Taxation Law Vol.

II
By Atty. Raegan Capuno

CHAPTER 1: ESTATE TAX Classification of Decedent:

1. Resident Citizen (RC)
Modes of Acquiring Ownership: (712, NCC) 2. Non-Resident Citizen (NRC)
1. Occupation 3. Resident Alien (RA)
2. Intellectual Creation 4. Non-Resident Alien (NRA)
3. Law
4. Donation GROSS ESTATE – pertains to the value of all properties, real or
5. Succession, whether Intestate or Testate personal, of the decedent subject to estate tax.
6. Tradition, as consequence of certain contracts, and
7. Prescription GROSS ESTATE (GE) NET ESTATE (NE)
At the time of his death, the  The value of the GE since it
Note: Succession and Donation are gratuitous transfer of property total value of all property, real, is taxed at a flat rate
from one person to another. There is no consideration involved in personal, tangible or intangible,
the transfer/acquisition of property. Subject to Transfer Taxes wherever situated (Sec 85,
NIRC)
THREE TRANSFER TAXES
Estate Tax (Sec 84, NIRC) Applies to both personal and INCLUSION TO GROSS ESTATE:
Donor’s Tax (Sec 98, NIRC) real property As a rule: All properties owned by the decedent and existing at the
Tax on transfer of real property Applies only to real property time of his death are included in the gross estate.
(Sec 135, LGC)
PROPERTIES WITHIN PH PROPERTIES
ESTATE TAX (ET) – tax on the privilege to transfer property upon DECEDENT REAL PERSONAL PROP OUTSIDE PH
one’s death (mortis causa) PROP TANGIBLE INTANGIBLE
RC included included included included
Theories of Estate Taxation: NRC included included included included
1. BENEFIT-RECEIVED THEORY – The Gov’t performed services in RA included included included included
the distribution of the properties of the decedent to the heirs. NRA with included included Not Not
 In view of these services and benefits derived both by the Reciprocity included included
estate and the heirs – the state collects the tax. NRA w/o included included included Not
Reciprocity included
2. REDISTRIBUTION OF WEALTH THEORY – The imposition of
estate tax reduces the property received by the successor RECIPROCITY RULE
bringing about a more equitable distribution of wealth in  It provides that no estate tax will be collected in respect of
society. Intangible Personal Prop (IPP) in the following instances:
 The portion of the property taken by the state in the form a. If the decedent at the time of his death was a RC of foreign
of tax is used to fund social programs and projects of the country which at the time of his death did not impose
state. estate tax, in respect of intangible personal property of PH
Citizens not residing in that foreign country, or
3. ABILITY-TO-PAY THEORY – The bigger the estate means the b. If the laws of the foreign country of which the decedent is a
higher taxes to be paid. RC at the time of his death allows a similar exemption from
 If the decedent dies without any property or if the transfer or death taxes of every character or description in
properties are sufficient to cover some of the deductions respect of IPP owned by PH Citizens no residing in that
allowed, then there is no liability to pay the tax; and foreign country.
 By nature: A form of exemption from estate tax – because if
4. STATE PARTNERSHIP THEORY – The state is viewed as a passive
NRA can avail this rule, IPP located in the PH are not included in
and silent partner in the accumulation of wealth and property
the Gross Estate. Therefore, not subject to Estate tax.
of the decedent.
 The state even grants protection to the large estate of the
IPP deemed located in the PH (Sec 104, NIRC)
decedent.
1. Franchised exercised in the PH
 The state collects its just share in such effort in the right
2. Shares, obligations, or bonds issued by
time
a. Any corporation or sociedad anonima organized or
constituted in the PH in accordance with its laws;
Taxpayer of Estate Tax and Liability of Tax: (Sec 9(g),RR 2-2003)
b. Any foreign corporation 85% of the business of which is
 ESTATE – the statutory taxpayer of estate tax. It is treated as a located in the PH
person for purposes of paying the taxes (Sec 22(a), NIRC) c. Any foreign corporation if such shares, obligations, or
 Estate Tax imposed is paid by the executor or administrator bonds have acquired a business situs in the Ph; and
(E/A) before the delivery of the distributive share in the 3. Shares or rights in any partnership, business, or industry
inheritance to any heir or beneficiary. established in the PH
 Where there are 2 or more E/A – all of them are severally
liable for the payment of tax. Note:
 E/A – has the primary obligation to pay the estate tax  Reciprocity rule applies: A decedent must be a citizen and
 Heir/Beneficiary – subsidiary liability for the payment of resident of a foreign country that does not impose estate tax or
that portion of the estate which his distributive share grants exemption.
bears to the value of the total net estate
 Reciprocity rule cannot be applied: If a decedent is a citizen of
a foreign country but a resident of another foreign country at
Determination of Estate Liability
the time of his death
 RATE: 6% (Effective Jan 1, 2018) – applies regardless of the
amount of net taxable estate.
 Taxation Law Vol. II
By Atty. Raegan Capuno

INCLUDED IN GROSS ESTATE: (Sec 85, NIRC)
(A) Decedent's Interest
o To the extent of the interest therein of the decedent at the
time of his death;
o It Includes:
i. Any interest including its fruits, having value or
capable of being valued transferred by the decedent
at his death
ii. Rental incomes from bldgs
iii. Dividends from investments
iv. Interest on bank deposits which have accrued at the
time of his death
v. Decedent’s interest in the partnerships contribution
and shares in the partnership profits and surplus
(B) Transfer in Contemplation of Death
o It is a transfer motivated by the thought of an impending
death regardless of WON death is imminent
o This takes place:
i. When the decedent has, at any time, made a transfer
in contemplation of or intended to take effect in
possession or enjoyment at or after death; or
ii. When decedent has, at any time, made a transfer
under which he has retained for his life or for a period
not ascertainable without reference to his death or any
period which does not in fact end before his death:
a. Possession, enjoyment or right to income from
the property; or
b. The right, either alone or in conjunction with any
other person, to designate the person who will
possess or enjoy the property or income
 The power to alter, amend or revoke is considered to exist on
the date of the decedent's death even though:
a. The exercise of the power is subject to a precedent giving
of notice or
b. The alteration, amendment or revocation takes effect only
on the expiration of a stated period after the exercise of
the power, whether or not on or before the date of the
decedent's death
i. notice has been given or
ii. the power has been exercised.
 In such cases, proper adjustment shall be made representing
the interests which would have been excluded from the power
if the decedent had lived, and for such purpose if the notice has
not been given or the power has not been exercised on or
before the date of his death, such notice shall be considered to
have been given, or the power exercised, on the date of death.
NOTE: Transferor can revoke the transfer any time, such person
wields tremendous amount of power such that he can revoke the
transfer as if none was actually made.
Is it necessary that the decedent should have exercised such right?
GR: No. It is sufficient that the decedent has the power to revoke,
though he did not exercise such
XPN: in case of bona fide sale for an adequate and full consideration
in money or money's worth
(D) Property Passing Under General Power of Appointment
POWER OF APPOINTMENT – It is the right to designate the person/s
who shall enjoy or possess certain property from the estate of a
prior transferor

XPN: In case of a bona fide sale for an adequate and full Two Parties Involved:
consideration in money or money’s worth. a. DONOR OF POWER – a person having property subject to
disposition who created, reserved, or granted the power to
NOTE: designate the transferees or recipients of the property.
 The concept of transfer does not constitute any transfers made
by a dying person. b. DONEE OF POWER – a person to whom the power to designate
 It is not the mere transfer that constitutes a transfer in the transferees or recipient of the property is given or
contemplation of death but the retention of some type of conferred. For estate tax purposes: He is the Decedent.
control over the property transferred.
 EFFECT: No full transfer of all interests in the property inter
vivos GPA SPA
DEFINITION It authorizes the done When the done can
(C) Revocable Transfer – involves a transfer of possession over the (Capuno, 2020) the power to appoint appoint only among a
property during the lifetime of the decedent but not transfer of nay person he pleases, restricted or designated
ownership of the said property. including: class of persons other
o Interest in the property of which the decedent has at any a. Himself than himself
time made a transfer by trust or otherwise is included in b. His estate
decedent’s gross estate c. His creditors, or
o Value of GE is determined by: including the value at the d. The creditors of
time of his death of all properties (R/P/T/IT) wherever his estate
situated to the extent of any interest, of which the NATURE Donee has the power Donee appoints
decedent has at any time made a transfer by trust – where to appoint any person successor to the
the enjoyment was subject at the date of his death to any he chooses or enjoy property within a
change through the exercise of a power by the decedent the property without limited group or class of
to alter or amend or revoke or terminate, or where any restriction persons according to
such power is relinquished in contemplation of the the will of the donor
decedent’s death. TAX Not included in the GE
IMPLICATIONS Forms part of the GE of the donee when he
Rationale: such transfer in trust at the time of death of the trustor is dies
to reach transfers which are really substitutes for testamentary EFFECTS Donee holds the Donee holds the
disposition and thus prevent evasion of estate tax appointed property appointed property in
with all the attributes trust or under the
To be exempt: The transfer inter vivos must be absolute and of ownership under concept of a trustee
outright with no strings attached whatsoever by the transferor. the concept of an
owner
 Taxation Law Vol. II
By Atty. Raegan Capuno

To be included in the GE: Example:

GR: Properties passing under a GPA forms part of decedent’s estate Scenario 1 Scenario 2 Scenario 3
through: FMV at the
a. Will time of 1,500,000 1,500,000 1,500,000
b. Deed executed n contemplation of death, or intended to take transfer of
effect in possession or enjoyment at, or after his death property
c. Deed under which he has retained for his life or for nay period Consideration
not ascertainable without reference to his death or for any received at the 1,500,000 500,000 0
period which does not in fact end before his death: time of
i. The possession, enjoyment or right to income from the transfer of
property; or property
ii. The right to designate the person who will possess or enjoy FMV at the
the property or income time of death 3,000,000 3,000,000, 3,000,000
of the transfer
XPN: in case of a bona fide sale for an adequate and full
Value to be
consideration in money or money's worth.
included in the 0 2,500,000 3,000.000
GE
(E) Proceeds of Life Insurance.
Explanation:
Forms part of the GE when the beneficiary is:
Scenario 1: FMV is equal to the consideration received. Therefore,
a. The estate of the decedent, his executor or administrator taken
the transfer is a bona fide sale and not subject to estate tax
out by the decedent upon his own life regardless of whether
the designation is revocable or irrevocable
Scenario 2: FMV is higher than the consideration received. The
b. 3rd person, other than the decedent’s estate, executor, or
transfer is insufficient consideration. Value to be included in the GE
administratior provided that the designation is not irrecovable
is the difference between Consideration received and FMV
NOTE: Presumption is that the beneficiary is revocably designated.
Scenario 3: This is a case of donation mortis causa because the
In the event the insured does not change the beneficiary during his
transfer is without any consideration. The full FMV is included in the
lifetime – Designation is deemed irrevocable
GE
Not part of the GE when:
DETERMINATION OF FAIR MARKET VALUE OF THE GE
a. Proceeds from a life insurance policy is receivable by a 3 rd
1. REAL PROPERTY
person (Not the decedent’s estate, executor or administrator)
a) Determined by the commissioner
and that the said beneficiary is designated is irrevocable
 Commissioner is authorized to divide the PH into
b. Where the life insurance was not taken by the decedent upon
different zones or areas and shall determine the FMV
his own life even though the beneficiary is the decedent’s
of real properties located in each zone or area
estate, executor or administrator
b) Shown in the schedule of the values fixed by the provincial
c. Accident insurance proceeds
and city assessor, whichever is higher
d. Proceed of Group Insurance policy
e. Proceeds of insurance policies issued by the GSIS
2. PERSONAL PROPERTY
f. Benefits accruing from SSS law
a) If recently acquired – purchase price may indicate the
g. Proceeds of life insurance payable to heirs of deceased
FMV
members of military personnel
b) If not recently acquired – there should be some
evidence of FMV (ipa-assess yung item)
(F) Prior Interests
o transfers, trusts, estates, interests, rights, powers and
3. SHARES OF STOCK
relinquishment of powers, as severally enumerated and
a) UNLISTED
described therein, whether made, created, arising,
i. COMMON SHARES – based on their book value
existing, exercised or relinquished before or after the
ii. PREFERRED SHARES – based on their par value
effectivity of this Code.
b) LISTED
Coverage of Prior Interest:
 Arithmetic between the highest and lowest quotation
a. Transfers in contemplation of death
at a date nearest of the date of death
b. Revocable Transfers
 If not available – date of the death itself
c. Life Insurance proceeds
4. UNIT OF PARTICIPATION IN ANY
(G) Transfers for Insufficient Consideration.
ASSOCIATION/RECREATION/AMUSEMENT CLUB
o When a transfer is for insufficient consideration, only the
 FMV: The Bid Price nearest the date of death
excess of the FMV of the property at the time of the published in any newspaper or publication of general
decedent’s death over the consideration received shall be circulation.
included in the GE
5. RIGHT TO USUFRUCT/USE/HABITATION
o Provided that transfer is not a bona fide sale for an  There shall be taken into account the probable life of
adequate and full consideration in money, This is the beneficiary in accordance with the latest basic
applicable to: standard mortality table
a. Transfer in contemplation of death  To be approved by SOF upon recommendation of the
b. Revocable Transfers Insurance Commissioner
c. Transfers under GPA
 Taxation Law Vol. II
By Atty. Raegan Capuno

EXCLUSION TO GROSS ESTATE

1. EXEMPT PROPERTIES (Sec 87, NIRC)
a. Merger of usufruct in the owner of the naked title;
b. Transmission or delivery of the inheritance or legacy by
the fiduciary heir or legatee to the fideicommissary;
c. Transmission form the first heir, legatee, or done in favour
of another beneficiary, in accordance with the desire of
the predecessor; and
d. All bequests, devises, legacies, or transfers to social
welfare, cultural and charitable institutions
 Provided: Not more than 30% shall be used for
administration purposes
Claims against insolvent persons:
Requisites:
a. Full amount of the receivables be included first in the GE
b. The incapacity of the DR to pay their obligation is proven not
merely alleged
Note: Judicial declaration of insolvency is not necessary. It is enough
that the DR’s liabilities exceeded his assets.
Unpaid mortgage or indebted on property

2. EXCLUDED PROPERTIES Requisites:

a. Capital of the surviving spouse of a Decedent (Sec 85(h), a. The value of the property to the extent of the decedent’s
NIRC) interest, undiminished by such mortgage or indebtedness is
b. Share in the conjugal Property (Sec 86(c), NIRC) included in the GE
b. The mortgage indebtedness was contracted in good faith and
3. Sec 104, NIRC
for an adequate and full consideration in money or money’s
o Property outside PH of NRA Decedent
worth
o Intangible personal property in the PH of NRA Decedent
provided there is reciprocity.
Note: If the loan is found to be merely an accommodation loan
where the loan proceeds went to another person – the value of the
DEDUCTIONS FROM GE:
unpaid loan, to the extent of the decedent’s interest must be
included as a receivable of the estate
GENERAL PRINCIPLES OF ESTATE DEDUCTIONS:
1. SUBSTANTIATION RULE – All items of deductions must be
If there isa legal impediment to recognize the same as receivable of
supported with documentary evidence (Receipts, invoices,
the estate – said unpaid obligation/mortgage payable shall not be
contracts, financial statements, and other proofs that they
allowed as a deduction from the GE
actually existed or occurred to establish their validity.
 Exception to this rule is Standard Deduction.
TAXES
2. MATCHING PRINCIPLE – An item of deduction must be part of
Requisites:
the gross estate to be deductible. No deduction is allowed for
a. Taxes which have accrued as of or before the death of the
those which are not part of the gross estate.
decedent
b. Unpaid as of the time of his death
3. NO DOUBLE CLASSIFICATION RULE – An item of deduction
cannot be claimed under several deduction classification. Only
TAXES NOT DEDUCTIBLE
one classification is allowable.
 Income tax on income received after death
 Property tax not accrued before death
4. DEFAULT PRESUMPTION ON ORDINARY DEDUCTION – In case
 Estate tax due from the transmission of his estate
of married decedents, ordinary deductions are presumed to be
against the common properties unless proven to be exclusive
property of either spouse.
 Rule: Properties are common properties unless proven LOSSES:
exclusive.
Requisites for deductibility:
DEDUCTIONS ALLOWED TO DEDUCTIONS ALLOWED TO 1. (RC/NRC/RA)
CITIZEN OR RESIDENT NON-RESIDENT ESTATE a. Were incurred during the settlement of estate
b. Arise from fire, storm, shipwreck or other casualties or
from robbery, theft or embezzlement
Standard Deduction Standard Deduction
c. Not compensable (no insurance)
 5M (Train Law)  500K (Train Law)
d. Not claimed as a deduction from income tax
 1M (Old Law)  No Deduction (Old Law)
e. Incurred not later than the last day or any extension for
payment of the estate tax
CLAIMS AGAINST ESTATE:
2. NRA
o Same items will be allowed as a deduction but only the
 Who can avail this deduction: RC/NRC/RA provided that:
proportion of such deduction which the value of his GE in
a. At the time of indebtedness was incurred the debt
the PH bears to the value of his entire GE, wherever
instrument was duly notarized, and
situated shall be deducted.
b. If the loan was contracted within 3 years before the death
of the decedent – the administrator or executor shall
Note:
submit a statement showing the disposition of the
Judicial Expenses:
proceeds of the loan.
o incurred not later that the last day prescribed by law or
any extension for the filing of the return.
Requisites:
o 6mos extendible to 30 days
a. Liability represents a personal obligation of the deceased
existing at the time of his death
Losses:
b. Liability was contracted in good faith and for adequate and full
o incurred up to the last day prescribed by law or any
consideration in money or money’s worth
c. Claim must be a debt or claim which is valid in law and extension for the payment of estate tax
enforceable in court o 6mos extendible to:
d. Indebtedness must not have been condoned by the creditor or - 2years – Extrajudicial Settlement
the action to collect from the decedent must not have - 5years – Judicial Settlement
prescribed.
Casualty losses can be allowed as deduction, either for income tax
 Taxation Law Vol. II
By Atty. Raegan Capuno
purposes or estate tax purposes.

Vanishing Deductions: Amount Received by Heirs Under

 Deduction allowed on the property left behind by the decedent RA 4917
which was previously subject to donor’s or estate taxes
Requisites for deductibility:
Requisites: a. Amounts received by heirs
a. Present decedent died within 5 years from receipt of property from decedent’s employer
from a prior decedent or donor b. Received as a consequence of
b. Property formed part of the GE situated in PH of the prior death of the decedent-
decedent or was a taxable gift of the donor employee; and
c. Estate tax on the prior succession or donor tax must have been c. Amount is included in the GE
paid of the decedent
d. Property must be identified as the one received or acquired
e. No vanishing deduction was allowed on the same property on NET SHARE OF THE SURVIVING
the prior decedent’s estate SPOUSE (Sec 86 (C)
 The net share of the surviving
Rate of Deduction: spouse in the conjugal
1day – 1 year = 100% partnership property as
1yr and 1 day – 2 yrs = 80% diminished by the obligations
2yrs and 1 day – 3 yrs = 60% properly chargeable to such
3yrs and 1 day – 4 yrs = 40% property shall be deducted
4yrs and 1 day – 5yrs = 20% from the net estate of the
More than 5yrs = 0% decedent.

Transfer for Public Use

 The amount of all the bequests, legacies, devises or transfers to TAX CREDIT FOR ESTATE TAXES PAID IN A FOREIGN COUNTRY
or for the use of the Government of the Republic of the  The estate of citizen and resident decedents are taxable in all
Philippines, or any political subdivision thereof, for exclusively their properties located within or without the PH
public purposes.  Through this, it is possible that their properties outside the PH
are also taxable in the foreign country where these properties
Requisites: are located
a. Disposition is in a last will and testament  In order to avoid or at least minimize the effect of double
b. Take effect after death taxation – an estate tax credit on the estate taxes paid in a
c. In favour of the Govt of the PH or any political subdivision foreign country is allowed in the PH
d. For exclusive public purposes
e. Value of the property given is included in the GE LIMITATIONS ON TAX CREDIT (Sec 101(c), NIRC)
 Tax Credit may be allowed in the PH is subj to the ff instances:
Note: In case of NRA – property transferred must be located within a. The amt of the credit in respect to the tax paid to any
the PH and included in the GE country shall not exceed the same proportion of the tax
against which such credit is taken, which the net gifts
situated within such country taxable under this Title bears
SEC 86(A)(3) SEC 87 (D) to his entire net gifts; and
Transfers by a citizen or resident Transfers to social welfare, b. The total amt of the credit shall nto exceed the same
of the PH in favour of the Gov’t cultural and charitable proportion of the tax against which such credit is taken,
of the PH institution – exempted from tax which the donor’s net gifts situated outside the PH taxable
under this title bears to his entire net gifts

FAMILY HOME
 An amount equivalent to the
current FMV of the decedent's
family home: 10M
 if current FMV 10M – excess
shall be subject to estate tax
Requisites for deductibility:
a. The family home must be the
actual residential home of the
decedent and his family at the
time of his death, certified by
the Brgy Captain of the locality
b. Total value of the family home
must be included as part of the
GE
c. Allowable deductions must be
in the amount equivalent to:
i. Current FMV of the family
home declared or
included in GE
ii. Extent of the decedent’s
interest (whether
conjugal/community/excl
usive) whichever is lower
d. Deduction does not exceed
10M
Note: NRA not allowed to
avail family home deduction
because under the Consti,
they are expressly prohibited
from acquiring lands.
 In fine, the tax credit allowed shall depend on whether one
foreign country or multiple foreign countries are involved
a. ONE FOREIGN COUNTRY
The tax credit is whichever is lower of the actual DT paid in the
foreign country and the limit as determined below:
Net Taxable Gift – Foreign x DT due in PH = Limitation
Net Taxable Gift – World
b. MULTIPLE FOREIGN COUNTRIES
I. Determine whichever is lower of the actual DT paid in each
of the foreign countries and the limit per country using the
formula above
II. Determine the total world DT credit limit using the formula
below
Total Net Taxable Gift – Foreign x DT Due in PH = Limitation
Net Taxable Gift – World
III. The allowable DT credit is whichever is lower between the
limitations in items 1 and 2 above
 Taxation Law Vol. II
By Atty. Raegan Capuno

ESTATE TAX ADMINISTRATION

1. Notice of Death
o Filing of notice of death is no longer required

2. Filing of Estate Tax Return

o Deleted in Sec 90(A), NIRC is the phrase “or where, though
exempt from tax, the gross value of the estate exceeds
P200K emphasizing the need to file an estate tax return of
the subject estate

3. Certification by a CPA
o The amount of gross value of estate provided in the estate
tax return that must be supported by a statement duly
certified by a CPA is increased from P2M to P5M

4. Deadline for Filing of Estate Tax Return

o The deadline for filing of estate tax return is extended
from 6mos to 1 year from the date of death of the
decedent
o Due to this change on the deadline of filing of ETR –
deadline for payment is also extended from 6mos to 1year
o Losses are incurred not later than the last day for the
payment of the estate tax
o Due to the extension of the deadline for payment of estate
tax – the period within which the losses must be incurred
is also extended to 1 year.

5. Payment of Estate Tax by Instalment

o An additional provision is inserted which provides for the
payment by instalment in case the available cash of the
estate is insufficient to pay the total estate tax due
o Payment shall be allowed within 2 years from the statutory
date for its payment without civil penalty and interest

6. Withdrawal of Bank Deposit

o TRAIN Law removes the P20K limit on bank withdrawal
without certification from the BIR.
o Even without certification, TRAIN Law now allows for the
withdrawal of any amount but subject to a final
withholding tax of 6%
o However, the withdrawal shall only be made within 1 year
from the date of death of the decedent.
 Taxation Law Vol. II
By Atty. Raegan Capuno

DONOR’S TAX
b) CANCELLATION OF INDEBTEDNESS
DONATION – An act of liberality whereby a person disposes
gratuitously of a thing or right in favour of another, who accepts it.  The cancellation and forgiveness of indebtedness may amount
to a:
(For tax purposes) Kinds of Donation: 1. Payment of income
2. To a gift
DONATION INTER VIVOS DONATION MORTIS CAUSA 3. To a capital transaction
 Subj to DT  Subj to ET
 A donation made between  Donation which takes effect  If the creditor merely desires to benefit a debtor and without
living persons upon the death of the any consideration, cancels the debt – the amount of the debt is
 Perfection: at the moment donor a gif from the creditor to debtor; Therefore subject to DT
when the donor knows the  On the part of the debtor who is the done, the debt
acceptance of the done cancelled need not be included in his gross income for
income tax purposes.
 RATE: Each calendar year is 6% in excess of 250K  If a corporation to which a stockholder is indebted forgive the
 Contribution for campaign election: Governed by Election Code debt – the transaction has the effect of the payment of a
dividend.
Requisites of a Valid Donation: (Capuno, 2020)  In this case, the cancellation of debt treated as
a. CAPACITY OF THE DONOR – The donor must have the capacity declaration of dividends may be subject to income tax
to donate which is determined as the time of the making of (RR 2-1940, Sec 50)
donation.
c) RENUNCIATION OF INHERITANCE
b. DONATIVE INTENT – The intent of the donor to make a give.
Donative Intent is presumed present when ne gives a part of  The heirs of he decedent, including the surviving spouse , may
one’s patrimony to another without consideration renounce, his share in the inheritance or hereditary estate left
by the decedent
c. ACCEPTANCE OF THE DONEE – the transfer of property by gift is  Renunciation may either be:
perfected from the moment the donor knows of the acceptance 1. GENERAL RENUNCIATION – a refusal to receive
by the done. inheritance or hereditary estate in favour of no specifically
identified heir; Not subject to DT because principle of
d. DELIVERY OF GIFT – Delivery of gift, whether actual or accretion applies.
constructive, of the donated property to the donee completes
the donation. 2. SPECIAL RENUNCIATION – A refusal to receive inheritance
or hereditary estate specifically and categorically done in
Note: DT shall not apply unless and until there is a completed gift. favour of identified heirs to the exclusion or disadvantage
The transfer is perfected from the moment the donor knows of the of the other co-heirs in the hereditary estate’ Subject to
accepted by the done. it is completed by the delivery, either actual DT.
or constructive.
d) RENUNCIATION OF THE SURVIVING SPOUSE OF THE SHARE IN
FORMAL REQUISITES OF DONATION: THE CONJUGAL PARTNERSHIP or ABSOLUTE COMMUNITY
1. Real Property – Donation must be In a public instrument
 Acceptance shall not take effect unless it is done during  The renunciation of the surviving spouse of his share in the
the lifetime of the donor. conjugal partnership or absolute community after the
dissolution of marriage in favour of the heirs of the deceased
2. Personal Property – may be made: spouse or any other person is subject to DT (RR 8-2018, Sec 12,
a) Orally – if the value does not exceed 5K par. 4)
b) In Writing - If value exceed 5K; otherwise, void. (Art 748,
NCC) e) TRANSFER FOR LESS THAN ADEQUATE AND FULL
CONSIDERATION (Sec 100, NIRC)
DONOR’s TAX (DT) – tax imposed on the privilege of transferring
property by way of a gift intervivos.  Where the sale is less than adequate and full consideration
 Is a transfer tax levied, assessed, collected, and paid upon when the fair maket value is higher than or exceeded the
the transfer of any person, resident or non-resident, of the agreed or actual consideration or the selling price.
property by gift intervivos.
 It applies whether the transfer is in trust or otherwise, DONOR’S TAX LIABILITY
whether the gift is direct or indirect, whether the property Gross Gift
is real or personal, intangible or tangible (Sec 9, NIRC) Less: Deductions______________
NET TASABLE GIFT
Multiply: Donor’s Tax Rate_________
Transfers which may be constituted as donation: DONOR’S TAX DUE
a) CAMPAIGN CONTRIBUTIONS Less: Tax Credits_____ _________
DONOR’S TAX STILL DUE
GR: Any contribution in cash or in kind to any candidate,
political party or coalition of parties for campaign purposes
shall be governed by the Election Code (Sec 99(c), NIRC)

XPN: Donition as utilized before or after the campaign period

are subject to DT and not deductible as political contribution on
the part of the donor (RMC No 31-2019)
 Taxation Law Vol. II
By Atty. Raegan Capuno
d. NFRC – Subject to DT only on its donations of properties
located in the PH. Reciprocity rule does not apply to NFRC.
 Under the old tax code, the donor’s tax rate is determined
based on who the done is, whether a relative or stranger RECIPROCITY RULE
1. A relative:
a. of the donor is a person who is a Brother or Sister GR: A NRA Donor is taxable only on properties, real and
(Whether by whole or half-blood), Spouse, Ancestor personal, situated in the PH
or lineal descendant
b. By consanguinity in the collateral line within the 4 th XPN: Reciprocity Rule applies to NRA Donor and only on his
degree intangible personal properties located in the PH.

 The following graduated and progressive rates shall
apply.
2. Stranger – Any person not falling in the definition of
relative is considered a stranger; the tax payable by the
donor shall be 30% of the net gifts.
 The first net gift is exempt from donor’s tax when the done is a
relative.
 This exemption is not applicable when the done is a stranger
because a rate of 30% applies regardless of the value of the
value
Reciprocity rule provides the following instances:
a. If the donor at the time of donation was a citizen and
resident of a foreign country which at the time the
gift is made did not impose donors tax , in respect of
intangible personal property of citizens of the PH not
residing in that foreign country; and
b. If the laws of the foreign country of which the donor
was a citizen and resident at the time of donation
allows a similar exemption from transfer or donor’s
taxes every character or description in respect of
intangible personal property owned by citizens of the
PH not residing in that foreign country.

Note: Sec 104, NIRC provides the intangible personal properties deemed
 Under the TRAIN Law, the donor’s tax rates are modified located in the PH, to wit:
 The tax for each calendar year shall be 6% computed on the 1. Shares, obligations, or bonds issued by
basis of the total net gifts in excess of P250K exempt gift made a. Any corporation or sociedad anonima organized or
during the calendar year constituted in the PH in accordance with its laws;
 The flat rate of 6% applies both to a relative and stranger. b. Any foreign corporation 85% of the business of which is
 6% Donor’s tax rate is in excess of P250K net gift making the located in the PH
first P250K exempt from Donor’s tax c. Any foreign corporation if such shares, obligations, or
bonds have acquired a business situs in the Ph; and
DETERMINATION OF GIFTS 2. Shares or rights in any partnership, business, or industry
established in the PH
GROSS GIFT NET GIFT
All property (R/P/T/IT) that was The net economic benefit from Note: before a reciprocity rule may apply, a donor must be citizen
given by the donor to the done the transfer that accrues to the and resident of a foreign country that does not impose donors tax or
by way of gift, without the donee grants exemption.
benefit of any deduction (Sec
104, NIRC) If a donor is a citizen of one foreign country but a resident of
another at the time of donation, reciprocity rule cannot be applied.
The value of the property or
right donated or transferred by VALUATION OF GIFTS MADE IN PROPERTY:
the donor to the done before
any deduction 1) PERSONAL PROPERTY
o VALUE OF GG: FMV of the prop at the time of the gift
Properties included in the gross o CASH – valued at face amount.
gift or those subject to donor’s
tax are determined based on the 2) REAL PROPERTY
classification of the donor, the o VALUE OF GG: FMV as determined by the CIR (Zonal Value)
location of the property, and at the time of donation or the value fixed by the assessor
whether the reciprocity rule (assessed value), whichever is higher (Sec 102, NIRC)
applies.
o If no zonal value – the taxable base is the FMV that
Note (INGLES): If mortgaged property is transferred as a gift, but appears in the latest Tax Dec.
imposing upon the done the obligation to pay the mortgage liability
– the net gift is measured by deducting from the FMV of the o If there is an improvement – the value of improvement:
property the amount of mortgage assumed. construction cost per bldg permit and or occupancy permit
plus 10% per year after year of construction. Or the market
CLASSIFICATION OF DONOR value per latest tax dec.
 Donor may either be a natural person or a juridical person
 The Donor may be classified as follows: 3) SHARES OF STOCKS
a. CITIZEN AND RA – Subject to Donor’s Tax regardless of a. If the share is listed in the stock exchange – FMV is the
where the gift is made or where the property donated is price quote on the date of death.
located. (DT in all properties donated within and without
PH) If there is no available price quote on the date of death –
FMV is the arithmetic mean between the highest and
b. NRA – Subject to Donor’s tax only on their donations of lowest quotation at a date nearest the date of death
properties located in the PH. Subject to reciprocity rule.
b. If the share is unlisted in the stock exchange:
c. DOMESTIC AND RFC – Subject to Donor’s tax regardless of i. Unlisted common shares are valued based on their
where the gift is made or where the property donated is book value; and
located. ii. Unlisted preferred shares are valued at par value

Note: the reckoning point for valuation is the date when
the donation is made.
EXCLUSIONS IN GROSS GIFT AND EXEMPTION OF CERTAIN GIFTS
(Sec 101, NIRC)
GIFTS MADE BY A RESIDENT GIFTS MADE BY A NON-
RESIDENT
1) Gifts made to or for the use of the National Government or any
entity created by any of its agencies which is not conducted for
profit, or to any political subdivision of the said Government.
2) Gifts in favor of an educational and/or charitable, religious,
cultural or social welfare corporation, institution, foundation,
trust or philanthropic organization or research institution or
organization:
Provided: Not more than (30%) of said gifts shall be used by
such donee for administration purposes.
non-profit educational and/or charitable corporation, institution,
accredited nongovernment organization, trust or philanthropic
organization and/or research institution or organization
 is a
a. School, college or university and/or charitable corporation,
accredited nongovernment organization, trust or
philanthropic organization and/or research institution or
organization
b. Incorporated as a non-stock entity
c. Paying no dividends
d. Governed by trustees who receive no compensation, and
e. Devoting all its income, whether students' fees or gifts,
donation, subsidies or other forms of philanthropy, to the
accomplishment and promotion of the purposes
enumerated in its Articles of Incorporation.
Donations to the following entities are exempt from DT by virtue of
special laws:
a. IBP
b. International Rice Research Institute
c. Philippine Red Cross
d. Ramon Magsaysay Award Foundation
e. UP
f. PNU
g. Development Academy of the PH
h. Girl Scout of the Philippines
i. Boy Scout of the Philippines
j. National Commission for Culture and the Arts
DEDUCTIONS ALLOWED:
 DT has limited deductions allowed such as:
a. Encumbrance assumed by the done; and
o When the property donated is the subject of an
encumbrance like a mortgage, the amount of unpaid
mortgage may be claimed as a deduction if assumed by
the done
o If the done does not assume the unpaid mortgage, then it
is not an allowable deduction.
EX. MR. A donated to MR B a parcel of land with a FMV of P1M
which is subject of a mortgage for P600K.
If Mr B assumes the mortgage, meaning he will pay the
balance of the mortgage, then the net gift is P400K, This is
because only P400K is the net economic benefit that accrued
to Mr B.
If Mr B does not assume the mortgage, then the taxable net
gift is the full P1M
Taxation Law Vol. II
By Atty. Raegan Capuno
b. Diminutions
o Are reductions on the donations given by the donor upon
his specific instructions.
EX. Mr. A donated P1M to Mr B with specific instruction that he will
give to his brother Mr. C P300K. Thus, the net gift to Mr B is
only P700K, the net economic benefit that accrues to him.
COMPUTATION OF DONOR’S TAX
 The computation DTT is on cumulative basis over a period of 1
calendar year.
DONATIONS BETWEEN HUSBAND AND WIFE
 H and W are considered as separate and distinct taxpayers for
purposes of the DT. However, if what was donates is a conjugal
or community property and only the husband signed the deed
of donation, there is only one donor for DT purposes, without
the prejudice to the right of the wife to question the validity of
the donation without her consent
 When spouses A and B gifted their daughter C and her husband
D. there are 4 donations made: namely: donations of A to C and
A to D, and donations of B to A and B to D
TAX CREDIT FOR DONOR’S TAXES PAID IN A FOREIGN COUNTRY
 Citizens and resident donors are taxable in all their donations of
properties located within or without the PH
 Thus, their donations abroad may also be taxable in the foreign
country where their properties are located
 In order to avoid or at least minimize the effect of double
taxation, a donor’s tax credit on the DT paid in the foreign
country is allowed in the PH
LIMITATIONS ON TAX CREDIT (Sec 101(c), NIRC)
 Tax Credit may be allowed in the PH is subj to the ff instances:
c. The amt of the credit in respect to the tax paid to any
country shall not exceed the same proportion of the tax
against which such credit is taken, which the net gifts
situated within such country taxable under this Title bears
to his entire net gifts; and
d. The total amt of the credit shall nto exceed the same
proportion of the tax against which such credit is taken,
which the donor’s net gifts situated outside the PH taxable
under this title bears to his entire net gifts
 In fine, the tax credit allowed shall depend on whether one
foreign country or multiple foreign countries are involved
c. ONE FOREIGN COUNTRY
The tax credit is whichever is lower of the actual DT paid in the
foreign country and the limit as determined below:
Net Taxable Gift – Foreign x DT due in PH = Limitation
Net Taxable Gift – World
d. MULTIPLE FOREIGN COUNTRIES
IV. Determine whichever is lower of the actual DT paid in each
of the foreign countries and the limit per country using the
formula above
V. Determine the total world DT credit limit using the formula
below
Total Net Taxable Gift – Foreign x DT Due in PH = Limitation
Net Taxable Gift – World
VI. The allowable DT credit is whichever is lower between the
limitations in items 1 and 2 above
 Taxation Law Vol. II
By Atty. Raegan Capuno

DONOR’S TAX ADMINISTRATION

FILING OF RETURNS AND PAYMENT OF TAXES

 Any person making a donation, whether direct or indirect, is
required to accomplish under oath a DT return in duplicate
 A DT return is filed for every donation
 The filing of return, however, is not required for donations
specifically exempt under the Tax Code or other special laws.
 The DT Return shall contain the following:
a. Each gift made during the calendar year which is to be
included in computing net gifts
b. The deductions claimed and allowable
c. Any previous net gifts made during the same calendar year
d. The name of the done
e. Relationship of the donor to the done; and
f. Such further information as the Commissioner may require

Under the TRAIN Law, the 6% DT rate applies regardless of who the
done is, RR 12-2018 removed the relationship of the donor to the
done as required information in the return

TIME AND PLACE OF FILING OF DT RETURN AND PAYMENT OF DT

 DT Return must be filed within 30 days after the date the gift is
made or completed and the tax due shall be paid at the same
time that the return is filed following the pay-as-you-file system

 Unless the Commissioner otherwise permits, The return shall

be filed and the tax paid to an authorized agent bank, Revenue
District Officer, Revenue Collection Officer, or duly authorized
Treasurer of the City or municipality where the donor was
domiciled at the time of the transfer, or if there be no legal
residence in the PH, with the Office of the Commissioner.

 In case of gifts made by a NR – the return may be filed with the

PH embassy or Consulate in the country where he is domiciled
at the time of the transfer, or directly with the Office of the
Commissioner

Office of the Commissioner – refer to the RDO having jurisdiction

over the BIR-National Office Building which houses the Office of the
Commissioner, or presently, to the RDO 39-South Quezon City

NOTICE OF DONATION BY A DONOR ENGAGED IN BUSINESS

 In order to be exempt from DT and to claim full deduction of
the donation given to qualified done institutions duly
accredited by the PH Council for NGO Certification, Inc (PCNC)
o the donor engaged in business shall give a notice of
donation on every donation worth at least P50K
o to the RDO which has jurisdiction over his place of
business
o within 30 days after receipt of the qualified done
institution’s duly issued Certificate of Donation, which shall
be attached to the said Notice of Donation,
 stating that not more than 30% of the said
donation/gifts for the taxable year shall be used by
such accredited non-stock, non-profit corp/NGO
institution (qualified-donee institution) for
administration purposes.

CHAPTER 3: VAT
Concept and Framework of VAT:
 VAT is a consumption tax
CONSUMPTION – use of a thing in a way that thereby exhausts it.
 As applied to services: Performance or successful completion
of a contractual duty, usually resulting in the performer’s
release from any past or future liability.
 As applied for tax purposes: Consumption arises when the
goods/properties are sold, exchanged or leased. When
goods/properties purchased are subsequently re-sold, there is
consumption. Consumption goes on until the goods/properties
reach the ultimate or final consumer. (Manufacturer –
Wholesaler – Retailer – Buyer)
DETERMINATION WHERE THE GOODS OR SERVICES ARE
CONSUMED:
 Consumption may either be:
a) DOMESTIC CONSUMPTION – Consumption or utilization of
goods or services WITHIN THE PH
b) FOREIGN CONSUMPTION – Consumption or utilization of
goods or services OUTSIDE THE PH
PRINCIPLE OF TERRITORIALITY – VAT may only be imposed on
DOMESTIC CONSUMPTION, or on goods or services destined to be
consumed in the Philippines
CROSS-BORDER DOCTRINE/DESTINATION PRINCIPLE – No VAT shall
be imposed to form part of the cost of goods destined for
consumption outside of the territorial border of the taxing authority.
GR: 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.
Exports – are zero rated
 Exportation is either:
a) ZERO-RATED – made by a VAT Registered Person (Sec
106(A)(2)(a), NIRC)
b) VAT-EXEMPT – made by a NON-VAT Registered Person
(Sec 109(I)(O)), NIRC)
Imports – are taxed.
PERSON PAYING THE CONSUMPTION TAX:
 He who consumes must pay the tax. The buyer/purchaser/the
person who avails the service is the one who pays the
consumption tax.
 There is a difference between the person statutorily liable to
pay the tax and the person actually paying the tax. This is the
case of VAT because it is an Indirect Tax.
VAT – is an indirect tax and the amount of tax may be shifted or
passed on to the buyer/transferee/lessee of the
goods/properties/services (Sec 105, NIRC)
DIRECT TAXES – those that are exacted from the very person, to
whom it is intended or desired, and should pay them; they are
impositions for which a taxpayer is directly liable on the transaction
or business he is engaged in.
INDIRECT TAXES – those that are demanded, in the first instance,
from, or are paid by, one person in the expectation and intention
that he can shift the burden to someone else.
 Taxes wherein the liability for the payment of the tax falls
on one person but the burden can be shifted or passed on
to another person.
Taxation Law Vol. II
By Atty. Raegan Capuno
Concept of Indirect Tax:
a) IMPACT OF TAXATION – the point on which a tax is originally
imposed.
 The taxpayer is the person who must pay the tax to the
government. He is referred to as the Statutory
Taxpayer/the one on whom the tax is formally assessed.
b) INCIDENCE OF TAXATION – the point on which the tax burden
finally rests or settles down. It takes place when shifting has
been effected from the statutory taxpayer to another.
PERSONS LIABILE
 VAT is impose on any person who, in the course of trade or
business: (Sec 105, NIRC)
a. Sells, barters, exchanges, leases goods or properties
b. Sells services; or
c. Imports goods, WON in the court of trade or business
Note: (INGLES)
 There must be a sale, barter, exchange, lease of goods or
properties, or rendering of service in the PH. If None – Not
subject to VAT
 Involuntary Sale of vessels by a taxpayer not engaged in the
sale of vessels pursuant to the government’s policy of
privatization is not subj to VAT because the sale was not in the
course of trade or business.
ELEMENTS (Transactions which is subj to VAT):
a. It must be done in the ordinary course of trade or business
b. There must be a sale, barter, exchange, lease of goods or
properties, or rendering service in the PH; and
c. It is not VAT-exempt or VAT Zero-rated
- Absence of one will not make the transaction subj to
VAT
 This rule shall likewise apply to existing contracts of sale or
lease of goods, properties or services at the time of the
effectivity of RA 7716.
NOTES: (CAPUNO, 2020)
IN THE COURSE OF TRADE OR BUSINESS – the regular conduct or
pursuit of a commercial or an economic activity, including
transactions incidental thereto, by any person regardless of WON
the person engaged therein is a non-stock, non-profit organization
(irrespective of the disposition of its net income and WON it sells
exclusively to members or their gusts, or government entity (Sec
105, NIRC)
GR: RULE OF REGULARITY – an act characterized by habituality and
repetitiveness.
 Course of business or doing business connotes regularity
of activity.
XPN:
1. IMPORTATION
 Importation of taxable goods WON made in the course of
trade or business shall be liable to VAT (Sec 105, NIRC)
2. TRANSACTIONS INCIDENTAL TO THE COURSE OF TRADE OR
BUSINESS
 In the course of trade or business includes transactions
incidental thereto or transactions accompanying or arising
from the regular course of trade or business.
Example:
a) Bakeshop – through the years accumulated empty sacks of
flours and the sold them is subject to VAT even though selling
of empty sacks of flours is not its trade or business.
 The sale of empty sacks of flours is a transaction incidental
to trade or business of a bakeshop. Similarly, a restaurant

selling empty bottles of oil is subject to VAT because the
sale of bottles of oil is incidental to the restaurant
business.
b) Sale of Nissan Patrol – Mindanao II’s business is to convert the
steam supplied to it by PNOC-EDC into electricity and to deliver
the electricity to NPC. Mindanao II bouth and eventually sold a
Nissan Patrol, Prior to the sale, the Nissan Patrol was part fo
Mindanao II’s property, plant and equipment, Therefore the
sale of the Nissan Patrol is an incidental transaction made in the
course of Mindanao II’s business which should be liable for VAT.
(Mindanao II Geothermal Partnership v CIR)
3. SERVICES PERFORMED IN THE PH by Non-Resident Person
 Non-resident persons who perform servies in the PH are
deemed to be making sales in the course of trade or
business, even if the performance of service is not regular
(Sec 195, NIRC; Sec 4,105-3 RR No 1-2005)
4. TRANSACTIONS DEEMED SALE (Sec 106(B), NIRC)
 Transactions deemed sale are:
a) Transfer, use or consumption not in the course of
business of goods or properties originally intended for
sale or for use in the course of business.
o Persons involved is a VAT Registered person
o Subj matter: Goods or properties originally
intended for sale or use in business.
o Transfer of goods or properties are not in the
course of business can take palce when a VAT
registered person withdraws good from his
business for personal use
b) Distribution or transfer to:
i. Shareholders or investors as share in the profits
of the VAT-Registered persons; or
o Property dividends which constitutes stocks in
trade or properties primarily held for ale or lease
declared out of retained earnings and distributed
by the company to its shareholders shall be subj
to VAT based on the zonal value or GMV at the
time of distribution, which is applicable
ii. Creditors in payment of debt;
o Dacion en pago is an act whereby property is
alienated to the creditor in satisfaction of a debt
in money.
o In dacion en page, The property used in payment
of debt must be
(a) Ordinary asset – subj to VAT
(b) Capital asset – not subj to VAT
c) Consignment of goofs if actual sale is not made
within 60 days following the date such goods were
consigned
o Subj Matter: Consigned Goods
o There are 2 important dates taken into
consideration before consigned goods may be
subj to VAT:
(a) If no sale is made within 60 days from the
date of consignment – The consigned goods
are deemed sold and subject to VAT
d) Retirement from or cessation of business, with
respect to inventories of taxable goods existing as of
such retirement or cessation
o The ff circumstance shall give rise to transactions deemed
sale for this purpose:
(a) Change of ownership of the business –
when a single proprietorship (SP)
incorporates or (SP) sells his entire business
Taxation Law Vol. II
By Atty. Raegan Capuno
(b) Dissolution of a partnership and creation of
a new partnership which takes over the
business
VAT ON SALE OF GOODS OR PROPERTIES
 The term GOODS or PROPERTIES, means all tangible and
intangible objects which are capable of pecuniary estimation
and shall include:
a) Real properties held primarily for sale to customers or held
for lease in the ordinary course of trade or business
b) The right or the privilege to use patent, copyright, design
or model, plan, secret formula or process, goodwill,
trademark, trade brand, or other like property or right
c) The right or the privilege to use in the Philippines of any
industrial, commercial, or scientific equipment
d) The right or the privilege to use motion picture films, tapes
and discs; and
e) Radio, television, satellite transmission and cable
television time (RR 1-2005, Sec 4, 106-2)
Note: Above enumeration is not an exclusive list of items considered
or included in the term goods or properties. The term good includes
not only the value of the improvements on the real properties but
should inclide the value of the real properties as well.
REQUISITES OF TAXABILITY OF SALE OF GOODS/PROPERTIES:
1. There is an actual or deemed sale, barter, or exchange of goods
or properties for valuable consideration
2. The sale is in the course of trade or businessi n the PH
3. The goods or proerpties are located in the PH and are for use or
consumption; and
4. The sale is not exemp from VAT under, Sec 109, NIRC, Special
Law, or International Agreement binding upon the Govt of the
PH
TYPES OF SLAE OF GOODS OR PROPERTIES
 For the purposes of imposing VAT, sale of goods or properties
may be classified as follows:
a) VATABLES SALES
 It refers to the sale, barter, exchange, and/or lease of
goods or properties, whether in cash or in kind, subject to
VAT
 VATABLE SALES are catch-all type of sale. This means that
the sale, barter, exchange, or lease of goods or properties
not falling either as deemed sales, zero-rated sales, or
exempt sales, are vatable sales.
RATE: !2% of the gross selling price or gross value in money of goods
or properties sold, bartered, or exchange in the Ph (Sec 4, 10-1, RR
16-2005)
TAX BASE: Gross Selling price – the total amount of money or its
equivalent which the purchaser pays or is obligated to pay to the
seller in consideration of the sale, barter, or exchange of the goods
or properties, excluding the VAT. The excise tax, if any, on such
goods or properties shall form part of the gross selling price (Sec
106(A), NIRC)
Selling Price without Vat 100%
Plus VAT 12%
Selling Price with VAT 112%
b) DEEMED SALES
RATE: 12% of the gross selling price or gross value in money of
the goods or properties deemed sold in the PH
 The Commissioner shall determine the appropriate tax base in
cases where a transaction is deemed a sale, barter, or exchange
of goods or properties or where the gross selling price is
unreasonably lower than the actual market.

 The gross selling price is unreasonably lower than the actual
market value if it is lower by more than 30% of the actual
market value of the same goods of the same quantity and
quality sold in the locality on or nearest date of sale
 For transactions deemed sale – the output tax shall be based
on the market value of the goods deemed sold as of the time of
the occurrence of the transaction.
 In case of retirement or cessation of business – the tax base
shall be acquisition cost or the current market price of the
goods or properties, whichever is lower.
 In case of a sale where gross selling price is unreasonably
lower than the FMV – the actual market value shall be tax base
(Sec 4,106-7(b), RR)
c) ZERO-RATED SALES (Automatic and Effectively Zero-rated
Sales); and
 Def: A sale, barter, or exchange of goods or properties of a VAT
registered person subject to 0% VAT.
 It is a vatable transaction for all intents and purposes but
considering the VAT rate is 0%, there is no resulting output tax.
 The input tax on purchases of goods, properties or services,
related to such zero-rated sales, shall be available as a tax
refund in accordance with existing regulations.
 AS stated, a zero-rated sale of goods or properties is subject
VAT except that VAT rate is 0% instead of 12%, thus, no
resulting output tax and no VAT liability.
Selling Price without VAT 100%
Plus: VAT 0%
Gross Selling Price 100%
 In general, the following sales by a VAT-registered person shall
be subject to 0% rate:
i. Export Sales
DEF: The sale, barter, or exchange of goods or properties
destined for consumption outside the PH.
As used in Sec 106(A)(2)(a), export sales may either be:
1. Actual Export Sales – When there is an actual shipment of
goods from the PH to a foreign country or when the goods
physically left the Ph Territory.
2. Constructive Export Sales – When the goods do not leave
the Ph but delivered to a resident or an entity which in the
eyes or by fiction of law is considered as export sales.
 Only export sales made by a VAT-registered person are zero-
rated sales. It means:
a. The sale and actual shipment of goods from the PH to a
foreign country irrespective of any shipping arrangement
that may be agreed upon, which may influence or
determine the transfer of ownership of the goods so
exported and paid for in acceptable foreign currency or its
equivalent in goods or services, and accounted for in
accordance with the rules and regulations of the BSP
b. Sales and delivery of goods to:
I. Registered enterprises within a separate customs
territory as provided under special laws; and
II. Registered enterprises within tourism enterprise
zones as declared by the Tourism Infrastructure and
Enterprise Zone Authority (TIEZA) subject to Tourism
Act
Note: This item were added in the TRAIN Law. However,
the President vetoed this additional provision on the
ground that the provision go against the principle of
limiting VAT zero-rating to direct exporters.
Taxation Law Vol. II
By Atty. Raegan Capuno
In effect: These sales are not zero-rated subject to
applicable tax incentive provisions of the TIEZA Law.
c. Sale of raw materials or packaging material to a non-
resident buyer for delivery to a resident local export-
oriented enterprise to be used in manufacturing
processing, packing or repacking in the PH of the said
buyer’s goods nad paid for in acceptable foreign currency
and accounted for in accordance with the rules and
regulations of the BSP
d. Sale of raw materials or packaging materials to export-
oriented enterprise whose export sales exceed 70% of
total annual productions
e. Those considered export sales under EO 226 (Omnibus
Invest Code, and other special laws;
f. The sale of goods, supplies, equipment, and fuel to
persons engaged in international shipping or international
air transport operations: Provided, that the good, supplies,
equipment and fuel shall be used for international shipping
or air transport operations
Note: Must be used for international shipping or air transport
operations to qualify for 0% VAT
SALE OF GOLD to BSP – considered an export sale subject to 0%
VAT. However, TRAIN Law removed the zero-rated status and
reclassified such as an exempt transaction.
 If the export is made by a non-VAT registered person – the
sale is merely an exempt sale (Sec 109(1)(O), NIRC)
ii. Foreign Currency Denominated Sales
 DEF: Sale to a non-resident of goods, except those mentioned
in Sec 149 and 150, Assembled or manufactured in the Ph for
delivery to a resident in the Ph, paid for in acceptable foreign
currency and accounted for in accordance with the rules and
regulations of the BSP.
 Foreign currency denominated sale is zero-rated under the
NIRC. Upon the effectivity of the TRAIN LAW, foreign currency
denominated sale is now a sale subject to 12% VAT.
iii. Effectively Zero-Rated Sales
 DEF: Sale of goods and properties by a VAT-registered person to
a person or entity who was granted indirect tax exemption
under special laws or international agreements.
 In order to qualify as effectively zero-rated sales, there must be
a special law or international agreement classifying the sales as
such.
d) EXEMPT SALES
 DEF: A sale of goods, properties, or services and the use ore
lease of properties which is not subject to output tax and
whereby the buyer is not allowed any tax credit or input tax
related to such exempt sale.
 Object of Exemption: may either be the transactions itself or
any of the parties to the transaction,
EXEMPT TRANSACTION – involves goods or services which, by
their nature, are specifically listed in the expressly exempted
from the VAT under the Tax Code. Such transaction is not
subject to the VAT, but the seller is not allowed any tax refund
of or credit for any input taxes paid.

EXEMPT PARTY – a person or entity granted VAT exemption
under the Tax code, a special law or an international agreement
to which the PH is a signatory and by virtue of which its taxable
transactions become exempt from the VAT. Such party is also
not subject to VAT but may be allowed a tax refund of or credit
for input taxes paid, depending on its registration as a VAT or
Non-VAT taxpayer.
IMPLEMENTATION OF ENHANCED VAT REFUND SYSTEM and the
CHANGE OF ZERO-RATED SALES TO 12% VATABLE SALES
 Sec 31, TRAIN Law, provides that items 3, 4, and 5 shall be
subject to 12% VAT and no longer be considered export sales
subject to 0% VAT rate upon satisfaction of the following
conditions:
a. The successful establishment and implementation of an
enhanced VAT refund system that grants refunds of
creditable input tax within 90 days from the filing of the
VAT refund application with the BIR: Provided, that, to
determine the effectivity of item no 1 – all applications
filed from Jan 1 2018 shall be processed and must be
decided within 90 days from the filing of the VAT refund
application; and
b. All pending VAT refund claims as of Dec 31, 2017 shall be
fully paid in cash by Dec 31, 2019
 DOF shall establish a VAT refund center in the BIR and BOC that
will handle the processing and granting of cash refunds of
creditable input tax.
 An amount equivalent to 5% of the total VAT collection of the
BIR and the BOC from the immediately preceding year shall be
automatically appropriated annually and shall be treated as a
special account in the General Fund or as trust receipts for the
purpose of funding claims for VAT refund: Provided, that any
unused fund, at the end of the year shall revert to the General
Fund.
 The BIR and BOC shall be required to submit to the
Congressional Oversight Committee on the Comprehensive Tax
Reform Program (COCCTRP) a quarterly report of all pending
claims for refund and any unused fund.
 The above provisions only cover the following zero- rated sales:
a. Sale of raw materials or packaging materials to a non-
resident buyer for delivery to a resident local export-
oriented enterprise to be used in manufacturing,
processing, packing, or repacking in the PH of the said
buyer’s goods and paid for in acceptable foreign currency
and accounted for in accordance with the rules and
regulations of the BSP
b. Sale of raw aterials or packaging materials to export
oriented enterprise whose export sales exceed 70% of
total annual production; and
c. Those considered export sales under EO 226 (Omnibus
Investment Code) and other special laws
AUTOMATIC ZERO-RATED SALE EFFECTIVE ZERO-RATED SALE
Refers to the export sale of Refers to the sale of goods or
goods and supply of services supply of services to persons or
entities whose exemption under
Tax Rate: 0% special laws or international
agreements to which the PH is a
signatory effectively subjects
such transactions to a zero rate
When applied to the tax base, As applied to the tax base, such
such rate obviously results in no rate does not yield any tax
tax chargeable against the chargeable against the
purchaser purchaser
The seller of such transactions The seller who charges zero
charges no output tax, but can output tax on such transactions
claim a refund of or a tax credit can also claim a refund of or a
certificate for the VAT previously tax credit certificate for the VAT
charged by suppliers previously charged by suppliers
Taxation Law Vol. II
By Atty. Raegan Capuno
SPECIAL RULES ON SALE OF REAL PROEPRTIES
 It is held primarily for sale to customers ro held for lease in the
ordinary course of trade or business of the seller.
 In the case of sale of properties on instalment plan: the real
estate dealer shall be subject to VAT on the instalment
payments, including interest and penalties, actually and/or
constructively received by the seller.
EX. Sale of residential lot with gross selling price exceeding P
1,919,599.00 residential house and lot or other residential dwellings
with gross selling price exceeding P 3,199,200.00, where the
instrument of sale (whether the instrument is nominated as a deed
of absolute sale, deed of conditional sale or otherwise) is executed
and notarized on or after January 1, 2012 and shall be subject to
12% output VAT
 Instalment sale of residential of residential house and lot and
other residential dwellings is subject to VAT,
SALE OF REAL PROPERTY ON INSTALMENT PLAN – sale of real
property by a real estate dealer, the initial payments of which in the
sale of sale do not exceed 25% of the gross selling price.
 In case of sale of real properties on deferred-payment basis, not
on the instalment plan – the transaction shall be treated as cash
sale which makes the entire selling price taxable in the month
of sale
SALE OF REAL PROPERTIES BY A REAL ESTATE DEALER ON A
DEFERRED PAYMENT BASIS, NOT ON THE ISNTALMENT PLAN – sale
of real property, initial payments of which in the year of sale exceed
25% gross selling price.
INITIAL PAYMENTS – payment/s which the seller receives before or
upon the execution of the instrument of sale and payments which
the seller expects or is scheduled to received in case or property
(other than evidence of indebtedness of the purchaser) during the
year when the sale or disposition of the real property was made.
 It covers any down payment made and includes all payments
actually or constructively received during the year of sale – the
aggregate of which determines the limit set by law.
 It does not include the amount of mortgage on the real
property sold except when such mortgage excess the costs or
other basis of the property to the seller, in which case, the
excess shall be considered part of the initial payments
 It also excludes the notes or other evidence of indebtedness
issued by the purchaser to the seller at the time of sale. Pre-
selling of real estate properties by real estate dealers shall be
subject to VAT in accordance with the rules prescribed above.
REAL ESTATE DEALER – includes any person engaged in the business
of buying, developing, selling, exchanging real properties as principal
and holding himself out as a full or part-time dealer in real estate
CHANGE OR CESSATION OF STATUS AS VAT-REGISTERED PERSON
 VAT under Sec 106, applies to goods or properties originally
intended for sale or use in business, and capital goods which
are existing as of the occurrence of the following:
a) Change of business activity from VAT taxable status to VAT-
EXEMPT Status.
o EX. A VAT registered person engaged in a taxable activity
like wholesaler or retailer who decides to discontinue such
activity and engages instead in life insurance business or in
any other business not subject to VAT
b) Approval of a request for cancellation of registration due to
reversion to exempt status
c) Approval of a request for cancellation of registration due to a
desire to revert to exempt status after the lapse of 3

consecutive years from the time of registration by a person
who voluntarily registered despite being exempt under Sec
109(2), TRAIN Law.
d) Approval of a request for cancellation of registration of one
who commenced business with the expectation of gross sales
or receipts exceeding P 3M but who failed to exceed this
amount during the first 12mos.
VAT shall not apply to goods or properties existing as of the
occurrence of the following:
a) Change of control of a corporation by the acquisition of the
controlling interest of such corporation by another stockholder
or group of stockholders.
o The goods or properties used in business or those
comprising the stock-in-trade of the corporation, having a
change in corporate control, will not be considered sold,
bartered, or exchanged despite the change in the
ownership interest in the said corporation;
b) Change in the trade or corporate name of the business
c) Merger or consolidation of corporation
o The unused input tax of the dissolved corporation, as of
the date of merger or consolidation, shall be absorbed by
the surviving or new corporation
VAT IMPORTATION
 IMPORTATION – an act of bringing goods from foreign a
country into the Philippines.
 Sec 1202, Tariff and Customs Code, Importation begins when
the carrying vessel or aircraft enters the jurisdiction of the
Philippines with the intention to unlade therein.
 Importation is deemed terminated upon payment of duties,
taxes, and other charges due upon the articles, or secured be
paid, at a port of entry and the legal permit for withdrawal shall
have been granted, or in case said are free of duties, taxes and
other chares, until they have legally left the jurisdiction of the
customs.
 In General, VAT is imposed on goods brought into the PH,
whether for business use or not.
o Tax based: on the total value used by the BOC in
determining tariff and customs duties, plus customs duties,
excise tax, if any, and other charges, such a postage,
commission, and similar charges, prior to the release of
the goods from customs custody.
o In case the valuation used by the BOC in computing
customs based on volume or quantity of the imported
good – the landed cost shall be the basis for computing
VAT.
o Landed cost consist of the invoice amount, customs duties,
freight, insurance and other charges.
o If the goods imported are subject to excise tax – the excise
tax shall form part of the tax base
 VAT is also imposed on technical importation, which is the sale
of goods by a person located in a Special Economic Zone to a
customer located in a customs territory.
PERSONS LIABLE TO VAT ON IMPORTATION
GR: Seller is the statutory taxpayer of VAT. He is the one liable
to declare and pay the VAT to the BIR
XPN: the importer who is actually the buyer of goods is the one
liable to pay the VAT on importation
IMPORTER – it is a person who brings goods into the PH, whether or
not made in the course of his trade or business. It includes non-
exempt persons or entities who acquire tax-free imported goods
from exempt persons, entities or agencies.
 VAT on importation is paid by the importer prior to the release
of such goods from customs custody.
TRANSFER OF GOODS BY TAX-EXEMPT PERSONS
 In case of goods imported into the PH by VAT-exempt persons,
entities or agencies which are subsequently sold, transferred or
exchanged in the PH to non-exempt person or entities, the
purchasers, transferees or recipients shall be considered the
importers and shall be liable for the VAT due on such
importation
Taxation Law Vol. II
By Atty. Raegan Capuno
 Tax due on such importation shall constitute lien on the goods
superior to all charges or liens on the goods, irrespective of the
possessor
VAT ON SALE OF SERVICES AND USE OR LEASE OF PROPERTIES
 For purposes of imposing VAT, sale of services and use or lease
of properties may be classified as:
a) Vatable Sale of Services
b) Zero-Rated Sale of Services; and
c) Exempt Sale of Services
VATABLE SALES OF SERVICES
 Sale or exchange of services, as well as the use or lease of
properties, in the course of trade or business is subject to VAT
 VAT: 12% of the gross receipts.
SALE OR EXCHANGE OF SERVICES – the performance of all kinds of
services in the PH for others for a fee, renumerations or
consideration, including those performed or rendered by the
following:
a) Construction and service contractors
b) Stock, Real Estate, Commercial, Customs and immigration
brokers
c) Lessors of property, whether personal or real
d) Warehousing services
e) Lessors or distributors of cinematographic films
f) Persons engaged in milling processing, manufacturing or
repacking goods for others
g) Proprietors, operators or keepers of hotels, motels, rest houses,
pension houses, inns, resorts
h) Proprietors, operators of restaurants refreshments parlors,
cafes and other eating places, including clubs and caterers
i) Dealers in securities
j) Lending investors
k) Transportation contractors on their transport of goods or
cargoes, including persons who transport goods or cargoes fro
hire and other domestic common carriers by land relative to
their transport of goods or cargoes
l) Common carriers by air and sea relative to their transport of
passengers, goods or cargoes from one place in the PH to
another place in the PH
m) Sales of electricity by generations companies, transmission, and
distribution companies
n) Franchise grantees of electric utilities, telephone and telegraph,
radio and television broadcasting and all other franchise
grantees except franchise grantees of radio and.or television
broadcasting whose annual gross receipts of the preceding year
do not exceed P10M, and franchise guarantees of gas and
water utilities
o) Non-life insurance companies (except their crop insurances),
including surety, fidelity, indemnity and bonding companies;
and
p) Similar services regardless of whether or not the performance
thereof calls for the exercise or use of the physical or mental
faculties.:
THE PHRASE “SALE OR EXCHANGE OF SERVICES” shall likewise
include:
a) The lease or the use of or the right or privilege to use any
copyright, patent, design or model, plan, secret formula or
process, goodwill, trademark, trade brand or other like
property or right;
b) The lease or the use of, or the right to use of any industrial,
commercial or scientific equipment;
c) The supply of scientific, technical industrial or commercial
knowledge or information;
d) The supply of any assistance that is ancillary and subsidiary to
and is furnished as a means of enabling the application or
enjoyment of any such property, or right as is mentioned in
subparagraph (2) or any such knowledge or information as is
mentioned in subparagraph (3);

e) The supply of services by a non-resident person or his employee
in connection with the use of property or rights belonging to, or
the installation or operation of any brand, machinery or other
apparatus purchased from such non-resident person;
f) The supply of technical advice, assistance or services rendered
in connection with technical management or administration of
any scientific industrial or commercial undertaking, venture,
projector scheme;
g) The lease of motion picture films, -films, tapes and discs; and
h) The lease or the use of or the right to use radio, television,
satellite transmission and cable television time.
 Lease of properties shall be subject to the tax herein imposed
irrespective of the place where the contract of lease or licensing
agreement was executed if the property is leased or used in the
PH
TAX BASE OF VAT ON SALE OF SERVICE: 12% VAT on Sale of Service
is based on the gross receipts
GROSS RECEIPTS – the total amount of money or its equivalent
representing the contract price, compensation, service fee, rental or
royalty, including the amount charged for materials supplied with
the services and deposits and advanced payments actually or
constructively received during the taxable quarter for the services
performed or to be performed for another person, excluding VAT
(Sec 108 (A), NIRC)
CONSTRUCTIVE RECEIPT – occurs when the money consideration or
its equivalent is placed at the control of the person who rendered
the service without restrictions by the payor.
The following are examples of constructive receipts:
a) Deposits in banks which are made available to the seller of
services without restrictions
b) Issuance by the debtor of a notice to offset any debt or
obligation and acceptance by the seller as payment for services
rendered; and
c) Transfer of the amounts retained by the payor to the account
of the contractor
 Just like in the gross selling price, gross receipts exclude the
VAT. Because the PH forbids forbids tax cascading or the tax on
tax.
REQUISITES FOR TAXABILITY
a) There is a sale or exchange of service, or lease or use of
property enumerated in the Tax Code, or other similar services
b) The service is performed or to be performed in the PH
c) The service is in the course of trade of taxpayer’s trade or
business or professions
d) The service is for a valuable consideration actually or
constructively received; and
e) The service is not exempt under the Tax Code, special law, or
international agreement.
ZERO-RATED SALE OF SERVICES
 A Zero-Rated sale of service by a VAT-Registered person is a
taxable transaction for VAT purposes but shall not result in any
output tax.
 However, the input tax on purchase of goods, properties, or
services related to such zero-rated sale shall be available as tax
refund in accordance with the applicable rules and regulations.
 A zero-rated sale of service is subject to VAT except that VAT
rate is 0% instead of 12%, thus, no resulting output tax and no
VAT liability.
The ff services performed in the PH by VAT-Registered persons shall
be subject to 0% rate:
1. Processing, manufacturing or repacking goods:
a) For other persons doing business outside the Philippines
b) Goods are subsequently exported; and
Taxation Law Vol. II
By Atty. Raegan Capuno
c) The services are paid for in acceptable foreign currency
and accounted for in accordance with the rules and
regulations of the (BSP);
Note:
 subject to the (12%) VAT and no longer be subject to zero
percent (0%) VAT rate upon satisfaction of the following
conditions:
a. The successful establishment and implementation of an
enhanced VAT refund system that grants refunds of
creditable input tax within (90) days from the filing of the
VAT refund application with the Bureau:
 To determine the effectivity of item no. 1, all applications
filed from January 1, 2018 shall be processed and must be
decided within (90) days from the filing of the VAT refund
application; and
b. All pending VAT refund claims as of December 31, 2017 shall
be fully paid in cash by December 31, 2019.
2. Services other than those mentioned in the preceding
paragraph, rendered to a:
a) Person engaged in business conducted outside the
Philippines or
b) Non-resident person not engaged in business who is
outside the Philippines when the services are performed
c) The consideration for which is paid for in acceptable
foreign currency and accounted for in accordance with the
rules and regulations of the (BSP);
3. Services rendered to persons or entities whose exemption
under special laws or international agreements to which the
Philippines is a signatory effectively subjects the supply of such
services to (0%) rate;
4. Services rendered to persons engaged in international shipping
or international air transport operations, including leases of
property for use thereof:
 These services shall be exclusive for international shipping
or air transport operations;
DESTINATION PRINCIPLE – exports are zero-rated whereas imports
are taxed.
5. Services performed by subcontractors and/or contractors in
processing, converting, or manufacturing goods for an
enterprise whose export sales exceed (70%) of total annual
production;
Note:
 subject to the (12%) VAT and no longer be subject to zero
percent (0%) VAT rate upon satisfaction of the following
conditions:
c. The successful establishment and implementation of an
enhanced VAT refund system that grants refunds of
creditable input tax within (90) days from the filing of the
VAT refund application with the Bureau:
 To determine the effectivity of item no. 1, all applications
filed from January 1, 2018 shall be processed and must be
decided within (90) days from the filing of the VAT refund
application; and
d. All pending VAT refund claims as of December 31, 2017 shall
be fully paid in cash by December 31, 2019.
6. Transport of passengers and cargo by domestic air or sea
vessels from the Philippines to a foreign country; and
7. Sale of power or fuel generated through renewable sources of
energy such as, but not limited to, biomass, solar, wind,
hydropower, geothermal, ocean energy, and other emerging
energy sources using technologies such as fuel cells and
hydrogen fuels.
 Taxation Law Vol. II
By Atty. Raegan Capuno
8. Services rendered to: c) To the purchaser of services or the lessee or licensee upon
I. Registered enterprises within a separate customs territory payment of the compensation, rental, royalty or fee
as provided under special law; and
II. Registered enterprises within tourism enterprise zones as
declared by the TIEZA subject to the provisions under RA.
9593:The Tourism Act of 2009.

CREDITABLE INPUT TAX

INPUT TAX – the VAT due from or paid by a VAT-registered person in

the course of his trade or business on importation of goods or local
purchase of goods or services, including lease or use of property,
from a VAT-registered person
 It includes:
a) The transitional input tax and the presumptive input tax
determined in accordance with Sec 111, Tax Code
b) Input taxes which can be directly attributed to transactions
subject to the VAT plus a ratable portion of any input tax
which cannot be directly attributed to either the taxable or
exempt activity.

 Input tax reduced the VAT liability because it is credited or

deducted from the output tax to determine the VAT liability of
the taxpayer.
 Without input tax, the VAT liability is equivalent to the output
tax.

SOURCES OF CREDITABLE INPUT TAX

a) Purchase or importation of goods:
i. For sale
ii. For conversion into a intended to form part of a finished
product for sale including packaging materials
iii. For use as supplies in the course of business
iv. For use as materials supplied in the sale of service; or
v. For use in trade or business for which deduction for
depreciation or amortization is allowed under the Tax
Code

b) Purchase of real properties for which a VAT has actually been

paid
c) Purchase of services on which a VAT has actually been paid
d) Transactions deemed sale under Sec 106(B), Tax Code
e) Transitional input tax allowed under Sec 111, Tax Code
f) Presumptive input tax allowed under Sec 111, Tax Code

PERSONS WHO CAN AVAIL OF THE INPUT TAX CREDIT

 Any qualified person may avail of the input tax credit provided
the transactions are evidenced by a VAT invoice or official
receipt issued by a VAT-Registered Person in accordance with
Sec 113 and 237
 The input tax credit on importation of goods or local purchases
of goods, properties or services by a VAT-registered person
shall be creditable:
a) To the importer upon payment of VAT prior to the release
of goods from customs custody
b) To the purchaser of the domestic goods or properties upon
consummation of the sale; or

NORMAL VAT TRANSACTION or those subject to 12% are:
a. Sale of Goods and Properties
b. Sale of Services; and
c. Importation
Sec 106 VAT on Sale of Goods or Properties
(A) Rate and Base of Tax
TAX RATE: 12% of the gross selling price or gross value in money of
the goods or properties sold, bartered or exchanged
 Such tax to be paid by the seller or transferor.
TAX BASE: Gross Selling Price
(1) GOODS or PROPERTIES – means all tangible and intangible
objects which are capable of pecuniary estimation and shall include:
(a) Real properties held primarily for sale to customers or held for
lease in the ordinary course of trade or business;
(b) The right or the privilege to use patent, copyright, design or
model, plan, secret formula or process, goodwill, trademark,
trade brand or other like property or right;
(c) The right or the privilege to use in the Philippines of any
industrial, commercial or scientific equipment;
(d) The right or the privilege to use motion picture films, tapes and
discs; and
(e) Radio, television, satellite transmission and cable television
time.
Note: This is not an exclusive list.
GROSS SELLING PRICE – means the total amount of money or its
equivalent which the purchaser pays or is obligated to pay to the
seller in consideration of the sale, barter or exchange of the goods or
properties, excluding the VAT.
 The excise tax, if any, on such goods or properties shall
form part of the gross selling price.
(2) The ff sales by VAT-registered persons shall be subj to (0%) rate:
Note: For goods, a rate of 0% of the gross selling price will be
applied if:
a. Export Sale
b. Sales to persons or entities whose exemption under
special laws, or international agreements to which the PH
is a signatory (effectively-zero rated sales)
(a) EXPORT SALES:
(1) The sale and actual shipment of goods from the Philippines
to a foreign country, irrespective of any shipping
arrangement that may be agreed upon which may
influence or determine the transfer of ownership of the
goods so exported; and
Paid for in acceptable foreign currency or its equivalent in
goods or services, and accounted for in accordance with
the rules and regulations of the Bangko Sentral ng Pilipinas
(BSP);
Taxation Law Vol. II
By Atty. Raegan Capuno
(2) Sale and delivery of goods to:
a. Registered enterprises within a separate customs
territory as provided under special laws; and
b. Registered enterprises within tourism enterprise zones
as declared by the Tourism Infrastructure and
Enterprise Zone Authority (TIEZA) subject to the
provisions under RA 9593: The Tourism Act of 2009.
(6) The sale of goods, supplies, equipment and fuel to persons
engaged in international shipping or international air
transport operations: Provided, That the goods, supplies,
equipment and fuel shall be used for international shipping
or air transport operations.
Note:
(3) Sale of raw materials or packaging materials to a
nonresident buyer for delivery to a resident local export-
oriented enterprise to be used in manufacturing,
processing, packing or repacking in the Philippines of the
said buyer’s goods and paid for in acceptable foreign
currency and accounted for in accordance with the rules
and regulations of the (BSP);
(4) Sale of raw materials or packaging materials to export-
oriented enterprise whose export sales exceed (70%) of
total annual production;
(5) Those considered export sales under EO 226: Omnibus
Investment Code of 1987, and other special laws; and
 Par. (3), (4), and (5) Subject to the (12%) VAT and no longer be
considered export sales subject to (0%) VAT rate upon
satisfaction of the following conditions:
1. Successful establishment and implementation of an
enhanced VAT refund system that grants refunds of
creditable input tax within (90) days from the filing of the
VAT refund application with the Bureau:
- To determine the effectivity of item no. 1, all
applications filed from January 1, 2018 shall be
processed and must be decided within (90) days from
the filing of the VAT refund application; and
2. All pending VAT refund claims as of December 31, 2017
shall be fully paid in cash by December 31, 2019.
 Department of Finance shall establish a VAT refund center in
the (BIR) and (BOC) that will handle the processing and granting
of cash refunds of creditable input tax.
 An amount equivalent to (5%) of the total VAT collection of the
BIR and the BOC from the immediately preceding year shall be:
a. Automatically appropriated annually; and
b. Treated as a special account in the General Fund or as
trust receipts for the purpose of funding claims for VAT
refund:
- Any unused fund, at the end of the year shall revert
to the General Fund.
 BIR and the BOC shall be required to submit to the
Congressional Oversight Committee on the Comprehensive
Tax Reform Program (COCCTRP) a quarterly report of all
pending claims for refund and any unused fund.
(b) 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.
(B) Transactions Deemed Sale – SUBJ TO VAT
 Taxation Law Vol. II
By Atty. Raegan Capuno
(1) Transfer, use or consumption not in the course of business of
goods or properties originally intended for sale or for use in LANDED COST meant:
the course of business; a. Invoice Cost
(2) Distribution or transfer to: b. Freight Insurance
(a) Shareholders or investors as share in the profits of the c. Custom Duties
VAT-registered persons; or d. Excise Tax (If any); and
(b) Creditors in payment of debt; e. Other charges prior to the removal of the goods from customs
(3) Consignment of goods if actual sale is not made within (60) custody.
days following the date such goods were consigned; and
(4) Retirement from or cessation of business, with respect to (B) Transfer of Goods by Tax-exempt Persons.
inventories of taxable goods existing as of such retirement or
cessation.  When a (Person/Entities/Agencies) who was exempt from VAT
on his importation – subsequently sells, transfers, exchanges in
the Ph such imported articles to a non-exempt person.
 The purchaser, transferee or assignee will be required to
pay the VAT.

 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.

(C) Changes in or Cessation of Status of a VAT-registered Person. Note:

 VAT of an importation should be paid prior to the release of the
TAX RATE: 12% of the gross selling price or gross value in money of goods from customs custody – If it is subject to both excise tax
the goods or properties sold, bartered or exchanged shall apply to: and VAT, Taxpayer has to pay both prior to the release.
 Goods disposed of or existing as of a certain date if under  Seller of goods/services who imports stuff can claim the VAT
circumstances to be prescribed in rules and regulations to be paid on importations, during a taxable period as input taxes
promulgated by the Secretary of Finance, upon creditable against the output taxes on the sales of the same
recommendation of the Commissioner, the status of a person period.
as a VAT-registered person changes or is terminated.  Same rule applies to technical importation of goods
a. Sold by a person (located in a special economic zone) to a
(D) Determination of the Tax customer (located in a customs territory)
(1) The tax shall be computed by multiplying the total amount
indicated in the invoice by (1/11). Example:
FACTS: A sold B a shirt.
(2) Sales Returns, Allowances and Sales Discounts. A: B shoulders 12% VAT. B can recover the amount he paid to
 The value of goods or properties sold and subsequently A by selling the shirt to C, where C will shoulder the 12%
returned or for which allowances were granted by a VAT- VAT
registered person may be deducted from the gross sales or
receipts for the quarter in which a refund is made or a ZERO RATED TRANSACTIONS EXEMPT TRANSACTIONS
credit memorandum or refund is issued.
 Sales discount granted and indicated in the invoice at the (EXEMPT WITH CREDIT) (EXEMPT WITHOUT CREDIT)
time of sale and the grant of which does not depend upon
the happening of a future event may be excluded from the  There is a TOTAL RELIEF for  There is a PARTIAL RELIEF
gross sales within the same quarter it was given. the purchaser (C) from the because Seller (B) is not
burden of tax since he does allowed any Tax Refund or
not have to pay any VAT on Credit for input taxes paid
(3) Authority of the Commissioner to Determine the the transaction on his purchases from his
Appropriate Tax Base supplier A
 The Commissioner shall determine the appropriate tax
 Seller (B), the input tax on
base in cases, by rules and regulations prescribed by the
his purchases from his
Secretary of Finance,
supplier (A)
(a) Where a transaction is deemed a sale, barter or
exchange of goods or properties under Subsection
(B), or  Available as a Tax
(b) Where the gross selling price is unreasonably lower Credit/Refund
than the actual market value.

Sec. 107 Value-added Tax on Importation of Goods.  Purpose: To exempt the

transactions completely
(A) In General. from VAT previously
TAX RATE: 12% VAT on Every importation of goods, whether for use collected since input taxes
in business or not passed to him may be
recovered as refund or
TAX BASE: credit
a. Total value used by the BOC in determining tariff and customs
duties, plus: 1) NORMAL VAT TRANSACTIONS
I. Customs duties,  VAT paid to the supplier can be recovered by selling the
II. Excise taxes (if any); and product to a purchaser.
III. Other charges, such tax to be paid by the importer prior to
the release of such goods from customs custody: Example: B paid A P112 (P100 Price and P12 as VAT) then B sold C
the shirt for P150.
b. Based on Landed Cost – where the customs duties are  B can recover P12 VAT by selling the product to a
determined on the basis of the quantity or volume of the purchaser. Here, B sold the shirt C for P150. In his sale, he
goods. received P18 which covered P12 he paid to A.

2) VAT-ZERO RATED
 Can apply for a refund/tax credit of P12 with the BIR.
Example: B paid A P112 (P100 Price and P12 as VAT) then B sold C
the shirt for P150 Price and P0 as VAT.
 B can recover P12 VAT by applying for a refund/tax credit
with the BIR
3) VAT-EXEMPT
 Cannot apply for a refund/tax credit of P12 with the BIR.
Example: B paid A P112 (P100 Price and P12 as VAT) then B sold C
the shirt for P150 Price and P0 as VAT.
 Unrecovered VAT in exempt transactions is considered
cost.
Sec 108 VAT on Sale of Services and Use or Lease of Properties
(A) Rate and Base of Tax: (12%) of gross receipts derived from the
sale or exchange of services, including the use or lease of properties.
SALE OR EXCHANGE OF SERVICES:
 The services:
a. Should be rendered in the PH
b. Can be any and all kinds of services rendered to others
(Provided there is no EE-REL)
c. There is a fee, remuneration or consideration
 It includes those performed or rendered by:
1) Construction and service contractors;
2) Stock, real estate, commercial, customs and immigration
brokers;
3) Lessors of property, whether personal or real;
4) Warehousing services;
5) Lessors or distributors of cinematographic films;
6) Persons engaged in milling, processing, manufacturing or
repacking goods for others;
7) Proprietors, operators or keepers of hotels, motels,
resthouses, pension houses, inns, resorts;
8) Proprietors or operators of restaurants, refreshment
parlors, cafes and other eating places, including clubs and
caterers;
9) Dealers in securities;
10) Lending investors;
11) Transportation contractors on their transport of goods or
cargoes, including persons who transport goods or cargoes
for hire and other domestic common carriers by land
relative to their transport of goods or cargoes;
12) Common carriers by air and sea relative to their transport
of passengers, goods or cargoes from one place in the
Philippines to another place in the Philippines;
13) Sales of electricity by generation companies, transmission
by any entity, and distribution companies, including
electric cooperatives;
14) Services of franchise grantees of electric utilities,
telephone and telegraph, radio and television broadcasting
and all other franchise grantees except those under Sec
119, NIRC;
15) Non-life insurance companies (except their crop
insurances), including surety, fidelity, indemnity and
bonding companies; and
16) Similar services regardless of whether or not the
performance thereof calls for the exercise or use of the
physical or mental faculties.:
17) The lease or the use of or the right or privilege to use any
copyright, patent, design or model, plan, secret formula or
process, goodwill, trademark, trade brand or other like
property or right;
18) The lease or the use of, or the right to use of any
industrial, commercial or scientific equipment;
Taxation Law Vol. II
By Atty. Raegan Capuno
19) The supply of scientific, technical industrial or commercial
knowledge or information;
20) The supply of any assistance that is ancillary and subsidiary
to and is furnished as a means of enabling the application
or enjoyment of any such property, or right as is
mentioned in subparagraph (2) or any such knowledge or
information as is mentioned in subparagraph (3);
21) The supply of services by a nonresident person or his
employee in connection with the use of property or rights
belonging to, or the installation or operation of any brand,
machinery or other apparatus purchased from such
nonresident person;
22) The supply of technical advice, assistance or services
rendered in connection with technical management or
administration of any scientific industrial or commercial
undertaking, venture, projector scheme;
23) The lease of motion picture films, -films, tapes and discs;
and
24) The lease or the use of or the right to use radio, television,
satellite transmission and cable television time.
LEASE OF PROPERTIES – subject to the tax, irrespective of the place
where the contract of lease or licensing agreement was executed, if
the property is leased or used in the Philippines.
GROSS RECEIPT – means cash or its equivalent actually received or
constructively received (not including the VAT) as:
a. Payments on the Contract price, compensation, service fee,
rental or royalty,
b. Payments or materials supplied with the services and
c. Deposits and advanced payments on the contract for the
services
Note:
CONSTRUCTIVE RECEIPT – occurs when the money consideration or
its equivalent is placed in the control of the person who rendered
the service without restriction by the payor.
 Ex: Bank Deposit; Issuance by the DR of a notice to offset
any debt or obligation and acceptance by the seller as
payment for the services rendered
 Gross receipts do not include amounts earmarked for payment
to unrelated 3rd parties or received as reimbursement for
advance payment on behalf of another which do not redound
to the benefit of the payor
 It is considered payment to a 3rd party if the same is made
to settle an obligation of another person (like customer or
client) to the said 3rd party.
 It is an advance payment on behalf of another if the
payment is to a 3rd party for a present or future obligation
 UNRELATED PARTY shall not include the;
a. Taxpayer’s employees
b. Partners
c. Affiliates
d. Relatives by consanguinity or affinity within the 4th
Degree; and
e. Trust funds where the taxpayer is the trustor, trustee,
or beneficiary, even if covered by an agreement to the
contrary
(B) Transactions Subject to (0%) Rate
 The following services performed in the Philippines by VAT
registered persons shall be subject to zero percent (0%) rate:
9. Processing, manufacturing or repacking goods:
d) For other persons doing business outside the Philippines
e) Goods are subsequently exported; and
f) The services are paid for in acceptable foreign currency
and accounted for in accordance with the rules and
regulations of the (BSP);
Note:
 subject to the (12%) VAT and no longer be subject to zero
percent (0%) VAT rate upon satisfaction of the following
conditions:

e. The successful establishment and implementation of an
enhanced VAT refund system that grants refunds of
creditable input tax within (90) days from the filing of the
VAT refund application with the Bureau:
 To determine the effectivity of item no. 1, all applications
filed from January 1, 2018 shall be processed and must be
decided within (90) days from the filing of the VAT refund
application; and
f. All pending VAT refund claims as of December 31, 2017 shall
be fully paid in cash by December 31, 2019.
Taxation Law Vol. II
By Atty. Raegan Capuno
III. Registered enterprises within a separate customs territory
as provided under special law; and
IV. Registered enterprises within tourism enterprise zones as
declared by the TIEZA subject to the provisions under RA.
9593:The Tourism Act of 2009.
 Department of Finance shall establish a VAT refund center in
the (BIR) and (BOC) that will handle the processing and granting
of cash refunds of creditable input tax.
 An amount equivalent to (5%) of the total VAT collection of the
BIR and the BOC from the immediately preceding year shall be:
a. Automatically appropriated annually; and
b. Treated as a special account in the General Fund or as
trust receipts for the purpose of funding claims for VAT
Refund
- Any unused fund, at the end of the year shall revert
to the General Fund.

10. Services other than those mentioned in the preceding  BIR and the BOC shall be required to submit to the COCCTRP a
paragraph, rendered to a: quarterly report of all pending claims for refund and any
d) Person engaged in business conducted outside the unused fund.
Philippines or
e) Nonresident person not engaged in business who is Note:
outside the Philippines when the services are performed ZERO RATED TRANSACTIONS EFFECTIVELY ZERO-RATED
f) The consideration for which is paid for in acceptable
TRANSACTIONS
foreign currency and accounted for in accordance with the
rules and regulations of the (BSP);
DEF: Export sale of goods and DEF: Sale of goods or supply of
11. Services rendered to persons or entities whose exemption supply of services services to persons or entities
under special laws or international agreements to which the whose exemption under special
Philippines is a signatory effectively subjects the supply of such laws or international agreements
services to (0%) rate; to which the PH is a signatory
effectively subjects such
12. Services rendered to persons engaged in international shipping transactions to a zero rate.
or international air transport operations, including leases of
property for use thereof:
 These services shall be exclusive for international shipping
or air transport operations; Such Rate does not yield any tax
chargeable against the
DESTINATION PRINCIPLE – exports are zero-rated whereas imports purchaser.
are taxed.
The seller of such transactions
13. Services performed by subcontractors and/or contractors in charges no output tax, but can
processing, converting, or manufacturing goods for an claim a refund or a tax credit
enterprise whose export sales exceed (70%) of total annual certificate for the VAT previously
production; charged by suppliers
For the benefit of the purchaser
Note:
 subject to the (12%) VAT and no longer be subject to zero For the Benefit of the Seller
percent (0%) VAT rate upon satisfaction of the following
conditions: In both, the seller who charges zero output tax can claim a refund or
g. The successful establishment and implementation of an a tax credit certificate for the VAT previously charged by suppliers.
enhanced VAT refund system that grants refunds of
creditable input tax within (90) days from the filing of the
VAT refund application with the Bureau:
 To determine the effectivity of item no. 1, all applications Sec 109 Exempt Transactions.
filed from January 1, 2018 shall be processed and must be
decided within (90) days from the filing of the VAT refund VAT-EXEMPT TRANSACTIONS – the sale of goods or properties
application; and and/or services and the use or lease of properties that is not subject
h. All pending VAT refund claims as of December 31, 2017 shall to VAT (output tax) and the seller is not allowed any tax credit of
be fully paid in cash by December 31, 2019. VAT (input tax) on purchases.

14. Transport of passengers and cargo by domestic air or sea
vessels from the Philippines to a foreign country; and
15. Sale of power or fuel generated through renewable sources of
energy such as, but not limited to, biomass, solar, wind,
hydropower, geothermal, ocean energy, and other emerging
energy sources using technologies such as fuel cells and
hydrogen fuels.
16. Services rendered to:
(1) Subject to the provisions of Subsection (2) hereof
 the following transactions shall be exempt from the VAT:
(A) Sale of agricultural products; marine food products in their
original state, livestock and poultry of a kind generally used as,
or yielding or producing foods from human consumption; and
breeding stock and genetic materials therefor.
Products classified under this par shall be considered in their
original state even if they have undergone the simple

processes of preparation or preservation for the market such
as freezing, drying, salting, broiling, roasting, smoking or
stripping. Polished and/or husked rice, corn grits, raw cane
sugar and molasses, ordinary salt and copra shall be
considered in their original state.
Note:
LIVESTOCK – does not include fighting cocks, race horses, zoo
animals and other animals generally considered as pets.
ORIGINAL STATE – include even if the products have
undergone the simple process of preparation or preservation
for the market.
RAW CANE SUGAR – natural sugar extracted from sugarcane
through simple mechanical process.
 It only refer to raw cane sugar produced from conducting
only 1 stage of filtering and centrifuging without any other
further process applied thereto
(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)
Note:
SPECIALTY FEEDS – non-agricultural feeds or foods 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 PH returning from abroad and non-
resident citizens coming to resettle in the PH
 Such goods are exempt from customs duties under the
Tariff and Customs Code
(D) Importation of professional instruments and implements,
tools of trade, occupation or employment, wearing apparel,
domestic animals, and personal and household effects (Except
vehicles, aircrafts, machineries and other similar goods for use
in manufacture – subject to duties, taxes and other charges)
 Belonging to:
a. Persons coming to settle in the Philippines or
b. (Overseas Filipinos) Filipinos or their families and
descendants who are now residents or citizens of
other countries
 in quantities and of the class suitable to the profession,
rank or position of the persons importing said items, for
their own use and not for barter or sale, accompanying
such persons, or arriving within a reasonable time:
- BOC may, upon the production of satisfactory
evidence that such persons are actually coming to
settle in the Philippines and that the goods are
brought from their former place of abode, exempt
such goods from payment of duties and taxes:
(E) Services subject to percentage tax under Title V;
(F) Services by agricultural contract growers and milling for others
of palay into rice, corn into grits and sugar cane into raw
sugar;
(G) Medical, dental, hospital and veterinary services except those
rendered by professionals;
Note:
Taxation Law Vol. II
By Atty. Raegan Capuno
 Laboratory services are exempted. But if hospital or clinic
operates a pharmacy or drug store, the sale of drugs and
medicine is subject to VAT
 Health care company which merely provides and arranges
for the provision of pre-med health care services to its
members in NOT VAT-EXEMPT. It does not provide
medical services.
(H) Educational services rendered by private educational
institutions, duly accredited by the (DepEd), (CHED), (TESDA)
and those rendered by government educational institutions;
Note:
 Educational services do not include seminars, in-service
training, review classes and other similar services
rendered by persons who are not accredited by the
DEPED, CHED or TESDA
(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 PD 529;
(L) Sales by agricultural cooperatives duly registered with the CDA
to their members as well as sale of their produce, whether in
its original state or processed form, to non-members; their
importation of direct farm inputs, machineries and equipment,
including spare parts thereof, to be used directly and
exclusively in the production and/or processing of their
produce;
(M) Gross receipts from lending activities by credit or multi-
purpose cooperatives duly registered with the Cooperative
Development Authority;
(N) Sales by non-agricultural, non-electric and non-credit
cooperatives duly registered with the Cooperative
Development Authority: Provided, That the share capital
contribution of each member does not exceed (₱15,000) and
regardless of the aggregate capital and net surplus ratably
distributed among the members;
(O) Export sales by persons who are not VAT-registered;
(P) Sale of real properties not primarily held for sale to customers
or held for lease in the ordinary course of trade or business or
real property utilized for low-cost and socialized housing as
defined by RA 7279: Urban Development and Housing Act of
1992, and other related laws, residential lot valued at
(1,500,000) and below, house and lot, and other residential
dwellings valued at (₱2,500,000) and below: Provided, That
beginning January 1, 2021, the VAT exemption shall only apply
to sale of real properties not primarily held for sale to
customers or held for lease in the ordinary course of trade or
business, sale of real property utilized for socialized housing as
defined by RA. 7279, sale of house and lot, and other
residential dwellings with selling price of not more than
(₱2,000,000): Provided, further, That every (3) years
thereafter, the amount herein stated shall be adjusted to its
present value using the Consumer Price Index, as published by
the Philippine Statistics Authority (PSA);
 Taxation Law Vol. II
By Atty. Raegan Capuno
(Q) Lease of a residential unit with a monthly rental not exceeding
(₱15,000);

(R) Sale, importation, printing or publication of books and any

newspaper, magazine, review or bulletin which appears at
regular intervals with fixed prices or 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: Provided,
That the fuel, goods, and supplies shall be used for
international shipping or air transport operations;

(V) Services of bank, non-bank financial intermediaries performing

quasi-banking functions, and other non-bank financial
intermediaries;

(W) Sale or lease of goods and services to senior citizens and

persons with disability, as provided under RA. 9994 (Expanded
Senior Citizens Act of 2010) and 10754 (An Act Expanding the
Benefits and Privileges of Persons With Disability),
respectively;

(X) Transfer of property pursuant to Section 40(C)(2) of the NIRC,

as amended;

(Y) Association dues, membership fees, and other assessments

and charges collected by homeowners associations and
condominium corporations;

(Z) Sale of gold to the (BSP);

(AA) Sale of drugs and medicines prescribed for diabetes, high

cholesterol, and hypertension beginning January 1, 2019; and
(BB) Sale or lease of goods or properties or the performance of
services other than the transactions mentioned in the
preceding paragraphs, the gross annual sales and/or receipts
do not exceed the amount of (₱3,000,000).

RECORDINGS

 Sec 109, Provision on VAT Exempt Transactions.

 How would you read Sec 109, That the transaction aside from
importation should be pursued or done in the course of trade
or business. Let it be the premises.