Tax 2 Midterms

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Taxation 2 Midterms reviewer

Prof. O. Carag
2 Semester A.Y. 2011-2012
nd
Janz Hanna Ria N. Serrano

Part I. Estate and Donors Tax
ESTATE TAX
I. Basic Principles of Estate Tax
A. Estate Tax Defined
Estate Tax is the tax on the right to transmit property at death and on certain transfers which are made by the statute the equivalent of
testamentary dispositions, and is measured by the value of property at the time of death.
B. Nature and Purpose of Estate Tax
(1) Estate tax is not a direct tax on property. Neither is it a capitation tax; that is the tax is laid neither on the property nor on the transferor or the
transferee. in other words, it is an excise or privilege tax.
(2) The object of estate tax is to tax the shifting of economic benefits and enjoyment of property from the dead to the living
Purpose: to add income/ benefits-received theory/ privilege theory / ability to pay theory / redistribution of wealth theory
C. Time of Transfer of Properties
Lorenzo v. Posadas. Estate and inheritance tax laws rest in their essence upon the principle that death is the generating source from which the
taxing power takes it being and that it is the power to transmit, or the transmission from the dead to the living in which the tax is more immediately
based. Hence, it accrues as of the death o the decedent by operation of law.
D. Governing Law statute in force at the time of death of the decedent
II. Determination of Gross Estate
NIRC, 85. Gross Estate. - the value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property,
real or personal, tangible or intangible, wherever situated: Provided, however, that in the case of a nonresident decedent who at the time of his death
was not a citizen of the Philippines, only that part of the entire gross estate which is situated in the Philippines shall be included in his taxable estate.
(A) Decedent's Interest. - To the extent of the interest therein of the decedent at the time of his death;
(B) Transfer in Contemplation of Death. - To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or
otherwise, in contemplation of or intended to take effect in possession or enjoyment at or after death, or of which he has at any time made a
transfer, by trust or otherwise, under which he has retained for his life or for any period which does not in fact end before his death (1) the
possession or enjoyment of, or the right to the income from the property, or (2) the right, either alone or in conjunction with any person, to
designate the person who shall possess or enjoy the property or the income therefrom; except in case of a bonafide sale for an adequate and full
consideration in money or money's worth.
(C) Revocable Transfer.
(1) To the extent of any interest therein, of which the decedent has at any time made a transfer (except in case of a bona fide sale for an adequate
and full consideration in money or money's worth) by trust or otherwise, where the enjoyment thereof was subject at the date of his death to
any change through the exercise of a power (in whatever capacity exerciseable) by the decedent alone or by the decedent in conjunction with
any other person (without regard to when or from what source the decedent acquired such power), t o alter, amend, revoke, or terminate, or
where any such power is relinquished in contemplation of the decedent's death.
(2) For the purpose of this Subsection, the power to alter, amend or revoke shall be considered to exist on the date of the decedent's death even
though the exercise of the power is subject to a precedent giving of notice or even though the alteration, amendment or revocation takes effect
only on the expiration of a stated period after the exercise of the power, whether or not on or before the date of the decedent's death notice
has been given or the power has been exercised. In such cases, proper adjustment shall be made representing the interests which would have
been excluded from the power if the decedent had lived, and for such purpose if the notice has not been given or the power has not been
exercised on or before the date of his death, such notice shall be considered to have been given, or the power exercised, on the date of his
death.
(D) Property Passing Under General Power of Appointment. - To the extent of any property passing under a general power of appointment
exercised by the decedent: (1) by will, or (2) by deed executed in contemplation of, or intended to take effect in possession or enjoyment at, or after
his death, or (3) by deed under which he has retained for his life or any period not ascertainable without reference to his death or for any period
which does not in fact end before his death (a) the possession or enjoyment of, or the right to the income from, the property, or (b) the right, either
alone or in conjunction with any person, to designate the persons who shall possess or enjoy the property or the income therefrom; except in case
of a bona fide sale for an adequate and full consideration in money or money's worth.
(E) Proceeds of Life Insurance. - To the extent of the amount receivable by the estate of the deceased, his executor, or administrator, as insurance
under policies taken out by the decedent upon his own life, irrespective of whether or not the insured retained the power of revocation, or to the
extent of the amount receivable by any beneficiary designated in the policy of insurance, except when it is expressly stipulated that the designation
of the beneficiary is irrevocable.
(F) Prior Interests. - Except as otherwise specifically provided therein, Subsections (B), (C) and (E) of this Section shall apply to the transfers, trusts,
estates, interests, rights, powers and relinquishment of powers, as severally enumerated and described therein, whether made, created, arising,
existing, exercised or relinquished before or after the effectivity of this Code.
(G) Transfers of Insufficient Consideration. - If any one of the transfers, trusts, interests, rights or powers enumerated and described in Subsections
(B), (C) and (D) of this Section is made, created, exercised or relinquished for a consideration in money or money's worth, but is not a bona fide sale
for an adequate and full consideration in money or money's worth, there shall be included in the gross estate only the excess of the fair market
value, at the time of death, of the property otherwise to be included on account of such transaction, over the value of the consideration received
therefor by the decedent.
(H) Capital of the Surviving Spouse. - The capital of the surviving spouse of a decedent shall not, for the purpose of this Chapter, be deemed a part of
his or her gross estate.
A. Classification of Decedent
1. Citizen and Resident Resident and non-resident citizens and resident aliens
2. Non-resident Alien
B. Composition of Gross Estate, in General
RR 02-03, Sec. 4. COMPOSITION OF THE GROSS ESTATE. The gross estate of a decedent shall be comprised of the following properties and
interest therein at the time of his death, including revocable transfers and transfers for insufficient consideration, etc.:
A) Residents and citizens all properties, real or personal, tangible or intangible, wherever situated.
B) Non-resident aliens only properties situated in the Philippines provided, that, with respect to intangible personal property, its inclusion in the
gross estate is subject to the rule of reciprocity provided for under Section 104 of the Code.
1. Citizen and Resident all properties, real or personal, tangible or intangible, wherever situated
2. Non-resident Alien only properties situated in the Philippines, except for intangible property which is subject to the rule on reciprocity
a. Rule on Reciprocity
NIRC, 104. Definitions. - For purposes of this Title, the terms 'gross estate' and 'gifts' include real and personal property, whether
tangible or intangible, or mixed, wherever situated: Provided, however, That where the decedent or donor was a nonresident alien at the
time of his death or donation, as the case may be, his real and personal property so transferred but which are situated outside the
Philippines shall not be included as part of his 'gross estate' or 'gross gift': Provided, further, That franchise which must be exercised in
the Philippines; shares, obligations or bonds issued by any corporation or sociedad anonima organized or constituted in the Philippines
in accordance with its laws; shares, obligations or bonds by any foreign corporation eighty-five percent (85%) of the business of which is
located in the Philippines; shares, obligations or bonds issued by any foreign corporation if such shares, obligations or bonds have
acquired a business situs in the Philippines; shares or rights in any partnership, business or industry established in the Philippines, shall
be considered as situated in the Philippines: Provided, still further, that no tax shall be collected under this Title in respect of intangible
personal property: (a) if the decedent at the time of his death or the donor at the time of the donation was a citizen and resident of a
foreign country which at the time of his death or donation did not impose a transfer tax of any character, in respect of intangible personal
property of citizens of the Philippines not residing in that foreign country, or (b) if the laws of the foreign country of which the decedent
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or donor was a citizen and resident at the time of his death or donation allows a similar exemption from transfer or death taxes of every
character or description in respect of intangible personal property owned by citizens of the Philippines not residing in that foreign
country.
The term 'deficiency' means: (a) the amount by which tax imposed by this Chapter exceeds the amount shown as the tax by
the donor upon his return; but the amount so shown on the return shall first be increased by the amount previously assessed (or
Collected without assessment) as a deficiency, and decreased by the amounts previously abated, refunded or otherwise repaid in respect
of such tax, or (b) if no amount is shown as the tax by the donor, then the amount by which the tax exceeds the amounts previously
assessed, (or collected without assessment) as a deficiency, but such amounts previously assessed, or collected without assessment, shall
first be decreased by the amount previously abated, refunded or otherwise repaid in respect of such tax.
C. Concept of Residence for Estate Tax Purposes
For purposes of estate taxation, residence refers to the permanent home, the place to which whenever absent, for business or pleasure, one
intends to return, and depends on the facts and circumstances, in the sense that they disclose intent. It is therefore, not necessarily the actual place
of residence.
D. Items to be included in determining Gross Estate
NIRC 85(A-G), supra.
1. Decedents interest
2. Transfers in contemplation of death
3. Revocable transfers
4. Property passing under a general power of appointment
5. Proceeds of life insurance
6. Prior interests
7. Transfers of insufficient consideration
E. Specific Items to be included in the Gross Estate
NIRC, 104, supra.
F. Valuation of the Gross Estate
NIRC, 88. Determination of the Value of the Estate. -
(A) Usufruct. - To determine the value of the right of usufruct, use or habitation, as well as that of annuity, there shall be taken into account the
probable life of the beneficiary in accordance with the latest Basic Standard Mortality Table, to be approved by the Secretary of Finance, upon
recommendation of the Insurance Commissioner.
(B) Properties. - The estate shall be appraised at its fair market value as of the time of death. However, the appraised value of real property as of
the time of death shall be, whichever is higher of
(1) The fair market value as determined by the Commissioner, or
(2) The fair market value as shown in the schedule of values fixed by the Provincial and City Assessors.
RR 02-03, Sec. 4, supra.
III. Determination of Net Estate/Allowable Deductions from Gross Estate
NIRC, 86. Computation of Net Estate. - For the purpose of the tax imposed in this Chapter, the value of the net estate shall be determined:
(A) Deductions Allowed to the Estate of Citizen or a Resident. - In the case of a citizen or resident of the Philippines, by deducting from the value of
the gross estate
(1) Expenses, Losses, Indebtedness, and taxes. - Such amounts
(a) For actual funeral expenses or in an amount equal to five percent (5%) of the gross estate, whichever is lower, but in no case to exceed
Two hundred thousand pesos (P200,000);
(b) For judicial expenses of the testamentary or intestate proceedings;
(c) For claims against the estate: Provided, That at the time the indebtedness was incurred the debt instrument was duly notarized and, if
the loan was contracted within three (3) years before the death of the decedent, the administrator or executor shall submit a statement
showing the disposition of the proceeds of the loan;
(d) For claims of the deceased against insolvent persons where the value of decedent's interest therein is included in the value of the gross
estate; and
(e) For unpaid mortgages upon, or any indebtedness in respect to, property where the value of decedent's interest therein, undiminished by
such mortgage or indebtedness, is included in the value of the gross estate, but not including any income tax upon income received after
the death of the decedent, or property taxes not accrued before his death, or any estate tax. The deduction herein allowed in the case of
claims against the estate, unpaid mortgages or any indebtedness shall, when founded upon a promise or agreement, be limited to the
extent that they were contracted bona fide and for an adequate and full consideration in money or money's worth. There shall also be
deducted losses incurred during the settlement of the estate arising from fires, storms, shipwreck, or other casualties, or from robbery,
theft or embezzlement, when such losses are not compensated for by insurance or otherwise, and if at the time of the filing of the return
such losses have not been claimed as a deduction for the income tax purposes in an income tax return, and provided that such losses
were incurred not later than the last day for the payment of the estate tax as prescribed in Subsection (A) of Section 91.
(2) Property Previously Taxed. - An amount equal to the value specified below of any property forming a part of the gross estate situated in the
Philippines of any person who died within five (5) years prior to the death of the decedent, or transferred to the decedent by gift within five
(5) years prior to his death, where such property can be identified as having been received by the decedent from the donor by gift, or from
such prior decedent by gift, bequest, devise or inheritance, or which can be identified as having been acquired in exchange for property so
received:
One hundred percent (100%) of the value, if the prior decedent died within one (1) year prior to the death of the decedent, or if the
property was transferred to him by gift within the same period prior to his death;
Eighty percent (80%) of the value, if the prior decedent died more than one (1) year but not more than two (2) years prior to the death of
the decedent, or if the property was transferred to him by gift within the same period prior to his death;
Sixty percent (60%) of the value, if the prior decedent died more than two (2) years but not more than three (3) years prior to the death
of the decedent, or if the property was transferred to him by gift within the same period prior to his death;
Forty percent (40%) of the value, if the prior decedent died more than three (3) years but not more than four (4) years prior to the death
Twenty percent (20%) of the value, if the prior decedent died more than four (4) years but not more than five (5) years prior to the death
These deductions shall be allowed only where a donor's tax or estate tax imposed under this Title was finally determined and paid by or
on behalf of such donor, or the estate of such prior decedent, as the case may be, and only in the amount finally determined as the value of
such property in determining the value of the gift, or the gross estate of such prior decedent, and only to the extent that the value of such
property is included in the decedent's gross estate, and only if in determining the value of the estate of the prior decedent, no deduction was
allowable under paragraph (2) in respect of the property or properties given in exchange therefor. Where a deduction was allowed of any
mortgage or other lien in determining the donor's tax, or the estate tax of the prior decedent, which was paid in whole or in part prior to the
decedent's death, then the deduction allowable under said Subsection shall be reduced by the amount so paid. Such deduction allowable shall
be reduced by an amount which bears the same ratio to the amounts allowed as deductions under paragraphs (1) and (3) of this Subsection as
the amount otherwise deductible under said paragraph (2) bears to the value of the decedent's estate. Where the property referred to consists
of two or more items, the aggregate value of such items shall be used for the purpose of computing the deduction.
(3) Transfers for Public Use. - The amount of all the bequests, legacies, devises or transfers to or for the use of the Government of the Republic of
the Philippines, or any political subdivision thereof, for exclusively public purposes.
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(4) The Family Home. - An amount equivalent to the current fair market value of the decedent's family home: Provided, however, That if the said
current fair market value exceeds One million pesos (P1,000,000), the excess shall be subject to estate tax. As a sine qua non condition for the
exemption or deduction, said family home must have been the decedent's family home as certified by the barangay captain of the locality.
(5) Standard Deduction. - An amount equivalent to One million pesos (P1,000,000).
(6) Medical Expenses. - Medical Expenses incurred by the decedent within one (1) year prior to his death which shall be duly substantiated with
receipts: Provided, That in no case shall the deductible medical expenses exceed Five Hundred Thousand Pesos (P500,000).
(7) Amount Received by Heirs Under Republic Act No. 4917. - Any amount received by the heirs from the decedent - employee as a consequence
of the death of the decedent-employee in accordance with Republic Act No. 4917: Provided, That such amount is included in the gross estate of
the decedent.
(B) Deductions Allowed to Nonresident Estates. - In the case of a nonresident not a citizen of the Philippines, by deducting from the value of that part
of his gross estate which at the time of his death is situated in the Philippines:
(1) Expenses, Losses, Indebtedness and Taxes. - That proportion of the deductions specified in paragraph (1) of Subsection (A) of this Section
which the value of such part bears to the value of his entire gross estate wherever situated;
(2) Property Previously Taxed. - An amount equal to the value specified below of any property forming part of the gross estate situated in the
Philippines of any person who died within five (5) years prior to the death of the decedent, or transferred to the decedent by gift within five
(5) years prior to his death, where such property can be identified as having been received by the decedent from the donor by gift, or from
such prior decedent by gift, bequest, devise or inheritance, or which can be identified as having been acquired in exchange for property so
received:
One hundred percent (100%) of the value if the prior decedent died within one (1) year prior to the death of the decedent, or if the
property was transferred to him by gift, within the same period prior to his death;
Eighty percent (80%) of the value, if the prior decedent died more than one (1) year but not more than two (2) years prior to the death of
the decedent, or if the property was transferred to him by gift within the same period prior to his death;
Sixty percent (60%) of the value, if the prior decedent died more than two (2) years but not more than three (3) years prior to the death
Forty percent (40%) of the value, if the prior decedent died more than three (3) years but not more than four (4) years prior to the death
of the decedent, or if the property was transferred to him by gift within the same period prior to his death; and
Twenty percent (20%) of the value, if the prior decedent died more than four (4) years but not more than five (5) years prior to the death
of the decedent, or if the property was transferred to him by gift within the same period prior to his death.
These deductions shall be allowed only where a donor's tax, or estate tax imposed under this Title is finally determined and paid by or on
behalf of such donor, or the estate of such prior decedent, as the case may be, and only in the amount finally determined as the value of such
property in determining the value of the gift, or the gross estate of such prior decedent, and only to the extent that the value of such property
is included in that part of the decedent's gross estate which at the time of his death is situated in the Philippines; and only if, in determining
the value of the net estate of the prior decedent, no deduction is allowable under paragraph (2) of Subsection (B) of this Section, in respect of
the property or properties given in exchange therefore. Where a deduction was allowed of any mortgage or other lien in determining the
donor's tax, or the estate tax of the prior decedent, which was paid in whole or in part prior to the decedent's death, then the deduction
allowable under said paragraph shall be reduced by the amount so paid. Such deduction allowable shall be reduced by an amount which bears
the same ratio to the amounts allowed as deductions under paragraphs (1) and (3) of this Subsection as the amount otherwise deductible
under paragraph (2) bears to the value of that part of the decedent's gross estate which at the time of his death is situated in the Philippines.
Where the property referred to consists of two (2) or more items, the aggregate value of such items shall be used for the purpose of computing
the deduction.
(3) Transfers for Public Use. - The amount of all bequests, legacies, devises or transfers to or for the use of the Government of the Republic of the
Philippines or any political subdivision thereof, for exclusively public purposes.
(C) Share in the Conjugal Property. - the net share of the surviving spouse in the conjugal partnership property as diminished by the obligations
properly chargeable to such property shall, for the purpose of this Section, be deducted from the net estate of the decedent.
(D) Miscellaneous Provisions. - No deduction shall be allowed in the case of a nonresident not a citizen of the Philippines, unless the executor,
administrator, or anyone of the heirs, as the case may be, includes in the return required to be filed under Section 90 the value at the time of his
death of that part of the gross estate of the nonresident not situated in the Philippines.
(E) Tax Credit for Estate Taxes paid to a Foreign Country.
(1) In General. - The tax imposed by this Title shall be credited with the amounts of any estate tax imposed by the authority of a foreign country.
(2) Limitations on Credit. - The amount of the credit taken under this Section shall be subject to each of the following limitations:
(a) The amount of the credit in respect to the tax paid to any country shall not exceed the same proportion of the tax against which such
credit is taken, which the decedent's net estate situated within such country taxable under this Title bears to his entir net estate; and
(b) The total amount of the credit shall not exceed the same proportion of the tax against which such credit is taken, which the decedent's
net estate situated outside the Philippines taxable under this Title bears to his entire net estate.
A. Net Estate of Decedent who is either Citizen or Resident of the Philippines
NIRC, 86(A), supra.
value of estate shall be determined by deducting from the value of gross estate:
1. Expenses, losses, indebtedness and taxes
RR 02-03, Sec. 6(A)(1). The value of the net estate of a citizen or resident alien of the Philippines shall be determined by deducting from the
value of the gross estate the following items of deduction :
(A) Expenses, losses, indebtedness, and taxes- Such amounts for:
(1) Actual funeral expenses (whether paid or unpaid) up to the time of interment, or an amount equal to five percent (5%) of
the gross estate, whichever is lower, but in no case to exceed P200,000.
Any amount of funeral expenses in excess of the P200,000 threshold, whether the same had actually been paid or still payable, shall
not be allowed as a deduction under this Subsection. Neither shall the unpaid portion of the funeral expenses incurred which is in
excess of the P200,000 threshold be allowed to be claimed as a deduction under claims against the estate provided under
Subsection (C) hereof.
The term "FUNERAL EXPENSES" is not confined to its ordinary or usual meaning. They include:
i. The mourning apparel of the surviving spouse and unmarried minor children of the deceased bought and used on the occasion
of the burial;
ii. Expenses for the deceaseds wake, including food and drinks;
iii. Publication charges for death notices;
iv. Telecommunication expenses incurred in informing relatives of the deceased;
v. Cost of burial plot, tombstones, monument or mausoleum but not their upkeep. In case the deceased owns a family estate or
several burial lots, only the value corresponding to the plot where he is buried is deductible;
vi. Interment and/or cremation fees and charges; and
vii. All other expenses incurred for the performance of the rites and ceremonies incident to interment.
Expenses incurred after the interment, such as for prayers, masses, entertainment, or the like are not deductible. Any portion of the
funeral and burial expenses borne or defrayed by relatives and friends of the deceased are not deductible.
Medical expenses as of the last illness will not form part of funeral expenses but should be claimed under subsection (F) of this
section.
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Actual funeral expenses shall mean those which are actually incurred in connection with the interment or burial of the deceased.
The expenses must be duly supported by receipts or invoices or other evidence to show that they were actually incurred.
Illustrations on how to determine the amount of allowable funeral expenses

(a) If five percent (5%) of the gross estate is P70,000 and the amount actually incurred is P50,000, only P50,000 will be allowed as
deduction;
(b) If the expenses actually incurred amount to P90,000 and five percent (5%) of the gross estate is P70,000, only P70,000 will be
allowed as deduction;
(c) If five percent (5%) of the gross estate is P220,000 and the amount actually incurred is P215,000, the maximum amount that
may be deducted is only P200,000;
(d) If five percent (5%) of the gross estate is P 100,000 and the total amount incurred is P150,000 where P20,000 thereof is still unpaid, the only
amount that can be claimed as deduction for funeral expenses is P100,000. The entire P50,000 excess amount consisting of P30,000 paid
amount and P20,000 unpaid amount can no longer be claimed as FUNERAL EXPENSES. Neither can the P20,000 unpaid portion be deducted
from the gross estate as CLAIMS AGAINST THE ESTATE under Subsection (C) hereof.
a. Funeral expenses lower between actual and 5% of gross estate; ceiling: PhP 200,000
b. Judicial expenses of the testamentary and intestate proceedings
Rule 81.
Rule 86.
c. Claims of deceased against insolvent persons
d. Casualty losses
e. Claims against the estate
(1) Requisites for deductibility
RR 02-03, Sec 6(A)(3)(i). Claims against the estate. The word claims is generally construed to mean debts or demands of a
pecuniary nature which could have been enforced against the deceased in his lifetime and could have been reduced to simple
money judgements. Claims against the estate or indebtedness in respect of property may arise out of : (1) Contract; (2) Tort; or (3)
Operation of Law.
i. Requisites for Deductibility of Claims Against the Estate
(a) The liability represents a personal obligation of the deceased existing at the time of his death except unpaid obligations
incurred incident to his death such as unpaid funeral expenses (i.e., expenses incurred up to the time of interment) and
unpaid medical expenses which are classified under a different category of deductions pursuant to these Regulations;
(b) The liability was contracted in good faith and for adequate and full consideration in money or moneys worth;
(c) The claim must be a debt or claim which is valid in law and enforceable in court;
(d) The indebtedness must not have been condoned by the creditor or the action to collect from the decedent must not have
prescribed.
(2) Substantiation requirements
RR 02-03, Sec 6(A)(3)(ii). Substantiation Requirements. - All unpaid obligations and liabilities of the decedent at the time of his
death (except unpaid funeral or medical expenses which are deductible under a different category) are allowed as deductions from
gross estate. Provided, however, that the following requirements/documents are complied with/submitted:
(a) In case of simple loan (including advances):
(1) The debt instrument must be duly notarized at the time the indebtedness was incurred, such as promissory note or
contract of loan, except for loans granted by financial institutions where notarization is not part of the business
practice/policy of the financial institution-lender;
(2) Duly notarized Certification from the creditor as to the unpaid balance of the debt, including interest as of the time of
death. If the creditor is a corporation, the sworn certification should be signed by the President, or Vice-President, or
other principal officer of the corporation. If the creditor is a partnership, the sworn certification should be signed by any
of the general partners. In case the creditor is a bank or other financial institutions, the Certification shall be executed by
the branch manager of the bank/financial institution which monitors and manages the loan of the decedent-debtor. If the
creditor is an individual, the sworn certification should be signed by him. In any of these cases, the one who should
certify must not be a relative of the borrower within the fourth civil degree, either by consanguinity or affinity, except
when the requirement below is complied with. When the lender, or the President/Vice-president /principal officer of the
creditor-corporation, or the general partner of the creditor-partnership is a relative of the debtor in the degree
mentioned above, a copy of the promissory note or other evidence of the indebtedness must be filed with the RDO having
jurisdiction over the borrower within fifteen days from the execution thereof.
(3) In accordance with the requirements as prescribed in existing or prevailing internal revenue issuances, proof of financial
capacity of the creditor to lend the amount at the time the loan was granted, as well as its latest audited balance sheet
with a detailed schedule of its receivable showing the unpaid balance of the decedent-debtor. In case the creditor is an
individual who is no longer required to file income tax returns with the Bureau, a duly notarized Declaration by the
creditor of his capacity to lend at the time when the loan was granted without prejudice to verification that may be made
by the BIR to substantiate such declaration of the creditor. If the creditor is a non-resident, the executor/administrator or
any of the legal heirs must submit a duly notarized declaration by the creditor of his capacity to lend at the time when the
loan was granted, authenticated or certified to as such by the tax authority of the country where the non-resident
creditor is a resident;
(4) A statement under oath executed by the administrator or executor of the estate reflecting the disposition of the proceeds
of the loan if said loan was contracted within three (3) years prior to the death of the decedent;
(b) If the unpaid obligation arose from purchase of goods or services:
(1) Pertinent documents evidencing the purchase of goods or service, such as sales invoice/delivery receipt (for sale of
goods), or contract for the services agreed to be rendered (for sale of service), as duly acknowledged, executed and
signed by decedent/debtor and creditor, and statement of account given by the creditor as duly received by the
decedent/debtor;
(2) Duly notarized Certification from the creditor as to the unpaid balance of the debt, including interest as of the time of
death. If the creditor is a corporation, the sworn Certification should be signed by the President, or Vice-President, or
other principal officer of the corporation. If the creditor is a partnership, the sworn certification should be signed by any
of the general partners. If the creditor is a sole proprietorship, the sworn certification should be signed by the owner of
the business. In any of these cases, the one who issues the certification must not be a relative of the decedent-debtor
within the fourth civil degree, either by consanguinity or affinity, except when the requirement below is complied with.
When the lender, or the President/Vice-President/principal officer of the creditor-corporation, or the general partner of
the creditor-partnership is a relative of the debtor in the degree mentioned above, a copy of the promissory note or other
evidence of the indebtedness must be filed with the RDO having jurisdiction over the borrower within fifteen days from
the execution thereof.
(3) Certified true copy of the latest audited balance sheet of the creditor with a detailed schedule of its receivable showing
the unpaid balance of the decedent-debtor. Moreover, a certified true copy of the updated latest subsidiary
ledger/records of the debt of the debtor-decedent, (certified by the creditor, i.e., the officers mentioned in the preceding
paragraphs) should likewise be submitted.
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(c) Where the settlement is made through the Court in a testate or intestate proceeding, pertinent documents filed with the Court
evidencing the claims against the estate, and the Court Order approving the said claims, if already issued, in addition to the
documents mentioned in the preceding paragraphs.
f. Unpaid mortgages
g. Taxes
2. Property Previously Taxed (Vanishing Deduction)
a. Requisites for Vanishing Deductions
3. Transfers for Public Use
4. Family Home
RR 02-03, Sec 6(D). The family home - An amount equivalent to the current fair market value of the decedents family home: Provided,
however, That if the said current fair market value exceeds One million pesos (P1,000,000), the excess shall be subject to estate tax. As a sine
qua non condition for the exemption or deduction, said family home must have been the decedents family home as certified by the barangay
captain of the locality.
a) Definition of terms-
Family home The dwelling house, including the land on which it is situated, where the husband and wife, or a head of the family, and
members of their family reside, as certified to by the Barangay Captain of the locality. The family home is deemed constituted on the
house and lot from the time it is actually occupied as a family residence and is considered as such for as long as any of its beneficiaries
actually resides therein. (Arts. 152 and 153, Family Code)
For purposes of these regulations, however, actual occupancy of the house or house and lot as the family residence shall not be
considered interrupted or abandoned in such cases as the temporary absence from the constituted family home due to travel or studies
or work abroad, etc.
In other words, the family home is generally characterized by permanency, that is, the place to which, whenever absent for business or
pleasure, one still intends to return.
The family home must be part of the properties of the absolute community or of the conjugal partnership, or of the exclusive properties
of either spouse depending upon the classification of the property (family home) and the property relations prevailing on the properties
of the husband and wife. It may also be constituted by an unmarried head of a family on his or her own property. (Art. 156, Ibid)
For purposes of availing of a family home deduction to the extent allowable, a person may constitute only one family home. (Art. 161,
Ibid)
Husband and Wife Legally married man and woman.
Unmarried Head of a Family An unmarried or legally separated man or woman with one or both parents, or with one or more brothers
or sisters, or with one or more legitimate, recognized natural or legally adopted children living with and dependent upon him or her for
their chief support, where such brothers or sisters or children are not more than twenty one (21) years of age, unmarried and not
gainfully employed or where such children, brothers or sisters, regardless of age are incapable of self-support because of mental or
physical defect, or any of the beneficiaries mentioned in Article 154 of the Family Code who is living in the family home and dependent
upon the head of the family for legal support.
The beneficiaries of a family home are:

(1) The husband and wife, or the head of a family; and
(2) Their parents, ascendants, descendants including legally adopted children, brothers and sisters, whether the relationship be
legitimate or illegitimate, who are living in the family home and who depend upon the head of the family for legal support. (Art. 154,
Ibid)
b) Conditions for the allowance of FAMILY HOME as deduction from the gross estate-
1. The family home must be the actual residential home of the decedent and his family at the time of his death, as certified by the
Barangay Captain of the locality where the family home is situated;
2. The total value of the family home must be included as part of the gross estate of the decedent; and
3. Allowable deduction must be in an amount equivalent to the current fair market value of the family home as declared or included in
the gross estate, or the extent of the decedents interest (whether conjugal/community or exclusive property),whichever is lower,
but not exceeding P1,000,000.
a. Ceiling on value of family home (P1M)
b. Definition of family home/when deemed constituted
c. Beneficiaries of a family home
d. Conditions for deductibility
5. Standard deduction
RR 02-03, Sec. 6(E). Standard deduction. - A deduction in the amount of One Million Pesos (P1,000,000) shall be allowed as an additional
deduction without need of substantiation. The full amount of P1,000,000 shall be allowed as deduction for the benefit of the decedent. The
presentation of such deduction in the computation of the net taxable estate of the decedent is properly illustrated in these Regulations.
6. Medical expenses
RR 02-03, Sec. 6(F). Medical expenses. - All medical expenses (cost of medicines, hospital bills, doctors fees, etc.) incurred (whether paid or
unpaid) within one (1) year before the death of the decedent shall be allowed as a deduction provided that the same are duly substantiated
with official receipts for services rendered by the decedents attending physicians, invoices, statements of account duly certified by the
hospital, and such other documents in support thereof and provided, further, that the total amount thereof, whether paid or unpaid, does not
exceed Five Hundred Thousand Pesos (P500,000).
Any amount of medical expenses incurred within one year from death in excess of Five Hundred Thousand Pesos (P500,000) shall no longer
be allowed as a deduction under this subsection. Neither can any unpaid amount thereof in excess of the P500,000 threshold nor any unpaid
amount for medical expenses incurred prior to the one-year period from date of death be allowed to be deducted from the gross estate as
claim against the estate.
Illustrations on how to determine the amount of allowable medical expenses given the P500,000 threshold amount:
a. If the actual amount of medical expenses incurred is P250,000, then only P250,000 shall be allowed as deduction and not to the extent of
the P500,000 threshold amount;
b. If the actual amount of medical expenses incurred within the year prior to decedents death is P600,000, only the maximum amount of
P500,000 shall be allowed as deduction. If in case the excess of P100,000 (P600,000-500,000) is still unpaid, such amount shall not be
allowed to be deducted from the gross estate as claims against the estate.
Ceiling: PhP 500,000.
7. Amounts received by Heirs under RA 4917
8. Net Share of Surviving Spouse in the Conjugal Partnership or Community Property
B. Net Estate of Decedent who is a Non-Resident Alien of the Philippines
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Prof. O. Carag
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NIRC, 86(B), supra.
RR 02-03, Sec. 7. COMPUTATION OF THE NET ESTATE OF A DECEDENT WHO IS A NON-RESIDENT ALIEN OF THE PHILIPPINES. - The value of
the net estate of a decedent who is a non-resident alien in the Philippines shall be determined by deducting from the value of that part of his gross
estate which at the time of his death is situated in the Philippines the following items of deductions:
(1) Expenses, losses, indebtedness, and taxes That proportion of the total expenses, losses, indebtedness, and taxes which the value of such
part bears to the value of his entire gross estate wherever situated. The allowable deduction under this subsection shall be computed using the
following formula:
.
( , , =

(2) Property previously taxed - xxx xxx xxx
(3) Transfers for public use - xxx xxx xxx
(4) Net share of the surviving spouse in the conjugal property or community property. - xxx xxx xxx
No deduction shall be allowed in the case of a non-resident decedent not a citizen of the Philippines, unless the executor, administrator, or anyone
of the heirs, as the case may be, includes in the return required to be filed under Section 90 of the Code the value at the time of the decedents death
of that part of his gross estate not situated in the Philippines.
1. Value of estate shall be determined by deducting from the value of gross estate:
a. Expenses, losses, indebtedness, and taxes
b. Property previously taxed
c. Transfers for public use
d. Net share of surviving spouse in the conjugal partnership or community property
2. Condition for deductibility
NIRC, 86(D). Miscellaneous Provisions. - No deduction shall be allowed in the case of a nonresident not a citizen of the Philippines, unless
the executor, administrator, or anyone of the heirs, as the case may be, includes in the return required to be filed under Section 90 the value at
the time of his death of that part of the gross estate of the nonresident not situated in the Philippines.
IV. Exclusions from Gross Estate/Exemptions of Certain Acquisitions and Transmissions
B. Capital of Surviving Spouse
NIRC, 85(H). Capital of the Surviving Spouse. - The capital of the surviving spouse of a decedent shall not, for the purpose of this Chapter, be
deemed a part of his or her gross estate.
CC, 148. The following shall be the exclusive property of each spouse:
(1) That which is brought to the marriage as his or her own;
(2) That which each acquires, during the marriage, by lucrative title;
(3) That which is acquired by right of redemption or by exchange with other property belonging to only one of the spouses;
(4) That which is purchased with exclusive money of the wife or of the husband.
CC, 150. . Property donated or left by will to the spouses, jointly and with designation of determinate shares, shall pertain to the wife as
paraphernal property, and to the husband as capital, in the proportion specified by the donor or testator, and in the absence of designation, share
and share alike, without prejudice to what is provided in Article 753.
CC, 201. The following shall be excluded from the community:
(1) Property acquired by gratuitous title by either spouse, when it is provided by the donor or testator that it shall not become a part of the
community;
(2) Property inherited by either husband or wife through the death of a child by a former marriage, there being brothers or sisters of the full
blood of the deceased child;
(3) A portion of the property of either spouse equivalent to the presumptive legitime of the children by a former marriage;
(4) Personal belongings of either spouse.
However, all the fruits and income of the foregoing classes of property shall be included in the community.
FC, 91. Unless otherwise provided in this Chapter or in the marriage settlements, the community property shall consist of all the property owned by
the spouses at the time of the celebration of the marriage or acquired thereafter.
FC, 92. The following shall be excluded from the community property:
(1) Property acquired during the marriage by gratuitous title by either spouse, and the fruits as well as the income thereof, if any, unless it is
expressly provided by the donor, testator or grantor that they shall form part of the community property;
(2) Property for personal and exclusive use of either spouse. However, jewelry shall form part of the community property;
(3) Property acquired before the marriage by either spouse who has legitimate descendants by a former marriage, and the fruits as well as the
income, if any, of such property.
FC, 109. The following shall be the exclusive property of each spouse:
(1) That which is brought to the marriage as his or her own;
(2) That which each acquires during the marriage by gratuitous title;
(3) That which is acquired by right of redemption, by barter or by exchange with property belonging to only one of the spouses; and
(4) That which is purchased with exclusive money of the wife or of the husband.
C. Proceeds of life insurance where designation of beneficiary is irrevocable
NIRC, 85(E). Proceeds of Life Insurance. - To the extent of the amount receivable by the estate of the deceased, his executor, or administrator, as
insurance under policies taken out by the decedent upon his own life, irrespective of whether or not the insured retained the power of revocation,
or to the extent of the amount receivable by any beneficiary designated in the policy of insurance, except when it is expressly stipulated that the
designation of the beneficiary is irrevocable.
D. Exemptions of Certain Acquisitions/Transmissions
NIRC, 87. E xemption of Certain Acquisitions and Transmissions. - The following shall not be taxed:
(A) The merger of usufruct in the owner of the naked title;
(B) The transmission or delivery of the inheritance or legacy by the fiduciary heir or legatee to the fideicommissary;
(C) The transmission from the first heir, legatee or donee in favor of another beneficiary, in accordance with the desire of the predecessor; and
(D) All bequests, devises, legacies or transfers to social welfare, cultural and charitable institutions, no part of the net income of which insures to
the benefit of any individual: Provided, however, That not more than thirty percent (30%) of the said bequests, devises, legacies or transfers
shall be used by such institutions for administration purposes.
E. Exemptions under Special Laws
V. Computation of Estate Tax
A. Tax Rate
NIRC, 84. Rates of Estate Tax. - There shall be levied, assessed, collected and paid upon the transfer of the net estate as determined in accordance
with Sections 85 and 86 of every decedent, whether resident or nonresident of the Philippines, a tax based on the value of such net estate, as
computed in accordance with the following schedule:
If the net estate is:
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Prof. O. Carag
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Over But Not Over The Tax shall be Plus Of the Excess Over
P 200,000 Exempt
P 200,000 550,000 0 5% P 200,000
500,000 2,000,000 P 15,000 8% 500,000
2,000,000 5,000,000 135,000 11% 2,000,000
5,000,000 10,000,000 465,000 15% 5,000,000
10,000,000 And Over 1,215,000 20% 10,000,000
1. Tax Credit for Estate Taxes paid to a foreign country

NIRC, 86(E). Tax Credit for Estate Taxes paid to a Foreign Country.
(1) In General. - The tax imposed by this Title shall be credited with the amounts of any estate tax imposed by the authority of a foreign
country.
credit is taken, which the decedent's net estate situated within such country taxable under this Title bears to his entire net estate;
and
(b) The total amount of the credit shall not exceed the same proportion of the tax against which such credit is taken, which the
decedent's net estate situated outside the Philippines taxable under this Title bears to his entire net estate.
VI. Filing of Notice of Death/Filing of Returns/Payment of Estate Tax
A. Requirement of Filing for Notice of Death
NIRC, 89. Notice of Death to be Filed. - In all cases of transfers subject to tax, or where, though exempt from tax, the gross value of the estate
exceeds Twenty thousand pesos (P20,000), the executor, administrator or any of the legal heirs, as the case may be, within two (2) months after the
decedent's death, or within a like period after qualifying as such executor or administrator, shall give a written notice thereof to the Commissioner.
- Within 2 months after death of decedent
B. Estate Tax Returns
1. Requirements
2. Time for Filing
3. Extension of Time to File
4. Place of Filing Return
NIRC, 90. Estate Tax Returns.
(A) Requirements. - In all cases of transfers subject to the tax imposed herein, or where, though exempt from tax, the gross value of the estate
exceeds Two hundred thousand pesos (P200,000), or regardless of the gross value of the estate, where the said estate consists of registered or
registrable property such as real property, motor vehicle, shares of stock or other similar property for which a clearance from the Bureau of
Internal Revenue is required as a condition precedent for the transfer of ownership thereof in the name of the transferee, the executor, or the
administrator, or any of the legal heirs, as the case may be, shall file a return under oath in duplicate, setting forth:
(1) The value of the gross estate of the decedent at the time of his death, or in case of a nonresident, not a citizen of the Philippines, of that
part of his gross estate situated in the Philippines;
(2) The deductions allowed from gross estate in determining the estate as defined in Section 86; and
(3) Such part of such information as may at the time be ascertainable and such supplemental data as may be necessary to establish the
correct taxes.
Provided, however, That estate tax returns showing a gross value exceeding Two million pesos (P2,000,000) shall be supported with a
statement duly certified to by a Certified Public Accountant containing the following:
(a) Itemized assets of the decedent with their corresponding gross value at the time of his death, or in the case of a nonresident, not a
citizen of the Philippines, of that part of his gross estate situated in the Philippines;
(b) Itemized deductions from gross estate allowed in Section 86; and
(c) The amount of tax due whether paid or still due and outstanding.
(B) Time for filing. - For the purpose of determining the estate tax provided for in Section 84 of this Code, the estate tax return required under
the preceding Subsection (A) shall be filed within six (6) months from the decedent's death.
A certified copy of the schedule of partition and the order of the court approving the same shall be furnished the Commissioner within thirty
(30) after the promulgation of such order.
(C) Extension of Time. - The Commissioner shall have authority to grant, in meritorious cases, a reasonable extension not exceeding thirty (30)
days for filing the return.
(D) Place of Filing. - Except in cases where the Commissioner otherwise permits, the return required under Subsection (A) shall be filed with an
authorized agent bank, or Revenue District Officer, Collection Officer, or duly authorized Treasurer of the city or municipality in which the
decedent was domiciled at the time of his death or if there be no legal residence in the Philippines, with the Office of the Commissioner.
RR 02-03, Sec. 9(A-C). TIME AND PLACE OF FILING ESTATE TAX RETURN AND PAYMENT OF ESTATE TAX DUE.
(A) Time for filing estate tax return. For purposes of determining the estate tax, the estate tax return shall be filed within six (6) months from
the decedents death.
The Court approving the project of partition shall furnish the Commissioner with a certified copy thereof and its order within thirty (30) days
after promulgation of such order.
(B) Extension of time to file estate tax return. - The Commissioner or any Revenue Officer authorized by him pursuant to the Code shall have
authority to grant, in meritorious cases, a reasonable extension, not exceeding thirty (30) days, for filing the return. The application for the
extension of time to file the estate tax return must be filed with the Revenue District Office (RDO) where the estate is required to secure its
Taxpayer Identification Number (TIN) and file the tax returns of the estate, which RDO, likewise, has jurisdiction over the donors tax return
required to be filed by any party as a result of the distribution of the assets and liabilities of the decedent.
(C) Place of filing the return and payment of the tax. In case of a resident decedent, the administrator or executor shall register the estate of
the decedent and secure a new TIN therefor from the Revenue District Office where the decedent was domiciled at the time of his death and
shall file the estate tax return and pay the corresponding estate tax with the Accredited Agent Bank (AAB), Revenue District Officer, Collection
Officer or duly authorized Treasurer of the city or municipality where the decedent was domiciled at the time of his death, whichever is
applicable, following prevailing collection rules and procedures.
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In case of a non-resident decedent, whether non-resident citizen or non-resident alien, with executor or administrator in the Philippines, the
estate tax return shall be filed with and the TIN for the estate shall be secured from the Revenue District Office where such executor or
administrator is registered: Provided, however, that in case the executor or administrator is not registered, the estate tax return shall be filed
with and the TIN of the estate shall be secured from the Revenue District Office having jurisdiction over the executor or administrators legal
residence. Nonetheless, in case the non-resident decedent does not have an executor or administrator in the Philippines, the estate tax return
shall be filed with and the TIN for the estate shall be secured from the Office of the Commissioner through RDO No. 39 South Quezon City.
The foregoing provisions notwithstanding, the Commissioner of Internal Revenue may continue to exercise his power to allow a different
venue/place in the filing of tax returns.
C. Payment of Estate Tax
1. Time for Payment
2. Extension of time to pay Estate Tax
3. Payment of Estate Tax by Installment
4. Liability for Payment
NIRC, 91. Payment of Tax.
(A) Time of Payment. - The estate tax imposed by Section 84 shall be paid at the time the return is filed by the executor, administrator or the
heirs.
(B) Extension of Time. - When the Commissioner finds that the payment on the due date of the estate tax or of any part thereof would impose
undue hardship upon the estate or any of the heirs, he may extend the time for payment of such tax or any part thereof not to exceed five (5)
years, in case the estate is settled through the courts, or two (2) years in case the estate is settled extrajudicially. In such case, the amount in
respect of which the extension is granted shall be paid on or before the date of the expiration of the period of the extension, and the running of
the Statute of Limitations for assessment as provided in Section 203 of this Code shall be suspended for the period of any such extension.
Where the taxes are assessed by reason of negligence, intentional disregard of rules and regulations, or fraud on the part of the taxpayer, no
extension will be granted by the Commissioner.
If an extension is granted, the Commissioner may require the executor, or administrator, or beneficiary, as the case may be, to furnish a bond
in such amount, not exceeding double the amount of the tax and with such sureties as the Commissioner deems necessary, conditioned upon
the payment of the said tax in accordance with the terms of the extension.
(C) Liability for Payment - The estate tax imposed by Section 84 shall be paid by the executor or administrator before delivery to any beneficiary
of his distributive share of the estate. Such beneficiary shall to the extent of his distributive share of the estate, be subsidiarily liable for the
payment of such portion of the estate tax as his distributive share bears to the value of the total net estate.
For the purpose of this Chapter, the term 'executor' or 'administrator' means the executor or administrator of the decedent, or if there is no
executor or administrator appointed, qualified, and acting within the Philippines, then any person in actual or constructive possession of any
property of the decedent.
RR 02-03, Sec. 9(D-G).
(D) Time for payment of the estate tax. As a general rule, the estate tax imposed under the Code shall be paid at the time the return is filed by
the executor, administrator or the heirs.
(E) Extension of time to pay estate tax. When the Commissioner finds that the payment of the estate tax or of any part thereof would impose
undue hardship upon the estate or any of the heirs, he may extend the time for payment of such tax or any part thereof not to exceed five (5)
years in case the estate is settled through the courts, or two (2) years in case the estate is settled extrajudicially. In such case, the amount in
respect of which the extension is granted shall be paid on or before the date of the expiration of the period of the extension, and the running of
the statute of limitations for deficiency assessment shall be suspended for the period of any such extension.
For purposes of these Regulations, the application for extension of time to file the return and extension of time to pay estate tax shall be filed
with the Revenue District Officer (RDO) where the estate is required to secure its TIN and file the estate tax return. This application shall be
approved by the Commissioner or his duly authorized representative.
Where the request for extension is by reason of negligence, intentional disregard of rules and regulations, or fraud on the part of the taxpayer,
no extension will be granted by the Commissioner.
If an extension is granted, the Commissioner or his duly authorized representative may require the executor, or administrator, or beneficiary,
as the case may be, to furnish a bond in such amount, not exceeding double the amount of the tax and with such sureties as the Commissioner
deems necessary, conditioned upon the payment of the said tax in accordance with the terms of the extension.
Any amount paid after the statutory due date of the tax, but within the extension period, shall be subject to interest but not to surcharge.
(F) Payment of the estate tax by installment. In case the available cash of the estate is not sufficient to pay its total estate tax liability, the
estate may be allowed to pay the tax by installment and a clearance shall be released only with respect to the property the
corresponding/computed tax on which has been paid. There shall, therefore, be as many clearances (Certificates Authorizing Registration) as
there are as many properties released because they have been paid for by the installment payments of the estate tax. The computation of the
estate tax, however, shall always be on the cumulative amount of the net taxable estate. Any amount paid after the statutory due date of the tax
shall be imposed the corresponding applicable penalty thereto. However, if the payment of the tax after the due date is approved by the
Commissioner or his duly authorized representative, the imposable penalty thereon shall only be the interest. Nothing in this paragraph,
however, prevents the Commissioner from executing enforcement action against the estate after the due date of the estate tax provided that
all the applicable laws and required procedures are followed/observed.
(G) Liability for payment The estate tax imposed under the Code shall be paid by the executor or administrator before the delivery of the
distributive share in the inheritance to any heir or beneficiary. Where there are two or more executors or administrators, all of them are
severally liable for the payment of the tax. The estate tax clearance issued by the Commissioner or the Revenue District Officer (RDO) having
jurisdiction over the estate, will serve as the authority to distribute the remaining/distributable properties/share in the inheritance to the heir
or beneficiary.
The executor or administrator of an estate has the primary obligation to pay the estate tax but the heir or beneficiary has subsidiary liability
for the payment of that portion of the estate which his distributive share bears to the value of the total net estate. The extent of his liability,
however, shall in no case exceed the value of his share in the inheritance.
DONORS TAX
I. Basic Principles of Donors Tax
A. Concept of Donors Tax
Lladoc v. CIR. Donors tax is not a property tax, but is a tax imposed on the transfer of property by way of gift inter vivos.
B. Nature of Donors Tax
It is an excise tax imposed on the privilege of the donor to give or on the privilege of the donee to receive. It is not a tax on property as such
because its imposition does not rest upon general ownership although the amount the tax is measured by the value of the property donated.
C. Purpose of Donors Tax
(1) To supplement the estate taxes by preventing their avoidance through the taxation of gifts inter vivos, without which the properties would be
subject to tax
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Prof. O. Carag
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(2) To prevent avoidance of income tax through the device of splitting income among numerous donees who are usually members of a family
D. Requisites of a valid Donation
1. Capacity of Donor
NCC, 735. All persons who may contract and dispose of their property may make a donation.
2. Donative intent
3. Delivery
4. Acceptance
NCC, 745. The donee must accept the donation personally, or through an authorized person with a special power for the purpose, or with a
general and sufficient power; otherwise, the donation shall be void.
E. Transfers which may be constituted as donation
1. Sale/exchange/transfer of property for less than adequate and full consideration
NIRC, 100. Transfer for Less Than Adequate and full Consideration. - Where property, other than real property referred to in Section
24(D), is transferred for less than an adequate and full consideration in money or money's worth, then the amount by which the fair market
value of the property exceeded the value of the consideration shall, for the purpose of the tax imposed by this Chapter, be deemed a gift, and
shall be included in computing the amount of gifts made during the calendar year.
2. Condonation/remission of debt
3. Renunciation of inheritance
- exception
F. Law governing Imposition of Donors Tax
RR 02-03, Sec. 11. THE LAW THAT GOVERNS THE IMPOSITION OF DONORS TAX. - The donors tax is not a property tax, but is a tax imposed on
the transfer of property by way of gift inter vivos. (Lladoc vs. Commissioner of Internal Revenue, L- 19201, June 16, 1965; 14 SCRA, 292) The donors
tax shall not apply unless and until there is a completed gift. The transfer of property by gift is perfected from the moment the donor knows of the
acceptance by the donee; it is completed by the delivery, either actually or constructively, of the donated property to the donee. Thus, the law in
force at the time of the perfection/completion of the donation shall govern the imposition of the donors tax.
In order that the donation of an immovable may be valid, it must be made in a public document specifying therein the property donated.
The acceptance may be made in the same Deed of Donation or in a separate public document, but it shall not take effect unless it is done during the
lifetime of the donor. If the acceptance is made in a separate instrument, the donor shall be notified thereof in an authentic form, and this step shall
be noted in both instruments.
A gift that is incomplete because of reserved powers, becomes complete when either: (1) the donor renounces the power; or (2) his right
to exercise the reserved power ceases because of the happening of some event or contingency or the fulfilment of some condition, other than
because of the donors death.
Renunciation by the surviving spouse of his/her share in the conjugal partnership or absolute community after the dissolution of the
marriage in favor of the heirs of the deceased spouse or any other person/s is subject to donors tax whereas general renunciation by an heir,
including the surviving spouse, of his/her share in the hereditary estate left by the decedent is not subject to donors tax, unless specifically and
categorically done in favor of identified heir/s to the exclusion or disadvantage of the other co-heirs in the hereditary estate.
Where property, other than a real property that has been subjected to the final capital gains tax, is transferred for less than an adequate
and full consideration in money or moneys worth, then the amount by which the fair market value of the property at the time of the execution of
the Contract to Sell or execution of the Deed of Sale which is not preceded by a Contract to Sell exceeded the value of the agreed or actual
consideration or selling price shall be deemed a gift, and shall be included in computing the amount of gifts made during the calendar year.
The law in force at the time of the completion of the donation shall govern the imposition of donors tax.
For purposes of the donors tax, NET GIFT shall mean the net economic benefit from the transfer that accrues to the donee. Accordingly,
if a mortgaged property is transferred as a gift, but imposing upon the donee the obligation to pay the mortgage liability, then the net gift is
measured by deducting from the fair market value of the property the amount of mortgage assumed.
II. Determination of Gross Gift
A. Classification of Donor
1. Citizens/Residents Resident and non-resident Citizens and Resident Aliens
2. Non-resident Alien
B. Composition of Gross Gift
1. Citizens/Resident real property located in the Philippines
- Tangible property located within and without the Philippines
- Intangible property located within and without the Philippines
NIRC, 104, supra.
2. Non-resident alien - real property located in the Philippines
- Tangible property located within and without the Philippines
- Intangible property located within and without the Philippines unless theres reciprocity
NIRC, 104, supra.
- Rule on Reciprocity
C. Exemptions of Gifts from Donation Tax
1. Gifts made by Residents
NIRC, 101(A). Exemption of Certain Gifts. - The following gifts or donations shall be exempt from the tax provided for in this Chapter:
(A) In the Case of Gifts Made by a Resident. -
(1) Dowries or gifts made on account of marriage and before its celebration or within one year thereafter by parents to each of their
legitimate, recognized natural, or adopted children to the extent of the first Ten thousand pesos (P10,000):
(2) Gifts made to or for the use of the National Government or any entity created by any of its agencies which is not conducted for
profit, or to any political subdivision of the said Government; and
(3) Gifts in favor of an educational and/or charitable, religious, cultural or social welfare corporation, institution, accredited
nongovernment organization, trust or philanthrophic organization or research institution or organization: Provided, however, That
not more than thirty percent (30%) of said gifts shall be used by such donee for administration purposes. For the purpose of the
exemption, a 'non-profit educational and/or charitable corporation, institution, accredited nongovernment organization, trust or
philanthrophic organization and/or research institution or organization' is a school, college or university and/or charitable
corporation, accredited nongovernment organization, trust or philanthrophic organization and/or research institution or
organization, incorporated as a nonstock entity, paying no dividends, governed by trustees who receive no compensation, and
devoting all its income, whether students' fees or gifts, donation, subsidies or other forms of philanthrophy, to the accomplishment
and promotion of the purposes enumerated in its Articles of Incorporation.
b. Services/gifts made on account of marriage by parents to children (first P10,000)
c. Gifts made to or for the use of national government
d. Gifts in favor of educational/charitable institution
Condition: not more than 30% of the gift will be used by done for admin purposes
2. Gifts made by a non-resident alien
NIRC, 101(B). In the Case of Gifts Made by a Nonresident not a Citizen of the Philippines.
(1) Gifts made to or for the use of the National Government or any entity created by any of its agencies which is not conducted for profit, or
to any political subdivision of the said Government.
(2) Gifts in favor of an educational and/or charitable, religious, cultural or social welfare corporation, institution, foundation, trust or
philanthrophic organization or research institution or organization: Provided, however, That not more than thirty percent (30% of said
gifts shall be used by such donee for administration purposes.
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a. Same as (b) above
b. Same as (c) above
3. Exemptions from donors tax under special laws
D. Valuation of Gifts Made in Property
NIRC, 102. Valuation of Gifts Made in Property. - If the gift is made in property, the fair market value thereof at the time of the gift shall be
considered the amount of the gift. In case of real property, the provisions of Section 88(B) shall apply to the valuation thereof.
NIRC, 88(B). (B) Properties. - The estate shall be appraised at its fair market value as of the time of death. However, the appraised value of real
property as of the time of death shall be, whichever is higher of
(1) The fair market value as determined by the Commissioner, or
(2) The fair market value as shown in the schedule of values fixed by the Provincial and City Assessors.
1. FMV at time of Gift

2. Real property = higher of FMV determined by CIR or FMV fixrf by provincial and city assessor
3. Valuation of Particular Gifts
a. Personal property
b. Real property
c. Cash
E. Computation of donors tax
1. Person liable (donors)
2. Tax basis
NIRC, 99. Rates of Tax Payable by Donor.
(A) In General. - The tax for each calendar year shall be computed on the basis of the total net gifts made during the calendar year in
accordance with the following schedule:
If the net gift is:
Over But Not Over The Tax Shall be Plus Of the Excess
Over
P 100,000 Exempt
P 100,000 200,000 0 2% P100,000
200,000 500,000 2,000 4% 200,000
500,000 1,000,000 14,000 6% 500,000
1,000,000 3,000,000 44,000 8% 1,000,000
3,000,000 5,000,000 204,000 10% 3,000,000
5,000,000 10,000,000 404,000 12% 5,000,000
10,000,000 1,004,000 15% 10,000,000
(B) Tax Payable by Donor if Donee is a Stranger. - When the donee or beneficiary is stranger, the tax payable by the donor shall be thirty
percent (30%) of the net gifts. For the purpose of this tax, a 'stranger,' is a person who is not a:
(1) Brother, sister (whether by whole or half-blood), spouse, ancestor and lineal descendant; or
(2) Relative by consanguinity in the collateral line within the fourth degree of relationship.
(C) Any contribution in cash or in kind to any candidate, political party or coalition of parties for campaign purposes shall be governed by the
Election Code, as amended.
RR 02-03, Sec. 10. RATES OF DONORS TAX. (A) Schedular rates of donors tax imposable on donation made to a donee who is not a
stranger. The transfer of the total net gifts made during the calendar year shall be subject to tax in accordance with the schedule provided in
Section 99 of the Code. The entire value of the net gifts for each calendar year is divided into brackets and each rate is imposed on the
corresponding brackets as shown below:
If the net gift is: [see table above]
(B) Tax payable by the donor if donee is a stranger. - When the donee or beneficiary is a stranger, the tax payable by the donor shall be
thirty per cent (30%) of the net gifts. For purposes of the donor's tax, a "stranger" is a person who is not a:
(1) Brother, sister (whether by whole or half blood), spouse, ancestor, and lineal descendant; or
(2) Relative by consanguinity in the collateral line within the fourth degree of relationship.
A legally adopted child is entitled to all the rights and obligations provided by law to legitimate children, and therefore, donation to him
shall not be considered as donation made to stranger.
Donation made between business organizations and those made between an individual and a business organization shall be considered
as donation made to a stranger.
(C) Contribution for election campaign. - Any contribution in cash or in kind to any candidate, political party or coalition of parties for
campaign purposes, shall be governed by the Election Code, as amended. The application of the rates as provided above is imposed on
donations made beginning January 1, 1998, which is the effectivity date of Republic Act No. 8424, otherwise known as The Tax Reform
Act of 1997.
3. Tax Rates
NIRC, 99(A), supra.
NIRC, 99(B), supra.
a. Graduated if done is not a stranger as defined in NIRC, 99(B)
b. 30% of net gifts if done is stranger
(3) Who is a stranger
4. Computation of Tax
RR 02-03, Sec. 12. COMPUTATION OF THE DONORS TAX. For donors tax purposes, donations made before January 1, 1998 shall be
subject to the donors tax computed on the basis of the old rates imposed under Section 92 of the National Internal Revenue Code of 1977 (R.A.
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No. 7499), while donations made on or after January I, 1998 shall be subject to the donors tax computed in accordance with the amended
schedule of rates prescribed under Section 99 of the National Internal Revenue Code of 1997 (R.A. No. 8424). THE COMPUTATION OF THE
DONORS TAX IS ON A CUMULATIVE BASIS OVER A PERIOD OF ONE CALENDAR YEAR. Husband and wife are considered as separate and
distinct taxpayers for purposes of the donors tax. However, if what was donated is a conjugal or community property and only the husband
signed the deed of donation, there is only one donor for donors tax purposes, without prejudice to the right of the wife to question the validity
of the donation without her consent pursuant to the pertinent provisions of the Civil Code of the Philippines and the Family Code of the
Philippines. (see illustration in RR)
a. Cumulative basis over a period of 1 calendar year
5. Tax Credit for Donors Taxes Paid to a Foreign Country
NIRC, 101(C). Tax Credit for Donor's Taxes Paid to a Foreign Country.
(1) In General. - The tax imposed by this Title upon a donor who was a citizen or a resident at the time of donation shall be credited with the
amount of any donor's tax of any character and description imposed by the authority of a foreign country.
credit is taken, which the net gifts situated within such country taxable under this Title bears to his entire net gifts; and
(b) The total amount of the credit shall not exceed the same proportion of the tax against which such credit is taken, which the donor's
net gifts situated outside the Philippines taxable under this title bears to his entire net gifts.
F. Returns/Payment
NIRC, 103. Filing of Return and Payment of Tax.
(A) Requirements. - any individual who makes any transfer by gift (except those which, under Section 101, are exempt from the tax provided
for in this Chapter) shall, for the purpose of the said tax, make a return under oath in duplicate. The return shall set forth:
(1) Each gift made during the calendar year which is to be included in computing net gifts;
(2) The deductions claimed and allowable;
(3) Any previous net gifts made during the same calendar year;
(4) The name of the donee; and
(5) Such further information as may be required by rules and regulations made pursuant to law.
(B) Time and Place of Filing and Payment. - The return of the donor required in this Section shall be filed within thirty (30) days after the
date the gift is made and the tax due thereon shall be paid at the time of filing. Except in cases where the Commissioner otherwise permits,
the return shall be filed and the tax paid to an authorized agent bank, the Revenue District Officer, Revenue Collection Officer or duly
authorized Treasurer of the city or municipality where the donor was domiciled at the time of the transfer, or if there be no legal residence
in the Philippines, with the Office of the Commissioner. In the case of gifts made by a nonresident, the return may be filed with the
Philippine Embassy or Consulate in the country where he is domiciled at the time of the transfer, or directly with the Office of the
Commissioner.
RR 02-03, Sec. 13. FILING OF RETURNS AND PAYMENT OF DONORS TAX.
(A) Requirements. Any person making a donation (whether direct or indirect), unless the donation is specifically exempt under the Code or
other special laws, is required, for every donation, to accomplish under oath a donors tax return in duplicate. The return shall set forth:
(1) Each gift made during the calendar year which is to be included in computing net gifts;
(2) The deductions claimed and allowable;
(3) Any previous net gifts made during the same calendar year;
(4) The name of the donee;
(5) Relationship of the donor to the donee; and
(6) Such further information as the Commissioner may require.
(B) Time and place of filing and payment. The donors tax return shall be filed within thirty (30) days after the date the gift is made or
completed and the tax due thereon shall be paid at the same time that the return is filed. Unless the Commissioner otherwise permits, the
return shall be filed and the tax paid to an authorized agent bank, the Revenue District Officer, Revenue Collection Officer or duly authorized
Treasurer of the city or municipality where the donor was domiciled at the time of the transfer, or if there be no legal residence in the
Philippines, with the Office of the Commissioner. In the case of gifts made by a non-resident, the return may be filed with the Philippine
Embassy or Consulate in the country where he is domiciled at the time of the transfer, or directly with the Office of the Commissioner. For this
purpose, the term OFFICE OF THE COMMISSIONER shall refer to the Revenue District Office (RDO) having jurisdiction over the BIR-
National Office Building which houses the Office of the Commissioner, or presently, to the Revenue District Office No. 39 South Quezon City.
(C) Notice of donation by a donor engaged in business. In order to be exempt from donors tax and to claim full deduction of the donation
given to qualified donee institutions duly accredited by the Philippine Council for NGO Certification, Inc. (PCNC), the donor engaged in
business shall give a notice of donation on every donation worth at least Fifty Thousand Pesos (P50,000) to the Revenue District Office (RDO)
which has jurisdiction over his place of business within thirty (30) days after receipt of the qualified donee institutions duly issued Certificate
of Donation, which shall be attached to the said Notice of Donation, stating that not more than thirty percent (30%) of the said donation/gifts
for the taxable year shall be used by such accredited non-stock, non-profit corporation/NGO institution (qualified-donee institution) for
administration purposes pursuant to the provisions of Section 101(A)(3) and (B)(2) of the Code.Requirements.
1. Time/Place of Filing and Payment
a. Time of Filing 30 days after date of gift is made/completed
Payment coincides with the filing of return
b. Place of filing/payment
(2) Residence/domicile of donor resident/citizen
(3) Phil. Embassy/consulate where he is domiciled at the time of transfer non-resident Alien
Part 2. Business Taxes
VALUE-ADDED TAX
I. Nature and Characteristics of VAT
A. Tax on value added
It is based on the gross selling price or gross value in money of the goods or properties sold, bartered, or exchanged or the gross receipts
derived from the sale or exchange of the services including the lease of goods or properties, or in the case of imported goods, on the total value or
landed cost thereof plus taxes and other charges, if any.
B. Sales Tax
C. Tax on Consumption
RR 16-05, Sec. 4.105-2. Nature and Characteristics of VAT VAT is a tax on consumption levied on the sale, barter, exchange or lease of goods or
properties and services in the Philippines and on importation of goods into the Philippines. The seller is the one statutorily liable for the payment of
the tax but the amount of the tax may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or services. This rule shall
likewise apply to existing contracts of sale or lease of goods, properties or services at the time of the effectivity of RA 9337. However, in the case of
importation, the importer is the one liable for the VAT
VAT is a consumption tax imposed at every stage of the distribution process on the sale, barter, exchange (including transactions
deemd by law as a sale), or lease of goods or properties and rendition of services in the course of trade or business, or the
importation of goods, whether such imported goods are for use in business or not
D. Indirect Tax
1. Impact of Tax
2. Incidence of Tax
Contex Corp v. CIR.
E. Tax Credit Method
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F. Destination Principle
CIR v. Toshiba Information Equipment.
II. Persons Liable to VAT
NIRC, 105. Persons Liable. - Any person who, in the course of trade or business, sells barters, exchanges, leases goods or properties, renders services,
and any person who imports goods shall be subject to the value-added tax (VAT) imposed in Sections 106 to 108 of this Code.
The value-added tax is an indirect tax and the amount of tax may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or
services. This rule shall likewise apply to existing contracts of sale or lease of goods, properties or services at the time of the effectivity of Republic Act
No. 7716.
The phrase 'in the course of trade or business' means the regular conduct or pursuit of a commercial or an economic activity, including transactions
incidental thereto, by any person regardless of whether or not the person engaged therein is a nonstock, nonprofit private organization (irrespective of
the disposition of its net income and whether or not it sells exclusively to members or their guests), or government entity.
The rule of regularity, to the contrary notwithstanding, services as defined in this Code rendered in the Philippines by nonresident foreign persons shall
be considered as being course of trade or business.
RR 16-05, Sec. 4.105-1. Persons Liable Any person who, in the course of his trade or business, sells, barters, exchanges or leases goods or properties,
or renders services, and any person who imports goods, shall be liable to VAT imposed in Secs. 106-108 of the Tax Code
However, in the case of importation of taxable goods, the importer, whether an individual or corporation and whether or not made in the course of his
trade or business, shall be liable to VAT imposed in Sec. 107 of the Tax Code.
Person refers to any individual, trust, estate, partnership, corporation, joint venture, cooperative or association.
Taxable person refers to any person liable for the payment of VAT, whether registered or registrable in accordance with Sec. 236 of the Tax Code
VAT-registered person refers to any person who is registered as a VAT taxpayer under Sec. 236 of the Tax Code. His status as a VAT-registered person
shall continue until the cancellation of such registration.
Taxable sale refers to the sale, barter, exchange and/or lease of goods or properties, including transactions deemed sale and the performance of
service for a consideration, whether in cash or in kind, all of which are subject to tax under SEcs. 106 and 108 of the Tax Code.
A. Person
RR 16-05, Sec. 4.105-1, supra
B. Taxable Person
RR 16-05, Sec. 4.105-1, supra.
1. Refers to any person liable to VAT whether registered or registrable according to NIRC, 236.
NIRC, 236. Registration Requirements.
(C) Requirements. - Every person subject to any internal revenue tax shall register once with the appropriate Revenue District Officer:
(1) Within ten (10) days from date of employment, or
(2) On or before the commencement of business, or
(3) Before payment of any tax due, or
(4) Upon filing of a return, statement or declaration as required in this Code.
The registration shall contain the taxpayer's name, style, place of residence, business and such other information as may be required by
the Commissioner in the form prescribed therefor.
A person maintaining a head office, branch or facility shall register with the Revenue District Officer having jurisdiction over the head
office, brand or facility. For purposes of this Section, the term 'facility' may include but not be limited to sales outlets, places of
production, warehouses or storage places.
(D) Annual Registration Fee. - An annual registration fee in the amount of Five hundred pesos (P500) for every separate or distinct
establishment or place of business, including facility types where sales transactions occur, shall be paid upon registration and every year
thereafter on or before the last day of January: Provided, however, That cooperatives, individuals earning purely compensation income,
whether locally or abroad, and overseas workers are not liable to the registration fee herein imposed.
The registration fee shall be paid to an authorized agent bank located within the revenue district, or to the Revenue Collection Officer, or
duly authorized Treasurer of the city of municipality where each place of business or branch is registered.
(E) Registration of Each Type of Internal Revenue Tax. - Every person who is required to register with the Bureau of Internal Revenue
under Subsection (A) hereof, shall register each type of internal revenue tax for which he is obligated, shall file a return and shall pay
such taxes, and shall updates such registration of any changes in accordance with Subsection (E) hereof.
(F) Transfer of Registration. - In case a registered person decides to transfer his place of business or his head office or branches, it shall be
his duty to update his registration status by filing an application for registration information update in the form prescribed therefor.
(G) Other Updates. - Any person registered in accordance with this Section shall, whenever applicable, update his registration information
with the Revenue District Office where he is registered, specifying therein any change in type and other taxpayer details.
(H) Cancellation of Registration. - The registration of any person who ceases to be liable to a tax type shall be cancelled upon filing with the
Revenue District Office where he is registered an application for registration information update in a form prescribed therefor.
(I) Persons Commencing Business. - Any person, who expects to realize gross sales or receipts subject to value-added tax in excess of the
amount prescribed under Section 109(z) of this Code for the next 12-month period from the commencement of the business, shall
register with the Revenue District Office which has jurisdiction over the head office or branch and shall pay the annual registration fee
prescribed in Subsection (B) hereof.
(J) Persons Becoming Liable to the Value-added Tax. - Any person, whose gross sales or receipts in any 12-month period exceeds the
amount prescribed under Subsection 109(z) of this Code for exemption from the value-added tax shall register in accordance with
Subsection (A) hereof, and shall pay the annual registration fee prescribed within ten (10) days after the end of the last month of that
period, and shall be liable to the value-added tax commencing from the first day of the month following his registration.
(K) Optional Registration of Exempt Person. - Any person whose transactions are exempt from value-added tax under Section 109(z) of
this Code; or any person whose transactions are exempt from the value-added tax under Section 109(a), (b), (c), and (d) of this Code,
who opts to register as a VAT taxpayer with respect to his export sales only, may update his registration information in accordance with
Subsection (E) hereof, not later than ten (10) days before the beginning of the taxable quarter and shall pay the annual registration fee
prescribed in Subsection (B) hereof.
In any case, the Commissioner may, for administrative reasons, deny any application for registration including updates prescribed under
Subsection (E) hereof.
For purposes of Title IV of this Code, any person who has registered value-added tax as a tax type in accordance with the provisions of
Subsection (C) hereof shall be referred to as VAT-registered person who shall be assigned only one Taxpayer Identification Number.
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(L) Supplying of Taxpayer Identification Number (TIN). - Any person required under the authority of this Code to make, render or file a
return, statement or other document shall be supplied with or assigned a Taxpayer Identification Number (TIN) which he shall indicate
in such return, statement or document filed with the Bureau of Internal Revenue for his proper identification for tax purposes, and which
he shall indicate in certain documents, such as, but not limited to the following:
(1) Sugar quedans, refined sugar release order or similar instruments;
(2) Domestic bills of lading;
(3) Documents to be registered with the Register of Deeds of Assessor's Office;
(4) Registration certificate of transportation equipment by land, sea or air;
(5) Documents to be registered with the Securities and Exchange Commission;
(6) Building construction permits;
(7) Application for loan with banks, financial institutions, or other financial intermediaries;
(8) Application for mayor's permit;
(9) Application for business license with the Department of Trade & Industry; and
(10) Such other documents which may hereafter be required under rules and regulations to be promulgated by the Secretary of Finance,
upon recommendation of the Commissioner.
In cases where a registered taxpayer dies, the administrator or executor shall register the estate of the decedent in accordance with
Subsection (A) hereof and a new Taxpayer Identification Number (TIN) shall be supplied in accordance with the provisions of this
Section.
In the case of a nonresident decedent, the executor or administrator of the estate shall register the estate with the Revenue District Office
where he is registered: Provided, however, That in case such executor or administrator is not registered, registration of the estate shall
be made with the Taxpayer Identification Number (TIN) supplied by the Revenue District Office having jurisdiction over his legal
residence.
Only one Taxpayer identification Number (TIN) shall be assigned to a taxpayer. Any person who shall secure more than one Taxpayer
Identification Number shall be criminally liable under the provision of Section 275 on 'Violation of Other Provisions of this Code or
Regulations in General'.
2. Where the amount of gross receipts exceeded the threshold fixed by law
NIRC, 109(V). Exempt Transactions. - The following shall be exempt from the value-added tax: (V) Sale or lease of goods or properties or the
performance of services other than the transactions mentioned in the preceding paragraphs, the gross annual sales and/or receipts do not
exceed the amount of One million five hundred thousand pesos (P 1,500,000): Provided, That not later than January 31, 2009 and every three
(3) years thereafter, the amount herein stated shall be adjusted to its present value using the Consumer Price Index as published by the
National Statistics Office (NSO)
C. In the course of trade or business
RR 16-05, Sec. 4.105-3. Meaning of In the Course of Trade or Business The term in the course of trade or business means the regular conduct
or pursuit of a commercial or economic activity, including transactions incidental thereto, by any person regardless of whether or not the person
engaged therein is a non-stock, non-profit private organization (irrespective of the disposition of its net income and whether or not it sells
exclusively to members or their guests), or government entity.
Non-resident persons who perform services in the Philippines are deemed to be making sales in the course of trade or business, even if
the performance of services is not regular
- Notwithstanding the rule on regularity services performed by non-resident foreign persons in the Philippines are subject to VAT
CIR v. COMASERCO.
CIR v. Magsaysay Lines.
III. VAT on Sale of Goods or Properties
NIRC, 106. SEC. 106. Value-Added Tax on Sale of Goods or Properties.
(A) Rate and Base of Tax. There shall be levied, assessed and collected on every sale, barter or exchange of goods or properties, a value-added tax
equivalent to ten percent (10%) 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: Provided, That the President, upon the recommendation of the Secretary of Finance, shall, effective January 1,
2006, raise the rate of value-added tax to twelve percent (12%), after any of the following conditions has been satisfied:
i. Value-added tax collection as a percentage of Gross Domestic product (GDP) of the previous year exceeds two and four-fifth percent (2
4/5%); or
ii. National government deficit as a percentage of GDP of the previous year exceeds one and one-half percent (1 %).
(1) The term 'goods' or 'properties' shall mean all tangible and intangible objects which are capable of pecuniary estimation and shall include:
(a) Real properties held primarily for sale to customers or held for lease in the ordinary course of trade or business;
(b) The right or the privilege to use patent, copyright, design or model, plan, secret formula or process, goodwill, trademark, trade brand or
other like property or right;
(c) The right or the privilege to use in the Philippines of any industrial, commercial or scientific equipment;
(d) The right or the privilege to use motion picture films, tapes and discs; and
(e) Radio, television, satellite transmission and cable television time.
The term 'gross selling price' means the total amount of money or its equivalent which the purchaser pays or is obligated to pay to the
seller in consideration of the sale, barter or exchange of the goods or properties, excluding the value-added tax. The excise tax, if any, on such
goods or properties shall form part of the gross selling price.
(2) The following sales by VAT-registered persons shall be subject to zero percent (0%) rate:
(a) Export Sales. The term export sales means:
1) The sale and actual shipment of goods from the Philippines to a foreign country, irrespective of any shipping arrangement that may
be agreed upon which may influence or determine the transfer of ownership of the goods so exported and paid for in acceptable
foreign currency or its equivalent in goods or services, and accounted for in accordance with the rules and regulations of the
Bangko Sentral ng Pilipinas (BSP);
2) Sale of raw materials or packaging materials to a nonresident buyer for delivery to a resident local export-oriented enterprise to be
used in manufacturing, processing, packing or repacking in the Philippines of the said buyer's goods and paid for in acceptable
foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP);
3) Sale of raw materials or packaging materials to export-oriented enterprise whose export sales exceed seventy percent (70%) of
total annual production;
4) Sale of gold to the Bangko Sentral ng Pilipinas (BSP);
5) Those considered export sales under Executive Order NO. 226, otherwise known as the Omnibus Investment Code of 1987, and
other special laws; and
6) The sale of goods, supplies, equipment and fuel to persons engaged in international shipping or international air transport
operations.
(c) Foreign Currency Denominated Sale. - The phrase 'foreign currency denominated sale' means sale to a nonresident of goods, except
those mentioned in Sections 149 and 150, assembled or manufactured in the Philippines for delivery to a resident in the Philippines, paid
for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas
(BSP).
(d) 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.
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(B) Transactions Deemed Sale. - The following transactions shall be deemed sale:
(1) Transfer, use or consumption not in the course of business of goods or properties originally intended for sale or for use in the course of
business;
(2) Distribution or transfer to:
(a) Shareholders or investors as share in the profits of the VAT-registered persons; or
(b) Creditors in payment of debt;
(3) Consignment of goods if actual sale is not made within sixty (60) days following the date such goods were consigned; and
(4) Retirement from or cessation of business, with respect to inventories of taxable goods existing as of such retirement or cessation.
(C) Changes in or Cessation of Status of a VAT-registered Person. - The tax imposed in Subsection (A) of this Section shall also apply to goods
disposed of or existing as of a certain date if under circumstances to be prescribed in rules and regulations to be promulgated by the Secretary of
Finance, upon recommendation of the Commissioner, the status of a person as a VAT-registered person changes or is terminated.
(D) Sales, Returns, Allowances, and Sales Discounts The value of goods or properties sold and subsequently returned or for which allowances
were granted by a VAT-registered person may be deducted from the gross sales or receipts for the quarter in which a refund is made or a credit
memorandum or refund is issued. Sales discount granted and indicated in the invoice at the time of sale and the grant of which does not depend
upon the happening of a future event may be excluded from the gross sales within the same quarter it was given.
(E) Authority of the Commissioner to Determine the Appropriate Tax Base. - The Commissioner shall, by rules and regulations prescribed by the
Secretary of Finance, determine the appropriate tax base in cases where a transaction is deemed a sale, barter or exchange of goods or properties
under Subsection (B) hereof, or where the gross selling price is unreasonably lower than the actual market value.
A. Rate and Tax Base
1. Rates 12% or 0%
2. Tax Base Gross selling price
(e) Meaning of gross selling price
RR 16-05, Sec. 4.106-4. Meaning of the Term Gross Selling Price. The term gross selling price means the total amount of money or
its equivalent which the purchaser pays or is obligated to pay to the seller in consideration of the sale, barter or exchange of the goods or
properties, excluding VAT. The excise tax, if any, on such goods or properties shall form part of the gross selling price. In the case of sale,
barter or exchange of real property subject to VAT, gross selling price shall mean the consideration stated in the sales document or the
fair market value whichever is higher. If the VAT is not billed separately in the document of sale, the selling price or the consideration
stated therein shall be deemed to be inclusive of VAT. The term fair market value shall mean whichever is higher of: 1) the fair market
value as determined by the Commissioner /zonal value, or 2) the fair market value as shown in schedule of values of the Provincial and
City Assessors (real property tax declaration). However, in the absence of zonal value/fair market value as determined by the
Commissioner, gross selling price refers to the market value shown in the latest real property tax declaration or the consideration,
whichever is higher. If the gross selling price is based on the zonal value or market value of the property, the zonal or market value shall
be deemed exclusive of VAT. Thus, the zonal value/market value, net of the output VAT, should still be higher than the consideration in
the document of sale, exclusive of the VAT.
If the sale of real property is on installment plan where the zonal value/fair market value is higher than the
consideration/selling price, exclusive of the VAT, the VAT shall be based on the ratio of actual collection of the consideration, exclusive of
the VAT, against the agreed consideration, exclusive of the VAT, appearing in the Contract to Sell/Contract of Sale applied to the zonal
value/fair market value of the property at the time of the execution of the Contract to Sell/Contract of Sale at the inception of the
contract. Thus, since the output VAT is based on the market value of the property which is higher than the consideration/selling price in
the sales document, exclusive of the VAT, the input VAT that can be claimed by the buyer shall be the separately-billed output VAT in the
sales document issued by the seller. Therefore, the output VAT which is based on the market value must be billed separately by the seller
in the sales document with specific mention that the VAT billed separately is based on the market value of the property.
Illustration:
ABC Corporation sold a parcel of land to XYZ Company on July 2, 2006 for P1,000,000.00, plus the output VAT, with a monthly
installment payment of P10,000.00, plus the output VAT. The zonal value of the subject property at the time of sale amounted to
P1,500,000.00. Compute for the output tax due on the installment payment.
Formula:
Actual collection (exclusive of the VAT) x Zonal value x 12% Agreed consideration (exclusive of the VAT)
Selling price is the amount of consideration in a contract of sale between the buyer and seller or the total price of the sale
which may include cash or property and evidence of indebtedness issued by the buyer, excluding the VAT.
China Banking Corp v. CA.
(f) Allowable deductions from Gross Selling Price
NIRC, 106(D). Sales, Returns, Allowances, and Sales Discounts The value of goods or properties sold and subsequently returned or
for which allowances were granted by a VAT-registered person may be deducted from the gross sales or receipts for the quarter in which
a refund is made or a credit memorandum or refund is issued. Sales discount granted and indicated in the invoice at the time of sale and
the grant of which does not depend upon the happening of a future event may be excluded from the gross sales within the same quarter it
was given.
RR 16-05, Sec. 4.106-9. Allowable Deductions from Gross Selling Price In computing the taxable base during the month or quarter,
the following shall be allowed as deductions from gross selling price:
(a) Discounts determined and granted at the time of sale, which are expressly indicated in the invoice, the amount thereof forming part
of the gross sales duly recorded in the books of accounts
Sales discount indicated in the invoice at the time of sale, the grant of which is not dependent upon the happening of a future
event, may be excluded from the gross sales within the same month/quarter it was given.
(b) Sales returns and allowances for which a proper credit or refund was made during the month or quarter to the buyer for sales
previously recorded as taxable sales
B. Requisites for Taxability of Sale of Goods and/or properties: in general
1. Sale, barter or exchange of goods or properties
(a) Meaning of term goods or properties
RR 16-05, Sec. 4.106-2. Meaning of the Term Goods or Properties The term goods or properties refers to all tangible and intangible
objects which are capable of pecuniary estimation and shall include, among others:
(1) Real properties held primarily for sale to customers or held for lease in the ordinary course or trade of business;
(2) The right or the privilege to use patent, copyright, design or model, plan, secret formula or process, goodwill, trademark, trade
brand or other like property or right;
(3) The right or the privilege to use any industrial, commercial, or scientific equipment;
(4) The right or the privilege to use motion picture films, tapes and discs; and
(5) Radio, television, satellite transmission and cable television time
2. In the course of trade or business
RR 16-05, Sec. 4.106-4, supra.
3. Goods and properties are located within the Philippines and consumed therein
4. Sale of goods or properties not exempt from VAT under NIRC, 109.
C. Sale of Real Properties
RR 16-05, Sec. 4.106-3. Sale of Real Properties. - Sale of real properties held primarily for sale to customers or held for lease in the ordinary
course of trade or business of the seller shall be subject to VAT.
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Sale of residential lot with gross selling price exceeding P1,500,000.00, residential house and lot or other residential dwellings with gross selling
price exceeding P2,500,000.00, where the instrument of sale (whether the instrument is nominated as a deed of absolute sale, deed of conditional
sale or otherwise) is executed on or after Nov. 1, 2005, shall be subject to ten percent (10%) output VAT, and starting Feb. 1, 2006, to twelve
percent (12%) output VAT.
Installment sale of residential house and lot or other residential dwellings with gross selling price exceeding P1,000,000.00, where the instrument
of sale (whether the instrument is nominated as a deed of absolute sale, deed of conditional sale or otherwise) was executed prior to November 1,
2005, shall be subject to ten percent (10%) output VAT.
Sale of real property on installment plan means sale of real property by a real estate dealer, the initial payments of which in the year of sale do
not exceed twenty-five (25%) of the gross selling price. In case of installment sale, the seller shall be subject to output VAT on the installment
payments received, including the interests and penalties for late payment, actually and/or constructively received, subject to the provisions of
Sec.4.106-4 hereof. Correspondingly, the buyer of the property can claim the input tax in the same period as the seller recognized the output tax.
Installment payments, including interests and penalties, actually and/or constructively received starting February 1, 2006 shall be subject to twelve
percent (12%) output VAT.
Sale of real property by a real estate dealer on a deferred payment basis not on the installment plan means sale of real property, the initial
payments of which in the year of sale exceed twenty-five percent (25%) of the gross selling pr ice.
Initial payments means payment or payments which the seller receives before or upon execution of the instrument of sale and payments which
he expects or is scheduled to receive in cash or property (other than evidence of indebtedness of the purchaser) during the taxable year 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.
Initial payments do not include the amount of mortgage on the real property sold except when such mortgage exceeds the cost or other basis of the
property to the seller, in which case the excess shall be considered part of the initial payments.
Also excluded from the initial payments are notes or other evidence of indebtedness issued by the purchaser to the seller at the time of the sale. In
the case of sale of real properties on a deferred-payment basis not on the installment plan, the transaction shall be treated as cash sale which makes
the entire selling price taxable in the month of sale. Output tax shall be recognized by the seller and input tax shall accrue to the buyer at the time of
the execution of the instrument of sale.
Payments subsequent to initial payments shall no longer be subject to output VAT, in the case of sale on a deferred payment basis. 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.
Transmission of property to a trustee shall not be subject to VAT if the property is to be merely held in trust for the trustor and/or beneficiary.
However, if the property transferred is one for sale, lease or use in the ordinary course of trade or business and the transfer constitutes a completed
gift, the transfer is subject to VAT as a deemed sale transaction pursuant to Section 4.106-7(a)(1) of these Regulations. The transfer is a completed
gift if the transferor divests himself absolutely of control over the property, i.e., irrevocable transfer of corpus and/or irrevocable designation of
beneficiary.
D. Zero-Rated Sales of Goods or Properties

NIRC, 106(A), supra.
1. Zero-rated sales, defined
RR 16-05, Sec. 4.106-5 1st par. A zero-rated sale of goods or properties (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 purchases of goods, properties or services, related to such zero-
rated sale, shall be available as tax credit or refund in accordance with these regulations
2. Sales subject to 0% VAT
(a) Export Sales
RR 16-05, Sec. 4.106-5 (a). (a) Export Sales. Export Sales shall mean:
(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, 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;
(2) The 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 Philippines of said buyers goods, paid for in acceptable foreign
currency, and accounted for in accordance with the rules and regulations of the BSP;
(3) The sale of raw materials or packaging materials to an export-oriented enterprises whose export sales exceed seventy percent
(70%) of total annual production;
Any enterprise whose export sales exceed 70% of the total annual production of the preceding taxable year shall be
considered an export-oriented enterprise.
(4) Sale of gold to the BSP; and
(5) Transactions considered export sales under Executive Order No. 226, otherwise known as the Omnibus Investments Code of 1987,
and other special laws.
Considered export sales under Executive Order No. 226 shall mean the Philippine port F.O.B. value determined from invoices,
bills of lading, inward letters of credit, landing certificates, and other commercial documents, of export products exported directly
by a registered export producer, or the net selling price of export products sold by a registered export producer to another export
producer, or to an export trader that subsequently exports the same; Provided, That sales of export products to another producer or
to an export trader shall only be deemed export sales when actually exported by the latter, as evidenced by landing certificates or
similar commercial documents; Provided, further, That pursuant to EO 226 and other special laws, even without actual exportation,
the following shall be considered constructively exported: (1) sales to bonded manufacturing warehouses of export-oriented
manufacturers; (2) sales to export processing zones pursuant to Republic Act (RA) Nos. 7916, as amended, 7903, 7922 and other
similar export processing zones; (3) sale to enterprises duly registered and accredited with the Subic Bay Metropolitan Authority
pursuant to RA 7227; (4) sales to registered export traders operating bonded trading warehouses supplying raw materials in the
manufacture of export products under guidelines to be set by the Board in consultation with the Bureau of Internal Revenue (BIR)
and the Bureau of Customs (BOC); (5) sales to diplomatic missions and other agencies and/or instrumentalities granted tax
immunities, of locally manufactured, assembled or repacked products whether paid for in foreign currency or not.
For purpose of zero-rating, the export sales of registered export traders shall include commission income. The exportation of
goods on consignment shall not be deemed export sales until the export products consigned are in fact sold by the consignee; and,
provided, finally, that sales of goods, properties or services made by a VAT-registered supplier to a BOI-registered
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manufacturer/producer whose products are 100% exported are considered export sales. A certification to this effect must be issued
by the BOI which shall be good for one year unless subsequently re-issued by the BOI.
(6) The sale of goods, supplies, equipment and fuel to persons engaged in international shipping or international air transport
operations; Provided, that the same is limited to goods, supplies, equipment and fuel pertaining to or attributable to the transport of
goods and passengers from a port in the Philippines directly to a foreign port, or vice versa, without docking or stopping at any
other port in the Philippines unless the docking or stopping at any other Philippine port is for the purpose of unloading passengers
and/or cargoes that originated from abroad, or to load passengers and/or cargoes bound for abroad; Provided, further, that if any
portion of such fuel, goods or supplies is used for purposes other than that mentioned in this paragraph, such portion of fuel goods
and supplies shall be subject to twelve percent (12%) output VAT starting February 1, 2006.
(b) Foreign currency denominated sales
RR 16-05, Sec. 4.106-5 (b). Foreign Currency Denominated Sale Foreign Currency Denominated Sale means the sale to a non-
resident of goods, except those mentioned in Secs. 149 and 150 of the Tax Code, assembled or manufactured in the Philippines for
delivery to a resident in the Philippines, paid for in acceptable foreign currency and accounted for in accordance with the rules and
regulations of the BSP
Sales of locally manufactured or assembled goods for household and personal use to Filipinos abroad and other non-residents of the
Philippines as well as returning Overseas Filipinos under the Internal Export Program of the government paid for in convertible foreign
currency and accounted for in accordance with the rules and regulations of the BSP shall also be considered export sales.
(c) Sales to tax-exempt entities
RR 16-05, Sec. 4.106-5 (c). Sales to Persons or Entities Deemed Tax-exempt Under Special Law or International Agreement. -
Sale of goods or property to persons or entities who are tax-exempt under special laws or international agreements to which the
Philippines is a signatory, such as, Asian Development Bank (ADB), International Rice Research Institute (IRRI), etc., shall be effectively
subject to VAT at zero-rate.
3. Differentiated from Effectively Zero-Rated Sales of Goods and Properties
RR 16-05, Sec. 4.106-6. Meaning of the term Effectively Zero-Rated Sale of Goods and Properties. The term effectively zero-rated sale
of goods and properties shall refer to the local 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 agreement.
E. Transactions deemed Sale
NIRC, 106(B), supra.
RR 16-05, Sec. 4.106-7. Transactions Deemed Sale
(a) The following transactions shall be deemed sale pursuant to Sec. 106(B) of the Tax Code:
(1) Transfer, use or consumption not in the course of business of goods or properties originally intended for sale or for use in the course
of business. Transfer of goods or properties not in the course of business can take place when VAT-registered person withdraws goods
from his business for his personal use;
(2) Distribution or transfer to:
i. Shareholders or investors share in the profits of VAT-registered person;
Property dividends which constitute stocks in trade or properties primarily held for sale or lease declared out of
retained earnings on or after January 1, 1996 and distributed by the company to its shareholders shall be subject to VAT
based on the zonal value or fair market value at the time of distribution, whichever is applicable
ii. Creditors in payment of debt or obligation
(3) Consignment of goods, if actual sale is not made within 60 days following the date such goods were consigned. Consigned goods
returned by the consignee within the 60-day period are not deemed sold;
(4) Retirement from or cessation of business with respect to all goods on hand, whether capital goods, stock-in-trade, supplies or
materials as of the date of such retirement or cessation, whether or not the business is continued by the new owner or successor. The
following circumstances shall, among others, give rise to transactions deemed sale for purposes of this Section;
i. Change of ownership of the business. There is a change in the ownership of the business when a single proprietorship
incorporates; or the proprietor of a single proprietorship sells his entire business.
ii. Dissolution of a partnership and creation of a new partnership which takes over the business.
(b) The Commissioner of Internal Revenue shall determine the appropriate tax base in cases where a transaction is deemed a sale, barter or
exchange of goods or properties under Sec. 4.106-7 paragraph (a) hereof, or where the gross selling price is unreasonably lower than the
actual market value. 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 immediate locality on or nearest the date of sale. Nonetheless, if
one of the parties in the transaction is the government as defined and contemplated under the Administrative Code, the output VAT on the
transaction shall be based on the actual selling price.
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 transactions enumerated in Sec. 4.106-7(a)(1)(2) and (3) of these Regulations. However, in the case of retirement or
cessation of business, the tax base shall be the acquisition cost or the current market price of the goods or properties, whichever is lower.
In the case of a sale where the gross selling price is unreasonably lower than the fair market value, the actual market value shall be the
tax base.
1. Transfer, use or consumption not in the course of business of goods/properties originally intended for sale or use in the course of business
2. Distribution or transfer to shareholders, investors or creditors
3. Consignment of goods if actual sale not made within 60 days from date of consignment
4. Retirement from or cessation of business with respect to inventories on hand
F. Change or Cessation of Status as VAT-registered person
NIRC, 106(C), supra.
RR 16-05, Sec. 4.106-8. Change or Cessation of Status as VAT-registered person
(a) Subject to output tax
The VAT provided for in Sec. 106 of the Tax Code shall apply 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:
(1) Change of business activity from VAT taxable status to VAT-exempt status. An example is 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;
(2) Approval of a request for cancellation of registration due to reversion to exempt status
(3) 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) of the Tax Code.
(4) Approval of a request for cancellation of registration of one who commenced business with the expectation of gross sales or receipts
exceeding P1,500,000.00, but who failed to exceed this amount during the first 12 months of operation
(b) Not subject to output tax
The VAT shall not apply to goods or properties existing as of the occurrence of the following:
(1) Change of control of a corporation by the acquisition of the controlling interest of such corporation by another stockholder or group of
stockholders. The goods or properties 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.
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Illustration: Abel Corporation is a merchandising concern and has an inventory of goods for sale amounting to Php 1 million. Nel
Corporation, a real estate developer, exchanged its real estate properties for the shares of stocks of Abel Corporation resulting to the
acquisition of corporate control. The inventory of goods owned by Abel Corporation (Php 1 million worth) is not subject to output tax
despite the change in corporate control because the same corporation still owns them. This is in recognition of the separate and
distinct personality of the corporation from its stockholders. However, the exchange of real estate properties held for sale or for lease,
for shares of stocks, whether resulting to corporate control or not, is subject to VAT, subject to exceptions provided under Section
4.106-3 hereof. On the other hand, if the transferee of the transferred real property by a real estate dealer is another real estate dealer,
in an exchange where the transferor gains control of the transferee-corporation, no output VAT is imposable on the said transfer.
(2) Change in the trade or corporate name of the business;
(3) Merger or consolidation of corporations. 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.
1. Subject to VAT goods or properties originally intended for sale or use in business and capital goods existing as of concurrence of the ff:
(a) Change of business activity from VAT taxable status to VAT-exempt status
(b) Approval of request for cancellation of a registration due to reversion to exempt status
(c) Approval of request for cancellation of registration due to desire to revert to exempt status after lapse of 3 consecutive years
(d) Approval of request for cancellation of registration for failure to meet threshold amount (1.5M) for VAT
2. Not subject to VAT
(a) Change of control of a corporation
(b) Change in the trade or corporate name
(c) Merger or consolidation of corporations
IV. VAT on Importation
NIRC, 107. Value-Added Tax on Importation of Goods.
(A) In General. - There shall be levied, assessed and collected on every importation of goods a value-added tax equivalent to twelve percent (12%)
based on the total value used by the Bureau of Customs in determining tariff and customs duties plus customs duties, excise taxes, if any, and other
charges, such tax to be paid by the importer prior to the release of such goods from customs custody: Provided, That where the customs duties are
determined on the basis of the quantity or volume of the goods, the value-added tax shall be based on the landed cost plus excise taxes, If any.
(B) Transfer of Goods by Tax-exempt Persons. - In the case of tax-free importation of goods into the Philippines by persons, entities or agencies
exempt from tax where such goods are subsequently sold, transferred or exchanged in the Philippines to non-exempt persons or entities, the
purchasers, transferees or recipients shall be considered the importers thereof, who shall be liable for any internal revenue tax on such
importation. The tax due on such importation shall constitute a lien on the goods superior to all charges or liens on the goods, irrespective of the
possessor thereof.
RR 16-05, Sec. 4.107-1. VATon Importation of Goods
(a) In general VAT is imposed on goods brought into the Philippines, whether for use in business or not. The tax shall be 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 as postage, commission,
and similar charges, prior to the release of the goods from customs custody.
In case the valuation used by the BOC in computing customs duties is based on volume or quantity of the imported goods, the landed cost shall
be the basis for computing VAT. Landed cost consists of the invoice amount, customs duties, freight, insurance and other charges. If the goods
imported are subject to excise tax, the excise tax shall form part of the tax base.
The same rule applies to technical importation of goods sold by a person located in a Special Economic Zone to a customer located in a
customs territory.
No VAT shall be collected on importation of goods which are specifically exempted under Sec. 109(1) of the Tax Code
(b) Applicability and payment -- the rates prescribed under Sec. 107(A) of the Tax Code shall be applicable to all importations withdrawn from customs
custody.
The VAT on importation shall be paid by the importer prior to the release of such goods from customs custody.
Importer refers to any person who brings goods into the Philippines, 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
(c) Sale, transfer or exchange of imported goods by tax-exempt persons in the case of goods imported into the Philippines by VAT-exempt persons,
entities or agencies which are subsequently sold, transferred or exchanged in the Philippines to non-exempt persons or entities, the latter shall be
considered the importers thereof and shall be liable for VAT due on such importation. The tax due on such importation shall constitute a lien on the
goods, superior to all charges/or liens, irrespective of the possessor of said goods.
V. VAT on Sale of Services and Use or Lease of Properties
NIRC, 108. Value-added Tax on Sale of Services and Use or Lease of Properties.
(A) Rate and Base of Tax. There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) of gross receipts derived
from the sale or exchange of services, including the use or lease of properties: Provided, That the President, upon the recommendation of the
Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%), after any of the following conditions
has been satisfied:
i. Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds two and four-fifth percent (2
4/5%); or
ii. National government deficit as a percentage of GDP of the previous year exceeds one and one-half percent (1 %).
The phrase sale or exchange of services means the performance of all kinds of services in the Philippines for others for a fee, remuneration or
consideration, including those performed or rendered by construction and service contractors; stock, real estate, commercial, customs and
immigration brokers; lessors of property, whether personal or real; warehousing services; lessors or distributors of cinematographic films; persons
engaged in milling, processing, manufacturing or repacking goods for others; proprietors, operators or keepers of hotels, motels, rest-houses,
pension houses, inns, resorts; proprietors or operators of restaurants, refreshment parlors, cafes and other eating places, including clubs and
caterers; dealers in securities; lending investors; transportation contractors on their transport of goods or cargoes, including persons who
transport goods or cargoes for hire and other domestic common carriers by land relative to their transport of goods or cargoes; 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; sales of
electricity by generation companies, transmission, and distribution companies; services of franchise grantees of electric utilities, telephone and
telegraph, radio and television broadcasting and all other franchise grantees except those under Section 119 of this Code and non-life insurance
companies (except their crop insurances), including surety, fidelity, indemnity and bonding companies; and similar services regardless of whether
or not the performance thereof calls for the exercise or use of the physical or mental faculties. The phrase sale or exchange of services shall
likewise include:
(1) The lease or the use of or the right or privilege to use any copyright, patent, design or model, plan secret formula or process, goodwill,
trademark, trade brand or other like property or right;
(2) The lease of the use of, or the right to use of any industrial, commercial or scientific equipment;
(3) The supply of scientific, technical, industrial or commercial knowledge or information;
(4) The supply of any assistance that is ancillary and subsidiary to and is furnished as a means of enabling the application or enjoyment of any
such property, or right as is mentioned in subparagraph (2) or any such knowledge or information as is mentioned in subparagraph (3);
(5) The supply of services by a nonresident person or his employee in connection with the use of property or rights belonging to, or the
installation or operation of any brand, machinery or other apparatus purchased from such nonresident person.
(6) The supply of technical advice, assistance or services rendered in connection with technical management or administration of any scientific,
industrial or commercial undertaking, venture, project or scheme;
(7) The lease of motion picture films, films, tapes and discs; and
(8) The lease or the use of or the right to use radio, television, satellite transmission and cable television time.
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Lease of properties shall be subject to the tax herein imposed irrespective of the place where the contract of lease or licensing agreement was
executed if the property is leased or used in the Philippines.
The term 'gross receipts' means the total amount of money or its equivalent representing the contract price, compensation, service fee, rental
or royalty, including the amount charged for materials supplied with the services and deposits and advanced payments actually or constructively
received during the taxable quarter for the services performed or to be performed for another person, excluding value-added tax.
(B) Transactions Subject to Zero Percent (0%) Rate. The following services performed in the Philippines by VAT-registered persons shall be
subject to zero percent (0%) rate:
(1) Processing, manufacturing or repacking goods for other persons doing business outside the Philippines which goods are
subsequently exported, where the services are paid for in acceptable foreign currency and accounted for in accordance with the
rules and regulations of the Bangko Sentral ng Pilipinas (BSP);
(2) Services other than those mentioned in the preceding paragraph rendered to a person engaged in business conducted outside the
Philippines or to a nonresident person not engaged in business who is outside the Philippines when the services are performed,
the consideration for which is paid for in acceptable foreign currency and accounted for in accordance with the rules and
regulations of the Bangko Sentral ng Pilipinas (BSP);
(3) Services rendered to persons or entities whose exemption under special laws or international agreements to which the
Philippines is a signatory effectively subjects the supply of such services to zero percent (0%) rate;
(4) Services rendered to persons engaged in international shipping or international air transport operations, including leases of
property for use thereof;
(5) Services performed by subcontractors and/or contractors in processing, converting, of manufacturing goods for an enterprise
whose export sales exceed seventy percent (70%) of total annual production.
(6) Transport of passengers and cargo by air or sea vessels from the Philippines to a foreign country; 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.
RR 16-05, Sec. 4.108-1. VAT on the Sale of Services and Use or Lease of Properties. Sale or exchange of services, as well as the use or lease
of properties, as defined in Sec. 108(A) of the Tax Code shall be subject to VAT, equivalent to twelve percent (12%) of the gross receipts
(excluding VAT) starting February 1, 2006.
A. Tax Rate 12% or 0%

B. Tax Base: Gross Receipts
1. Gross Receipts, defined
NIRC, 108, last par. The term 'gross receipts' means the total amount of money or its equivalent representing the contract price,
compensation, service fee, rental or royalty, including the amount charged for materials supplied with the services and deposits and advanced
payments actually or constructively received during the taxable quarter for the services performed or to be performed for another person,
excluding value-added tax.
RR 16-05, Sec. 4.108-4. Definition of Gross Receipts. Gross receipts refers to 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
applied as payments for services rendered and advance payments actually or constructively received during the taxable period for the
services performed or to be performed for another person, excluding the VAT, except those amounts earmarked for payment to unrelated
third (3rd ) party or received as reimbursement for advance payment on behalf of another which do not redound to the benefit of the payor.
A payment is a payment to a third (3rd) party if the same is made to settle an obligation of another person, e.g., customer or client, to the
said third party, which obligation is evidenced by the sales invoice/official receipt issued by said third party to the obligor/debtor (e.g.,
customer or client of the payor of the obligation).
An advance payment is an advance payment on behalf of another if the same is paid to a third (3rd) party for a present or future
obligation of said another party which obligation is evidenced by a sales invoice/official receipt issued by the obligee/creditor to the
obligor/debtor (i.e., the aforementioned another party) for the sale of goods or services by the former to the latter.
For this purpose unrelated party shall not include taxpayers employees, partners, affiliates (parent, subsidiary and other related
companies), relatives by consanguinity or affinity within the fourth (4th) civil degree, and trust fund where the taxpayer is the trustor, trustee
or beneficiary, even if covered by an agreement to the contrary.
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:
(1) deposits in banks which are made available to the seller of services without restrictions;
(2) issuance by the debtor of a notice to offset any debt or obligation and acceptance thereof by the seller as payment for services
rendered; and
(3) transfer of the amounts retained by the payor to the account of the contractor.
2. Constructive Receipt
C. Requisites for Taxability of Sale of Services
1. Sale or exchange of services
(a) Meaning of sale or exchange of services
RR 16-05, Sec. 4.108-2. Meaning of Sale or Exchange of Services The term sale or exchange of services means the performance of
all kinds of services in the Philippines for others for a fee, remuneration, consideration, whether in kind or in cash, including those
performed or rendered by the following:
(1) Construction and service contractors;
(2) Stock, real estate, commercial, customs and immigration brokers;
(3) Lessors of property, whether personal or real;
(4) Persons engaged in warehousing services;
(5) Lessors or distributors of cinematographic films;
(6) Persons engaged in milling, processing, manufacturing or repacking goods for others;
(7) Proprietors, operators, or keepers of hotels, motels, rest houses, pension houses, inns, resorts, theaters and movie houses;
(8) Proprietors or operators of restaurants, refreshment parlors, cafes and other eating places, including clubs and caterers;
(9) Dealers in securities;
(10) Lending investors;
(11) Transportation contractors 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, transmission, and/or distribution companies;
(14) Franchise grantees of electric utilities, telephone and telegraph, radio and/or 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 10 Million Pesos and franchise grantees of gas and water utilities;
(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.
The phrase sale or exchange of services shall likewise include:
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(1) The lease or the use of or the right or privilege to use any copyright, patent, design or model, plan, secret formula or process,
goodwill, trademark, trade brand, or other like property or right
(2) The lease or the use of, or the right to use any industrial, commercial or scientific equipment;
(3) The supply of scientific, technical, industrial or commercial knowledge or information;
(4) The supply of any assistance that is ancillary and subsidiary to and is furnished as a means of enabling the application or
enjoyment of any such property, or right as is mentioned in subparagraph (2) hereof or any such knowledge or information as is
mentioned in subparagraph (3) hereof;
(5) 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 nonresident person;
(6) The supply of technical advice, assistance or services rendered in connection with technical management or administration of
any scientific, industrial or commercial undertaking, venture, project or scheme;
(7) The lease of motion picture films, films, tapes, and discs; and
(8) The lease or the use of, or the right to usem radio, television, satellite transmission and cable television time.
CIR v. COMASERCO.
2. Persons selling services liable to VAT
RR 16-05, Sec. 4.108-2, supra.
RR 16-05, Sec. 4.108-3. Definitions and Specific Rules on Selected Services.-
(a) Lessors of Property All forms of property for lease, whether real or personal, are liable to VAT subject to the provisions of Sec. 4.109-
1(B)(1)(v) of these Regulations
Real Estate Lessor includes any person engaged in the business of leasing or subleasing real property.
Lease of property shall be subject to VAT regardless of the place where the contract of lease or licensing agreement was executed if
the property leased or used is located in the Philippines
VAT on rental and/or royalties payable to non-resident foreign corporations or owners for the sale of services and use or lease or
properties in the Philippines shall be based on the contract price agreed upon by the licensor and the licensee. The licensee shall be
responsible for the payment of VAT on such rentals and/or royalties in behalf of the non-resident foreign corporation or owner in the
manner prescribed in Sec. 4.114-2(b) hereof.
Non-resident lessor/owner refers to any person, natural or juridical, an alien, or a citizen who establishes to the satisfaction of the
Commissioner of Internal Revenue the fact of his physical presence abroad with a definite intention to reside therein, and who
owns/leases properties, real or personal, whether tangible or intangible, located in the Philippines.
In a lease contract, the advance payment by the lessee may be:
i. A loan to the lessor from the lessee, or
ii. An option money for the property, or
iii. A security deposit to insure the faithful performance of certain obligations of the lessee to the lessor, or
iv. Pre-paid rental
If the advance payment is actually a loan to the lessor, or an option money for the property, or a security deposit for the faithful
performance of certain obligations of the lessee, such advance payment is not subject to VAT. However, a security deposit that is applied
to rental shall be subject to VAT at the time of its application.
If the advance payment constitutes a pre-paid rental, then such payment is taxable to the lessor in the month when received,
irrespective of the accounting method employed by the lessor.
(b) Warehousing service means rendering personal services of a warehouseman such as:
(1) Engaging in the business of receiving and storing goods of others for compensation or profit;
(2) Receiving goods and merchandise to be stored in his warehouse for hire; or
(3) Keeping and storing goods for others, as a business and for use.
(c) A miller, who is a person engaged in milling for others (except palay into rice, corn into corn grits, and sugar cane into raw sugar), is
subject to VAT on sale of services. If the miller is paid in cash for his services, VAT shall be based on his gross receipts for the month or
quarter. If he receives a share of the milled products instead of cash, VAT shall be based on the actual market value of his share in the
milled products. Sale by the owner or the miller of his share of the milled product (Except rice, corn grits and raw sugar) shall be subject
to VAT
(d) All receipts from service, hire, or operating lease of transportation equipment not subject to the percentage tax on domestic common
carriers and keepers of garages imposed under Sec. 117 of the Tax Code shall be subject to VAT
Common carrier refers to persons, corporations, firms or associations engaged in the business of carrying or transporting
passengers or goods or both, by land, water, or air, for compensation, offering their services to the public and shall include transportation
contractors
common carriers by land with respect to their gross receipts from the transport of passengers including operators of taxicabs,
utility cars for rent or hire driven by the lessees (rent-a-car companies), and tourist buses used from the transport of passengers shall be
subject to the percentage tax imposed under Sec. 117 of the Tax Code, but shall not be liable for VAT.
(e) Domestic common carriers by air and sea are subject to twelve percent (12%) VAT on their gross receipts from their transport of
passengers, goods or cargoes from one place in the Philippines to another place in the Philippines starting Feb. 1, 2006.
(f) Sale of electricity by generation, transmission, and distribution companies shall be subject to twelve percent (12%) VAT on their gross
receipts starting Feb. 1, 2006; Provided, that 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 shall be subject to 0% VAT.
Generation Companies refers to persons or entities authorized by the ERC to operate facilities used in the generation of electricity.
For this purpose, generation of electricity refers to the production of electricity by a generation company or a co-generation facility
pursuant to the provisions of RA 9136(EPIRA). They shall include all Independent Power Producers (IPPs) and NPC/Power Sector Assets
and Liabilities Management Corp (PSALM)-owned generation facilities
Transmission companies refers to any person or entity that owns or conveys electricity through high voltage backbone system
and/or subtransmission assets, e.g. NPC or TRANSCO. Subtransmission assets shall refer to the facilities related to the power delivery
service below the transmission voltages and based on the functional assignment of asset including, but not limited to step-down
transformers used solely by load customers, associated switchyard/substation, control and protective equipment, reactive compensation
equipment to improve power factor, overhead lines, and the land where such facilities/equipments are located/ these include NPC assets
linking the transmission system and the distribution system which are neither classified as generation or transmission.
Distribution companies refer to persons or entities which operate a distribution system in accordance with the provisions of the
EPIRA. they shall include any distribution utility such as an electric cooperative organized pursuant to PD 269, as amended, and/or RA
6938, or as otherwise provided in the EPIRA, a private corporation, or a government-owned utility or existing local government unit
which has an exclusive franchise to operate a distribution system in accordance with the EPIRA.
For this purpose, a distribution system refers to the system of wires and associated facilities belonging to a franchised distribution
utility extending between delivery points on the transmission and subtransmission system or generator connection and the point of
connection to the premises of the end-users.
Gross Receipts under subsection (f) shall refer to the following:
(1) Total amount charged by generation companies for the sale of electricity and related ancillary services and/or
(2) Total amount charged by transmission companies for transmission of electricity and related ancillary services; and/or
(3) Total amount charged by distribution companies and electric cooperatives for distribution and supply of electricity and
related electric services. The universal charge passed on and collected by distribution companies and electric cooperatives
shall be excluded from the computation of the Gross Receipts
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(g) Dealers in securities and lending investors shall be subject to VAT on the basis of their gross receipts. However, for dealer in securities,
the term gross receipts means gross selling price less cost of securities sold.
Dealer in Securities means a merchant of stock or securities, whether an individual, partnership or corporation, with an
established place of business, regularly engage in the purchase of securities and their resale to customers, that is, one who as a merchant
buys securities and sells them to customers with a view to the gains and profits that may be derived therefrom.
Lending investor includes all persons other than banks, non-bank financial intermediaries, finance companies and other financial
intermediaries not performing quasi-banking functions who make a practice of lending money for themselves or others at interest.
(h) Services of franchise grantees of telephone and telegraph, radio and/or television broadcasting, toll road operations and all other
franchise grantees, except gas and water utilities, shall be subject to VAT in lieu of franchise tax, pursuant to Sec. 20 of RA 7716, as
amended. however, franchise grantees of radio and/or television broadcasting whose annual gross receipts of the preceding year do not
exceed 10 Million pesos shall not ber subject to VAT but to the 3% franchise tax imposed under Sec. 119 of the Tax Code, subject to the
optional registration provisions under Sec. 9.236-1(c) hereof.
Likewise, franchise grantees of gas and water utilities shall be subject to 2% franchise tax of their gross receipts derived from the
business covered by the law granting the franchise pursuant to Sec. 119 of the Tax Code.
Gross receipts of all other franchisees, other than those covered by Sec. 119 of the Tax Code , regardless of how their franchises may
have been granted, shall be subject to the twelve percent (12%) VAT imposed under Sec. 108 of the Tax Code starting Feb. 1, 2006. This
includes among others, the Philippine and Amusement Gaming Corporation (PAGCOR), and its licensees or franchisees.
Franchise grantees of telephone and telegraph shall be subject to VAT on their fross receipts derived from their telephone,
telegraph, telewriter exchange, wireless and other communication equipment services. However, amounts received for overseas
dispatch, message, or conversation originating from the Philippines are subject to the percentage tax under Sec. 120 o the Tax Code and
hence exempt from VAT.
(i) Non-life insurance companies including surety, fidelity, indemnity and bonding companies are subject to VAT. They are not liable to
the payment of the premium tax under Sec. 123 of the Tax Code.
Non-life insurance companies including surety, fidelity, indemnity and bonding companies, shall include all individuals,
partnerships, associations, or corporations, including professional reinsurers defined in Sec. 280 of PD 612, otherwise known as the
Insurance Code of the Philippines, mutual benefit associations and government-owned or controlled corporations, engaging in the
business of property insurance, as distinguished from insurance on human lives, health, accident and insurance appertaining thereto or
connected therewith which shall be subject to the percentage tax under Sec. 123 of the Tax Code.
The gross receipts from non-life insurance shall mean total premiums collected whether paid in money, notes, credits or any
substitute for money.
Non-life insurance premiums are subject to VAT whereas non-life reinsurance premiums are not subject to VAT, the latter being
already subjected to VAT upon receipt of the insurance premiums. Insurance and reinsurance commissions, whether life of non-life, are
subject to VAT.
(j) Pre -need Companies are corporations registered with the SEC and authorized/licensed to sell or offer for sale pre-need plans, whether
a single plan or multi-plan. They are engaged in business as seller of services providing services to plan holders by managing the funds
provided by them and making payments at the time of need or maturity of the contract.
As service providers, the compensation for their services is the premiums or payments received from the plan holders.
(k) Health Maintenance Organizations (HMOs) are entities, organized in accordance with the provisions of the Corporation Code of the
Philippines and license by the appropriate government agency, which arranges for coverage or designated managed care services needed
by plan holders/members for fixed prepaid membership fees and for a specified period of time.
HMOs gross receipts shall be the total amount of money or its equivalent representing the service fee actually or constructively
received during the taxable period for the services performed or to be performed for another person, excluding the value-added tax. The
compensation for their services representing the service fee, is presumed to be the total amount received as enrollment fee from their
member plus other charges received.
3. Service performed in the Philippines
4. Service performed in the course of trade or business
5. Seller of service actually or constructively receives the fee or remuneration
6. Service is not exempt from VAT
D. Zero-rated Sale of Services
NIRC, 108(B). Transactions Subject to Zero Percent (0%) Rate. The following services performed in the Philippines by VAT-registered persons
shall be subject to zero percent (0%) rate:
(1) Processing, manufacturing or repacking goods for other persons doing business outside the Philippines which goods are
subsequently exported, where the services are paid for in acceptable foreign currency and accounted for in accordance with the
rules and regulations of the Bangko Sentral ng Pilipinas (BSP);
(2) Services other than those mentioned in the preceding paragraph rendered to a person engaged in business conducted outside the
Philippines or to a nonresident person not engaged in business who is outside the Philippines when the services are performed,
the consideration for which is paid for in acceptable foreign currency and accounted for in accordance with the rules and
regulations of the Bangko Sentral ng Pilipinas (BSP);
(3) Services rendered to persons or entities whose exemption under special laws or international agreements to which the
Philippines is a signatory effectively subjects the supply of such services to zero percent (0%) rate;
(4) Services rendered to persons engaged in international shipping or international air transport operations, including leases of
property for use thereof;
(5) Services performed by subcontractors and/or contractors in processing, converting, of manufacturing goods for an enterprise
whose export sales exceed seventy percent (70%) of total annual production.
(6) Transport of passengers and cargo by air or sea vessels from the Philippines to a foreign country; 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.
1. Zero-Rated Sales, defined
RR 16-05, Sec. 4.108-5 1st par. 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 the purchase of goods, properties or services related to such zero-rated sale shall be
available as tax credit or refund in accordance with these regulations
2. Services subject to 0% VAT
RR 16-05, Sec. 4.108-5(b)(1-7). The following services performed in the Philippines by a VAT-registered person shall be subject to 0% VAT
rate:
(1) Processing, manufacturing or repacking of goods for other persons doing business outside the Philippines, which goods are subsequently
exported, where the services are paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations
of the BSP
(2) Services other than processing, manufacturing or repacking rendered to a person engaged in business conducted outside the Philippines
to a non-resident person not engaged in business who is outside the Philippines when the services are performed, 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 air transport operations, including leases of property for use thereof;
Provided, however, that the services referred to herein shall not pertain to those made to common carriers by air and sea relative to their
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transport of passengers, goods or cargoes from one place in the Philippines to another place in the Philippines, the same being subject to
twelve percent (12%) VAT under Sec. 108 of the Tax Code starting Feb. 1, 2006;
(5) Service performed by subcontractors and/or contractors in processing, converting or manufacturing goods for an enterprise whose
export sales exceed 70% of the total annual production;
(6) Transport of passengers and cargo by domestic air or sea carriers from the Philippines to a foreign country. Gross receipts of
international air carriers doing business in the Philippines and international sea carriers doing business in the Philippines are still liable
to a percentage tax of 3% based on their gross receipts as provided for in sec. 118 of the tax Code but shall not be liable to VAT; and
(7) Sale of power or fuel generated through renewable sources of energy such as, but not limited to, biomass, solar, wind, hydropower,
geothermal and steam, ocean energy, and other emerging sources using technologies such as fuel cells and hydrogen fuels; provided,
however, that zero-rating shall apply strictly to the sale of power or fuel generated through renewable sources of energy, and shall not
extend to sale of s4ervices related to the maintenance and operation of plants generating said power
3. Differentiated from effectively zero-rated sales of goods and properties
RR 16-05, Sec. 4.108-6. Meaning of the term Effectively Zero-Rated Sale of Services. The term effectively zero-rated sales of services shall
refer to the local sale of services by a VAT -registered person to a person or entity who was granted indirect tax exemption under special laws
or international agreement.
VI. VAT Exempt Transactions
NIRC, 109. SEC. 109. Exempt Transactions. (1) Subject to the provisions of subsection (2) hereof, the following transactions shall be exempt from the
value-added tax:
(A) Sale or importation of agricultural and marine food products in their original state, livestock and poultry of a kind generally used as, or yielding
or producing foods for human consumption; and breeding stock and genetic materials therefor.
Products classified under this paragraph shall be considered in their original state even if they have undergone the simple processes of
preparation or preservation for the market, such as freezing, drying, salting, broiling, roasting, smoking or stripping. Polished and/or husked
rice, corn grits, raw cane sugar and molasses, ordinary salt, and copra shall be considered in their original state;
(B) Sale or importation of fertilizers; seeds, seedlings and fingerlings; fish, prawn, livestock and poultry feeds, including ingredients, whether locally
produced or imported, used in the manufacture of finished feeds (except specialty feeds for race horses, fighting cocks, aquarium fish, zoo
animals and other animals generally considered as pets);
(C) Importation of personal and household effects belonging to the residents of the Philippines returning from abroad and nonresident citizens
coming to resettle in the Philippines: Provided, That such goods are exempt from customs duties under the Tariff and Customs Code of the
Philippines;
(D) Importation of professional instruments and implements, wearing apparel, domestic animals, and personal household effects (except any vehicle,
vessel, aircraft, machinery, other goods for use in the manufacture and merchandise of any kind in commercial quantity) belonging to persons
coming to settle in the Philippines, for their own use and not for sale, barter or exchange, accompanying such persons, or arriving within ninety
(90) days before or after their arrival, upon the production of evidence satisfactory to the Commissioner, that such persons are actually coming
to settle in the Philippines and that the change of residence is bona fide;
(E) Services subject to percentage tax under Title V;
(F) Services by agricultural contract growers and milling for others of palay into rice, corn into grits and sugar cane into raw sugar;
(G) Medical, dental, hospital and veterinary services except those rendered by professionals;
(H) Educational services rendered by private educational institutions, duly accredited by the Department of Education (DEPED), the Commission on
Higher Education (CHED), the Technical Education and Skills Development Authority (TESDA) and those rendered by government educational
institutions;
(I) Services rendered by individuals pursuant to an employer-employee relationship;
(J) Services rendered by regional or area headquarters established in the Philippines by multinational corporations which act as supervisory,
communications and coordinating centers for their affiliates, subsidiaries or branches in the Asia-Pacific Region and do not earn or derive
income from the Philippines;
(K) Transactions which are exempt under international agreements to which the Philippines is a signatory or under special laws, except those under
Presidential Decree No. 529;
(L) Sales by agricultural cooperatives duly registered with the Cooperative Development Authority to their members as well as sale of their produce,
whether in its original state or processed form, to non-members; their importation of direct farm inputs, machineries and equipment, including
spare parts thereof, to be used directly and exclusively in the production and/or processing of their produce;
(M) Gross receipts from lending activities by credit or multi-purpose cooperatives duly registered with the Cooperative Development Authority;
(N) Sales by non-agricultural, non-electric and non-credit cooperatives duly registered with the Cooperative Development Authority: Provided, That
the share capital contribution of each member does not exceed Fifteen thousand pesos (P 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 Republic Act No. 7279, otherwise known as the Urban Development and Housing Act of
1992, and other related laws, residential lot valued at One million five hundred thousand pesos (P 1,500,000) and below, house and lot, and other
residential dwellings valued at Two million five hundred thousand pesos (P 2,500,000) and below: Provided, That not later than January 31,
2009 and every three (3) years thereafter, the amounts herein stated shall be adjusted to their present values using the Consumer Price Index, as
published by the National Statistics Office (NSO);
(Q) Lease of a residential unit with a monthly rental not exceeding Ten thousand pesos (P 10,000) Provided, That not later than January 31, 2009 and
every three (3) years thereafter, the amount herein stated shall be adjusted to its present value using the Consumer Price Index as published by
the National Statistics Office (NSO);
(R) Sale, importation, printing or publication of books and any newspaper, magazine, review or bulletin which appears at regular intervals with fixed
prices for subscription and sale and which is not devoted principally to the publication of paid advertisements;
(S) Sale, importation or lease of passenger or cargo vessels and aircraft, including engine, equipment and spare parts thereof for domestic or
international transport operations;
(T) Importation of fuel, goods and supplies by persons engaged in international shipping or air transport operations;
(U) Services of banks, non-bank financial intermediaries performing quasi-banking functions, and other non-bank financial intermediaries; and
(V) Sale or lease of goods or properties or the performance of services other than the transactions mentioned in the preceding paragraphs, the gross
annual sales and/or receipts do not exceed the amount of One million five hundred thousand pesos (P 1,500,000): Provided, That not later than
January 31, 2009 and every three (3) years thereafter, the amount herein stated shall be adjusted to its present value using the Consumer Price
Index as published by the National Statistics Office (NSO);
(2) A VAT-registered person may elect that Subsection (1) not apply to its sale of goods or properties or services: Provided, That an election made
under this Subsection shall be irrevocable for a period of three (3) years from the quarter the election was made.
A. VAT Exempt Transactions, in general
RR 16-05, Sec. 4.109-1(A). VAT exempt transactions refer to the sale of goods or properties and/or services and the use or lease of properties
that is not subject to VAT (output tax) and the seller is not allowed any tax credit of VAT (input tax) on purchases
The person making the exempt sale of goods, properties or services shall not bill any output tax to his customers because the said transaction
is not subject to VAT
B. Exempt Transactions, enumerated
RR 16-05, Sec. 4.109-1(B).
(1) Subject to the provisions of subsection (2) hereof, the following transactions shall be exempt from VAT:
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(a) Sale or importation of agricultural and marine food products in their original state, livestock and poultry of a kind generally used as, or
yielding or producing foods for human consumption; and breeding stock and genetic materials therefor.
Livestock shall include cows, bulls and calves, pigs, sheep, goats and rabbits. Poultry shall include fowls, ducks, geese and turkey.
Livestock or poultry does not include fighting cocks, race horses, zoo animals and other animals generally considered as pets.
Marine food products shall include fish and crustaceans, such as, but not limited to, eels, trout, lobster, shrimp, prawns, oysters,
mussels and clams.
Meat, fruit, fish, vegetables and other agricultural and marine food products classified under this paragraph shall be considered in
their original state even if they have undergone the simple processes of preparation or preservation for the market, such as freezing,
drying, salting, broiling, roasting, smoking or stripping, including those using advanced technological means of packaging, such as shrink
wrapping in plastics, vacuum packing, tetra-pack and other similar packaging methods.
Polished and/or husked rice, corn grits, raw can sugar and molasses, ordinary salt and copra shall be considered as agricultural
food products in their original state.
Sugar whose content of sucrose be weight, in the dry state, has a polarimeter reading of 99.5 0 and above are presumed to be refined
sugar.
Can sugar produced from the following shall be presumed, for internal revenue purposes, to be refined sugar:
(1) Product of a refining process;
(2) Products of a sugar refinery, or
(3) Product of a production line of a sugar mill accredited by the BIR to be producing and/or capable of producing sugar with a
polarimeter reading of 99.50 and above, and for which the quedan issued therefor, and verified by the Sugar Regulartory
Administration, identifies the same to be of a polarimeter reading of 99.50 and above.
Bagasse is not included in the exemption provided for under this section.
(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);
Specialty feeds refers to non-agricultural feeds or food for race horses, fighting cocks, aquarium fish, zoo animals and other
animals generally considered as pets.
(c) Importation of personal and household effects belonging to the residents of the Philippines returning from abroad and nonresident
citizens coming to resettle in the Philippines: Provided, That such goods are exempt from customs duties under the Tariff and Customs
Code of the Philippines;
(d) Importation of professional instruments and implements, wearing apparel, domestic animals, and personal household effects (except any
vehicle, vessel, aircraft, machinery, other goods for use in the manufacture and merchandise of any kind in commercial quantity)
belonging to persons coming to settle in the Philippines, for their own use and not for sale, barter or exchange, accompanying such
persons, or arriving within ninety (90) days before or after their arrival, upon the production of evidence satisfactory to the
Commissioner, that such persons are actually coming to settle in the Philippines and that the change of residence is bona fide;
(e) Services subject to percentage tax under Title V of the Tax Code, as enumerated below:
(1) Sale or lease of goods or properties or the performance of services of non-VAT registered persons, other than the transactions
mentioned in NIRC 109(A-U), the gross annual sales and/or receipts of which does not exceed 1.5M; provided that not later than
Jan. 31, 2009 and every 3 years thereafter, the amount herein stated shall be adjusted to its present value using the Consumer Price
index as published by the NSO (NIRC, 116)
(2) Services rendered by domestic carriers by land, for the transport of passengers and keepers of garages (NIRC, 117)
(3) Services rendered by international air/shipping carriers (NIRC, 118)
(4) Services rendered by franchise grantees of radio and/or TV broadcasting whose annual gross receipts of the preceding year do not
exceed 10M, and by franchise grantees of gas and water utilities (NIRC, 119)
(5) Services rendered for overseas dispatch, message or conversation originating from the Philippines (NIRC, 120)
(6) Services rendered by any person, company or corporation (except purely cooperative companies or associations) doing life
insurance business of any sort in the Philippines (NIRC, 123)
(7) Services rendered by fire, marine or miscellaneous insurance agents of foreign insurance companies (NIRC, 124)
(8) Services of proprietors, lessees or operators of cockpits, cabarets, night or day clubs, boxing exhibitions, professional basketball
games, jai-alai and race tracks (NIRC, 125); and
(9) Receipts on sale, barter or exchange of shares of stock listed and traded through the local stock exchange or through initial public
offering (NIRC, 127)
(f) Services by agricultural contract growers and milling for others of palay into rice, corn into grits and sugar cane into raw sugar;
Agricultural Contract Growers refers to those persons producing for others poultry, livestock or other agricultural and
marine food products in their original state.
(g) Medical, dental, hospital and veterinary services except those rendered by professionals;
Laboratory services are exempted. If the hospital or clinic operates a pharmacy or drug store, the sale of drugs and medicine is
subject to VAT.
(h) Educational services rendered by private educational institutions, duly accredited by the Department of Education (DEPED), the
Commission on Higher Education (CHED), the Technical Education and Skills Development Authority (TESDA) and those rendered by
government educational institutions;
Educational services shall refer to academic, technical or vocational education provided by private educational institutions
duly accredited by the DepED, CHED and TESDA and those rendered by government educational institutions and it does not include
seminars, in-service training, review classes and other similar services rendered by persons who are not accredited by the DepED, CHED
and/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 Presidential Decree No. 529 Petroleum Exploration Concessionaires under the Petroleum Act of 1949;
(l) Sales by agricultural cooperatives duly registered and in good standing with the Cooperative Development Authority (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.
Sale by agricultural cooperatives to non-members can only be exempted from VAT if the producer of the agricultural products
sold is the cooperative itself. If the cooperative is not the producer (e.g., trader), then only those sales to its members shall be exempted
from VAT;
It is to be reiterated however, that sale or importation of agricultural food products in their original state is exempt from VAT
irrespective of the seller and buyer thereof, pursuant to Subsection (a) hereof.
(m) Gross receipts from lending activities by credit or multi-purpose cooperatives duly registered with the Cooperative Development
Authority;
(n) Sales by non-agricultural, non-electric and non-credit cooperatives duly registered with the Cooperative Development Authority:
Provided, That the share capital contribution of each member does not exceed Fifteen thousand pesos (P 15,000) and regardless of the
aggregate capital and net surplus ratably distributed among the members;
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Importation by non-agricultural, non-electric and non-credit cooperatives of machineries and equipment, including spare
parts thereof, to be used by them are subject to VAT;
(o) Export sales by persons who are not VAT-registered;
(p) The following sales of real properties are exempt from VAT, namely:
(1) Sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or business.
However, even if the real property is not primarily held for sale to customers or held for lease in the ordinary course of trade
or business but the same is used in the trade or business of the seller, the sale thereof shall be subject to VAT being a transaction
incidental to the taxpayers main business.
(2) Sale of real properties utilized for low-cost housing as defined by RA 7279, otherwise known as the Urban Development and
Housing Act of 1992 and other related laws, such as RA 7835 and RA 8763
Low-cost housing refers to housing projects intended for homeless low-income family beneficiaries, undertaken by the
Governemnt or private developers, which may either be a subdivision or a condominium registered and licensed by the HLURB
under BP220, PD957 or any other similar law, wherein the unit selling proce is within the selling price ceiling per unit of 750K
under RA 7279, and other laws, such as RA 7835 and RA 8763.
(3) Sale of real properties utilized for socialized housing as defined under RA 7279 and other laws, such as RA 7835 and RA 8763,
wherein the price ceiling per unit is 225K or as may from time to time be determined by the HUDCC and the NEDA and other related
laws
Socialized housing refers to housing programs and projects covering houses and lots or home lots only undertaken by the
Government or the private sector for the underprivileged and homeless citizens which shall include sites and services development,
long-term financing, liberated terms on interest payments, and such other benefits in accordance with the provisions of RA7279
and other laws, such as RA 7835 and RA 8763. Socialized housing shall also refer to projects intended for the underprivileged and
homeless wherein the housing package selling price is within the lowest interest rates under the Unified Home Lending Program or
any equivalent housing program of the government, the private sector or nongovernment organizations
(4) Sale of residential lot valued at 1.5M and below, or house & lot and other residential dwellings valued at 2.5M and below where the
instrument of sale/transfer/disposition was executed on or after 11/01/2005; provided, that not later 01/01/2009, the amount
herein stated shall be adjusted to its present value using the Consumer Price index as published by the NSO; provided further, that
such adjustment shall be published through revenue regulations to be issued not later than March 31 st of each year;
If 2 or more adjacent residential lots are sold or disposed in favor of 1 buyer, for the purpose of utilizing the lots as 1
residential lot, the sale shall be exempt from VAT only if the aggregate value of the lots do not exceed 1.5M. adjacent residential lots,
although covered by separate titles and/or separate tax declarations, when sold or disposed to one and the same buyer, whether
covered by one or separate Deed of Conveyance, shall be presumed as a sale of 1 residential lot.
(q) Lease of a residential unit with a monthly rental not exceeding Ten thousand pesos (P 10,000) Provided, That not later than January 31,
2009 and every three (3) years thereafter, the amount herein stated shall be adjusted to its present value using the Consumer Price Index
as published by the National Statistics Office (NSO);
The foregoing notwithstanding, lease of residential units where the monthly rental per unit exceeds 10K but the aggregate of such
rentals of the lessor during the year do not exceed 1.5M shall likewise be exempt from VAT, however, the same shall be subjected to 3%
percentage tax
In cases where a lessor has several residential units for lease, some are leased out for a monthly rental per unit of not exceeding
10K while others are leaded out for more than 10K per unit, his tax liability will be as follows:
(1) The gross receipts from rentals not exceeding 10K/month/unit shall be exempt from VAT regardless of the aggregate annual
gross receipts
(2) The gross receipts from rentals exceeding 10K/month/unit shall be subject to VAT if the aggregate annual gross receipts from
said units only (not including the gross receipts from units leased for not more than 10K) exceeds 1.5M. otherwise, the gross
receipts will be subject to 3% tax under NIRC, 116.
The term residential units shall refer to apartments and houses & lots used for residential purposes, and buildings or parts or
units thereof used solely as dwelling places (e.g., dormitories, rooms and bed spaces) except motels, motel rooms, hotels, hotel rooms,
lodging houses, inns and pension houses.
The term unit shall mean an apartment unit in the case of apartments, house in the case of residential houses; per person in the
case of dormitories, boarding houses and bed spaces; and per room in case of rooms for rent.
(r) Sale, importation, printing or publication of books and any newspaper, magazine, review or bulletin which appears at regular intervals
with fixed prices for subscription and sale and which is not devoted principally to the publication of paid advertisements;
(s) Sale, importation or lease of passenger or cargo vessels and aircraft, including engine, equipment and spare parts thereof for domestic or
international transport operations; Provided, that the exemption from VAT on the importation and local purchase of passenger and/or
cargo vessels shall be limited to those of 150tons and above, including enginge and spare parts of said vessels; provided further, that the
vessels to be imported shall comply with the age limit requirement, at the time of acquisition counted from the date of the vessels
original commissioning as follows: (i) for passenger and/or cargo vessels, the age limit is 15y/o, (ii) for tankers, the age limit is 10y/o,
and (iii) for high-speed passenger crafts, the age limit is 5y/0; provided finally, that exemption shall be subject to the provisions of Sec. 4
of RA 9295 (Domestic Shipping Devt Act of 2004)
(t) Importation of life-saving equipment, safety and rescue equipment and communication and navigational safety equipment, steel plates
and other metal plates including marine-grade aluminum plates, used for shipping transport operations; Provided, that the exemption
shall be subject to the provisions of Section 4 of Republic Act. No. 9295, otherwise known as The Domestic Shipping Development Act of
2004;
(u) Importation of capital equipment, machinery, spare parts, lifesaving and navigational equipment, steel plates and other metal plates
including marine-grade aluminum plates to be used in the construction, repair, renovation or alteration of any merchant marine vessel
operated or to be operated in the domestic trade. Provided, that the exemption shall be subject to the provisions of Section 19 of Republic
Act. No. 9295, otherwise known as The Domestic Shipping Development Act of 2004;
(v) Importation of fuel, goods and supplies by persons engaged in international shipping or air transport operations; Provided, that the said
fuel, goods and supplies shall be used exclusively or shall pertain to the transport of goods and/or passenger from a port in the
Philippines directly to a foreign port, or vice versa, without docking or stopping at any other port in the Philippines unless the docking or
stopping at any other Philippine port is for the purpose of unloading passengers and/or cargoes that originated from abroad, or to load
passengers and/or cargoes bound for abroad; Provided, further, that if any portion of such fuel, goods or supplies is used for purposes
other than that mentioned in this paragraph, such portion of fuel, goods and supplies shall be subject to twelve percent (12%) VAT
starting February 1, 2006;
(w) Services of banks, non-bank financial intermediaries performing quasi-banking functions, and other non-bank financial intermediaries,
such as money changers and pawnshops, subject to percentage tax under Secs. 121 and 122 , respectively, of the Tax Code; and
(x) Sale or lease of goods or properties or the performance of services other than the transactions mentioned in the preceding paragraphs,
the gross annual sales and/or receipts do not exceed the amount of One Million Five Hundred Thousand Pesos (P1,500,000.00).
Provided, that not later than January 31, 2009 and every three (3) years thereafter, the amount of P1,500,000.00 shall be adjusted to its
present value using the Consumer Price Index, as published by the NSO.
For purposes of the threshold of P1,500,000.00, the husband and the wife shall be considered separate taxpayers. However,
the aggregation rule for each taxpayer shall apply, for instance, if a professional, aside from the practice of his profession, also derives
revenue from other lines of business which are otherwise subject to VAT, the same shall be combined for purposes of determining
whether the threshold has been exceeded. Thus, the VAT-exempt sale shall not be included in determining the threshold.
VII. Computation of VAT
A. Input Tax & Output Tax, defined
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NIRC, 110. SEC. 110. Tax Credits.
(A) Creditable Input Tax.
(1) Any input tax evidenced by a VAT invoice or official receipt issued in accordance with Section 113 hereof on the following transactions
shall be creditable against the output tax:
(a) Purchase or importation of goods:
i. For sale; or
ii. For conversion into or intended to form part of a finished product for sale including packaging materials; or
iii. For use as supplies in the course of business; or
iv. For use as materials supplied in the sale of service; or
v. For use in trade or business for which deduction for depreciation or amortization is allowed under this Code.
(b) Purchase of services on which a value-added tax has actually been paid.
(2) The input tax on domestic purchase or importation of goods or properties by a VAT-registered person shall be creditable:
(a) To the purchaser upon consummation of sale and on importation of goods or properties; and
(b) To the importer upon payment of the value-added tax prior to the release of the goods from the custody of the Bureau of
Customs.
Provided, That the input tax on goods purchased or imported in a calendar month for use in trade or business for which
deduction for depreciation is allowed under this Code, shall be spread evenly over the month of acquisition and the fifty-nine
(59) succeeding months if the aggregate acquisition cost for such goods, excluding the VAT component thereof, exceeds One
million pesos (P 1,000,000): Provided, however, That if the estimated useful life of the capital good is less than five (5) years, as
used for depreciation purposes, then the input VAT shall be spread over such a shorter period: Provided, finally, that in the
case of purchase of services, lease or use of properties, the input tax shall be creditable to the purchaser, lessee or licensee
upon payment of the compensation, rental, royalty or fee
(3) A VAT-registered person who is also engaged in transactions not subject to the value-added tax shall be allowed tax credit as
follows:
(a) Total input tax which can be directly attributed to transactions subject to value-added tax; and
(b) A ratable portion of any input tax which cannot be directly attributed to either activity.
The term 'input tax' means the value-added tax due from or paid by a VAT-registered person in the course of his trade or
business on importation of goods or local purchase of goods or services, including lease or use of property, from a VAT-
registered person. It shall also include the transitional input tax determined in accordance with Section 111 of this Code.
The term 'output tax' means the value-added tax due on the sale or lease of taxable goods or properties or services by any
person registered or required to register under Section 236 of this Code.
(B) Excess Output or Input Tax. If at the end of any taxable quarter the output tax exceeds the input tax, the excess shall be paid by the
VAT-registered person. If the input tax exceeds the output tax, the excess shall be carried over to the succeeding quarter or
quarters: Provided, That the input tax inclusive of input VAT carried over from the previous quarter that may be credited in every
quarter shall not exceed seventy percent (70%) of the output VAT: Provided, however, That any input tax attributable to zero-rated
sales by a VAT-registered person may at his option be refunded or credited against other internal revenue taxes, subject to the
provisions of Section 112.
(C) Determination of Creditable Input Tax. - The sum of the excess input tax carried over from the preceding month or quarter and
the input tax creditable to a VAT-registered person during the taxable month or quarter shall be reduced by the amount of claim for
refund or tax credit for value-added tax and other adjustments, such as purchase returns or allowances and input tax attributable to
exempt sale.
The claim for tax credit referred to in the foregoing paragraph shall include not only those filed with the Bureau of Internal Revenue
but also those filed with other government agencies, such as the Board of Investments the Bureau of Customs.
RR 16-05, Sec. 4.110-1. Credits for input tax Input Tax means the VAT due on or paid by a VAT-registered person on importation of goods or
local purchases of goods, properties or services, including lease or use of properties, in the course of his trade or business. It shall also include the
transitional input tax and the presumptive input tax determined in accordance with NIRC, 111.
It includes input tax 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.
B. Sources of Input Tax creditable against output tax
NIRC, 110, supra.
RR 16-05, Sec. 4.110-1(a-g). Any input tax on the following transactions evidenced by a VAT invoice or official receipt issued by a VAT-registered
person in accordance with NIRC, 113 and 237 shall be credited against the output tax:
1. Purchase or importation of goods
(a) For sale; or
(b) For conversion into or intended to form part of a finished product for sale, including packaging materials; or
(c) For use as supplies in the course of business; or
(d) For use as raw materials supplied in the sale of services; or
(e) For use in trade or business for which deduction for depreciation or amortization is allowed under the NIRC
(1) Claim for input tax on depreciable goods
RR 16-05, Sec. 4.110-3. Claim for Input Tax on Depreciable Goods. Where a VAT-registered person purchases or imports capital
goods, which are depreciable assets for income tax purposes, the aggregate acquisition cost of which (exclusive of VAT) in a
calendar month exceeds 1M, regardless of the acquisition cost of each capital good, shall be claimed as credit against output tax in
the following manner:
a. if the estimated useful life of a capital good is 5 years or more the input tax shall be spread evenly over a period of 60 months
and the claim for input tax credit will commence in the calendar month when the capital good is acquired. The total input taxes
on purchases or importations of this type of capital goods shall be divided by 60 and the quotient will be the amount to be
claimed monthly
b. If the estimated useful life of a capital good is less than five (5) years The input tax shall be spread evenly on a monthly basis
by dividing the input tax by the actual number of months comprising the estimated useful life of a capital good. The claim for
input tax credit shall commence in the month that the capital goods were acquired.
Where the aggregate acquisition cost (exclusive of VAT) of the existing or finished depreciable capital goods purchased
or imported during any calendar month does not exceed one million pesos (P1,000,000.00), the total input taxes will be
allowable as credit against output tax in the month of acquisition.
Capital goods or properties refers to goods or properties with estimated useful life greater than one (1) year and which
are treated as deprecia ble assets under Sec. 34(F) of the Tax Code, used directly or indirectly in the production or sale of
taxable goods or services.
The aggregate acquisition cost of depreciable assets in any calendar month refers to the total price, excluding the VAT,
agreed upon for one or more assets acquired and not on the payments actually made during the calendar month. Thus, an
asset acquired on installment for an acquisition cost of more than P1,000,000.00, excluding the VAT, will be subject to the
amortization of input tax despite the fact that the monthly payments/installments may not exceed P1,000,000.00.
Construction in progress (CIP) is the cost of construction work which is not yet completed. CIP is not depreciated until
the asset is placed in service. Normally, upon completion, a CIP item is reclassified and the reclassified asset is capitalized and
depreciated. CIP is considered, for purposes of claiming input tax, as a purchase of service, the value of which shall be
determined based on the progress billings. Until such time the construction has been completed, it will not qualify as capital
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goods as herein defined, in which case, input tax credit on such transaction can be recognized in the month the payment was
made; Provided, that an official receipt of payment has been issued based on the progress billings.
In case of contract for the sale of service where only the labor will be supplied by the contractor and the materials will be
purchased by the contractee from other suppliers, input tax credit on the labor contracted shall still be recognized on the
month the payment was made based on a progress billings while input tax on the purchase of materials shall be recognized at
the time the materials were purchased.
Once the input tax has already been claimed while the construction is still in progress, no additional input tax can be
claimed upon completion of the asset when it has been reclassified as a depreciable capital asset and depreciated.
2. Purchase of real property for which VAT has actually been paid
3. Purchases of services in which VAT has actually been paid
4. Transaction deemed sale under NIRC, 106(B)
5. Transitional input tax
NIRC, 111(a). (A) Transitional Input Tax Credits. A person who becomes liable to value-added tax or any person who elects to be a VAT-
registered person shall, subject to the filing of an inventory according to rules and regulations prescribed by the Secretary of Finance, upon
recommendation of the Commissioner, be allowed input tax on his beginning inventory of goods, materials and supplies equivalent to two
percent (2%) of the value of such inventory or the actual value-added tax paid on such goods, materials and supplies, whichever is higher,
which shall be creditable against the output tax.
RR 16-05, Sec. 111-1(a). Transitional Input Tax Credits on Beginning Inventories
Taxpayers who became VAT-registered persons upon exceeding the minimum turnover of 1.5M in any 12-month period, or whol
voluntarily register even if their turnover does not exceed 1.5M (except franchise grantees of radio and TV broadcasting whose threshold is
10M) shall be entitled to a transitional input tax on the inventory on hand as of the effectivity of their VAT registration, on the following:
(1) Goods purchased for resale in their present condition;
(2) Materials purchased for further processing, but which have not yet undergone processing;
(3) Goods which have been manufactured by the taxpayer;
(4) Goods in process for sale; or
(5) Goods and supplies for use in the course of the taxpayers trade or business as a VAT-registered person
The transitional input tax shall be 2% of the value of the beginning inventory or actual VAT paid on such goods, material and supplies,
whichever is higher, which amount shall be credited against the output tax of VAT-registered person. The value allowed for income tax
purposes on inventories shall be the basis for the computation of the 2% transitional input tax, excluding goods that are exempt from VAT
under NIRC, 109.
The threshold amount of 1.5M shall be adjusted, not later than 01/31/2009 and every 3 years thereafter, to its present value using the
CPI published by the NSO
6. Presumptive input tax
NIRC, 111(b). Presumptive Input Tax Credits.
(1) Persons or firms engaged in the processing of sardines, mackerel and milk, and in manufacturing refined sugar, cooking oil and
packed noodle based instant meals, shall be allowed a presumptive input tax, creditable against the output tax, equivalent to
four percent (4%) of the gross value in money of their purchases of primary agricultural products which are used as inputs to
their production.
As used in this Subsection, the term 'processing' shall mean pasteurization, canning and activities which through physical or
chemical process alter the exterior texture or form or inner substance of a product in such manner as to prepare it for special
use to which it could not have been put in its original form or condition.
(2) Public works contractors shall be allowed a presumptive input tax equivalent to one and one-half percent (1 1/2%) of the
contract price with respect to government contracts only in lieu of actual input taxes therefrom.
RR 16-05, Sec. 111-1(b). Persons or firms engaged in the processing of sardines, mackerel and milk, and in manufacturing refined sugar,
cooking oil and packed noodle based instant meals, shall be allowed a presumptive input tax, creditable against the output tax, equivalent to
four percent (4%) of the gross value in money of their purchases of primary agricultural products which are used as inputs to their
production.
As used in this paragraph, the term 'processing' shall mean pasteurization, canning and activities which through physical or chemical
process alter the exterior texture or form or inner substance of a product in such manner as to prepare it for special use to which it could not
have been put in its original form or condition.
7. Transitional input tax credits allowed under the transitory and other provisions of the regulations
C. Persons who can avail of the input tax credit
RR 16-05, Sec. 4.110-2. Persons who can Avail of the Input Tax Credit 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
(c) To the purchaser of services or the lessee or licensee upon payment of the compensation, rental, royalty or fee.
D. Determination of Output/Input Tax; VAT Payable; Excess Input Tax Credits
1. Determination of Output Tax
2. Determination of Input Tax Creditable
RR 16-05, Sec. 4.110-5. Determination of Input Tax Creditable during a Taxable Month or Quarter The amount of input taxes creditable
during a month or quarter shall be determined in the manner illustrated (in the IRR) by adding all creditable input taxes arising from
transactions enumerated under the preceding subsections of Sec. 4.110 during the month or quarter plus any amount on input tax carried-
over from the preceding month or quarter, reduced by the amount of claim for VAT refund or tax credit certificate (whether filed with the BIR,
the DOF, the BOI or the BOC) and other adjustments, such as purchases returns or allowances, input tax attributable to exempt sales and input
tax attributable to sales subject to final VAT withholding.
3. Allocation of Input Tax on Mixed Transactions
RR 16-05, Sec. 4.110-4. Apportionment of Input Tax on Mixed Transactions. A VA-registered person who is also engaged in transactions
not subject to VAT shall be allowed to recognize input tax credit on transactions subject to VAT as follows
1. All the input taxes that can be directly attributed to transactions subject to VAT may be recognized for input tax credit; Provided, that
input taxes that can be directly attributable to VAT taxable sales of goods and services to the Government or any of its political
subdivisions, instrumentalities or agencies, including government-owned or controlled corporations (GOCCs) shall not be credited
against output taxes arising from sales to non-Government entities.
Claims for VAT refund/Tax Credit Certificate (TCC) with the Bureau of Internal Revenue, Board of Investment, and One-Stop-
Shop and Duty Drawback Center of the Dept. of Finance should be deducted from the allowable input tax that are attributable to zero-
rated sales.
2. If any input tax cannot be directly attributed to either a Vat taxable or VAT-exempt transaction, the input tax shall be pro-rated to the
VAT taxable and VAT-exempt transactions and only the ratable portion pertaining to transactions subject to VAT may be recognized for
input tax credit [see illustration in RR]
4. Determination of the Output Tax and VAT Payable and Computation of VAT Payable or Excess Tax Credits
RR 16-05, Sec. 4.110-6. Determination of the Output Tax and VAT Payable and Computation of VAT Payable or Excess Tax Credits. In
a sale of goods or properties, the output tax is computed by multiplying the gross selling price as defined in these Regulations by the regular
rate of VAT. For sellers of services, the output tax is computed by multiplying the gross receipts as defined in these Regulations by the regular
rate of VAT.
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In all cases where the basis for computing the output tax is either the GSP or the GR, but the amount of VAT is erroneously billed in the
invoice, the total invoice amount shall be presumed to be comprised of the GSP/GR plus the correct amount of VAT. Hence ,the output tax shall
be computed by multiplying the total invoice amount be a fraction using the rate of VAT as numerator and 100% plus rate of VAT as the
denominator. Accordingly, the input tax that can be claimed by the buyer shall be the corrected amount of VAT computed in accordance with
the formula herein prescribed.
There shall be allowed as a deduction from the output tax the amount of input tax deductible as determined under Sec.4.110-1 to 4.110-5 of
these Regulations to arrive at VAT payable on the monthly declaration and the quarterly VAT returns.
RR 16-05, Sec. 4.110-7. SEC.4.110-7. VAT Payable (Excess Output) or Excess Input Tax
(a) If at the end of any taxable quarter the output tax exceeds the input tax, the excess shall be paid by the VAT-registered person.
Illustration: For a given taxable quarter ABC Corp has output VAT of 100 and input VAT of 80. Since output tax exceeds the inpout tax
for such taxable quarter, all of the input tax may be utilized to offset against the output tax. Thus, the net VAT payable is 100-80=20.
(b) If the input tax inclusive of input tax carried over from the previous quarter exceeds the output tax, the excess input tax shall be carried
over to the succeeding quarter or quarters; Provided, however, that any input tax attributable to zero-rated sales by a VAT-registered
person may at his option be refunded or applied for a tax credit certificate which may be used in the payment of internal revenue taxes,
subject to the limitations as my be provided for by law, as well as, other implementing rules.
Illustration: For a given taxable quarter, XYZ Corporation has output VAT of 100 and input VAT of 110. Since input tax exceeds the
output tax for such taxable quarter, there is an excess input tax at the end of the quarter of 10 which may be carried over to the next
quarter or quarters.
E. Substantiation of input tax credits
RR 16-05, Sec. 4.110-8. Substantiation of input tax credits
(a) Input taxes for the importation of goods or the domestic purchase of goods, properties or services is made in the course of trade or business,
whether such input tax shall be credited against zero-rated sake, non-zero rated sales, or subject to the final 5% withholding VAT, must be
substantiated and supported by the following documents, and must be reported in the information returns required to be submitted to the
Bureau:
(1) For the importation of goods import entry or other equivalent document showing actual payment of VAT on the imported goods
(2) For the domestic purchase of goods and properties invoice showing the information required under NIRC 113, 237.
(3) For purchase of real property public instrument, i.e. deed of absolute sale, deed of conditional sale, contract/agreement to sell, etc,
together with VAT invoice issued by the seller
(4) For the purchase of services official receipt showing the information required under NIRC, 114 and 237.
A Cash register machine tape issued to a registered buyer shall constitute valid proof of substantiation of tax credit only if its shows the
information required under Sec. 113 and 237
(b) Transitional input tax shall be supported by an inventory of goods as shown in a detailed list to be submitted to the BIR
(c) Input tax on deemed sale transactions shall be substantiated with the invoice required under Sec. 4.113-2 of these Regulations
(d) Input tax from payments made to nonresidents (such as for services, rentals and royalties) shall be supported by a copy of the Monthly
Remittance Return of VAT Withheld (BIR Form 1600) filed by the resident payor in behalf of the nonresident evidencing remittance of VAT
due which was withheld by the payor
(e) Advance VAT on sugar shall be supported by the Payment Order showing payment of advance VAT.
F. Refund or Tax Credit of Excess Input Tax
NIRC, 112. SEC. 112. Refunds or Tax Credits of Input Tax.
(A) Zero-Rated or Effectively Zero-Rated Sales. Any VAT-registered person, whose sales are zero-rated or effectively zero-rated may, within
two (2) years after the close of the taxable quarter when the sales were made, apply for the issuance of a tax credit certificate or refund of
creditable input tax due or paid attributable to such sales, except transitional input tax, to the extent that such input tax has not been
applied against output tax: Provided, however, That in the case of zero-rated sales under Section 106(A)(2)(a)(1), (2) and (b) and Section
108 (B)(1) and (2), the acceptable foreign currency exchange proceeds thereof had been duly accounted for in accordance with the rules
and regulations of the Bangko Sentral ng Pilipinas (BSP): Provided, further, That where the taxpayer is engaged in zero-rated or effectively
zero-rated sale and also in taxable or exempt sale of goods of properties or services, and the amount of creditable input tax due or paid
cannot be directly and entirely attributed to any one of the transactions, it shall be allocated proportionately on the basis of the volume of
sales: Provided, finally, That for a person making sales that are zero-rated under Section 108 (B)(6), the input taxes shall be allocated
ratably between his zero-rated and non-zero-rated sales.
(B) Cancellation of VAT Registration. A person whose registration has been cancelled due to retirement from or cessation of business, or due
to changes in or cessation of status under Section 106(C) of this Code may, within two (2) years from the date of cancellation, apply for the
issuance of a tax credit certificate for any unused input tax which may be used in payment of his other internal revenue taxes.
(C) Period within which Refund or Tax Credit of Input Taxes shall be Made. In proper cases, the Commissioner shall grant a refund or issue the
tax credit certificate for creditable input taxes within one hundred twenty (120) days from the date of submission of complete documents in
support of the application filed in accordance with Subsection (A) hereof.
In case of full or partial denial of the claim for tax refund or tax credit, or the failure on the part of the Commissioner to act on the
application within the period prescribed above, the taxpayer affected may, within thirty (30) days from the receipt of the decision denying
the claim or after the expiration of the one hundred twenty day-period, appeal the decision or the unacted claim with the Court of Tax
Appeals.
(D) Manner of Giving Refund. Refunds shall be made upon warrants drawn by the Commissioner or by his duly authorized representative
without the necessity of being countersigned by the Chairman, Commission on Audit, the provisions of the Administrative Code of 1987 to
the contrary notwithstanding: Provided, That refunds under this paragraph shall be subject to post audit by the Commission on Audit.
RR 16-05, Sec. 4.112-1. Claims for Refund/Tax Credit Certificate of Input Tax
(a) Zero-Rated or Effectively Zero-Rated Sales of Goods, Properties or Services
A VAT-registered person whose sales of goods, properties or services are zero-rated or effectively zero-rated may apply for the issuance
of a TCC/R of input tax to such sales. The input tax that may be subject of the claim shall exclude the portion of input tax that has been applied
against the output tax. The application should be filed within two (2) years after the close of the taxable quarter when the sales were made
In case of zero-rated sales under Section 106(A)(2)(a)(1), (2) and Section 106(A)(2)(b) and Section 108 (B)(1) and (2) of the tax code,
the payments for the sales must have been made in acceptable foreign currency duly accounted for in accordance with the rules and
regulations of the Bangko Sentral ng Pilipinas (BSP)
Where the taxpayer is engaged in zero-rated or effectively zero-rated sale and also in taxable 9including sales subject to final withholding
VAT) or exempt sale of goods, properties or services, and the amount of creditable input tax due or paid cannot be directly and entirely
attributed to any one of the transactions, only the proportionate share of input taxes allocated to zero-rated or effectively zero-rated sales can
be claimed for refund or issuance of a TCC.
In case of a person engaged in the transport of passenger and cargo be air or sea vessels from the Philippines to a foreign country, the
input taxes shall be allocated ratably between his zero-rated sales and non-zero-rated sales (sales subject to regular rate, subject to final VAT
withholding and VAT-exempt sales)
(b) Cancellation of VAT Registration.
A VAT-registered person whose registration has been cancelled due to retirement from or cessation of business, or due to changes in or
cessation of status under Section 106(C) of the Tax Code may, within two (2) years from the date of cancellation, apply for the issuance of a tax
credit certificate for any unused input tax which may be used in payment of his other internal revenue taxes; provided, however, that he shall
be entitled to a refund if he has no internal revenue tax liabilities against which the tax credit certificate may be utilized.
(c) Where to file the claim for refund/TCC
27
Prof. O. Carag
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Claims for refund/TCC shall be filed with the appropriate BIR office (Large Taxpayers Service (LTS) or RDO) having jurisdiction over the
principal place of business of the taxpayer; provided, however, that direct exporters may also file their claim for TCC with the One Stop Shop
Center of the DOF; Provided finally, that the filing of the claim with one office shall preclude the filing of the same claim with another office.
(d) Period within which Refund or Tax Credit of Input Taxes shall be Made
In proper cases, the Commissioner shall grant a tax credit certificate/refund for creditable input taxes within one hundred twenty (120)
days from the date of submission of complete documents in support of the application filed in accordance with subparagraph (a) hereof.
In case of full or partial denial of the claim for TCC/refund as decided by the CIR, the taxpayer may appeal to the CTA within 30 days from
receipt of said denial, otherwise the decision shall become final. However, if no action on the claim for TCC/R has been taken by the CIR after
the 120-day period from the date of submission of the application with complete documents, the taxpayer may appeal to the CTA within 30
days from the lapse of the 120-day period.
(e) Manner of Giving Refund.
Refund shall be made upon warrants drawn by the CIR or by his duly authorized representative without the necessity of being
countersigned by the Chairman, Commission on Audit, the provisions of the Administrative Code of 1987 to the contrary notwithstanding:
Provided, That refunds under this paragraph shall be subject to post audit by the COA
1. Who may claim for refund/apply for issuance of Tax Credit Certificate (TCC)
2. Period to file claim for refund/apply for issuance of TCC
3. Manner of giving refund
Intel Tech Phil v. CIR.
JRA Phils v. CIR.
VIII. Transactions subject to special rules
A. Transactions of Foreign Governments
B. Transactions with PEZA/SBMA/CEZA-registered entities
IX. Compliance Requirements
A. Registration
NIRC, 236(G-H).
(G) Persons Required to Register for Value-added Tax.
(1) Any person who, in the course of trade or business, sells, barters or exchanges goods or properties, or engages in the sale or exchange of
services, shall be liable to register for Value-added tax if:
(a) His gross sales or receipts for the past twelve (12) months, other than those that are exempt under section 109 (a) to (u), have
exceeded One million five hundred thousand pesos (P 1,500,000); or
(b) There are reasonable grounds to believe that his gross sales or receipts for the next twelve (12) months, other than those that are
exempt under Section 109 (A) to (U), will exceed one million five hundred thousand pesos (P 1,500,000).
(2) Every person who becomes liable to be registered under paragraph (1) of this Subsection shall register with the Revenue District Office
which has jurisdiction over the head office or branch of that person, and shall pay the annual registration fee prescribed in Subsection
(B) hereof. If he fails to register, he shall be liable to pay the tax under Title IV as if he were a VAT-registered person, but without the
benefit of input tax credits for the period in which he was not properly registered.
(H) Optional Registration for Value-added Tax of Exempt Person.
(1) Any person who is not required to register for Value-added tax under Subsection (G) hereof may elect to register for Value-added tax by
registering with the Revenue District Office that has jurisdiction over the head office of that person, and paying the annual registration
fee in Subsection (B) hereof.
(2) Any person who elects to register under this Subsection shall not be entitled to cancel his registration under Subsection (F)(2) for the
next three (3) years.
For purposes of Title IV of this Code, any person who has registered value-added tax as a tax type in accordance with the provisions of
Subsection (C) hereof shall be referred to as a VAT-registered person who shall be assigned only one Taxpayer Identification Number
(TIN).
RR 16-05, Sec. 9.236-1. Registration of VAT Taxpayers.
(a) In general Any person who, in the of trade or business, sells, barters or exchanges goods or properties, or engages in the sale of services
subject to VAT imposed in NITC 106 and 108 shall register with the appropriate RDO using the appropriate BIR Forms and pay an annual
registration fee in the amount of P500 using BIR Form 0605 for every separate and distinct establishment or place of business (save a
warehouse without sales transactions) before the start of such business and every year thereafter on or before the 31st of January
Separate or distinct establishment shall mean any branch or facility where sale transactions occur.
Branch means a fixed establishment in a locality which conducts sales operation of the business as an extension of the principal office.
Principal place of business refers to the place where the head or main office is located as appearing in the corporations AOI. In the case
of an individual, the principal place of business shall be the place where the head or main office is located and where the books of account are
kept.
Warehouse means the place or premises where the inventory of goods for sale are kept and from which such goods are withdrawn for
delivery to customers, dealers, or persons acting in behalf of the business.
Any person who maintains a head or main office and branches in different place shall register with RDO which has jurisdiction over the
place wherein the main or head office or branch is located. However, the registration fee shall be paid to any accredited bank in the revenue
district where the head office or branch is registered provided that in areas where there are no accredited banks, the same shall be paid to the
RDO, collection agent, or duly authorized treasurer of the municipality where each place of business or branch is situated.
Each VAT-registered person shall be assigned only 1 TIN. The branch shall use the 9-digit TIN of the Head Office plus a 3-digit Branch
Code
VAT-registered Person refers to any person registered in accordance with this section.
VAT-registrable person refers to any person who is required to register under the provisions of this section but failed to register.
(b) Mandatory:
Any person who, in the course of trade or business, sells, barters or exchanges goods or properties, or engages in the sale or exchange of
services, shall be liable to register if:
1. His gross sales or receipts for the past twelve (12) months, other than those that are exempt under section 109 (a) to (u), have
exceeded One million five hundred thousand pesos (P 1,500,000); or
2. There are reasonable grounds to believe that his gross sales or receipts for the next twelve (12) months, other than those that are
exempt under Section 109 (A) to (U), will exceed one million five hundred thousand pesos (P 1,500,000).
Every person who becomes liable to be registered under paragraph (1) of this Subsection shall register with the Revenue District
Office which has jurisdiction over the head office or branch of that person, and shall pay the annual registration fee prescribed in
Subsection 9.236-1(a) hereof. If he fails to register, he shall be liable to pay the output tax under Sec. 106 and/or 108 as if he were a
VAT-registered person, but without the benefit of input tax credits for the period in which he was not properly registered.
Moreover, franchise grantees of radio and television broadcasting, whose gross annual receipt for the preceding taxable year
exceeded P10,000,000.00 shall register within thirty (30) days from the end of the taxable year.
(c) Optional VAT Registration:
(1) Any person who is VAT-exempt under Sec. 4.109-1(B)(1)(V) not required to register from VAT may, in relation to Sec. 4.109-2, elect to be
VAT-registered by registering with the RDO that has jurisdiction over the head office of that person, and paying the annual registration
fee of P500 for every separate and distinct establishment
(2) Any person who is VAT-registered but enters into transactions which are exemot from VAT (mixed transactions) may opt that the VAT
apply to his transactions which would have been exempt under NIRC, 109(1)
28
Prof. O. Carag
nd

(3) Franchise grantees of radio and/or TV broadcasting whose annual GR of the preceding year do not exceed 10M derived from the
business covered by the law granting the franchise may opt for VAT registration. This option, once exercised, shall be irrevocable.
Any person who elects to register under this subsections (1) and (2) shall not be allowed to cancel his registration for the next 3 years.
The above-stated taxpayers may apply for VAT registration not later than ten (10) days before the beginning of the taxable quarter and
shall pay the registration fee prescribed under sub-paragraph (a) of this Section, unless they have already paid at the beginning of the year. In
any case, the Commissioner of Internal Revenue may, for administrative reason deny any application for registration. Once registered as VAT
person, the taxpayer shall be liable to output tax and be entitled to input tax credit beginning on the first day of the month following
registration.
RR 16-05, Sec. 9.236-2. Registration of Non-VAT or Exempt Taxpayer. Every person, other than those required to be registered as
VAT persons, engaged in any business, shall, on or before the commencement of his business, or whenever he transfers to another revenue
district, register with the RDO concerned within 10days from the commencement of business or transfer in the manner prescribed under this
section and shall pay the applicable registration fee of P500 for ever separate and distinct establishment or place of business, if he has not paid
the registration fee in the beginning of the taxable year. The fee shall be paid to any AAB where each place of business or branch is situated. In
areas where there is no AAB, such person shall pay the fee prescribed herein with the RDO, RCO, or authorized municipal treasurer. The
registration shall contain his name or style, place of residence, business, the place where such business is carried on, and such information as
may be required by the CIR in the form prescribed therefor.
The following are required to register as non-VAT persons and pay the applicable registration fee:
1) VAT-exempt persons under Sec. 109 who did not opt to register as VAT taxpayers
2) Individuals engaged in business where the GS/R do not exceed 100K during any 12-month period. They are required to register
but will not be made to pay the registration fee of 500.
3) Non-stock, non-profit organizations and associations engaged in trade or business whose GS/R do not exceed 1.5M for any 12-
month period or in an amount as adjusted thereafter every 3 years depending on the annual CPI as published by the NSO
4) Cooperatives other than electric cooperatives. However, they are not required to pay the registration fee imposed in these
regulations
5) Radio and TV broadcasting whose gross annual receipts do not exceed ten million pesos (P10,000,000) and which do not opt to be
VAT registered;
6) PEZA and other ecozone registered enterprises enjoying the preferential tax rate of 5% in lieu of all taxes;
7) SBMA and other free port zone-registered enterprises enjoying the preferential tax rate of 5% in lieu of all taxes.
RR 16-05, Sec. 9.236-3. Application for Registration The application shall be filed with the RDO where the principal place of business, branch,
storage place or premises is located, as the case may be , before commencement of business or production or qualification as a withholding agent. In
the case of storage places, the application shall be filed within 30days from the date the aforesaid premises have been used for storage.
In any case, the CIR may, for administrative and meritorious reasons, deny or revoke any application for registration.
RR 16-05, Sec. 9.236-4. Certificate of Registration The certificate shall be issued to the applicant by the BIR office concerned upon compliance
with the requirements for registration.
RR 16-05, Sec. 9.236-5. Posting of Registration Certificate Every Registered Taxpayer shall post or exhibit his Registration Certificate and duly
validate Registration Fee Return at a conspicuous place in his principal place of business and at each branch in such a way that is clearly and easily
visible to the public.
RR 16-05, Sec. 9.236-6. Cancellation of VAT Registration A VAT Registered-person may cancel his registration for VAT if:
a. He makes written application and can demonstrate to the CIRs satisfaction that his GS/R for the following 12 months, other than those
exempt under Sec. 109(1)(A) to (U) of the Tax Code, will not exceed 1.5M
b. He has ceased to carry on his trade or business, and does not expect to recommence any trade or business within the next 12 months
Some other instances where a VAT-registered person may apply for cancellation of registration are:
a. A change of ownership, in the case of a single proprietorship
b. Dissolution of a partnership or corporation
c. Merger or consolidation with respect to the dissolved corporation(s)
d. A person who has registered prior to planned business commencement, but failed to actually start his business;
Some instances where taxpayer will update his registration by submitting a duly accomplished BIR Form 1905:
a. A persons business has become exempt in accordance with Sec. 4.109-1(b)(1) of these regulations
b. A change in the nature of the business itself from sale of taxable goods and/or services to exempt sales and/or services;
c. A person whose transactions are exempt from VAT who voluntarily registered under VAT system, who after the lapse of 3 years after his
registration, applies for cancellation of his registration as such; and
d. A VAT-registered person whose gross sales or receipts for 3 consecutive years did not exceed 1.5M beginning 11/01/2005, which
amount shall be adjusted to its present value every 3 years using the CPI as published by the NSO. Upon updating his registration, the
taxpayer shall become liable to the percentage tax under NIRC, 116. A short period return for the remaining period that he was VAT-
registered shall be filed within 25 days from date of cancellation of registration
For purposes of the percentage tax, the taxpayer shall file a monthly return. An initial return shall be filed for the month following the monith
of cancellation/update of his registration.
All applications for cancellation of registration due to closure/cessation or termination of business shall be subjected to immediate
investigation by the BIR office concerned to determine the TPs tax liabilities.
Any minor change in the original registration (such as change of address within the same RDO, typos, etc) which may not necessitate
cancellation of the registration shall be effected by accomplishing BIR Form 1905.
Any person, who opted to be registered as a VAT taxpayer, may apply for cancellation of such registration. However, the optional registration
as a VAT taxpayer of a franchise grantee of radio and/or TV broadcasting whose GR for the preceding year did not exceed 10M shall not be
revocable.
1. Mandatory
NIRC, 236(G), supra.
2. Optional
NIRC, 236(H),supra.
B. Invoicing and Accounting Requirements
NIRC, 113. SEC. 113. Invoicing and Accounting Requirements for VAT-Registered Persons.
(A) Invoicing Requirements. A VAT-registered person shall issue:
(1) A VAT invoice for every sale, barter or exchange of goods or properties; and
(2) A VAT official receipt for every lease of goods or properties, and for every sale, barter or exchange of services.
(B) Information Contained in the VAT Invoice or VAT Official Receipt. The following information shall be indicated in the VAT invoice or VAT
official receipt:
(1) A statement that the seller is a VAT-registered person, followed by his taxpayers identification number (TIN);
(2) The total amount which the purchaser pays or is obligated to pay to the seller with the indication that such amount includes the value-
added tax: Provided, That:
(a) The amount of the tax shall be shown as a separate item in the invoice or receipt;
(b) If the sale is exempt from value-added tax, the term VAT-exempt sale shall be written or printed prominently on the invoice or
receipt;
(c) If the sale is subject to zero percent (0%) value-added tax, the term zero-rated sale shall be written or printed prominently on
the invoice or receipt;
29
Prof. O. Carag
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(d) If the sale involves goods, properties or services some of which are subject to and some of which are VAT zero-rated or VAT-
exempt, the invoice or receipt shall clearly indicate the breakdown of the sale price between its taxable, exempt and zero-rated
components, and the calculation of the value-added tax on each portion of the sale shall be shown on the invoice or receipt:
Provided, That the seller may issue separate invoices or receipts for the taxable, exempt, and zero-rated components of the sale.
(3) The date of transaction, quantity, unit cost and description of the goods or properties or nature of the service; and
(4) In the case of sales in the amount of one thousand pesos (P 1,000) or more where the sale or transfer is made to a VAT-registered person,
the name, business style, if any, address and taxpayer identification number (TIN) of the purchaser, customer or client.
(C) Accounting Requirements. Notwithstanding the provisions of Section 233, all persons subject to the value-added tax under Sections 106 and
108 shall, in addition to the regular accounting records required, maintain a subsidiary sales journal and subsidiary purchase journal on which
the daily sales and purchases are recorded. The subsidiary journals shall contain such information as may be required by the Secretary of
Finance.
(D) Consequence of Issuing Erroneous VAT Invoice or VAT Official Receipt.
(1) If a person who is not a VAT-registered person issues an invoice or receipt showing his Taxpayer Identification Number (TIN), followed
by the word VAT:
(a) The issuer shall, in addition to any liability to other percentage taxes, be liable to:
i. The tax imposed in Section 106 or 108 without the benefit of any input tax credit; and
ii. A 50% surcharge under Section 248 (B) of this Code;
(b) The VAT shall, if the other requisite information required under Subsection (B) hereof is shown on the invoice or receipt, be
recognized as an input tax credit to the purchaser under Section 110 of this Code.
(2) If a VAT-registered person issues a VAT invoice or VAT official receipt for a VAT-exempt transaction, but fails to display prominently on
the invoice or receipt the term VAT-exempt Sale, the issuer shall be liable to account for the tax imposed in Section 106 or 108 as if
Section 109 did not apply.
(E) Transitional Period. Notwithstanding Subsection (B) hereof, taxpayers may continue to issue VAT invoices and VAT official receipts for the
period July 1, 2005 to December 31, 2005, in accordance with Bureau of Internal Revenue administrative practices that existed as of December
31, 2004.
RR 16-05, Sec. 4.113-1. Invoicing Requirements.
(A) A VAT-registered person shall issue:
(1) A VAT invoice for every sale, barter or exchange of goods or properties; and
(2) A VAT official receipt for every lease of goods or properties, and for every sale, barter or exchange of services.
Only VAT registered persons are required to print their TIN followed by the word VAT in their invoice or official receipts. Said documents
shall be considered as VAT invoice or VAT official receipt. All purchases covered by invoices/receipts other than VAT Invoice/ VAT OR shall
not give rise to any input tax.
VAT invoice/OR shall be prepared at least in duplicate, the original to be given to the buyer and the duplicate to be retained by the seller
as part of his accounting records.
(B) Information Contained in the VAT Invoice or VAT Official Receipt. The following information shall be indicated in the VAT invoice or VAT
official receipt:
1. A statement that the seller is a VAT-registered person, followed by his taxpayers TIN;
2. The total amount which the purchaser pays or is obligated to pay to the seller with the indication that such amount includes the VAT:
Provided, That:
(a) The amount of the tax shall be shown as a separate item in the invoice or receipt;
(b) If the sale is exempt from value-added tax, the term VAT-exempt sale shall be written or printed prominently on the invoice or
receipt;
(c) If the sale is subject to zero percent (0%) value-added tax, the term zero-rated sale shall be written or printed prominently on
the invoice or receipt;
(d) If the sale involves goods, properties or services some of which are subject to and some of which are VAT zero-rated or VAT-
exempt, the invoice or receipt shall clearly indicate the breakdown of the sale price between its taxable, exempt and zero-rated
components, and the calculation of the value-added tax on each portion of the sale shall be shown on the invoice or receipt. The
seller has the option to issue separate invoices or receipts for the taxable, exempt, and zero-rated components of the sale.
3. In the case of sales in the amount of one thousand pesos (P 1,000) or more where the sale or transfer is made to a VAT-registered person,
the name, business style, if any, address and TIN of the purchaser, customer or client, shall be indicated to the information required in (1)
and (2) of this section.
1. Invoicing Requirements, in general
RR 16-05, Sec. 4.113-1, supra.
2. Invoicing and Recording Deemed Sale Transactions
RR 16-05, Sec. 4.113-2. Invoicing and Recording Deemed Sale Transactions In the case of Sec. 4.106-7(a)(1) of these Regulations, a
memorandum entry in the subsidiary sales journal to record withdrawal of goods for personal use is required. In the case of Sec. 4.106-7(a)(2)
and (3) of these regulations, an invoice shall be prepared at the time of the occurrence of the transaction, which shall include all the
information prescribed in Sec 4.113-1. The date appearing in the invoice shall be duly recorded in the subsidiary sales journal. The total
amount of deemed sale shall be included in the return to be filed for the month or quarter.
In the case of Sec. 4.106-7(a)(4) an inventory shall be prepared and submitted to the RDO who has jurisdiction not later than 30 days
after retirement or cessation from business.
An invoice shall be prepared for the entire inventory, which shall be the basis of the entry into the subsidiary sales journal. The invoice
need not enumerate the specific items appearing in the inventory, but it must show the total amount. It is sufficient to just make a reference to
the inventory regarding the description of the goods. However the sales invoice number should be indicated in the inventory filed and a copy
thereof shall form part of this invoice. If the business is to be continued by the new owners or successors, the entire amount of output tax on
the amount deemed sold shall be allowed as input taxes. If the business is to be liquidated and the goods in the inventory are sold or disposed
of to VAT-registered buyers, an invoice or instrument of sale or transfer shall be prepared citing the invoice number wherein the tax was
imposed on the deemed sale. At the same time the tax paid corresponding to the goods sold should be separately indicated in the instrument
of sale
Example: A, at the time of retirement, had 1000 pieces of merchandise which was deemed sold at P20,000 with an output tax of 2000.
After retirement, A sold to B 500pcs for 12K. in the contract of sale/invoice, A should state the sales invoice number wherein the output tax
on deemed sale was imposed and the corresponding tax paid on the 500pcs is 1K, which is included in the 12K
3. Consequences of Issuing Erroneous VAT Invoice or VAT Official Receipt
RR 16-05, Sec. 4.113-4. Consequence of Issuing Erroneous VAT Invoice or VAT Official Receipt.
(A) Issuance of a VAT Invoice/VAT Receipt by a non-VAT person If a person who is not VAT-registered issues an invoice or receipt showing
his TIN, followed by the word VAT, the erroneous issuance shall result to the follwong:
(1) The non-VAT person shall be liable to:
i. The percentage taxes applicable to his transactions
ii. VAT due on the transactions under NIRC, 106 or 108 without the benefit of any input tax credit; and
iii. A 50% surcharge under Section 248 (B) of the Tax Code;
(2) VAT shall be recognized as an input tax credit to the purchaser under Section 110 of the Tax Code, provided the requisite
information required under Subsection 4.113(B) of these Regulations is shown on the invoice or receipt.
(B) Issuance of a VAT Invoice/VAT Receipt on an Exempt Transaction by a VAT-registered Person If a VAT-registered person issues a VAT
invoice or VAT official receipt for a VAT-exempt transaction, but fails to display prominently on the invoice or receipt the words VAT-
30
Prof. O. Carag
nd

exempt Sale, the transaction shall be come taxable and the issuer shall be liable to pay VAT thereon. The purchaser shall be entitled to
claim an input tax credit on his purchase.
C. Filing of Return and Payment of VAT
D. RR 16-05, Sec. 114-1(A-B). Filing of Return and Payment of VAT
(A) Filing of Return - Every person liable to pay VAT shall file a quarterly return of the amount of his quarterly gross sales or receipts within
twenty-five (25) days following the close of taxable quarter suing the latest version of Quarterly VAT Return. The term taxable quarter shall
mean the quarter that is synchronized to the income tax quarter of the taxpayer (i.e. calendar quarter or fiscal quarter)
Amounts reflected in the monthly VAT declaration for the first 2 months of the quarter shall still be included in the quarterly VAT return
which reflects the cumulative figures for the taxable quarter. Payments in the monthly VAT declarations, shall however, be credited in the
quarterly VAT return to arrive at the net VAT payable or excess input tax/overpayment as of the end of a quarter. (see example in RR)
The monthly VAT Declarations (BIR Form 2550M) of taxpayers whether large or non-large shall be filed and the taxes paid not later than
the 20th day following the end of each month.
For purposes of filing returns under the EFPS the taxpayers classified under the business industries shall be required to file monthly VAT
declarations on or before the dates prescribed in the RR.
It is reiterated and clarified, however, that the return for withholding of VAT shall be filed on or before the 10th of the following month,
which is likewise the due date for the payment of this type of w/holding tax
To erase any doubt and to ensure receipt by the BIR before midnight of the due dates prescribed above for the filing of a return, the e-
return shall be filed on or before 10pm of the above prescribed due dates
For the electronic payment of tax for the returns []
(B) Payment of VAT [see page 38 onwards of RR]
E. Withholding of Creditable VAT
NIRC, 114(C). Withholding of Value-Added Tax. The Government or any of its political subdivisions, instrumentalities or agencies, including
government-owned or controlled corporations (GOCCs) shall, before making payment on account of each purchase of goods and services which
are subject to the value-added tax imposed in Sections 106 and 108 of this Code, deduct and withhold a final value-added tax at the rate of five
percent (5%) of the gross payment thereof: Provided, That the payment for lease or use of properties or property rights to nonresident owners
shall be subject to ten percent (10%) withholding tax at the time of payment. For purposes of this Section, the payor or person in control of the
payment shall be considered as the withholding agent.
RR 16-05, Sec. 4.114-2. [see full text of RR]
F. Administrative and Penal Sanctions
NIRC, 115. Power of the Commissioner to Suspend the Business Operations of a Taxpayer. - The Commissioner
(a) In the case of a VAT-registered Person.
(1) Failure to issue receipts or invoices;
(2) Failure to file a value-added tax return as required under Section 114; or
(3) Understatement of taxable sales or receipts by thirty percent (30%) or more of his correct taxable sales or receipts for the taxable
quarter.
(b) Failure of any Person to Register as Required under Section 236. The temporary closure of the establishment shall be for the
duration of not less than five (5) days and shall be lifted only upon compliance with whatever requirements prescribed by the
Commissioner in the closure order.
RR 16-05, Sec. 4.115-1. Administrative and Penal Provisions or his authorized representative is hereby empowered to suspend the business
operations and temporarily close the business establishment of any person for any of the following violations:
(a) Suspension of business operations in addition to other administrative and penal sanctions provided for in the tax code and IRR, the CIR or
his duly authorized representative may order suspension or closure of business establishment for a period of not less than 5 days fro any of
the following violations:
1. Failure to issue receipts or invoices;
2. Failure to file a value-added tax return as required under Section 114; or
3. Understatement of taxable sales or receipts by thirty percent (30%) or more of his correct taxable sales or receipts for the taxable
quarter.
4. Failure of any person to register as required under the provision of NIRC, 236.
(b) Surcharge, interest and other penalties the interest on unpaid amount of tax, civil penalties and criminal penalties imposed in Title XI of the
Tax Code shall also apply to violations of the provisions of Title IV of the Tax Code.

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Taxation 2 Midterms reviewer

Janz Hanna Ria N. Serrano

Janz Hanna Ria N. Serrano

Janz Hanna Ria N. Serrano

Janz Hanna Ria N. Serrano

Illustrations on how to determine the amount of allowable funeral expenses

Janz Hanna Ria N. Serrano

Husband and Wife Legally married man and woman.

The beneficiaries of a family home are:

Janz Hanna Ria N. Serrano

Janz Hanna Ria N. Serrano

P 200,000 550,000 0 5% P 200,000

500,000 2,000,000 P 15,000 8% 500,000

2,000,000 5,000,000 135,000 11% 2,000,000

5,000,000 10,000,000 465,000 15% 5,000,000

10,000,000 And Over 1,215,000 20% 10,000,000

1. Tax Credit for Estate Taxes paid to a foreign country

Janz Hanna Ria N. Serrano

Janz Hanna Ria N. Serrano

Janz Hanna Ria N. Serrano

1. FMV at time of Gift

If the net gift is:

P 100,000 200,000 0 2% P100,000

200,000 500,000 2,000 4% 200,000

500,000 1,000,000 14,000 6% 500,000

1,000,000 3,000,000 44,000 8% 1,000,000

3,000,000 5,000,000 204,000 10% 3,000,000

5,000,000 10,000,000 404,000 12% 5,000,000

10,000,000 1,004,000 15% 10,000,000

Janz Hanna Ria N. Serrano

Janz Hanna Ria N. Serrano

Janz Hanna Ria N. Serrano

Janz Hanna Ria N. Serrano

Janz Hanna Ria N. Serrano

D. Zero-Rated Sales of Goods or Properties

Janz Hanna Ria N. Serrano

Janz Hanna Ria N. Serrano

Janz Hanna Ria N. Serrano

A. Tax Rate 12% or 0%

Janz Hanna Ria N. Serrano

Janz Hanna Ria N. Serrano

Janz Hanna Ria N. Serrano

Janz Hanna Ria N. Serrano

Janz Hanna Ria N. Serrano

Janz Hanna Ria N. Serrano

Janz Hanna Ria N. Serrano

Janz Hanna Ria N. Serrano

Janz Hanna Ria N. Serrano

Janz Hanna Ria N. Serrano

Janz Hanna Ria N. Serrano

Janz Hanna Ria N. Serrano

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