Tax 2 Midterms Notes

Tax 2 Gonzales Reviewer: Midterms | KITTEHS
ESTATE TAX
an excise tax on the right of transmitting property at the time of death and
on the privilege that a person is given controlling to a certain extent the
disposition of his property to take effect upon death.
Class Notes:
Is this a direct tax or indirect tax? [Sir did not directly answer]
Technically, the estate is a separate entity.
Sec. 60. Imposition of Tax. (A) Application of Tax. The tax imposed
by this Title upon individuals shall apply to the income of estates or of
any kind of property held in trust: xxx
PERSONS SUBJECT TO ESTATE TAX

1. Citizens
2. Resident Aliens properties within and without the Philippines
3. Non-Resident Aliens properties within the Philippines
Kind of
Property
Real
Property:
- Within
Philippines
- Outside
Philippines
Personal
Property:
- Tangible
Within
- Tangible
Outside
- Intangible
Within
- Intangible
Outside
Resident
Citizen/
NonResident
Citizen
Resident
Alien
Non-Resident Alien
RIGHTS ACCRUING UPON DECEDENTS DEATH

Art. 777, Civil Code
The rights to the succession are transmitted from the moment of the death
of the decedent.
Rules and Laws applicable at time of death will be made to apply.
No point where no one owns the property as the property is immediately
transferred upon the death of decedent.
Lorenzo v. Posadas
The accrual of inheritance tax is distinct from the obligation to pay the
same. Succession takes place in any event at the moment of the decedents
death. The time when the heirs legally succeed to the inheritance may
differ from the time when the heirs actually receive such inheritance.
Upon the death of the decedent, succession takes place and the right of
the state to tax vests instantly.
Tax should be measured by the value of the estate as it stood at the time
of the decedents death, regardless of any subsequent contingency
affecting value or any subsequent increase or decrease in value and
notwithstanding he postponement of the actual possession or enjoyment
of the estate by the beneficiary.
WHERE TO FILE
NRA w/out
reciprocity
NRA with
reciprocity
amchua | Tax 2 Gonzales Midterm Reviewer
Residence of the Decedent (domicile)

Not the actual place of residence or where the property is located.
Refers to the permanent home, the place to which one has the intention
to return (animus revertendi)
Important: SIR uses residence as a term referring to domicile. So,
important to use the phrase residence where one has the intention to
return when he asks where to file.
Section 90(D), NIRC
(D) Place of Filing. Except in cases where the Commissioner otherwise
permits, the return required under Subsection (A) shall be filed with an
authorized agent bank, or Revenue District Officer, Collection Officer, or
duly authorized Treasurer of the city or municipality in which the decedent
was domiciled at the time of his death or if there be no legal residence in the
Philippines, with the Office of the Commissioner.
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BIR Ruling 100-96
Estate Tax Returns must be filed in the residence where one has the intention
to return (domicile) of the decedent. If there is no legal residence in the
Philippines, return may be filed with the Office of the Commissioner of the
BIR.
Marcos v. CA
Claims for taxes, whether assessed before or after the death of the
deceased, can be collected from the heirs even after the distribution of the
properties of the decedent. They are exempted from the application of
the statute of non-claims. This tax can be claimed through proportionate
collection (going after the heirs) or pursuant to the lien created by Section
315 of the Tax Code upon all property and rights to property belong to
the taxpayer for unpaid income tax.
There is nothing in the Tax Code or the Rules of Court which requires
the necessity of the probate courts approval of the states claim for estate
taxes can be enforced and collected against the estate.
The probate court is bidden not to authorize the delivery of any
distributive share to any party unless a Certificate from the BIR showing
that estate taxes have already been paid is presented.
In case of failure to file a return or the omission to file a return or fraud,
tax may be assessed at any time within 10 years after the omission, and
any tax so assessed may be collected by levy upon real property within 3
years following the assessment of the tax.
BIR Revenue Regulation 2-2003
State taxation is governed by the statute in force at the time of death of
the decedent. The estate tax accrues as of the death of the decedent and
the accrual of the tax is distinct from the obligation to pay the same. Upon
the death of the decedent, succession takes place and the right of the State
to tax the privilege to transmit the estate vests instantly upon death.
The properties comprising the gross estate shall be valued based on their
fair market value as of the time of death.
v If the property is a real property, the fair market value shall be the
fair market value as determined by the Commissioner or the fair
market value as shown in the schedule of values fixed by the
provincial and city assessors, whichever is higher.
v Unlisted common shares are valued based on their book value while
unlisted preferred shares are valued at par value. In determining the
book value of common shares, appraisal surplus shall not be

considered as well as the value assigned to preferred shares, if there
are any.
v For shares which are listed in the stock exchanges, the fair market
value shall be the arithmetic mean between the highest and lowest
quotation at a date nearest the date of death, if none is available on
the date of death itself.
v To determine the value of the right to usufruct, use or habitation, as
well as that of annuity, there shall be taken into account the probable
life of the beneficiary in accordance with the latest basic standard
mortality table, to be approved by the Secretary of Finance, upon
recommendation of the Insurance Commissioner.
In case of a resident decedent, the administrator or executor shall register
the estate of the decedent and secure a new TIN therefor from the
Revenue District Office where the decedent was domiciled at the time of
his death and shall file the estate tax return and pay the corresponding
estate tax with the Accredited Agent Bank (AAB), Revenue District
Officer, Collection Officer or duly authorized Treasurer of the city or
municipality where the decedent was domiciled at the time of his death,
whichever is applicable, following prevailing collection rules and
procedures.
In case of a non-resident decedent, whether non-resident citizen or nonresident alien, with executor or administrator in the Philippines, the estate
tax return shall be filed with and the TIN for the estate shall be secured
from the Revenue District Office where such executor or administrator is
registered: Provided, however, that in case the executor or administrator
is not registered, the estate tax return shall be filed with and the TIN of
the estate shall be secured from the Revenue District Office having
jurisdiction over the executor or administrators legal residence.
Nonetheless, in case the non-resident decedent does not have an executor
or administrator in the Philippines, the estate tax return shall be filed with
and the TIN for the estate shall be secured from the Office of the
Commissioner through RDO No. 39 South Quezon City.
Commissioner of Internal Revenue may continue to exercise his power to
allow a different venue/place in the filing of tax returns.
In case the available cash of the estate is not sufficient to pay its total
estate tax liability, the estate may be allowed to pay the tax by installment
and a clearance shall be released only with respect to the property the
corresponding/computed tax on which has been paid. There shall,
therefore, be as many clearances (Certificates Authorizing Registration) as
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there are as many properties released because they have been paid for by
the installment payments of the estate tax. The computation of the estate
tax, however, shall always be on the cumulative amount of the net taxable
estate. Any amount paid after the statutory due date of the tax shall be
imposed the corresponding applicable penalty thereto. However, if the
payment of the tax after the due date is approved by the Commissioner
or his duly authorized representative, the imposable penalty thereon shall
only be the interest.
The estate tax imposed under the Code shall be paid by the executor or
administrator before the delivery of the distributive share in the
inheritance to any heir or beneficiary. Where there are two or more
executors or administrators, all of them are severally liable for the
payment of the tax. The estate tax clearance issued by the Commissioner
or the Revenue District Officer (RDO) having jurisdiction over the estate,
will serve as the authority to distribute the remaining/distributable
properties/share in the inheritance to the heir or beneficiary.
The executor or administrator of an estate has the primary obligation to
pay the estate tax but the heir or beneficiary has subsidiary liability for the
payment of that portion of the estate which his distributive share bears to
the value of the total net estate. The extent of his liability, however, shall
in no case exceed the value of his share in the inheritance.
GROSS ESTATE
Section 84, NIRC
Rates of Estate Tax. There shall be levied, assessed, collected, and paid
upon the transfer of the net estate as determined in accordance with Sections
85 and 86 of every decedent, whether resident or non-resident of the
Philippines, a tax based on the value of such net estate, as computed in
accordance with the following schedule:
If the Net Estate is:
Over
200,000
500,000
2,000,000
5,000,000
10,000,000
But Not Over

200,000
500,000
2,000,000
5,000,000
10,000,000
And Over
Tax Shall Be
Exempt
0
15,000
135,000
465,000
1,215,000
Plus
5%
8%
11%
15%
20%
Of the Excess Over

200,000
500,000
2,000,000
5,000,000
10,000,000
Section 85 NIRC
Gross Estate. The value of the gross estate of the decedent shall be
determined by including the value at the time of his death of all property, real
or personal, tangible or intangible, wherever situated: Provided, however,
That in the case of a non-resident decedent who at the time of his death was
not a citizen of the Philippines, only that part of the entire gross estate which
is situated in the Philippines shall be included in his taxable estate.
A. Decedents Interest
B. Transfer in Contemplation of Death
C. Revocable Transfer
D. Property Passing Under General Power of Appointment
E. Proceeds of Life Insurance
F. Prior Interests
G. Transfers for Insufficient Consideration
H. Capital of the Surviving Spouse
DECEDENTS INTEREST
Includes share of the decedent in:
Co-owned only that which is his share
Partnership death will extinguish partnership, so dissolution of
partnership first and then whatever the share
Receivables based on present value
v Example: IF the person passed away, but he is also an heir to another
person who has passed away but whose estate has not yet been
settled, does he have an interest?
A: YES.
Extra discussion, in conjugal system, properties which are:
v Donated when single exclusive property
v Donated when married exclusive unless donated to both
Extra discussion, in absolute community, properties which are
v Donated when single absolute community
v Donated when married exclusive property unless donated to both
(BUT technically, they are exclusive owners of of the donation, so
technically still exclusive.)
BIR Ruling 130-98
Donations to one spouse alone in consideration of the donors love and
affection are exclusive property of the donee spouse and should not be
deemed as part of the estate of the deceased spouse.
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BIR Ruling 103-96
Roads and open spaces which are required by law to be reserved/set aside by
the subdivision owners for the common use of the buyers of the subdivision
lots and the public in general do not form part of the transmissible
properties/interest of the decedent; hence, the value thereof are excluded in
determining the taxable properties of the decedent subject to estate tax.
Considering that roads and open spaces are for public use they are, in fact,
government properties which cannot be transmitted to the heirs by way of
succession.
TRANSFERS IN CONTEMPLATION OF DEATH

Donations made during the lifetime of the donor (intervivos) that are
contemplation of death are considered part of the estate.
Example: Juan dela Cruz has a child, Johny. He was told he was going to
die within 6 months, so he donated everything to Johny. But he lived for
another 50 years, but Johny died immediately. Is there a transfer?
A: Yes. Because there is intent to transfer because of impending death.
(SIR: But now its difficult because NIRC requires that there must be
proof that it was in contemplation of death. 3 year rule is now abolished)
Example: I donate to Juan but I reserve the right to use the property for
the rest of my life, intervivos/ in contemplation of death/ mortis causa?
Is every usufruct in contemplation of death?
A: (Sir did not answer, but I think trick question because he was saying
know ALL the facts first)
SIR: Any transfer when the person is sick is usually considered in
contemplation of death. BUT there are certain cases where a perfectly
healthy person will donate but the donation will just be effective after
death.
Extra discussion: for sir, there are 3 modes in acquiring ownership
1. Creating
2. Buying (this necessitates earning Money to pay for it. Or
inheriting something to pay for it.)
3. Inheriting/Donation
In transfers in contemplation of death, donors tax has already been paid.
Because you cannot transfer property unless you paid donors tax. So in
Donation, donation tax is already paid, so when it reverts back to the
estate, estate tax needs now be paid. The previously paid tax will now be
considered in computing estate tax.
v Why do this? Donors tax (max) is 15% and Estate tax (max) is 20%.
Even more exciting CGT is only 6%. This is estate planning!
Vidal dela Roces v. Posadas
The law presumes that gifts intervivos have been made in anticipation of
inheritance, devise, bequest, or gift mortis causa, when the donee, after the
death of the donor proves to be his heir, devisee or donee mortis causa, for
the purpose of evading the tax, and it is to prevent this that it provides that
they shall be added to the resulting amount. However, gifts intervivos, the
transmission of which is not made in contemplation of the donors death is
not considered as advances in inheritance that will be reverted back to the
estate and subject to estate tax
REVOCABLE TRANSFERS
In trusts, who will pay the estate tax?
v Revocable Reverts back to the estate of the Trustor. So, Trustor

pays tax.
v Irrevocable No reversion back to the estate.
Executor/Administrator of Trust (Trustee? [sir did not use this
term]) pays tax. BUT this is covered by sec 98 on Donors tax.
BIR Ruling 21-98
Transfer to revert back properties in the name of the trustee to its true owner
is not subject to capital gains tax as the transfer is without any consideration.
It is also exempt from donors tax for lack of donative intent on the part of
the decedent.
BIR Ruling UN-041-1-2-95
Property placed in revocable trusts are included in the trustors gross estate
for estate tax purposes. Mere possession at death of the power to revoke shall
cause the inclusion of the properties held in trust in the trustors estate.
TRANSFERS UNDER GENERAL POWER OF APPOINTMENT

Example: I made a document, transferring the property to Juan de la Cruz,
with the condition that I will tell him who to transfer the property to. Dela
Cruz then does not exercise any rights of ownership but holds the naked
titled. Does this fall under general powers of appointment?

A: Yes. General Powers of Appointment is: I transfer naked title to you,
but I retain the right to appoint who would use the property. IF the
decedent dies, its as if that he appoints himself.
Transfers made by Special Powers of appointment are not included in
estate
v Example: I give Beneficial title to Juan de la Cruz, naked title to his
son. NO WAY of returning back to the transferor.
Important discussion on the inconsistencies with treatment of value of
gross estate:
v In a transfer in contemplation of death, revocable transfer, or
transfer under a general power of appointment, the value to include
in the gross estate will be as determined under the following rules:
If transfer was in the nature of a bona fide sale for an adequate
and full consideration in money or moneys worth, no value will
be included in the gross estate; the price received is considered
equivalent and is now part of estate
If the consideration received on the transfer was less than
adequate and full, the value to include in the gross estate will be
the excess of the fair market value at the time of the decedents
death over the consideration received;
o BUT SEC. 100. Transfer for Less Than Adequate and Full
Consideration. - Where property, other than real property
referred to in Section 24(D), is transferred for less than an
adequate and full consideration in money or money's worth,
then the amount by which the fair market value of the
property exceeded the value of the consideration shall, for
the purpose of the tax imposed by this Chapter, be deemed
a gift, and shall be included in computing the amount of
gifts made during the calendar year.
o SEC 86 f conflicts w/ SEC 100
Sale with inadequate consideration86 says part of
estate and subject to estate tax; 100 says it will be
deemed a gift and as such subject to donors tax.
WHICH PREVAILS? 100 prevails. (Sir: actually 100
already solves the issue created by 86. It will be
considered as a Gift)
SINCE DONORS TAX HAS been paid, then it should
not be part of the estate anymore.
o If there was no consideration received on the transfer (as in

donation mortis cause), the value to include in the gross
estate will be the fair market value of the property at the
time of the decedents death.
BIR Ruling 86-95
In the arrangement that trustee will release trust funds to the beneficiaries
upon the death of a decedent NOT the trustor, the same is not included in
the gross estate of the decedent, and as such not subject to estate tax.
However, the trustor will be subject to the donor's tax on the transfer of the
money he placed in trust to the said beneficiaries upon the death of decedent.
LIFE INSURANCE
Revocable Part of estate. BUT DUE TO RA 10607. If revocation is not
exercised, policy becomes irrevocable at the Point of death of decedent.

BUT, it is still a question if BIR will follow RA 10607 in application of
NIRC.
Irrevocable Not part of estate.
v Exceptions:
Example: What if I get irrevocable insurance payable to BIR for
settlement of estate tax? This is included as estate. WHY?
Because it redounded to the benefit of the estate.
What if I get irrevocable insurance payable to wife, provided
that she uses money to pay for my estate tax? This is also
included ONLY WHEN it redounds to the benefit of the estate.
IF she does not use it to pay for estate tax, then it is
EXCLUDED
Extra discussion: if you receive insurance proceeds from death of a
relative:
1. Is it part of income yes
2. Is it part of taxable income no, sec. 32b lists it as exempted
v NORMALLY, insurance premiums are deductible expense, but they
are not deductible on part of corporation if the beneficiary is the
corporation itself.
BIR Ruling 87-423 (Subsequent law repeals the ruling)
Where the designation of the beneficiary is revocable, the proceeds of a life
insurance policy form part of the gross estate of the insured upon his death,
even if he failed to exercise his right or option to revoke that designation. As
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part of the estate, said proceeds are subject to the estate tax. On the other
hand, if the beneficiary is irrevocably designated, the right to the proceeds of
the life insurance policy, upon the death of the insured immediately vests on
the beneficiary in which case, said proceeds no longer form part of the gross
estate of the deceased. Such being the case, they are not subject to estate tax.
BIR Ruling 87-314
Since the council is organized for religious, charitable, and civic purposes,
donations and/or contributions made to or coursed through the council is
deductible from the gross income of the donors or contributors to the extent
of 6% in the case of individual donors, or 3% in the case of corporate donors
of the taxpayer's taxable income as computed without the benefit of this
deduction. For this purpose, the receipt issued by the council evidencing the
donation
shall
be
sufficient.
Moreover,
the
aforesaid
donations/contributions are exempt from gift tax provided not more than
30% of said donations/contributions shall be used for administration
purposes, pursuant to Section 104(3) of the same Code.
TRANSFERS FOR INEFFICIENT CONSIDERATIONS

Another discussion on the inconsistencies. If you receive a donated
property and you sell it, how do you compute the gain? Selling price less
cost <with the basis of the cost being based on sec 40B: or value in hands
of the preceding owner (the donor)>
BUT, consider 40b3 and 40b4?
v Sec 40 b (3) If the property was acquired by gift, the basis shall be
the same as if it would be in the hands of the donor or the last
preceding owner by whom it was not acquired by gift, except that if
such basis is greater than the fair market value of the property at the
time of the gift then, for the purpose of determining loss, the basis
shall be such fair market value;
v Sec 40 b (4) If the property was acquired for less than an adequate
consideration in money or money's worth, the basis of such property
is the amount paid by the transferee for the property;
v Sec 100 then causes slight problem. Because it taxes something that
was not normally taxed at 15% in the first place.
CAPITAL OF SURVIVING SPOUSE

For purposes of computation of net estate, if the decedent is married; you
do not immediately exclude the share of the surviving spouse. The

properties of husband and wife forms part of the gross estate, however,
there are allowable deduction for the part of the surviving spouse.
v Example: WHAT if A dies and there are 2 properties:
TCT 1 A and B owners
TCT 2 B, married to A owners
Which are included in the gross estate of A?
o TCT 1 is for sure included
o TCT 2, it depends, because it should be determined if it is
conjugal property or merely a description. [BUT IN NEW
TITLES: THE PRESUMPTION IS THAT IT IS JUST A
DESCRIPTION]
TREATMENT OF PERSONAL PROPERTY

Certain intangibles are deemed located in the Philippines, such as:
1. Franchise which must be exercised in the Philippines;
2. Shares, obligations or bonds issued by any corporation or sociedad
anonima organized or constituted in the Philippines in accordance with
its laws;
3. Shares, obligations or bonds issued by any foreign corporation eighty-five
percent (85%) of the business of which is located in the Philippines;
4. Shares, obligations or bonds issued by any foreign corporation, if such
shares, obligations or bonds have acquired a business situs in the
Philippines (e.g. bonds that have been subjected to numerous transactions
in the Philippines); and
5. Shares of rights in any partnership, business, or industry in the Philippines
v Example: Non Resident Corporation sells a share of stock in a
Philippine Corp. to another Filipino in the US
Is the transaction subject to capital gains tax?
A: Yes. Corporation is a Phil. Corp. 5% on 100k, 10% on the
excess.
Is a tax certificate a real property or personal property?
A: Personal Property.
If property is personal what is the residence of that property?
A: where the person who owns the property resides.
BETTER BASIS: (According to sir) Section 42 E Share is still
based in the Philippines, where he exercised right.
v Example: NRA owns share of stock in a Philippine Corp. and died
abroad
Is he still required to file for estate tax in phil?
6

A: Yes. Shares represent property within the Philippines. NRA
are taxed on properties within Philippines.
What if he died in Florida, but NRA hasnt fully paid his stocks
in Phil. Corp, still required?
A: Still yes. He still owns property in the Philippine, just not fully
paid.
Exception: Reciprocity (for Non-Resident Aliens only)
v Intangible personal property of the decedent located in the
Philippines will not be included in the gross estate:
1. If the decedent at the time of his death was a citizen and resident
of a foreign country which at the time of death did not impose
a transfer or death tax of any character in respect of intangible
personal property of citizens of the Philippines no residing in
that foreign country; or
2. If the laws of the foreign country of which the decedent was a
citizen and resident at the time of death allow a similar
exemption from transfer taxes or deaths taxes of every character
in respect of intangible personal property owned by citizens of
the Philippines not residing in that foreign country
Section 104, NIRC
Definitions. xxx That franchise which must be exercised in the Philippines;
shares, obligations or bonds issued by any corporation or sociedad anonima
organized or constituted in the Philippines in accordance with its laws; shares,
obligations or bonds by any foreign corporation eighty- five percent (85%)
of the business of which is located in the Philippines; shares, obligations or
bonds issued by any foreign corporation if such shares, obligations or bonds
have acquired a business situs in the Philippines; shares or rights in any
partnership, business or industry established in the Philippines, shall be
considered as situated in the Philippines xxx
VALUATION OF PROPERTY
The value of the properties shall be the fair market value at the time of death.
The non-determination of the value of the estate is not a valid excuse because
of lifeblood theory.
Section 88 NIRC
Determination of the Value of the Estate.
A. Usufruct. To determine the value of the right of usufruct, use or

habitation, as well as that of annuity, there shall be taken into account the
probable life of the beneficiary in accordance with the latest Basic Standard
Mortality Table, to be approved by the Secretary of Finance, upon
recommendation of the Insurance Commissioner.
B. Properties. The estate shall be appraised at its fair market value as of the
time of death. However, the appraised value of real property as of the time
of death shall be, whichever is the higher of
1. The fair market value as determined by the Commissioner, or
2. The fair market value as shown in the schedule of values fixed by the
Provincial and City Assessors.
VALUATION OF REAL PROPERTY

FMV is Zonal Value as determined by the BIR Commissioner or FMV at
prevailing market price (on tax declarations) whichever is higher.
BIR Ruling 95-98
The estate shall be appraised, at the election of the executor or
administration, at the current and fair market value as shown in the
schedule of values fixed by the Provincial and City Assessor or the fair
market value as determined by the Commissioner of Internal Revenue,
whichever is higher as of the:
1. Time of Death
2. 6 months after the time of death
Such assessment shall be binding upon all concerned for purposes of
computing any internal revenue tax based on the value of the property.
If gross value of estate exceeds P3k, the executor shall give a written
notice within 2 months to the BIR after the death of the decedent or
within a like period after qualifying as executor or administrator.
Sec. 6 (E) NIRC
Authority of the Commissioner to Prescribe Real Property Values. The
Commissioner is hereby authorized to divide the Philippines into different
zones or areas and shall, upon consultation with competent appraiser both
from the private and public sectors, determine the fair market value of real
properties located in each zone or area. For purposes of computing any
internal revenue tax, the value of the property shall be, whichever is the
higher of:
1. the fair market value as determined by the Commissioner; or
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2. the fair market value as shown in the schedule of values of the
Provincial and City Assessors.
VALUATION OF SHARES OF STOCK

BIR Ruling 86-11
For estate tax purposes, the value of every item of property includible in the
gross estate is the fair market value thereof at the time of the decedent's death.
However, shares of stock which had been either suspended, delisted or where
no transactions involving them have been made, shall be valued at their book
value nearest the valuation date which in this case, is the date of decedent's
death. Said book value shall be prima facie considered as their fair market
value. If there have been previous bona fide sales/exchanges of such shares,
the price at which such shares exchanged hands should be taken or
considered as their fair market value. With respect to the shares which have
been insolvent, it shall have zero valuation for estate tax purposes. Should
the shares later on appreciate in value and are subsequently sold or disposed,
for tax purposes, their cost basis shall be zero.
VALUATION OF RECEIVABLES
BIR Ruling 186-81
Receivables form part of gross estate of decedent. The tax refundable for the
taxable year prior to his death forms part of his gross estate. The value of a
tax refund claim is includible in the decedent's gross estate whether filed by
the decedent during his lifetime and unresolved at his death or by the
executor after his death. Over-withholding or overpayment of estimated tax
in the taxable year ending with decedent's death may also result in a right of
recovery which is part of the decedent's gross estate.
VALUATION OF BANK DEPOSITS

BIR Ruling 60-81
Interest on a deposit account maintained by two persons shall be deemed to
be equally owned by them for income tax purposes. The same presumption
may likewise apply for estate tax purposes. Accordingly, only half of the
balance of the deposit should be reported for estate tax purposes.
NET ESTATE DEDUCTIONS FOR RESIDENTS/CITIZENS

BIR Ruling, 99-99

The items in Section 86(A) are separate and distinct items, independent of
each other. As such, the items in Section 86 (A) are properly authorized by
law to be deducted as independent, separate and distinct items of deduction,
which may properly be deducted from the gross estate of a resident decedent,
subject to the limitations or conditions that are provided for under each said
item above.
1. Expenses:
a) Funeral Expenses of 5% of gross or max of P200,000
Q/A: which costs are part of funeral expenses
Black/White dresses YES
FOOD served YES
POLICEMAN Escorting vehicle of deceased YES
Death day (9 days) No
De Guzman v. De Guzman
An executor or administrator is allowed the necessary expenses in the
care, management, and settlement of the estate. Administration
expenses should be those which are necessary for the management of
the estate, for protecting it against destruction and deterioration, and
possibly, for the production of fruits. They are expenses entailed for the
preservation and productivity of the estate and its management for
purposes of liquidation, payment of debts, and distribution of the
residue among the persons entitled thereto.
Revenue Regulation 2-2003
Sec. 6, A1. Actual funeral expenses (whether paid or unpaid) up to the
time of interment, or an amount equal to five percent (5%) of the gross
estate, whichever is lower, but in no case to exceed P200,000.
Any amount of funeral expenses in excess of the P200,000 threshold,
whether the same had actually been paid or still payable, shall not be
allowed as a deduction under this Subsection. Neither shall the unpaid
portion of the funeral expenses incurred which is in excess of the
P200,000 threshold be allowed to be claimed as a deduction under
claims against the estate provided under Subsection (C) hereof.
The term "FUNERAL EXPENSES" is not confined to its ordinary or
usual meaning. They include:
8

(a) The mourning apparel of the surviving spouse and unmarried minor
children of the deceased bought and used on the occasion of the burial;
(b) Expenses for the deceaseds wake, including food and drinks;
(c) Publication charges for death notices;
(d) Telecommunication expenses incurred in informing relatives of the
deceased;
(e) Cost of burial plot, tombstones, monument or mausoleum but not
their upkeep. In case the deceased owns a family estate or several burial
lots, only the value corresponding to the plot where he is buried is
deductible;
(f) Interment and/or cremation fees and charges; and
(g) All other expenses incurred for the performance of the rites and
ceremonies incident to interment.
Expenses incurred after the interment, such as for prayers, masses,
entertainment, or the like are not deductible. Any portion of the funeral
and burial expenses borne or defrayed by relatives and friends of the
deceased are not deductible.
b) Judicial Expenses Rule:
COST MUST BE INCURRED FOR THE BENEFIT OF
THE ESTATE, not the heirs
Vera v. Navarro
The distribution of a decedents assets may only be ordered under
the following circumstances
(1) when the inheritance tax, among others, is paid
(2) When a sufficient bond is given to meet the payment of the
inheritance tax and all other obligations of the nature enumerated
(3) When the payment of the said tax and all the other obligations
mentioned in the Rule has been provided for. None of these were
present when the questioned orders were issued at the case at bar.
c) Claims against the Estate Rule:
DEDUCTIBLE ONLY WHEN: CASE IS EITHER TO
INCREASE, MAINTAIN or defend against deduction of estate
De la Vina v. Collector
Income tax on the profits derived by the properties of the estate
cannot be considered as administration expenses. the necessary
expenses of administration are those which the administrator may
have incurred in the care, administration and liquidation of the

properties of the estate and the commissions due to him for
collections and disbursements which he may have made, and not
those which he could or might have wished to make out of his own
pocket or out of the funds of the estate. Costs incurred by the
administrator in defense of claims against the estate, or in
prosecuting claims in favor of it, pertain to the administration, and
are to be allowed in full; but costs incurred by claimants in
establishing their claims stand on the same footing with the claims
themselves. The claim of an administrator for the necessary expenses
of administration enjoys preference over the claim for payment of
income tax.
d) Claims of the Deceased against Insolvent Debtors
Include the claims first in the gross estate
e) Unpaid Mortgage
Must be included in the estate as gross asset
2. Property Previously Taxed (VANISHING DEDUCTION)
v Requisites:
- PRIOR DECEDENT died WITHIN 5 years
- Estate of decedent is settled (has already paid estate tax or donors
tax)
- Should not have been availed of by the previous decedent
v How to compute
Value to take :
Less: mortgage:
Initial Basis:
Less Proportional Deduction:
Final Basis:
Rate:
Vanishing Deduction:
v Proportional Deduction: (initial basis) / (gross estate) * Expenses
LossesIndebtednessTaxes
v Rates:
100% if B died within 1 year from the donation/succession of
A
80% if B died more than 1 year but not more than 2 years
60% if B died more than 2 years but not more than 3 years
9

v Example: 800k FMV, 650k Old FMV, 50k Mortgage, 1M all assets,
100k ELIT
Value to take:
650 000
Less Mortgage:
(50 000)
Initial Basis:
600 000
Prop: 600k/1.8M*100k
(33 333)
Final Basis:
566 666
Rate:
20%
Vanishing Deduction:
10 333
3. Transfers for public use
v Transfers of property/money in favor of the government
v This achieves the goal of estate tax (take from the rich to give to the
poor) directly.
v Example: If you donate directly to the mayor, is that for public use?
Depends. You must not donate to the person, but to the office.
v Requisites:
Property must be included in the gross estate
Must be donated for public purpose
4. Family Home maximum of 1M
v Qualification to qualify as family home
Certification by barangay captain
v Example: Value of the family home 600k
Home is conjugal property. What is the maximum amount that
can be deducted?
A: 300k. The surviving spouse owns half a conjugal property
[Rev Regs 2-2003]
Home is exclusive property. What is the maximum amount that
can be deducted?
A: 600k.
Home is conjugal property. Surviving spouse then dies. At that
time, the conjugal half is now worth 1.5M, what is maximum
amount that can be deducted?
A: 1M
5. Standard deduction 1M, does not need to be substantiated
v Why does the law allow standard deduction?
v Standard deduction was given to allow small landowners or families
to not be hit so much by estate tax.
6. Medical Expenses Max is 500k but should always be the actual expense
7. Amount received under RA 4917
v Should be computed as part of the assets before being counted as a
deduction
NET ESTATE DEDUCTIONS FOR NON-RESIDENT/NONCITIZEN

1. 1-3 of Deductions for Citizen/residents
4. Share in Conjugal Property
5. NOTE: no deduction shall be allowed unless the estate tax return includes
the value of the properties of the gross estate not in the Philippines
6. Tax Credit Taxes already paid in the Foreign Country by a citizen or a
resident alien on the whole estate are credited in estate tax in the
Philippines
v Theory of renvoi Law in the other country prevails over Philippine
law in cases that involves a foreign entity, foreign properties, etc.
v Presumption is the law in the other country is the same as the law in
the Philippines
Tax Credits
Location of Property
Phil
FC- A
FC- B
Computation
Estate Tax for GM
Less: Tax Credit
Tax Paid "A"
(2M/6M *615k)
Tax Paid "b"

(2.5M/6M *615k)
(4.5M/6M*615k)
!
Net Estate
1.5 M
2M
2.5 M
6M
Tax Paid
210 k
30k
Total
615k
Remarks
(235k)
<- lower amount is tax credit
210k
205k
205k
30k
256k
30k
235k
461k
v Always choose whichever is lower. BIR will not give higher credit.
10
SETTLING THE ESTATE

Rev. Regs. 2-2003
Gross Estate
Real Property
Personal Property
Intangible
Exclusive
Conjugal
xxx
xxx
xxx
Gross Estate
xxx
Regular Deductions
Funeral
Claims
Judicial
Vanishing Deduction
Gambling debts
Decedent Spouse Deduction (1/2)
xxx
TRANSMISSION OF FIDUCIARY
xxx
xxx
xxx
-
xxx
xxx
v For partnership/co-owned property just place the actual

percentage owned
v For conjugal include the whole amount
v For Family Home and SIM, normally it must be wholly deducted.
BUT, due to Rev Regs 2-2003, the standard deductions are included
by the BIR in regular deductions so only is counted.
EXEMPT TRANSFER
Section 87, NIRC
Exemption of Certain Acquisitions and Transmissions. The following shall
not be taxed:
A. The merger of usufruct in the owner of the naked title;
B. The transmission or delivery of the inheritance or legacy by the fiduciary
heir or legatee to the fideicommissary;
C. The transmission from the first heir, legatee or done in favour of another
beneficiary, in accordance with the desire of the predecessor; and (D) All
MERGERS IN USUFRUCT
BIR Ruling 50-84
The assignor having not parted with any property but merely giving to the
assignee what rightfully belonged to them as their share in the decedent's
estate, the corresponding estate tax on which had already been fully paid.
xxx
xxx
xxx
Standard Deductions
Family Home
SIM
Net Conjugal Estate (Assets
Liabilities)
Share of surviving spouse (1/2)
Total
bequests, devises, legacies or transfers to social welfare, cultural and

charitable institutions, no part of the net income of which inures to the
benefit of any individual: Provided, however, That no more than 30% of said
bequests, devises, legacies or transfers shall be used by such institutions for
administration purposes.
Example: Will by a grandmother, particular property shall be transferred to

the first child of every generation; subject to estate tax?
A: Yes, as to the grandmother who died, but as to the inheritor, he is merely
a trustee to the next inheritor.
DONEE INSTITUTION
Section 34 H, NIRC
Contributions or gifts actually paid or made within the taxable year to, or
for the use of the Government of the Philippines or any of its agencies or
any political subdivision thereof exclusively for public purposes, or to
accredited domestic corporation or associations organized and operated
exclusively for religious, charitable, scientific, youth and sports
development, cultural or educational purposes or for the rehabilitation of
veterans, or to social welfare institutions, or to non-government
organizations, in accordance with rules and regulations promulgated by
the Secretary of finance, upon recommendation of the Commissioner, no
part of the net income of which inures to the benefit of any private
stockholder or individual in an amount not in excess of ten percent (10%)
in the case of an individual, and five percent (5%) in the case of a
corporation, of the taxpayer's taxable income derived from trade, business
or profession as computed without the benefit of this and the following
subparagraphs.
Contributions Deductible in Full. - Notwithstanding the provisions of the
preceding subparagraph, donations to the following institutions or entities
11

shall be deductible in full;
v Donations to the Government. - Donations to the Government of
the Philippines or to any of its agencies or political subdivisions,
including fully-owned government corporations, exclusively to
finance, to provide for, or to be used in undertaking priority activities
in education, health, youth and sports development, human
settlements, science and culture, and in economic development
according to a National Priority Plan determined by the National
Economic and Development Authority (NEDA)
v Donations to Certain Foreign Institutions or International
Organizations. - Donations to foreign institutions or international
organizations which are fully deductible in pursuance of or in
compliance with agreements, treaties, or commitments entered into
by the Government of the Philippines and the foreign institutions or
international organizations or in pursuance of special laws;
v Donations to Accredited Nongovernment Organizations. - The term
"nongovernment organization" means a non- profit domestic
corporation:
Organized and operated exclusively for scientific, research,
educational, character-building and youth and sports
development, health, social welfare, cultural or charitable
purposes, or a combination thereof, no part of the net income
of which inures to the benefit of any private individual;
Which, not later than the 15th day of the third month after the
close of the accredited nongovernment organizations taxable
year in which contributions are received, makes utilization
directly for the active conduct of the activities constituting the
purpose or function for which it is organized and operated,
unless an extended period is granted by the Secretary of Finance
in accordance with the rules and regulations to be promulgated,
upon recommendation of the Commissioner;
The level of administrative expense of which shall, on an annual
basis, conform with the rules and regulations to be prescribed
by the Secretary of Finance, upon recommendation of the
Commissioner, but in no case to exceed thirty percent (30%) of
the total expenses; and
The assets of which, in the even of dissolution, would be
distributed to another nonprofit domestic corporation
organized for similar purpose or purposes, or to the state for
public purpose, or would be distributed by a court to another

organization to be used in such manner as in the judgment of
said court shall best accomplish the general purpose for which
the dissolved organization was organized.
An amount set aside for a specific project which comes within one or
more purposes of the accredited nongovernment organization may be
treated as a utilization, but only if at the time such amount is set aside, the
accredited nongovernment organization has established to the satisfaction
of the Commissioner that the amount will be paid for the specific project
within a period to be prescribed in rules and regulations to be promulgated
by the Secretary of Finance, upon recommendation of the Commissioner,
but not to exceed five (5) years, and the project is one which can be better
accomplished by setting aside such amount than by immediate payment
of funds.
Valuation. - The amount of any charitable contribution of property other
than money shall be based on the acquisition cost of said property.
Proof of Deductions. - Contributions or gifts shall be allowable as
deductions only if verified under the rules and regulations prescribed by
the Secretary of Finance, upon recommendation of the Commissioner.
Rev. Reg. 13-98
SECTION 8. Substantiation Requirements.
(a) For Donors. Donors claiming donations and contributions to
accredited non-stock, non-profit corporation/NGO as deductions from
their taxable business income should submit evidences or proofs to the BIR
by showing the Certificate/s of Donation and indicating therein the
following:
(i) Actual receipt by the accredited non-stock, non-profit
corporation/NGO of the donation or contribution and the date of receipt
thereof; and
(ii) The amount of the charitable donation or contribution, if in cash; if
property, whether real or personal, the acquisition cost of the said
property.
On the other hand, donors claiming exemption from donor's tax on their
donations and contributions to accredited non-stock, non-profit
corporations/NGOs should submit evidences or proofs showing the amount
of donation, if in cash; if real property, the zonal value thereof at the time of
donation; and if personal property, the acquisition cost thereof, but if said
personal property had already been used at the time of donation, the
depreciated or book value thereof.
12

(b) For Accredited Non-stock, Non-profit Corporations/NGOs.
Accredited non-stock, non-profit corporations/NGOs shall, upon filing
their income tax returns/annual information returns, furnish the Revenue
District Officer of the place where the said accredited non-stock, non-profit
corporation/NGO is located, the following:
(i) A list of the donations and income received during the year,
showing the name and address of the donors; the sources of income; the
amount or market value of each donation and items of
income and the disposition thereof;
(ii) A list of the activities and/or projects undertaken by the institution
and the cost of each undertaking indicating in particular where and how
the donations has been utilized.
(iii) A list of projects, their corresponding costs; the amount "set aside"
and the status of funds balances at the end of the year;
(iv) A declaration that the utilization requirements under Section 2(c) and
8 of these Regulations have been sufficiently complied with;
(v) A declaration that no part of the net income of the accredited nonstock, non-profit corporation/NGO inures to the benefit of any private
stockholder or individual; and
(vi) A declaration of the status of project implementation.
PROCEDURAL REQUIREMENTS
1. Notice of Death
2. Returns to be Filed
3. Payment of Estate Tax
4. Surcharges
Notice of Death
When: 60 days after death of decedent
When needed: if estate exceeds 20k
Estate Tax Return
When filed: within 6 months
When needed: estate is worth more than 200k OR when estate
consists of registered or registrable property such as real property,
motor vehicle, shares of stock or other similar property for which a
clearance from the Bureau of Internal Revenue is required as a
condition precedent for the transfer of ownership thereof in the
name of the transferee, the executor, or the administrator, or any of

the legal heirs
What is included:
value of the gross estate of the decedent at the time of his death,
or in case of a nonresident, not a citizen of the Philippines, of
that part of his gross estate situated in the Philippines
The deductions allowed from gross estate in determining the
estate as defined in Section 86
Such part of such information as may at the time be ascertainable
and such supplemental data as may be necessary to establish the
correct taxes.
BUT, estate tax returns showing a gross value exceeding Two million
pesos (P2,000,000) shall be supported with a statement duly certified
to by a Certified Public Accountant containing the following:
Itemized assets of the decedent with their corresponding gross
value at the time of his death, or in the case of a nonresident,
not a citizen of the Philippines, of that part of his gross estate
situated in the Philippines;
Itemized deductions from gross estate allowed in Section 86
The amount of tax due whether paid or still due and outstanding.
Ruiz v. CA
In settlement of estate proceedings, the distribution of the estate properties
can only be made: (1) after all the debts, funeral charges, expenses of
administration, allowance to the widow, and estate tax have been paid; or (2)
before payment of said obligation only if the distributees or any of them gives
a bond in a sum fixed by the court conditioned upon the payment of said
obligation within such time as the court directs, or when provision is made
to meet those obligations. The estate tax is one of those obligations that must
be paid before distribution of the estate, and if not paid, the rule requires that
the distributees post a bond or make such provisions as to meet the said tax
obligation in proportion to their respective shares in the inheritance.
Surcharges
Interest is not waived. (1/2% per month in grace period; 1% per
month after)
There are estates that are not liquid. Heirs have difficulty paying
estate tax. What happens then? Heir/(s) give advances of money OR
sell property of the estate (with approval of BIR Capital Gains tax
13

still must be paid.
THERE IS NO MORE 5% surcharge. The law is no longer existing.
Commissioner v. Cu Unjieng
The 5% surcharge for deficiency payment of the inheritance tax is
mandatory and must be imposed regardless of any extension in the
payment of the deficiency tax given by the commissioner. The 5%
surcharge attaches at the end of the 30-day period reckoned from the day
a notice of assessment and demand issued by the Commissioner is
received, if the taxpayer fails to pay the deficiency within the said period.
Tax Code empowers commissioner to extend the deadline for the
payment of death taxes in meritorious cases has no effect on the provision
that states that the 5% surcharge shall be collected in addition to the
interest prescribed herein and in sections 99 and 100. The power of the
BIR to extend the deadline has no modifying effect on the imposition of
surcharge.
When a taxpayer, despite the extension of time given to liquidate his estate
and settle his inheritance tax liabilities, still fails to pay them in full,
including all lawful charges applicable thereon, such taxpayer should pay
interest at the rate of 1% a month from the date of his deficiency taxes
were in the first instance due and collectible and not from the date of
expiry of the period of extension granted.
BIR Ruling 46-98
Extension granted by the Commissioner as when payment would impose
undue hardship on the estate or any other heirs, should not exceed 5 years if
the estate is settled through the courts, or 2 years in case the estate is settled
extra-judicially. However, even if the request for waiver of the surcharge on
the estate tax due on the transmission of the estate is granted, it is reasonable
that interest must be paid to compensate for the concomitant use of the funds
by the estate when it is supposed to have been paid.
LIABILITIES OF EXECUTORS AND HEIRS

Section 92, NIRC
Discharge of Executor or Administrator from Personal Liability. - If the
executor or administrator makes a written application to the Commissioner
for determination of the amount of the estate tax and discharge from
personal liability therefor, the Commissioner (as soon as possible, and in any
event within 1 year after the making of such application, or if the application
is made before the return is filed, then within 1 year after the return is filed,
but not after the expiration of the period prescribed for the assessment of
the tax in Section 203) shall notify the executor or administrator of the
amount of the tax. The executor or administrator, upon payment of the
amount of which he is notified, shall be discharged from personal liability for
any deficiency in the tax thereafter found to be due and shall be entitled to a
receipt or writing showing such discharge.
Government v. Pamintuan
Heirs are not required to respond with their own property for the debts of
their deceased ancestors. But even after the partition of an estate, heirs and
distributees are liable individually for the payment of all lawful outstanding
claims against the estate in proportion to the amount or value of the property
they have respectively received from the estate. Claims for income tax need
not be filed with the committee on claims and appraisals appointed in the
course of testate proceedings, and the amount thereof may be collected after
the distribution of the decedents estate among his heirs, who shall be liable
therefore in proportion to their share in the inheritance.
DEFICIENCIES
Normally, Filipinos only settle the estate ONCE. But the problem is, there
are hidden/unknown properties that was found out to be owned by the
decedent. The estate must then be opened and then the deficiency must be
paid.
Section 93, NIRC
Definition of Deficiency. - The term deficiency means:
(a) The amount by which the tax imposed by this Chapter exceeds the amount
shown as the tax by the executor, administrator or any of the heirs upon his
return; but the amount so shown on the return shall first be increased by the
amounts previously assessed (or collected without assessment) as a deficiency
and decreased by the amounts previously abated, refunded or otherwise
repaid in respect of such tax; or
(b) If no amount is shown as the tax by the executor, administrator or any of
the heirs upon his return, or if no return is made by the executor,
administrator, or any heir, then the amount by which the tax exceeds the
amounts previously assessed (or collected without assessment) as a
deficiency; but such amounts previously assessed or collected without
14

assessment shall first be decreased by the amounts previously abated,
refunded or otherwise repaid in respect of such tax.
RENUNCIATION OF HEIR OF SHARE IN THE ESTATE

Art. 777: property transfers at the death of the decedent, so, if you
DUTIES OF GOVERNMENT AGENCIES

Section 94 NIRC
Payment Before Delivery by Executor or Administrator. - No judge shall
authorize the executor or judicial administrator to deliver a distributive share
to any party interested in the estate unless a certification from the
Commissioner that the estate tax has been paid is shown.
Section 95 NIRC
Duties of Certain Officers and Debtors. - Registers of Deeds shall not register
in the Registry of Property any document transferring real property or real
rights therein or any chattel mortgage, by way of gifts inter vivos or mortis
causa, legacy or inheritance, unless a certification from the Commissioner
that the tax fixed in this Title and actually due thereon had been paid is show,
and they shall immediately notify the Commissioner, Regional Director,
Revenue District Officer, or Revenue Collection Officer or Treasurer of the
city or municipality where their offices are located, of the non payment of the
tax discovered by them. Any lawyer, notary public, or any government officer
who, by reason of his official duties, intervenes in the preparation or
acknowledgment of documents regarding partition or disposal of donation
inter vivos or mortis causa, legacy or inheritance, shall have the duty of
furnishing the Commissioner, Regional Director, Revenue District Officer or
Revenue Collection Officer of the place where he may have his principal
office, with copies of such documents and any information whatsoever which
may facilitate the collection of the aforementioned tax. Neither shall a debtor
of the deceased pay his debts to the heirs, legatee, executor or administrator
of his creditor, unless the certification of the Commissioner that the tax fixed
in this Chapter had been paid is shown; but he may pay the executor or
judicial administrator without said certification if the credit is included in the
inventory of the estate of the deceased.
Section 97 NIRC
Payment of Tax Antecedent to the Transfer of Shares, Bonds or Rights. There shall not be transferred to any new owner in the books of any
corporation, sociedad anonima, partnership, business, or industry organized
or established in the Philippines any share, obligation, bond or
renounce the share, what are the consequences

v Renunciation retroacts to the death and that portion now belongs to
the estate to be distributed to the other heirs by accretion
How to renounce?
v I renounce, must be express.
If renouncement is for a specific person, it may be considered as donation.
v Husband died; wife renounces. To whom is it in favor to?
A: By accretion, just the children
Renouncement triggers accretion among heirs of same degree.
v Grandfather died, grandmother renounces. 3 children: A, B, C. they
have grandchildren. To whom is it in favor to?
A: By accretion, just the children
v What if she says, renounce in favor of A?
A: it is subject to donors tax.
v When grandmother renounces, does she still have property?
A: Yes, her share of conjugal property
v What if she says she renounces her share of estate including her
conjugal share.
A: Conjugal share is subject to donors tax.
v You can only renounce what you inherit, you cannot renounce what
you own. If you do, it is subject to donors tax.
Delivery of presumptive legitime is NOT a donation but merely an
advance to the legitime.
v This is to protect the children of the annulled marriage in cases of
remarriage.
Scenario. Father and Mother, 2 children: C and D
v Father dies. Mother does not waive. C waives, stating I waive my
rights in favor of D is there a donation?
A: Surviving spouse in succession is treated like a surviving child. It
is then a donation because the wife and D are both same degree heirs
as C, so both of them should have benefited from the renunciation
by accretion.
Renunciation can be only 2 words: I renounce and it is accepted.
If the surviving spouse renounces the 12 share of the conjugal property,
it will trigger donors tax. But if the surviving spouse renounces his/her
share in the property of his/her deceased spouse via succession, no
donors tax will trigger.
15

intent.
BIR Ruling 455-11
In legal succession, accretion takes place in case of repudiation among
heirs of the same degree. This is so because there is no right of
representation. The co-heirs in legal succession are co-owners of the
inheritance, for which reason there is always a right of accretion among
them, unlike in testamentary succession where there may or may not be a
right of accretion.
However, if the renunciation by an heir or heirs is made in favor of one
or more heirs but not all the other heirs, the act of renunciation is in effect
an act of disposition inasmuch as the act of disposition and the benefits
thereof are not enjoyed by everybody but by one or more heirs
BIR Ruling UN 536-12-01-98
On legal succession, accretion takes place in case of repudiation among
heirs of the same degree. This is so because there is no right of
representation. The co-heirs in legal succession are co-owners of the
inheritance, for which reason there is always a right of accretion among
them, unlike in testamentary succession where there may or may not be a
right of accretion. However, if the renunciation by an heir or heirs is made
in favor of one or more heirs but not all the other heirs, the act of
renunciation is in effect an act of disposition inasmuch as the act of
disposition and the benefits thereof are not enjoyed by everybody but only
by one or more heirs.
The renunciation in favor of the other co-heirs specifying the areas for
each and every co-heir shall be treated as donation and therefore the coheirs to whom the renunciation was made shall pay not only the
inheritance/estate tax but also the gift tax in proportion to what they
received.
BIR UN 251-4-23-99
When the surviving spouse renounced her share in the inheritance, she did
not donate the property which had never became hers. Such being the case,
the renunciation is not subject to donors tax imposed under Section 98 of
the Tax Code.
CREATION OF UNREGISTERED PARTNERSHIP

Co-ownership is taxed as partnership when there is intent to profit by
pooling of funds/resources.
So, how can you punish intent? There are overt acts that may indicate
So, if the co-ownership is just earning profit. The heirs are not doing
anything, but they dont partition? It can be considered as partnership if

co-ownership was retained for a long time.
Ona v. Commissioner
The income derived from inherited properties may be considered as
individual income of the respective heirs only so long as the inheritance or
estate is not distributed or, at least, partitioned, but the moment their
respective known shares are used as part of the common assets of the heirs
to be used in making profits, it is but proper that the income of such shares
should be considered as the part of the taxable income of an unregistered
partnership.
BIR Ruling 102-87
For tax purposes, the co-ownership of inherited properties is automatically
converted into an unregistered partnership the moment the said common
properties and/or the incomes derived therefrom are used as a common fund
with intent to produce profits for the heirs in proportion to their respective
shares in the inheritance as determined in a project partition either duly
executed in an extrajudicial settlement or approved by the court in the
corresponding testate or intestate proceeding.
PARTITION OF ESTATE AMONG HEIRS

BIR Ruling 258-91
Every act which is intended to put an end to indivision among co-heirs and
legatees and devises is deemed to be a partition, although it should purport
to be a sale, an exchange, a compromise, or any other transaction.
PARTITION OF ESTATE AMONG HEIRS

Gatchalian v. CIR
There is no doubt that if the plaintiffs merely formed a community of
property the latter is exempt from the payment of income tax under the law.
But according to the stipulation facts the plaintiffs organized a partnership of
a civil nature because each of them put up money to buy a sweepstakes ticket
for the sole purpose of dividing equally the prize which they may win, as they
did in fact in the amount of P50,000. Having organized and constituted a
16

partnership of a civil nature, the said entity is the one bound to pay the
income tax which the defendant collected under the aforesaid section 10 (a)
of Act No. 2833, as amended by section 2 of Act No. 3761. There is no merit
in plaintiff's contention that the tax should be prorated among them and paid
individually, resulting in their exemption from the tax.
Pascual v. CIR
Where transactions are isolated and the character of habituality peculiar to
business transactions for the purpose of gain was not present, there is no
partnership.
effective upon the death because the acquisition of the survivor of the share
of the decedent is considered to be acquired by bequest and thus, subject to
estate tax.
Vitug v. CA
Pursuant to a survivorship agreement, the stocks and properties became
separate properties of the surviving spouse. It is not a donation mortis causa
which should be embodied in the will because the properties do not pertain
to the testator. Neither is it a donation intervivos because it was to take effect
upon the death of one party. However, it is also not a donation because it
involved no conveyance of the spouses own property to the other.
Obillos v. CIR
Their original purpose was to divide the lots for residential purposes. If later
on they found it not feasible to build their residences on the lots because of
the high cost of construction, then they had no choice but to resell the same
to dissolve the co-ownership. The division of the profit was merely incidental
to the dissolution of the co-ownership which was in the nature of things a
temporary state. It had to be terminated sooner or later.
SURVIVORSHIP CLAUSE
If there is a co-ownership (example: joint bank account), a survivorship
clause automatically vests the whole ownership to the surviving coowners.

2 views:
v Part of estate still
v Owned by Surviving Co-owner
GR: even if there is a survivorship clause, it depends whether the bank
will cooperate with you.
SIR: This is not a transfer in contemplation of death.
BIR Ruling 10-2003
The share or portion belonging to joint depositors in the joint deposit
account shall be presumed equal and benefits and charges in the joint account
shall be presumed equal and the benefits as well as the charges in the joint
account shall be proportional to their respective shares. With a survivorship
clause, upon the death of any of them, the whole amount of funds shall
belong to the surviving co-depositors and may be withdrawn by the latter.
The agreement is valid and binding but it has an effect of a gift or donation
mortis causa made by the deceased co-depositor during his lifetime but
17
DONORS TAX
A tax on the privilege of transmitting ones property or property rights to
another or others without adequate and full valuable consideration. It is an
act of liberality.
Section 98, NIRC
Imposition of Tax. (A) There shall be levied, assessed, collected and paid upon the transfer by
any person, resident or nonresident, of the property by gift, a tax, computed
as provided in Section 99.
(B) The tax shall apply whether the transfer is in trust or otherwise, whether
the gift is direct or indirect, and whether the property is real or personal,
tangible or intangible.
Article 725, Civil Code
Donation is an act of liberality whereby a person disposes gratuitously of a
thing or right in favor of another, who accepts it.
The donation is perfected from the moment the donor knows of the
acceptance by the donee.
In order that the donation of an immovable may be valid, it must be made in
a public document, specifying therein the property donated and the value of
the charges which the donee must satisfy.
The acceptance may be made in the same deed of donation or in a separate
public document, but it shall not take effect unless it is done during the
lifetime of the donor.
If the acceptance is made in a separate instrument, the donor shall be notified
thereof in an authentic form, and this step shall be noted in both instruments.
WHAT IS DONORS TAX

Donors tax is a tax on the privilege of transmitting ones property rights to
another or others without adequate and full valuable consideration.
1. Act of Liberality
v Pure Liberality
No valuable consideration. No expectation of anything in return.
There is DONATIVE INTENT.
v When not an Act of Liberality

CIR v. Goodrich
Internal revenue taxes shall be assessed within 5 years after the
return was filed, and no proceeding in court without assessment

for the collection of such taxes shall be begun after expiration of
such period.
Exception: in the case of a false or fraudulent return with intent
to evade a tax or of a failure to file a return, the tax may be
assessed, or a proceeding in court for the collection of such tax
may be begun without assessment, at any time within ten years
after discovery of the falsity, fraud or omission.
Metro Pacific v. CIR
In case where property is transferred for less than an adequate and
full consideration in money or money's worth, then the amount by
which the fair market value (FMV) of the property exceeded the
value of the consideration shall be deemed a gift, and shall be
included in computing the amount of gifts made during the calendar
year. It is thus, important to determine the "fair market value" (FMV)
of the property sold or transferred, and whether it exceeded the value
of the consideration.
2. What it should not mean
v When the law says all gifts, it doubtless refers to gifts inter vivos,
and not mortis causa. Both the letter and spirit of the law leave
no room for any other interpretation. Such clearly is the tenor
of the language which refers to donations that took effect
before the donors death, and not to mortis causa donations.
v If a creditor merely desires to benefit the debtor and without
any consideration therefore cancels the debt, the amount of the
debt is a gift from the creditor to the debtor and need not be
included in the latters gross income. If a corporation to which
a stockholder is indebted forgives the debt, the transaction has
the effect of the payment of a dividend.
v Donation Mortis Causa Takes effect upon death and subject
to estate tax
v Donation Intervivos Donation that is act of liberality,
subject to donors tax
18

Dizon vs. Posadas
The law presumes that gifts have been made in anticipation of
inheritance, devise, bequest or gift mortis causa, when the done, after
the death of the donor proves to be his heir, devisee or done mortis
causa, for the purpose of evading taxes, and it is to prevent this that
it provides that they be added to the resulting amount. Therefore,
the gifts referred to under the said provision are those donations
intervivos that take effect immediately or during the lifetime of the
donor but are made in consideration or in contemplation of death.
Roces v. Posadas
The law considers gifts intervivos made in contemplation of death as
those advances on inheritance. . Gifts inter vivos, the transmission
of which is not made in contemplation of the donor's death should
not be understood as included within the said legal provision
BIR Ruling 76-80
Condonation of debts, depending on the circumstances, may be
viewed, for taxing purposes, as payment of income, a gift, or a capital
transaction. If an individual performs services for a creditor, who in
consideration thereof cancels the debt, income to that amount is
realized by the debtor as compensation for his services. But if a
creditor merely desires to benefit a debtor and without any
consideration thereof cancels the debt, the amount of the debt is a
gift from the creditor to the debtor and need not be included in the
latters gross income. But, if there is no donative interest and it is
solely for business consideration, it is not subject to donors tax.
TO WHOM APPLICABLE
1. Citizens- within and without the Philippines
2. Resident Aliens- within and without the Philippines
3. Non-resident Alien- within the Philippines
VALUATION
General Rule: FMV at the time of the donation.
Real Property
v FMV based on Zonal Value (Commissioner) or based on Tax
Declaration (City or Provincial Assessor) whichever is higher
Personal Property
v Example of Sir: Your father gave you an amorsolo painting valued

at 1M at the time. Now, you give it to your child, it is now valued at
10M. What is the basis of the tax?
A: Use GR. 10M, the FMV.
Shares of Stock
v Listed par value per share; else, market value
v Unlisted In determining the value of the shares, the Adjusted Net
Asset Method shall be used whereby all assets and liabilities are
adjusted to fair market values. The net of adjusted asset minus the
adjusted liability value is the indicated value of the equity.
v Fire Sales when shares are sold below book value
Commissioner has the right to provide for the minimum value.
Concept of Net Gift
v net gift shall mean the net economic benefit from the transfer that
accrues to the donee. Accordingly, if a mortgaged property is
transferred as a gift, but imposing upon the donee the obligation to
pay the mortgage liability, then the net gift is measured by deducting
from the fair market value of the property the amount of mortgage
assumed.
RULES
Gift by employers to employee
GR: Existing employer-employee relationship. Part of compensation. Only
question is if it is taxable because some are exempt (ex. De minimis, fringe
benefits.)
Gifts by corporation to shareholders
GR: no such thing as a gift. Corp. distributes dividends not a donation.
Corporate Sponsorship:
GR: Not subject to donors tax
BIR 03-80
Sponsorship schemes are not subject to donors tax or to any tax liability; the
payments constitute advertising and business promotion costs, hence
included in business expenses and deductible from gross income.
Bonus plus additional Compensation (DA-060-2-5-99)
19

Support in the form of allowances are not compensation and/or salary per
se, but donations made by individuals and NGOs in the USA to sustain the
purpose for which the officers and employees receive such kind of benefits
to sustain them to such endeavors. Consequently, they are exempted from
income and withholding taxes but the net gift or donation to each and every
local officer and employee by each and every individual donor shall be subject
to donors tax.
Contributions to Political Campaign:
GR: Governed by Election Code. But, current practice is it is not taxable on
amount utilized but on amount not utilized, remainder becomes part of the
income of recipient and is subject on income tax.
Abello v. CIR
Republic Act No. 7166 on November 25, 1991, providing in Section 13
thereof that political/electoral contributions, duly reported to the
Commission on Elections, are not subject to the payment of any gift tax. This
all the more shows that the political contributions herein made are subject to
the payment of gift taxes, since the same were made prior to the exempting
legislation, and Republic Act No. 7166 provides no retroactive effect on this
point.
RATES
If donee is not a stranger: 5-15% based on amount of donation
Net Gift
Over
But not
Tax Shall
Over
Be
100,000
exempt
100,000
200,000
0
200,000
500,000
2,000
500,000
1,000,000
14,000
1,000,000
3,000,000
44,000
3,000,000
5,000,000
204,000
5,000,000 10,000,000
404,000
10,000,000
and over
1,004,000
30% if donee is a stranger
Plus
2%
4%
6%
8%
10%
12%
15%
Of the
Excess
Over
100,000
200,000
500,000
1,000,000
3,000,000
5,000,000
10,000,000
BIR Ruling 159-89

A stranger is a person who is not a:
(i) Brother, sister (whether by whole or half blood), spouse, ancestor, and
lineal descendant, or
(ii) A relative by consanguinity in the collateral line with the fourth degree of
relationship.
Tang Ho v. BTA
Under the old Civil Code, to be a donation by both spouses, taxable to both,
the wife must expressly join the husband in making the gift; her participation
therein cannot be implied.
Questions given in class
1. Husband and wife gives something to mother in law. It is subject to donors
tax, how do you treat it?
v Remember, 1 of those persons are related to the mother. How do
you treat it?
v Assumed that is given by husband, by the wife. is taxed as
stranger, is not.
2. Conjugal partnership of property, are there really co-owned properties?
v Yes.
So if a spouse is giving a donation, who is really giving the donation?
v by each of the spouses
3. If the spouses donated 200,000 to their child, how much is tax?
v Exempt. Because each spouse is entitled to 100k exemption.
4. Widow Mother gave 200k within 2 week period to child, exempt?
v Depends if it is within the same calendar period. If 100k in
December, 100k in January. Exempt. It is cumulative within the year.
EXEMPTIONS
Resident
1st P100,000 (see table for
donation)
1st P10,000 for Donation Prompter
Numptias (only for legitimate,
recognized natural, adopted
children)
Not a Resident/Citizen
Gifts to National Government
Gifts to Educational and/or
Charitable Institutions (not more
than 30% of donations used for
admin purposes)
Gifts to National Government

20

v
Gifts to Educational and/or

Charitable Institutions (not more
than 30% of donations used for
admin purposes)
Class Notes on Donations to Institutions

1. Donee institution Donations made to these institutions are not subject
to donors tax
2. Deductions for income tax for donations?
v 5% for corporations,
v 10% for individuals, based on taxable income before contribution
3. Donations which can be deductible in full?
v to the government
v donations to certain foreign institutions or international
organizations
v To accredited NGOs
CREDITS FOR DONORS TAXES PAID TO FOREIGN

COUNTRY
(See tax credits illustration for Estate tax because it is similar.)
1. GR: Donor must be resident alien or citizen also paying foreign donors
tax.
2. Limits: Choose lower
v Donors Tax paid in foreign country
!"#$% '( 3.*,/% )%* +,(*
>
FILING OF RETURNS
BIR 101-80
Donations made in favor of cultural organizations (like CCP) are exempt
from donors tax.
!"#$% '( )%* +,(*- ,. ('/%,0. 1'$.*/2
!"#$% '( 3.*,/% )%* +,(*-
4. The lower amount is always the tax credit.
BIR 100-98
Under the Comprehensive Agrarian Reform Law of 1988, the donation of
homelots to the tenant-beneficiaries of the comprehensive agrarian reform
program are therefore exempt from all taxes and fees being imposed in
connection therewith.
!"#$% '( )%* +,(*- ,. ('/%,0. 1'$.*/2 ,
. >
3. Then choose between:

v Aggregate of lower tax chosen per foreign country (see rule 2)
Any individual who makes any transfer by gift, except those which are
exempt from donors tax, shall for purposes of donors tax make a return
under oath in duplicate.
Return shall contain the following:
v Each gift made during the calendar year which is to be included in
computing net gifts
v Deductions claimed and allowable
v Any previous net gifts made during the same calendar year
v Name of done
v Any other information as required by rules and regulations made
pursuant to law.
Return should be filed within 30 days after the date the gift is made. Tax
shall be paid at the time of filing.
Where filed & paid:
v Resident Alien/Citizen Authorized agent bank, the Revenue
District Officer, Revenue Collection Officer or duly authorized
Treasurer of the city or municipality where the donor was domiciled
at the time of the transfer.
v Person with No Legal Residence in Phil. Office of the
Commissioner.
v Non-resident Return may be filed with the Philippine Embassy or
Consulate in the country where he is domiciled at the time of the
transfer, or directly with the Office of the Commissioner.
SPECIAL TOPICS
Terminations of Trusts
When trust is irrevocable, it is subject to donors tax. Trust is revocable, it
remains within the assets of the trustor.. If he dies, the trust is deemed
revoked at the time of his death and it reverts back to the estate.
Donations to Income Tax Exempt Organization
The donee being an income tax exempt organization does not automatically
make the donation exempt from donors tax. To be exempt, donee must be
21

an educational, and/or charitable, religious, cultural, or social welfare
corporation, institution, foundation, trust or philanthropic organization or
research institution or organization. Donee must also not have fraternal
and/or beneficiary purposes. (BIR 107-82)
Dissolution of Conjugal Partnership
When there was no clear or unmistakable intent on the part of one or the
other to part with his dominion over an exclusive property, then there was
no donation but merely an appropriation to themselves of their respective
shares of the conjugal partnership. Therefore, it is not subject to donors tax.
Homeowners Association Dues
Gifts, donations, and other contributions received by the Homeowners
Associations (Associations) are subject to the payment of donors tax.
SIR: also subject to income tax and VAT per Henares BIR Rulings.
Repudiation of Heir
1. General no donors tax
2. Specific donors tax is imposed.
Termination of Co-ownership
No donors tax. It is just a partition of co-ownership.
Revocation of Donation
NOTE: Donation is perfected by knowledge of donor of the acceptance of
donee
1. If donor wants to revoke, donee had already accepted and had not agreed.
Donation has still been made, so donors tax is due
2. Donor revokes, donee agrees. Donation is repudiated, no donors tax.
VALUE ADDED TAX

Value-Added Tax is a form of sales tax. It is a tax on consumption levied on
the sale, barter, exchange or lease of goods or properties and services in the
Philippines and on importation of goods into the Philippines. It is an indirect
tax, which may be shifted or passed on to the buyer, transferee or lessee of
goods, properties or services.
Direct v. Indirect Tax
Direct Tax
v Tax paid directly by an individual or organization to an imposing
entity.
Indirect Tax
v An indirect tax is shifted from one taxpayer to another.
v Tax that is paid to the government by one entity in the supply chain,
but it is passed on to the consumer as part of the price of a good or
service. The consumer is ultimately paying the tax by paying more
for the product.
Destination Principle
As a general rule, the VAT system uses the destination principle as a basis for
the jurisdictional reach of the tax. Goods and services are taxed only in the
country where they are consumed.
For goods: exports are zero-rated, while imports are taxed.
For services:
v Consumption is "the use of a thing in a way that thereby exhausts
it." Applied to services, the term means the performance or
"successful completion of a contractual duty, usually resulting in the
performer's release from any past or future liability.
v Services, if performed in the Philippines, are therefore also
consumed in the Philippines.
Exception to the Destination Principle
Services performed by VAT-registered persons in the Philippines (other than
the processing, manufacturing or repacking of goods for persons doing
business outside the Philippines), when paid in acceptable foreign currency
and accounted for in accordance with the rules and regulations of the BSP,
are zero-rated.
CONCEPT OF VAT
22

Output Tax Tax on selling something
v BIR definition: VAT due on the sale, lease or exchange of taxable
goods or properties or services by any person registered or required
to register under Section 236 of the Tax Code.
Input Tax Tax on buying something
v BIR definition: VAT due on or paid by a VAT-registered on
importation of goods or local purchase of goods, properties or
services, including lease or use of property in the course of his trade
or business. It shall also include the transitional input tax determined
in accordance with Section 111 of the Tax Code, presumptive input
tax and deferred input tax from previous period.
Illustration: For this example, A is the reference person
v Z has a widget valued at P100. He sells it for P112 (which is product
price of P100 + 12% VAT on the price)
A buys the widget. Then, he resells it to B for P200 + 12% VAT on
the price.
B therefore buys it from A by paying P224. (P200 + 12% of 200)
v In this scenario, when A bought the widget from Z, he paid an input
VAT of P12. When he sold it to B, he imposed an output VAT of
P24.
VAT Payable (by A, the withholding agent) = Output VAT Input VAT
v In the example above. VAT Payable = 24-12 = 12
Note that there are instances where you buy something but not sell
anything, in which case: no output VAT, with input VAT
Or, where you sell something only from inventory, in which case, with
output VAT but no input VAT.
v For Non-Resident Aliens

Services rendered in the Philippines, with regularity, by such entities
VAT registered person liable for VAT who either have:
v Gross sales or receipts for the past 12 months, other than those that
are exempt, that exceeded P1,919,000.00
v Reasonable grounds to believe that gross sales or receipts for the
past 12 months, other than those that are exempt, will have exceeded
P1,919,000.00
DIFFERENCE BETWEEN VAT AND INCOME TAX
A. All tangible and intangible objects, which are capable of pecuniary

estimation, sold in the course of trade or business, including:
1. Real properties held primarily for sale to customers or held for lease
in the ordinary course of trade or business;
In the case of sale of real property on installment plan (means
that initial payments in the year of sale do not exceed 25% of the
gross selling price), the seller shall be subject to output VAT on
the installment payments received, including the interests and
penalties for late payment, actually and/or constructively
received. Correspondingly, the buyer of the property can claim
the input tax in the same period as the seller recognized the
output tax.
Income Tax factors the cost of goods sold against the gross selling price
VAT considers that which was purchased as against that which was sold.
PERSONS LIABLE FOR VAT

Any person who in the course of trade or business, sells, barters, exchanges,
leases goods or properties, renders services, and any person who imports
goods.
In the Course of Trade or Business
v For Resident Alien/ Resident Citizen/ Non-resident Citizen:
Regular conduct or pursuit of a commercial or economic activity,
including incidental transactions
ILLUSTRATION:
SALE OR EXCHANGES OF GOODS OR PROPERTIES

SUBJECT TO VAT
23

In the case of sale of real properties on a deferred-payment basis
(means that initial payments made in the year of sale of real
property exceeded 25% of gross selling price), the transaction
shall be treated as cash sale which makes the entire selling price
taxable in the month of sale. Output tax shall be recognized by
the seller and input tax shall accrue to the buyer at the time of
the execution of the instrument of sale. Payments subsequent to
initial payments shall no longer be subject to output VAT, in
the case of sale on a deferred payment basis.
2. The right or the privilege to use patent, copyright, design or model,
plan, secret formula or process, goodwill, trademark, trade brand or
other like property or right;
The licensee shall be responsible for the payment of VAT on
such rentals and/or royalties in behalf of the non-resident
foreign corporation or owner
3. The right or privilege to use in the Philippines of any industrial,
commercial or scientific equipment;
4. The right or the privilege to use motion picture films, films, tapes
and discs; and
5. Radio, television, satellite transmission and cable television time.
The buying and selling of TV airtime constitutes rendition of
services to others for a consideration subject to VAT.
B. Transactions deemed sale of taxable goods and properties, which are:
1. Transfer, use or consumption not in the course of business of goods
or properties originally intended for the course of business
Example: If you are selling goods in the grocery, and then you
get hungry, you opened a pack of lucky-me and ate it; it is now
deemed sold, you are now the buyer of that lucky-me.
Why? When you sell the lucky-me, you generate output tax.
When you consumed it, if not for this provision, there would be
no output tax. However, you are still allowed to credit the input
tax you paid to your supplier. This provision now ensures that
there is still an accompanying output tax to offset the input tax.
2. Distribution or transfer to:
a) Shareholders or investors as share in profits of VAT registered
persons
b) Creditors in payment of debt
3. Consignment of goods if actual sale is not made within 60 days of
date when goods were consigned
4. Retirement from or cessation of business with respect to inventories

of taxable goods at the time of retirement or cessation.
Example: You ran out of money so you need to close the
grocery. But, you still have inventory. That inventory is deemed
sold and subject to vat. So, you need to have firesales or even
sell it at a loss so that you wont be subject to this provision
(although the sale is still vatable)
SALE OR EXCHANGES OF SERVICES SUBJECT TO VAT

A. Performance of all kinds of services in the Philippines for others for a fee,
remuneration or consideration, whether in kind or in cash.
v See Sec. 108, NIRC for Full list, but important to note is: Services
done by franchise grantees of radio and/or television broadcasting
whose annual gross receipts of the preceding year do not exceed
P10,000,000.00, and franchise grantees of gas and water utilities are
EXEMPT from VAT.
B. Phrase shall likewise include:
1. 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;
2. The lease or the use of, or the right to use of any industrial,
commercial or scientific equipment;
3. The supply of scientific, technical, industrial or commercial
knowledge or information;
4. The supply of any assistance that is ancillary and subsidiary to and is
furnished as a means of enabling the application or enjoyment of any
such property, or right or any such knowledge or information;
5. The supply of services by a nonresident person or his employee in
connection with the use of property or rights belonging to, or the
installation or operation of any brand, machinery or other apparatus
purchased from such non-resident person;
6. The supply of technical advice, assistance or services rendered in
connection with technical management or administration of any
scientific, industrial or commercial undertaking, venture, project or
scheme;
7. The lease of motion picture films, films, tapes and discs; and
8. The lease or the use of or the right to use radio, television, satellite
transmission and cable television time.
24
DIFFERENCE BETWEEN ZERO-RATED AND VAT EXEMPT

Zero-rated Transaction
A zero rated sale of goods,
properties and/or services by a
VAT-registered person is a taxable
transaction for VAT purposes but
shall not result in any output tax.
Input tax on purchases of goods,
properties or services, related to
such zero-rated sale, shall be
available as tax credit or refund in
accordance w/ existing regulations.
Exempt Transaction
A VAT-exempt transaction refers
to the sale of goods, properties or
services or the use or lease of
properties that is not subject to
VAT output tax. However, the
seller/supplier is not allowed any
tax credit of VAT input tax on
purchases related to such exempt
transaction.
DIFFERENCE BETWEEN AUTOMATICALLY AND EFFECTIVELY

ZERO-RATED
Automatically Zero-Rated
Refers to a sale of goods, properties
and services to a Freeport Zoneregistered enterprise by a VAT
registered seller, or an export sale or
a foreign currency denominated sale
under Sec. 106 of the tax code.
Effectively Zero-Rated
Refers to the local sale of goods,
properties and services by a VAT
registered person to an entity that
was granted indirect tax exemption
under special laws or international
agreements. Since the buyer is
exempt from indirect tax, the seller
cannot pass on the VAT and
therefore, the exemption enjoyed
by the buyer shall extend to the
seller, making the sale effectively
zero-rated.
DIFFERENCE BETWEEN EXEMPT TRANSACTION AND

EXEMPT ENTITY
Exempt Transaction
Involves goods or services which,
by their nature, are specifically listed
and expressly exempted from the
VAT under the tax code
Exempt Entity
Is a person or entity granted VAT
exemption under the Tax Code, a
special law, or an international
agreement to which the Philippines
is a signatory, and by virtue of
which its taxable transaction
become exempt from the VAT.
SALE OR EXCHANGES OF GOODS OR PROPERTIES

SUBJECT TO ZERO- RATED VAT
A. Export Sales
Transaction
The sale and actual shipment of goods
from the Philippines to a foreign country
Sale of raw materials or packaging materials

to a nonresident buyer delivered to a
resident local export - oriented enterprise
Sale of raw materials or packaging materials

to export-oriented enterprise
Sale of gold to the BSP
Those considered export sales under
Executive Order NO. 226, otherwise
known as the Omnibus Investment Code
of 1987, and other special laws.
Sale of goods, supplies, equipment and
fuels to persons engaged in international
shipping or international air transport
operations.
Additional Requirements
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
1. Local enterprise uses such
materials in manufacturing,
processing, packing or
repacking buyer's goods in
the Philippines
services.
3. Accounted for in
1. Export sales of which
exceed 70% of total annual
production
Note: Suppose the GM of

that international airline
company bought a house
paid for by the company, is
25

it still now zero-rated? Yes.
Take note that the Code
says SALES TO the
international shipping or
airline company. Since it is
the company that bought
the house, it is zero-rated.
B. Foreign Currency Denominated Sales
Sale to a nonresident of goods, except those mentioned in Sections 149 and
150, assembled or manufactured in the Philippines for delivery to a resident
in the Philippines, paid for in acceptable foreign currency and accounted for
in accordance with the rules and regulations of the Bangko Sentral ng
Pilipinas (BSP).
C. Sales to Persons or Entities Deemed Tax-exempt under Special Law or
International Agreement
Sales to persons or entities whose exemption under special laws or
international agreements to which the Philippines is a signatory effectively
subjects such sales to zero rate.
SALE OR EXCHANGES OF SERVICES SUBJECT TO ZERORATED VAT

Transaction
Processing, manufacturing or repacking
goods for other persons doing business
outside the Philippines
Services rendered to a person in business

conducted outside the Philippines or to a
non-resident person not engaged in
business who is outside the Philippines
when the services are performed
Additional Requirements
1. Goods are subsequently
exported to which
services.
3. Accounted for in
1. Services other than
processing, manufacturing
or repacking goods
services.
3. Accounted for in
Services rendered to persons or entities
whose exemption under special laws or
international agreements to which the
Philippines is a signatory effectively
subjects the supply of such services to zero
rate
Services rendered to persons engaged in
international shipping international air
transport operations
Services performed by subcontractors
and/or
contractor
in
processing,
converting or manufacturing goods for an
enterprise
Transport of passengers and cargo by air
and sea vessels from the Philippines to a
foreign country
Sale of power or fuel generated through
renewable sources of energy and other
emerging
energy
sources
using
technologies
Note: leases of property for

use thereof is included
1. Enterprise has exports
sales which exceed 70% of
total annual production
EXEMPT TRANSACTIONS
(sir said memorize in one of the meetings)
a. Sale or importation of:
v agricultural and marine food products in their original state,
v livestock and poultry of a kind generally used as, or yielding or
producing foods for human consumption; and breeding stock and
genetic materials therefor.
Products classified under this paragraph (such as meat, fruits and vegetables)
shall be considered in their original state even if they have undergone the
simple processes of preparation or preservation for the market, such as
freezing, drying, salting, broiling, roasting, smoking or stripping. Polished
and/or husked rice, corn grits, raw cane sugar and molasses, ordinary salt,
26

and copra shall be considered in their original state.
b. Sale or importation of fertilizers; seeds, seedlings and fingerlings; fish,
prawn, livestock and poultry feeds, including ingredients, whether locally
produced or imported, used in the manufacture of finished feeds. (except
specialty feeds for race horses, fighting cocks, aquarium fish, zoo animals and
other animals generally considered as pets).
c. Importation of personal and household effects belonging to the residents
of the Philippines returning from abroad and nonresident citizens coming to
resettle in the Philippines: Provided, That such goods are exempt from
customs duties under the Tariff and Customs Code of the Philippines;
d. Importation of professional instruments and implements, wearing apparel,
domestic animals, and personal household effects.
v Except: Any vehicle, vessel, aircraft, machinery, other goods for use
in the manufacture and merchandise of any kind in commercial
quantity belonging to persons coming to settle in the Philippines, for
their own use and not for sale, barter or exchange, accompanying
such persons, or arriving within ninety (90) days before or after their
arrival, upon the production of evidence satisfactory to the
Commissioner, that such persons are actually coming to settle in the
Philippines and that the change of residence is bona fide;
e. Services subject to Percentage Tax
f. Services by agricultural contract growers and milling for other of palay into
rice, corn into grits and sugar cane into raw sugar
g. Medical, dental, hospital and veterinary services except those rendered by
professionals
v Professional Practitioners includes CPA, Lawyers, etc.
v Professional Practitioners are subject to VAT if gross professional
fees exceed P1,919,500 for a 12-month period and subject to 3%
Percentage Tax if gross professional fees total P1,919,500 and below
for a 12-month period.
h. Educational services rendered by private educational institutions, duly
accredited by the Department of Education (DEPED), the Commission on
Higher Education (CHED), the Technical Education And Skills
Development Authority (TESDA) and those rendered by government

educational institutions;
i. Services rendered by individuals pursuant to an employer-employee
relationship
j. Services rendered by regional or area headquarters established in the
Philippines by multinational corporations which act as supervisory,
communications and coordinating centers for their affiliates, subsidiaries or
branches in the Asia-Pacific Region and do not earn or derive income from
the Philippines;
k. Transactions which are exempt under international agreements to which
the Philippines is a signatory or under special laws, except those under
Presidential Decree No. 529 (Petroleum Exploration Concessionaires under
the petroleum act of 1949.
l. Sales by agricultural cooperatives duly registered with the Cooperative
Development Authority to their members as well as sale of their produce,
whether in its original state or processed form, to non-members; their
importation of direct farm inputs, machineries and equipment, including
spare parts thereof, to be used directly and exclusively in the production
and/or processing of their produce.
v Sale of cooperatives own produce to:
To its members exempt
To its non-members exempt
v Sale of cooperative of other cooperatives goods
To its members exempt
To its non-members VATable
m. Gross receipts from lending activities by credit or multi-purpose
cooperatives duly registered with the Cooperative Development Authority;
n. Sales by non-agricultural, non-electric and non-credit cooperatives duly
registered with the Cooperative Development Authority: Provided, That the
share capital contribution of each member does not exceed Fifteen thousand
pesos (P15,000) and regardless of the aggregate capital and net surplus ratably
distributed among the members;
o. Export sales by persons who are not VAT-registered
27

p. Sale of real properties
v Not primarily held for sale to customers or held for lease in the
ordinary course of business
v Real property utilized for low-cost and socialized housing as defined
by Urban Development and Housing Act of 2005
v Residential lot valued at P1,919,500 & below.
If two or more adjacent residential lots are sold or disposed in
favor of one buyer, for the purpose of utilizing the lots as one
residential lot, the sale shall be exempt from vat only if the
aggregate value of the lots do not exceed P1,919,500.
v House & Lot, and Other Residential Dwellings valued at P3,199,200
and below.
q. Lease of a residential unit with a monthly rental not exceeding P12,800.
v Cap is per unit.
v If there are multiple units, even if the aggregate exceed P12,800, it is
still exempt if unit lease is P12,800 or less.
r. Sale, importation, printing or publication of books and any newspaper,
magazine, review or bulletin which appears at regular intervals with fixed
prices for subscription and sale and which is not devoted principally to the
publication of paid advertisements;
s. Transport of passengers by international carriers
t. Sale, importation or lease of passenger or cargo vessels and aircraft,
including engine, equipment and spare parts thereof for domestic or
international transport operations;
u. Importation of fuel, goods and supplies by persons engaged in
international shipping or air transport operations
v. Services of banks, non-bank financial intermediaries performing quasibanking functions, and other non-bank financial intermediaries; and
w. Sale or lease of goods or properties or the performance of services other
than the transactions mentioned in the preceding paragraphs, the gross
annual sales and/or receipts do not exceed the amount of P1,919,500.
VAT TREATMENT OF PEZA

Transaction
Sale of goods by PEZA
enterprise to buyer in
customs territory
Sale of services by PEZA

enterprise to buyer in
customs territory
Sale of goods by a PEZA
enterprise to another PEZA
enterprise
Sale
of
Service
by
ECOZONE Enterprise to
another
ECOZONE
enterprise
Sales to Persons or Entities
whose Exemption under
Special Laws or International
Agreements to which the
Philippines is a signatory
Treatment
Such Buyer shall be treated as an
importer thereof and shall be
imposed with the corresponding
import tax/es (i.e., VAT or VAT
plus excise tax, as the case may
be)
Transaction not covered by 5% special tax
regime. Subject to 12% VAT or
percentage tax depending if the P1.919 is
exceeded
Exempt from VAT
a) if PEZA registered seller is subject to
5% Special Tax Regime Exempt
b) If PEZA-Registered Seller Subject to
Taxes under NIRC subject to zero rated
VAT pursuant to cross border doctrine
Effectively Zero Rated
VAT TREATMENT OF MERGERS

Under the VAT law, the absorbed entity should pay the VAT on the
merchandise inventory, there being a "deemed sale" transaction, after tax
crediting the corresponding input taxes, with the right to claim refund, if the
input exceeds the output tax. If the output tax is paid, this may be "passed
on" to the surviving corporation for its use as tax credit.
VAT TREATMENT OF SALES RETURNS, ALLOWANCES AND

SALES DISCOUNT

Sales Returns Value of goods or properties sold and subsequently

returned may be deducted from gross sales or receipts for the quarter in
28

which a refund is made.
Allowances Value of goods or properties sold for which allowances
are granted by a Vat-registered person may be deducted from the gross
sales or receipts for the quarter in which a credit memorandum is issued.
Sales Discount Sales discounts granted and indicated in the invoice at
the time of sale and the grant of which does not depend upon the
happening of a future event may be excluded from the gross sales within
the same quarter it was given.
v You sell product at P100, but tell the buyer if you pay me within 5
days, Ill sell it for P80, vat is still based on the original price. This
is a prompt payment discount that is not covered by Sec 106 D.

TAX BASE
Commissioner shall by rules and regulations prescribed by the Sec. of Finance
determine appropriate tax base in cases where transaction is deemed a sale,
barter or exchange of goods and services in transactions deemed sales, or
where the gross selling price is unreasonably lower than the actual market
value.
VAT ON IMPORTATION
GR: There shall be levied, assessed and collected on every importation of
goods a value-added tax equivalent to 12%
v Based on the total value used by the Bureau of Customs in
determining tariff and customs duties plus customs duties, excise
taxes, if any, and other charges, such tax to be paid by the importer
prior to the release of such goods from customs custody:
v Where the customs duties are determined on the basis of the quantity
or volume of the goods, the value-added tax shall be based on the
landed cost plus excise taxes, If any.
Except: Importation by Exempt Entities
Exception to Exception: In the case of tax-free importation of goods into
the Philippines by persons, entities or agencies exempt from tax where
such goods are subsequently sold, transferred or exchanged in the
Philippines to non-exempt persons or entities, the purchasers, transferees
or recipients shall be considered the importers thereof, who shall be liable
for any internal revenue tax on such importation. The tax due on such
importation shall constitute a lien on the goods superior to all charges or
liens on the goods, irrespective of the possessor thereof.
INVOICING REQUIREMENT
1. Purchase Order document by the buyer telling the seller what he wants
to buy
2.Invoice confirmed sale; where inventory is already subtracted and delivery
has been made. PAYMENT is not made yet. (VAT receipt source of input
tax)
3. Statement of account Sales invoice of sale of services (Seller of Services
does not issue Invoices)
4. Official Receipt generated by sales invoice. It issued when the goods have
been paid in cash (VAT receipt source of input tax)
5. Acknowledge receipt document given when paid a check, but the check
needs to be cleared first. It will eventually be replaced by the Official Receipt
when check is cleared (Not a source of input tax)
VAT inclusive v. VAT Exclusive
1. VAT Inclusive: Price already includes the VAT.
2. VAT Exclusive: Price does not include the VAT and it must be computed.
FILING OF VAT RETURN

RDO where the business is located, within 25 days following the close of
each taxable quarter.
Example: So, if an individual resides in san juan and has a business in
Makati. Can I file my income tax in san juan and Vat in Makati?
A: Yes. However, in current practice, BIR will ask you to move your
income tax filing to where your business is so its easier for them.
WITHHOLDING ON VAT
1. The government or any of its political subdivisions, instrumentalities or
agencies including government-owned or controlled corporations (GOCCs)
shall, before making payment on account of each purchase of goods and/or
of services taxed at twelve percent (12%) VAT pursuant to Secs. 106 and 108 of
the Tax Code, deduct and withhold a final VAT due at the rate of five percent
(5%) of the gross payment thereof.
2. The five percent (5%) final VAT withholding rate shall represent the net
VAT payable of the seller. The remaining seven percent (7%) effectively
accounts for the standard input VAT for sales of goods or services to
government or any of its political subdivisions, instrumentalities or agencies
including GOCCs in lieu of the actual input VAT directly attributable or
29

ratably apportioned to such sales. Should actual input VAT attributable to sale
to government exceeds seven percent (7%) of gross payments, the excess may form
part of the sellers' expense or cost. On the other hand, if actual input
VAT attributable to sale to government is less than seven percent (7%) of gross
payment, the difference must be closed to expense or cost.
CLASS DISCUSSION:
RULE IN VAT:
When you buy it, there is already input tax. W/N you sell it, you paid the
input tax. However, if you sell it, you can credit the input tax from the output
tax
2) Example: You are a law office. What are your input tax?
/ Lease of equipment
/ Buying of equipment
x Salaries paid to employees
ERRONEOUS ISSANCE OF VAT INVOICE/RECEIPT

Action
Not
vat-registered
entity
issues
vat
receipt or invoice
Why would there need to be a presumptive income tax (Sec. 111B)? Relate it
to See. 109A.
109A makes these basic food products for human consumption in their
original state exempt from output tax (input for the buyer/manufacturer).
This eases the burden of the buyer-manufacturer. He is now given a credit in
the things he purchased. BUT, this is supposedly to be shared by the buyermanufacturer to the end buyer- consumer.
Think of it this way. You are a sardines manufacturer, whatever you sell is
subject to VAT. So what is the implication of 111B.
Because of 111B, you can now deduct an input tax. Because if not for 111B,
109A states that these basic food products are not subject to Vat so no
input tax for the sardines manufacturer.
When is VAT a flat tax?
Flat tax situation is that there are no more input taxes to charge against the
output.
1) Example: You lease commercial spaces, and you are subject to 12% VAT.
Tell me, what are the input taxes you can charge against it?
x construction materials cannot because not in the construction stage
already.
/ paper for statement of account
/ electricity bill for office
/ Repainting (every year to charge it as input tax)
/ Manpower services (cleaning services) -> But, normally, these are done by
contractors; now is there an employee-employer services? NO.
See, in this industry, VAT seems to be a flat tax.
Effect
Non-Vat Registered Entity is liable for:
1. the percentage taxes applicable to his
transactions;
2. VAT due on the transactions under Sec. 106 or
108 of the Tax Code, without the benefit of any
input tax credit; and
3. a 50% surcharge under Sec. 248 (B) of the Tax
Code;
Receipt/Invoice issued shall:
VAT shall be recognized as an input tax credit to
the purchaser under Sec. 110 of the Tax Code,
provided the requisite information required
under Subsection 4.113 (B) of these
Regulations is shown on the invoice or receipt.
VAT
registered
person issues vat
receipt/invoice for a
vat
exempt
transaction,
but
receipt does
not
prominently display
the words VAT
exempt sale
Transaction will be taxable and issuer shall be

liable to pay VAT.
Purchaser shall be entitled to claim input tax
credit on his purchase.
READ CODAL FOR THE FOLLOWING:

1. Section 110
2. Section 111
3. Section 236
4. Section 237
5. Section 238
30
PERCENTAGE TAX
3%
3% of the Gross quarterly sales or receipts

Requirements:
1. Any person who is exempt from VAT and who is not a VAT-registered
person or under any other specific percentage tax
2. Those who gross annual sales and receipts does not exceed P1.919 million
are exempted from VAT.
Note: Cooperatives shall be exempt from the 3% gross receipts tax (GRT)
DOMESTIC
Domestic
Percentage
Tax (Sec 117)
Goods/cargo
Domestic
12% VAT
By Land
TAX ON PERSONS EXEMPT FROM VAT:
PERCENTAGE TAX ON
KEEPERS OF GARAGERS
Persons
CARRIERS
AND
Whether
transporting person
or goods
Persons/Passengers
International Air
Carriers
Cargo
International
Trip Vat
Exempt
3%
Percentage
Tax
Cargo
By Sea
International
Trip Zerorated
Domestic
Leg - VAT
Exempt
By Air
Carriers of persons/passengers are subject to 3% percentage tax

Minimum quarterly receipts:
Jeepney for hire
1. Manila and other cities P2,400
2. Provincial 1,200
Public utility bus
1. Not exceeding 30 passengers P3,600
2. Exceeding 30 but not exceeding 50 passengers 6,000
3. Exceeding 50 passengers 7,200
Taxis
1. Manila and other cities P3,600
2. Provincial 2,400
3. Car for hire (with chauffeur) 3,000
4. Car for hire (without chauffeur) 1,800"
Domestic Air Carrier
Domestic
Leg 12%
VAT
International Shipping
Carriers
3%
Percentage
Tax
FRANCHISE TAX
International air carriers and international shipping carriers doing business in

the Philippines shall pay a tax equivalent to 3% of their gross receipts from
shipping outgoing from the Philippines.
1. Franchises on radio and broadcasting companies whose annual gross

receipts of the preceding year does not exceed P10 million
v 3% tax on the gross receipts derived from the business covered by
law granting the franchise
v Radio and television broadcasting has an irrevocable option to be
registered as a VAT taxpayer and pay the corresponding VAT
2. Franchises on Gas and water utilities
v 2% tax on the gross receipts derived from the business covered by
the law granting the franchise
SUMMARY OF CARRIERS, TAX
TAX ON OVERSEAS CONNECTION
TAX ON INTERNATIONAL CARRIERS:
Common
Carrier
Thing Transported
Kind of Carrier
Tax
Liability
(sir says the provision is not really useful anymore)

Imposes 10% tax on every overseas dispatch, message or conversation
31

transmitted from the Philippines by telephone, telegraph, telewriter
exchange, wireless and either communication equipment services; exempted:
v Government and any of its political subdivisions and
instrumentalities
v Diplomatic services
v International organizations (based in the Philippines and enjoying
privileges, exemptions and immunities pursuant to an international
agreement)
v News services (which messages deal exclusively with the collection
of news for dissemination)
TAX ON BANKS/ GROSS RECEIPTS TAX

Tax base would be gross receipts from sources within the Philippines
Transaction
Rate
Interest, commission, discounts from lending
activities and financial leasing bases on remaining
5%
maturities of instruments: Maturity period is 5 years
or less
Interest, commission, discounts from lending activities
and financial leasing bases on remaining maturities of 1%
instruments: Maturity period is more than 5 years
Dividends and equity shares in net income of subsidiaries 0%
Royalties, rentals of property (real/personal), profits from
exchange and all other items treated as gross income 7%
under Section 32
Net trading gains on foreign currency, debt securities,
derivatives, and other similar financial instruments
7%
TAX ON NON-BANKS FINANCIAL INTERMEDIARY

GR: Taxed 5% on gross receipts
Except on: income from financial leasing bases on remaining maturities of
instruments:
Maturity
Rate
Maturity period is 5 years or less
Maturity period is more than 5 years
TAX ON LIFE INSURANCE PREMIUMS

5%
1%
Transaction
Premiums collected by Life insurance Companies
Premiums collected by agents of Foreign Insurance
Companies
Rate
2%
5%
AMUSEMENT TAX
Transactions
Cockpits
Cabarets, night or day clubs
Boxing Exhibitions
Rate
18%
18%
10%
BUT: boxing exhibitions wherein World or Oriental

Championships in any division is at stake
Requirements:
exempt
1. at least one of the contenders for World or Oriental
Championship is a citizen of the Philippines
2. Said exhibitions are promoted by a citizen/s of the
Philippines or by a corporation or association at least sixty
percent (60%) of the capital of which is owned by such
citizens
Professional Basketball Games
15%
Jai Alai and Racetracks
30%
the term 'gross receipts' embraces all the receipts of the proprietor, lessee
or operator of the amusement place. Said gross receipts also include
income from television, radio and motion picture rights, if any. A person
or entity or association conducting any activity subject to the tax herein
imposed shall be similarly liable for said tax with respect to such portion
of the receipts derived by him or it.
The taxes imposed herein shall be payable at the end of each quarter and
it shall be the duty of the proprietor, lessee or operator concerned, as well
as any party liable, within twenty (20) days after the end of each quarter,
to make a true and complete return of the amount of the gross receipts
derived during the preceding quarter and pay the tax due thereon.
TAX ON WINNINGS
Transactions
Of persons in horse races of Jai Alai
Rate
10%
32

Double, forecast, quinella and trifecta
Owners of winning horses
4%
10%
TAX ON STOCKS
Transactions
Sale, Barter or Exchange of Shares of Stock Listed and
Traded through the Local Stock Exchange
Rate
of 1%
Every sale, barter, exchange or other disposition through

initial public offering of shares of stock in closely held
corporations, based on the gross selling price or gross value
in money of the shares of stock sold, bartered, exchanged or
otherwise disposed in accordance with the proportion of
shares of stock sold, bartered, exchanged or otherwise
disposed to the total outstanding shares of stock after the
listing in the local stock exchange:
EXCISE TAX
Tax imposed in addition to the VAT and apply to certain goods
manufactured or produced in the Philippines for domestic sale or
consumption or for any other disposition and to those imported
1. Specific Tax imposes a specific sum on an article per its unit or
number, weight, or volume capacity, or any other physical unit or
measurement
2. Ad Valorem Tax based on the selling price or other specified value
of the article.
TO WHOM APPLICABLE:
1. Manufacturers or Producers of goods for domestic sale or consumption
2. Importers
FOR RATES:
Up to 25%
4%
Over 25% but not over 33 1/3%
2%
Over 33 1/3%
1%
RETURN AND PAYMENT OF PERCENTAGE TAX

File quarterly tax return and pay tax within 25 days after the end of each
taxable quarter. 20 days after close of business if retiring.
Where? every person liable to the percentage tax under this Title may, at his
option, file a separate return for each branch or place of business, or a
consolidated return for all branches or places of business with the authorized
agent bank, Revenue District Officer, Collection Agent or duly authorized
Treasurer of the city or municipality where said business or principal place of
business is located, as the case may be.
Read Codal. Sir said this doesnt appear in the bar exams and just asked
people to read provisions. I dont expect you to know the rates, but you
should know which are subject to excise tax
1. Alcohol/Liquor Products
2. Tobacco Products
3. Petroleum Products
4. Coal Products
5. Automobiles
6. Non-essential Goods
7. Mineral Products
8. Cigar/Cigarette Products
CLASS NOTES:
In relation to VAT: Does it exclude or remove VAT?
Excise tax is in addition to the VAT.
Concept of Tax on Tax: Imposing a tax on a transaction that was imposed a
tax already.
Example: Real Property Zonal Value/Market Value + VAT, but there is
also a DST. Now is the DST based on the selling price only or price +vat?
Can you impose a tax on tax? Yes. VAT = It is a tax on Value of Good plus
the Excise Tax.
33
READ CODAL FOR THE FOLLOWING:

1. Sec. 171
2. Sec 172
3. Sec. 263
4. Sec. 264
WHO PAYS THE TAX:

For Manufactured Goods
1. Manufacturer or Producer
2. Possessor where the Manufacturer releases goods without paying tax
v Before: Smart Chinese man (transfer pricing) sold directly to stores
owned also by him at a very low price, where these stores
subsequently sold them at regular prices. He then saved a lot from
taxes. Now, the Code prevents this
For Imported Goods
1. Importers
2. Purchasers of Imports where it was originally imported by tax-exempt
person/entity
WHEN PAID:
1. Manufactured goods before removal from place of production
2. Imported goods before release from customs custody
DOCUMENTARY STAMP TAX

Tax paid by the person making, signing, issuing, accepting, issuing or
transferring a document. It is an excise tax on transaction. If one party is
exempt from the tax, the one not exempt will bear the burden of the tax.
RATES:
Important rates focused by sir; for others, read codal:
Documents
Taxable Unit
Tax Due
per Unit
Original Issue of P200.00
or P1.00
Shares of Stock fraction thereof
with par value
Original Issue of P200.00
or P1.00
Shares of Stock fraction thereof
without par value
Stock Dividend
P200.00
or
fraction thereof
P1.00
Sales, Agreements
to Sell, Memoranda
of Sales, Deliveries
or Transfer of
Shares
or
Certificates of Stock
Sales, Agreements
to Sell, Memoranda
of Sales, Deliveries
or Transfer of
Shares
or
Certificates of Stock
without par value
Bank
Checks,
Drafts, Certificate
of Deposit not
bearing
interest
and
other
Instruments
All
Debt
P200.00
or
fraction thereof
P0.75
25%
On
document
P200.00
each
P1.50
or
P1.00
Taxable Base
Par value of
shares of stocks
Actual
consideration for
the issuance of
shares of stocks
Actual
value
represented by
each share
Par value of such
stock
DST paid upon

the
original
issuance of said
stock
Issue price of any

34

Instruments
All
Bills
of
Exchange or Drafts
fraction thereof
P200.00 or
fraction thereof
Lease and other

Hiring agreements
or memorandum or
contract for hire,
use or rent of any
land or tenements
or portions thereof
First 2,000 or P3.00

fractional part
thereof
Mortgages Pledges
of lands, estate, or
property and Deeds
of Trust
Deed of Sale,
instrument or
writing and
Conveyances of
Real Property
(except grants,
patents or original
certificate of the
government)
Sec. 188: Catch all
Provision
Stamp Tax on
Assignments and
Renewals or
P0.30
such instrument
Face value of any
such bill of
exchange or draft
For
each P15.00
additional
P1,000
or
fractional part
thereof in excess
of P1,000
P15.00
At the
same rate
as that
imposed
on the
original
instrument.
CLASS NOTES:
For every P1,000

or fractional part P1.00
thereof in excess
of the
first
P2,000 for each
year of the term
of
the
said
contract
or agreement
First 5,000
P20.00
On each P5,000 P10.00
or fractional part
thereof in excess
of 5,000
First 1,000
P15.00
Continuance of
Certain
Instruments
Consideration or
Fair
Market
Value, whichever
is higher
Share which is not fully paid/has existing subscription fee is subject to

what tax?
A: Subject to Capital Gains. Selling price Subscription Receivable = Net
value of share - Cost of Acquisition of Seller.
A: And also subject to DST
Normally you have a loan agreement which is secured by promissory note.
In this case, there are 2 documents there. But, the rule is now there is only
1 documentary stamp tax due. And you pay DST for every year or every
portion of the year (number of days/365)
Person sells his house were he lives in, selling price is 1M, zonal value is
1.1M. What are the taxes due? He is not availing of exemptions.
A: CGT: 6% of zonal value
DST: 1.5% of selling price
Assuming the transaction is the same, except the property is commercial
(ordinary asset), what are the taxes due?
Expanded Withholding tax: 6% of zonal value
VAT: 12%
DST: 1.5% of selling price
Withholding/Creditable is not a final tax. There is a credit collected from
you, 6% of the selling price. For the quarter it is sold, tax payable (income
tax) = selling price cost creditable withholding tax.
If for example, selling price is 1m, zonal is 1m. But because of vat, selling
price is 1.12. What is basis for DST. Do I apply DST on the VAT?
A: No. DST is tax based on the actual consideration, which is 1m. the
120k is the tax, not consideration. You cannot impose DST on VAT.
If you transfer an instrument, DST is due again on the transaction. You
can not rely to the previous DST.
PAYMENT OF DST
When:
DST Return shall be filed within file (5) days after the close of the month
when the taxable document was made, signed, accepted or transferred, and
35

the tax thereon shall be paid at the same time the aforesaid return is filed.
Where:
the authorized agent bank within the territorial jurisdiction of
the Revenue District Office which has jurisdiction over the residence or
principal place of business of the taxpayer. In places where there is no
authorized agent bank, the return shall be filed with the Revenue District
Officer collection agent, or duly authorized Treasurer of the city or
municipality in which the taxpayer has his legal residence or principal place
of business.
Exception
Tax may be paid either through purchase and actual affixture, or by
imprinting the stamps through a documentary stamp metering machine, on
the taxable document, in the manner as may be prescribed by rules and
regulations to be promulgated by the Secretary of Finance, upon
recommendation of the Commissioner.
EFFECT OF FAILURE TO ATTACH DOCUMENTARY STAMP

1. Non-payment/non-attachment of Documentary stamp does not affect
validity of instrument
2. Instrument will be non-admissible as evidence until the requisite stamp or
stamps shall have been affixed thereto and cancelled.
3. No notary public or other officer authorized to administer oaths will add
his jurat or acknowledgment to any document subject to Documentary Stamp
Tax unless the proper documentary stamps are affixed thereto and cancelled.
DOCUMENTS NOT SUBJECT TO DST
governments made at the instance and for the sole use of some other
branch of the national, provincial, city or municipal governments
5. Borrowing and lending of securities executed under the Securities
Borrowing and Lending Program of a registered exchange, or in
accordance with regulations prescribed by the appropriate regulatory
authority
v Any borrowing or lending of securities agreement as contemplated
hereof shall be duly covered by a master securities borrowing and
lending agreement acceptable to the appropriate regulatory
authority, and which agreement is duly registered and approved by
the Bureau of Internal Revenue (BIR)
6. Loan agreements or promissory notes, the aggregate of which does not
exceed P250,000, or any such amount as may be determined by the
Secretary of Finance, executed by an individual for his purchase on
installment for his personal use or that of his family and not for business
or resale, barter or hire of a house, lot, motor vehicle, appliance or
furniture.
7. Fixed income and other securities traded in the secondary market or
through an exchange
8. Assignment or transfer of any mortgage, lease or policy of insurance, or
the renewal or continuance of any agreement, contract, charter, or any
evidence of obligation or indebtedness, if there is no change in the
maturity date or remaining period of coverage from that of the original
instrument.
9. All forebearances arising from sales or service contracts including credit
card and trade receivables: Provided, That the exemption be limited to
those executed by the seller or service provider itself.
10. Bank deposit accounts without a fixed term or maturity
(See sec. 199 for full list. What looks important are:)
1. Certificates of oaths administered by any government official in his
official capacity or acknowledgement by any government official in
performance of his official duty
2. Written appearance in any court by any government official in his official
capacity
3. Certificates of the administration of oaths to any person as to the
authenticity of any paper required to be filed in court by any person or
party thereto, whether the proceedings be civil or criminal
4. Certified copies and other certificates placed upon documents,
instruments and papers for the national, provincial, city or municipal
36

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Tax 2 Gonzales Reviewer: Midterms | KITTEHS

PERSONS SUBJECT TO ESTATE TAX

RIGHTS ACCRUING UPON DECEDENTS DEATH

amchua | Tax 2 Gonzales Midterm Reviewer

Residence of the Decedent (domicile)

Tax 2 Gonzales Reviewer: Midterms | KITTEHS

book value of common shares, appraisal surplus shall not be

Tax 2 Gonzales Reviewer: Midterms | KITTEHS

But Not Over

amchua | Tax 2 Gonzales Midterm Reviewer

Of the Excess Over

Tax 2 Gonzales Reviewer: Midterms | KITTEHS

TRANSFERS IN CONTEMPLATION OF DEATH

v Revocable Reverts back to the estate of the Trustor. So, Trustor

TRANSFERS UNDER GENERAL POWER OF APPOINTMENT

Tax 2 Gonzales Reviewer: Midterms | KITTEHS

amchua | Tax 2 Gonzales Midterm Reviewer

o If there was no consideration received on the transfer (as in

exercised, policy becomes irrevocable at the Point of death of decedent.

Tax 2 Gonzales Reviewer: Midterms | KITTEHS

TRANSFERS FOR INEFFICIENT CONSIDERATIONS

CAPITAL OF SURVIVING SPOUSE

do not immediately exclude the share of the surviving spouse. The

TREATMENT OF PERSONAL PROPERTY

Tax 2 Gonzales Reviewer: Midterms | KITTEHS

amchua | Tax 2 Gonzales Midterm Reviewer

A. Usufruct. To determine the value of the right of usufruct, use or

VALUATION OF REAL PROPERTY

Tax 2 Gonzales Reviewer: Midterms | KITTEHS

VALUATION OF SHARES OF STOCK

VALUATION OF BANK DEPOSITS

NET ESTATE DEDUCTIONS FOR RESIDENTS/CITIZENS

BIR Ruling, 99-99

Tax 2 Gonzales Reviewer: Midterms | KITTEHS

have incurred in the care, administration and liquidation of the

Tax 2 Gonzales Reviewer: Midterms | KITTEHS

NET ESTATE DEDUCTIONS FOR NON-RESIDENT/NONCITIZEN

Tax Paid "b"

<- lower amount is tax credit

Tax 2 Gonzales Reviewer: Midterms | KITTEHS

SETTLING THE ESTATE

v For partnership/co-owned property just place the actual

bequests, devises, legacies or transfers to social welfare, cultural and

Example: Will by a grandmother, particular property shall be transferred to

Tax 2 Gonzales Reviewer: Midterms | KITTEHS

public purpose, or would be distributed by a court to another

Tax 2 Gonzales Reviewer: Midterms | KITTEHS

amchua | Tax 2 Gonzales Midterm Reviewer

name of the transferee, the executor, or the administrator, or any of

Tax 2 Gonzales Reviewer: Midterms | KITTEHS

LIABILITIES OF EXECUTORS AND HEIRS

Tax 2 Gonzales Reviewer: Midterms | KITTEHS

RENUNCIATION OF HEIR OF SHARE IN THE ESTATE

DUTIES OF GOVERNMENT AGENCIES

amchua | Tax 2 Gonzales Midterm Reviewer

renounce the share, what are the consequences

Tax 2 Gonzales Reviewer: Midterms | KITTEHS

CREATION OF UNREGISTERED PARTNERSHIP

!"#$% '( )%* +,(- ,. ('/%,0. 1'$./2

!"#$% '( 3.,/% )% +,(*-

!"#$% '( )%* +,(- ,. ('/%,0. 1'$./2 ,