4. Philippine National Red Cross
5. Embassies of foreign governments
6. The Philippine Amusement and Gaming Corporation
Under the NIRC as amended, sales to these persons are listed under the VAT-exempt transactions. However, for VAT
taxpayers, this VAT exemption is favorably effected by means of a zero-rating treatment.
Illustration 1
Ureshi Company, a non-VAT taxpayer, supplies the Asian Development bank with office supplies. During the quarter,
ATB made total deliveries of supplies worth P500,000.

Based on the Agreement Between the Asian Development Bank and the Government of the Republic of the Philippines,
ADB's property and its operations and transactions shall be exempt from all taxation and any obligation for the payment,
withholding or collection of taxes or duty. Thus, the sale of Ureshi Company to ADB is exempt from percentage tax.

The percentage tax under Sec. 109 (BB) or the NIRC, as amended, applies to sales or lease of goods or properties or
the performance of services other than those enumerated therein. The enumeration includes "transactions which are
exempt under international agreements to which the Philippines is a signatory or under special law".

Illustration 2
Assuming the same information in the previous illustration, except that Ureshi is a VAT-registered taxpayer.

11
The P500,000 sales to ADB will be subject to zero-rated VAT.

➢ TAX-FREE EXCHANGE OF PROPERTY

The TRAIN law added tax-free exchange of property to the list of VAT-exempt transactions, thus the following
exchange of properties are not vatable:
1. Exchange of properties by a corporation in pursuant to a plan of merger or consolidation
2. Exchange of properties by a person, alone or together with others not exceeding four, which resulted
to the acquisition of control

Illustration 1
Pursuant to a plan of merger between Zeus Company, a VAT registered taxpayer, and T-Rex Company, Zeus
Company shall surrender the following assets:
Cash P 500,000
Receivables 800,000
Inventories 1,800,000
Property, plant and equipment 3,000,000
Patent 1,500,000

Zeus Company shall receive 2,000,000 shares of stocks of T-Rex Company which it plans to distribute to its
shareholders after which it shall cease to exist and operate as a legal entity.
The transfer of all of Zeus Company's assets including the ordinary assets inventory and property, plant and equipment
shall not be subject to VAT. This exchange will not be subject to the rules on "deemed sales" which will be discussed
in later chapters.

Assuming Zeus is a non-VAT taxpayer, the same shall not be subject to percentage tax. Non-VAT taxpayers are not
subject to percentage tax on the sale as the tax applies only to sales of goods or services in the ordinary course of
business.

Illustration 2
Miss Vanessa, a VAT-registered, taxpayer exchange his real estate inventories for the stocks of a start-up corporation.
As a result of this exchange, she obtained 51% voting stake in said corporation.

The transfer of real estate inventory, an ordinary asset, in this case is not subject to VAT since this is a tax-free
exchange of property.
Assuming Vanessa is a non-VAT registered taxpayer, the transfer of the real estate inventory shall not be subject to
percentage tax since percentage tax applies only to sales of goods or services in the ordinary course of business,
excluding incidental transactions.

➢ SALE OF GOLD TO THE BANGKO SENTRAL NG PILIPINAS (BSP)

The TRAIN law reclassified the sale of gold to the BSP from zero-rated to exempt. Under RA 11256, the tax applies
both to registered small scale miners and registered gold traders.

Illustration 1
Mang Joseph, a non-VAT-registered miner, sold to the BSP his gold production of 2,000 grams of raw gold nuggets
with specific gravity of 14.9.

The final BSP assay results in the following pay-out before refining charges:

Final assay Price/gram Price

12
 Gold (74%) 1,480 grams P2,140,000 3,167,200
Silver (18%) 360 grams 53 19,080
Trace elements (8%) 160 grams 0 0
Total 2,000 grams 3,186,280

The P3,167,200 sale of gold is exempt. The P19,080 sale of silver is subject to 3% percentage tax. The BSP shall
withhold the 3% percentage tax as final tax.

Illustration 2
Assuming the same information in Illustration 1 except that Mang Joseph is a VAT-registered miner.

The P3,167,200 shall still be exempt. The P19,080 sale of silver is subject to 12% VAT. The BSP shall withhold final
VAT on the selling price of the silver. The final withholding by government agencies and GOCCs on their purchases
will be discussed in future chapters.

Illustration 3
Boss Edong is gold trader. He purchases gold and silver from electronic scrap metal refiners and small-scale miners.
He refined the gold and sold them to the following:

Jewelers BSP Total

Sales of gold P200,000 P800,000 P1,200,000
Sales of silver 100,000 40,000 140,000
Total P300,000 P840,000 P1,340,000

Under RA 11256, the gold sold by traders shall be presumed purchased from small-scale miners.

Whether VAT registered or non-VAT registered, Boss Edong shall be exempt from VAT or percentage tax on the
P800,000 sales of gold to the BSP. The sales of gold to jeweIers and the sale of silver is vatable. It is subject to 12%
VAT if Boss Edong is a VAT taxpayer and to a 3% percentage tax if he is a non-VAT taxpayer.

*There is no tax for the BIR but there is gold in the treasury which help strengthen our Gross International Reserve.

EXEMPT SALES OF SERVICES, IN DETAIL (SEARCH2 VA TRIPS)

➢ EDUCATIONAL SERVICES OFSCHOOLS

Educational services rendered by:
1. private educational institution duly accredited by the:
a. Department of Education (Dep-Ed)
b. Commission on Higher Education (CHED)
c. Technical Education and Skills Development Authority (TESDA)
2. government educational institutions
Considering that education is a necessity, the law exempts school fees from business taxes. This exemption covers
government and private schools, proprietary or non-profit, so long as they have the required accreditation from the
government.

The exemption does not cover services rendered by educational institutions that are not accredited by Dep-ED, CHED
or TESDA, such as:

13
 • Seminars
• in-service trainings
• review classes
• other similar services

Illustration 1
Hebron college, a private college accredited by CHED, reported P2,000,000 receipts from tuition fees during the month.
Hebron also reported P100,000 rental income from the building being rented by commercial tenants.

The tuition fee is exempt. The P100,000 rental is an income from unrelated trade to education; hence, subject to
business tax.

Illustration 2
Topnotch Pampanga, an accredited continuing professional education provider, provides professional seminars,
professional reviews and certification programs for graduates and professionals.

The receipts of Topnotch Pampanga from the foregoing services is subject to business tax. It is subject to VAT if it is
a VAT-registered taxpayer and 3% percentage tax if non-VAT registered taxpayer.

➢ EMPLOYMENT
Services performed by individuals in pursuant to an employer and employee relationship
The provision of services to an employer under an employer-employee relationship is not a business. Hence, it is
exempt from business taxes.
Professional practitioners, consultants, talents, TV artists, brokers and agents are not employees; hence, they are
subject to business taxes.
Illustration 1
Aljon, an audit practitioner and a part-time teacher earned the following:
Compensation income 1,800,000
Receipts from audit clients 1,200,000
The compensation income is exempt from business tax as employment is not business. Only the PI,200,000 receipt
from professional fees is subject to business tax because the exercise of a profession is considered business.

Illustration 2
Dr. Almor Ranas arranged with a hospital to accept his clients. He entertains clients in the hospital. The hospital shall
bill his professional fees in the name of the hospital. The hospital repays Dr. Ranas his professional fees less hospital
accommodation charges.
The professional fees are not compensation income and are therefore subject to business tax. Furthermore, medical
practitioners are not allowed to claim exemption under the cloak of the hospital service exemption.

Director’s Fees
The BIR made a reversal of the rule in RMC 77-2008 declaring that director's fees are not earned in the course of
business pointing, among others, that director's fees do not arise from an undertaking that is intended to be pursued
in the course of business.

According to RMC 77-2008, engagement in business or trade involves the following:

a. Continuity of activity on a going concern basis

14
b. Objective to earn unrestricted amounts of pecuniary gains or profits
c. Unrestricted offering of the goods or service to any customer or client

➢ AGRICULTURAL CONTRACT GROWERS AND MILLERS

Services by agricultural contract growers and milling for others of palay into rice, corn into grits, and sugar
cane into raw sugar
Agricultural contract growers refers to persons producing for others poultry, livestock or other agricultural and marine
food products in their original state.

Illustration 1
John was contracted by Purepork, a distributor of pork and chicken meat products, to raise hogs and chicken. John
shall be paid a fixed contract price for undertaking.

John is an agricultural contract grower. The contract price received by John from Purepork is exempt from business
tax. The sale of Purepork of its meat products is also exempt from business tax.

Illustration 2
Cordilleran Milling Company offers a variety of milling services ranging from palay, corn, cane to raw sugar, and gold
ores. It had the following receipts during the month:
Palay and corn milling fees P600,000
Sugar milling fees 200,000
Ore ball milling fees 400,000

Only those receipts from milling services for the processing of agricultural produce for ultimate human consumption
are specifically exempted. Hence, the receipts from the ball milling of gold ore are taxable.

*It must be noted that the exemption is limited to the services of producing or raising for others and milling of agricultural
or marine food products. Agricultural support services, food processing and food service enterprises are taxable.

Illustration 1
Horacio Company is a general agricultural generator. It had the following receipts during the month:
Rice and corn milling fees P170,000
Construction fees for a poultry building 500,000
Installation fee for a biogas plant 300,000
Installation fee for a solar-power plant 200,000
Cultivation fees for rice field preparation 50,000
Installation fee for a submersible pump 80,000
Total P1,300,000
Only the rice and corn milling fees is exempt. Horacio Company is not a producer of livestock, poultry or crops for
others. Its receipts from agricultural support services is vatable.
Illustration 2
SA Dressing Company operates a chicken dressing plant whereby chicken of farm producers are brought, slaughtered,
cut and dressed for supermarket sales.

Dressing services on agricultural products even if the residual product is in original state is not agricultural contract
growing or milling; thus, it is vatable.

Illustration 3
You Lechon, Inc. sells charcoal roasted swine, chicken or ducks offered with different menus in its dining outlets.

15
You Lechon is subject to VAT even if the goods sold it sells underwent simple processing. It is a restaurant classified
as a seller of service rather than seller of goods. Restaurants is not one of those exempt sellers of services under
SEARCH2 VA TRIPS.

Illustration 4
Chooks sells roasted swine chicken and ducks alone without the dining space where customers buy and leave.
Chooks is not a seller of service but a seller of goods. Since it is selling agricultural product which underwent simple
processing, it shall be exempt.

➢ RESIDENTIAL LEASING
Lease of residential unit with monthly rental not exceeding P15,000
Residential units refer to apartments and houses and lots used for residential purposes, and building or parts or units
thereof used as dwelling places such as, dormitories, rooms and bed spaces, except, motels, motel rooms, hotels, and
hotel rooms, lodging houses, inns and pension houses.

The term unit shall mean:

1. an apartment unit -in the case of apartment
2. a house -in the case of residential houses
3. per person - in the case of dormitories, boarding houses and beds space
4. per room -in the case of rooms for rent

The apparent purpose of this exemption is to provide tax incentive for keeping the rentals of housing units low
considering that housing is necessary and natural human consumption.

Illustration I
Cohen Homes is a real property lessor with the following properties and receipts:
Per unit rental Annualized rent
Apartment houses P 20,000 P 480,000
Residential houses 12,500 750,000
Boarding houses 2,000 2,400,000
Total annual rent P3,630,000

The following indicates the taxability of these residential dwellings:

Per unit rental Annualized rent

Apartment houses P 20,000 P 480,000 Taxable
Residential houses 12,500 750,000 Exempt
Boarding houses 2,000 2,400,000 Exempt
Total annual rent 3,630,000

The residential units rented for P15,000/month and below are exempt from VAT or percentage tax regardless of the
aggregate annual rental receipts.
The rentals of the apartment houses is vatable but since the aggregate rentals did not exceed the P3M VAT threshold,
Cohen pay 3% percentage tax on this receipt.
Illustration 2
Alpine Residence is a real property lessor with the following properties:

16
 Per unit rental Annualized rent
10 Class A Residence P20,000 P2,400,000
12 Class B Residence 16,000 2,304,000
30 Class C Residence 15,000 5,400,000
Total rent P10,104,000
The Class C residences are exempt from business tax. Class A and Class B are above the P15,000/monthly hence,
vatable. Since the total receipts from Class A and Class B (4,704,000), exceeds the P3M VAT threshold, Alpine
Residence shall pay VAT on Class A and Class B receipts.
Illustration 3
Gensan Travel Lodge has 200 rooms with average occupancy of twenty-four days a month. Gensan Travel Lodge
charges P2,000 for each day of stay. It earns P320,000 average monthly fees.

Hotels, inns, and lodges are not residential dwellings hence subject to business tax. The exemption limit does not
apply to them. Since the projected annual receipt of P3,840,000 (P320,000 x 12) exceeds the P3,000,000 VAT
threshold, Gensan Travel Lodge is subject to VAT.

➢ SALE OF SERVICES BY COOPERATIVES

The gross receipts from sale of services by cooperatives such as lending, marketing or multi-purpose cooperatives is
exempt similar to the rules discussed under sales of goods by cooperatives.

➢ HEALTH OR HOSPITAL SERVICES

Medical, dental, hospital and veterinary services except those rendered by professionals and sales of drugs
by hospital drugstores
The sale of the above services is not subject to business tax. This rule applies to all health services whether rendered
by a private, non-profit or government hospital. Health services rendered by professionals, and the sale of drugs are
vatable.
Illustration
Betany Hospital, a private hospital, had the following receipts and sales during a month:
Patient service revenue P10,000,000
In-patient sales 1,000,000
Out-patient sales
Anti-diabetes and hypertension medicines 800,000
Other medicines 3,000,000
Check-up fees 200,000
Laboratory services 2,700,000
Rent income on clinic space leased to doctors 500,000
Total P18,200,000
The following receipts and sales are exempt:
Patient service revenue 10,000,000
In-patient sales 1,000,000
Out-patient sales:
Anti-diabetes and hypertension 800,000
Check-up fees 200,000
Laboratory services 2,700,000
Total exempt receipts P14,700,000

17
Hospital services including laboratory services are exempt. In-patient revenue refers to the sale of medicines to
confined patients. This is not a sales of goods but rather an essential part of the hospital medical services, hence
exempt.
On the other hand, out-patient sale of medicine or the sale to non-confined clients is a taxable sale of goods but the
sale of medicine prescribed for diabetes and hypertension is an exempt sale of goods. Check-up or consultation fees
charged by the hospital outpatient clients is an exempt sale of hospital service.

Note that the leasing of clinic space is a sale of service that is not part of the listed exempt sales of services and hence,
vatable.

➢ HOME OWNER'S ASSOCIATION OR CONDOMINIUM CORPORATION

The TRAIN law exempted association dues, membership fees, and other assessments and charges collected by
homeowner's associations and condominium corporations on a purely reimbursement basis from business tax.
In the absence of profit-seeking motive as proven by the reimbursement-type assessments of its members, the
homeowner's or condominium associations cannot be said to be businesses. However, if it is being operated as if it
sells its services to its members from which it derives a mark-up and profit, then it is taxable business.

➢ LEASE OF PASSENGER OR CARGO VESSELS AND AIRCRAFTS, INCLUDING SPARE PARTS AND
EQUIPMENTS THEREOF

Similar to import and sales, the leasing of vessels and aircrafts including spare parts and equipment thereof are VAT-
exempt.
Illustration
DXY Enterprise imports, sells and leases air and water crafts. During the quarter, it had the following transactions:

Lease
Sales Lease rentals
rentals
Yacht P2,000,000 300,000 500,000
Tanker 20,000,000 25,000,000 800,000
Roll-on Roll-off boat 4,000,000 6,000,000 600,000
Fishing boat 2,400,000 3,600,000 300,000
Cargo plane 50,000,000 70,000,000 2,500,000
Private jets 40,000,000 50,000,000 4,000,000
The following indicate the taxation of each of the following transactions:
Lease
Import Sales rentals
Yacht vatable vatable vatable
Tanker exempt exempt exempt
Roll-on Roll-off boat exempt exempt exempt
Fishing boat vatable vatable vatable
Cargo plane exempt exempt exempt
Private jets vatable vatable vatable

Yatch, fishing boat and private jets are not intended for passenger or cargo transport and hence taxable.

18
 ➢ TREATY-EXEMPT SALES OF SERVICES
The receipts from services sold to entities which are exempt under treaties or international agreements to which the
Philippine government is a signatory are exempt. Same rules apply similar to our discussion on the topic under exempt
sales of goods.

➢ REGIONAL OR AREA HEADQUARTER OF A MULTINATIONAL COMPANY

Services rendered by regional or area headquarters established in the Philippines by multinational
corporations which acts as supervisory, communications and coordinating centers for their affiliates,
subsidiaries or branches in the Asia Pacific Region and do not or derive income from the Philippines
A regional or area headquarters (RAH or RHQ) is an integral part of the multinational corporation. It is not a separate
business or a branch, but an administrative office which does not derive income on its own; hence, it is not subject to
business tax. On the other hand, a regional operating headquarters (ROHQ) is taxable.

Illustration 1
A representative office of Institu Company, a corporation established in the Netherlands, is based in Baguio City. The
office coordinates activities of branches and subsidiaries of Institu Company across Asia. Institu Company subsidizes
the Philippine office by transferring P2,000,000 monthly to cover administrative expenses.

This representative office is exempt since it is not a business. The monthly subsidy from Institu Company are mere
advances or reimbursements for office expenses.

Illustration 2
Assume the same information in the preceding problem, except that the Philippine office is a research office. Research
output are sold by the Philippine Office to its affiliates and subsidiaries of Institu in the Philippines and Asia.

In this case, the Philippine office would be subject to a business tax. Sales of services for Philippine affiliates would be
vatable. Sales of services for overseas affiliates would be subject to zero-rated VAT.
➢ TRANSPORT OF PASSENGERS BY INTERNATIONAL CARRIERS
The receipts from the transport of passengers by international carriers originating from the Philippines going abroad is
now exempt from business tax under RA 10378.

International carriers are air carriers or shipping carriers owned by resident foreign corporations doing business in the
Philippines.

Illustration 1
Singapore Airlines, an international carrier, had the following receipts during a month:
From passengers From cargoes Total
Outgoing flights P32,000,000 P7,000,000 P39,000,000
Incoming flights 41,000,000 18,000,000 59,000,000
Total P73,000,000 P25,000,000 P98,000,000

The P32M receipt from outgoing transport of passengers is exempt. The P7M receipt from outgoing cargoes, excess
baggage, or mails is specifically subject to percentage tax under the NIRC.

The P59M receipt from incoming flights is a foreign consumption. This is exempt from Philippine business tax because
the service is rendered abroad.

19
Illustration 2
JDC Airlines, a domestic carrier with international operations, reported P20,000,000 receipts from outgoing flights,
P10,000,000 from incoming flights, and P90,000,000 from domestic flights during the month.
The following summarizes the business tax treatment:
1. Receipts from outgoing flights (foreign consumption, service rendered within)- 0% VAT
2. Receipts from incoming flights (foreign consumption, service rendered abroad) -Exempt
3. Receipts from domestic flights (domestic consumption) — 12% VAT
Note that airliners and shipping carriers are subject to VAT because their receipts are normally above the VAT
threshold.

➢ SERVICES OF PRINTERS AND PUBLISHERS

The printing, or publication of books and any newspaper, magazine, review, or bulletin which appear at regular
intervals with fixed prices for subscription and sale and which is not devoted principally to the publication of
paid advertisements is exempt.

Illustration 1
Cordillera Courier publishes a weekly newspaper. During the month, it had the following receipts:
Sale of newspapers P 500,000
Fees from advertisements 300,000
Rent from lessees of vacant spaces 50,000

Only the sale of newspapers is exempt. Advertisement fees and the rent of its vacant space are subject to business
tax.

Illustration 2
Baguio Printing Press reported the following receipts from printing services:
Books P 300,000
Newspapers 200,000
Tarpaulins and campaign ads 200,000

The receipts from printing of tarpaulins and campaign ads are subject to business tax. The printing fees from books
and newspapers are exempt.

Illustration 3
Jet Bookstore reported the following sales during the month:
Sales of book inventories P400,000
Commission income from book publishers 30,000

The sale of books is an exempt sales of goods. The service of undertaking to sell books for others for a fee or
commission is not among those exempt sales of services; hence, commission income is vatable.

➢ SALES OF SERVICE TO SENIOR CITIZENS AND PERSONS WITH DISABILITY

Senior citizens and PWDs
Senior citizens and persons with disability are exempt from VAT on essential services provided by the following covered
establishment:
1. Lodging establishment, such as apartel, dormitory, motorist hotel, tourism inn, pension house
excluding long-term residency arrangements
2. Hospital and clinic

20
 3. Sports and recreation centers
4. Restaurants such as eating places offering regular or special menus to the public
5. Land, air and sea travel
6. Medical, dental, diagnostic and laboratory fees and professional medical fees
7. Funeral or burial services for the burial of senior citizens

Illustration 1
A medical doctor had the following clients and gross service fees:

Patients Professional fees Medicine sales

Senior citizens P 18,000 P70,000
Persons with disability 12,000 40,000
Minor patients 10,000 28,000
Adult patients 24,000 42,000

The following are exempt:

Patients Professional fees Medicine sales

Senior citizens P 18,000 P 70,000
Persons with disability 12,000 40,000
Total P40,000 P110,000

Illustration 2
TLC Lechon, a non-VAT registered, seller of roasted chicken, decided to add a small for dine-in service to cater for
customer demand. It had the following receipts and sales for the month:

Patients Dine in receipts Take-out sale

Senior citizens P 8,000 P 40,000
Persons with disability 2,000 12,000
Other customers 14,000 240,000

The following are exempt:

Patients Dine in receipts Take-out sales

Senior citizens P 8,000 P 40,000
Persons with disability 2,000 12,000
Other customers 240,000

The original take-out sales are sales of goods not service. Since the goods underwent simple process, they are exempt
The dine-in receipts are sales of service not sales of goods hence normally taxable but restaurant receipts from senior
citizens and persons with disability are legally exempted hence non-taxable. The dine-in receipts from other customers
shall be subject to 3% percentage tax since TLC Lechon is a non-VAT taxpayer.
Illustration 3
A senior citizen presented a senior citizen identification card when paying the funeral expenses of his deceased
grandchild.

21
The VAT exemption including the senior citizen discount can be claimed for the burial of the senior citizen. The VAT
exemption can only be availed by senior citizens or persons with disabilities but not for or by other persons.

Illustration 4
A beautiful young lady is presenting a senior citizen identification card for the purchase of food for herself and her
friends.

The VAT exemption privilege is reserved by law only to senior citizens or persons with disabilities. The sale is vatable.
Recording of sales to senior citizens and PWDs
Aside from the VAT exemption, senior citizens and persons with disability (PWD) are entitled to a 20% special discount
on their purchases from qualified establishments. This discount including the VAT exemption shall be applied only for
the consumption of the senior citizen or PWD.

The sale to senior citizens and PWDs is recorded as:

Cash/Receivable xxx
Senior citizen/PWD discount xxx
Sales xxx

Illustration 1
A VAT-registered restaurant sold food and beverages totaling P2,240 to a senior citizen who presented a senior
citizen identification card. The senior citizen was accompanied by three other non-senior citizens.

The amount to be billed shall be computed follows:

Invoice price to senior citizen (P2,240 x 1/4) 560

Less: Output VAT to senior citizens (P560 x 12/112) 60
Sales to senior citizen 500
Less: Senior citizen discount (20% x P500) 100
Net amount due from senior citizen 400
Sales to non-senior citizen (P2,40 x 3/4) 1,680
Total amount to bill P2,080

The bill shall be presented in the VAT invoice or receipt as follows:

Total sales P2,240

Less: VAT on senior citizen sales 60
Total sales 2,180
Less: Senior citizen discount (this is an expense) 100
Amount due P2,080

Details of the bill shall be presented in the VAT invoice or receipt as:

Vatable sales (P2,240 x 3/4) 112% P1,500

22
 VAT exempt sales (sales to senior citizen) 500
Output VAT amount (P1,500 x 12%) 180
Total sales P2,180

Senior citizen and PWD engaged in business

It must be noted that senior citizen and PWD are given the tax privilege of discounts and exemption when they
purchase essential goods or services. If senior citizens and PWDs own businesses, they are, of course, subject to
VAT or percentage tax on their sales or receipts similar to other regular business taxpayers.

Invoicing Requirement for Exempt Sales

With respect to VAT-taxpayers, exempts sales of goods or services must be specifically designated as such by
indicating or pre-printing the caption “EXEMPT” on the invoice or receipt.

The failure to comply with this requirement shall make the sale vatable. The sale will be subject to VAT is a VAT-
registered taxpayer and subject to 3% percentage tax if the person is a non-VAT registered taxpayer.

23
CHAPTER 5 PERCENTAGE TAX

Percentage Tax
 A percentage tax is a national tax measured by a certain percentage of the gross selling price or gross value
in money or goods sold or bartered; or of the gross receipts or earnings derived by any person engaged in
the sale of services.

The Scope of the Percentage Tax

Coverage Type of % tax Tax rates
Services specifically subject to percentage tax Specific % tax Various tax rates
Sales of goods or other services not exempted General % tax 3% percentage tax

Who pays percentage tax?

VAT registered
Type of Percentage Tax taxpayers Non-VAT taxpayers
Specific percentage tax / /
General percentage x /

**Non-VAT taxpayers are those who did not exceed the VAT threshold and who did not register as VAT taxpayers.

SERVICES SPECIFICALLY SUBJECT TO PERCENTAGE TAX

 Banks and non-bank financial intermediaries
 International carriers on their transport of cargoes, excess baggage and mails only
 Common carrier on their transport of passengers by land and keepers of garage
 Certain amusement places
 Brokers in effecting sales of stocks through the Philippine Stock Exchange and corporations or shareholders
on initial public offerings
 Certain franchise grantees
 Life insurance companies and agents of foreign insurance
 Telephone companies on overseas communication
 Jai-alai and cockpit operators on winnings
**BICAP FLOW

TAX ON BANKS AND NON-BANK FINANCIAL INTERMEDIARIES

PERFORMING QUASI-BANKING FUNCTIONS
 Banks refers to entities engaged in the lending of funds obtained in the
form of deposits. Banks includes commercial banks, savings banks,
mortgage banks, development banks, rural banks, stocks and savings
associations, branches and agencies of foreign banks.

 Non-bank financial intermediaries refers to persons or entities whose

principal function include the lending, investing or placement of funds or
evidences of indebtedness or equity deposited with them, acquired with
them or otherwise coursed through them, either for their own account or
for the account of others.

 Quasi banking function refers to the borrowing of funds from twenty 20

or more personal or corporate lenders at any one time, through the
issuance, endorsement or acceptance of debt instruments of any kind,
other than deposits, for the borrower’s own account or through the

1
 issuance of certificates of assignment or similar instruments, with recourse, or of repurchase agreements for
purposes of relending or purchasing receivables or other similar obligations.
**Non- bank financial intermediaries performing quasi-banking functions are commonly referred to as Quasi-banks.

Tax rates on banks and quasi-banks

Source of income or receipt % tax rate
1. Interest income, commissions and discounts from lending activities, and income from
financial leasing, on the basis of remaining maturities of instruments form which the
receipts were derived:
a. Maturity period of five years or less 5%
b. Maturity period of more than five years 1%
2. Dividend and equity shares in the net income of subsidiaries 0%
3. On royalties, rentals of property, real or personal, profits from exchange and all other 7%
items treated as gross income under section 32 of the NIRC
4. On net trading gains within the taxable years on foreign currency, debt securities, 7%
derivatives, and other similar financial instruments (RA 9337)

Note:
1. The percentage tax on banks, quasi-banks and other non-bank financial institution is commonly known as
the “gross receipt tax.”
2. The BSP usually makes a periodic publication of the list of quasi-banks. Non-bank financial intermediaries
not performing quasi-banking functions are subject to a separate set of gross receipt tax rate.

Illustration 2: Meaning of “On the basis of remaining maturities”

In 2019, east bank had a 10-year loan with a principal amount of P 1,000,000 which was issued on March 31, 2014.
The loan pays P 20,000 monthly interest income on the last day of every month.

The applicable gross receipt tax rate for the monthly interest payments on the loan in 2014 shall be:
Month Remaining maturity Applicable tax rate
January 31, 2019 5 years and 2 months 1%
February 28, 2019 5 years and 1 month 1%
March 31, 2019 Exactly 5 years 5%*
April 30, 2019 4 years and 11 months 5%*

This tax rate applies on interest income for every month thereafter until maturity The monthly gross receipt tax
on the interest income on this loan shall be:
January February March April
Interest income P 20,000 P 20,000 P 20,000 P 20,000
Gross receipt tax rate 1% 1% 5% 5%
Gross receipt tax P 20,000 P 20,000 P 1,000 P 1,000

Meaning of “gross income

 The items of gross income referred to in section 32 of the NIRC include only those items of gross income
subject to regular income tax. It can be argued therefore that only those items of gross income subject to the
regular tax are includible as “gross receipt” for purposes of the percentage tax.

2
**Under current jurisprudence, however, the term “gross income” of banks was held to include those items of gross
income subject to final tax. (CIR vs. Bank of Commerce, GR No. 14936)

**Furthermore, it was also held that the amount of gross income to be included in gross receipts for purposes of the
gross receipt tax shall be the amount of income, gross of the final income tax (CIR vs. Bank of the Philippine Islands,
GR No. 147375).

Illustration:
The kalibo Bank received a total of P8M interest income from short-term deposits with other banks during the month.
The interest was net of the 20% final income tax.

Gross receipts (P8M/80%) P10,000,000

Multiply by: 7%
Gross receipt tax (GRT) P700,000

Net trading gains within the taxable year on foreign currencies, debts, securities, derivatives and other
financial instruments
 The tax clearly applies to the annual net gains from this category. According to RR4-2009, the figure to be
reported in the monthly percentage tax return shall be cumulative total of the net trading gain/loss since
the start of the taxable year less the figures already reflected in the previous months of the taxable year.
 Net trading loss sustained from this category shall be deductible only to the gains from trading on the same
category. The net trading loss shall not be deductible to other categories of receipts. If the bank has a
cumulative net loss at the end of the year, the same cannot be carried over as deduction against
trading gains in the following year.

Illustration 1
A bank had the following income respectively in April 2016 and May 2016
April May
Interest income from short-term loans P 100,000 P 100,000
Rentals 50,000 50,000
Net trading (loss) gain (10,000) 20,000

The percentage tax shall be computed as follows:

For the month of April

Gross receipt tax on interest-short term (P 100,000 x 5%) P 5,000
Gross receipt tax on rent (P 50,000 x 7%) 3,500
Net trading loss -
Gross receipt tax P 8,500
Note: the loss cannot be offset against other items of gross receipts.

For the month of May

Gross receipt tax on interest-short term (P 100,000 x 5%) P 5,000
Gross receipt tax on rent (P 50,000 x 7%) 3,500
Net trading loss 700
Gross receipt tax P 9,200
Note: the table amount of the gain is the cumulative net gain to date.

3
Exemption from the gross receipt tax
**The gross receipt tax imposed on banks does not apply to the income or revenue realized by the Bangko Sentral
ng Pilipinas (BSP) from its transactions undertaken in pursuit of its legally mandated functions. (Sec. 5, RR No. 8-
2008)

TAX ON OTHER FINANCIAL INTERMEDIARIES WITHOUT QUASIBANKING FUNCTIONS

Source of income or receipt % Tax rate
Interest income, commissions and discounts form lending activities, income from
financial leasing, on the basis of remaining maturities derived:

1.Maturity period is five years or less 5%

2. Maturity period is more than five years 1%
From all other items treated as gross income under the NIRC 5%

Examples of non-bank financial intermediaries without quasi-banking functions include:

a. Pawnshops (RR10-2004, October 18,2004 and RA 9238)
b. Money changers
Pre-termination of loans
In the case of pre-termination, the maturity period shall be recommended to end as of the date of pre-termination for
purposes of classifying the transaction and applying the correct rate of tax.

Illustration:
On January 1, 2015, Juan Bank loaned P1M to a client payable within 10 years. The loan pays 10% interest payable
every December 31 with the first interest payment due December 31, 2015. On June 30, 2021, the client pre-
terminated the loan by repaying the principal in full.
The ffg. are the interest income and the gross receipt taxes paid since the origination of the loan:

Year Remaining maturity Interest Tax rate Amount

2015 9 years 100,000 1% 1,000
2016 8 years 100,000 1% 1,000
2017 7 years 100,000 1% 1,000
2018 6 years 100,000 1% 1,000
2019 5 years 100,000 5% 5,000
2020 4 years 100,000 5% 5,000
Total 14,000
6/30/2021 50,000 ? ?

*Upon pre-termination in June 30, 2021, the loan shall be reclassified. The remaining maturities of the loan shall be
re-counted up to the date of pretermination. The correct gross receipt tax shall be recomputed and adjustment
shall be made:
Remaining
Year maturity Interest Tax rate Amount
2015 5.5 years 100,000 1% 1,000
2016 4.5 years 100,000 5% 5,000
2017 3.5 years 100,000 5% 5,000

4
 2018 2.5 years 100,000 5% 5,000
2019 1.5 years 100,000 5% 5,000
2020 less than 1 year 100,000 5% 5,000
2021 None 50,000 5% 2,500
Total GRT 28,500
Less: GRT previously reported and paid 14,000
GRT due as recomputed 14,500

PERCENTAGE TAX ON INTERNATIONAL CARRIERS

 International carriers doing business in the Philippines
shall pay a tax equivalent to 3% of their quarterly
gross receipts derived from the transport of cargoes,
baggage, or mails from the Philippines to another
country.

There are two types of international carriers:

a. International air carriers
b. International shipping carriers
 The 3% quarterly percentage tax is based on the gross receipts from the transport of cargoes,
excess baggage, or mails regardless of the place where they are actually billed.
 Gross receipts shall include, but shall not be limited to, the total amount of money or its equivalent
representing the contract, freight/cargo fees, mail fees, deposits applied as payments, advanced payments,
and other service charges and fees actually or constructively received during the taxable quarter from
uninterrupted flight, irrespective of the place of sale or issue and the place of payment of the passage
documents.

Taxation of gross receipts on flights or voyages

Domestic
Types of carriers operation International operation
Outgoing Incoming
Domestic carrier 12% VAT 0% VAT Exempt
International carriers
Passenger N/A Exempt Exempt
Goods, ,mails or cargoes N/A 3% OPT Exempt

Illustration
The Philippines operations of Singaporean Airlines, a foreign air carrier, reported the following gross receipts for the
month of April 2020:
Incoming Outgoing Total
Transport of passengers P 24,000,000 P 36,000,000 P 60,000,000
Total of baggage 8,000,000 11,000,000 19,000,000
Total P 32,000,000 P 47,000,000 P 79,000,000

20% of the outgoing freights was billed abroad while 40% of the incoming freight was billed in the Philippines. The
percentage tax shall be:

5
Gross Philippine billings P 11,000,000
Multiply by: 3%
Percentage tax due P 330,000

Note:
1. Only outbound fares for cargos, excess baggage or mails are included in the tax base. The place of actual
billing is ignored.
2. The same tax rules apply to the international shipping carriers.

PERCENTAGE TAX ON DOMESTIC CARRIERS AND KEEPERS OF

GARAGE
 For purposes of the percentage tax, common carriers include cars for
rent or hire driven by the lessee, transportation contractors, persons
who transport passengers for hire and other domestic land carriers on
their transport passengers, except owners of bancas and owners of
animal-drawn two wheeled vehicles.

The following table summarizes the rules on common carriers:

Mode of transport Passenger Baggage/Mails/Cargoes
By land 3% percentage tax Vatable
By water or sea Vatable Vatable
By air Vatable Vatable

 Under the NIRC, the 3% percentage tax is due quarterly upon the gross receipts of common carriers on
their transport of passengers by land. This is called “common carrier’s tax”. In practice, this quarterly tax is
paid in three monthly payments.

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

Minimum presumptive gross receipts for common carriers and keeper of garage
QUARTERLY MONTHLY
Jeepney for hire:
Manila and other cities P 2,400 P 800
Provincial 1,200 400

Public utility bus:

Not exceeding 30 passengers 3,600 1,200
Exceeding 30 but not 50 6,000 2,000
Exceeding 50 passengers 7,200 2,400
Taxis:
Manila and other cities 3,600 1,200
provincial 2,400 800
Car for hire:
With chauffeur 3,000 1,000
Without chauffeur 1,800 600

6
Illustration:
Aling Nena is an operator of a taxi and a car for hire in Cebu City. The taxi reported gross receipts of P26,000 in the
month. The car for hire was indefinitely garaged for repair when its chauffeur bumped it on a bus. The car registered
only P600 receipts in the same month.
The gross percentage tax shall be computed as:

*Common carriers are exempt from local taxes.

*Note that the owner of bancas and animal-drawn two-wheeled vehicles are exempt from the percentage tax, the law
is silent regarding pedicabs bit these businesses may qualify as “business for mere subsistence”; hence, these are
also exempt from business tax.

AMUSEMENT TAXES
Proprietor, lessee or operator of the following amusement places shall pay the
following respective tax rates on their quarterly gross receipts:

Places of boxing exhibitions 10%

Places of professional basketball games 15%
Cockpits, cabarets, night or day clubs 18%
Jai-alai and race tracks 30%

Note that other operations of amusement places such as bowling alleys golf
courses and billiards are vatable.

Exempt receipts on professional boxing

The gross receipts from professional boxing are exempt from percentage tax under
the following conditions:
1. World or oriental championship
2. At least one of the contenders is a Filipino citizen
3. The promoter is a Filipino citizen or a corporation 60% of which is owned
by Filipino citizens.
 For the purpose of the amusement tax, gross receipts embrace all receipts of the proprietor, lessee or
operator of the amusement places. Said receipts include income from television, radio and motion pictures
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 (Sec. 125,
NIRC)
 The tax shall be payable within 20 days after the end of each quarter. The proprietor, lessee or operator
shall make a true and complete return of the amount of the gross receipts derived during the preceding
quarter and pay the tax thereon.

7
Illustration 1
ABC Hotel, Inc. operates a hotel with a disco and restaurant. The following were its sales and receipts during a
particular quarter:
Room rentals 2,000,000
Parking rentals 100,000
Sales from hotel restaurant 1,200,000
Sale of foods and beverages from disco 1,000,000
Gate receipts from disco 200,000

The quarterly percentage tax will be computed as follows:

Sale of foods and beverages from disco 1,000,000

Gate receipts from disco 200,000
Total amusement receipts 1,200,000
Multiply by: Amusement tax rates 18%
Amusement tax 216,000

*The other receipts are vatable.

Illustration 2
Sabong Sports Complex, a cockpit operated by Mr. Ma Nuk, had the following receipts during the quarter:

Gross receipts 400,000

Plasada (10% tongs on winnings on every sultada) 600,000
Sales of foods and drinks (Restaurant operated by Sabong) 100,000
Rent income from concessionaires (other business operating in the cockpit) 40,000
Total receipts 1,140,000

The total percentage tax due of Sabong Sports Complex shall be:
Total amusement receipts P1,140,000
Multiply by: Amusement tax rates 18%
Amusement tax P205,200

*if the concessionaires inside the cockpit do not qualify as business for mere subsistence, they will be subjected to
the 3% PT or to VAT.
*Persons who are engaged in the same operations such as operators of illegal “tupada” cockpit are also taxed at
18% of their gross receipts.
NOTE: RA 11494 is tasking the DTI and the DILG to review the imposition of the amusement tax for the regulatory relief to the
critically impacted creative sector. The President shall have the power to suspend, reduce, or waive the imposition of the fees and
charges as recommended by the DTI and DILG for a period of six (6) months. (Section 4(hhh) of RA 11494 – Bayanihan To Recover
As One Act)

Brokers in effecting sales of stocks through the Philippines stock exchange and corporations or
shareholders on initial public offerings

8
NOTE: Section 127 (B) of the NIRC of 1997, as amended - Tax on sale, barter, or sale of stock listed and traded through the local
stock exchange or through initial public offering have been repealed. (Section 6 of RA 11494 – Bayanihan To Recover As One Act)

TAX ON FRANCHISES
Generally, franchises are vatable. Exceptionally however, there are only
two types of franchises that are specifically subject to percentage taxes
under the NIRC:

Franchise grantees % tax rates

1.Radio or television broadcasting companies whose annual gross receipts do not 3%
exceed P 10,000,000
2.Gas and water utilities 2%
Note: the percentage tax on these franchise grantees is referred to as “franchise tax”.

TAX ON LIFE INSURANCE PREMIUMS

 A person, company or corporation (except purely
cooperative companies or associations) doing life
insurance business of any sort in the Philippines is subject
to a tax of 2% on the premiums collected, whether such
premiums paid in money, notes, credits or any substitute
for money.
 Hence premiums on health and accident insurance
underwritten by life insurance companies are subject to the premiums tax. However, premiums on health
and accident insurance underwritten by non-life insurance policies are vatable.

The following shall not be included in gross receipts of an insurance company:

a. Premiums refunded within 6 months after payment on account of rejection of risk or returned for other
reasons
b. Re-insurance premiums
c. Premiums from life insurance of non-residents received from abroad by branches of domestic corporation,
firm or association doing business outside the Philippines
d. Excess of premiums on variable contracts in excess of the amounts necessary to insure the loves of the
variable contract owners.

Types of Insurance Business

a. Direct insurance
b. Reinsurers
c. Retrocessionaires

Note: Except for crop insurance non-life insurance is vatable. Non-life insurance includes surety, fidelity, indemnity,
bonding companies, marine, fire and casualty insurance.

9
Illustration 1
Absolute insurance underwrites both life and non-life insurance policies. The following were premiums collected in a
month:
Life policies Non-life
Cash collections P 2,000,000 P 1,500,000
Checks 400,000 600,000
Promissory note 500,000 400,000
Total P 2,900,000 P 2,500,000

The percentage tax will be computed as

Cash collections P 2,000,000
Checks 400,000
Promissory notes 500,000
Total premiums P 2,900,000
Multiply by: percentage tax rates 2%
Premiums tax P 58,000
Note:
1. Gross receipt includes collections of cash or money substitutes such as check. Only in the case of life
insurance that a promissory note is exceptionally included as part of gross receipts for the purposes of
computing the premium tax.
2. Non-life insurance is vatable. The gross receipts of non-life business do not include promissory notes.

Taxation of other receipts of life insurance business

1. Renewal or re-insurance fee, re-instatement fee and penalties- these are considered incidental to or
connected to insurance policy contracts and akin to premium, hence, subject to the 2% premium tax.
2. Management fees, rental income, or other income from unrelated services- these are vatable
3. Investment income if investment income is realized from the investment of premiums earned, it is exempt
Note that the premiums which have been the source of the funds invested had already been subject to 2% premium
tax.

Summary of tax rules on insurance:

Life insurance Non-life insurance
Direct premiums 2% premiums tax Vatable
Re-insurance premiums Exempt Exempt
Insurance commissions* vatable vatable

Tax on Agents of Foreign Insurance

*equal to twice of 2% (4%)
*direct insurance from abroad (5%)

10
TAX ON OVERSEAS DISPATCH, MESSAGE OR CONVERSATION ORIGINATING FROM THE PHILIPPINES
 The overseas dispatch, message or conversation transmitted from the Philippines by telephone, telegraph,
telewriter exchange, wireless and other communication equipment services is subject to a 10% tax. The
percentage tax is commonly referred to as the “overseas communication tax”

The following table summarizes the business tax rules:

Call Origin Call Destination Business tax
Philippines Philippines 12% vat
Abroad Philippines 0% vat
Philippines Abroad 10% overseas communication tax

*Subject to zero-rating requirements; if not met. Receipt is exempt.

Exemptions
The overseas communication tax shall not apply to the outgoing calls of the following:
1. Government – including any of its political subdivisions or instrumentalities
2. Diplomatic services – embassies and consular offices of foreign governments
3. International organizations – those enjoying privileges, exemptions and immunities under international
agreements
4. News services

WINNINGS FROM HORSE RACE OR JAI-ALAI

Winning from race tracks and jai-alai are subject to the following amusement taxes:
Winnings in horse race or jai-alai, in general (Straight wagers) 10%
Winnings from double, forecast/quinella and trifecta bets (Combination 4%
bets)
Owners of winning race horses 10%

Tax on winnings
The pay-out on combination bets is subject to 4% on the winnings. The pay-out on straight wagers (non-combination
bets) is taxable at 10%.

The tax shall be deducted from the dividend corresponding to each winning ticket or the prize of each winning race
horse owner and withheld by the operator or person in charge of the horse race before paying the dividends or prizes
to the person entitled there to. The tax shall be paid within 20 days from the date it is withheld.

Illustration: Race track operators

Suga Rol operates a race track. It had the following dividends for winning tickets during an event:

Total winnings on straight bets (costs of winning tickets, P5,000) 40,000

Total winnings in daily double, forecast and quinella (cost of winning tickets, P300) 20,000
A winner of trifecta (cost of ticket, P100) 15,000
Prize of the owner of winning horses 50,000
Total prizes, winnings or dividends 125,000

11
The following tax must have been withheld from these winnings before their release to the winners:
Net winnings in daily double, forecast and quinella (P20,000-P300) P19,700
Net winning on trifecta (P15,000-P100) 14,900
Total 34,600
Multiply by: 4% 1,384

Prize of the winning horse 50,000

Net winnings on straight bets (P40K -5K) 35,000
Total 85,000
Multiply by: 10% 8,500
Total percentage tax on winnings 9,884

Note: These taxes on winnings are separate from the 30% amusement tax to be paid by the race track on its own
quarterly gross receipts.

The net pay-out of Suga Rol on the prizes or winnings shall be:
Total prizes, winnings or dividends 125,000
Less: Percentage tax on winnings 9,884
Net pay-out to winners 115,116

WITHOLDING OF PERCENTAGE TAX AT SOURCE

 The sale to government agencies, and instrumentalities including government owned and controlled
corporation (GOCC) is subject to a withholding tax of 3% at source.

 The government agency, instrumentality or GOCC withholds the 3% percentage tax and issues to the
taxpayer BIR form 2307. The taxpayers shall attach BIR form 2307 in filing his percentage tax return.
 The same procedure is employed for withholdings made by the BSP on gross receipts of banks and quasi-
banks on their special deposit accounts or liquidity reserve accounts.

Illustration:
During the quarter, Mr. Avila, a non-VAT taxpayer, sold various supplies to a government agency for 200,000 and to
private customers for P80,000. The government agency shall pay Mr. Avila the following proceeds ne to of the 3%
final percentage tax.
Sales P200,000
Less: 3% FWPT 6,000
Net proceeds to be released to Mr. Avila P194,000

The percentage tax payable for the quarter shall be computed and presented in BIR Form 2551Q as follows:

Sales subjected to government withholding (194,000/97%) P200,000

Sales to private customers 80,000
Gross sales 280,000
Multiply by: 3%
Percentage tax due 8,400
Less: Tax credit (BIR Form 2307) = P200,000 x 3% 6,000
Percentage tax payable P 2,400

12
TAX ON OTHER TAXABLE SALES OF NON-VAT TAXPAYERS
 The imposable percentage tax on taxable sales or receipts, other than from services or transactions
specifically subject to percentage tax, of non-VAT registered person is 3%

Illustration:
Mr. Steve is an operator of 40 taxis with annual receipts exceeding3M and a store with annual sales not exceeding
P3M. The following are the sales and receipts during the month:

Receipts from taxi units P2,000,000*

Sales of fruits 100,000**
Sales of other merchandise 180,000***
Total revenue P2,280,000

*subject to the 3% common carrier’s tax.

**exempt from business tax
***vatable

Exemption of cooperative from percentage tax

Under the section 116 of the NIRC of 1997, cooperatives shall be exempt from the 3% percentage tax.
This exemption, however, is not absolute. Sales or receipts of cooperatives outside their registered activities are still
subject to business tax similar to the business tax treatment of government agencies and nonprofit institutions.

13
CHAPTER 6- INTRODUCTION TO THE VALUE ADDED TAX

VALUE ADDED TAX

 Covers all vatable sales of goods, properties services or leases
Vatable sales or receipts are from sources other than:
 Exempt Sales
 Receipts from services specifically subject to percentage tax
VAT taxpayers
 VAT-registered persons
o Subject to VAT even if its annual sales does not exceed threshold
 VAT-registrable persons
o Those whose sales or receipts exceed VAT threshold without registering as VAT
taxpayers.
o Subject to VAT without the benefit of input tax credit
VAT threshold
VAT Threshold Amount Covered taxpayers
General Threshold 3,000,000 Applicable to all taxpayers other
than franchise grantees of radio
and television
Special Threshold 10,000,000 Applicable only to franchise
grantees of radio and television

Assessment of the VAT threshold

Illustration 1: Taxpayers with mixed transactions
Cipeda Department Store had the following sales for the last 12-month period:
Fertilizers, seeds, poultry and hog feeds 1,200,000
Fruits and Vegetables 800,000
Groceries 800,000
Clothes, shoes and other apparel 600,000
Furniture 400,000
Total 3,800,000

Fertilizers, seeds, poultry and hog feeds Exempt

Fruits and Vegetables Exempt
Groceries Vatable
Clothes, shoes and other apparel Vatable
Furniture Vatable

Vatable sales are:

Groceries 800,000
Clothes, shoes and other apparel 600,000
Furniture 400,000
Total 1,800,000

The total vatable sales is below the VAT threshold, thus the business is not required to register as a
VAT taxpayer and may continue paying 3% percentage tax until it exceeds the threshold.

Illustration 2 Individual with multiple proprietorship businesses

As of September 2020, Mr. See had the following gross receipts from his professional practice and his
other businesses in the immediately preceding-12 months
Gross receipts from restaurant businesses 2,200,000
Gross receipts from barbecue stand 200,000
Gross receipts from taxicab operations 1,500,000
Gross receipts from professional practice 900,000
Total 4,800,000

Gross receipts from restaurant businesses Vatable

Gross receipts from barbecue stand* Exempt
Gross receipts from taxicab operations 3% common carrier’s tax
Gross receipts from professional practice Vatable

Gross receipts from restaurant business 2,200,000

Gross receipts from exercise of profession 900,000
Total Vatable Sales and Receipts 3,100,000

*Gross receipts from barbecue stand is exempt since it involves simple processing
*starting October 2020, Mr. See shall pay VAT.

Illustration 3: Corporations with subsidiaries and branches

Black Clover Corp. had the following subsidiaries and branches and their corresponding recorded 12-
month sales:

Subsidiaries:
Asta Corporation- 55% owned 3,200,000
Yuno- Corporation- 70% owned 1,800,000
Total subsidiary sales 4,000,000

Branches:
Royal Capital Branch 800,000
Heart Kingdom Branch 700,000
Total Branch Sales 1,500,000

Black Clover reported the following sales:

Sales to Heart Kingdom Branch 400,000
Sales to Asta Corporation 300,000
Sales to other customers 900,000
Total parent company sales 1,600,000

Each corporation is a separate taxpayer.

Asta Corporation Vat- taxpayer
Yuno Corporation Non-VAT taxpayer
Black Clover Corporation Non-VAT taxpayer

A branch is not a separate entity with their head office, thus Heart Kingdom and Royal Capital are not
separate entities with Black Clover.

Sales to Asta Corporation 300,000

Sales to other customers 900,000
Sales of Royal Capital Branch 800,000
Sales of Heart Kingdom Branch 700,000
Total Vatable sales of Black Clover 2,700,000

Black Clover Sales to Heart Kingdom Branch is not considered because it is a sale to itself; it is not a
realized sale. Black Clover shall be registered as a non-VAT taxpayer.

Illustration 4: Married individual taxpayers

Mr. and Mrs. Tanaka had the following sales and gross receipts

Mr. Tanaka Mrs. Tanaka Total

Gross receipts from profession 2,200,000 1,700,000 3,900,000
Sales from sari-sari store ________ 1,350,000 1,350,000
Total 2,200,000 3,050,000 5,250,000

Each individual is a taxable person and is separately subject to business tax. Aggregation shall be
made for each individual. Mr. Tanaka will pay 3% percentage tax and Mrs. Tanaka shall pay VAT.

If any sales or receipts cannot be directly attributed to or identified as exclusively earned or realized by
either spouse, the same shall be divided equally between them for the purpose of determining their
respective sales or receipts or the purposes of threshold

Optional VAT Registration

 Taxpayers below the threshold can voluntarily register as VAT taxpayers. Such option is
subject to the 3-year lock-in period. The taxpayer is precluded to have his VAT registration
revoked until the lapse of 3 years.

VAT Taxpayers with Mixed Transactions

 It must be noted that despite the VAT registration, VAT shall apply only to vatable sales or
receipts. His non-vatable sales or receipts remain exempt from VAT. The exempt sales remain
to be exempt while the receipts specifically subject to percentage tax are subject to their
specific percentage tax rates. The only exception to this is when the taxpayer opted to have
the VAT apply to this non-vatable sales or receipts.

 Recall that the option to subject to exempt sales to VAT is not permanent. It can be revoked by
the taxpayer after the lapse of the 3-year lock in period.

THE VALUE ADDED TAX MODEL

The VAT payable of a VAT taxpayer is computed as:

Output VAT xxx,xxx

Less: Input VAT xxx,xxx
VAT Due xxx,xxx
Less: Tax Credits xxx,xxx
Vat Still Due xxx,xxx

Output VAT
1. Regular Output VAT- 12% VAT imposed on domestic sales or receipts
2. Zero Output VAT-0% VAT imposed on export and other zero-rated sales

The detailed rules on output VAT will be discussed in Chapter 7

Input VAT
 Input VAT is the VAT paid by the taxpayer on the domestic purchases from VAT suppliers or
on the importation of goods or services in the course of business.

 Despite absence of actual payment of VAT on purchase or import, input VAT may also be
allowed by law as incentives to the taxpayer such as in the case of presumptive input VAT
Chapter 9 (Sa Mami Co PaRe-on their purchases of primary agricultural products.)

 Input VAT has rules on creditability. Not all paid input VAT is creditable against output VAT.
Those allowed to be deductible against output VAT is called "claimable input VAT", "allowable
input VAT" or "creditable input VAT.
VAT DUE
At the end of each month, the input VAT is offset with the output VAT. A positive VAT due is paid to the
BIR. A negative VAT is normally non-refundable but is carried over to the next succeeding months or
quarter.

Output VAT 12,000

Less: Input VAT 8,400
Vat Due 3,600

VAT REPORTING
Period covered BIR Form Deadline
First month of the quarter 2550M 20 days from end of month
Second month of the quarter 2550M 20 days from end of month
For the quarter 2550Q 25 days from end of quarter

Illustration
A VAT taxpayer had the following purchases and sales, exclusive of VAT
January February March
Cash Purchases 700,000 320,000 375,000
Cash Sales 650,000 580,000 500,000

Journal Entries: (January)

Purchases 700,000
Input VAT 84,000
Cash 784,000

Cash 728,000
Sales 650,000
Output VAT 78,000

Output VAT 78,000

Input VAT 78,000

In VAT reporting, the January 2550M would look like:

Output VAT 78,000
Less:Input VAT 84,000
VAT due (6,000)*

*this is not a VAT refundable. It is called input VAT carry-over.

Journal Entries: (February)

Purchases 320,000
Input VAT 38,400
Cash 358,400

Cash 649,600
Sales 580,000
Output VAT 69,600

Output VAT 69,600

Input VAT* 44,400
VAT Payable 25,200

VAT Payable 25,200

Cash 25,200
In VAT reporting, the February 2550M would look like:
Output VAT 69,600
Less:Input VAT 44,000
VAT due 25,200

Journal Entries: (March)

Purchases 375,000
Input VAT 45,000
Cash 420,000

Cash 560,000
Sales 500,000
Output VAT 60,000

Output VAT 60,000

Input VAT* 45,000
VAT Payable 15,000

VAT Payable 15,000

Cash 15,000

In VAT reporting, the March 2550Q would look like:

Output VAT 207,600
Less: Input VAT 167,400
VAT due 40,200
Less: Tax Credit
Estimated monthly VAT payments 25,200
Vat still due 15,000

Sales subject to special VAT rules

There are sales or receipts that are receipts that are subject to special or unique tax, rules such as the
following:
a. Sales to the Government
b. Zero-rated Sales
c. Exempt sales

Type of sales What is unique?

Sales to the Government Limited claimable input VAT (7%)
Zero-rated sales No output VAT but with claimable input VAT
Exempt sales No output VAT and no claimable input VAT

Sales to the government including GOCCs

 The sales to the government and GOCCs is vatable at 12% normal rate but the law requires
government agencies or GOCCs to withhold a 5% final VAT on their purchases. The invoice
sales or billing to the government or GOCCs will be deducted 5% final VAT based on sales or
receipts. The taxpayer will only collect the balance.

Output VAT 12% of sales or receipts

Less: Input VAT (Limited to 7%)
VAT due 5% of sales or receipts

The 7% claimable input VAT on sales to the government or GOCCs is referred to as the standard input
VAT or presumed Input VAT.
Illustration
During the month, a VAT-registered person made a single sale of goods to a government agency for
P448,000, inclusive of P48,000 output VAT. These goods were purchased for P336,000, including
P36,000 input VAT.

In reporting, Form 2550M would look like:

Output VAT (400K x 12%) 48,000

Less: Standard Input VAT (400K x 12%) 28,000
VAT due 20,000
Less: Tax credit- 5% withholding VAT (400K x 5%) 20,000
VAT due and payable 0

Actual Input VAT > Standard Input VAT= the difference (loss) is closed to cost of sales or expenses as an
addition.
36,000-28,000= 8,000

Actual Input VAT < Standard Input VAT= the difference (gain) is closed to cost or expenses as reduction.

Zero-rated Sales
 In principle, foreign consumption like export sales are non-vatable. In our current tax laws, they
are subject to a 0% VAT to VAT taxpayers. With a zero output VAT and a claimable input VAT,
the VAT due would be negative.

As such, the allows taxpayer the privilege to claim the input VAT as a:
a. Tax refund
b. Tax credit

If claimed as tax refund, the taxpayer will be paid back in cash.

Debit: Cash Credit: Input VAT

If claimed as tax credit certificate (TCC), the taxpayer can use it to reduce other internal revenue tax
obligations to the BIR. Debit: Prepaid Tax Credit: Input VAT

**If the input VAT on zero rated sales is not applied with refund or tax credit, the claimable input VAT
would be added to creditable input VAT deductible against output VAT on other vatable sales.
Debit: Output VAT Credit: Input VAT

**default treatment (silent)

Not only export sales are subject to 0% VAT. There are domestic sales or local sales of goods or
services that are considered export sales such as sales to economic zones and persons engaged
international transport operations

Local sales to persons with indirect tax exemption such as international Rice Research Institute and
Asian Development Bank are effectively subject to 0% VAT. This is referred to as effectively zero-rated
sale. (to be discussed in Chapter 8)

Exempt sales
For purpose of the VAT, exempt sales are non-vatable sales such as:
a. Exempt sales of goods, services or properties
b. Services specifically subject to percentage tax
Exempt sales will not be subject to output VAT. Consequently, the seller is also not allowed to credit
input VAT. The input VAT traceable to exempt sales is part of costs or expenses of the seller and is
deductible against gross income subject to income tax.

Illustration:
Mr. Leo, a VAT-registered person sold unprocessed marine food products for P450,000 which he
bought for P200,000. He also purchased P10,000 supplies, exclusive of P1,200 input VAT, which were
all used in connection with these sales.

Inventory/Purchases 200,000
Supplies 10,000
Input VAT 1,200
Cash 211,200

Cash 450,000
Sales 450,000

Cost of sales 200,000

Supplies expense 11,200
Inventory/Purchases 200,000
Supplies 10,000
Input VAT 1,200

Zero-rated sales Exempt sales

Output VAT None None
Input VAT Creditable Non-creditable (expense)
Types of sales Export or domestic/local sales Domestic sales
Taxpayers involved VAT taxpayers only VAT or non-VAT taxpayers

Classification of sales or receipts

1. Sales to the government
2. Zero-rated sales
3. Exempt sales
4. Regular sales

Regular sales are subject to 12% VAT and are allowed full credit of actual input VAT. It covers all sales
of goods, properties or services other than:
a. Sales to the government or GOCCs
b. Zero-rated sales
c. Exempt sales

Summary of VAT rules for each type of sales

Type of sales Output VAT Claimable input VAT VAT due
Exempt sales None None None
Zero-rated sales Zero Actual if not claimed as Negative
credit or refund
Sales to government 12% of sales/ receipts 7% of sales/receipts None
Regular sales 12% of sales/ receipts Actual input VAT paid Positive or Negative

Classification Rules
1. The sale of goods destined to a non-resident buyer abroad is a zero-rated sale even if it
involves exempt goods
2. The sale of vatable goods or services in the Philippines is normally a regular vatable sale,
except when the sale is:
a. Made to the government or GOCCs- subject to the final withholding VAT
 b. Considered an export or effectively zero-rated such as sales to VAT exempt persons-
subject to 0% VAT
3. The sale of exempt goods and services to the government or GOCC is still exempt sales.

Summary of Rules on Sales of Goods:

Domestic Sales Export Sales
Taxable persons VAT-exempt persons Any person
Sale of exempt goods Exempt 0% VAT 0% VAT
Sale of vatable goods 12% VAT 0% VAT 0% VAT

Other sales subject to VAT

1. Sales of registrable persons

o The sales of registrable persons are subject to VAT despite their non-registration as
VAT taxpayers but no input VAT credit is allowed.
2. Sales of non-VAT taxpayers who issues VAT receipt or invoice
o Non-VAT taxpayers who illegally charge VAT on their sales shall be subject to VAT
without the benefit of input VAT plus the 50% surcharge and 3% percentage tax.
3. Exempt sales billed by VAT taxpayers as regular sales
o Exempt sales which are not so clearly indicated as “Exempt” in the VAT receipts shall
be considered as regular sales subject to VAT
CHAPTER 7-THE REGULAR OUTPUT VAT

➢ This chapter discusses the detailed rules of 12% output VAT on vatable sales of goods, services, or
properties.

SOURCES OF REGULAR OUTPUT VAT

1. Sale of vatable goods
2. Sale of vatable services
3. Sale of vatable properties
4. Transactions deemed sales

The following table an overview of the tax basis of the VAT:

Taxable transaction Tax basis

1. Sale of goods Gross selling price, unless unreasonably lower

2. Sale of services Gross receipts

3. Sale of properties Gross selling price as defined by the BIR
4. Transactions deemed sales Fair value of the property deemed sold

Sale of Vatable Goods

➢ The sale of goods is subject to 12% VAT based on gross selling price. Gross selling price is simply referred
to as gross sales.

Illustration
In February 2020, Cenidoza Corporation made the following sales:
Cash sales 200,000
Sales on account (80,000 collected) 100,000
Installment sales (120,000 collected) 300,000
Delivery charges to customers 15,000
Advances from customers 50,000
Total sales 665,000

The gross selling price and output VAT are as follows:

Cash sales 200,000

Sales on account (80,000 collected) 100,000
Installment sales (120,000 collected) 300,000
Delivery charges to customers 15,000
Gross selling price 615,000
Multiply by: 12%
Output VAT 73,800

Unreasonably lower selling price

*If the selling price is unreasonably lower, the VAT shall be based on the fair value of the goods sold.

*The gross selling price deemed unreasonably lower when it is lower by more than 30% of the actual market value
of the goods sold.

Nonetheless, if one of the parties is the government, the output VAT shall be based on the actual selling price
(Sec. 7, RR4-2007).
Illustration 1
A VAT seller made the following sales of goods to private customers during the month:
Selling Price Fair value
To Customer 1 150,000 180,000
To Customer 2 200,000 190,000
To Customer 3 102,000 150,000
Total sales 452,000

The output VAT shall be computed as:

Customer Discount Selling Price Fair value Tax basis
1 (150/180) = 83% 17% 150,000 180,000 150,000
2 (200/190)=105% 0% 200,000 190,000 200,000
3 (102/150)=68% 32% 102,000 150,000 150,000
Tax basis 500,000
Multiply by: 12%
Output VAT 60,000

• The output VAT on the sale of vatable goods is reported in the month of sale

Sale of Vatable Services

* The sale of services is subject to 12% VAT based on the gross receipts. Gross receipt is collection of income.
The gross receipt includes advances and collection of amount charged for labor and materials included in the
service.
• The output VAT on the sale of services is reported in the month of collection.

Sale of Vatable Properties

The sale, barter or exchange of vatable real properties is subject to VAT on the gross selling price.

Under the regulations, gross selling price" means the higher of the:
a. Consideration or selling price
b. Fair value of the property

Under the NIRC, the fair value of real property is the higher between the:
a. Zonal value; and
b. Fair value per assessor's office.

If the gross selling price is based on the zonal value or assessor's fair value of the property, the zonal value or
assessed value shall be presumed exclusive of VAT.
Illustration
Mr. Realtor, a real property dealer, sold a commercial lot in June 2020. The following data relate to the sale:

Appraisal value 4,500,000

Zonal value 4,000,000
Assessor’s fair value 2,500,000
Selling price 3,800,000

The gross selling price and the output VAT shall be:
Gross selling price (FMV) 4,000,000
Multiply by: 12%
Output VAT 480,000
Note: If the gross selling price is based on the consideration appearing in document of sale, the same is presumed
to be inclusive of VAT.

Note: Do not forget the threshold on residential lot (SP-1,919,500) and residential dwelling (SP-3,199,200).

Comparison of the VAT on goods and VAT on properties

It must be noted that the term "selling price" or consideration on the sale of property is legally presumed VAT
inclusive but this is not the case on the sale of goods.

The output VAT on the sale of

If the FV is And the SP is
Goods is computed as Real property is computed as
100,000 120,000 120,000 x 12% 120,000 x 12/112
100,000 80,000 80,000 x 12% 100,000 x 12%
100,000 60,000 100,000 x 12% 100,000 x 12%

Note: The concept of unreasonably lower does not apply on the sale of property---the higher of the fair value and
selling price is always the basis of the VAT.
• The output VAT on the sale of vatable properties is reported in the month of sale or by installment method.

Installment reporting of Output VAT on real properties

The output VAT on the sale of real properties may be reported in installment if the initial payment from such sale if
it does not exceed 25% of the selling price.

Illustration
On August 1, 2020, a real property dealer sold a commercial lot with the following data:
Zonal value 6,000,000
Assessed value 4,500,000
Selling price 5,000,000

A down payment of P500,000 was paid with the balance due in 36 monthly installments of P125,000 starting
September 1, 2020.

Output VAT (6M x 12%) 720,000

Ratio of initial payment= Initial payment/ Selling Price

*if it does not exceed the 25% of the selling price, the output VAT on the sale may be reported in installments.
*If it exceeds to 25%, the output VAT is reported in the month of sale in full.

Reportable output VAT:

Payments/SP x Output VAT Output VAT
August 2020 500k/5M x 720K 72,000
September 2020* 125K/5M x 720K 18,000
*and every month thereafter

The billing for every installment (125k + 18K Output VAT = 143K, starting September)

The reportable Output VAT in the third and fourth quarters of 2020 shall be:

Third Quarter Fourth Quarter

July August Sept Oct Nov Dec
Output VAT 72K 90K 18K 18K 54K
Sale of property by a realty dealer on a deferred payment basis
* If it exceeds to 25%, the output VAT is reported in the month of sale in full.

Interest and penalties

*whether actually or constructively received by the seller are likewise subject to VAT.

Sale of properties considered "ordinary assets"

➢ Even if the real property is not primarily held for sale to customers or held for lease in the ordinary course
of 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 taxpayer's main business (Sec of RR16-2005 as amended by
RR4-2007).

➢ Therefore, the sale of properties held for use (ordinary assets) such as land, building equipment,
machineries, property improvements, and supplies aside from inventories and supplies are vatable.

Sale of property not in the ordinary course of business

The sales of properties not in the ordinary course of business are exempt from VAT. Hence, the sale of capital
assets is exempt from VAT.

Illustration:
Pearl Corporation, a VAT Taxpayer, sold the following properties:

Old factory (BV=1.5M) 1.3M

Vacant lot, held as investment 4 M

SP of old factory 1.3 M x 12% = 156K output VAT

Note: The VAT on sale of ordinary assets applies only to VAT-registered taxpayers.

Transactions Deemed Sales (subjected to the VAT)

List of Transactions deemed sales:
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. (gift or donation, not revocable)
2. Distribution or transfer to:
a. Shareholders or investors share in the profits of VAT-registered persons
b. Creditors in payment of debt or obligation
3. Consignment of goods if actual sale is not made within 60 days following the date such goods were consigned
4. Retirement from or cessation of business with respect to all goods on hand whether capital goods, stock in trade;
supplies or materials as of the date of cessation, whether or not the business is continued by the new owner or
successor
5. Cessation of status as a VAT-registered person

Transfer, use or consumption not in the ordinary course of business

This occurs when vatable ordinary assets are used for purposes other than their intended purpose, such as when:
1. Goods or properties held for sale are no longer sold but are transferred or disposed of by other means
other than sale.
2. Properties originally intended for use are no longer used but are transferred, disposed of or exchanged
with other properties.
Examples of consumptions not in the course of business:
1. Withdrawal by the business owner for personal use goods held for sale or properties held for use
2. Using goods held for sale or properties held for use to pay off debts with creditors (Dacion en pago)
3. Using goods held for sale or properties held for use as property dividends to shareholders
 4. Exchange of goods held for use for other properties
5. Sale or disposal of properties held for use in exchange for cash or other properties

Note:
✓ Transfer to an accredited non-profit organization is not subject to VAT. (output VAT is nil or zero)
✓ Transfer as to be merely held in trust for the trustor and/or beneficiary is not subject to VAT. (output VAT
is nil or zero)
✓ Initial acquisition of control is a VAT-exempt transaction.
✓ Distribution of property dividends (capital assets) are not subject to VAT as deemed sales. Needless to
say, distribution of property dividends (ordinary assets) are subject to VAT as deemed sales.

Consignment of goods not withdrawn in 60 days

Consigned goods to consignees, if not withdrawn within 60 days, are also presumed or deemed sold subject to
VAT.
This is not an actual consumption, but the rule is apparently intended to prevent taxpayers from deferring
recognition of output VAT by nonreporting or delayed reporting of the sales on consignment
Illustration
A VAT-registered taxpayer has its own sales operations but also sells goods through consignees. It also sells
goods on consignment for a commission. The following were the results of operations for the month ended April
30, 2020:

Sales own inventories 500,000

Sales - reported by consignees 150,000
Sales in behalf of consignors 100,000
Commission income on goods sold for consignors 20,000
The billed prices of outstanding consignments still held by consignees as of April 30, 2020 are as follows:
February 2020 50,000
March 2020 80,000
April 2020 120,000

The Output VAT shall be computed as:

Direct sales 500,000
Sales through consignees 150,000
Commission income 20,000
Total sales/receipts P670,000 x 12% 80,400
Deemed sales (February) 50,000 x 12% 6,000
Output VAT 86,400

Retirement or cessation of business

➢ Remember that when the owner of the business withdraws a certain merchandise for his personal
consumption, much would it be when he ceased or retire from business where all of the assets will
become his personal disposal. Hence, it is also a "deemed sale."
➢ If the business is continued by a new owner, the goods or properties of the business are effectively sold
to the new owner. Hence, the goods or Properties of the business are likewise deemed sold.

Illustration:
Mr. Misamis, a VAT-registered taxpayer, ceased business operation in May 2020. His business properties upon
termination of business operation include:
 Book value Fair value
Cash 50,000 50,000
Accounts receivables 120,000 120,000
Investments 180,000 400,000
Inventories 200,000 250,000
Property, plant and equipment 800,000 600,000
Total assets 1,350,000

Inventories 200,000
Property, plant and equipment 600,000
Basis 800,000
Multiply by: 12%
Output VAT 96,000

General Rule: Business dissolution is deemed sale.

1. Change of ownership of the business
a. Incorporation of a sole proprietorship
b. Sale by a proprietor of his entire business
2. Dissolution of a partnership
a. And creation of a new partnership which takes over the business
b. By incorporation into a partnership

Not business dissolution: Change in controlling shareholder; change in trade or corporation name; change in
business address

*Merger or dissolution and acquisition of corporate control are not considered deemed sale under the law.

Cessation of status as VAT-registered person

1. VAT to VAT exempt (business activity)
2. Cancellation of VAT registration to exempt status.
3. Cancellation of VAT registration after 3 years lock in period.
4. Approval from VAT to nonVAT status of one who commenced business with expectation of exceeding 3M
but failed to exceed.

Note: The output tax on deemed sales transactions shall be based on the market value of the goods sold as of
the occurrence of the deemed sale transaction.

In the case of retirement or cessation of business, it shall be based on the acquisition costs or the current market
price of the goods or properties, whichever is lower.

The Commissioner of Internal Revenue shall determine the appropriate tax base in cases where the:
a. transaction is a deemed sale
b. gross selling price is unreasonably lower
Invoicing Requirement for Subsequent Sale of Goods or Properties Deemed Sold.
➢ The subsequent sale of goods or properties deemed sold shall not be subject to VAT. The seller of
goods or properties previously deemed sold shall indicate the sales invoice number wherein the output
tax on the deemed sales was imposed and the corresponding tax paid on the items sold.

Note: Deemed sales rules apply only to VAT taxpayers only

Determination of the Output VAT

The amount of output VAT is dependent upon the price quoted (invoice price) by the VAT taxpayer. Such
amount is understood to be inclusive of the VAT in the absence of a special agreement to the contrary.
How to get the output vat
If inclusive of VAT, you can get the output VAT by using 12/112
If exclusive of VAT, just simply multiply the gross selling price or gross receipts to 12%.

Rule on VAT not separately billed

If the VAT is not separately billed in the document of sale, the selling price or the consideration stated therein shall
be deemed agreed to be inclusive of the VAT. The VAT shall be computed from the agreed price as a factor of
12/112.

Incorrect billing of VAT

If the VAT is incorrectly billed, the total amount billed by the taxpayer shall be deemed inclusive of the VAT. The
VAT shall be recomputed as a factor of 12/112.

Illustration
A VAT seller invoiced a sale of goods as follows:
Selling price P 100,000
Output VAT 10,000
Invoice price 110,000

The Output VAT should have been P12,000, computed as P100,000 x 12%. This is an incorrect billing. Hence,
the Output VAT shall be re-computed from the invoice price as: P110,000x 12/112; hence, P11,785.71. The
P11,785.71 Output VAT shall be reported in the VAT return.
CHAPTER 8-OUTPUT VAT: ZERO-RATED SALES

WHAT ARE ZERO-RATED SALES?

➢ Zero-rated sales are basically foreign consumptions (i.e., export sales) or equivalents of foreign
consumptions (foreign currency-denominated sales and constructive exports) and sales conferred with
an export sale treatment by special laws and international agreements to which the Philippines is a
signatory.
➢ Foreign consumption like export of goods or services is not charged with consumption taxes. Hence, the
export sales of VAT taxpayers are subject to a VAT at zero rate. The export sales of a non-VAT taxpayer
are exempt from the 3% general percentage tax.

What is the benefit of Zero-rating?

➢ A zero-rated sale will have a zero output VAT but with a deductible (i.e., creditable) input VAT. As such,
the taxpayer will fully recover the VAT he paid on his domestic purchases and on importation either by
credit to any tax liability of the taxpayer with the government or by tax refund.

Zero-rated sales vs. Exempt sales

➢ Both exempt sales and zero-rated sales will not have output VAT. In both cases, the taxpayer does not
pay VAT. The difference lies in the treatment of input VAT. The input VAT in the case of exempt sales is
non-creditable and nonrefundable. It can only be claimed as deductions in the income tax return.

Illustration: Zero-rated sales vs. VAT-exempt sales

During the month, Pineda Corporation purchased goods invoiced at P350,000 excluding P42,000 input tax. It
exported the goods for $12,000 which is equivalent to P510,000 and incurred P10,000 expenses.

Assuming Pineda Corporation is a VAT taxpayer

The sale shall be subject to a zero-rated VAT. Pineda Corporation shall compute its VAT liability as follows:
Output VAT 0
Less: Input VAT 42,000
Excess: Input VAT (P 42,000)

The P42,000 excess input VAT on zero-rated sales is claimable in full as a tax credit against other output VAT or
claimed as tax credit against any internal revenue tax liability of Pineda Corporation or as tax refund.

Assuming Pineda Corporation is subject to a 30% corporate income tax, it shall compute its taxable income and
income tax due as follows:
Sales P510,000
Less: Cost of goods sold, exclusive of VAT 350,000
Gross income 160,000
Less: Deductions 10,000
Taxable income 150,000
Multiply by: Corporate income tax rate 30%
Income tax due P45,000

Note: The input VAT cannot be claimed as deduction against gross income in income taxation because it is a tax
credit or tax refund.

Assuming Pineda Corporation is a non-VAT taxpayer

The sale is exempt from VAT including percentage tax. Pineda Corporation shall compute its taxable income and
income tax due as follows:
Sales P510,000
Less: Cost of goods sold (P350,000 + P42,000) 392,000
Gross income 118,000
Less: Deductions 10,000
 Taxable income 108,000
Multiply by: Corporate income tax rate 30%
Income tax due P32,400

Note: The input VAT is claimed as deduction against gross income in income taxation. Its tax benefits to the
taxpayer is only P12,600 [i.e., P42,000 x 30% or (P45,000 – P32,400)] through a decrease in its income tax due.

Thus, VAT-exempt sales result in partial relief to the taxpayer while zero-rated sales result in a total relief to the
taxpayer.

Summary: Table of comparison

VAT exempt sales Zero-rated sales
Output VAT No output VAT No output VAT
Input VAT treatment Deductible against gross income Creditable or refundable
Extent of tax relief Partial relief Full relief

ZERO-RATED SALES OF GOODS

There are two types of zero-rated sales of goods:
A. Export Sales
B. Effectively zero-rate sales

EXPORT SALES
Eventually, the term export sales will only include:
1. Direct export
2. Sale to economic zones and tourism enterprise zones
3. Sale of goods or properties, supplies, equipment and fuel to persons engaged in international shipping or
international air transport operations

Direct export is the sale and actual shipment of goods from the Philippines to a foreign country, irrespective of
any shipping arrangement that influences or determines the transfer of ownership of the goods so exported.

Required:
1. Paid for in acceptable foreign currency or its equivalent in goods or services
2. Accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP)

Illustration 1
123 Company sold various goods as follows:
Customer/buyer Place delivered Payment
Resident alien Philippines $15,000 cash
Visiting tourist Philippines P420,000 cash
A Filipino employee in Japan Japan ¥800,000 cash
A business in Indonesia Indonesia $10,000 in services

The relevant conversion rates were: €1: P60; $1: P52; ¥1: P50

The following are zero-rated sales:

Customer Conversion Amount
Sale to Filipino in Japan ¥800,000 x P.50 P400,000
Sale to business in Indonesia $10,000 x P52 520,000
Total zero-rated sales P920,000

The following are subject to 12% VAT:

 Customer Conversion Amount
Resident alien $ 15,000 x P.52 P 780,000
Visiting tourist 420,000
Total domestic sales P1,200,000

Illustration 2
Sulapo Company made the following export sales during the year:
Export destination Terms Payment
Export for Hongkong FOB Destination $100,000 cash
Export for Thailand FOB Destination P450,000 cash
Export to Japan FOB shipping point ¥800,000 cash
Export to Indonesia Free alongside vessel $10,000 in goods

The following shows the VAT treatment of the foregoing export sales:
If Sulapo is a
VAT taxpayer Non-VAT taxpayer
Export for Hongkong zero-rated exempt
Export for Thailand exempt exempt
Export to Japan zero-rated exempt
Export to Indonesia zero-rated exempt

Illustration 3
BABAY Corporation, a VAT-registered export trader, had the following export sales during the month:
Goods exported Amount Traceable input VAT
Processed food $200,000 P10,000
Fruits and vegetables € 50,000 20,000

Both sales are subject to zero-rated

Query: What if BABAY is a non-VAT registered taxpayer?

The export sales shall be considered exempt. BABAY can claim the input VAT as expense.

Export commission and consignment

➢ For purposes of zero-rating, the export sales of registered export traders shall include commission
income. However, the exportation of goods on consignment shall not be considered export until the export
products consigned abroad are in fact sold by the consignee.

➢ Deemed sales rules applies only on domestic consignments not on foreign consignments

Examples of Philippine Ecozones:

1. Philippines Economic Zones Authority (PEZA)
2. Cagayan Special Economic Zone
3. Zamboanga Special Economic Zone
4. Clark Special Economic Zone
5. Clark Freeport Zone
6. Poro Point Special Economic and Freeport Zone
7. John Hay Special Economic Zone
8. Aurora Special Economic Zone (ASZ) – RA 9490

The sale of goods, supplies, equipment and fuel to persons engaged in international shipping or
international air transport operations
 ➢ The sale of supplies to the airline’s domestic operation is subject to 12% VAT while the sale to the airline’s
international operation is subject to 0% VAT.
EFFECTIVE ZERO-RATED SALES (Effectively subject to 0% VAT)
Examples refer to sales to persons or entities whose exemption under special laws or international agreement to
which the Philippines is a signatory effectively subjects such sales to zero-rate.

Examples of entities are granted indirect tax exemption under special laws or international agreements:
1. Asian Development Bank (ADB)
2. International Rice Research Institute (IRRI)
3. United Nation (UN) and its various organizations, such as:
a. World Health Organization
b. UNICEF
4. United States Agency for International Development (USAID) and its personnel and contractors
5. Embassies, qualified employees and dependents – subject to the reciprocity rule
6. Philippine National Red Cross (PNRC)
7. Philippine Amusement and Gaming Corporation (PAGCOR)

Requirements for effective zero-rating

Generally, effective zero-rating of sales requires prior application with the appropriate BIR office. Without an
approved application for effective zero-rating, the transaction otherwise entitled to zero-rating shall be considered
exempt (Sec 4.106-6, RR16-2005).

An approved application shall be given prospective effect from the date received by the BIR. The same shall be
valid until December 31 of the same year and renewable every year thereafter.

Where to file application for zero rating?

Taxpayers shall file their application with the Audit Information, Tax Exemption and Incentives Division (AITEID)
under Assessment Service. For large taxpayers, applications shall be filled with the Large Taxpayer Audit and
Investigations Divisions I and II (LTAID I and II), BIR National Office.

The VAT reciprocity exemption on embassies and their personnel

Embassies and their qualified employees and dependents of employees do not have indirect tax exemption under
The Vienne Convention on Diplomatic Relations, but they may be exempt under the principle of reciprocity.

Under the reciprocity rule, foreign governments granting Philippine embassies and diplomats indirect tax
exemptions shall likewise be conferred the same treatment on their embassies of diplomats in the Philippines.
Countries granting indirect tax exemption to Philippine embassies and personnel are listed by the DFA (BIR Ruling
DA-ITAD-98-08, 101-08).

Qualified foreign embassies and their qualified personnel and qualified dependents of the latter are issued VAT
Exemption Certificates (VEC) or VAT Exemption Identification Card (VEIC).

VAT taxpayers selling to foreign embassies, personnel or their dependents with the VEC or VEIC shall be entitled
to the benefit of zero-rating. (See RMO-81-99 and RMO 22-2004)

Illustration
LEON Corporation, a VAT supplier, sold office supplies and equipment to the following embassies:
Embassy Exemption status Sales
US Embassy Without reciprocity exemption P 200,000
Malaysian Embassy With reciprocity exemption 400,000
 Total P 600,000
The P400,000 sales is subject to zero-rated VAT. The P200,000 sales is subject to 12% VAT.

PREVIOUSLY ZERO-RATED SALES

1. Foreign currency denominated sale*
2. Sales under the internal export program*
3. Sales to Boy Scout of the Philippines*
4. Sale of gold to BSP – now exempt effective January 1, 2018

*To be subjected to 12% VAT upon successful completion and implementation of an effective VAT refund system

➢ The term “Foreign currency denominated sale” means sale to non-residents of goods, except export
of automobiles and non-essential commodities, 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 regulation of the BSP.

Sales under the International Export Program of the government

➢ Sales of locally manufactured or assembled goods for household and personal use of Filipinos abroad
and other non-residents of the Philippines as well as returning overseas Filipinos under the International
Export Program of the government paid for in convertible foreign currencies and accounted for in
accordance with the rules and regulations of the BSP shall also considered export sales.

ZERO-RATED SALES OF SERVICES

Eventually, zero-rated sales of services will only include:
1. Sales of service to non-residents
2. Effectively zero-rated sales of services
3. Services rendered to persons engaged in international shipping or international air transport operations including
leases of properties thereof
4. Transport of passengers and cargoes by domestic air or sea carriers from the Philippines to a foreign country
5. Sale of power or fuel generated from renewable sources of energy
6. Services rendered to Eco zones or tourism enterprise zones

SALES OF SERVICES TO NON-RESIDENTS

➢ Services other than processing, manufacturing or repacking rendered to a person engaged in business
conducted outside the Philippines or to a non-resident person not-engaged in business who is outside
Philippines when the services are performed

➢ The term “other services” is not limited only to project studies, information services, and engineering and
architectural designs. The term encompasses any other services.

Requirement for zero-rating of services to non-residents:

a. The services must be performed in the Philippines
b. The services must be paid for in acceptable foreign currency or its equivalent in goods or services.
c. The payment must be accounted for under the rules and regulations of the BSP.

Illustration 1
Excel Tailoring, a VAT taxpayer, is engaged in a sewing business. During the month, it had the following receipts
from the sewing services to various clients:

Item Client Amount

School uniforms DLSU, a Philippine university P 800,000
Garment Levi’s, a foreign dressmaker $ 100,000
Curtains Finesse, a foreign textile manufacturer P 1,000,000

The receipt from DLSU is subject to 12% VAT as it is a domestic consumption. The receipt from Levi’s is subject
to zero-rated VAT. The receipt from Finesse is VAT exempt because it is a foreign consumption, but it is not paid
in foreign currencies.

Illustration 2
General Consultants, a VAT taxpayer, provides various services to clients. The details of each transaction during
the month are shown below:

Client Place rendered Amount Remarks

A foreign corporate client Abroad $ 200,000 VAT-exempt
A resident foreign corporation Philippines ¥ 100,000 12% VAT
A non-resident foreign corporation Philippines P 1,000,000 VAT-exempt

EFFECTIVELY ZERO-RATED SALES OF SERVICES

The local sales of services to a person or entity who was granted indirect tax exemption under special laws or
international agreements shall likewise be subjected to 0% VAT.

Please refer to the list of entities with indirect tax exemption as discussed under effectively zero-rated sales of
goods.

Illustration 1
Johnny Thor, a VAT taxpayer, provides security and janitorial services to the building of the International Rice
Research Institute (IRRI). IRRI paid the taxpayer P200,000 for the services rendered.

The P200,000 gross receipts is qualified for VAT zero-rating but Johnny Thor must first secure an approval from
the BIR for an effective zero-rating of the receipts.

Illustration 2
Berde residences lease residential units to certain embassy personnel of foreign governments:

Foreign embassy personnel VAT status Rental Remarks

Mr. Vladimir Cutin A Russian with VEIC P 50, 000 Zero-rated
Mr. Marco Poroshenco A Ukrainian without VEIC 20,000 Regular VAT
Mrs. Janice Naran A Mongolian without VEIC 12,000 Exempt from VAT
Total P82, 000

SERVICES RENDERED TO PERSONS ENGAGED IN INTERNATIONAL SHIPPING OR AIR TRASPORT

OPERATIONS, INCLUDING LEASES OF PROPERTY FOR USE THEREOF

➢ To be considered for zero-rating, service shall be exclusively for international shipping or air transport
operations.

Illustration
S2Technologies specialized in aircraft repair maintenance services.
S2Technologies has two clients: Malay Airlines and Airphil. Malay Airlines is an international air carrier while Airpil
is a domestic carrier.
The service fees for Airphil shall be subject to 12% VAT. The service fees from Malay Airlines shall be subject to
0%VAT.

Transport of passengers and cargo by domestic air or sea carriers from the Philippines to a foreign country
Incoming flights-exempt
Outgoing flights-zero-rated
Domestic flights-12% VAT

Sale of power or fuel generated through renewable sources of energy

➢ The sale of power or fuel from renewable sources or energy is zero-rated. Renewable sources of energy
may include, but are not limited to, biomass, solar, wind, hydropower, geothermal and steam, ocean
energy, and other emerging sources using technologies such as fuel cells and hydrogen fuels. (RA 9513
& RA 9337).

➢ The zero-rating treatment is limited to sale of power and does not extend to sale of services related to the
maintenance or operation of plants generating said fuel.

Types of business in the electricity business:

a. Generation companies – refer to persons or entities authorized by the Energy Regulatory Commission
(ERC) to operate a facility used in the production of electricity.
b. Transmission companies – refer to any person or entity that owns and conveys electricity through the
high voltage backbone system and or sub-transmission assets
c. Distribution companies – refer to persons or entities including a distribution utility such as an electric
cooperative which operates a distribution system with the provision of RA 9136 (EPIRA law).

Services Rendered to Ecozones or Tourism Enterprise Zones

The sales of goods to registered enterprises of economic zone or tourism enterprise zones are also subject to 0%
VAT.

Enhanced VAT Refund System

➢ The Department of Finance shall establish a VAT refund center in the BIR and in the BOC that will handle
the processing and granting the cash refunds of creditable input VAT within 90 days.

➢ Zero-rated sales that will be subjected to 12% VAT upon the establishment of an enhanced VAT refund
system

Pending the successful establishment and implementation of an enhanced VAT refund system, the
following shall still be considered export sales subject to 0% VAT.
1. The sale of raw materials or packaging materials to a non-resident buyer for delivery to a resident 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 BSP.
2. Sale of raw materials or packaging materials to an export-oriented enterprise whose export sales exceeds
70% of total annual production (based on the preceding taxable year)
3. Those considered export sales under E.O 226 (Omnibus Investment Code of 1987)

Sale of services shall likewise be considered zero-rated sales pending the successful establishment of
VAT Refund System.
1. Processing, manufacturing or repacking goods for other persons doing business outside the Philippines,
which goods are subsequently exported
2. 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.
Sale to an export-oriented enterprise
Any enterprise whose export sales exceed 70% of the total annual production of the preceding taxable year shall
be considered an export-oriented enterprise.
Requirement:
a. The sale must have been paid for in acceptable foreign currency or its equivalent in good or services.
b. The sale must be accounted for under the rules of the BSP.

Considered export sales under EO 226

1. The Philippine FOB value of export products exported directly by an export producer
2. The net selling price of export products sold by a registered export producer to another export producer
(and subsequently exports the same)
3. Even without actual exportation, the following shall be considered constructively exported:
✓ Sales to bonded manufacturing warehouses of export-oriented enterprises
✓ Sales to export processing zones
✓ Sales to enterprises duly registered and accredited with the Subic Bay Metropolitan Authority
✓ Sales to registered export traders operating bonded manufacturing warehouses supplying raw
materials in the manufacture of export products
✓ Sales to diplomatic missions
✓ Sale of goods, properties or services to a BOI-registered manufacturer or producer

Note: The sale of goods, properties, or services made by a VAT-registered supplier to a BOI-registered
manufacturer/producer whose products are 100% exported are considered export sales.
INPUT VAT CHAPTER 9
Input VAT/TAX
 Refers to the VAT due or paid by a VAT-registered person on importation or local purchases of
goods, properties, or services, including lease or use of properties in the course of his trade or
business.
 If VAT is not billed separately, the selling price stated in the sales document shall be deemed
to be inclusive of VAT.
Determination of Input VAT
 The VAT on purchase is usually reflected as a separate Item in the VAT invoice or VAT-
registered supplier.
Illustration
Selling Price 500,000
Output VAT 60,000
Invoice Price 560,000

The input VAT of the buyer is the “Output VAT” on the VAT sales invoice or VAT official receipt issued by the
seller or supplier.
CREDITABLE INPUT VAT
Not all input VAT paid on purchases is creditable or deductible against output VAT.

Requisites of a creditable input VAT:

1. The input VAT must have been paid or incurred in the course of trade or business
2. The input VAT is evidenced by VAT invoice or official receipt
3. The VAT invoice or receipt must be issued by a VAT-registered person
4. Input VAT is incurred in relation to vatable sales not from exempt sales

Illustration
Mrs. Ackerman had a 230,000 output VAT in the month. She also made the following purchases during the
month:
Goods from non-VAT suppliers 280,000
Goods from VAT suppliers with VAT invoices 224,000
Importation of car for personal use, VAT inclusive 1,120,000
Importation of grapes and apples for sale 300,000
Importation of merchandise for sale, VAT inclusive 896,000
Services from VAT suppliers, evidenced by 120,000
ordinary receipts

The creditable input VAT shall be:

Goods from VAT suppliers (224,000x12/112) 24,000
VAT on importation (896,000x12/112) 96,000
Total creditable input VAT 120,000

Note:
1. The purchases from non-VAT suppliers and purchases of VAT-exempt goods or properties have no input VAT
2. The input VAT on purchases not intended for business (i.e , for personal use) is non-creditable against the output VAT.
3. Input VAT evidenced by an ordinary receipt rather than by a VAT invoice or VAT official receipt is not creditable

TYPES OF INPUT VAT

1. Transitional Input VAT
2. Regular Input VAT
3. Amortization of Deferred Input VAT*
4. Presumptive Input VAT
 5. Standard Input VAT*
6. Input VAT carry-over

TRANSITONAL INPUT VAT

 A person who becomes liable to value-added tax or any person who elects to be a VAT-registered
person shall be given an initial input tax credit equivalent to 2% of the beginning inventory of goods,
materials, or supplies or the actual VAT paid thereon whichever is higher.

 The value allowed for income tax purposes on inventory shall be basis of the computation of the 2%
transitional VAT. Goods exempt from VAT shall be excluded in the computation of the transitional input
VAT.

In short, the transitional input VAT is based on vatable beginning inventories in the month of registration as
VAT taxpayer.

Requisites for claim of Transitional Input VAT

1. The taxpayer must submit an inventory list of goods
2. The taxpayer must prepare an entry recognizing the transitional input VAT credit in his accounting
books.

Transitional input VAT xxx

Beginning Inventory xxx

Illustration
Mr. Kazuma opted to be registered as a VAT taxpayer. He had the following inventory:

VAT-exempt goods 80,000

Vatable goods (all purchased from non-VAT 40,000
suppliers)
Equipment (purchased from VAT supplier) 112,000
Total beginning Inventory 232,000

2% of beginning inventory (2% x 40,000) 800

Actual VAT in beginning inventory 0
Transitional Input VAT (HIGHER) 800

Note:
1. 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.
2. The transitional input VAT applies only to beginning inventory of goods, materials, or supplies, excluding equipment and other
capital goods.

Timing of Credit of Transitional Input VAT

 Transitional input VAT shall be claimable in the month of registration as a VAT taxpayer.

Regular Input VAT

The regular input VAT is the 12% VAT paid on:

a. Domestic purchase of goods, services, or properties, or
b. Importation of goods and services

Timing of credit of Regular Input VAT

Source of Regular Input VAT Timing of Credit
Purchase of goods or properties In the month of purchase
Purchase of services In the month paid
Importation of goods In the month VAT is paid
Purchase of depreciable capital goods or properties:
- General treatment In the month of purchase
- When the monthly aggregate acquisition Amortized over useful life in months or 60 months,
cost exceeds 1,000,000 whichever is shorter
Purchase of non-depreciable vehicles and on Not creditable (RR12-2012)
maintenance incurred thereon

Purchase of goods or properties

Illustration 1: Input VAT on goods

In March 15, 2020, Eren company purchased goods worth 40,000, exclusive of VAT, Eren Company paid the
invoice on April 28, 2020

The 4,800 input VAT (40,000*12%) shall be claimed in March, not in April.

Illustration 2: Input VAT on service

In March 2020, Yukihira Company retained the services of a professional practitioner who billed 168,000
inclusive of VAT. Yukihira Company paid the invoice in April 2020.

The 18,000 VAT (168,000*12/112) shall be claimed in April, not in March.

Illustration 3- Input VAT on importation

In March 2020, Hinata Boke Company imported goods with a total landed cost of 200,000, the company paid
24,000 VAT on importation and withdrew the goods in April 2020.

The 24,000 VAT shall be claimed in April, not in March.

Input VAT on purchase of capital goods or properties

If the monthly aggregate acquisition cost of depreciable capital goods:
- Does not exceed 1M- The input VAT is claimable in the month of purchase
- Exceeds 1M- Input VAT is amortized over the useful life in months or 60 months, whichever is shorter.
Input VAT to be amortized is called the “Deferred input VAT”

Under the TRAIN law, the amortization treatment of deferred input VAT will be phased out effective January 1,
2022. Previously recognized deferred Input VAT will continue to be amortized even after that date but the
deferral treatment will be stopped. Input VAT will be claimed outright in the month of purchase effective January
1, 2022.

Depreciable capital goods

- Goods or properties with estimated useful life of more than 1 year which are treated as depreciable
assets for income tax purposes, used directly or indirectly in the production or sale of taxable goods or
services.

Monthly Aggregate Acquisition Cost

- Refers to the total price, excluding VAT, agreed upon one or more assets acquired and not the
payments or installments actually made during the calendar month.
Illustration 4:
Mami Company, a VAT-registered taxpayer, purchased the following capital goods in March 2020.

Capital Goods Purchase price Input VAT Useful life

Equipment 600,000 72,000 4 years (48 months)
Truck* 700,000 84,000 10 years (120 months)
Total 1,300,000 156,000
*Acquired on installment, 100,000 down payment is paid during the month

Monthly aggregate acquisition cost exceeds 1M, thus input VAT shall be amortized over a period not exceeding
60 months.

- Input VAT on the equipment shall be deferred and credited 1,500 monthly starting March 2020
(72,000/48) until February 2024.
- Input VAT on the truck shall be deferred and credited 1,400 monthly starting March 2020 (84,000/60)
until February 2025.

Sale of depreciable capital goods within 5 years

 If the depreciable property is sold or transferred within 5 years or prior to the exhaustion of the
amortizable input tax thereon, the entire unamortized input tax (deferred input tax) on the capital goods
sold/transferred can be claimed as input tax credit during the calendar month or quarter when the sale
or transfer was made.

Illustration
The following relates to a depreciable property (equipment) which was sold during the month:

Selling price in cash 3,500,000

Output VAT 420,000

Original cost of property 3,000,000

Accumulated depreciation of property 1,000,000
Unutilized input VAT on property 200,000

The seller can deduct the total unamortized deferred input VAT outright in the month of sale. Hence, the VAT
payable on the sale of the property may be computed as:

Output VAT 420,000

Less: Deferred Input VAT 200,000
VAT payable 220,000

Special rules on Input Tax Credit:

1. Non-depreciable vehicles
2. Construction in progress
3. Purchase of real property on installment
4. Purchase of goods or properties deemed sold

Input VAT on Non-depreciable vehicles

Rules in the deductibility of depreciation expense on vehicles:

a. Only one vehicle for land transport is allowed for the use of an official or employee, the value of which
should not exceed 2,400,000.
 b. No depreciation shall be allowed to yachts, helicopters, airplanes and/or aircrafts, and land
vehicles which exceed 2,400,000 threshold, unless the taxpayers main line of business is transport
operations or lease of transport equipment and the vehicles are used in said operations.
c. The purchase must be substantiated with sufficient evidence such as official receipts or other adequate
records
d. The direct connection or relation of the vehicles to the development, operation and or conduct of the
trade of business or profession of the taxpayer must be substantiated

Non-conformance to these requisites shall render the vehicle non-depreciable for income tax purposes.

The input VAT on the purchase of a non-depreciable vehicles and all input VAT on maintenance expenses
incurred thereon are likewise disallowed for taxation purposes.

Input VAT on Construction in Progress

 Construction in progress is the cost of uncompleted construction work of extent of completion on an
asset. This is the accumulated progress billing of the contractor for the extent of completion on an asset
under construction. Upon completion of the construction activity, the construction in progress account is
reclassified to an appropriate asset account.

RR4-2007 does not consider construction in progress as purchase of capital goods, but as purchase of service.

Hence, the input tax is creditable upon payment of each progress billings of the contractor and is neither credited
upon completion of the construction activity nor amortized over a period not exceeding 60 months.

Illustration
In January 2020, Pedro Corporation hired the services of Aleng Construction to build a small sales building at an
P11,200,000 fixed price contract price inclusive of VAT. The construction was subject to 10% retention which
would be released upon completion.

The following quarterly data in 2020 related to the project:

1stQ 2nd Q 3rd Q 4th Q Total
Quarterly billing 2,240,000 4,480,000 3,360,000 1,120,000 11,200,000
Payments 2,016,000 4,032,000 3,024,000 2,128,000 11,200,000

The input tax claimable in each quarter shall be computed from the payments, not from the progress billings or
construction in progress account.

1stQ 2nd Q 3rd Q 4th Q

Payments 2,016,000 4,032,000 3,024,000 2,128,000

Multiply by: 12/112 12/112 12/112 12/112

Claimable input VAT 216,000 432,000 324,000 228,000

Input VAT on purchase of real property on installments

If the seller of real property is subject to VAT on the sale on a deferred payment basis not on the installment plan,
the input VAT shall be claimable by the buyer at the time of the execution of the instrument of sale, subject to the
amortization rule on depreciable properties.
However, if the purchase is by installment and the seller is allowed to bill the output VAT in installment, the buyer
can also claim the input VAT in the same period as the seller recognizes the output VAT
In other words, the output VAT appearing in every billing statement of the seller at every installment which the
buyer is obliged to pay is the input VAT claimable by the buyer. This means the buyer also claims the Input VAT
in installments.

Input VAT on goods or properties deemed sold

The claimable input VAT on goods or properties previously deemed sold shall be portion of the output VAT
imposed upon the goods deemed sold which corresponds to the goods purchased by the buyer.

Illustration: Mr. A had 1,000 pieces of merchandise which were previously deemed sold at a value of P20,000
with an Output VAT of P2,400 upon Mr. A’s retirement from business.

Subsequently, Mr. B bought 500 pieces of the 1,000 pieces of the merchandise deemed sold from Mr. A for
P12,000, inclusive of VAT. Mr. A indicated the invoice number wherein the output tax on the deemed sale was
imposed and billed Mr. B as follows:

Gross selling price 10,800

VAT previously paid on deemed sale 1,200 (500/1,000 x 2,400)
Total 12,000

PRESUMPTIVE INPUT VAT

Persons or firms engaged in the processing of sardines, mackerel, milk and in the manufacturing of refined
sugar, cooking oil and packed noodle based instant meals, shall be allowed a presumptive input tax
equivalent to 4% of the gross value in money of their purchases of primary agricultural products which are
used in their production.

The presumptive input VAT is a tax incentive to these VAT-exempt raw materials into processed food products
because of the absence of adequate claimable input VAT for these entities.

Illustration
Kaguya Corporation processes hot chili-flavored sardines. During the month Kaguya purchased the following
ingredients for the processing of canned sardines.
Cost Input VAT
Fresh sardines 800,000
Hot chili 50,000
Tomatoes 400,000
Ordinary salt 20,000
Tin can 120,000 14,400
Labels 60,000 7,200

The presumptive input VAT shall be computed from the agricultural purchases as follows:

Hot chili 50,000

Tomatoes 400,000
Ordinary salt 20,000
Total agricultural purchases 470,000
Multiply by: 4%
Presumptive input VAT 18,800
Note:
- Sardines are marine products , not agricultural products.
- Ordinary salt is an agricultural product in original state
- The input VAT on the tin cans and labels are claimable in the month of purchase separate from the
presumptive input VAT which both be claimed in the month of purchase.

STANDARD INPUT VAT

The sale of goods and services to the services to the government or any of its political subdivisions,
instrumentalities, or agencies, including government-owned and control corporations (GOCCs) is subject to a 5%
final withholding VAT based on the gross payment.

The government, instrumentalities, agencies or GOCCs shall withhold the final VAT before making the payment
and remit the same within 10 days following the end of the month the withholding was made.

The 5% withheld final VAT shall be deemed the actual VAT payable to the government, instrumentalities or
agencies, including GOCCs can effectively claim only 7% of sales as input VAT. This is called the “standard input
VAT”.

Note:
If the seller is a non-VAT registered seller the government or GOCC shall withhold 3% final percentage tax on
the sale before payment

Illustration

A VAT taxpayer made a 100,000 sales to the government invoiced at 112,000 inclusive of output VAT. The
taxpayer purchased the same for 90,000 exclusive of 10,800 input VAT.

The government will withhold 5,000 (100,000*5%) and release the 107,000 net proceeds of the sale to the
taxpayer. The 5,000 withheld is presumed the actual VAT payable of the seller.

Output VAT 12,000

Less: Standard Input VAT 7,000
VAT Payable (5% withheld final VAT) 5,000

Actual Input VAT (amount to be claimed) 10,800

Less: Standard Input VAT 7,000
Loss or addition to expense 3,800

Future Transition
The final withholding system on the sales to the government or GOCC will be abandoned effective January
1,2021 in favor of the tax creditable withholding system. This would mean the elimination of the 7% standard
input VAT in favor of full creditability of input VAT on government or GOCC sales.

INPUT VAT CARRY-OVER

The input VAT carry-over is the excess of the input VAT over the output VAT in a particular month or quarter. It is
the VAT overpayment that appears after tax credits and payments are deducted against the net VAT payable

Rules on input VAT carry-over

1. The input VAT carry-over of the prior quarter is deductible in the first month of the current quarter
2. The input VAT carry-over of the first month is deductible in the second month of the current quarter
 3. The input VAT carry-over of the second month of a quarter is not deductible in the third month of the
current quarter
4. The input VAT carry-over of the prior quarter is deductible in the third month quarterly balance of the
present quarter

Illustration
The following data relates to the regular sales of a VAT taxpayer

Output VAT Input VAT

Prior quarter 350,000 390,000
Current quarter:
1st month of the current quarter 120,000 100,000
2nd month of the current quarter 150,000 145,000
3rd month of the current quarter 220,000 70,000
490,000 315,000

The credit rules of the input VAT carry-over shall be applied as follows:

Prior quarter Present Quarter

3rdmonth 1st month 2nd month 3rd month
Output VAT 350,000 120,000 150,000 490,000
Less: Input VAT 390,000 100,000 145,000 315,000
Carry-over (40,000) 40,000 40,000
Input VAT Carry- over (20,000) 20,000
Not an input VAT (15,000)
carry-over
VAT payable 135,000

The taxpayer will not pay VAT in the prior quarter, first month and second month of the current quarter since
there is a negative VAT payable. The taxpayer shall pay 135,000 VAT in the third month of the current quarter.

EXCLUSIONS FROM INPUT VAT CARRY-OVER

1. Advanced VAT which have been applied for a tax credit certificate
2. Input VAT attributable to zero-rated claim which have been applied for a tax refund or tax credit
certificate
3. Input VAT attributable to zero-rated sales that expired after two-year prescriptive period.

RULES ON CLAIM FOR CREDIT OF INPUT VAT

1. Specific identification – input VAT that can be traced to a particular sales transaction is credited
against the output VAT of such sales
2. Pro-rata allocation – the amount of input tax due or paid cannot be directly and entirely attributed to
any one of the sales transactions shall be allocated proportionately on the basis of sales

Illustration 1
A VAT taxpayer had the following sales with their corresponding directly traceable input VAT during the month:

Sales amount Input VAT

Sales to private entities 900,000 60,000
Export sales 300,000 36,000
Sales to government 250,000 24,000
Sales of exempt goods 100,000 2,000
Total 1,550,000 122,000

The creditable input VAT may be computed directly as:

Input VAT on private sales 60,000

Input VAT on export sales 36,000
Input VAT on government sales (7%*250,00) 17,500
Total allowable Input VAT 113,500

Input VAT deductible against gross income through cost and expenses:

Input VAT on exempt goods 2,000

Excess input VAT (government) (24,000-17,500) 6,500
Total 8,500

Illustration 2
A taxpayer engaged in merchandising had the following transactions during the month:

Exempt sales 200,000

Export sales 300,000
Sales to government 100,000
Regular sales 400,000
Total 1,000,000

During the month, the taxpayer had 124,000 total input VAT that cannot be traced to a particular transaction.

The non-traceable input VAT shall be allocated as follows:

Sales amount Allocation Factor Allocated input VAT

Exempt sales 200,000 200K/1M*124,000 24,800
Export sales 300,000 300K/1M*124,000 37,200
Sales to government 100,000 100K/1M*124,000 12,400
Regular sales 400,000 400K/1M*124,000 49,600
Total sales 1,000,000 124,000

The creditable input VAT shall be:

Input VAT allocable to export sale 37,200

Standard Input VAT 7,000
Input VAT allocable to regular sales 49,600
Total 93,800

Illustration 3
A taxpayer had the following sales during the month:
Sales Amount Traceable Input VAT
Exempt sales 200,000 12,000
Regular sales 300,000 18,000
Total 500,000 30,000
There is a P24,000 input tax that cannot be traced to either type of transaction.
The creditable input VAT shall be:
Input VAT directly traceable to vatable sales 18,000
Allocated input VAT to vatable sales (300/500 x 24k) 14,400
Total allowable (creditable) input VAT 32,400
DETERMINATION OF VAT STILL DUE/PAYABLE CHAPTER 10
Output VAT xx
Less: Creditable Input VAT xx
Net VAT payable xx
Less: Tax credits/payments xx
Tax still due/(overpayment) xx

Tax Credits/Payments
1. VAT paid in the previous two months-for quarterly VAT returns
2. VAT paid in return previously filed, in the case of amended return
3. Advanced payments made to the BIR.
4. Final withholding VAT on sales to the government
5. Advanced VAT on certain goods

VAT Payments in the Monthly Returns

This tax credit applies to the quarterly VAT return. (BIR Form 2550Q). This is not applicable to the monthly VAT
return (BIR Form 2550M).

Advanced VAT
The owners or sellers of the following goods are required to pay advanced VAT before their withdrawal at the point
of production:
1. Refined sugar
2. Flour
3. Naturally grown and planted timber products

-advanced VAT is not an input VAT. However, unutilized advanced VAT in the period may form part of the Input
VAT carry-over if opted by the taxpayer.

Advanced VAT on the Sale of Sugar

Sugar owners refers to a person who has legal title over the sugar and may include sugar planters, traders, sugar
millers, cooperatives or associations.

Base price of advanced VAT: P1,400 per 50 kg. bag

Illustration 1
Mayumu Company buys sugar cane from farmers, processes it in its refinery and sells the output to wholesalers.
The following relates to its processing and refining activities during a month:

Purchase of cane sugar from cane farmers P2,000,000

Refining expenses, including P24,000 VAT 324,000
Total production of 50 kg-bag refined sugar 4,000 bags

The advanced input VAT to be paid prior to the withdrawal of the sugar from the refinery shall be:

Advanced VAT= 4,000 bags x P1,400 x 12% P672,000

Assuming Mayumu was able to sell 3,800 bags at P1,800/bag during the month, the VAT payable shall be
computed as:

Output VAT (3,800 bags x P1,800 x 12%) P820,800

Less: Input VAT
Presumptive input VAT (2M x 4%) P80,000
Regular input VAT 24,000 104,000
VAT payable 716,800
Less: Tax credits/payments
Advanced input VAT 672,000
Tax still payable/overpayment 44,800

Advanced VAT on the Sale of Flour by Millers

Flour millers is a person who is engaged in the milling of imported wheat to produce flour as finished product,
where such wheat may be directly imported or purchased from an importer/trader.

Wheat trader is a person who is engaged in the importing/buying and selling of imported wheat.

Basis of the advanced VAT

For wheat imported by millers-75% of the sum of:
a. Invoice value x currency exchange rate at the date of payment
b. Custom’s charges
c. And 5% of the sum of a and b

For wheat purchased by millers from wheat traders-75% of the sum of:
a. Invoice value
b. Estimated freight
c. And 5% of the sum of a and b

Illustration:
A VAT-registered flour miller imported wheat from abroad at a total invoice price of $100,000. P300,000 total
charges was estimated to be paid prior to the release of the wheat from Customs. The Peso-Dollar exchange rate
at the date of payment was P43.50 to $1.

The advanced input VAT shall be computed as:

Invoice price ($100,000 x P43.50) P4,350,000

Estimated custom's charges 300,000
Landed cost 4,650,000
Multiply b 105%
Total 4,882,500

Total 4,882,500
Multiply by: 75%
Advanced VAT base 3,661,875
Multiply by: 12%
Advanced VAT 439,425

• The payment order, together with the deposit slip issued by the authorized agent bank or the ROR issued
by the Revenue Collection officer, shall serve as proof for such advanced payment for purposes of
claiming input VAT.

Advanced VAT on the Transport of Naturally Grown and Planted Timber Products

Basis of advanced VAT

The 12% advanced VAT shall be based on per cubic meter (m3) of each species of naturally grown timber as
follows:
 Luzon Visayas Mindanao
(Peso/m3) (Peso/m3) (Peso/m3)

Phil mahogany group, Manggasinor group, Manggachapui group, Narig

group, Palosapis group, Guijo group 1,400 1,400 1,425
Yakal Group 1,500 1,500 1,530
Apitong Group 1,260 1,260 1,260
Softwood Species except Igem 715 715 715
Igem 1,275 1,275 1,275
Nato 1,000 1,000 1,000
Furniture/construction hardwood 950 950 950
Premium species, allowed cut 3,000 3,000 3,000
Lesser-used 700 700 700
Pulpwood, chipwood and mathwood species (per m3) 95 95 95

Illustration:
Forester Isidoro is a VAT registered person and a licensee under a Private Forest Development Agreement with
the government in Kalinga Province in Luzon. He harvested 1,700 cubic meter of mahogany.

Forster Isidoro shall pay the following advanced VAT on the timber prior to the transport of the same:

Advanced VAT= 1,700 m3 x P1,400/ m3 x 12% P285,600

Unutilized Advanced VAT

At the option of the owner/seller/taxpayer or importer/miller/taxpayer be available for the issuance of a tax credit
certificate (TCC).

Requisite for TCC claim

1. The seller/owner or importer/miller must file a claim for credit within 2 years from the date of filing of the
fourth quarter VAT return of the year return was made.
2. Claim shall be limited to the unutilized VAT payment and shall not include excess input VAT.

When Input VAT may be claimed for refund

1. Unutilized input VAT on zero-rated sales
2. Unutilized input VAT upon cancellation of VAT registration due to retirement from or cessation of business.

When and where to claim for VAT refund or TCC for zero-rated sales (within 2 years)
1. BIR
2. BOI
3. One stop shop and Duty Drawback Center of the Department of Finance

Illustration-VAT PAYABLE COMPUTATION

Illustration 1
Denver Company had the following transactions, net of VAT, in the first quarter of 2020:

January February March

Sales 1,000,000 1,200,000 1,400,000
Purchases
Goods and services 1,100,000 700,000 900,000
Building (3 year life) 2,400,000
 The VAT payable shall be computed in the VAT return as:

January February March

Output VAT 120,000 144,000 432,000
Less: Input VAT
Input VAT carry-over 20,000
Goods/services 132,000 84,000 324,000
Building 8,000 8,000 24,000
Net VAT payable (20,000) 32,000 84,000
Less: Tax credit/payments
VAT paid-prior months 32,000
VAT due and payable (20,000) 32,000 52,000

Illustration 2
BYAHE Bus Lines is a VAT-registered operator of several buses. During the month, it had the following receipts
and payments:

Receipts from passengers 700,000

Receipts from baggage, cargoes, and mails 100,000
Purchase of diesel, inclusive of VAT 448,000
Bus maintenance and insurance, inclusive of VAT 134,400
Salaries and commission of staff 150,000
Life insurance of drivers 20,000
Office supplies, utilities and rental, inclusive of VAT 100,800

The total input VAT shall first be determined from the vatable purchases:
Purchase of diesel, inclusive of VAT 448,000
Bus maintenance and insurance, inclusive of VAT 134,400
Office supplies, utilities and rental, inclusive of VAT 100,800
Total purchases with VAT 683,200
Multiply by: x 12/112
Total input VAT 73,200

The creditable input VAT shall be:

P73,200 x P100,000/P800,000 9,150

The VAT payable shall be computed as follows:

Output VAT (100K x 12%) 12,000
Less: Creditable input VAT 9,150
Net VAT payable 2,850

Illustration 3
A VAT taxpayer using the cash basis presented the following data during the month:

Professional fees billed, VAT-inclusive 896,000

Professional fees collected, VAT-inclusive 784,000
Client advances, VAT-exclusive 200,000
Salaries expense 300,000
Depreciation expense 50,000
Supplies expense, inclusive of VAT 33,600

During the month, an equipment with 8 year estimated useful life was purchased. An input VAT of P144,000 was
paid on the purchase.

The gross receipt and output VAT shall be computed as:

Professional fees collected (784,000/112) 700,000
Client advances 200,000
Gross receipt 900,000
Multiply by: 12%
Output VAT 108,000

The creditable input VAT shall be computed as:

Input VAT on equipment (144k/60mos.) 2,400

Input VAT on supplies (33.6k x 12/112) 3,600
Total 6,000

The VAT payable shall be:

Output VAT 108,000

Less: Input VAT 6,000
Net VAT payable 102,000

Illustration 4
Danube Corporation reported the following sales and purchases during the third calendar quarter:
July August September
Sales 1,100,000 1,340,100 1,240,000
Unsold consignment sales from:
May 64,800 12,800
June 86,200 37,500 -
July 122,800 80,400 48,000
August 150,000 90,000
Purchases:
Goods from VAT suppliers 896,000 1,008,000 784,000
Machineries from non-VAT suppliers 1,232,000

Additional information:
1. The reported sales include direct sales and those made by consignees but excludes sales of goods previously
deemed sold.
2. All amounts are inclusive of VAT.

The VAT payable in each month may be computed as:

July August September

Vatable sales
Direct sales 1,100,000 1,340,100 3,680,100
Deemed sales (60-day old) 64,800 37,500 150,300
Total 1,164,800 1,377,600 3,830,400
 Multiply by: 12/112 12/112 12/112
Output VAT 124,800 147,600 410,400
Less:
Vatable purchase 896,000 1,008,000 2,688,000
Multiply by: 12/112 12/112 12/112
Input VAT 96,000 108,000 288,000
VAT paid in prior months 68,400
Total 96,000 108,000 356,400
VAT due and payable 28,800 39,600 54,000

Illustration 5
Nasam-it Sugar Company produces refined sugar. It had the following transactions during the month:

Total production (50-kg bag) 2,000 bags

Total bags exported at $55/bag 400 bags
Total bags sold to local buyers at P2,000/bag 1,600 bags
Purchase of sugar cane P1,200,000
Purchase of other supplies (VAT inclusive) 224,000
Electricity bill (VAT inclusive) 44,800

The current exchange rate is P42.50: $1

The advanced VAT to be paid shall be computed as follows:

Presumptive input VAT (P1.2m x 4%) 48,000
Advanced input VAT 336,000
Regular input VAT
Electricity bill (P224,000x 12/112) 24,000
Other supplies (44,800 x 12/112) 4,800
Total creditable input VAT 412,800

The VAT payable shall be:

Output VAT (1,600 bags x P2,000 x 12%) 384,000
Less: Creditable input VAT 412,800
Net VAT payable (28,800)

Note:
1. There is no need to allocate the P412,800 total creditable input VAT in this case because there are only two types of vatable sales and export
sales. Note that any input VAT allocable to export sales would still be creditable against output VAT.
2. Allocation is necessary if the taxpayer intends to claim the input VAT traceable to export sale as tax refund or tax credit.

Compliance Requirement
1. Invoicing requirement
-Vat invoice/receipt
-separate single/mixed invoice or receipt

2. Accounting requirement
All persons subject to VAT shall maintain
1. Regular accounting records
2. Subsidiary sales journal
3. Subsidiary purchase journal

3. Filing of VAT return

Where to file the VAT return?
1. Authorized agent bank under the jurisdiction of the RDO/LTO
 2. Revenue Collection officer
3. Duly authorized treasurer of the municipality or city

Manual filing (20/20/25)

Electronic Filing and Payment System (eFPS)
Monthly Filing (Group A, B, C, D, E) / 25/24/23/22/21 days following the end of the month

4. Filing of quarterly summary lists

Quarterly summary lists to be submitted by all VAT taxpayers

1. Sales to regular buyers or customers (6 times), casual buyers or customers (individual purchase 100k or
more) and output tax.
2. Local purchases and input tax
3. Importation

A taxpayer’s quarterly sales and purchases are submitted to the BIR’s website through RELIEF Data Entry System.
These shall be submitted by the taxpayer before the 25th day of the month following the close of the taxable year.

5. Government withholding
 Introduction to Transfer Taxation CHAPTER 12

 Transfers refer to any transmission of property from one person to another.

 A person may be a natural person such as individuals or a juridical person created by law such as
corporation, partnership or joint ventures.

Types of transfers
1. Bilateral transfers 2. Unilateral transfers 3. Complex transfers

Bilateral Transfers
 Bilateral transfers involve transmission of property for a consideration. They are referred to as onerous
transactions or exchanges.
Ex:
1. Sale-exchange of property for money
2. Barter-exchange for another property

Unilateral Transfers
 Unilateral transfers involve the transmission of property by a person without consideration. They are
commonly referred to as gratuitous transactions or simply, transfers.

 The right or privilege to transfer properties is subject to transfer taxes.

Types of Unilateral Transfers

1. Donation is the gratuitous transfer of the property from a living donor to a donee. Since it is made between
living persons, it is called donation inter vivos.

2. Succession is the gratuitous transfer of the properties of the deceased person upon his death to his heirs.
When a person dies, his legal identity including proprietary rights are extinguished. His properties transferred to
his successors either by operation of law or by virtue of a written will. Succession is a donation of all the
properties of the decedent caused by his death. Hence, it is called donation mortis causa.

Comparison between inter-vivos and mortis causa

Inter-vivos Mortis causa
Transferor Living donor Decedent
Nature Voluntary Involuntary
Reason Gratuity Death
Scope of the transfer of properties Only properties selected by All properties of the decedent at
the donor death
Property given Gift Estate
Transferee Donee Heir
Transfer tax Donor's tax Estate tax
Timing of valuation of donation Date of donation Date of death

Complex Transfers
 Complex transfers are transfers for less than full and adequate consideration. These are sales made at
prices which are significantly lower that the fair value of the property sold.

What constitutes an adequate consideration?

There is no fixed quantitative rule on what constitutes an adequate consideration.
Tax rules on transfers for adequate consideration
Transfers for adequate consideration are deemed pure exchanges and are subject to income tax, not to transfer
tax.

Transfer for less than adequate and full consideration

 Transfers for less than full and adequate consideration are split into its components: transfer element
and exchange element. The transfer element is subject to transfer tax while the realized gain on the
exchange element is subject to income tax.

Illustration
Assume a property with a fair value of P70,000 and tax basis of P20,000 is sold for merely P40,000.
Fair value P70,000
Gratuity (indirect donation) 30,000 Transfer tax
Consideration or selling price P40,000
Less: Cost or tax basis 20,000
Realized gain P20,000 Income tax

The transfer element is generally considered as an inter-vivos donation, but it is a donation mortis-causa if:
 the sale is made in comtemplation of the death of the seller, or
 if title to the property is agreed to be transferred upon the death of the seller.

Rationale of Transfer Taxation

 Tax evasion or minimization theory
 Tax Recoupment theory
 Benefit received theory
 State partnership theory
 Wealth redistribution theory
 Ability to pay theory

Comparison of the Two Types of Transfer Tax

Donor's Tax Estate Tax
Subject transfer Inter-vivos Mortis causa
Nature Annual tax One-time tax
Taxpayer Donor Decedent
Who actually pay the tax? The donor himself Executor, administrator or heirs in
behalf of the decedent

Nature of Transfer Taxes

 Privilege Tax
 Ad valorem tax
 Proportional tax-flat 6%
 National tax
 Direct tax
 Fiscal tax

Classification of Transfer Taxpayers and their extent of Taxation

1. Residents or Citizens-such as
a. Resident citizens
b. Resident aliens
c. Non-resident citizens
-these are taxable on global transfers of property.

2. Non-resident Aliens
-these are taxable on Philippine transfers of property

 The citizenship of juridical persons is determined by the incorporation tests. Juridical persons that are
organized in the Philippines are considered Philippine citizens. Those organized abroad are considered
aliens.

 In donor’s taxation, the term resident citizen or alien includes domestic or resident foreign corporation.
Obviously, corporations are not subject to estate taxation.

Situs of Transfer
 Properties are transferred mortis causa in the place where they are located at the point of death. They
are not transferred at the place where the decedent died. Likewise, properties are transferred inter-vivos
in the place where they are located at the date of donation. They are not transferred at the place where
the donor executed the deed of donation.

Examples:
1. A resident alien who has P10M properties in the Philippines and P40M properties in Japan died in an airplane
crash in Malaysia.
The P10M properties is deemed transferred mortis causa in the Philippines while the P40M properties is also deemed
transferred mortis causa in Japan.

2. While in Korea, a non-resident Filipino donated his car in Japan worth P5,000,000 to his American best friend.
The P5M is deemed transferred inter-vivos in Japan.

General Rule in Transfer Taxation

Taxpayers Inter-vivos Mortis causa
Resident or citizens Global donation Global estate
Non-resident aliens Philippine donation Philippine estate

Illustration 1
Mr. Lugaw, an American residing in the Philippines, donated a car in Mexico to a friend and a motorbike in the
Philippines to his brother in America.
Since the taxpayer is a resident, both the donation of a car abroad and the donation of a motorbike in the Philippines are
subject to transfer tax. Since the donor is living, the transfers are donations inter-vivos subject to donor’s tax.

Illustration 2
Eddie Wow, a non-resident Filipino citizen, died leaving a building in the United States and an agricultural land in
the Philippines for his heirs.
Since the taxpayer is a citizen, the transfer mortis causa of the building in the US and the agricultural land in the Philipp ines
is subject to Philippine estate tax.

Illustration 3
Mr. Kobid, a Japanese citizen residing in Japan, donated a parcel of land in Japan to a resident Filipino friend.
He also donated his investment in the shares of stocks of a Philippines corporation to his Japanese sister.
Since the donor is neither a Philippine resident nor a citizen, only the donation of domestic shares of stock in the Philippines
is subject to transfer tax. Also, since the donor is living at the date of donation, the transfer is a donation inter-vivos subject
to donor’s tax.

Illustration 4
Mr. Bo Kung, a Chinese citizen residing in Hong Kong, died leaving a building in Hong Kong and a car in the
Philippines.
The donor is neither a resident nor a citizen. Only the car in the Philippines is subject to transfer tax. Since the transfer is
effected by death, it is a donation mortis causa subject to estate tax.

Properties located in the Philippines

The following properties are considered located in the Philippines:
1. Interest in a domestic business
a. Shares, obligations, or bonds issued by any corporation or sociedad anonima organized or constituted in the
Philippines in accordance with its laws
b. Shares or rights in any partnership, business or industry established in the Philippines

2. Foreign securities, under certain conditions:

a. Shares, obligations, or bonds issued by any foreign corporation 85% of the business of which is located in the
Philippines.
b. Shares, obligations, or bonds issued by any foreign corporation if such shares, obligations, or bonds have
acquired business situs in the Philippines

3. Franchise exercisable in the Philippines

4. Any personal property, whether tangible or intangible, located in the Philippines

Reciprocity Rule on Non-Resident Aliens

Examples of intangible properties:
1. Financial assets (cash, receivables or credit, investment in bonds, shares of stock in a corporation, interest in
a partnership)
2. Accounting intangible assets (patent, franchise, leasehold right, copyright, trademark)

Illustration 1
Mr. Gato, a Japanese citizen, donated the following properties in the Philippines:

Car; Cash in bank; Shares of stocks of a domestic corporation

Under Japanese laws, non-resident Filipinos are exempt on transfers of intangible properties in Japan

Since the reciprocity exemption applies, Mr.Gato is subject to donor’s tax only on the donation of the car. The donation of
the intangible personal properties such as cash and shares of stocks are exempt.

Note: non-resident alien’s intangible properties (PH) under reciprocity rule, whether the transfer is donation or
estate there is no donor’s tax or estate tax to impose.

What if Mr. Gato died leaving those properties mentioned above?

Only the tangible property would be subject to estate tax.

What if in the previous illustration Mr. Gato is a resident alien, died leaving those properties
All of the properties will be subject to estate tax since reciprocity exemption applies only to non-resident aliens.

Transfers intended to take effect upon death

 A donation that is made on the decedent’s last will and testament is a donation mortis causa. Similarly,
a donation that is a made during the lifetime of the decedent with a stipulation that ownership shall
transfer upon his death, the same is a donation mortis causa.

Incomplete Transfers
 Incomplete transfers involve the transmission or delivery of properties from one person to another, but
ownership is not transferred at the point of delivery.

Types of income transfers

1. Conditional transfers
2. Revocable transfers
3. Transfers with reservation of title to property until death

How are incomplete transfers completed?

1. Conditional transfers
a. fulfillment of the condition
b. waiver of the condition

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

3. Transfers with reservation of title to property until death are completed by the death of the decedent.

*1 and 2 transfers become donation mortis causa when the transfer is pre-terminated by death.

Timing of Taxation of Incomplete Transfers

Illustration:
On June 1, 2019, Don Condesion donated a luxury car with a value of P5M to his son, Sonny, under a condition
that Sonny must be a topnotcher in the October 2019 CPA Board Exam. To motivate Sonny, Don Condesion
delivered the car to him on June 1, 2019.

*June 1, 2019-no donor’s tax even if there is a physical transfer of the car
*Assuming Sonny topped the Board Exam on October 2019, there is a completed donation subject donor’s tax.
*If Sonny failed the exam, there is no donation at all.
*If Don Condesion waived his condition, the donation will be perfected at that time he waived the condition.
*If Don Condesion died before the exam, the car would be transferred mortis causa as part of his estate and would be subject to estate
tax.

Illustration 2
On February 14, 2019, GeneRoss transferred a phone to Clara but subject to revocation if GeneRoss so
pleases.

Although there is an actual physical transfer of property on February 14, 2019, the same cannot be subject to donor’s tax since there is no
transfer of ownership at that date.

Assuming GeneRoss waived his right to revoke, the donation shall be subject to donor’s tax at its fair value at the time of waiver. If
GeneRoss revoked the property, there is no donation to speak of.

Assuming GeneRoss died without revoking the phone, the same would be transferred mortis-causa and would be included part of his
estate subject to estate tax at its fair value at the point of death.

Complex Incomplete Transfers

 Incomplete transfers are sometimes made for less than full and adequate consideration.

Test of Taxability of Complex Incomplete Transfers

1. There is adequate consideration at the date of delivery of the property.
2. At the completion of the transfer the property must have not have decrease in value below the consideration
paid.

Valuation of complex incomplete transfers

Mortis causa- FV at death less consideration upon transfer
Inter-vivos- FV at completion or perfection of donation less consideration upon transfer

Illustration:
In October 1, 2017, Mr. Intoy transferred his car worth P1M to Mr. Bitoy but for a minimal consideration of
P300,000 only. The transfer shall be revocable by Mr. Intoy in 4 years.

Case 1: Waiver before death

On November 1, 2019, Mr. Intoy intimated to Mr. Bitoy that he was waiving his right of revocation. The fair value
of the car was P800,000 less P300,000. Hence, P500,000 shall be subject to donor’s tax.
Since Mr. Intoy was still living upon the perfection of the transfer, the transfer is a donation inter-vivos. It shall be valued at P800,000 less
P300,000. Hence, P500,000 shall be subject to donor’s tax.

Case 2: Death without revocation

Assume instead that Mr. Intoy died on November 1, 2019 without saving his right to revoke the transfer. The fair
value of the property was P850,000 at that time.
Since the revocable transfer is pre-terminated by death, it is a donation mortis causa. It shall be valued at P850,000 less P300,000.
Hence, P550,000 shall be subject to estate tax.

Illustration 2
Artison has a rare Egyptian artifact which has a fair value of P3M. He gave the artifact to Gustoko for a
consideration of P2,950,000 but revocable if Gustoko did not graduate as cum laude. Gustoko subsequently
graduated cum laude when the artifact was worth P4M.

*Adequate consideration= bona fide sale

Illustration 3
Leon sold a gold bullion with a fair value of P2.5M to Carlo at a price of P1.8M but revocable within one year. The
one-year period lapse when the gold bullion had a fair value of P1.7M.

*FV upon completion is less than the consideration, there is no gratuity subject to donor’s tax. In case of mortis
causa, there is still no estate tax in this case.

Non-Taxable Transfers
1. Void transfers
2. Quasi-transfers

Void transfers are those that are prohibited by law or those do not conform to legal requirements for their validity.
Void transfers do not transfer ownership over property and are therefore not subject to transfer tax.

Ex.
Donation of properties not owned
Donation between spouses
Donation refused by the done
Donations that do not conform to formal requirements such as oral donation of real properties.

Quasi-transfers
-there is no also transfer of ownership.
1. Transmission of the property by the usufructuary to the owner of the naked title.
2. Transmission of the property by a trustee to the real owner.
3. Transmission of property by first heir to the second heir (owner of naked title) according to predecessor’s
desire.
 CHAPTER 13

THE CONCEPT OF SUCCESSION AND ESTATE TAX

➢ Succession is a mode of acquisition by virtue of which the property, rights and obligations to the extent
of the value of the inheritance, of a person are transmitted through his death to another or others either
by his will or by operation of law.

➢ The inheritance includes all the property, rights and obligations of a person which are not extinguished by
his death.

Types of Succession
1. Testate or Testamentary Succession
-with a written will (with designation of an heir).
-Last will and testament (Testator)

2. Legal or Intestate Succession

-without a will or with an invalid one.
-provision of the Civil Code on succession (operation of law)

3. Mixed Succession
-Partly by virtue of a written will and partly by operation of law
Types of will
1. Holographic will- handwritten and need not to be witnessed.
2. Notarial will- a notarized will signed by the decedent and witnesses.
3. Codicil- a supplement or addition to a will (added to or altered to the original will)
Elements of Succession
1. Decedent
2. Estate-property, rights and obligation of the decedent not extinguished by his death.
3. Heirs
Heirs under intestate succession
1. Compulsory heirs (Primary heirs/Secondary heirs/Concurring heirs)
2. Relatives up to 5th degree of consanguinity
3. Republic of the Philippines
*second cousins both are in the 6th degree in the collateral line; hence, they cannot inherit.
Heirs under Testamentary Disposition
1. Compulsory heirs
2. Other persons specified by the decedent in his will
The rules on Legitime/Repudiation/Disinheritance of an heir are matters of law which are irrelevant to estate
taxation. (Title IV of Book III of the Civil Code)
Other persons in succession
1. Legatee- a person whom gifts of personal property is given by virtue of a will.
2. Devisee-a person whom gifts of real property is given by virtue of a will.
3. Executors-person appointed by the decedent to carry out the provisions of his will
4. Administrators- person appointed by the court to manage the distribution of the estate of the decedent.
Estate Taxation pertains to the taxation of the gratuitous transfer of properties of the decedent to the heirs upon
the decedent’s death.

Decedents who died Between Jan 1, 1998 to Dec 31, 2017 On or after January 1, 2018
Shall be governed by NIRC Train Law
Nature of Estate Tax
1. Excise tax-privilege to transfer property through death
2. Revenue or general tax- fiscal measure
3. Ad valorem tax-value of the estate
4. National tax- national government
5. Proportional tax- 6% on the net estate
6. One-time tax- once in a lifetime

Classification of Decedents for Taxation Purposes

1. Resident or Citizen Decedents 2. Non-resident Alien Decedents

Estate Tax Model

Gross estate (Separate/ exclusive properties + common properties) xx
Less: Deductions from gross estate xx
Net taxable estate xx

Exclusions in gross estate-excluded by law from estate taxation.

Inclusions in gross estate- included as part of the taxable gross estate.

GROSS ESTATE CHAPTER 13 - A

Gross estate consists of all properties of the decedent, tangible or intangible, real or personal, and wherever
situated at the point of death.

Summary of rules on gross estate

Residents or Citizens NRA without reciprocity NRA with reciprocity

Property Location Within Without Within Without Within Without
Real Properties ✓ ✓ ✓ X ✓ X
Personal Properties
-Tangible ✓ ✓ ✓ X ✓ X
-Intangible ✓ ✓ ✓ X X X

Procedures in establishing gross estate

1. Inventory count of existing properties at the point of death
2. Adjustments for exempt transfers and taxable transfers
THE GROSS ESTATE FORMULA
Inventory of properties at the point of death xxx,xxx
Less: Exempt transfers
Properties not owned xxx,xxx
Properties owned but excluded by law xxx,xxx xxx,xxx
Inventory of taxable properties present properties xxx,xxx
Add: Taxable transfers xxx,xxx
GROSS ESTATE xxx,xxx

Transfer of properties not owned by the decedent

1. Merger of the usufruct in the owner of the naked title
2. The transmission or delivery of the inheritance or legacy by the fiduciary heir or legatee to the
fideicommissary
 3. The transmission from the first heir, legatee, or done in favor of another beneficiary, in accordance with
the desire of the predecessor
4. Proceeds of irrevocable life insurance policy payable to beneficiary other than the estate, executor or
administrator
5. Properties held in trust by the decedent
6. Separate properties of the surviving spouse of the decedent (husband’s capital/wife’s paraphernal)
7. Transfer by way of bona fide sales (adequate consideration)
Summary of Rules: Proceeds of Life Insurance
Designation of beneficiary
Beneficiary Revocable Irrevocable
Estate, administrator, or executor Include Include
Other parties Exclude Exclude

Legal exclusions
List of properties owned by the decedent at the point of death which naturally forms parts of the
hereditary state but are not subjected to estate tax by law: (exclusions in gross estate)
1. Proceeds of group insurance taken out by a company for its employees
2. Proceed of GSIS policy or benefits from GSIS
3. Accruals from SSS
4. United States Veterans Administration (USVA) benefits-RA 136
5. War damage payments
6. All bequests, devises, legacies or transfers to social welfare, cultural and charitable institutions, no
part of net income of which inures to the benefit of any individual; provided, however, that no more than
30% of the said bequest, devises, legacies or transfers shall be used by such institutions for administration
purposes.

The 30% conditional exclusion is deemed satisfied if the donee is an accredited non-profit donee
institution.
7. Acquisitions and/or transfers expressly declared as non-taxable by law (properties acquired using benefits
or proceeds from item number 1 to 5 are still exempt so long as the heirs or administrators can prove that
the properties were acquired using these exempt properties)
8. Bank deposits withdrawn from the decedent account during the settlement of the estate
These properties must be removed from the gross estate of the decedent. (1-8)

Illustration:
A decedent had the following properties:
Family home 5,000,000
Truck 1,200,000
Cash 200,000*
Commercial Land 800,000 X
Other properties 600,000
Total 7,800,000

In his will, the decedent designated the cash to be given to a public elementary school. The commercial land was
also devised to a non-profit charitable institution restricted to be used for program expenses of the latter.

Gross estate= P7,000,000

*transfers to the government and its instrumentalities are not items of exclusion but items of deduction. They are
included in gross estate and then separately presented as deductions from gross estate in the estate tax return.

Taxable Transfers
➢ Taxable transfers are mortis causa transfers of properties in the guise and form of inter-vivos transfers.
These are referred to as inclusions in gross estate.

Types of Taxable Transfers

1. Transfer in contemplation of death
2. Revocable transfers, including conditional transfers
3. Property passing under general power of appointment (the same shall be included in his/her gross estate)

Composition of Gross Estate

1. Properties, movable or immovable, tangible or intangible
2. Decedent’s interest on properties
3. Proceeds of life insurance:
a. Designated as revocable to any heir
b. Designated to estate, administrator or executor as beneficiary
4. Taxable transfers

Illustration 1:
A resident decedent died with the following properties at the point of death:
Cash in bank 1,000,000
Receivables from friends and relatives 200,000
Borrowed car from a friend 120,000
House and lot 2,000,000
Motorcycle, registered in the name of his youngest son 80,000
Total 4,400,000

The Gross estate shall be computed as:

Inventory of present properties 4,400,000
Less: Not owned
Borrowed car 120,000
Motorcycle 80,000 200,000
Gross estate 4,200,000

Illustration 2:
Mr. A, a citizen decedent, died leaving the following properties:
Cash proceeds of life insurance designated to a brother as revocable beneficiary 1,000,000
Building, properties held as usufructuary 4,000,000
Cash in bank 2,400,000
Agricultural land 3,000,000
House and lot, from Mr. A’s industry 7,000,000
Benefits from GSIS 500,000
Total properties 17,900,000

Additional information:
1. The agricultural land was designated by Mr. A’s father in his will to be transferred to D, Mr. A’s son, upon
Mr. A’s death.
2. Mr. A made a revocable donation involving a residential lot to his brother E. Mr. E paid P400,000 when
the lot was worth P1m. The lot was currently valued at P2m zonal value upon Mr. A’s death.
3. The heirs withdrew P376,000 cash from the decedent’s bank account for Mr. A’s wake, net of 6% final tax
deducted by the bank.
The gross estate shall be computed as:
Inventory of present properties P17,900,000
Less:
Properties not owned
Building, held as usufructuary P4,000,000
Agricultural land, under special power 3,000,000
Total 7,000,000
Properties exempted by law
GSIS benefits 500,000
Bank withdrawal (P376,000/94%) 400,000 7,900,000
Taxable present properties 10,000,000
Add: Taxable transfers (2m-400k) 1,600,000
Gross estate 11,600,000

Illustration 3:
An inventory of Mr. D’s properties was taken two years after his death. He had the following properties during the
inventory-taking:
Cash (40% from income of properties after death) 4,000,000
Car (bought for 1.2 M a week before Mr. D’s death) 800,000
House and Lot (worth 8M on Mr. D’s death) 10,000,000
Business interest (worth 6M on Mr. D’s death) 7,000,000
Total 21,800,000

The following possible deductions can be claimed by the estate:

Funeral and judicial expenses paid 1,100,000
Wreck of a fishing boat, one year after Mr. D’s death 800,000
Obligations of Mr. D paid from his property 1,500,000

The gross estate shall be established as:

Inventory of property 21,800,000
Add: Decreases in properties since death
Funeral and judicial expense 1,100,000
Wreck of a fishing boat 800,000
Obligations paid after death 1,500,000
Decrease in value of car (1.2m-.8m) 400,000 3,800,000
Total 25,600,000
Less: Increases in properties after death
Cash income of properties (4M*40%) 1,600,000
Increase in value of house and lot(10m-8m) 2,000,000
Increase in business interest (7m-6m) 1,000,000 4,600,000
GROSS ESTATE 21,000,000

Valuation rules
FV at the time of death//FV set by law//FV under GAAP//Encumbrances on the property or decrease in value
thereof after death shall be ignored.

1. Real properties
Zonal value (CIR) or fixed by the provincial or city assessor, whichever is higher
2. Shares of stock
Preference shares-par value
Unlisted common share-financial statement method (Book value per share)
 Listed shares- arithmetic mean of highest and lowest quotation at a date nearest the date of death.
3. Usufruct and annuities (PV of OA)

Additional guidelines in determining FV

Newly purchased property- FV, purchase price/second-hand value
Pawned properties-grossed up value by the loan to value ratio
Property fixed in monetary terms-Principal + accrued income thereto
Foreign currencies- peso value at the prevailing rate at the date of death.

Taxable Transfers
➢ Taxable transfers made without consideration are included in gross estate at the FV of the transferred
property at the date of death.
➢ Taxable transfers made for a consideration are valued as: FV at the date of death less consideration
paid at the date of transfer.

Illustration:
At the date of transfer
FV at death
FV Consideration
To A 300,000 - 200,000
To B 200,000 195,000 300,000
To C 100,000 40,000 120,000
To D 150,000 80,000 70,000

ESTATE TAX: Gross Estate of Married Decedents CHAPTER 13 - B

Gross Estate of Married Decedents

The gross estate of a married decedent is composed of:
1. The decedent’s exclusive properties
2. The common properties of the spouses

The property interest of the spouse shall be determined based on their agreed of property regime.

Common types of property regimes:

1. Absolute separation of property (ASP)- technically, all properties of the spouses are separate
properties, except those properties which they may acquire jointly.

2. Conjugal partnership of gains (CPG)- all properties that accrue as fruit of their individual or joint labor
or fruits of their properties during the marriage will be common properties of the spouses.

3. Absolute community of property (ACP)- all present properties owned by the spouses at the date of
celebration of the marriage shall become common properties of the spouses including future fruit of their
separate or joint industry or fruits of their common properties.

Applicable property regime in default of an agreement

➢ In the absence of an agreement or when the regime agreed by the spouses is void, marriages celebrated
before August 3, 1988 shall be governed by the conjugal partnership of gains. Marriages celebrated
starting August 3, 1988 shall be governed by the absolute community of property.
CONGUGAL PARTNERSHIP OF GAINS (CPG)
This property relation views marriage as a partnership of gains.

Conjugal Partnership of Gains (CPG)

Classification
Properties before the marriage Exclusive
Properties derived during the marriage
From fruits income and gains Common
From gratuitous acquisitions Exclusive*

• Conjugal if designated to both spouses

Before marriage: All properties here are exclusive

During marriage: All properties here are common

Except: gratuitous acquisitions received by either spouse

A detailed look
Before marriage During marriage
Fruit of labor or industry Exclusive Conjugal
Fruit of properties Exclusive Conjugal
Inheritance or donation received Exclusive Exclusive*
*conjugal if designated to both spouses

Note: The sale of exchange of properties do not alter their classification. Properties acquired using separate
properties are separate properties. Likewise, properties acquired using common properties are common
properties.

Accruals in value or gains on sale of properties are fruits subject to the rules of the property regime agreed upon
by the spouses.

Illustrations: CONJUGAL PARTNERSHIP OF GAINS

Illustration 1:
Spouses Rene and Bebe who were under the conjugal partnership of gains had the following properties:
Rene Bebe
Before Marriage
1. Donations or inheritance received 100,000 150,000
2. Income of property from No 1 10,000 20,000
During Marriage
3. Properties acquired from separate industry or labor 400,000 300,000
4. Property received by donation or inheritance 800,000 500,000
5. Income of property from No.1 and No.2 15,000 25,000
6. Income of property from No. 3 40,000 30,000
7. Income of property No. 4 80,000 50,000

Separate properties of the spouses

Separate properties
Rene Bebe
Before Marriage
1. Donations or inheritance received 100,000 150,000
 2. Income of property from No.1 10,000 20,000
During Marriage
4. Property received by donation or inheritance 800,000 500,000

Total separate properties 910,000 670,000

Common properties of the spouses:

Rene Bebe Total
During marriage
1.Properties acquired from separate industry or labor 400,000 300,000 700,000
5.Income of property from 1&2 15,000 25,000 40,000
6.Income of property from No.3 40,000 30,000 70,000
7.Income of property from No.4 80,000 50,000 130,000
Total common properties 940,000

Illustration 2:
Mr. Crocs died. An inventory of the properties of Mr. and Mrs. Crocs is prepared below:

Mr. Crocs Mrs. Crocs Total

Properties accruing before marriage:
Properties inherited before marriage 200,000 100,000 300,000
Other properties brought into the marriage 400,000 500,000 900,000

Properties accruing during marriage:

Properties inherited during marriage 250,000 150,000 400,00
Properties as fruit of own labor 140,000 160,000 300,000
Properties as fruit of common labor 250,000
Fruits of:
Properties inherited before marriage 100,000 50,000 150,000
Properties inherited during marriage 20,000 80,000 100,000
Properties acquired from own labor 20,000 40,000 60,000
Properties earned from common labor 50,000

The following shows an analysis of the properties of the spouses under the CPG:
Exclusive properties Common
properties
Mr. Crocs Mrs. Crocs
Properties accruing before marriage:
Properties inherited before marriage 200,000 100,000
Other properties brought into the marriage 400,000 500,000

Properties accruing during marriage:

Properties inherited during marriage 250,000 150,000
Properties as fruit of own labor 300,000
Properties as fruit of common labor 250,000
Fruits of:
Properties inherited before marriage 150,000
Properties inherited during marriage 100,000
Properties acquired from own labor 60,000
Properties earned from common labor 50,000
Total 850,000 750,000 910,000
Note: All properties accruing during marriage are common properties except those received by way of gratuitous title.

The gross estate of Mrs. Crocs shall be:

Exclusive property of Mr. Crocs 850,000
Common property of Mr. and Mrs. Crocs 910,000
Gross estate 1,760,000

ABSOLUTE COMMUNITY OF PROPERTIES (ACP)

➢ Under ACP, marriage is viewed as a union of the properties of the spouses at the time of marriage
including fruits of their labor and industries in the marriage.
Special features of ACP
1. Retroactive feature
All properties which the spouses owned before the marriage which they brought into the marriage will
become common properties.

Exception:
a. Properties of a spouse with descendant/s in a prior marriage
b. Properties for exclusive personal use of either spouse, except jewelry

2. Prospective feature
All properties which the spouses may acquire during the marriage from their separate or joint labor or
industry are common properties.
Exception:
a. Gratuitous acquisition received by either spouse.
b. Fruits of exclusive property
c. Properties acquired for exclusive personal use of either spouse, except jewelry
Before marriage: (Retrospective)
All properties here are common
Exceptions:
Properties of spouse with descendants in a prior marriage
Properties of personal exclusive use of either spouse, except jewelry

During marriage: (Prospective)

All properties here are common
Exceptions:
Gratuitous acquisitions received by either spouse
Fruits of exclusive property
Properties of personal exclusive use of either spouse, except jewelry

Spouses with descendants in prior marriage

Illustration:
Ms. Beauty Fool, 20 years old, married Don Mario Montero Montemayor Milagroso, a wealthy 65-year old
businessman known for his alias “Mr. 4M.” Mr. 4M had a child with his deceased wife in a prior marriage.

Ms. Beauty brought into the marriage properties totaling P50,000. Mr. 4M also brought into the marriage properties
totaling P70,000,000. During the marriage, Ms. Beauty accumulated P300,000 from her salaries.

Mr. 4M can no longer work at his age so he is totally dependent from the fruits of his properties. His properties
earned P11,000,000 during the marriage.
The following shows an analysis of the properties of either spouse:

Exclusive Properties Common Properties

Mr. 4M Ms. Beauty
Properties brought into the marriage
Mr. 4M 70M
Ms. Beauty 50K

Properties acquired during marriage:

Fruits of properties 11M
Cash-salaries of Beauty 300K
81M 350K

*in ACP, fruits follow the principal

Properties received by way of gratuitous title

➢ Similar to CPG, properties received by way of gratuitous title such as donation or inheritance during
marriage is a separate property unless designated by the donor or decedent to be for both spouses.

Summary of Rules: Absolute Community of Property

Properties acquired Before marriage During marriage
From gratuitous acquisitions Communal Exclusive*
From fruit of industry Communal Communal
From fruit of property:
Separate property Communal Exclusive
Community property Communal Communal
For exclusive use of either spouse:
Jewelry Communal Communal
Non-jewelry Exclusive Exclusive

*communal if designated to both spouses

Illustrations: ABSOLUTE COMMUNITY OF PROPERTY

Illustration 1:
Spouses Rene and Bebe who were under the absolute community of property had the following properties:
Rene Bebe
Before Marriage
1. Donations or inheritance received 100,000 150,000
2. Income of property from No. 1 10,000 20,000

During Marriage
3. Properties acquired from separate industry 400,000 300,000
4. Property received by donation or inheritance 800,000 500,000
5. Income of properties from No.1 and No.2 15,000 25,000
6. Income of property from No. 3 40,000 30,000
7. Income of property from No. 4 80,000 50,000
Separate properties of the spouses
Separate properties
Rene Bebe
Before marriage
1. Donations or inheritance received - -
2. Income of property from No.1 - -

During Marriage
4. Property received by donation or inheritance 800,000 500,000
7. Income of property from No.4 80,000 50,000
Total separate properties 880,000 550,000

Common properties of the spouses:

Rene Bebe Total
Before marriage
1. Donations or inheritance received 100,000 150,000 250,000
2. Income of property from No.1 10,000 20,000 30,000

During marriage
3. Properties acquired from separate industry 400,000 300,000 700,000
5. Income of properties from 1&2 15,000 25,000 40,000
7. Income of property from No.3 40,000 30,000 70,000
Total common properties 1,090,000

Illustration 2:
Mr. Crocs died. An inventory of the properties of Mr. and Mrs. Crocs is prepared below:

Mr. Crocs Mrs. Crocs Total

Properties accruing before marriage:
Properties inherited before marriage 200,000 100,000 300,000
Properties for exclusive personal use 50,000 60,000 110,000
Other properties brought into the marriage 350,000 440,000 790,000

Properties accruing during marriage:

Properties inherited during marriage 250,000 150,000 400,000
Properties as fruit of own labor 140,000 160,000 300,000
Properties acquired for exclusive use 30,000 40,000 70,000
Properties as fruit of common labor 250,000
Fruits of:
Properties inherited before marriage 100,000 50,000 150,000
Properties inherited during marriage 20,000 80,000 100,000
Properties acquired from own labor 20,000 40,000 60,000
Properties earned from common labor 50,000
The following shows the classification of the properties of the spouses under ACP:
Exclusive properties Common
Properties
Mr. Crocs Mrs. Crocs
Properties accruing before marriage:
Properties inherited before marriage 300,000
Properties for exclusive personal use 50,000 60,000
Other properties brought into the marriage 790,000

Properties accruing during marriage:

Properties inherited during marriage 250,000 150,000
Properties as fruit of own labor 300,000
Properties acquired for exclusive use 30,000 40,000
Properties as fruit of common labor 250,000
Fruits of:
Properties inherited before marriage 150,000
Properties inherited during marriage 20,000 80,000
Properties acquired from own labor 60,000
Properties earned from common labor 50,000
Total 350,000 330,000 1,900,000

The gross estate of Mrs. Crocs shall be:

Exclusive property of Mr. Crocs 350,000
Common property of Mr. and Mrs. Crocs 1,900,000
Gross estate 2,250,000

Acquisition of Exempt Properties

➢ The acquisition of exempt properties will be included as exclusive or common properties of the spouses
but shall be excluded in the computation of the gross estate.
➢ The principal of exempt properties shall be removed from the reportable gross estate.
➢ The exclusion of exempt properties cannot be extended to the income of exempt properties.
ESTATE TAX: DEDUCTIONS FROM GROSS ESTATE CHAPTER 14

DEDUCTIONS FROM GROSS ESTATE

➢ There are charges which naturally diminish the amount of the inheritance of the heirs. Hence, the law allows
deductions from gross estate. In addition to these charges, the law also allows certain deductions in the
nature of incentives from gross estate.

Presentation of deductions in the Estate Tax Return

Exclusive Conjugal/Communal Total

GROSS ESTATE P xxx,xxx P xxx,xxx Pxxx,xxx
Less: Ordinary deductions xxx,xxx xxx,xxx xxx,xxx
Claims against the estate xxx,xxx xxx,xxx xxx,xxx
Claims against insolvent persons xxx,xxx xxx,xxx xxx,xxx
Unpaid mortgages xxx,xxx xxx,xxx xxx,xxx
Property previously taxed (VD) xxx,xxx xxx,xxx xxx,xxx
Transfer for public use xxx,xxx xxx,xxx xxx,xxx
Others xxx,xxx xxx,xxx xxx,xxx
Estate after deductions P xxx,xxx P xxx,xxx P xxx,xxx
Less: Special Deductions
Family Home xxx,xxx
Standard deduction xxx,xxx
Others xxx,xxx
Net Estate P xxx,xxx
Less: Share of the surviving spouse X 1/2 > xxx,xxx
NET TAXABLE ESTATE P xxx,xxx

Note: For a single decedent, the column common properties will be left blank.
.
Classification of Deductions
A. Ordinary Deductions
B. Special Deductions
C. Share of the surviving spouse

➢ Ordinary deductions conceptually include items which diminish the amount of the inheritance. The only
exception here is the deduction for “Property previously taxed” which is a tax incentive but is classified as
ordinary deductions in pursuant to the estate tax form.

➢ Special deductions are items which do not reduce the inheritance but are nonetheless allowed by the law
as incentive deductions against gross estate in the determination of the net taxable estate,

➢ Share of the Surviving spouse pertains to the interest of the surviving spouse in the conjugal or communal
properties of the spouses. This portion is not owned by the decedent and will not be transmitted by the
decedent as part of the inheritance; hence, it must be removed in the taxable estate.
GENERAL PRINCIPLES OF THE ESTATE DEDUCTIONS

✓ The substantiation rules

As a rule, items of deduction must be supported with documentary evidence such as receipts, invoices, contracts, and
other proofs that they actually exist or occurred to establish their validity.

✓ Matching Principle
As a rule, items of deduction must pertain to properties that are part of the gross estate. They must be proper charges
thereto.

Examples:
A. Obligations of the exclusive properties of the surviving spouse cannot be claimed as deductions because said properties are
not included in the gross estate.
B. Losses of properties before the death of the taxpayer are not deductible because the properties are no longer part of the gross
estate of the decedent at the date of death.
C. Separate obligations or losses of exclusive properties of the surviving spouse cannot be deducted against the gross estate.

✓ “No double classification” rule

Items of deduction cannot be claimed simultaneously under several deduction categories.

Examples:
A. A family home which is destroyed by any casualty during the settlement of the estate cannot be simultaneously deducted as a
“family home” and a “casualty loss.”
B. Losses claimed in the income tax return of the estate cannot be claimed again as deduction in the estate tax return.

✓ Default presumption on ordinary deduction

In the case of married decedents, ordinary deductions are presumed to be against the common properties unless
proven to be an exclusive property of either spouse. This is in line with the rule that properties are common properties
unless proven to be exclusive.

Ordinary deductions
Under current usage, the following are deemed ordinary deductions:
1. Losses, Indebtedness and Taxes (LIT)
2. Transfer for Public Use
3. Vanishing deductions

LOSSES, INDEBTEDNESS AND TAXES (LIT)

Losses
➢ These pertain to losses of properties of the estate during the settlement of the estate. These may arise from
casualty such as fires, storms, shipwreck, robbery, theft or embezzlement when such losses are not
compensated for by insurance.

Date of death Deadline of return

Non-deductible here! Deductible if losses occurred here| Non-deductible here!
(1 year)
Points to Remember:
1. Loss must be sustained casualty loss.
2. The loss must occur during the settlement of the estate up to the deadline of the estate tax return.
3. The loss must not be concurrently claimed in the income tax return.
Illustration 1
Mr. Y died in a fatal car crash on November 2, 2019. The following losses of properties were identified by his estate
administrator:

Losses up of the point of death:

Value of car totally destroyed during the crash P 1,200,000
Pilferage loss on merchandise revealed by
the physical inventory count on October 31, 2019 80,000

Losses since the death of the decedent:

Fire loss on an insured building on December 25, 2019 P 2,000,000
Theft of personal valuables of Mr. Y on January 1, 2020 180,000
Value of cash robbed from Mr. Y’s residence on February 14, 2020 620,000
Value of an uninsured car destroyed by a storm on March 1, 2021 800,000
Unpaid loans receivable from a bankrupt customer 100,000

The deductible loss shall be:

Loss on theft of personal valuables P 180,000

Loss on robbery 620,000
Total deductible loss P 800,000

Illustration 2
Just before filing the return on June 15, 2020, the estate administrator noted the following losses in the estate of Mr.
Wong, a businessman who died June 30, 2019:

1. The $100,000 in Mr. Wong’s savings account. He purchased these dollars at P54/$ on June 30, 2019 and P52/share
on June 15, 2020.
2. Mr. Wong had an office equipment with book value P400,000 on June 30, 2019. the executor sold this for P350,000
on March 10, 2020 to settle claims against the estate.
3. Mr. Wong’s vault containing P300,000 inventories of precious metals was stolen on august 15, 2019. this was
claimed as deduction in the income tax return of the estate for 2019.

None of these losses is deductible.

Claims against insolvent persons

➢ Claims against insolvent persons is a form of loss but is presented as separate item of deduction in the tax
return. The deductible amount of claim against insolvent persons is the unrecoverable amount of claim.

Illustration 1
Mr. Kugar died with a total receivable of P200,000 from Mr. Kumag. The latter was adjudged bankrupt by the court with
only P800,000 total assets but with P2,000,000 in total liabilities.

Mr. Kugar would be expected to recover only P200,000/P2,000,000 x P800,000 or P80,000 from Mr. Kumag. The claim
from insolvent person shall be P200,000-P80,000= P120,000.

Assuming that there is zero recovery, the entire amount of claim shall be presented as a deduction. Either way, the
P200,000 claim must be included in gross estate.
Illustration 2
Mrs. Shelly died leaving a P500,000 promissory note from Dye Company a bankrupt company undergoing liquidation.
The note was secured by a small piece of land with current value of P300,000. The fiduciary of Dye Company estimates
a 40% recovery for unsecured creditors.

Mrs. Shelly also loaned Dye Company P20,000 in a written instrument which prescribed a few years prior to her death.

The claim against insolvent persons shall be computed as:

Recoverable amount P380,000

Less: Total claim 500,000
Claim against insolvent persons P120,000

The recoverable amount is computed as:

Total claim P500,000

Less: Fair value of collateral 300,000 P300,000
Unsecured portion P200,000
Multiply by: Recovery Ratio 40% 80,000
Recoverable amount P380,000

Note: The 20,000 waived loan which prescribed is not a claim against insolvent person since it is no longer an enforceable right at the point of
death.

Classification of Losses
Losses, including claims against insolvent persons shall be classified based on the “Property classification Rule”. The
loss of separate property is presented as a deduction against separate property. The loss of common property is
presented as a deduction against common property.

Claims against the estate (Indebtedness)

➢ The word “claims” as used in the statute is generally construed to means debts or demands of a pecuniary
nature which could have been enforced against the deceased in his lifetime and could have been reduced to
simple money judgments.

➢ Claims against estate or indebtedness with respect to property may arise out of contract, tort, or operations
of law.

➢ Unpaid mortgages are claims against the estate but are separately reported under the category “Unpaid
mortgage” in the estate tax return.

Requisites of deductibility of claims against the estate:

1. The liability represents a personal obligation of the deceased existing at the time of his death except unpaid medical expenses
2. The liability was contracted in good faith and for adequate and full consideration in money or money’s worth.
3. The claim must be a debt or claim which is valid in law and enforceable in court;
4. The indebtedness must not have been condoned by the creditor or the action to collect from the decedent must not have
prescribed.

Classification Rules for Claims against the Estate

1. Family benefit rule
➢ If the obligation was contracted or incurred for the benefit of the family, the claim shall be classified as
deduction against common property. Otherwise, the property classification rule shall be applied.
Examples:
a. A mortgage which was contracted for the education of the children of the spouses shall be deducted against common properties
even if the same is constituted against a separate property of either spouse.
b. An unpaid real property tax on the family home shall be deducted against common property even if the family home is a separate
property of either spouse.

2. Property classification rule

➢ Claims follow the classification of the relevant property.

Examples:
a. A mortgage or unpaid taxes on property inherited or acquired before marriage shall be classified following the classification of
the property based on the applicable family regime of the spouses.
b. An obligation arising from exclusive property shall be considered as deduction from exclusive properties unless it accrued or
was used for the benefit of the family.

Special rules on certain claims against the estate

1. Unpaid mortgage
➢ This includes mortgage upon, or any indebtedness, with respect to property where the value of the
decedent’s interest therein, undiminished by such mortgage or indebtedness, is included in gross estate.

Illutration1
A decedent had a family home worth P1,500,000 which was encumbered by a mortgage. Details about the mortgage
were as follows:

Mortgage A
Original amount P900,000
Less:
Paid before death P200,000
Paid after death 400,000
Present balance P300,000

The family home is a common property of the decedent and his spouse. The proceeds of the mortgage were used for
the family.

A deductible mortgage, just like other obligations, must have been incurred before death and remain unpaid at the
point of death. Hence, the allowable deduction for “Unpaid mortgage” shall be the balance of the mortgage at the point
of death:

Mortgage A
Original amount P900,000
Less: Paid before death 200,000
Balance at the date tax return: P700,000

Presentation in the tax return:

Exclusive Common
Gross estate P - P1,500,000
Deductions:
Unpaid mortgage P - P 700,000
Illustration 2
During the marriage, Mr. Y inherited a commercial lot with a zonal value of P4,000,000. When one of his children got
sick, he mortgaged the property for P2,000,000. He was able to pay P400,000 until his death.

Presentation in the tax return:

Exclusive Common
Gross estate P4,000,000
Deductions:
Unpaid mortgage P - P1,600,000

2. Unpaid Taxes
This includes taxes such as income tax, business tax, and property tax which have accrued as of the death of the
decedent and which were unpaid as of the time of death.

It must be emphasized that only obligations existing at the point of death are deductible. Obligations including taxes
which are settled before death and those accruing after death are not deductible from gross estate.

Hence, the following taxes are non-deductible:

a. Tax on income earned after death
b. Property taxes accruing after death
c. Business taxes accruing after death
d. Estate tax on the transmission of the estate to the heirs

It must be noted also that contemplated in RR2-2003 , “Claims against the estate” are restricted to private claims
against the decedent’s estate.

Although taxes are claims against the estate, taxes should be reported under a separate category, but since there is
no separate category for taxes in the estate tax return, the same shall properly be included under the category “Others.”

3. Accommodation loan
An accommodation loan is one contracted by a person in behalf of another person with the contracting person merely
representing in behalf of the other person who will be the beneficiary of the loan proceeds.

Accommodation loan are presented as a receivable in the gross estate and is presented as a deduction. However, if
there is a legal impediment to recognize the same as a receivable, it may not be included in the gross estate. Likewise,
it will not be presented as an obligation.

Illustration 1: Claim against the estate - unmarried decedent

The heirs identified the following obligations of Mr. Natoy, a bachelor, who died on September 1, 2019:

Personal loan condoned by the creditor P400,000

Balance on the purchase price of a car, paid by the heirs
on September 28, 2019 200,000
Prescribed promissory note 100,000
Bank Loan 300,000
Interest on bank loan, P30,000 accrued as of
September 1, 2019 50,000

The deductible “claims against the estate” shall be:

Unpaid balance on purchased car at point of death P200,000
Bank loan 300,000
Interest payable accruing as of date of death 30,000
Total deductible claims against the estate P530,000

Presentation in the estate tax return:

Exclusive Common
Claims against the estate P530,000 P 0

Illustration 2: Claim against the estate - married decedent

The executor of Mr. X compiled the following obligations:

Obligations of the exclusive properties of Mrs. X P500,000

Unpaid funeral expense 100,000
Unpaid medical expense 200,000
Obligations accruing after death 150,000
Obligations of family before decedent’s death 300,000
Obligations of the separate properties of Mr. X 600,000
Unpaid mortgage on family properties 1,000,000

The deductible “claims against the estate” shall be:

Obligations of the family before decedent’s death P300,000

Obligations of the separate property of the decedent 600,000
Total deductible claims against the estate P900,000

Presentation in the state tax return:

Exclusive Common
Claims against the estate P600,000 P300,000

TRANSFER FOR PUBLIC USE

➢ Transfer for public use includes the amount of all bequests, legacies, devises or transfer to or for the use of
the Government of the Republic of the Philippines, or any political subdivision thereof, for the exclusive public
purposes. These must be indicated in the decedent’s last will and testament.

Illustration
Mr. A devised in his will the following properties:
Commercial land, to a public school P 2,000,000
Land and building to a government-owned and controlled corporation (GOCC) P 3,000,000
Total P 5,000,000

The P5,000,000 must be include in gross estate. Only the P2,000,000 can be claimed as transfer for public use. GOCCs are commercial and are
not for public.

PROPERTY PREVIOUSLY TAXED (VANISHING DEDUCTION)

➢ There are instances where properties are transferred between persons in short periods of time causing a
series of transfer taxation.

Example:
a. The death of the decedent is preceded by a donation inter-vivos
b. The death of the decedent is preceded by a donation mortis causa

Case 1: Donation before death

＋
A Donates to → B →
↑ ↑
Donor’s tax estate tax

Case 2: Series of deaths

＋ ＋ ＋ ＋ ＋
A → B → C → D → E →
↑ ↑ ↑ ↑ ↑
estate tax estate tax estate tax estate tax estate tax

Note the series of double transfer taxation in both cases. Due to this, a deduction for property previously taxed is
allowed by the law against gross estate to mitigate the impact of successive transfer taxation. This deduction is
commonly known as “Vanishing Deduction”.

Requisites of Vanishing Deduction:

1. The present decedent must have died within five (5) years from date of death of the prior decedent or taxable gift of
the donor.
Donation/Succession ＋
∣ ← 5 years → X
Non-claimable here! Claimable if received in this period.

2. The property with respect to which the deduction is claimed must have been part of the gross estate situated in the
Philippines of the prior decedent or taxable gift of the donor

In short, the property must have been previously subjected to a transfer tax.

3. The property must be identified as the same property received from prior decedent or donor or the one received in
exchange thereof

Deduction is still claimed even if the property transformed into another kind of property.

4. The estate taxes on the transmission of the prior estate or the donor’s tax on the gift must have been finally
determined and paid.

The basis of vanishing deduction is to mitigate the impact of double taxation. Vanishing deduction cannot be claimed
if the donor’s tax or estate tax was not paid in the prior transfer.

5. No vanishing deduction on the property or the property given in exchange thereof was allowed to the prior estate.
This rule applies in the case of a series of deaths. If the prior estate claimed vanishing deduction, the second estate
cannot claim vanishing deduction because the purpose of vanishing deduction is to mitigate double taxation.

The double deduction with vanishing deduction

➢ The purpose of vanishing deduction is no other than to minimize the burden of double transfer taxation that
could occur when a decedent dies soon after receiving properties that are previously subjected to transfer
tax.
 ➢ This noble gesture from the government should not be constructed as permit for taxpayers to abuse claims
of deduction. In principle, vanishing deduction can be claimed only if there is an incidence of double transfer
taxation.

➢ Despite the absence of a rule prohibiting double deduction using vanishing deduction, there is no good
reason to claim vanishing deduction if the entire value of the property is already claim under:
a. Casualty losses
b. Transfer for public purpose
c. Family home

The property is effectively excused from taxation by being deducted under the aforementioned categories. There would
be no double taxation to occur. Hence, further claim of vanishing deduction should be disallowed.

Illustration 1
Mr. A died on June 3, 2019 with the following properties in his gross estate:

Property Mode of acquisition Date of acquisition

Condo unit Purchase July 1, 2018
Car Donation July 3, 2016
Residence Purchase 1 August 5, 2018
Commercial building Purchase 2 June 1, 2019
Agricultural land Inheritance April 1, 2014

Note:
1. Using money inherited from his father who died on July 15, 2017
2. Using money received by way of donation on December 25, 2011

Only the car and residence can be claimed with vanishing deductions.

Procedural Computation: Vanishing Deduction

1. Determine the initial value.

The initial value is the fair market value of the property at the date of the first transfer (I.e., date of prior decedent’s
death or date of gift) or the fair value at the date of death whichever is lower.

Illustration
The following relates to a property that was donated to the decedent:
Upon Donation Upon death of decedent
Zone Value P1,200,000 P900,000
Fair Value per assessor 1,100,000 1,000,000

The respective fair value at those dates shall be the higher:

Upon donation Upon death of decedent
Higher P1,200,000 P1,000,000

Hence, the initial value shall be the lower P1,000,000.

2. Determine the initial basis

The initial basis is the initial value reduced by any indebtedness on the property which was assumed and paid by the
present decedent before his or her death.
 Initial Value P xxx,xxx
Less: Indebtedness assumed and paid before death xxx,xxx
Initial basis Pxxx.xxx

3. Determine the final basis

The final basis is the initial basis reduced by a proportion of other ordinary deductions (i.e. LIT + transfers for public
purpose) which the initial basis bears over the gross estate of the decedent.

This is computed as:

Initial basis P xxx, xxx

Less:
Initial basis/Gross Estate) x (Losses, indebtedness, taxes and transfer for public purpose) xxx, xxx
Final basis P xxx, xxx

4. Determine the vanishing deduction.

The vanishing deduction is the final basis multiplied by the following vanishing percentages:

If the decedent died within Vanishing percentage

1 year from receipt of the property 100%
2 years from receipt of the property 80%
3 years from receipt of the property 60%
4 years from receipt of the property 40%
5 years from receipt of the property 20%
More than five years 0%

If more than one property qualifies for vanishing deduction, the properties shall be grouped and totaled on a per-year
basis.

It is because of these decreasing deduction percentages that the deduction for property previously taxed is referred to
as “Vanishing Deduction”. Also, due these yearly percentages, properties qualified for vanishing should be grouped
annual.

Illustration 1 - Basic procedures

Mr. H, a bachelor, died with the following properties and allowable deductions:
Value upon inheritance Value at death
Car received as inheritance 3 years ago P 1,200,000 P 1,000,000
Other properties 9,000,000
Gross estate P 10,000,000

Allowable ordinary deductions:

Mortgage on the car P 500,000 300,000
Indebtedness and taxes 1,400,000
Transfer for public use 300,000
Total ordinary deductions before vanishing deductions P 2,000,000

The vanishing deduction shall be determined as follows:

Initial value (lower of P1,200,000 and P1,000,000) P 1,000,000

Less: Mortgage assumed and paid (500,000-P300,000) 200,000
Initial basis P 800,000
Less: Proportional other ordinary deductions
Initial basis/Gross estate x LIT + TFPU
(P800,000/P10,000,000 x P2,000,000) 160,000
Final basis P 640,000
Multiply by: Vanishing percentage (3 years) 60%
Vanishing deduction P 384,000

Tax return presentation

These shall be presented in the estate tax return as follows:
Exclusive Communal Total
Gross estate P 10,000,000 P - P 10,000,000
Less: ordinary deductions
- Mortgage 300,000 - 300,000
-Debts and taxes 1,400,000 - 1,400,000
- Transfer for public use 300,000 - 300,000
- Vanishing deduction 384,000 - 384,000

Illustration 2 - Integrative application

Mrs. Z died on July 1, 2019 leaving the following properties upon on her death:

ACP: During Marriage

Ranch, received as inheritance from her father on June 30, 2017 P 2,000,000
Orchard, brought with money donated to Mr. And Mrs. Z
by a friend on December 18, 2107 3,000,000
Rest house, inherited by Mr. Z on March 21, 2016 4,000,000
Commercial land, donated by her mother on January 2018 1,000,000
Family home, from salaries of Mrs. X 2,000,000
Other Properties, from salaries of Mr. X 7,000,000

The estate of Mrs. Z clams the following deductions

Casualty losses on other properties P 400,000

Claims against the estate, inclusive of P100,000 funeral expenses 900,000
Unpaid mortgage on the ranch 600,000

Additional Information:
- The ranch had a fair value of P2,400,000 in the gross estate of her father and is subjected to P1,000,000 mortgage
at that time
- The orchard had a fair value of P2,500,000 on December 18, 2017.
- Mrs. Z mortgaged the orchard on January 1, 2018 for P1,500,000. P500,000 of the mortgage was paid before her
death.
- Mrs. Z designated in her will to donate the commercial land to a government agency for public use.

Required: Determine the vanishing deduction.

The gross estate shall be computed first as follows:

Exclusive Communal Total
Ranch P 2,000,000 P 2,000,000
Orchard 3,000,000 3,000,000
Commercial land 1,000,000 1,000,000
Family home 2,000,000 2,000,000
Other properties 7,000,000 7,000,000
Gross estate P 3,000,000 P 12,000,000 P 15,000,000

Note: the rest house is an exclusive property of Mr. Z., the surviving spouse; hence, it is excluded in gross estate.

The other ordinary deduction shall also be computed, as follows:

Exclusive Communal Total
Casualty losses P 400,000 P 400,000
Claims against the estate 800,000 800,000
Unpaid mortgage P 600,000 1,000,000 1,600,000
Transfer for public purpose 1,000,000 1,000,000
Total other ordinary deductions P 1,600,000 P 2,200,000 P 3,800,000

The vanishing deduction for the ranch and the orchard shall be computed as follows:

Initial value Exclusive Communal total

- Ranch (lower of P2m & P2.4M) P 2,000,000 P 2,000,000
- Orchard (lower of P2.5 M & P3M) P2,500,000 2,500,000
Total P 2,000,000 P 2,500,000 P 4,500,000
Less: Debts assumed and paid 400,000 0 400,000
Initial basis P 1,600,000 P 2,500,000 P 4,100,000
Less: Pro-rated deduction
Ranch: (P1.6M/ P15M x P1.6M) 170,667 170,667
Orchard: (P2.5M/ P15M x P2.2M) 366,667 366,667
Final basis P 1,429,333 P 2,133,333 P 3,562,666
Multiply by: 60% 80%
Vanishing deduction P 857,600 P 1,706,666 P 2,564,266

Note:
1. The mortgage on the orchard is a new indebtedness of Mrs. Z. It is not a passed-on pre-existing debt. Deduction for mortgage
or indebtedness payments pertains to mortgage or indebtedness on the property assumed and paid for the decedent.
2.) The ranch is June 30, 2017 to July 1, 2019 or 2+ years; hence, up to 3 or 60%.
3.) The orchard is December 18, 2017 to July 1, 2019 or 1+ years; hence, up to 2 or 80%.

Tax return presentation

These shall be presented in the estate tax return as follows:
Exclusive Communal Total
Gross estate P 3,000,000 P12,000,000 P15,000,000
Less: Ordinary deductions
- Casualty Losses - 400,000 400,000
- Claims against the estate - 800,000 800,000
- Unpaid mortgage 600,000 1,000,000 600,000
- Transfer for public use 1,000,000 - 1,000,000
- Vanishing Deduction 857,600 1,706,666 2,564,266

SPECIAL DEDUCTIONS
The following considered special deductions:
1. Family home
2. Standard deductions
3. Benefits under RA 4917

FAMILY HOME
➢ Family home includes the dwelling house, and the land on which it is situated, where the decedent and/or
members of his family reside as certified by the Barangay Captain of the locality. The family home is deemed
constituted on the house and lot from the time it is actually occupied as a family residence and is considered
as such for a long as any of its beneficiaries actually resides therein (Arts. 152 and 153 Family Code).

➢ To be considered family home, the residence shall be characterized by permanency. It is the place to which,
whenever absent for business or pleasure, one still intends to return.

➢ For purposes of availing of a family home deduction to the extend allowable, a person may constitute only
one family home (Art 161, Ibid)

Requisites for deduction of family home

1. The family home must be the actual residential home of the decedent and his family at the time of his death, as
certified by the Barangay Captain of the locality where the family home is situated.
2. The value of the family home must be included as a part of the gross estate of the decedent; and
3. The allowable deduction must not exceed the lowest fair market the value of the family home as declared or included
in gross estate, the extent of the decedent's interest therein, or P10,000,000.

Not only married decedents can claim family home. A single decedent who is a head of a family can also claim
deduction for family home. A single who is not a head of a family is not legally allowed deduction for family home.

Illustration 1
A decedent died leaving a family home with a fair value of P 17,000,000 at the date of his death.

The following shall be deductible for family home under each of the following independent cases:

Assuming the family home is

Exclusive property Common property Exclusive Property
of the decedent of the spouses of the surviving spouse

Value of family home P 17,000,000 P 17,000,000 P 17,000,000

Multiply by % owned 100% 50% 0%
Decedent’s interest P 17,000,000 P 8,500,000 P 0
Limit P 10,000,000 P 10,000,000 P 0

Family home deduction P 10,000,000 P 8,500,000 P 0

Illustration 2
Mr. Ti died leaving a family home consisting of a lot valued at P 4,000,000 and a house value at P 11,000,000.

Required:
Determine the amount to be included in gross estate and the deductible family home under each of the following
independent cases:
Case 1 Case 2 Case 3
Lot Exclusive of Mr. Ti Common property Common property
House Common property Exclusive of Mrs. Ti Exclusive of Mr. Ti

Solution:
1. Case 1
Gross estate % owned Family home
Lot - SP - decedent P 4,000,000 100% P 4,000,000
House - CP 11,000,000 50% 5,500,000
To be reported in gross estate P 15,000,000
Decedent’s Interest P 9,500,000
Limit P 10,000,000
Deductible family home P 9,500,000

2. Case 2
Gross estate % owned Family home
Lot - SP - decedent P 4,000,000 50% P 2,000,000
House - CP - surviving spouse 0 0% 0
To be reported in gross estate P 4,000,000
Decedent’s Interest P 2,000,000
Limit P 10,000,000
Deductible family home P 2,000,000

3. Case 3
Gross estate % owned Family home
Lot - SP - decedent P 4,000,000 50% P 2,000,000
House - CP 11,000,000 100% 11,000,000
To be reported in gross estate P 15,000,000
Decedent’s Interest P 13,000,000
Limit P 10,000,000
Deductible family home P 10,000,000

STANDARD DEDUCTION
➢ A deduction in the amount of 5,000,000 shall be allowed as an addition deduction without the need of
substantiation. The full amount of shall be allowed as deduction for the benefit of the decedent.

➢ In order to simplify tax administration of the estate tax, the TRAIN Law adjusted the standard deduction of
P1M under the NIRC to P5M in lieu of the funeral expense, judicial expense and medical expense which were
previously deductible in the old law. In view of this, these expense deductions are no longer allowed under
the TRAIN law. They are deemed included in the increase in the standard deductions.

BENEFITS UNDER RA 4917

➢ Pursuant to RA 4917 which took effect on June 17, 1967, the retirement benefit or termination benefit received
by employees of private firms is not subject to attachment, levy, execution, or any tax whatsoever. Pursuant
to the NIRC which took effect on January 1, 1998, any amount received by the heirs from the decedent’s
employer as a consequence of the death of the decedent-employee in accordance with Republic Act No. 4917
is allowed as a deduction provided that the amount of the separation benefit is included as part of the gross
estate of the decedent.

Illustration 1
In 2018, Mr. W resigned from his employment and received a P 2,000,000 retirement pay from his employer's private
benefit plan. Mr. W invested P 1,000,000 in the stock market and use the other P 1,000,000 to purchase a car. In 2019,
Mr. W died leaving the car which now has a value of P 800,000 and his investments with a value of P 1,500,000.
The amount to be included in gross estate shall be:
Car P 800,000
Investment in stocks 1,500,000
Total inclusion in gross estate P 2,300,000

The deduction for benefits under RA 4917 shall be nil. The NIRC qualified the exemption of benefits received as a consequence
of death (i.e., death benefits) rather than retirement or termination benefit received during the lifetime of the decedent.

Illustration 2
Mr. H, a bachelor, died in a car accident. His heirs received a P 1,500,000 termination pay from his employer on
account from of Mr. H’s death.

The P1,500,000 termination pay shall be included in gross estate and shall likewise be presented as a deduction against gross
estate.

SHARE OF THE SURVIVING SPOUSE

➢ The share of the surviving spouse is one-half of the net conjugal or community properties of the spouses.
Needless to say, only married decedents have this deduction. After deducting the allowable deductions
appertaining to the conjugal or community properties included in the gross estate, the share of the surviving
spouse must be removed to ensure that only the decedent’s interest in the estate is taxed (RR2-2003).

Illustration
Using the same information in the illustration 2 of the vanishing deduction, the share of the surviving spouse shall be
computed as follows:
Exclusive Communal Total
Gross estate P 3,000,000 P 12,000,000 P 15,000,000
Less:
Ordinary deductions
- Casualty losses - 400,000 400,000
- Claims against the estate - 800,000 800,000
- Unpaid mortgage 600,000 1,000,000 1,600,000
- Transfer for public use 1,000,000 - 1,000,000
- Vanishing Deduction 857,600 1,706,666 2,564,266
Total P 542,400 P 8,093,334 P 8,635,734
Less: share of surviving spouse ÷ 2 4,046,667

Correction to audio recording :7,960,000 to 8,093,334

Share of the surviving spouse from 3,980,000 to 4,046,667

Illustration
A married decedent died with the following gross estate and allowable deductions:

Separate properties of the decedent P 1,200,000

Common property 3,800,000
Gross estate P 5,000,000

Actual state expenses and deductions:

Funeral expenses P 500,000
Judicial or estate administration expenses 400,000
Claim against the estate - separate properties 400,000
Claim against the estate - common properties 600,000
Unpaid mortgage on separate properties 100,000
Unpaid mortgage on common properties 400,000
Loss of common properties 150,000
Transfer for public use 100,000
Vanishing deduction on common properties 200,000

The statutory deduction for surviving spouse

The statutory deduction for the share of the surviving spouse shall be computed using estate tax rules as follows:

Exclusive Communal Total

Gross estate P 1,200,000 P 3,800,000 P 5,000,000
Less: ordinary deductions
Claims against the estate 400,000 600,000 1,000,000
Mortgage 100,000 400,000 500,000
Loss 150,000 150,000
Transfer for public use 100,000 100,000
Vanishing deduction - 200,000 200,000
Net estate before special deduction P 600,000 P 2,450,000 P 3,050,000
Divide by: 2
Share of surviving spouse P 1,225,000

Benefit under RA 4917 is commonly treated as a special deduction because it is normally deductible by citizens or
residents and is at least likely to be availed of by non-resident aliens.

Note on the classification of benefits under RQ4917

Death benefit under RQ 4917 may be indicated as an ordinary deduction or a special deduction under the category
“Others” in either classification.

This can be made without defeating the law. Regardless of the classification used for RA 4917 death benefits. The
share of surviving spouse us adjust to ensure that only the interest of the decedent is taxed as declared under RR2-
2003.

If the decedent is single, there is no tax issue on which classification to use. In the case of married decedents, however,
the following approach must be followed:
• If RA 4917 death benefit is classified as an ordinary deduction
the amount of benefits must be included in conjugal or communal properties of the spouses but is
removed in full under ordinary deductions.
• If RA 4917 death benefit is classified as a special deduction
The amount of the benefits must be included is conjugal or community properties of the spouses.
However, the deduction for benefits under RA 4917 shall only be one-half of its value. This is
because the other half is deducted through the deduction category, “Share of the surviving spouse.”

Illustration 1: RA 4917 death benefits as an ordinary deduction

Assume a married decedent died with RA 4917 death benefits of P800,000, a family home of P1,200,000, other
conjugal properties of P2,800,000 and P7,500,000 exclusive properties. Losses, indebtedness, and taxes chargeable
against conjugal properties were P700,000.
The net taxable estate shall be determined as follows:
Exclusive Conjugal Total
Family home P P 1,200,000 P 1,200,000
Benefits under RA 4917 800,000 800,000
Other Properties 7,500,000 2,800,000 10,300,000
Gross Estate P7, 500,000 P 4,800,000 P 12,300,000
Less Ordinary Deductions
LIT 700,000 700,000
Benefits under RA 4917(other) 800,000 800,000
Estate after deductions P7, 500,000 P 3,300,000 P 10,800,000
Less special deductions
Family home (P 1,200,000 x ½ since family home is conjugal) 600,000
Standard deduction 5,000,000
Net estate P 5,200,000
Less: Share of surviving spouse (3.3 m x ½) 1,650,000
NET TAXABLE ESTATE P3, 550,000

Illustration 2: RA 4917 death benefit as a special deduction

The taxable net estate shall be determined as follows:

Exclusive Conjugal Total

Family home P P 1,200,000 P 1,200,000
Benefits under RA 4917 800,000 800,000
Other Properties 7,500,000 2,800,000 10,300,000
Gross Estate P7, 500,000 P 4,800,000 P 12,300,000
Less Ordinary Deductions
LIT 700,000 700,000
Estate after deductions P 7,500,000 P 4.100,000 P 11,600,000
Less special deductions
Benefits under RA 4917 (800K x 50%) 400,000
Family home (P 1,200,000 x ½ since family home is conjugal) 600,000
Standard deduction 5,000,000
Net estate P 5,600 ,000
Less: Share of surviving spouse (4.1 m x ½) 2,050,000
NET TAXABLE ESTATE P 3,550,000

Both treatments results in the same net taxable state. Despite this, Benefits under RA 4917 is best presented as part
of special deduction because it is a deduction prescribed by special law.

RULES ON CLAIMABLE DEDUCTIONS PER DECENDENT CLASSIFICATION

Resident or citizen* Non-resident alien

Ordinary deduction ✓ ✓
Special deduction ✓ None, except
standard deduction
Share of surviving spouse ✓ ✓
*includes resident citizen, non-resident citizen and resident alien

DEDUCTION ALLOWED TO NON-RESIDENT ALIEN DECENDENTS

It should be emphasized that non-resident aliens cannot claim the special deductions. Non-resident aliens can claim
only the following deductions:
1.Prorated Losses, Indebtedness, and Taxes (LIT)
2. Property previously taxes (Vanishing Deductions)
3. Transfer for public purpose
4. Share of the surviving spouse
5. Standard deduction

Prorated LIT

The claimable deduction amounts of LIT of non-resident aliens are prorated as follows:

Philippine gross estate

----------------------------- X Losses, indebtedness, and Taxes
World gross estate

Illustration
An unmarried non-resident alien decedent died with the following gross estate and deductions details:

Philippines Abroad Total

Family home P- P 1,200,000 P 1,200.000
Other properties estate 4,000,000 4,800,000 8,800,000
Gross Estate P4,000,000 P 6,000,000 P 10,000,000

Philippines Abroad Total

Claims against the estate **300,000 2,100,000 2,400,000
Losses on properties 400,000 800,000 1,200,000
Transfer to public use 300,000 400,000 700,000
Note: Peso equivalents **P150,000 is unsupported.

While relaxing the matching rule with respect to deductions abroad, the total deductible amount of LIT items must first
be determined in the usual way similar to citizens:

Claims against the estate (P300k -P150K + 2.1M) P 2,250,000

Losses on properties (P400k+P800K) 1,200,000
Total World LIT P 3,450,000

The Philippine gross estate ratio shall be computed as follows:

Philippine Gross Estate P 4,000,000

------------------------- = -------------- = 40%
World Gross Estate P 10,000,000

The deductible amount of each LIT to be presented in the estate tax return shall be computed as:

Claims against the estate (P2,250,000 x 40%) P 900,000

Losses on properties (P1,200,000 x 40%) 480,000
Total Deductible LIT P 1,660,000
Property previously taxed (Vanishing Deductions)
The same vanishing deductions shall be deductible provided that the property subject to vanishing deductions is
included as part of gross estate. In other words, the property subject to vanishing deduction must be within the
Philippines at the date of death.

Illustration
A non-resident alien died with Philippine gross estate of P4M and foreign gross estate of P6M. The computed allowable
pro-rated LIT against Philippine estate is P1,660,000. The Philippine gross estate included a P1M property which was
inherited 2 years ago when its value was worth P1.2M. The foreign gross state also included a P2M property which
was intertied 3 years ago when it was valued at P2.5M

The vanishing deduction of the non-resident alien decedent shall be computed as:

Initial value (P1M or P1.2M whichever is lower) P 1,000,000

Less: Indebtedness paid 0
Initial basis P 1,000,000

Initial basis P 1,000,000

Less: Prorated deduction
(Initial basis/ Philippine GE) x (LIT + TFPP)
[(P1M/4M) x P 1,660,000) 415,000
Final basis P 585,000
Multiply by: Vanishing percentage for up to 2 years 80%
Vanishing deductions P 468,000

Note: No vanishing deduction can be claimed with respected to the properties located abroad because these are not
included in the Philippine gross estate.

Transfer for public Purpose

Transfer for public purpose by non-resident alien decedents are deductible only if the properties being transferred to
the Philippine government is part of the gross estate. It must be situated In the Philippines at the time of transfer.

Share of the surviving spouse

The deductible share of the surviving spouse of a non-resident alien decedent shall be computed out of Philippine
conjugal or communal properties using the same procedures as previously discussed.

Standard Deductions
In view of the removal of the prorated funeral and judicial expense for non-resident alien decedents, the TRAIN law
allows a standard deduction of P500,000 for non-residents.

Illustration
A non-resident alien died leaving the following gross estate:

Philippines Abroad Total

Exclusive property P 3,000,000 P 10,000,000 P 13,000,000
Communal property 7,000,000 13,000,000 20,000,000
Total Gross Estate P 10,000,000 P 23,000,000 P 33,000,000
Prorated LIT P 1,200,000 P 2,800,000 P 4,000,000
 Transfer to Philippine Government
Involving exclusive property 600,000 800,000 1,400,000
Vanishing deduction on communal property 400,000 400,000

The share of the surviving spouse and the net taxable of the non-resident alien decedent shall be computed as:

Exclusive Communal Total

Gross Estate P 3,000,000 P 7,000,000 P 10,000,000
Less: Deductions
Prorated LIT 1,200,000 1,200,000
Transfer for public use 600,000 600,000
Vanishing Deduction 400,000 400,000
Net estate after deduction P 2,400,000 P 5,400,000 P 7,800,000
Less: Standard deduction 500,000
Net estate P 7,300,000
Less: Share of the surviving spouse (P5,400,000/2) 2,700,000
TAXABLE NET ESTATE P 4,600,000

Additional requirements on Deductions of non-resident Alien

No deduction shall be allowed in the case of a non-resident alien decedent, unless the executor, administrator, or
anyone of the heirs, as the case may be, includes in the return the value at the time of the decedent’s death that part
of his gross estate not situated in the Philippines.

SUMMARY OF DEDUCTION RULES

Residents or Citizens Non-resident aliens
Losses YES
Claims against the estate YES Pro-rated
Indebtedness YES amount.
Taxes YES
Transfer for public use YES YES
Vanishing deductions YES YES
Family home YES NO
Standard deductions YES YES
Benefits under RA 4917 YES NO
Share of the surviving spouse YES YES
 ESTATE TAX PAYABLE CHAPTER 15

Determination of the Net Taxable Estate

Illustration 1: Single resident or citizen decedent
An unmarried Filipino died leaving the following properties and possible deductions:

Philippines Abroad Total

Motorcycle 120,000 - 120,000
Business interests 6,500,000 800,000 7,300,000
Family home 10,200,000 - 10,200,000
Other personal properties 200,000 100,000 300,000
Gross Estate 17,020,000 900,000 17,920,000

Funeral expenses 180,000 40,000 220,000

Judicial expenses 40,000 30,000 70,000
Obligations 300,000 200,000 500,000
Losses 50,000 50,000 100,000
Medical expenses 150,000 400,000 550,000

The net taxable estate and tax due shall be computed in the estate tax return as:
Separate Common Total
Gross Estate 17,920,000 - 17,920,000
Less: Ordinary deductions
Obligations 500,000 500,000
Losses 100,000 100,000
Net estate before share of surviving spouse 17,320,000 - 17,320,000
Less: Share of the surviving spouse -
Net estate before special deductions 17,320,000
Less: Special deductions
Family home 10,000,000
Standard deductions 5,000,000
Net taxable estate 2,320,000
Multiply by: 6%
Estate tax due 139,200

Illustration 2: Single non-resident alien decedent

A non-resident Japanese died leaving the following properties and possible deductions:
Philippines Abroad Total
Condominium 2,000,000 2,000,000
Business interests 1,500,000 800,000 2,300,000
Family home 1,200,000 1,200,000
Other personal properties 350,000 1,150,000 1,500,000
Total 3,850,000 3,150,000 7,000,000

Funeral expenses 50,000 240,000 290,000

Judicial expenses 40,000 110,000 150,000
Obligations 300,000 200,000 500,000
Losses 80,000 120,000 200,000
Transfer for public purpose 50,000 20,000 70,000
Vanishing deductions 140,000 80,000 220,000
Medical expenses 150,000 400,000 550,000
The net taxable estate and tax due shall be computed in the estate tax return as:
Separate Common Total
Gross Estate 3,850,000 - 3,850,000
Less: Ordinary deductions
Pro-rated LIT
Obligations 275,000 275,000
Losses 110,000 110,000
Transfer for public use 50,000 50,000
Vanishing deductions 140,000 - 140,000
Net estate before share of surviving spouse 3,275,000 - 3,275,000
Less: Share of the surviving spouse -
Net estate before special deductions 3,275,000
Less: Special deductions
Family home -
Standard deductions 500,000
Net taxable estate 2,775,000
Multiply by: 6%
Estate tax due 166,500

Illustration 3: Married resident or citizen decedent

Mr. Rice, a resident alien, died leaving the following properties and estate deductions:
Separate properties Conjugal
Located in the Philippines: Mr. Rice Mrs. Rice Properties
Personal properties 8,400,000 1,100,000 2,500,000
Family home - - 10,800,000
Other real properties 2,300,000 1,800,000 4,000,000
Total Philippine properties 10,700,000 2,900,000 17,300,000
Located abroad:
Personal properties 2,000,000 1,000,000 4,000,000
Real properties 1,000,000 2,500,000 4,200,000
Total foreign properties 3,000,000 3,500,000 8,200,000
World Properties 13,700,000 6,400,000 25,500,000

The executor of Mr. Rice compiled the following expenses and deductions which are matched to their respective
sources:

Separate properties Conjugal

Philippines and Abroad: Mr. Rice Mrs. Rice Properties
Funeral expenses 250,000 350,000
Judicial expenses 600,000
Obligations 1,000,000 1,800,000 2,000,000
Losses 200,000 400,000 300,000

The net taxable estate and tax due shall be computed as:
Separate Common Total
Philippine properties 10,700,000 17,300,000 28,000,000
Foreign properties 3,000,000 8,200,000 11,200,000
Gross estate 13,700,000 25,500,000 39,200,000
Less: Ordinary deductions
Obligations 1,000,000 2,000,000 3,000,000
Losses 200,000 300,000 500,000
Net estate before share of surviving spouse 12,500,000 23,200,000 35,700,000
 Less: Share of surviving spouse ÷2 11,600,000
Net estate before special deductions 24,100,000
Less: Special deductions
Family home 5,400,000
Standard deduction 5,000,000
Net taxable estate 13,700,000
Multiply by: 6%
Estate tax due 822,000

Illustration 4: Married non-resident alien decedent

Mrs. Kay Yakoto, a non-resident Japanese, died leaving the following properties and estate deductions:

Separate properties Conjugal

Located in the Philippines Mr. Yakoto Mrs. Yakoto Properties
Tangible personal properties 1,400,000 1,100,000 2,500,000
Intangible personal properties 300,000 600,000 200,000
Real properties 1,300,000 1,800,000 5,800,000
Total Philippine Properties 3,000,000 3,500,000 8,500,000

Located abroad:
Personal properties 2,000,000 1,000,000 2,000,000
Real properties 1,000,000 2,500,000 2,500,000
Total foreign properties 3,000,000 3,500,000 4,500,000

World Properties 6,000,000 7,000,000 13,000,000

A breakdown of the items of LIT is presented as follows:

Philippines Abroad
Separate Common Separate Common Total
Obligations 1,000,000 1,400,000 1,000,000 1,600,000 5,000,000
Losses 200,000 400,000 200,000 - 800,000
Transfer for public
purposes 350,000 250,000 600,000

The gross estate shall be computed as:

Mrs. Yakoto Common Total
Philippine gross estate 3,500,000 8,500,000 12,000,000
Foreign gross estate 3,500,000 4,500,000 8,000,000
World gross estate 7,000,000 13,000,000 20,000,000

Philippine Gross Estate Ratio= 12m/20m= 60%

The total allowable deductions for LIT items shall be computed as follows:
Allowable
Global LIT Phil Ratio Phil LIT
Obligations 5,000,000 x 60% 3,000,000
Losses 800,000 x 60% 480,000
Total 5,800,000 3,480,000
The deductible amounts of LIT between separate and common properties shall be pro-rated based on the ratio of
actual LIT amounts as follows:
Total Proportional Value Allowed
Allowable Percentage =
Total Actual Philippine Value

Hence,
Total Allowed/ Actual Phil. Value =%
Obligations 3,000,000 2,400,000 125%
Losses 480,000 600,000 80%

Separate Common Total

Obligations:
Actual 1,000,000 1,400,000 2,400,000
x Allowable % 125% 125% 125%
Deductible 1,250,000 1,750,000 3,000,000

Losses:
Actual 200,000 400,000 600,000
x Allowable % 80% 80% 80%
Deductible 160,000 320,000 480,000

The net taxable estate and tax due of Mrs. Yakoto shall be computed as:
Separate Common Total
Gross estate 3,500,000 8,500,000 12,000,000
Less: Ordinary deductions
Pro-rated LIT:
Obligations 1,250,000 1,750,000 3,000,000
Losses 160,000 320,000 480,000
Transfer for public use 350,000 - 350,000
Net estate before share of surviving spouse 1,740,000 6,430,000 8,170,000
Less: Share of surviving spouse ÷2 3,215,000
Net estate before special deductions 4,995,000
Less: Special deductions
Family home -
Standard deduction 500,000
Net taxable estate 4,455,000
Multiply by: 6%
Estate tax due 267,300

➢ Determination of Foreign Tax Credit

The estate tax due of decedents who are taxable on global estate such as resident citizens, resident aliens and
non-resident citizens shall be further reduced by foreign tax credit for estate taxes paid in foreign countries.

➢ The foreign tax credit shall depend on whether the decedent has properties in a single foreign country
or multiple countries.

Single Foreign Country

The foreign tax credit shall be whichever is lower of the actual foreign estate tax paid and the following limit:

Foreign net taxable estate

x Philippine estate tax due
World net taxable estate
Multiple Foreign Countries
The lower of actual estate tax and the foregoing limit for each country is determined first.
The final foreign tax credit shall be the lower of the total of the tax credit allowable per country and the world
estate tax credit limit computed as:

Total foreign net taxable estate

x Philippine estate tax due
World net taxable estate

Illustration 1: One foreign country

A resident decedent paid P110,000 estate tax in Japan. The following shows a breakdown of his net taxable
estate:
Net taxable estate in the Philippines 1,200,000
Net taxable estate in Japan 1,800,000
World net taxable estate 3,000,000

The estate tax on the P3,000,000 world net taxable estate is P180,000.

The estate tax credit shall be computed as:

Actual foreign estate tax paid 110,000

Limit: (1,800,000/3,000,000 x 180,000) 108,000

Foreign tax credit-Lower 108,000

The estate tax payable shall be computed as:

Estate tax due 180,000
Less: Foreign tax credit 108,000
Estate tax still due or payable 72,000

Illustration 2: Multiple foreign countries

A citizen decedent had the following data:

Net taxable estate Estate tax paid

Hong Kong 1,700,000 200,000
Korea 2,800,000 150,000
Philippines 1,500,000
Total 6,000,000

The estate tax on the P6,000,000 world net taxable estate is P360,000.

Limit 1: Per country limit

Hong Kong Korea Total
Actual estate tax paid 200,000 150,000
Limit:
1.7m/6m x 360,000 102,000
2.8/6m x 360,000 168,000
Lower 102,000 150,000 252,000

Limit 2: Total foreign countries

Lower in Limit 1 252,000
Limit 2: (1.7m + 2.8m) / 6m x 360,000 270,000
Final Foreign Tax Credit 252,000

The estate tax payable shall be computed as:

Estate tax due 360,000
Less: Foreign tax credit 252,000
Estate tax still due or payable 108,000

Determination of the Net Taxable Estate Per Country

Illustration 1: Single decedent-foreign tax credit
A single citizen decedent died leaving the following gross estate and deductions:

Philippines Japan Total

Gross Estate 21,000,000 9,000,000 30,000,000
Deductions:
Obligations 300,000 200,000 500,000
Losses 50,000 50,000 100,000
Family home 12,000,000
Estate tax paid - 320,000

The net taxable estate of each country shall be computed as:

Philippines Japan Total

Gross estate 21,000,000 9,000,000 30,000,000
Less: Ordinary deductions
Obligations 300,000 200,000 500,000
Losses 50,000 50,000 100,000
Net estate before share of surviving spouse 20,650,000 8,750,000 29,400,000
Less: Share of surviving spouse - - -
Net estate before special deduction 20,650,000 8,750,000 29,400,000
Less: Special deductions
Family home 10,000,000 10,000,000
Standard deduction 3,500,000 1,500,000 5,000,000
Net taxable estate 7,150,000 7,250,000 14,400,000
Multiply by: 6%
Estate tax due 864,000

The allocable standard deduction per country shall be:

Philippines 21m/30m x 5m = 3,500,000
Japan 9m /30m x 5m = 1,500,000
Total 5,000,000

Estate tax credit and tax still due

The estate tax credit shall be computed as:

Actual foreign estate tax paid 320,000

Limit: (7,250,000/14,400,000 x 864,000) 433,000

Foreign tax credit-lower 320,000

 The estate tax still due or payable shall be computed as:

Estate tax due 864,000

Less: Foreign tax credit 320,000
Estate tax still due or payable 544,000

Illustration 2: Married decedent – foreign tax credit

Mr. Nasser, a citizen decedent, died leaving the following properties and estate deductions:

Mr. Nasser Common Total

Properties in the Philippines 27,000,000 45,000,000 72,000,000
Properties in Egypt 3,000,000 5,000,000 8,000,000
World Total 30,000,000 50,000,000 80,000,000

The executor of Mr. Nasser compiled the following deductions.

Philippines Egypt Total

Obligations *700,000 **800,000 1,500,000
Losses **200,000 *100,000 300,000
Family home **15,000,000
Estate tax paid ? 290,000

*Attributable to exclusive properties of Mr. Nasser

**Attributable to common properties

The taxable net estate per country shall be computed as follows:

(Amounts are in thousands)

Philippines Egypt Grand

Separate Common Total Separate Common Total Total
Gross estate 27,000 45,000 72,000 3,000 5,000 8,000 80,000
Less:
Obligations 700 - 700 - 800 800 1,500
Losses 200 200 100 - 100 300
Net estate before share of SS 26,300 44,800 71,100 2,900 4,200 7,100 78,200
Less: Share of SS ÷2 22,400 ÷2 2,100 24,500
Net estate before special
deduction 48,700 5,000 53,700
Less:
Family home 7,500 - 7,500
Standard deduction 4,500 500 5,000
Net taxable estate 36,700 4,500 41,200

Phil standard deduction= 72m/80m x 5m = 4,500,000

Foreign standard deduction= 8m/80m x 5m = 500,000
Total 5,000,000

Tax credit and estate tax still due

The estate tax shall be computed as follows 41.2m x 6% = 2,472,000

The estate tax credit shall be computed as:

Actual foreign estate tax paid 290,000
Limit: 4,500/41,200 x 2,472,000 270,000

Foreign tax credit- lower 270,000

The estate tax still due or payable shall be computed as:

Estate tax due 2,472,000

Less: Foreign tax credit 270,000
Estate tax still due or payable 2,202,000

Determination of estate tax due with multiple foreign countries

In our example, we used only one country to simplify the illustration. If multiple countries are involved, similar
procedures and logic are applied.

Estate tax requirements

1. Estate tax return
2. Certified Public Accountant (CPA) Certification- exceeds P5M

The estate tax return shall be filed within one year after the date of death.

Where to file the estate tax return?

1. Accredited Agent Bank
2. Revenue District Office
3. Collection Agent
4. Duly authorized Treasurer of the City or Municipality
5. Office of the Commissioner
 Introduction to Donor’s Tax CHAPTER 16

Donation
 Donation is the gratuitous transfer of property from one living person (donor) to another (donee).

Essential Requisites of Donation

1. Capacity of the donor
2. Intention to donate
3. Donative act or delivery
4. Acceptance by the donee

Formal Requisites of Donation

Property Required formality
Real property Public instrument*
Tangible personal property
Amount exceeding P5,000 Written
Amount not exceeding P5,000 Oral
Intangible personal property Public instrument

*Art. 749, New Civil Code; a public instrument is a written document annotated
by a lawyer.

Types of Inter-Vivos Donation

1. Direct donation
A direct donation is one made by the donor directly to the donee

2. Indirect donation
An indirect donation involves transfer of property by the donor in favor of the donee but under the supervision of
another party. This is called donation in trust.

The designation of a donation in trust may either be:

a. Revocable- this is not a completed donation and is not taxable.
b. Irrevocable- this is a completed donation; hence, taxable.

Types of Donors
A. Resident or citizen- taxable on global donations, such as
1. resident citizen
2. non-resident citizen
3. resident alien

B. Non-resident alien- taxable only on Philippine donations, except intangible personal property subject to
reciprocity conditions.

Under TRAIN Law, donation to any donee is now subject to a flat 6% tax.

Summary of rules on taxable donation

Residents or Citizens NRA without reciprocity NRA with reciprocity
Property location Within Abroad Within Abroad Within Abroad
 Real properties ⁄ ⁄ ⁄ x ⁄ x
Personal properties
⁄ ⁄ ⁄ ⁄
Tangible x x
⁄ ⁄ ⁄ x
Intangible x x

Illustration 1
Mr. Rallo donated the following properties:

Philippines Abroad Total

Real properties 1,000,000 800,000 1,800,000
Tangible personal properties 400,000 300,000 700,000
Intangible personal properties 200,000 100,000 300,000
Total 1,600,000 1,200,000 2,800,000

The following shall be the taxable donation in each of the following cases:
If Rallo is a The taxable donation is
Resident or citizen donor 2,800,000
Non-resident alien
With reciprocity exemption 1,400,000
Without reciprocity exemption 1,600,000

Donor’s Tax
 Donor’s tax is a tax upon the gratuitous transfer of property between two or more living persons at the time
of transfer whether the transfer is direct or in trust and without regard to the type of property transferred.

Nature of Donor’s Tax

1. Privilege tax
2 Proportional tax
3. Annual tax
4. Ad valorem
5. National tax
6. Revenue or fiscal tax

Rationale of Donor’s Taxation

1. To control tax evasion of the estate tax
2. To control tax evasion on income tax

Illustration
Mr. Lex had an art collection item with a fair value of P4,000,000 which he previously acquired for P2,000,000. Mr.
Lex sold the collector’s item for only P2,500,000.

Fair market value P4,000,000 1,500,000- donation

Selling Price 2,500,000
Cost or tax basis 2,000,000 500,000- income

3. To recoup future loss of income tax expense

Exempt Gifts
The following are exempt donations:
1. Donations to exempt donees under the NIRC and special laws
2. Donations for election campaign
3. Transfers for insufficient consideration involving real property classified as capital assets
4. General renunciations of inheritance
5. Donations with reserved powers
6. Donation to the government for public use
7. Donation to accredited non-profit institution
8. Quasi-transfers
9. Void donations
10. Foreign donations of non-resident alien donors
11. Donations of property exempt under reciprocity

Donation to certain exempt donees under the NIRC and special laws
Donations to the following donee entities are exempt:

1. Aquaculture Department of the Southeast Asian Fisheries Development Center

2. Aurora Pacific Economic Zone and Freeport Authority
3. Development Academy of the Philippines
4. Girl Scouts of the Philippines
5. Integrated Bar of the Philippines
6. International Rice Research Institute
7. National Commission for Culture and the Arts
8. National Social Action Council
9. National Water Quality Management Fund
10. People’s Television Network, Incorporated
11. People’s Survival Fund
12. Philippine-American Cultural Foundation
13. Philippine Normal University
14. Philippine Investors Commission
15. Philippine Red Cross
16. Ramon Magsaysay Award Foundation
17. Rural Farm School
18. Task Force on Human Settlements
19. Tubbataha Reefs Natural Park
20. University of the Philippines
The list of exempt donees herein is non-exhaustive. There may be other exempt donees under special laws.

Donations for election campaign

Any contribution in cash or in kind to any candidate, political party, or coalition of parties for campaign purposes shall
be governed by the Election Code.

Transfers for insufficient consideration involving real property classified as capital assets
Not subject to donor’s tax.
Hence, the exemption does not extend to
a. Sale of real properties classified as ordinary asset
b. Sale of personal or movable property

Illustration
A corporation sold the following properties:
 Fair value Selling Price
Vacant and unused lot 2,000,000 1,000,000
Building 4,000,000 2,500,000
Investment in shares of stocks 1,000,000 400,000
Equipment 400,000 200,000

The donation and the donor's tax shall be computed as:

Building (4M-2.5M) 1,500,000
Investment in stocks ( 1M-400K) 600,000
Equipment (400K-200K) 200,000
Net taxable gifts 2,300,000
Less: Exempt donation 250,000
Excess 2,050,000
Multiply by: Donor's tax rate 6%
Donor's tax 123,000

Insufficient consideration on transfer of other properties

In the absence of the donative intent, the same shall be exempt.

Illustration 1
Mr. Greg had a car with a fair value of P4M. His brother Pablo is interested to buy the car but could only offer P2.5M.
Another friend offered P3.8M for the car but Greg preferred to sell the car to Pablo.

The P1.5M discount is a taxable gift. The donation is clearly intentional since despite the presence of willing buyers
at almost fair value, Mr. Greg decided to give the car to his brother.

Illustration 2
Leon Manalo is having a business liquidity problem. Faced with an imminently maturing debt which he could not
repay, he sold his truck with a second hand value of P3M for only P1M.

The P2M discount is not a taxable gift there being total lack of donative intent since the sale is forced by a
circumstance beyond the Leon Manalo’s control.

General Renunciation of Inheritance

A general renunciation of inheritance occurs when an heir or the surviving spouse renounces his or her share in the
hereditary estate of a decedent in favor of no particular coheir. A general renunciation is a repudiation of inheritance
which cannot be imputed as a donation.

Illustration
Don Pablo died with a net distributable estate of P1.2M for his children Mari, Lea, and Mario as heirs. Mario
renounces his P400K share in the net estate in favor of no particular assignee. Thus, Mario’s P400K is reallocated as
P200K each to Mari and Lea.

The renunciation made by Mario is a general renunciation. This is exempt from donor’s tax.

Important point to consider

To be exempt, the renunciation of inheritance must not be done categorically in favor of an identified heir to the
exclusion of other heirs.
Illustration 1: Specific renunciation in cases of more than two heirs
Don Pablo died with a net distributable estate of P1.2M for heirs: Mari, Lea and Mario. Mario renounced his P400K
share in favor of Lea to the exclusion of Mari.

This is called specific renunciation. This is subject to the donor’s tax.

Illustration 2: Specific renunciation in the case of only two heirs

Don Pablo died with a net distributable estate of P800K for his two heirs: Lea and Mario. Mario renounced his P400K
share in the net distributable estate.

In this case, even if the renunciation is specific, it is not construed as a donation. Hence, it is exempt from donor’s
tax.

Renunciation by the surviving spouse of his/her share in the hereditary estate of the decedent will be subject to the
aforementioned rules.

However, the renunciation by the surviving spouse of his/her share in the conjugal or communal properties upon
dissolution of the marriage is a taxable donation regardless of whether it is specific or general.

Summary of rules on renunciation

Type of renunciation General Specific
Renunciation with more than two heirs Exempt Taxable
Renunciation with only 2 heirs Exempt Exempt
Renunciation by the surviving spouse of his
share in the common properties Taxable Taxable

Donation with reserved powers (Incomplete transfers)

This pertains to transfers of property wherein ownership will transfer only upon the happening of a future event which
is specified by the donor, such as:
1. Conditional donation
2. Revocable transfers

Donation to the government for public use

Gifts made to or for the national government or any entity created by any of its agencies which are not conducted for
profit or to any political subdivision of the said government are exempt from donor’s tax.

Illustration
Mr. Leonard donated P200K worth of goods to the Land Bank of the Philippines and P200K to the Dep-Ed.

The donation to Dep-Ed is exempt being a government agency. The donation to Land Bank which is a government-
owned and controlled corporation is subject to tax.

Donation to accredited non-profit organization

Gifts in favor of an educational and or charitable, religious, cultural or social welfare corporation, institution,
accredited nongovernment organization, trust, or philanthropic organization or institution are exempt from donor’s tax.

Requisite for exemption

1. Not more than 30% of said gift shall be used by such donee for administrative purposes.
2. The donee entity must be organized as a non-stock entity.
3. The donee entity does not pay dividends.
4. The donee entity’s board of trustees earns no compensation.
5. The donee entity must devote all its income, donations, subsidies, or other forms of philanthropy to the
accomplishment and promotion of its purposes in its Articles of Incorporation.

Accrediting Agencies
1. Department of Social Welfare and Development
2. Department of Science and Technology
3. Philippine Sports Commission
4. National Council for Culture and Arts
5. Commission on Higher Education

Illustration 1-Donation to an accredited NPOs

Mr. Rafael donated P500K to ALDO, a non-profit cultural organization established in the Cordilleras.

If ALDO is a donee cultural organization accredited by the appropriate accrediting agency (i.e., the National Council
for Culture and Sports), the donation shall be exempt. The net gift shall be nil.

If ALDO is a non-accredited donee organization, the donation shall be taxable. The net gift shall be P500K.

Illustration 2- Direct donation to beneficiaries of aids

Don Richie was so touched by a TV ad which is sponsored by Sagip Kapamilya Foundation regarding a parent who
is seeking financial assistance for the medication of his son who is under terminal illness. Mr. Richie proceeded to the
hospital and donated P2M to the parent.

The P2M donation shall be subject to donor’s tax. In order to be exempt, the donation must be given to an accredited
non-profit organization like Sagip Kapamilya Foundation in our example. The non-profit organization shall in turn
release the same to the beneficiary.

Gratuitous Donations to Associations

Associations do not qualify as exempt donee institutions. Hence, endowments or gifts received by associations are
not exempt from donor’s tax. All donations to associations for tax purposes must be covered by a donor’s tax return.

Quasi-transfers
Quasi-transfers involve delivery of property to another person but will never results in transfer of ownership thereto.
These are not subject to donor’s tax.

Examples:
1. Merger of the usufruct in the owner of the naked title during the lifetime of the usufructuary.
2. The transmission or delivery of the inheritance or legacy by the fiduciary heir or legatee to the fideicommissary
during the lifetime of the fiduciary heir.
3. The transmission from the first heir, legatee, or donee during his lifetime in favor of another beneficiary, in
accordance with the desire of the predecessor.

Void donations
Void donations are invalid donations.

Prohibited donation under the Civil Code

1. Donation between spouses, except minor gifts
2. Donations between persons who were guilty of adultery or concubinage at the time of donation.
3. Donations between persons found guilty of the same criminal offense, in consideration thereof
4. Donations to a public officer or his wife, descendants or ascendants by reason of his office.
5. Donations to incapacitated persons
6. Donations of future property

Donation with defects at execution

1. Donation by a person who has no legal title to the property
2. Oral or written donation of real property or intangible personal property
3. Donation refused by the donee

Foreign donations of non-resident alien donors

Donations of property situated in a foreign country by non-resident alien donors are not subject to donor’s tax.

Donation of property exempt under reciprocity

-NRA, reciprocity rule

Diminution of Gift as Specified by the Donor

The donor may specify that a portion of the donation will be given to another person other than the donee.
Diminution is not exempt from donor’s tax. It is merely a deduction against the original donation but it is in itself
another form of donation from the same donor which may be subject to donor’s tax.

Illustration
Gregorio donated P600K cash to his older sister subject to the condition that she will give P200K to her nephew.

There are two donations in this case :

Sister Nephew
Gross gift 600K 200K
Less: Diminution of gift 200K -
Net gift 400K 200K

Gregorio’s donor’s tax due shall be computed as follows:

Gross gift 600K
Less: Exempt donation 250K
Excess 350K
Multiply by: 6%
Donor’s tax due 21K

Taxable Donation
Examples of taxable donations:
1. Direct donation of property
a. Transfer of property to the name of another person
b. Transfer of personal property coupled with delivery of the same
2. Donation in trust, if irrevocable
3. Specific renunciation of inheritance, unless there are only two heirs.
4. Renunciation by the surviving spouse of his share in the conjugal or community property
5. Transfer inter-vivos for insufficient consideration of any property other than real property capital asset.
 Donor’s Tax CHAPTER 17
➢ The donor’s tax is imposed on annual net gifts reckoned over a calendar year basis. For every taxable
donation, the donor shall determine and report his/her net gift. The tax is paid within 30 days after every
donation.

➢ Net gift refers to the net economic benefits from the transfer that accrues to the donee.

Donor’s tax rate:

Up to P250,000 Exempt
Excess above P250,000 6%

Illustration 1
In 2019, Mr. Reyes donated a condominium unit with a value of P4M to his first cousin, Mr. Alfonso.
Amount
Net gift 4,000,000
Less: Exempt donation 250,000
Net gift subject to tax 3,750,000
Multiply by: Tax rate 6%
Donor's tax 225,000

Illustration 2
A donor made the following donations in 2019:
Date Donee Net gift
Jan. 4, 2019 Bestfriend 100,000
Mar. 7, 2019 Brother, as wedding gift 300,000
Nov. 10, 2019 Sister, as birthday gift 500,000
Dec. 25, 2019 Mother as Christmas gift 400,000
Feb. 14, 2020 Girlfriend 700,000

January 4, 2019 donation

The donor’s tax due shall be nil.
Amount
Net gift 100,000
Less: Exempt donation 250,000
Net gift subject to tax (150,000)

March 7, 2019 donation

The donor’s tax due shall be P9,000, computed as follows:
Amount
Total net gift (100K + 300K) 400,000
Less: Exempt donation 250,000
Net gift subject to tax 150,000
Multiply by: 6%
Donor's tax to date 9,000
Less: Tax due in prior donation 0
Donor's tax still due 9,000

November 10, 2019 donation

The donor’s tax due shall be P30,000, computed as follows:
 Amount
Total net gift (100K + 300K+ 500K) 900,000
Less: Exempt donation 250,000
Net gift subject to tax 650,000
Multiply by: 6%
Donor's tax to date 39,000

Less: Tax due in prior donation 9,000

Donor's tax still due 30,000

December 25, 2019 donation

The donor’s tax due shall be P24,000, computed as follows:
Amount
Total net gift (100K + 300K+ 500K + 400K) 1,300,000
Less: Exempt donation 250,000
Net gift subject to tax 1,050,000
Multiply by: 6%
Donor's tax to date 63,000
Less: Tax due in prior donation 39,000
Donor's tax still due 24,000

February 14, 2020 donation

Amount
Net gift 700,000
Less: Exempt donation 250,000
Net gift subject to tax 450,000
Multiply by: 6%
Donor's tax due to date 27,000
Less: Tax due in prior donation 0
Donor's tax still due 27,000

Note: Note that the gifts made in 2019 shall not be included since the donor’s tax is a tax on annual donation. The
accumulation of donation stops at the end of every calendar year.

Valuation of Net Gift

1. Valuation rules
2. Timing of valuation
3. Donation of common properties
4. Encumbrances on the property donated

Valuation of property donated

A. Real property- the higher of zonal or fair value per assessor’s office
B. Personal properties-
1. Shares of stock
a. If listed in the PSE- average high and low price of the stocks at the date of donation
b. If not listed
i. Preferred stocks- par value
ii. Common stocks- book value appearing in FS published nearest to the date of donation

2. Other properties-
a. Newly purchased- purchase price
b. Old items- second hand value
 c. Monetary claims- the amount fixed in the contract

Illustration: FV of listed shares

On June 4, 2019, Mr. Gary donated 1,000 shares of the stocks of Labama Corporation, a listed corporation. The
shares of Labama Corporation had the following trading prices on June 4, 2019:

Opening price P800.00

Highest intra-day trading price 870.00
Lowest intra-day trading price 790.00
Weighted average traded price 820.00
Last trading price 850.00

The donation shall be included in net gift at P830,000, computed as ((P870 + P790)/2 x 1,000). The regulation
requires the use of simple average of the high and low not the weighted average price.

Illustration: FV of non-listed shares

Ms. Pagco donated her 20,000 common stocks of Argon Corp., a closely-held corporation. The latest balance
sheet of Argon Corp. disclosed the following:

Total assets P20,000,000

Less: Total liabilities 5,000,000
Stockholder’s equity 15,000,000

Argon issued 40,000 preference shares at par value of P100 per share and 1,000,000 ordinary shares.

Stockholder’s equity 15,000,000

Less: Par value of preferred stocks (P400 x 10,000) 4,000,000
Residual equity to common shares 11,000,000
Divided by: No. of outstanding common shares 1,000,000
BV per share P 11.00

The donation of Ms. Pagco shall be reported in net gift at P220,000, computed as P11.00 x 20,000 shares.

Timing of value of gift

➢ Donation is valued at the point of completion or perfection of donation.
➢ Donation is perfected upon acceptance by the donee. In conditional donations, the donation is completed
and perfected upon satisfaction by the donee of the terms of donation or upon waiver by the donor of the
conditions.
a. Revocable donation b. Conditional donation

Donation of common properties

➢ Husband and wife are considered as separate and distinct taxpayers for purposes of the donor’s tax.
➢ Donation of conjugal or community property by the spouses is deemed ½ made by the husband and ½
made by the wife. The husband and the wife shall file separate donor’s tax returns for the donation.

Illustration:
Mr. and Mrs. Villarama donated a brand new car worth P2M to their son on his graduation. Mr. and Mrs. Villarama
shall report half of the donation in their respective donor’s tax return as follows:

Mr. Villarama Mrs. Villarama

Net gift 1,000,000 1,000,000
Less: Exempt gift 250,000 250,000
Net gift subject to tax 750,000 750,000
Multiply by: 6% 6%
 Donor's tax due 45,000 45,000

This rule applies to donation of co-owned properties

Encumbrances on the property donated assumed by the donee

➢ Obligations on the donated property which are assumed by the donee are diminutions to the gratuity
accruing to the donee. These are onerous assignments of debt are not gratuity; hence are deductible
from the value of the donation.

Illustration:
Don Quito donated an agricultural land to his son, Kervin. The land which was encumbered by an P8M mortgage
had value of P20M. The land also had P500K unpaid real property tax. Kervin assumed the mortgage while Don
Quito assumed the real property tax.

The net gift of Don Quito shall be computed as:

Gross gift P20,000,000

Less: Obligations assumed by donee 8,000,000
Net gift 12,000,000

Note: An obligation assumed by the donor is not deductible as it will not reduce the economic benefits accruing to
the donee.

Donor’s tax return

➢ BIR Form 1800 is filed within 30 days after the donation is made. Note that the law requires duplicate
copies. In practice, the return is filed in triplicate copies. Two copies will be taken by the BIR. One copy
will be the taxpayer’s copy.

➢ Only one return is required for donations made on at a single day even if made to several donees.

Content of the donor’s tax return

The return shall set 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;
5. Such further information as the Commissioner may require.

Where to file the return?

Except in cases where the Commissioner otherwise permits, the return shall be filed and the tax paid to any of the
following:
a. An authorized agent bank
b. Revenue district officer
c. Revenue collection officer
d. Duly authorized treasurer of the city or municipality where the donor is domiciled
e. Office of the Commissioner, if the taxpayer has no legal residence in the Philippines

Note: Donation for public use-exempt

Donation to an accredited non-profit institution-exempt

Resident or citizen donor- globally taxable on donations

Non-resident alien donor- taxable on Philippine donations. If with reciprocity, exclude the intangible
property in the Philippines.
Foreign Tax Credit
➢ Residents and citizens with foreign donation may be subjected to foreign donor’s tax. To minimize
international double taxation, our tax law allows a credit for taxes paid in a foreign country.

➢ Foreign tax credit is computed depending on whether a single foreign country or multiple foreign
countries are involved.

Foreign Tax Credit Limit: One foreign country

The foreign tax credit shall be the lower of the actual foreign donor’s tax paid and the following limit:

Foreign country net gifts

X Philippine donor's tax due
World net gifts

Foreign tax credit limit: Multiple foreign countries

The tax credit limit for each country is individually determined first using the foregoing computations.
The final foreign tax credit shall be the lower of the total of the donor’s tax credit allowable per country and the
world donor’s tax credit limit computed as:

Total foreign country net gifts

X Philippine donor's tax due
World net gifts

Illustration 1: One foreign country

A Filipino citizen made the following donations during the year:

Philippines Abroad Total

Total net gifts 600,000 300,000 900,000
Foreign donor's tax paid 21,000 14,000

The donor’s tax due on the donations shall be computed as:

Total global net gifts 900,000

Less: Exempt donation 250,000
Total net gifts subject to tax 650,000
Multiply by: 6%
Total donor's tax due 39,000

The donor’s tax credit shall be computed as:

Actual foreign donor’s tax paid 14,000

Limit: (P300K/900K x P39K) 13,000
Foreign tax credit-LOWER 13,000

The donor’s tax payable shall be:

Total donor’s tax due 39,000
Less:
Foreign tax credit 13,000
Philippine donor’s tax paid 21,000 34,000
Donor’s tax still due 5,000
Illustration 2: Multiple foreign countries
Assume a resident alien made the following donations during the year:

Donation Philippines Taiwan Korea Total

Total net gifts 500,000 300,000 200,000 1,000,000
Donor's tax paid 15,000 21,000 5,000 41,000

The tax due on the donations shall be computed as:

Total global net gifts 1,000,000

Less: Exempt donation 250,000
Total net gifts subject to tax 750,000
Multiply by: 6%
Total donor’s tax due 45,000

The donor’s tax credit shall be determined as follows:

Per country tax credit:

Taiwan:
Actual amount paid 21,000
Country limit: (300K/ 1M x P45K) 13,500
Lower amount 13,500

Korea:
Actual amount paid 5,000
Country limit: (200K/ 1M x 45K) 9,000
Lower amount 5,000
Total of tax credit allowable per country 18,500

World tax credit limit:

((300K + 200K)/ 1 M x P45K tax due) 22,500

Foreign income tax credit (LOWER) 18,500

The donor’s tax payable shall be:

Total donor’s tax due 45,000

Less:
Foreign tax credit 18,500
Philippine donor’s tax paid 15,000 33,500
Donor’s tax payable 11,500

Practical case application

Illustration:
A resident donor made the following donation in 2020:

Date Net gifts Net gift subject to tax Location of property Donor's tax paid
Mar. 5 400,000 150,000 Philippines 9,000
Apr. 3 200,000 350,000 Philippines 12,000
May. 7 150,000 500,000 Abroad ?
Aug. 4 250,000 750,000 Philippines ?

The donor paid P10,000 on the donations made abroad.

Since tax credit cannot be computed until all donations throughout the year are known, the donor’s tax paid in the
foreign country should be deducted as a preliminary tax credit. The final tax credit will be determined at year-end.

May 7, 2020 donation 30,000

Tax due on P500,000 global net gifts
Less: Donor’s tax paid on prior gifts
Tax paid, prior Philippines gifts 21,000
Foreign donor’s tax paid 10,000 31,000
Donor’s tax still due (1,000)

August 4, 2020 donation

Tax due on P750,000 global donation 45,000
Less: Donor’s credit
Tax paid prior gifts- Philippines 21,000
Foreign donor’s tax paid 10,000 31,000
Donor’s tax still due 14,000

Adjustment return at year-end

Year 2020 concluded with P1M total gifts and a P750K net gift subject to tax.

The donor’s tax for the 2020 donation is P45,000 since there is no more succeeding donation from thereafter:

The foreign donor’s tax credit should be computed as:

Actual foreign income tax paid 10,000

Limit: (150K/1M x 45K) 6,750
Foreign tax credit-LOWER 6,750

The donor’s tax still due shall be:

Total donor’s tax due 45,000

Less:
Foreign tax credit-final amount 6,750
Philippine donor’s tax paid 35,000 41,750
Donor’s tax still due 3,250

Mar 5, 2020 9,000

April 3, 2020 12,000
Aug 4, 2020 14,000
Total 35,000

Tax credit is limited to residents or citizens