TRANSFER TAXES ...............................................................................................................................

2
ESTATE TAXES ................................................................................................................................. 2
Valuation of gross estate.3
Determination of the value of the estate4
Exclusions and exemptions..7
Deductions from gross estate..8
Ordinary deductions.9
Special deductions14
Notice of death and filing of return.18
DONORS TAXES..22
Imposition of gift tax..22
Transfer for inadequate consideration.22
Exemption from gift tax23
Tax credit..23
Tax return.24
Political considerations.24
VALUE ADDED TAX .......................................................................................................................... 25
VAT in general25
Imposition of the tax..26
Sales of goods or properties29
Importation of goods..36
Sale of services and use or lease or property.37
Exemptions..41
Tax credits or refunds45
Compliance requirements52
PERCENTAGE TAX..58
Carriers tax.58
Franchise tax..59
Overseas communications tax..59
Gross receipts tax.59
Tax on insurance premiums61
Tax on agents of foreign insurance companies62
Amusement taxes.62
Tax on winnings62
Percentage tax on IPOs.62
Returns and payment.65

RR2-2003, Sec. 866

1
TRANSFER TAXES
Concept and Nature of Transfer Taxes
Transfer Taxes are taxes imposed upon the gratuitous
disposition of private properties. Taxes of this general
character are predicated on the passing of property as
distinguished from those imposed on property as such
because of its ownership and possession.
Lorenzo v. Posadas (1937)
Facts: Hanleys Estate was assessed with inheritance tax.
Lorenzo, the trustee, paid under protest and then sued the
CIR. The CIR claimed more penalty interest.
Held: In awarding the interest to the CIR, the SC explained
several concepts: (1) inheritance tax accrues at the time of
the decedents death, but the obligation to pay the same is
different and is fixed by law; (2) the value of the estate (i.e.
basis for the tax) should be at the time of the decedents
death; (3) trustees compensation do not form part of
administrative expenses that can be deducted from the gross
value of the estate; and (4) tax laws cannot be given
retroactive effect unless they explicitly provide for it.
(Note that inheritance taxes are no longer imposed under the
NIRC)
ESTATE TAX
Estate Tax is the tax on the right to transmit property at
death and on certain transfers by the decedent diring his
lifetime which are made by the law the equivalent of
testamentary dispositions. The tax is measured by the value
of the property at the time of death.
Nature and Object 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 and Justification of Estate Tax
1. Benefit received theory The State collects the tax
because of the services it renders in the distribution
of the estate of the decedent, either by law or in
accordance with his wishes.
2. Privilege theory or state partnership theory
Succession to the property of a deceased person is
not a right but a privilege granted by the State and
consequently, the legislature can constitutionally
burden such succession with a tax. The State
collects the tax because of the protection it provides
in the acquisition of large estates. Consequently, the
State, as a passive and silent partner in the
accumulation of property, has the right to collect
the share which is properly due to it.
3. Ability to pay theory Receipt of inheritance,
which is in the nature of unearned wealth or
windfall, place assets into the hands of the heirs and
beneficiaries. This creates an ability to pay the tax
and thus contributes to government income.
2
4. Redistribution of wealth theory Receipt of
inheritance is a contributing factor to the
inequalities in wealth and income. The imposition
of estate tax reduces the property received by the
successor, this helping to promote a more equitable
distribution of wealth in society. The tax base is
the value of the property and the progressive
scheme of taxation is precisely motivated by the
desire to mitigate the evils of inheritance in the
present form.
Source of Power
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 on
which the tax is more immediately based. Hence, it accrues
as of the death of the decedent by operation of law.
Accrual of, and obligation to pay the tax distinguished
Ordinarily, an estate or inheritance tax accrues at the date of
the decedents death, although the amount of tax may then
be unknown, but on determination thereof, it relates back to
the time of death. Upon the death of the decedent,
succession takes place and the right of the State to tax the
transmission of the estate vests instantly upon death.
The accrual of the tax is to be distinguished from the
obligation to pay the same. The time when the heir legally
succeeds to the inheritance may differ from the time when
he actually receives such inheritance. The property belongs
to the heir at the moment of the death of the ancestor as
completely as if the latter had executed and delivered to the
former a deed for the same before his death. However, it
does not follow that the obligation to pay the tax arises as of
that date. The time for payment is clearly fixed by law.
Time and Transfer of Properties
Decedents interest is to its extent at the time of his death.
(Sec. 85(A))
Estate taxation is governed by the statute in force at the time
of death of the decedent. Estate tax accrues as of the death of
the decedent and the accrual of the tax is distinct from the
obligation to pay the same. Upon the death of the decedent,
succession takes place and the right of the State to tax the
privilege to transmit the estate vests instantly upon death.
(Sec. 3, RR 2-2003)
Upon the death of the decedent, succession takes place, and
the right of the State to tax the privilege to transmit the
estate vests instantly upon death. (Sec. 3 RR 2-2003) Thus:
1. The notice of death must be made within 2 months after
the death of the decedent or within 2 months after
qualifying as an executor or administrator (Sec. 89)
2. The properties comprising the gross estate shall be
valued based on their fair market value as of the time of
the death of the decedent (Sec. 5 RR 2-2003)
3. The return must be filed within 6 months from the
decedents death (Sec. 90(B))
4. Despite the transfer of properties and rights at the time
of death, the executor or judicial administrator shall not
 deliver a distributive share to any party interested in the death was not a citizen of the Philippines, it shall
estate unless ther is a certification from the include to the extent of his interest, the value of the
Commissioner that the estate tax has been paid (Sec. 94) time of his death of all:
a. Real property situated in the Philippines
Section 84. Rates of Estate Tax. There shall be levied, b. Tangible personal property situated in the
assessed, collected and paid upon the transfer of the net Philippines
estate as determined in accordance with Sections 85 and 86 c. Intangible personal property with a situs in the
of every decedent, whether resident or nonresident of the Philippines unless exempted on the basis of
Philippines, a tax based on the value of such net estate, as reciprocity
computed in accordance with the following schedule:
If the net estate is: Concept of residence
Residence and domicile are used interchangeably without
distinction. For purposes of estate taxation, residence
Of the
But Not The Tax refers to the permanent home, the place to which whenever
Over Plus Excess
Over shall be absent, one intends to return, and depends on facts and
Over
circumstances, in the sense that they disclose intent. It is
P 200,000 Exempt therefore, not necessarily the actual place of residence.
P 200,000 550,000 0 5% P 200,000
Situs of Intangible Personal Properties
500,000 2,000,000 P 15,000 8% 500,000 Such as credits, bills, bank deposits promissory notes, and
2,000,000 5,000,000 135,000 11% 2,000,000 corporate stocks
5,000,000 10,000,000 465,000 15% 5,000,000 General Rule Situs is the domicile or residence of the
owner
10,000,000 And Over 1,215,000 20% 10,000,000 Exceptions:
1. When it is inconsistent with express provisions of law
Basic Formula for Estate Tax 2. When justice does not demand that it should be, as
Gross Estate (Sec. 85) where the property in fact has a situs elsewhere
Less: Deductions (Sec. 86)
Net share of the surviving spouse in the conjugal Collector v. Fisher (1961)
property (Sec. 86(C)) Facts: Stevenson, a Brit who resided in San Francisco, died
------------------------------------------------------- and left properties including shares of stock and parcels of land
= Net taxable estate in Baguio. In these returns, the administrator based the value of
Multiply by: Tax rate (Sec. 84) the shares on the market quotation of the stock in San
------------------------------------------------------- Francisco, asked for certain deductions according to reciprocity
= Estate Tax Due supposedly granted by the NIRC, as well as certain deductions.
Less: Tax Credit, if any (Sec. 86(E), or 110 (B)) Held: The situs of the shares of stock, for purposes of taxation,
------------------------------------------------------- being located in the Philippines, the fair market value of those
= Estate Tax Due, if any shares should be taxed on the basis of the price prevailing in the
Philippines.
VALUATION OF GROSS ESTATE
In the Philippines, upon the death of any citizen or resident or
non-resident with properties therein, an estate and an
Section 85. Gross Estate. - the value of the gross estate of the decedent
inheritance tax are imposed upon his estate. In California, only
shall be determined by including the value at the time of his death of all
property, real or personal, tangible or intangible, wherever situated: inheritance tax is imposed. The Federal Internal Revenue Code
Provided, however, that in the case of a nonresident decedent who at the imposes an estate tax on non-residents not citizens of the US,
time of his death was not a citizen of the Philippines, only that part of the but does not provide for any exemption on the basis of
entire gross estate which is situated in the Philippines shall be included in reciprocity. Thus, his shares are not exempt from inheritance
his taxable estate. taxes because there is no complete reciprocity between the
xxx
Philippine laws and the foreign laws.

Determination of Gross Estate Rules of Reciprocity

1. As to resident or Filipino decedent If the
decedent was a resident OR citizen of the
Philippines, the gross estate shall include, to the
extent of his interest, the value at the time of his
death of all:
a. Real property wherever situated
b. Tangible personal property wherever situated,
and
c. Intangible personal property wherever situated
2. As to non-resident alien decedent In the case
of a non-resident decedent who at the time of his
3
The intangible personal property of a non-resident alien
individual, if:
1. With reciprocity shall not be included in the gross
estate if:
a. The laws of the foreign country to which the
decedent was a citizen and resident at the time of
his death, 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. The law of the foreign country allows a similar
exemption from transfer or death taxes of every
character owned by citizens of the Philippines not
residing in that foreign country.
2. Without reciprocity shall be included in the gross
estate
Intangible Properties Which Are Considered Situated
in the Philippines (Sec. 104)
1. Franchise which must be exercised in the Philippines
2. Shares, obligations or bonds issued by any corporation or
sociedad anonima organized or constituted in the
Philippines in accordance with its laws
3. Shares, obligations or bonds issued by any foreign
corporation 85% of the business of which is located in
the Philippines
4. Shares, obligations or bonds issued by any foreign
corporation if such shares, obligations or bonds have
acquired a business situs in the Philippines
5. Shares or rights in any partnership, business or industry
established in the Philippines
DETERMINATION OF THE VALUE OF THE
ESTATE
SEC. 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.
Valuation of Gross Estate (Sec. 5 RR 2-2003)
Real Property whichever is higher between the FMV
1. As determined by the Commissioner (zonal value)
2. As shown in the schedule of values fixed by the
provincial and city assessors (Sec. 88)
Personal Property (Sec. 5 RR 2-2003)
1. General Rule: FMV at the time of death
2. Exception: Shares of stock
a. If listed The FMV is the arithmetic mean between
the highest and lowest quotation at the date of death
or the date nearest the date of death, if none is
available on the date of death itself (Sec. 5 RR 2-
2003)
b. If unlisted The FMV is the par value in case of
preferred shares, and book value in case of common
shares
- In determining the book value of common shares,
the following shall NOT be considered:
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1. Appraisal Surplus, and
2. The value assigned to preferred shares, if there are
any.
3. Right to Usufruct, use, habitation, and annuity The
probable life of the beneficiary in accordance with the
latest basic standard mortality table is to be taken into
account, to be approved by the Secretary of Finance,
upon recommendation of the Insurance Commissioner.
What is included in the gross estate?
SEC. 85. Gross Estate. x x x
(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), to 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.
1. Property owned by the decedent actually and physically
present in his estate at the time of his death;
2. Decedents interest;
3. Properties not physically in the estate, such as:
a. Transfers in contemplation of death
b. Transfers with retention or reservation of certain
rights
c. Revocable transfers
d. Property passing under general power of appointment
e. Transfers for insufficient consideration
f. Proceeds of life insurance
g. Claims against insolvent persons; and
h. Capital of the surviving spouse
Decedents interest (Sec. 85(A))
It includes any interest having value or capable of being
valued, transferred by the decedent at the time of his death.
Transfers in Contemplation of Death (Sec. 85(B))
The term in contemplation of death, as used in estate
taxation, does not refer to the general expectation of death.
The words mean that it is the thought of death, as a
controlling motive, which induces the disposition of the
property for the purpose of avoiding the tax. The decedents
motive is a question of fact. Thus, the imminence of death
may afford convincing evidence of the impelling cause of
transfer. However, it is a contemplation of death and not
necessarily contemplation of imminent death to which the
statute refers.
The law does not specify the number of years prior to a
decedents death within which a transfer can be considered
in contemplation of death. (De leon)
Revocable Transfers (Sec. 85(C))
Rule: A transfer is a revocable transfer where:
1. There is a transfer by trust or otherwise,
2. The enjoyment thereof was subject at the date of his
death to any change through the exercise of a power (in
whatever capacity exercisable) by:
a. The decedent alone;
b. The decedent in conjunction with any other person
without regard to when or from what source the
decedent acquired such power, to alter, amend,
revoke, or terminate; or
5
c. Where any such power is relinquished in
contemplation of the decedent death.
Exception: Bona fide sale for an adequate and full
consideration in money or moneys worth
Transfer of property under general power of
appointment (Sec. 85(D))
Power of Appointment the right to designate the person
or property who shall enjoy and possess certain property
from the estate of a prior decedent. (Domondon)
Rule: Property over which the decedent held a power of
appointment is not includible in his gross estate unless such
power is general.
1. General Power of Appointment the decedent must
have had a power exercisable in favor of himself,
his creditors or creditors of his estate (AmJur)
2. A power is NOT general (thus, specific_) if it can
be exercised only in favor of one or more
designated person or classes of persons exclusive of
the decedent, his estate, the creditors of his estate,
or if it is expressly not exercisable in favor of the
decedent, his estate, his creditors, or creditors of his
estate.
Among those to be included in the gross estate is property
arising 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 enjoy or
possess the property or the income therefrom.
Transfers for insufficient consideration (Sec. 85(G))
Transfers, trusts, interests, rights, or powers (denominated as
transfer in contemplation of death, revocable transfer and
property passing under general power of appointment) made,
created, exercised or relinquished for a consideration in
money or moneys worth, but is NOT a bona fide sale for an
adequate and full consideration in money or moneys worth.
The value to be included in the gross estate is the excess of
the fair market value of the property at the time of the
decedents death over the consideration received.
FMV of the property at the date of the decedents death
Less: Actual consideration received by the decedent
----------------------------------------------------------
= Amount which can be included in the decedents gross
estate
Example (from UP Law Reviewer) To determine the conjugal or separate character of proceeds,
Case A: If bona fide sale no value shall be included in the the following factors are considered:
gross estate 1. Policy was taken before marriage Source of funds
Case B: If not a bona fide sale - the excess of the fair market determines ownership of the proceeds of life insurance
value at the time of death over the value of the consideration 2. Policy was taken during marriage
received by the decedent shall form part of his gross estate. a. Beneficiary is estate of the insured Proceeds are
Case C: If inter vivos transfer is proven fictitious/simulated presumed conjugal; hence, one-half share of the
total value of the property at the time of death included in surviving spouse is not taxable
the gross estate. b. Beneficiary is third person Proceeds are payable
to beneficiary even in premiums were paid out of
Case Case the conjugal
Over Case A
B C
EXCLUSIONS AND EXEMPTIONS
FMV, transfer 2,000 1,500 2,500
FMV, death 2,500 2,000 2,000 Sec. 85 x x x
(H) Capital of the Surviving Spouse. - The capital of the surviving
Consideration received 2,000 800 0 spouse of a decedent shall not, for the purpose of this Chapter, be deemed a
part of his or her gross estate
Value included in the Gross 0 1,200 2,000
Estate
SEC. 87 Exemption of Certain Acquisitions and Transmissions. -
The following shall not be taxed:
The transfer for insufficient consideration must fall under (A) The merger of usufruct in the owner of the naked title;
any of the following: (B) The transmission or delivery of the inheritance or legacy by the
fiduciary heir or legatee to the fideicommissary;
1. Transfer in contemplation of death; (C) The transmission from the first heir, legatee or donee in favor of another
2. Revocable transfer, or beneficiary, in accordance with the desire of the predecessor; and
3. Property passing under a GPA. (D) All bequests, devises, legacies or transfers to social welfare, cultural
- Otherwise, the tax imposed is donors tax. 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
Proceeds of life insurance (Sec. 85(E)) used by such institutions for administration purposes.
When taxable
Proceeds of life insurance taken out by the decedent on his Capital of the Surviving Spouse (Sec. 85(H))
own life shall be included in the gross estate in the following Capital under the provisions of the NIRC should be taken to
cases: mean the property of the spouses brought into marriage.
1. Beneficiary is the estate of the deceased, his executor or Strictly speaking, capital under the Civil Law refers to the
administrator, irrespective of whether or not the insured property brought by the husband to the marriage while that
retained the power of revocation; or brought into the marriage by the wife known is as
2. Beneficiary is other than the decedents estate, executor paraphernal property. (Domondon)
or administrator, when designation of beneficiary is not
expressly made irrevocable. The capital of the surviving spouse of a decedent shall not be
- Under the Insurance Code of 1978, if not deemed a part of the gross estate.
clear or silent, the designation of the
beneficiary is presumed to be revocable; Exclusive Property of Each Spouse
hence, includible in the decedents gross If ACP governs property relations
estate. The community of property shall consist of all the property
owned by the spouses at the time of the celebration of the
When not taxable marriage or acquired thereafter. (Art. 91 Family Code)
1. Accident insurance proceeds as the Tax Code 1. The following are excluded from the community
specifically mentions only life insurance policies property:
2. Proceeds of a group insurance policy taken out by a a. Property acquired by gratuitous title by either
company for its employees spouse, and the fruits as well as the income thereof,
3. Amount receivable by any beneficiary irrevocably if any, unless it is expressly provided by the donor,
designated in the policy of insurance by the insured. The testator, or grantor that they shall form part of the
transfer is absolute and the insured did not retain any community property.
legal interest in the insurance b. Property for personal and exclusive use of either
4. Proceeds of insurance policies issued by the GSIS to spouse; however, jewelry shall form part of the
government officials and employees , which are exempt community property.
from all taxes; c. Property acquired before the marriage by either
5. Benefits accruing under the SSS law spouse who has legitimate descendants from a
6. Proceeds of life insurance payable to heirs of deceased former marriage, and the fruits as well as the
members of military personnel income, if any, of such property. (Art. 92 Family
Code)

6
2. Property acquired during the marriage is presumed to
belong to the community, unless it is proved that it is
one of those excluded therefrom.
If CPG governs property relations
Under this regime, the husband and wife place in a common
fund the proceeds, products, fruits, and income from their
separate properties and those acquired by either or both
spouses through their efforts or by chance, and, upon
dissolution of the marriage or of the partnership, the net
gains or benefits obtained by either or both spouses shall be
divided equally between them, unless otherwise agreed in
marriage settlements. (Art. 106, Family Code)
1. The following are exclusive property of each spouse:
a. That which is brought to the marriage as his or her
own
b. That which each acquires DURING the marriage by
gratuitous title
c. That which is acquired by right of redemption, by
barter or by exchange with property belonging to
only one of the spouses
d. That which is purchased with exclusive money of
the wife or the husband (Art. 109, Family Code)
2. Property bought on instalments paid partly from
exclusive funds of either or both spouses and partly
from conjugal funds belong to the buyer or buyers if full
ownership was vested BEFORE the marriage subject to
reimbursement advanced by the conjugal partnership or
by either or both spouses. (Art. 118, Family Code)
3. Whenever an amount or credit payable within a period
of time belongs to one of the spouses, the sums collated
during the marriage in partial payments or by
instalments on the principal are considered the exclusive
property of the spouse. However, interest falling due
during the marriage on the principal belong to the
conjugal partnership.
4. All property acquired during the marriage whether the
acquisition appears to have been made, contracted or
registered in the name of one or both spouses,, is
presumed to belong to the conjugal partnership, unless it
is proved that it pertains exclusively to the husband or to
the wife.
If separation of property governs property relations:
Separation of property may refer to present or future
property or both. It may be total or partial. In the latter case,
the property not agreed upon as separate shall pertain to the
absolute community. (Art. 144, Family Code)
To each spouse shall belong all earnings from his or her
profession, business or industry, and all fruits, natural,
industrial, or civil, due or received during the marriage from
his or her separate property. (Art. 145, Family Code)
Exemptions:
1. Where net estate does not exceed P200,000. (Sec. 84)
2. The following transmissions shall not be taxed:
a. Merger of the usufruct in the owner of the naked
title
7
b. Transmission or delivery of the inheritance or
legacy by the fiduciary heir or legatee to the
fideicomissary
c. The transmission from the first heir, legatee, or
done in favor of another beneficiary in accordance
with the desire of the predecessor
d. All bequests, devises, legacies, or transfers to social
welfare, cultural and charitable institutions, no part
of the net income of which inures to the benefit of
any individual, and provided that not more than
30% of the said bequests, etc shall be used by such
institution for administration purposes.
Exemptions under special laws
1. Benefits received by members from the GSIS and the
SSS by reason of death
2. Amounts received from the Philippines and US
governments for damages suffered during the last war.
3. Benefits received by beneficiaries residing in the
Philippines under laws administered by the US Veteran
Administration
4. Bequests, legacies, or donations mortis causa to social
welfare, cultural, or charitable organizations. Bequests
to be used actually, directly and exclusively for
educational purposes are also exempt from tax.
5. Grants and donations to the Intramuros Administration
DEDUCTIONS FROM GROSS ESTATE
I. Citizens and Resident Aliens
A. Expenses, Losses, Indebtedness, and Taxes (ELIT)
or Ordinary Deductions
1. Funeral Expenses
2. Judicial Expenses
3. Claims against the estate
4. Claims against insolvent persons
5. Unpaid Mortgages
6. Unpaid Taxes
7. Losses
B. Property Previously Taxed (Vanishing Deductions)
C. Transfers for Public Use
D. Amount received by heirs under RA 4917
E. Net share of the surviving spouse in the conjugal
property
F. Special Deductions
1. Family Home
2. Standard Deduction
3. Medical Expenses
II. Non-Resident Aliens
A. Expenses, Losses, Indebtedness, and Taxes (ELIT)
or Ordinary Deductions
Allowable Deduction = Philippine Gross Estate
------------------------------ x ELIT
World Gross Estate
B. Transfers for Public Use
C. Property Previously Taxed for Property in the
Philippines (Vanishing Deductions)
D. Net share of the surviving spouse in the conjugal
property
 Expenses NOT allowed as deductions to non-
resident aliens
a. Family Home
b. Standard Deduction
c. Medical Expenses
d. Amount received by heirs under RA 4917
Section 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.
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. (Sec.
86 (D), NIRC; Sec 7, RR 2-2003)
ORDINARY DEDUCTIONS
Expenses, Losses, Indebtedness and Taxes, Etc.
(ELIT)
Funeral Expenses (Sec. 86 (A)(1)(a))
Allowable deduction is not to exceed P200,000 and
whichever is lower of:
(a) The actual funeral expenses (whether or not paid) up to
the time of interment, or
(b) An amount equal to 5% of the gross estate.
8
Actual funeral expenses shall mean those which are actually
incurred in connection with the interment or burial of the
deceased and must be paid out of the estate and not by
another person or out of contributions from friends and
relatives. These must be duly supported by receipts or
invoices or other evidence to show that they were actually
incurred.
The unpaid portion of the funeral expenses incurred which is
in excess of the P200,000 threshold is NOT allowed to be
claimed as a deduction under claims against the estate.
(Sec. 6(A)(1), RR 02-2003)
The term funeral expenses is not confined to its ordinary or
usual meaning. They include:
a. The mourning apparel of the surviving spouse and
unmarried minor children of the deceased bought and used
on the occasion of the burial;
a. Expenses for the deceaseds wake, including food
and drinks;
b. Publication charges for death notices;
c. Telecommunication expenses incurred in informing
relatives of the deceased;
d. 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;
e. Interment and/or cremation fees and charges; and
f. 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. (Sec. 6, RR 2-2003)
Illustrations
a. If 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;
b. If 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.
Judicial Expenses of Testamentary and Intestate
Proceedings (Sec. 86 (A)(1)(b))
Expenses allowed as deduction under this category are
those incurred in the inventory-taking of assets comprising
the gross estate, their administration, the payment of debts
of the estate, as well as the distribution of the estate among
the heirs. In short, these deductible items are expenses
incurred during the settlement of the estate but not beyond
the last day prescribed by law, or the extension thereof, for
the filing of the estate tax return. (Sec. 86 (A)(2), RR 2-
2003)
Judicial expenses may include:
a. Fees of executor or administrator
b. Attorneys fees
c. Court fees
d. Accountants fees
e. Appraisers fees
f. Clerk hire
g. Costs of preserving and distributing the estate
h. Costs of storing or maintaining property of the estate
i. Brokerage fees for selling property of the estate
Any unpaid amount for the aforementioned cost and
expenses claimed under Judicial Expenses should be
supported by a sworn statement of account issued and signed
by the creditor.
The expenses should be supported by receipts or invoices or
by a sworn statement of account issued by the creditor.
Expenses not deductible
a. Compensation paid to a trustee of the decedents estate
for his services rendered for the purpose of managing
the decedents real estate for the benefit of the
testamentary heirs (Lorenzo v. Posadas)
b. Expenses incurred by the presumptive heir and that of
her witnesses for appearance at the trial to oppose the
probate of a will.
c. Attorneys fees incident to litigation incurred by the
heirs in asserting their respective rights, or claims as to
who are entitled to the estate left by the deceased.
d. Premiums paid by the administrator on his bond, being
exclusively used for his account, since the giving of the
bond is in the nature of a qualification for the office and
not necessary in the settlement of his estate.
Claims Against the Estate (Sec. 86 (A)(1)(c))
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: contract, tort, or operation of law.
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 internment) and unpaid
medical expenses which are classified under a
different category of deductions.
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;
9
d. The indebtedness must not have been condoned by
the creditor or the action to collect from the
decedent must not have prescribed.
Substantiation Requirements
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
15 days from the execution thereof.
3. 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 it was
contracted within 3 years prior to the death of the
decedent.
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 services),
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.
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
debtor-decedent, should likewise be submitted.
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.
Claims Against Insolvent Persons (Sec. 86 (A)(1)(d))
These are claims that are not collectible. To be deductible
from the gross estate:
a. The incapacity of the debtor to pay his obligation should
be proven, although a judicial declaration of insolvency
is not required;
b. The full amount owed by the insolvent must first be
included in the decedents gross estate; and
c. If the insolvent could only pay a partial amount, the full
amount owed shall be included in the gross estate, and
the amount uncollectible shall be allowed as a
deduction.
Unpaid Mortgages, Losses and Taxes (Sec.
86(A)(1)(e))
Unpaid Mortgages
Requisites for Deductibility
10
a. The value of the decedents interest therein,
undiminished by such mortgage or indebtedness, is
included in the value of the gross estates.
b. The mortgages were contracted bona fide and for an
adequate and full consideration in money or moneys
worth.
In case the loan of the decedent is only an accommodation
loan where the loan proceeds went to another person, the
value of the unpaid loan must be included as a receivable of
the estate. If there is a legal impediment to recognize the
same as a receivable of the estate, the said unpaid obligation
shall not be allowed as a deduction. In all instances, the
mortgaged property, to the extent of the decedents interest
therein, should always form part of the taxable gross estate.
Unpaid Taxes
Requisites for Deductibility
a. Taxes which have accrued as of or before the death
of the decedent, and
b. Unpaid as of the time of his death, regardless of
whether or not it was incurred in connection with
trade or business
This deduction will not include:
a. Income tax upon income received after death, or
b. Property taxes not accrued before his death, or
c. The estate tax due from the transmission of his
estate
Casualty Losses
Requisites for Deductibility
a. Incurred during the settlement of the estate
b. Arising from fires, storms, shipwreck, or other
casualties from robbery, theft, or embezzlement
c. Not compensated by insurance or otherwise
d. At the filing of the estate tax return, such losses
have not been claimed as a deduction for income
tax purposes in an income tax return
e. Incurred not later than the last day for the payment
of the estate tax as prescribed by law.
Casualty loss can be allowed as deduction in one instance
only, either for income tax purposes or estate tax purposes.
(Sec. 6(A)(5)), Rev. Reg 2-2003)
Sec. 86 x x x
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 of the decedent,
or if the property was transferred to him by gift within the same period prior
to his 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 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 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.
Property Previously Taxed/PPT (Sec. 86(A)(2)) also
called as vanishing deductions
This is an amount allowed to reduce the taxable estate of a
decedent where property:
1. Received by him from a prior decedent by gift, bequest,
device, or inheritance
2. Transferred to him by gift, has been the object of
previous transfer transaction
Conditions
1. There must be 2 deceased persons and the first one is
the donor
2. The second decedent dies within 5 years after the death
of a prior decedent, or in case of gift, the decedent-
donee dies within the same period after the date of the
gift.
The vanishing deduction is allowable to the gross estate
situated in the Philippines of a resident or Filipino decedent
as well as to the gross estate of a non-resident alien
decedent.
Reason
The deduction operates to ease the harshness of successive
taxation of the same property within a relatively short period
of time, occasioned by the untimely death of the transferee
after the receipt of the property form the prior decedent or
donor.
Requisites
1. Death The present decedent died within 5 years from
the date of the prior decedent OR date of gift.
11
2. Identity of the property The property with respect to
which deduction is sought can be identified as the one
who received from prior decedent, or from the donor, or
as the property acquired in exchange for the original
property so received.
3. Inclusion of the property The property must have
formed part of the gross estate situated in the
Philippines of the prior decedent, or have been included
in the total amount of the gifts of the donor made
within 5 years prior to the present decedents death.
4. Previous taxation of property The estate tax on the
prior succession, or the donors tax on the gift must
have been finally determined and paid by the prior
decedent or by the donor, as the case may be.
5. No previous vanishing deduction on the property
No such deduction on the property, or the property
given in exchange therefor, was allowed in determining
the value of the net estate of the prior decedent. This is
intended to preclude the application of the vanishing
deduction on the same property more than once.
Limitations
1. Value of property The deduction is limited by the
value of property previously taxed or the aggregate
value of such property if more than one item, as finally
determined for the purpose of the prior estate tax (or gift
tax) or the value of such property in present decedents
gross estate, whichever is lower.
2. Deduction for mortgage or lien The initial value
(in number 1 above) shall be reduced by the total
amount paid, if any, by the present decedent on any
mortgage or other lien on the property where a
deduction was allowed, by reason of the payment, of
such mortgage or other lien from the gross estate of the
prior decedent, or gift or donor, in determining the
estate tax of the prior decedent or the donors tax.
3. Deductions for expenses, etc. The value as reduced
in #2 shall be further reduced by an amount which bears
the same ratio to the amounts allowed as deductions for:
a. Expenses, losses, indebtedness, and taxes (ordinary
deductions), and
b. Transfers for public use as the amount otherwise
deductible for property previously taxed bears to
the value of the decedents gross estate; and
4. Percentage of deductions The vanishing deduction
shall be the value (final basis) in #3 multiplied by the ff.
percentages:
Vanishing If received by inheritance or gift
Deduction
Rate
Within one (1) year prior to the death of
100%
the present decedent
More than one year but not more than
80% two years prior to the death of the
decedent
More than two years but not more than
60% three years prior to the death of the
decedent
 More than three years but not more than
40% four years prior to the death of the Amounts Received by Heirs Under RA 4917 (An Act
decedent Providing that Retirement Benefits of Employees of
Private Firms shall not be subject to attachment, levy,
More than four years but not more than
execution, or any tax whatsoever. (Sec. 86(A)(7))
20% five years prior to the death of the
Any amount received by the heirs from the decedents
decedent
employer as a consequence of the death of the decedent-
employee in accordance with RA 4917, provided that such
Formula: amount is included in the gross estate of the decedent.
1. Value taken of PPT SPECIAL DEDUCTIONS
Less: Mortgage debt (or other lien) paid, if any (1 st
deduction) Family Home (Sec. 86(A)(4))
----------------- It is the dwelling house, including the land on which it is
= Initial Basis situated, where the husband and wife, or a head of the
2. Initial Basis family, and members of their family reside, as certified to by
--------------- X Expenses etc. and transfer for public the Barangay Captain of the locality. It is deemed
purposes = 2nd deduction constituted on the house and lot from the time it is actually
Value of the occupied as the family residence and considered as such for
gross estate of as long as any of its beneficiaries actually resides therein.
present decedent (Arts. 152 and 153, Family Code)
3. Initial Basis Temporary absence from the constituted family home due to
Less: 2nd deduction travel or studies or work abroad, etc. does not interrupt
------------------ actual occupancy. The family home is generally
= Final Basis characterized by permanency, that is, the place to which,
Multiplied by the rate of deduction whenever absent for business or pleasure, one still intends to
----------------- return. (Sec. 6(D), RR 2-2003)
= Vanishing Deduction
It must be part of the ACP or CPG, or the exclusive
Sec. 86 x x x properties of either spouse. It may also be constituted by an
(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 unmarried head of a family on his or her own property. (Sec.
the Philippines, or any political subdivision thereof, for exclusively public 6(D), RR 2-2003 citing Art. 156, FC). For purposes of
purposes. availing this deduction, a person may constitute only one
family home. Sec. 6(D), RR 2-2003 citing Art. 161, FC.
(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 Requisites for Deductibility (Sec. 6(D)(b), RR 2-2003)
excess shall be subject to estate tax. As a sine qua non condition for the 1. The family home must be the actual residential home of
exemption or deduction, said family home must have been the decedent's the decedent and his family at the time of his death, as
family home as certified by the barangay captain of the locality.
certified by the barangay captain of the locality.
(5) Standard Deduction. - An amount equivalent to One million pesos 2. The total value of the family home must be included as
(P1,000,000). part of the gross estate of the decedent
3. Allowable deduction must be in an amount equivalent to
(6) Medical Expenses. - Medical Expenses incurred by the decedent
within one (1) year prior to his death which shall be duly substantiated with the current FMV of the family home as declared or
receipts: Provided, That in no case shall the deductible medical expenses included in the gross estate, or the extent of the
exceed Five Hundred Thousand Pesos (P500,000). decedents interest (whether conjugal/community or
exclusive property), whichever is lower, but in no case
(7) Amount Received by Heirs Under Republic Act No. 4917. - Any
amount received by the heirs from the decedent - employee as a shall the deduction exceed P1,000,000.
consequence of the death of the decedent-employee in accordance with 4. The decedent was married or if single, was a head of the
Republic Act No. 4917: Provided, That such amount is included in the gross family.
estate of the decedent. 5. Along with the decedent, any of the beneficiaries must
be dwelling in the family home.
Transfers for Public Purpose (Sec. 86(A)(3)) 6. The family home as well as the land on which it stands
These are dispositions in a last will and testament or must be owned by the decedent. Therefore, the FMV of
transfers to take effect after death in favor of the the family home should have been included in the
Government of the Republic of the Philippines, or any computation of the decedents gross estate.
political subdivision thereof, for exclusively public
purposes. The whole amount of all the bequests, legacies, Beneficiaries of a Family Home
devises, or transfers to or for the use of shall be deductible 1. The husband and wife, or an unmarried person who is
from gross estate, provided such amount or value had been the head of a family; and
included in the computation of the gross estate.
12
2. Their parents, ascendants, descendants, 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.
Standard Deduction (Sec. 86(A)(5), Sec. 6(E), RR 2-
2003)
An amount equivalent to one million pesos (P1,000,000)
shall be deducted from the gross estate without need of
substantiation.
Medical Expenses (Sec. 86(A)(6), NIRC; Sec. 6(F),
RR 2-2003)
All medical expenses (cost of medicine, hospital bills,
doctors fees, etc.) incurred (whether paid or unpaid).
Requisites for Deductibility
1. The expenses were incurred by the decedent within 1
year prior to his death
2. The expenses are duly substantiated with receipts and
other documents in support thereof
Provided, that in no case shall the deductible medical
expenses exceed Five Hundred Thousand Pesos (P500,000).
Any amount of medical expenses incurred within one year
from death in excess of 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 under Claims against the
estate. (RR 2-2003, Sec. 6-F)
Net share of the surviving spouse in the conjugal
partnership property (Sec. 86(C), NIRC; Sec. 6(H), RR 2-
2003)
The amount deductible is the net share of the surviving
spouse in the conjugal partnership property. The net share is
equivalent to of 50% of the conjugal property after
deducting the obligations chargeable to such property. The
share of the surviving spouse must be removed to ensure that
only the decedents interest in the estate is taxed. Net share
of the surviving spouse is neither an ordinary nor a special
deduction.
NON RESIDENT ALIENS
Sec. 86 x x x
(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:
13
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 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.
III. Non-Resident Aliens
A. Expenses, Losses, Indebtedness, and Taxes (ELIT)
or Ordinary Deductions
Allowable Deduction = Philippine Gross Estate
------------------------------ x ELIT
World Gross Estate
B. Transfers for Public Use
C. Property Previously Taxed for Property in the
Philippines (Vanishing Deductions) Decedents net estate
D. Net share of the surviving spouse in the conjugal situated in foreign country
property --------------------------------- x PH estate tax = Tax Credit
Limit
Expenses NOT allowed as deductions to non- Entire net estate
resident aliens
a. Family Home
b. Standard Deduction B. For estate taxes paid to 2 or more foreign countries
c. Medical Expenses The total amount of the credit shall not exceed the same
d. Amount received by heirs under RA 4917 proportion of the tax against which such credit is taken,
which the decedent's net estate situated outside the
Allowable Deductions form the Gross Estate of Non- Philippines taxable under the tax code bears to his entire net
Resident Aliens estate.
In case of non-resident aliens, no deduction shall be allowed
unless the executor, administrator, or anyone of the heirs as Decedent net estate
the case may be, includes in the estate tax return of the Situated outside the PH
decedent required to be filed, the value at the time of his ------------------------------ x PH estate tax = Tax Credit
death that part of the gross estate of the non-resident not Limit
situated in the Philippines. (Sec. 7, RR 2-2003) Entire net estate

Example from UP Reviewer

TAX CREDIT FOR ESTATE TAXES PAID IN A Net Estate Philippines (reduced by P1,050,000
FOREIGN COUNTRY all allowable deductions, except
standard deduction)
Sec. 86
xxx Country G Net Estate 300,000
E) Tax Credit for Estate Taxes paid to a Foreign Country. - Country H Net Estate 150,000
(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. Tax paid/incurred:
(2) Limitations on Credit. - The amount of the credit taken under this Philippines 15,000
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
Country G 5,000
not exceed the same proportion of the tax against which such credit is taken, Country H 1,400
which the decedent's net estate situated within such country taxable under
this Title bears to his entire net estate; and Net Estate Philippines (reduced by P1,050,000
(b) The total amount of the credit shall not exceed the same proportion of all allowable deductions, except
the tax against which such credit is taken, which the decedent's net estate standard deduction)
situated outside the Philippines taxable under this Title bears to his entire
net estate.
Net taxable estate is P500,000 (1,050,000 + 300,000 +
150,000 1,000,000 standard deduction). The Philippine
It is a remedy against international double taxation. To estate tax on P500,000 is P15,000
minimize the onerous effect of taxing the same property
twice, tax credit against Philippine estate tax is allowed for Solution Limitation A
estate taxes paid to foreign countries. 1. Apply Formula A. The result after applying the
formula above is compared to the tax actually paid
Only the estate of a decedent who was a citizen or a resident for each foreign country.
of the Philippines at the time of his death can claim tax 2. The lower of the two amounts for each foreign
credit for any estate tax paid to a foreign country. country will be added to get the total tax credit
allowed under Limitation A.
General Rule
The estate tax imposed by the NIRC shall be credited with Amount
the amounts of any estate tax imposed by the authority of a Allowed
foreign country. (whichever
is lower)
Limitations on Credit Country G
A. For Estate Taxes paid to one foreign country 3,000
(300/1500 x 15,000) 3,000
The amount of the credit in respect to the tax paid to any
country shall not exceed the same proportion of the tax Actually paid to Country G 5,000
against which such credit is taken, which the decedent's net Country H
estate situated within such country taxable under the tax 1,500 1,400
(150/1500 x 15,000)
code bears to his entire net estate.

14

Actually paid to Country H 1,400
Tax credit allowed under Limitation P 4,400
A legal heirs, as the case may be, shall file a return under oath in duplicate,
Solution Limitation B:
1. Apply Formula B. The result after applying the
formula above is compared to the tax actually paid
in total to foreign countries.
2. The lower of the two amounts will be added to get
the total tax credit allowed under Limitation B.
Amount
Allowed
(Lower)
450/1500 x 15,000 4,500
Total foreign income taxes paid 6,400
Tax credit allowed under Limitation P 4,400
Compare the tax credit allowed under Limitation A and
Limitation B. The lower of the two amounts is the final
allowable tax credit. In this case, the amount computed
under Limitation A (4,400) is lower, thus it becomes the
final allowable tax credit.
If there is only one foreign country involved, both
Limitations will yield the same answer.
To get the tax credit allowable, use the formula in Limitation
A.
The resulting amount will be compared to the actual tax paid
to the foreign country. The lower amount will be the final
allowable tax credit.
NOTICE OF DEATH AND FILING OF RETURN
SEC. 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.
Notice of Death
In all cases of transfers subject to tax or where, though
exempt from tax, the value of the gross estate exceeds
P20,000, a written Notice of Death must be given to the BIR
a. Within 2 months after the death of the decedent or
b. Within 2 months after the executor or administrator
or executor qualifies as such.
Estate Tax Return
SEC. 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
15
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
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.
When Required
1. When the estate is subject to estate tax, OR
2. When, though exempt from tax, the gross value of the
estate exceeds Two hundred thousand pesos (P200,000),
OR
3. Regardless of the gross value of the estate, when 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.
Contents
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 net taxable estate; 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.
4. For estate tax returns showing a gross value exceeding
P2,000,000 - there must be 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 non-resident, 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.
Period for Filing
General Rule: Filed within 6 months from the decedent's
death.
Exception: The Commissioner shall have authority to grant,
in meritorious cases, a reasonable extension not exceeding
30 days for filing the return.
Where to file the estate tax return and pay the tax due
(Sec. 9, RR 2-2003)
Resident Citizen
The executor or administrator shall register the estate of the
decedent and secure a new TIN from the RDO 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:
1. An authorized agent bank (AAB), or
2. Revenue District Officer (RDO), or
3. Collection Officer,
4. Duly authorized Treasurer of the city or municipality in
which the decedent was domiciled at the time of his
death, or
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 RDO where such executor
or administrator is registered.
If the executor or administrator is not registered, the estate
tax return shall be filed with and the TIN for the estate shall
be secured from the RDO having jurisdiction over the
executor or administrators legal residence.
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 39 QC.
The foregoing provisions notwithstanding, the
Commissioner of Internal Revenue may continue to exercise
16
his power to allow a different venue/place in the filing of tax
returns.
Payment of Estate Tax
SEC. 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.
Rule: Pay as you file
At the time the return is filed by the executor, administrator
or the heirs.
The executor or administrator means the executor or
administrator of the decedent, or if there is none appointed,
qualified, and acting within the Philippines, then any person
in actual or constructive possession of any property of the
decedent. The estate tax shall be paid by the executor or
administrator before the delivery of the distributive share in
the inheritance to any heir or beneficiary.
Exception: In meritorious cases, The Commissioner grant
reasonable extension not exceeding 30 days.
Extension of Payment (Sec. 9(E), RR 2-2003)
The Commissioner may allow an extension of payment, if he
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:
1. Extension not to exceed 5 years, in case the estate is
settled judicially, or
2. 2 years in case the estate is settled extrajudicially.
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 extension 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.
Effects of granting an extension
1. Payment of the amount in respect of which the
extension is granted on or before the date of the
expiration of the period of the extension
2. Suspension of the running of statute of limitations for
deficiency assessment for the period of any extension
3. 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.
Can estate tax be paid in installments? Yes!
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. (Sec. 9(F), RR 2-2003)
Who are liable for the payment of estate taxes
Primarily, the estate, through the executor or administrator.
1. Payment shall be made before the delivery of the
distributive share in the inheritance to any heir or
beneficiary.
2. If there are two or more executors or
administrators, all of them are severally liable for the
payment of the tax.
3. The estate tax clearance issued by the
Commissioner or the RDO having jurisdiction over the
estate, will serve as the authority to distribute the remaining
properties/share in the inheritance to the heir or beneficiary.
Subsidiarily, heirs or beneficiaries, 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.
Claims for taxes, whether assessed before or after the death
of the deceased, can be collected from the heirs even after
the distribution of the properties of the decedent, xxx. The
heirs shall be liable therefor, in proportion to their share in
the inheritance. Marcos v. CA (1997)
SEC. 93. Definition of Deficiency. - As used in this Chapter, the
term 'deficiency' means:
(a) The amount by which the tax imposed by this Chapter exceeds the
amount shown as the tax by the executor, administrator or any of the heirs
17
upon his return; but the amounts so shown on the return shall first be
increased by the amounts previously assessed (or collected without
assessment) as a deficiency and decreased by the amount previously abated,
refunded or otherwise repaid in respect of such tax; or
(b) If no amount is shown as the tax by the executor, administrator or any of
the heirs upon his return, or if no return is made by the executor,
administrator, or any heir, then the amount by which the tax exceeds the
amounts previously assessed (or collected without assessment) as a
deficiency; but such amounts previously assessed or collected without
assessment shall first be decreased by the amounts previously abated,
refunded or otherwise repaid in respect of such tax.
SEC. 94. Payment before Delivery by Executor or Administrator. -
No judge shall authorize the executor or judicial administrator to deliver a
distributive share to any party interested in the estate unless a certification
from the Commissioner that the estate tax has been paid is shown.
SEC. 95. Duties of Certain Officers and Debtors. - Registers of Deeds
shall not register in the Registry of Property any document transferring real
property or real rights therein or any chattel mortgage, by way of gifts inter
vivos or mortis causa, legacy or inheritance, unless a certification from the
Commissioner that the tax fixed in this Title and actually due thereon had
been paid is show, and they shall immediately notify the Commissioner,
Regional Director, Revenue District Officer, or Revenue Collection Officer
or Treasurer of the city or municipality where their offices are located, of
the non payment of the tax discovered by them. Any lawyer, notary public,
or any government officer who, by reason of his official duties, intervenes
in the preparation or acknowledgment of documents regarding partition or
disposal of donation intervivos or mortis causa, legacy or inheritance, shall
have the duty of furnishing the Commissioner, Regional Director, Revenue
District Officer or Revenue Collection Officer of the place where he may
have his principal office, with copies of such documents and any
information whatsoever which may facilitate the collection of the
aforementioned tax. Neither shall a debtor of the deceased pay his debts to
the heirs, legatee, executor or administrator of his creditor, unless the
certification of the Commissioner that the tax fixed in this Chapter had been
paid is shown; but he may pay the executor or judicial administrator without
said certification if the credit is included in the inventory of the estate of the
deceased.
SEC. 96. Restitution of Tax Upon Satisfaction of Outstanding
Obligations. - If after the payment of the estate tax, new obligations of the
decedent shall appear, and the persons interested shall have satisfied them
by order of the court, they shall have a right to the restitution of the
proportional part of the tax paid.
SEC. 97. Payment of Tax Antecedent to the Transfer of Shares,
Bonds or Rights. - There shall not be transferred to any new owner in the
books of any corporation, sociedad anonima, partnership, business, or
industry organized or established in the Philippines any share, obligation,
bond or right by way of gift inter vivos or mortis causa, legacy or
inheritance, unless a certification from the Commissioner that the taxes
fixed in this Title and due thereon have been paid is shown.
If a bank has knowledge of the death of a person, who maintained a bank
deposit account alone, or jointly with another, it shall not allow any
withdrawal from the said deposit account, unless the Commissioner has
certified that the taxes imposed thereon by this Title have been paid:
Provided, however, That the administrator of the estate or any one (1) of the
heirs of the decedent may, upon authorization by the Commissioner,
withdraw an amount not exceeding Twenty thousand pesos (P20,000)
without the said certification. For this purpose, all withdrawal slips shall
contain a statement to the effect that all of the joint depositors are still living
at the time of withdrawal by any one of the joint depositors and such
statement shall be under oath by the said depositors.
Duties of certain officers or debtors
1. Executor or administrator must ensure that payment
shall be made of the amount of which he is notified
before he shall be discharge from personal liability.
(Sec. 92)
2. Judge will not issue authorization to deliver distributive
shares unless certification of payment is shown. (Sec.
94)
3. Register of Deeds shall not register in the Registry of
property any document transferring real property or real
interest rights therein without certification from the
Commissioner that the tax actually due thereon had
been paid. (Sec. 95)
4. Lawyer, notary public, or any government officer
intervening in the preparation or
acknowledgement of documents regarding
partition or disposal of donation inter vivos or
mortis causa, legacy or inheritance, shall have the
duty of furnishing the Commissioner, Regional
Director, Revenue District Officer, or Revenue
Collector Officer such documents. (Sec. 95)
5. A debtor of the deceased shall not pay his debts to
the heirs, legatee, executor or administrator of his
creditor, unless the certification of the Commissioner
that the estate tax imposed by NIRC has been paid is
shown, BUT he may pay the executor or judicial
administrator without said certification if the credit is
included in the inventory of the estate of the deceased.
(Sec. 95)
6. A corporation will not transfer to the new owners of
shares, bonds, obligations, or rights without the
certification from the Commissioner that the tax
actually due thereon had been paid. (Sec. 97)
7. When a bank has knowledge of the death of a person
who maintained a joint account, it shall not allow any
withdrawal by the surviving depositor without the above
certification.

The administrator of the estate or any one of the heirs of

the decedent may, upon authorization by the
Commissioner, withdraw an amount not exceeding
P20,000 without the said certification. (Sec. 97)

18
DONORS TAX SEC. 104. Definitions. x x x 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
1. IMPOSITION OF GIFT TAX was a citizen and resident of a foreign country which at the time of his death
SEC. 98. Imposition of Tax. - or donation did not impose a transfer tax of any character, in respect of
(A) There shall be levied, assessed, collected and paid upon the transfer intangible personal property of citizens of the Philippines not residing in
by any person, resident or nonresident, of the property by gift, a tax, that foreign country, or (b) if the laws of the foreign country of which the
computed as provided in Section 99. decedent or donor was a citizen and resident at the time of his death or
(B) The tax shall apply whether the transfer is in trust or otherwise, donation allows a similar exemption from transfer or death taxes of every
whether the gift is direct or indirect, and whether the property is real or character or description in respect of intangible personal property owned by
personal, tangible or intangible. citizens of the Philippines not residing in that foreign country.

1.3.1. Requirements
1.1. Tax rates (Sec. 99) 1. Resident and citizen of a foreign country
1.1.1. If the donee is a STRANGER: 30% 2. No transfer tax on intangible personal property of non-
resident Philippine citizens
Stranger: a person who is not a: 3. Allows exemption from transfer tax same as (2)
1. Brother, sister (whether by whole or half-blood),
spouse, ancestor and lineal descendant; or 2. TRANSFER FOR INADEQUATE
2. Relative by consanguinity in the collateral line within CONSIDERATION
the fourth degree of relationship.
SEC. 100. Transfer for Less Than Adequate and full Consideration.
RR 2-2003: Donations made between business organizations, and those - Where property, other than real property referred to in Section 24(D), is
made between an individual and a business organization shall be considered transferred for less than an adequate and full consideration in money or
donations made to a stranger. 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
1.1.2. If the donee is NOT A STRANGER to the computing the amount of gifts made during the calendar year.
donor:
2.1. Transfers which may be constituted as donation
Of the
Over But not over Tax is Plus
Excess Over
(from the BOC reviewer and RR 2-2003)
0 100,000 Exempt
100,000 200,000 0 2% 100,000 1. Sale, exchange or transfer of property for insufficient
200,000 500,000 2,000 4% 200,000 consideration
500,000 1,000,000 14,000 6% 500,000 2. Condonation or remission of debt where the debtor did
1,000,000 3,000,000 44,000 8% 1,000,000 not render service in favor of the creditor
3,000,000 5,000,000 204,000 10% 3,000,000 3. Renunciation in favor of other heirs
5,000,000 10,000,000 404,000 12% 5,000,000 a. Renunciation by the surviving spouse of their share
10,000,000 1,004,000 15% 10,000,000 in the ACP/CPG after the dissolution of the
marriage in favor of heirs of the deceased spouse or
1.2. Tax base any other person/s
1.2.1. General formula b. Renunciation specifically and categorically in favor
of identified heir/s to the exclusion or disadvantage
Gross gifts of the other co-heirs in the hereditary estate
Less: Deductions from the gross gifts c. However, general renunciation by an heir,
Net gifts including the surviving spouse, of their share in the
Multiplied by the applicable rate hereditary estate left by the decedent is NOT
Donors tax on the net gifts subject to DT

1.2.2. Several gifts during the year 3. EXEMPTION FROM GIFT TAX

Gross gifts made on this date SEC. 101. Exemption of Certain Gifts. - The following gifts or
donations shall be exempt from the tax provided for in this Chapter:
Less: Deductions from the gross gifts (A) In the Case of Gifts Made by a Resident. -
Net gifts made on this date (1) Dowries or gifts made on account of marriage and before its
Add: all prior net gifts during the year celebration or within one year thereafter by parents to each of their
legitimate, recognized natural, or adopted children to the extent of the first
Aggregate net gifts Ten thousand pesos (P10,000):
Multiplied by applicable rate (2) Gifts made to or for the use of the National Government or any
Donors tax on the aggregate net gifts entity created by any of its agencies which is not conducted for profit, or to
any political subdivision of the said Government; and
Less: Donors tax paid on prior net gifts (3) Gifts in favor of an educational and/or charitable, religious, cultural
Donors tax due on the net gifts to date 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%)
1.3. Rule on reciprocity 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

19
corporation, institution, accredited nongovernment organization, trust or SEC. 101. (C) Tax Credit for Donor's Taxes Paid to a Foreign
philanthrophic organization and/or research institution or organization' is a Country. -
school, college or university and/or charitable corporation, accredited (1) In General. - The tax imposed by this Title upon a donor who was a
nongovernment organization, trust or philanthrophic organization and/or citizen or a resident at the time of donation shall be credited with the
research institution or organization, incorporated as a nonstock entity, amount of any donor's tax of any character and description imposed by the
paying no dividends, governed by trustees who receive no compensation, authority of a foreign country.
and devoting all its income, whether students' fees or gifts, donation, (2) Limitations on Credit. - The amount of the credit taken under this
subsidies or other forms of philanthrophy, to the accomplishment and Section shall be subject to each of the following limitations:
promotion of the purposes enumerated in its Articles of Incorporation. (a) The amount of the credit in respect to the tax paid to any country
(B) In the Case of Gifts Made by a Nonresident not a Citizen of shall not exceed the same proportion of the tax against which such credit is
the Philippines. - taken, which the net gifts situated within such country taxable under this
(1) Gifts made to or for the use of the National Government or any Title bears to his entire net gifts; and
entity created by any of its agencies which is not conducted for profit, or to (b) The total amount of the credit shall not exceed the same proportion
any political subdivision of the said Government. of the tax against which such credit is taken, which the donor's net gifts
(2) Gifts in favor of an educational and/or charitable, religious, cultural situated outside the Philippines taxable under this title bears to his entire net
or social welfare corporation, institution, foundation, trust or philanthrophic gifts.
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. 4.1. Who may claim the tax credit
1. Resident citizen
These are deductible from gross gifts in order to arrive at the 2. Non-resident citizen
taxable net gifts, and are not treated as exclusions from the 3. Resident alien
gross gifts of the donor.
4.2. Limitations on the tax credit
3.1. Gifts made by a RESIDENT 1. Per country limit
1. Dowries or donations made: NET GIFT (foreign
country) PHIL DONORS
a. On account of marriage x
TAX
b. Before its celebration or within one year thereafter ENTIRE NET GIFTS
c. By parents to each of their legitimate, recognized
natural, or adopted children 2. Worldwide limit
d. To the extent of the first P10,000 NET GIFT (all
countries) PHIL DONORS
x
2. Gifts made to or for the use of the National TAX
ENTIRE NET GIFTS
Government or any entity created by any of its
agencies which is not conducted for profit, or to any
5. TAX RETURN
political subdivision of the said Government.
3. Gifts in favor of an educational and/or charitable,
SEC. 103. Filing of Return and Payment of Tax. -
religious, cultural or social welfare corporation, (A) Requirements. - any individual who makes any transfer by gift (except
institution, accredited nongovernment organization, those which, under Section 101, are exempt from the tax provided for in this
trust or philanthropic organization or research Chapter) shall, for the purpose of the said tax, make a return under oath in
institution or organization, Provided not more than duplicate. The return shall se forth:
(1) Each gift made during the calendar year which is to be included in
30% of said gifts will be used by such donee for computing net gifts;
administration purposes. (2) The deductions claimed and allowable;
(3) Any previous net gifts made during the same calendar year;
3.2. Gifts made by a NON-RESIDENT (4) The name of the donee; and
(5) Such further information as may be required by rules and regulations
1. Gifts made to or for the use of the National made pursuant to law.
Government or any entity created by any of its (B) Time and Place of Filing and Payment. - The return of the donor
agencies which is not conducted for profit, or to any required in this Section shall be filed within thirty (30) days after the date
political subdivision of the said Government. 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
2. Gifts in favor of an educational and/or charitable, be filed and the tax paid to an authorized agent bank, the Revenue District
religious, cultural or social welfare corporation, Officer, Revenue Collection Officer or duly authorized Treasurer of the city
institution, accredited nongovernment organization, or municipality where the donor was domiciled at the time of the transfer,
trust or philanthropic organization or research 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
institution or organization, provided not more than filed with the Philippine Embassy or Consulate in the country where he is
30% of said gifts will be used by such donee for domiciled at the time of the transfer, or directly with the Office of the
administration purposes. Commissioner.

3.3. Common exemptions 5.1. Contents of the tax return

1. Encumbrances on the property donated if assumed by 1. Each gift made during the calendar year which is to
the donee in the deed of donation. be included in computing net gifts;
2. Donations made to entities exempted under special 2. The deductions claimed and allowable;
laws. 3. Any previous net gifts made during the same
calendar year;
4. TAX CREDIT 4. The name of the donee;
5. Relationship of the donor to the donee;

20
6. Such further information as the Commissioner may
require.

5.2. Filing
The return must be filed within 30 days after the date when
the gift was made or completed. The tax due thereon shall be
paid at the same time that the return is filed.

5.3. Payment

5.3.1. Residents

Unless the Commissioner otherwise permits, the return shall

be filed and the tax paid to:
1. An authorized agent bank
2. The Revenue District Officer
3. Revenue Collection Officer or
4. Duly authorized Treasurer of the city or
municipality where the donor was domiciled at the time
of the transfer, or
5. If there be no legal residence in the Philippines,
with the Office of the Commissioner.

5.3.2. Gifts made by non-residents

1. The Philippine Embassy or Consulate in the country
where he is domiciled at the time of the transfer, or
2. Directly with the Office of the Commissioner.

6. POLITICAL CONTRIBUTIONS: TAX

TREATMENT

Abello v CIR (2005)

Facts: Partners of ACCRA contributed money to Senator
Edgardo Angaras Senate campaign funds. The BIR assessed
donors taxes on their contributions. ACCRA opposed the
assessment, arguing that political or electoral contributions
werent considered gifts under the NIRC; therefore they
werent liable for donors tax.
Held: While the NIRC didnt define transfer of property by
gift, the Civil Code supplied the deficiency. The elements
of donation were: (a) the reduction of the patrimony of the
donor; (b) the increase in the patrimony of the donee; and,
(c) the intent to do an act of liberality or animus donandi.
Electoral contributions were within the definition of a
donation. It was not necessary to look into the intent of the
giver, as donative intent was all in the mind, and such intent
was not negated if the person donating had other intentions.

Note: Under Sec. 13 of Republic Act No 7166:

Any provision of law to the contrary notwithstanding any contribution in
cash or in kind to any candidate or political party or coalition of parties for
campaign purposes, duly reported to the Commission shall not be subject to
the payment of any gift tax.

21
VALUE-ADDED TAX 1. The output tax exceeds the input tax, the excess
shall be paid by the VAT-registered person
2. The input tax exceeds the output tax, the excess
VAT IN GENERAL
shall be carried over to the succeeding quarter or
VAT is a consumption tax imposed at every stage of
quarters
distribution process on the sale, barter, exchange, or lease of
goods or properties and rendition of services in the course of
Illustration:
trade or business, or the importation of goods, whether such
Producer Manufacturer Retailer Consumer
imported goods are for use in business or non-business
Producer Manufacturer Retailer Consumer
purposes. Selling Price SP: P1,000 SP: 10,000
(SP): P100
Tax Base: Gross Selling Price or Gross Value in money of Input VAT: 0 Input VAT: Input VAT: Input VAT:
the goods or Gross Receipts derived from the transaction or P12 P120 P1,200
Total Value/Landed Cost in case of imported Goods Output VAT: Output VAT: Output VAT: Output VAT:
P12 P120 P1,200 0
Three basic rates: Remittance to Remittance to Remittance to Remittance to
1. 12% all goods, properties, and services the BIR: P12 the BIR: the BIR: the BIR:
2. 0% for export and sales and services which are zero- P108 P1,080 0
rated or effectively zero-rated * Total Remittance to the Government: P1,200. This amount
3. 5% withholding when selling to the government is equal to the total VAT paid by the end consumer.

Nature 2. All goods, properties and services (except exempt)

1. Privilege/Percentage Tax imposed by law directly not
on the thing or service but on the ACT (sale, barter,
exchange, lease, importation, or perfrormance of
service)
2. Ad Valorem Tax the amount is based on the gross
selling price or gross value in money of the goods or
service, including the use or lease or properties.
3. Indirect Tax it may be shifted or passed on to the
buyers, transferee, or lessee of the goods, properties or
services as part of the purchase price.
Impact Incidence
Seller/Importer Seller is Buyer/Final Consumer
the one who collects the the buyers is the one who
tax and pays to the bears the burden of the
government taxation.
Transactions Covered:
1. Sale, Barter or Exchage of Goods or Property
2. Sale of Services, including lease or use of property
3. Importation of Goods.
General Features: (more discussion of each later)
1. Tax Credit Method a VAT-registered person is
entitled to credit input taxes evidenced by VAT invoice
or official receipt against the output tax payable.
Input tax 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.
Output tax the VAT 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 the Code.
If at the end of any taxable month or quarter:
22
including goods subject to excise taxes, and use or lease
of properties, whether real or presonal, are subject to tax
at all levels of distribution.
3. Although tax is levied at all stages, the total value of the
goods is subject to tax only once.
4. VAT, as a general rule, follow the destination principle
(goods and services are taxed only in the country where
they are consumed). Therefore, no VAT shall be
imposed to form part of the cost of goods destined for
consumption outside the territorial border of the taxing
authority.
EXCEPTIONS:
a. The service is performed in the Philippines;
b. The service falls under any of the categories
provided in Section 102(b) of the Tax Code;
and
c. It is paid for in acceptable foreign currency that
is accounted for in accordance with the
regulations of the Bangko Sentral ng Pilipinas.
American Express v. Commissioner (2005)
Facts: American Express International Philippine Branch
(respondent) is a branch of American Express, a corporation
organized in the US. It is engaged in collection of
receivables from Hong Kong and payment to establishments
in the Philippines. Respondent filed a request for refund of
its excess input taxes for 1997, arguing that it qualified for
zero-rating under the pertinent VAT Ruling, which states:
as a VAT registered entity whose service is paid for in
acceptable foreign currency which is remitted inwardly to
the Philippines and accounted for in accordance with the
rules and regulations of the Central Bank of the Philippines.
Held: The Court held that respondent was entitled to the
refund. It first cited sec. 102(b) of the Tax Code, which lists
down the services performed in the Philippines by VAT-
registered persons that shall be subject to 0% VAT rate. It
states that services (other than processing, manufacturing or
repacking goods for other persons doing business outside the
Philippines) when paid for in acceptable foreign currency
and accounted for in accordance with the rules and
regulations of the BSP, are zero-rated. Respondent has all
the requisites to fall under this category: it is a VAT-
registered person that facilitates in the Philippines the
collection and payment of receivables belonging to its Hong
Kong based foreign client, and is paid in foreign currency.
The general rule is that VAT system uses the destination
principle as a basis for jurisdictional reach of the tax (i.e.
goods and services are taxed only in the country where they
are consumed). Consumption applied to services (such as in
this case) means the successful completion of a contractual
duty. The services in this case are successfully completed
here in the country, upon its sending to its foreign clients
their drafts and bills. Thus, under the destination principle,
respondents service is subject to tax. HOWEVER, the law
clearly provides for an exception to the destination principle,
and that is for services that are performed in the
Philippines, paid for in acceptable foreign currency, and
accounted for in accordance with the rules and regulations of
the BSP.
IMPOSITION OF THE TAX
SEC. 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. cralaw
"incidental thereto" - case to case basis
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. Cralaw
Transactions subject to VAT:
1. Sale, Barter or Exchage of Goods or Properties
2. Sale of Services, including Lease or use of Properties
3. Importation of Goods.
DIAZ v SECRETARY OF FINANCE (2011)
Facts: Diaz contested the validity of the impending
imposition of VAT on the collections of tollway operators.
Held: The VAT is valid. VAT is levied on the gross receipts
derived from the sale or exchange of services as well as from
the use or lease of properties. Sec. 108 of the NIRC states
that sale or exchange of services means the performance
of all kinds of services in the Philippines for others for a fee,
remuneration, or consideration. Thus, the government is not
23
unlawfully expanding VAT coverage by including tollway
operators and tollway operations in sale of services.
Persons Liable:
Any persons who sells, barters, exchanges, or leases goods
or properties, or who renders services, in the course of trade
or buesiness, and any person who imports goods, whether or
not in the course of business, is liable to pay either VAT or
3% percentage tax.
VAT:
Any persons who, in the course of trade or
busienss, sells, barters or exchanges goods or
properties, or sale of services, is required to
register for VAT if his gross sales or receipts
for the past 12 months or the next 12 months
exceed P1,919,500; Or,
Any person who elects to register for VAT.
Any person whose gross sales or receipts are
less than P,1919,500; Or,
Is exempt under Section 109;
AND is not VAT registered.
As a General Rule, VAT and Percentage Tax cannot be
charged together. Its either the transaction is under VAT or
Other Percentage Tax.
EXC: When one erroneously declares himself to VAT
registered.
isolated transaction rule
CIR v SM PRIME HOLDINGS (2010)
Facts: SM Prime and First Asia operated cinema houses. At
issue was whether they were liable to pay VAT, on top of
the amusement tax imposed by the LGC. SM Prime argued
the list in the NIRC imposing VAT (which did not include
cinema houses) is exhaustive. CIR argued the list is not
exhaustive.
Held: The Court held that the list was not exhaustive. The
activity of showing motion pictures, films or movies by
cinema/theater operators or proprietors may fall under the
phrase similar services. The intent of the legislature must
therefore be ascertained. Court found that the intent was not
to impose VAT on persons already covered by the
amusement tax. The VAT law was intended to replace the
percentage tax on certain services. To hold otherwise would
impose an unreasonable burden on cinema/theater houses
operators or proprietors, who would be paying an additional
10% VAT on top of the 30% amusement tax.
CIR also argued that the LGC, which eliminated the
prohibition to impose tax on places of amusement, makes
the VAT imposition on SM Prime valid. Court ruled that this
did not grant nor restore to the national government the
power to impose amusement tax.
Mindanao v. CIR
CIR v PHILIPPINE AMERICAN ACCIDENT
INSURANCE COMPANY (2005)
Facts: The insurance companies were being charged lending
investors tax. Insurance companies argued that they were not
lending investors.
Held: The Court held that the pertinent law does not
encompass insurance companies under the definition of
lending investor (persons who make a practice of lending
money for themselves or others at interest). Though
insurance companies grant mortgages and other kinds of
loans, these are not independent of the insurance business.
These transactions are means of investment allowed to
insurance companies. Insurance companies are required by
law to maintain substantial legal reserves to meet their
obligations to policyholders. Investment income is
therefore, necessary and essential to the business of
insurance. When a company is taxed on its main business, it
is no longer taxable further for engaging in an activity or
work which is merely a part of, incidental to and is
necessary to its main business. Respondents already paid
percentage and fixed taxes. To require them to pay said tax
again for an activity which is necessarily a part of the same
business, the law must expressly require such.
The Court also cited sec. 182 (A)(3) (gg): Banks, insurance
companies, finance and investment companies doing
business in the Philippines and franchise grantees, five
hundred pesos. The separate provisions on lending
investors and insurance companies demonstrate an intention
to treat these businesses differently. Grouping insurance
companies together with banks and finance companies show
that insurance companies had more in common with these
enterprises than with lending investors. Even current tax law
does not treat insurance companies as lending investors.
Under Sec. 108(A) of the NIRC, lending investors and non-
life insurance companies, except for their crop insurance are
subject to VAT. Life insurance companies are exempt from
VAT but are subject to percentage tax under Sec. 123 of the
NIRC.
VAT Registration
Sec. 236. Registration Requirements
(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 (P1,500,000)**; 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 (P1,500,000)**.
** The threshold amount has been increased from P1,500,000 to
P1,919,500 per RR 16-2011.
(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
24
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).
In the course of trade or business
Rule of Regularity: 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.
EXC:
1. 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. (Sec. 105, NIRC; RR 16-2005)
2. Importation og Goods, may be for business or non-
business use.
CIR v CA (2000)
Facts: BIR issued an assessment to COMASERCO for
deficiency VAT. COMASERCO contended that it rendered
services only to Philamlife (which organized it) relating to
consultative and technical services on a no-profit,
reimbursement-of-cost basis, and not engaged in the sale of
services. It was not profit motivated.
Held: Sec. 99 of the NIRC states that any person who, in
the course of trade or business, sells, barters or exchanges
goods, renders services, or engages in similar transactions
and any person who imports goods shall be subject to the
value-added tax (VAT) imposed in Sections 100 to 102 of
this Code." In the course of trade or business requires the
regular conduct or pursuit of a commercial or economic
activity, regardless of WON it is profit-oriented. BIR Ruling
no. 010-98 also emphasized that domestic corporations
which prove technical, research, management and technical
assistance to its affiliated companies and received payments
on a reimbursement-of-cost basis, without any intention of
realizing profit, was subject to VAT. In fact, even if it was
organized without any intention of realizing profit, any
income generated by the entity in the conduct of its activity
was subject to income tax.
Mindanao II Geothermal v. CIR (2013)
Facts: Mindanao II entered into a BOT with PNOC-EDC
for the construction and maintenance of a geothermal power
plant. It filed for refund of input VAT but the BIR ruled that
the VAT for the sale of their Nissan Patrol was not included,
therefore decreased the refund granted.
Held: The sale of a fully depreciated Nissan Patrol is an
incidental transaction, not an isolated one, and is therefore
subject to 10% VAT. Mindanao IIs sale of the Nissan Patrol
is said to be an isolated transaction. However, it does not
follow that an isolated transaction cannot be an incidental
transaction for purposes of VAT liability. Indeed, a reading
of Section 105 of the 1997 Tax Code would show that a
transaction "in the course of trade or business" includes
"transactions incidental thereto." Mindanao IIs business is
to convert the steam supplied to it by PNOC-EDC into
electricity and to deliver the electricity to NPC. In the course
of its business, Mindanao II bought and eventually sold a
Nissan Patrol. Prior to the sale, the Nissan Patrol was part of
Mindanao IIs property, plant, and equipment. Therefore, the
sale of the Nissan Patrol is an incidental transaction made in
the course of Mindanao IIs business which should be liable
for VAT.
CIR v MAGSAYSAY LINES (2006)
Facts: National Development Company sold private
enterprises through public bidding its shares in National
Marine Corporation and 5 vessels, and Magsaysay Lines
won the bidding. The BIR held that the sale of the vessel
was subject to 10% VAT, because the transaction was
incidental to NDCs normal VAT registered activity of
leasing out personal property, including sale of its own
assets.
Held: The sale of the vessels should not have been subject
to VAT, as the transaction was not in the ordinary course of
trade or business of NDC. VAT is levied only on the sale,
barter, or exchange of goods or services by persons who
engage in such activities in the course of trade or business.
Transactions outside the course of trade or business may
invariably contribute to the production chain, but they do so
only as a matter of accident or incident. Carrying on
business does not mean the performance of a single
disconnected act, but means continuing or conducting
business by performing progressively all the acts normally
incident thereof.
PHILAMLIFE v CA (2000)
Facts: Philamlife entered into a management services
contract with AIRCO, a non-resident foreign corporation,
which later merged with AIGI. The CIR granted a tax credit
to Philamlife for erroneous payment of withholding tax at
source on remittances to AIGI for services rendered abroad
in 1979. Philamlife then filed a claim for a similar refund for
1980, but the CIR denied the claim, and also cancelled the
tax credit and ordered Philamlife to pay deficiency
withholding tax at source for 1979. Philamlife contended
that the compensation it received for the advisory services it
rendered outside the Philippines to AIGI (a non-resident
foreign corporation not engaged in trade or business in the
Philippines) is not considered rentals or royalties from
properties located in the Philippines, and that AIGI is not
covered by the Tax Code provision because it has no
properties located in the Philippines from which rentals and
royalties can be derived.
25
Held: The SC ruled against Philamlife. The services were
taxable as they fall under the expanded meaning of royalties
under the amended Tax Code (sec. 37(a)(4) Rentals and
Royalties). The services in the contract call for the supply by
AIGI of technical and commercial information, knowledge,
advice, assistance or services in connection with technical
management or administration of Philamlifes business.
Therefore, the income derived from the services performed
by AIGI for PHILAMLIFE shall be considered as income
from services within the Philippines. The test of taxability is
the source, and the source of an income is that activity
which produced the income. It is not the presence of any
property from which one derives rentals and royalties that is
controlling, but rather as expressed under the expanded
meaning of "royalties.
SALES OF GOODS OR PROPERTIES (Sec. 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 1/2%).
(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, 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.
TAX RATE TAX BASE TAX
PAYABLE
12% Gross Selling VAT Payable
(Starting Feb. 1, Price/Gross Value (paid by
2006 RMC 7-06) in Money seller/transferor)
Goods or properties all tangible and intangible objects
which are capable of pecuniary estimation, including:
1. Real properties held primarily for sale to customers or
held for
Actual Collection x Zonal Value x 12%
lease in the
Agreed Consideration
ordinary
course of
trade or 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 in the Philippines of
any industrial, commercial or scientific equipment;
4. The right or the privilege to use motion picture films,
films tapes and discs;
5. Radio, television, satellite transmission and cable
television time.
Requisites of taxability of sale of goods or properties
The sale of goods (tangible or intangible) must be:
1. an actual or deemed sale of goods or properties for a
valuable consideration;
2. undertaken in the course of trade or business;
sale
3. for the use or consumption in the Philippines; and
4. not exempt from value added tax under the Tax Code,
special law, or international agreement
Gross Selling Price (GSP) The total amount of money
or its equivalent which the purchaser pays or is obligated to
pay to the seller in consideration of the sale, barter or
exchange of the goods or properties, excluding the VAT.
The excise tax, if any, on such goods or properties shall form
part of the gross selling price.
For real property, GSP means the higher of the ff values:
(RR 16-2005)
1. The consideration stated in the sales document, or
2. The fair market value (FMV), whichever is the
HIGHER of:
a. FMV as determined by the Commissioner
(zonal value), or
b. FMV as shown in schedule of values of the
Provincial & City assessors (real property tax
declaration)
In the absence of zonal value, gross selling price refers
to the FMV shown in the latest real property tax
declaration or the consideration, whichever is HIGHER.
If GSP is based on the zonal value or market value of
the property, the zonal or market value shall be deemed
EXCLUSIVE of VAT.
If the VAT is not billed separately, the selling price
stated in the sales document shall be deemed to be
EXCLUSIVE of VAT.
If the sale of real property is on installment plan where
the zonal value/FMV is higher than the consideration
exclusive of VAT: (RR 4-2007)
Sale of Real Property
Person Liable: gross sales/receipts > P1,919,500/year
1. Any person (natural or juridical) engaged in sale or
exchange of real properties
2. Real estate lessors or sub-lessors
3. Non-resident lessors (property located in the
Philippines)
4. Non-stock, Non-profit organizations
5. Government agencies, instrumentalities, GOCCs
Taxable:
1. On installment plan
26
2. Pre-selling by real estate dealers
3. Sale of residential lot >P1,919,500 ; or house and
lot/other residential dwelling >P3,199,200 (
4. Lease of residential units (rental per unit >
12,800/month OR total rental from ALL
units>P1,919,500/year)
Not taxable: (Sec. 109 (P)(Q)(V))
1. Not primarily held for sale or lease
2. Low cost or socialized housing
3. Residential lot < P1,919,500
4. House and lot/other residential dwelling < P3,199,200
5. Lease (rental per unit < 12,800/month and total rental
from all units < P1,919,500/ year)
6. Transmission to a trustee (Except: transmission is
deemed sale transaction)
* 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 originally
intended 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. 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.
7. Transfer to corporation in exchange of shares of stocks
(see Sec. 40, NIRC for Tax-free exchange)
8. Advance payment by the lessee
9. Security deposits for lease agreements
Sale of Real Property on installment plan [RR 16-
2005]:
The real estate dealer shall be subject to VAT on the
installment payments, including interest and penalties,
actually and/or constructively received by the seller.
Installment Plan Deferred Payment
Initial payments in the year Initial payment in the year of
of sale do not exceed 25% of sale exceeds 25% of the
the gross selling price gross selling price
Taxable only on the payment Treated as cash sale and the
actually or constructively entire selling price is taxable
received on the month of sale
Initial payments payment/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 during the year when the sale or disposition
of the real property was made.
It includes down payment and all payments actually or
constructively received during the year of sale.
It does not include the amount of mortgage on the real
property sold (except as to the excess when such
mortgage exceeds the cost or other basis of the property
to the seller) and notes or other evidence of
indebtedness issued by the purchaser to the seller at the
time of the sale.

ZERO-RATED SALES OF GOODS OR
PROPERTIES, AND EFFECTIVELY ZERO-
RATED SALES OF GOODS OR PROPERTIES
(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.
(b) 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).
(c) 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.
Zero-Rated Sales on Goods or Property
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.
1. Export Sales
2. Foreign Currency Denominated Sales
3. Sales of Goods or Property to perons or entites who are
tax-exempt/Effectively Zero-Rated Sales
CIR v BENGUET CORP. (2005)
Facts: Benguet sold gold to the Central Bank. The
transactions occurred when Sec. 99 of the NIRC as amended
by EO 273 was in effect. Benguet applied for and was
granted zero-rated status on its sale of gold to Central Bank,
and the CIR even issued a VAT Ruling declaring so.
However, when Benguet filed applications for tax
refunds/credits, the CIR instead issued a deficiency
assessment. BIR even issued subsequent VAT rulings
revoking the first VAT ruling, and said that doing so would
not prejudice mining companies.
Held: The VAT ruling revoking the zero-rated status cannot
be given retroactive effect. The retroactive application of the
VAT Ruling would unilaterally forfeit the option of
respondent to pass on its VAT costs to the Central Bank.
The change resulted in the loss of its exemption from
27
payment of output VAT and its opportunity to recover input
VAT.
Prejudice obtained: Even if Benguet may treat the VAT as
an expense, such benefit from treating it as such is
substantially less than claiming the entire portion as input
tax refund. (Treating it as expense will only equal 30% of
what it could get by claiming the entire input VAT)
1. Export Sales
1. The sale and actual shipment of goods from the
Philippines to a foreign country AND paid for in
acceptable foreign currency or its equivalent in goods or
services, AND accounted for in accordance with the
rules and regulations of the BSP
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 BSP
3. Sale of raw materials or packaging materials to export-
oriented enterprise whose export sales exceed seventy
percent (70%) of total annual production.
a. Any enterprise whose export sales exceed 70%
of the total annual production of the preceding
taxable year shall be considered an export-
oriented enterprise upon accreditation under
the rules & regulations of Export Development
Act, RA 7844 (RR 7-95)
4. Sale of gold to the Bangko Sentral ng Pilipinas (BSP)
5. The sale of goods, supplies, equipment and fuel to
persons engaged in international shipping or
intenrational air transport operations (RA 9337)
a. Limited to goods, supplies, equipment and fuel
pertaining to or attributable to the transport of
goods and passengers from a port in the Phil.
directly to a foreign port without docking or
stopping at any other port in the Phil.
b. If any portion of such fuel, goods, or supplies
is used for purposes other than that mentioned,
such portion of fuel, goods, and supplies shall
be subject to VAT. (RR 16-2005)
6. Those considered export sales under the Omnibus
Investment Code of 1987, and other special laws (ex.
Bases Conversion & Development Act of 1992)
**Under Omnibus Investment Code:
Considered Export Sales
1. Phil. port FOB value of export products exported
directly by a registered export producer; OR
2. 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 (only
when actually exported by the latter).
Constructive Exports (without actual exportation):
1. Sales to bonded manufacturing warehouses of export-
oriented manufacturers;
2. Sales to export processing zones;
3. Sales to registered export traders operating bonded
trading warehouses supplying raw materials in the
manufacture of export products;
4. 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.
Export sales of registered export traders shall include
commission income, and that exportation of goods on
consignment shall not be deemed export sales until the
export products consigned are in fact sold by the consignee,
and
Sales by a VAT-registered supplier to a foreign currency and accounted for in accordance with the
manufacturer/producer whose products are 100% exported
are considered export sales. A certification to this effect
must be issued by the Board of Investment which shall be
good for 1 year unless subsequently re-issued. (RR 16-
2005)
CIR v BURMEISTER (2007)
Facts: A foreign consortium was entered into by BSWC-
Denmark and Mitsui on the one hand and NAPOCOR on the
other for the operation and maintenance of NAPOCORs
power barges. BSWC-Denmark established Burmeister, a
domestic corporation, for the actual operation and
maintenance. The consortium pays Burmeister in foreign
currency inwardly remitted to the Philippines. Burmeister
claims that it is subject to 0% VAT, asserting that he meets
all the requirements under Sec. 102(b) (payment of its
service fees was in acceptable foreign currency; there was
inward remittance of the foreign currency into the
Philippines; and accounting of such remittance was in
accordance with BSP rules).
Held: These three are not the only requisites under the Tax
Code to qualify for zero-rating under Sec. 102(b)(2). The
provision not only requires that the services be other than
processing, manufacturing, or repacking of goods and that
payment for such service be in acceptable foreign currency
accounted for in accordance with BSP rules, but also that the
recipient of such service is doing business outside the
Philippines. This requirement is not expressly stated in
102(b)(2) but is stated in 102(b)(1), where the listed services
must be for other persons doing business outside the
Philippines. This phrase not only refers to 102(b)(1) but
also to the term services found in 102(b)(2).
Services under 102(b)(1) and (2) are in the nature of export
sales since the payer-recipient of services is doing business
outside the Philippines. In the present case, although the
consortiums principal members are foreign corporations,
the consortium itself is doing business in the Philippines.
However, the Court allowed Burmeister a refund of its
excess output tax because it relied on a (mistaken) BIR
ruling saying that he was subject to 0% VAT.
CIR v AMERICAN EXPRESS INTERNATIONAL
(2005)
Facts: SUPRA
28
Held: The collection of receivables is different from the
consumption of the outcome of such service. While
the collection is done in the Philippines, the consumption is
not.Consumption applied to services means the performance
or successful completion of a contractual duty, usually
resulting in the performers release from any past or future
liability. The services of respondent are performed or
successfully completed upon its sending to its foreign client
the drafts and bills it has gathered from service
establishments here.
However, the law clearly provides for an exception the
destination principle: for 0% VAT rate for services that
are performed in the Philippines, paid for in acceptable
rules and regulations of the BSP
Thus, for the supply of service to be zero-rated as an
exception to the destination principle, the law requires that:
The service be performed in the Philippines
The service fall under any of the categories in
Section 102(b) of the Tax Code
It be paid in acceptable foreign currency accounted
for in accordance with BSP rules and regulations.
2. Foreign Currency Denominated Sale (FCDS)
1. Sale to a nonresident of goods, except those mentioned
in Sections 149 and 150 (automobiles and non-essential
goods like jewelry, perfume, and yachts), 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.
2. 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. (RR 16-2005)
3. Effectively Zero-Rated Sales
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.
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.
(RR 16-2005)
Examples:
1. Sales to enterprises duly registered & accredited with
the
a. Subic Bay Metropolitan Authority,
b. Philippine Economic Zone Authority (PEZA),
2. International agreements to which the Phil. is signatory,
such as
a. Asian Development Bank (ADB),
b. International Rice Research Institute (IRRI)
ECOZONES
The ECOZONES shall be managed and operated by the
PEZA as separate customs territory. (Sec. 8, RA 7916
Special Economic Zone Act of 1995). Consequently,
sales made by a person in the customs territory to a
PEZA-registered entity are considered exports to a
foreign country and thus, zero-rated. Conversely, sales
by a PEZA-registered entity to a person in the customs
territory are deemed imports from a foreign country.
Tax treatment of sales to & by PEZA-registered enterprise
within & without the ecozone [rmc 74-99]:
1. Any sale of goods, property or services made by a VAT
registered supplier from the Customs Territory** to any
registered enterprise operating in the ecozone,
REGARDLESS of the class or type of the latters PEZA
registration, is actually qualified and thus LEGALLY
ENTITLED TO THE 0% VAT.
**Customs Territory shall mean the national territory
of the Philippines outside of the proclaimed boundaries
of the ECOZONES except those areas specifically
declared by other laws and/or presidential proclamations
to have the status of special economic zones and/or free
ports. [Sec. 2(g), Rule 1, Part I, RA 7916-IRR]
2. By a VAT-Exempt Supplier from the Customs Territory
to a PEZA registered enterprise
Sale of goods, property and services by VAT-Exempt
supplier from the Customs Territory to a PEZA
registered enterprise shall be treated EXEMPT FROM
VAT, regardless of whether or not the PEZA registered
buyer is subject to taxes under the NIRC or enjoying the
5% special tax regime.
3. By a PEZA Registered Enterprise
a. Sale of Goods by a PEZA registered enterprise
to a buyer from the Customs Territory (ie
domestic sales) -- this case shall be treated as a
technical IMPORTATION made by the buyer.
Such buyer shall be treated as an IMPORTER
thereof and shall be imposed with the
corresponding VAT.
b. Sale of Services by a PEZA registered
enterprise to a buyer from the Customs
Territory this is NOT embraced by the 5%
special tax regime, hence, such seller shall be
SUBJECT TO 12% VAT.
c. Sale of Goods by a PEZA registered enterprise
to Another PEZA registered enterprise (ie
Intra-ECOZONE Sales of Goods) this shall
be EXEMPT from VAT.
4. Sale of Services by ECOZONE enterprise, to Another
ECOZONE enterprise (Intra-ECOZONE enterprise Sale
of Service)
a. if PEZA registered seller is subject to 5%
special tax regime - EXEMPT from VAT
b. if PEZA registered seller is subject to taxes
under NIRC (ie not subject to 5% special tax
regime) subject to 0% VAT pursuant to
cross border doctrine
CIR v SEAGATE TECHNOLOGY (2005)
29
Facts: Seagate is a foreign corporation registered with the
PEZA to engage in the manufacture of recording
components primarily used in computers for export. It filed a
claim for refund of VAT input taxes.
Held: Seagate as a PEZA-registered enterprise within a
special economic zone is entitled to financial incentives
under PD 66 and EO 226, and is thus entitled to a tax credit
or refund.
A zero-rated transaction generally refers to the export sale
of goods and supply of services. The tax rate is set at zero. In
contrast, an effectively zero-rated transaction is the sale of
goods or supply of services to persons or entities whose
exemption under special laws or international agreements
effectively subjects such transactions to a zero rate.
In terms of VAT computation, zero rating and exemption are
the same, but the extent of relief is not.
Applying the destination principle to the exportation of
goods, automatic zero rating is intended to be enjoyed by the
seller, making the latter internationally competitive by
allowing the refund or credit of input taxes that are
attributable to export sales. On the other hand, effective zero
rating is intended to benefit the purchaser, who will
ultimately bear the burden of the tax shift. In both instances
of zero rating, there is total relief for the purchaser from the
burden of the tax, but in exemption there is only partial
relief, because the purchaser is not allowed a tax refund or
credit for input taxes paid.
TRANSACTIONS DEEMED SALE
(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 aoods existing as of such retirement or cessation.
TAX RATE TAX BASE TAX
PAYABLE
Market value as of the VAT Payable
12% time of the occurrence of
the transaction as the
Commissioner shall
prescribe
Retirement/ Acquisition cost or the
cessation of current market price of
business the goods or properties,
whichever is lower.
GSP is Actual market value
unreasonably
lower than the
FMV
 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.
o 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. (RR 16-2005)
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.
Ex.. when a VAT-registered person withdraws
goods from his business for his personal use. (RR
16-2005)
2. Distribution or transfer to shareholders, investors or
creditors
a. Shareholders or investors as share in the profits of
the VAT-registered persons;
i. Property dividends which constitute stocks in
trade or properties primarily held for sale or lease
declared out of retained earnings on or after Jan.
1, 1996 and distributed by the company to its
shareholders shall be subject to VAT based on
the zonal value or FMV at the time of the
distribution, whichever is applicable. (RR 16-
2005)
b. Creditors in payment of debt;
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. (RR 16-
2005)
4. Retirement from or cessation of business, with respect
to inventories of taxable goods existing as of such
retirement or cessation.
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.
Examples are change of ownership of the business
(e.g. when a sole proprietorship incorporates, or the
proprietor sells his entire business) and dissolution
of a partnership and creation of a new partnership
which takes over the business. (RR 16-2005)
CHANGE OR CESSATION OF STATUS AS VAT-
REGISTERED PERSON
(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.
TAX RATE TAX BASE TAX
PAYABLE
12% Acquisition cost or VAT Payable
Current Market Price,
whichever is LOWER
30
VAT shall apply to goods disposed of or existing as of a
certain date if under the 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.
Subject to VAT - applicable to goods/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
Example: 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 request for cancellation of a registration
due to reversion to exempt status
3. Approval of request for cancellation of registration due
to desire to revert to exempt status after lapse of 3
consecutive years from the time of registration by a
person who voluntarily registered despite being exempt
under Sec. 109 (2)
4. Approval of request for cancellation of registration of
one who commenced business with the expectation of
gross sales/receipts exceeding P1,919,500 (per RR 16-
2011) but who failed to exceed this amount during the
first 12 months of operation
Not Subject to Vat 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 (individual or corporate) or group of
stockholders.
Note: Exchange of goods or properties including
the real estate properties used in business or held
for sale or for lease by the transferor, for shares of
stocks, whether resulting in corporate control or
not, is SUBJECT TO VAT (RR 10-11)
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 the surviving
or new corporation.
ALLOWABLE DEDUCTIONS FROM GROSS
SELLING PRICE
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.
The following are deductible from the gross selling price:
1. Sales returns and allownaces the selling price of the
goods or properties returned and not sold necessarily
reduces the gross sales on which the rate is applied.
 a. Sales returns and allownaces for which a proper value-added tax to twelve percent (12%), after any of the following
conditions has been satisfied:
credit/refund was made during the month or quarter (i) Value-added tax collection as a percentage of Gross Domestic
to the buyer for sales previously recorded as taable Product (GDP) of the previous year exceeds two and four-fifth percent (2
sales are allowed as a deduction in the period when 4/5%); or
they are made. Excess may be carried over to the (ii) National government deficit as a percentage of GDP of the
previous year exceeds one and one-half percent (1 1/2%).
succeeding period.
b. The value of goods or properties sold and (B) Transfer of Goods by Tax-exempt Persons. - In the case of tax free
subsequently returned or for which allowances importation of goods into the Philippines by persons, entities or agencies
were granted by a VAT-registered person may be exempt from tax where such goods are subsequently sold, transferred or
deducted from the gross sales or receipts for the exchanged in the Philippines to non-exempt persons or entities, the
purchasers, transferees or recipients shall be considered the importers
quarter in which a refund is made or a credit thereof, who shall be liable for any internal revenue tax on such
memorandum is issued. importation. The tax due on such importation shall constitute a lien on the
2. Sales Discounts bona fide or regular discounts given goods superior to all charges or liens on the goods, irrespective of the
to purchasers, which are ascertainable and definitely possessor thereof.
agreed upon between the vendor and the vendee at the TAX RATE TAX BASE TAX
time of sale are deductible from the GSP. PAYABLE
a. If given after the sale or are in the nature of a rebate 12% Total value used by VAT Payable
or partial remission of indebtedness, they will not Customs in (paid by the
be allowed as a deduction from the GSP. determining tariff and importer prior to
b. Furthermore the discuont must be expressly custom duties + the release of such
indicated in the sales invoice and the amount custom duties, excise goods from
forming part of the gross sales duly recorded in the taxes and other customs custody)
books fo accounts. charges such as
c. Credits for allowances to cover roll back in prices postage, commission
and other adjustments are not deductible. and similar charges

DETERMINATION OF APPROPRIATE TAX Where customs duties

BASE are determied on the
(E) Authority of the Commissioner to Determine the Appropriate Tax basis of quantity or
Base. - The Commissioner shall, by rules and regulations prescribed by the volume, the VAT shall
Secretary of Finance, determine the appropriate tax base incases where a be based on landed
transaction is deemed a sale, barter or exchange of goods or properties
under Subsection (B) hereof, or where the gross selling price is
cost plus excise taxes,
unreasonably lower than the actual market value." if any.
The Commissioner, shall, by rules and regulations,
prescribed by the Secetary of Finance, determine approprite Importer - any person who brings goods into the Philippines,
tax base in two cases: whether or not made in the course of his trade or business,
1. Where a transaction is deemd a sale, barter or echange including non-exempt persons or entities who acquire tax-
of goods or properties; or free imported goods from exempt persons, entities or
2. Where the gross selling price is unreasonably lower than agencies (RR 16-2005)
the actual market value.
The gross selling price is unreasonably lower than Customs duty amount of customs duty legally due and
the actual market value if it is lower by more than paid by the importer. Therefore, if importer is entitled to
30% of the actual market value of the same goods 90% customs duty exemption, the 10% duty paid should be
of the same quantity and quality sold in the the base in computation of the VAT.
immediate locality on or nearest the date of sale.
(RR 16-2005) Other similar chargers specific charges which an importer
has to pay.
If one of the parties to the transaction is the
government, the output VAT on the transaction Other taxes (special import tax)
shall be based on the actual selling price. Bank charges
Arrastre charges
Wharfage dues
IMPORTATION OF GOODS Brokerage fees
SEC. 107. Value-Added Tax on Importation of Goods. - All other charges or expeses
(A) In General. - There shall be levied, assessed and collected on every Landed Cost - invoice amount including costs of loading,
importation of goods a value-added tax equivalent to ten percent (10%)
based on the total value used by the Bureau of Customs in determining tariff shipping and unloading, customs duties, freight, insurance,
and customs duties, plus customs duties, excise taxes, if any, and other other charges, excise tax (if any)
charges, such tax to be paid by the importer prior to the release of such Expenses incurred after the release of the goods
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-
such as those incurred in delivering goods do not
added tax shall be based on the landed cost plus excise taxes, if any: form part of the landed cost.
Provided, further, That the President, upon the recommendation of the
Secretary of Finance, shall, effective January 1, 2006, raise the rate of Transfer of goods by tax exempt persons:
31
1. If importer is tax-exempt, the subsequent purchasers,
transferees or recipients of such imported goods shall be
considered as importers who shall be liable for the tax
on importation.
2. 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. (as
amended by RA 9337)
SALES OF SERVICES AND USE OR LEASE OF
PROPERTY (Sec. 108)
SEC. 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 1/2%).
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 or the use of, or the right to use of any industrial,
commercial or, scientific equipment;
(3) The supply of scientific, technical, industrial or commercial
knowledge or information;
(4) The supply of any assistance that is ancillary and subsidiary
to and is furnished as a means of enabling the application or enjoyment of
any such property, or right 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 technicai 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.
32
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.
TAX RATE TAX BASE TAX
PAYABLE
12% Gross receipts derived VAT Payable
from the sale or
exchange of services,
including the use or
lease of property
Gross Receipts - the total amount of money or its equivalent
representing the contract price, compensation, service fee,
rental or royalty, including the amount charged for materials
supplied with the services and deposits and advanced
payments actually or constructively received during the
taxable quarter for the services performed or to be performed
for another person, excluding VAT.
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.
Examples:
Deposit in banks which are made available to the
seller of services without restrictions
Issuance by the debtor of a notice to offset any debt
or obligation and acceptance thereof by the seller as
payment for services rendered
Transfer of the amounts retained by the contractee
to the account of the contractor. (RR 16-2005)
Requisites for taxability
1. The service must be performed or is to be performed in
the course of trade or business in the Philippines;
2. For a valuable consideration actually or constructively
received; and
3. The service is not exempt under the Tax Code, special
law or international agreement
4. Person selling or rendering service is liable to VAT
Sale/Exchange of Services - the performance of all kind
of services in the Philippines for others for a fee,
remuneration or consideration, whether in kind or in cash,
including those performed or rendered by the following:
(unless otherwise indicated, from RR 16-2005)
1. Construction and service contractors
2. Stock, real estate, commercial, customs and
immigration brokers
3. Lessors of property, whether personal or real
In a lease contract, the advance payment by the lessee
may be:
a loan to the lessor from the lessee - NOT subject to
VAT
 an option money for the property - NOT subject to Common Transporting Kind of carrier Tax Liability
VAT carrier
a security deposit to insure the faithful performance Philippines -
3% percentage
of certain obligations of the lessee to the lessor - tax (Sec. 118,
NOT subject to VAT BUT if the security deposit is NIRC)
applied to rental, it shall be subject to VAT at the International
time of its application trip - zero-
Pre-paid rental - subject to VAT when received, rated VAT
irrespective of the accounting method employed by (Sec. 108
the lessor (B)(6), NIRC)
4. Persons engaged in warehousing service.
5. Lessors or distributors of cinematographic films 13. Sales of electricity by generation, transmission, and/or
6. Persons engaged in milling, processing, manufacturing distribution companies
or repacking goods for others are subject to VAT, EXCEPT sale of power or fuel generated through
EXCEPT palay into rice, corn into corn grits, and renewable sources of energy, such as, but not
sugarcane into raw sugar limited to, biomass, solar, wind hydropower,
7. Proprietors, operators, or keepers of hotels, motels, rest geothermal, ocean energy, and other emerging
houses, pension houses, inns, resorts, theaters, and energy sources using technologies such as fuel cells
movie houses and hydrogen fuels, which shall be subject to 0%
8. Proprietors or operators of restaurants, refreshment rate of VAT (zero-rated).
parlors, cafes and other eating places, including clubs The universal charge passed on and collected by
and caterers distribution companies and electric cooperatives
9. Dealers in securities shall be excluded from the computation of gross
Gross receipts means gross selling price less cost receipts.
of the securities sold. RR 7-95: 14. Franchise grantees of electric utilities, telephone and
Pre-need companies are considered dealers in telegraph, radio and/or television broadcasting and all
securities. other franchise grantees (including PAGCOR and its
10. Lending investors licensees/franchisees)
All persons OTHER than banks, non-bank financial EXCEPT franchise grantees of radio and/or
intermediaries, finance companies and other television broadcasting whose annual gross receipts
financial intermediaries NOT performing quasi- of the preceding year do not exceed Ten Million
banking functions who make a practice of lending Pesos (P10,000,000.00) (which shall be subject to
money for themselves or others at interest 3% franchise tax under Sec. 119, subject to optional
11. Transportation contractors on their transport of goods or registration), and franchise grantees of gas and
cargoes, including persons who transport goods or water utilities (under Sec. 109, subject to 2%
cargoes for hire and other domestic common carriers by franchise tax)
land relative to their transport of goods or cargoes With respect to franchise grantees of telephone and
12. Common carriers by air and sea relative to their telegraph services, amounts received for overseas
transport of passengers, goods or cargoes from one dispatch, message, or conversation originating from
place in the Philippines to another place in the the Philippines are subject to the percentage tax
Philippines under Sec. 120 and hence exempt from VAT
15. Non-life insurance companies (except their crop
On transportation (#11 & 12): All receipts from service, hire, insurances), including surety, fidelity, indemnity and
or operating lease of transportation equipment not subject to bonding companies; and
the percentage tax on domestic common carriers and keepers Insurance and reinsurance commissions, as opposed
of garages shall be subject to VAT. to premiums, whether life or non-life, are subject to
VAT.
Common Transporting Kind of carrier Tax Liability Non-life insurance premiums are subject to VAT.
carrier Life insurance premiums are NOT subject to VAT,
By land Persons Domestic 3% percentage for they are subject to percentage tax.
tax (Sec. 117,
NIRC)
16. Similar services regardless of whether or not the
Goods/ cargo Domestic 12% VAT performance thereof calls for the exercise or use of the
(Sec. 108, physical or mental faculties
NIRC)
By sea/air Domestic Domestic trip - Lease of Properties -Subject to the tax imposed
Whether 12% VAT irrespective of the place where the contract of lease or
transporting International licensing agreement was executed if the property is leased or
persons or trip zero- used in the Philippines.
goods/ cargo rated VAT 1. The lease or the use of or the right or privilege to use
International Doing business any copyright, patent, design or model, plan secret
in the
33
 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 #2 or any such knowledge or
information as is mentioned in #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
8. The lease or the use of or the right to use radio,
television, satellite transmission and cable television
time
Additional services subject to VAT:
1. Services performed in the exercise or practice of
profession or calling by individuals subject to
professional tax under the LGC, and professional
services rendered by general professional partnerships
(GPPs);
2. Services performed by actors/actresses, talents, singers,
emcees, radio/television broadcasters, choreographers,
musical/radio/movie/television/stage directors, and
professional athletes;
3. Services rendered by customs, real estate, stock,
immigration and commercial brokers;
4. Services rendered by doctors, and lawyers.
The performance of the services should not be in pursuit of
an employer-employee relationship between the service-
provider and the service-recipient.
ZERO-RATED SALE OF SERVICES
(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;
34
(5) Services performed by subcontractors and/or contractors in
processing, converting, or 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.
A zero-rated sale 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.
The following services performed in the Philippines by
VAT-registered persons shall be subject to 0%:
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
BSP
2. Services other than those mentioned in the preceding
paragraph rendered to a person engaged in business
conducted outside the Philippines or 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 BSP
The services referring to processing,
manufacturing, repacking and services other than
those in (1) both require (i) payment in foreign
currency; (ii) inward remittance; (iii) accounted for
by the BSP; AND (iv) that the service recipient is
doing business outside the Philippines. If this is not
the case, taxpayers can circumvent just by
stipulating payment in foreign currency. (CIR v.
Burmeister)
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 (as amended by RA 9337)
4. Services rendered to persons engaged in international
shipping or international air transport operations,
including leases of property for use thereof [as amended
by RA 9337];
5. Provided, however, that the services referred to herein
shall not pertain to those made to common carriers by
air and sea relative to their transport of passengers,
goods or cargoes from one place in the Phil. to another
place in the Phil. (the same being subject to 12% VAT
under Sec. 108)
6. Services performed by subcontractors and/or contractors
in processing, converting, or manufacturing goods for
an enterprise whose export sales exceed seventy percent
(70%) of total annual production.
7. Transport of passengers and cargo by air or sea vessels
from the Philippines to a foreign country (as added by
RA 9337) and;
8. 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. (as added by RA 9337)
Zero-rating shall apply strictly to the sale of power
or fuel generated through renewable sources of
energy, and shall not extend to the sale of services
related to the maintenance or operation of plants
generating said power.
Effectively zero-rated sale of service a local sale of
services by a VAT-registered person to a person or entity
granted indirect tax exemption under special laws or
international agreement.
The taxpayer must seek prior approval or prior
confirmation from the appropriate offices of the
BIR so that a transaction is qualified for effective
zero-rating
RR 4-2007 removed the distinction between
automatic and effectively zero-rated transactions
found in prior Revenue Regulations (inc. RR 16-
2005) with respect to prior application from the
BIR.
EXEMPTIONS
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;
35
(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 (P15,000) and regardless of the aggregate capital and net surplus
ratably distributed among the members;
(O) Export sales by persons who are not VAT-registered;
(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 (P1,500,000) and below, house and lot, and other residential
dwellings valued at Two million five hundred thousand pesos (P2,500,000)
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 (P10,000)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) Transport of Passengers by International Carriers
(T) Sale, importation or lease of passenger or cargo vessels and aircraft,
including engine, equipment and spare parts thereof for domestic or
international transport operations;
(U) Importation of fuel, goods and supplies by persons engaged in
international shipping or air transport operations;
(V) Services of banks, non-bank financial intermediaries performing quasi-
banking functions, and other non-bank financial intermediaries; and
(W) Sale or lease of goods or properties or the performance of services
other than the transactions mentioned in the preceding paragraphs, the gross
annual sales and/or receipts do not exceed the amount of One million five
hundred thousand pesos (P1,500,000): 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."
*** RA 10378 July 23, 2012: (S) Transport of Passenger
by International Carriers
Vat Exempt Transactions
Sale of goods or properties and/or services and the
use or lease of properties that is exempt from 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. (RR 16-2005)
But, the VAT-registered person may elect that the
exemption not apply to its sale of goods or
properties or services; provided that the election
made shall be irrevocable for a period of three (3)
years from the quarter the election was made.
Exempt Transactions
1. Sale/import of agricultural, marine food products in
original state; of livestock and poultry; breeding stock
and genetic materials
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. Also
includes preservation using advanced technological
means of packaging, such as shrink wrapping in
plastics, vacuum packing, tetra-pack, and other
similar packaging methods (RR 16-2005)
Polished and/or husked rice, corn grits, raw cane
sugar and molasses, ordinary salt, AND COPRA
shall be considered in their original state
Livestock or poultry do not include fighting cocks,
race horses, zoo animals and other animals
generally considered as pets.
2. Sale/ import of fertilizers; seeds, seedlings and
fingerlings; fish, prawn, livestock and poultry feeds
(including ingredients)
3. Import of personal and household effects of Phil
resident returning from abroad and nonresident citizens
coming to resettle in the Philippines
4. Import of professional instruments and implements,
wearing apparel, domestic animals, and personal
household effects belonging to persons coming to settle
in the Philippines, for their own use and not for sale,
barter or exchange
Does not include vehicles, vessels, aircrafts,
machineries, and other goods for use in
manufacturing in commercial quantities)
5. Services subject to percentage tax
6. Services by agricultural contract growers and milling
for others of palay into rice, corn into grits and sugar
cane into raw sugar
7. 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. [RR 16-
2005]
8. Educational services rendered by private educational
institutions, duly accredited by DEPED, CHED,
TESDA, and those rendered by government educational
institutions;
Educational services does not include seminars,
in-service training, review classes and other similar
services rendered by persons who are not accredited
36
by the DepED, CHED, and/or TESDA. [RR 16-
2005]
9. Services rendered by individuals pursuant to an
employer-employee relationship
10. 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
11. Transactions which are exempt under international
agreements to which the Philippines is a signatory or
under special laws, except those under PD No. 529
[Petroleum Exploration Concessionaires under the
Petroleum Act of 1949]
12. Sales by agricultural cooperatives duly registered with
the Cooperative Development Authority to their
members as well as sale of their produce to non-
members. Exemption includes 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. [RR 16-2005]
13. Gross receipts from lending activities by credit or multi-
purpose cooperatives duly registered with the
Cooperative Development Authority
14. Sales by non-agricultural, non- electric and non-credit
cooperatives duly registered with the Cooperative
Development Authority are exempt BUT their
importation of machineries and equipment, including
spare parts thereof, to be used by them are SUBJECT to
VAT.
15. Export sales by persons who are not VAT-registered
16. Sale of real properties the ff. sales are exempt:
a. Sale of real properties NOT primarily held for sale
to customers or held for lease in the ordinary course
of trade or business.
o 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. [RR 4-2007]
b. Sale of real properties utilized for low-cost housing
as defined by RA No. 7279, otherwise known as the
"Urban Development and Housing Act of 1992"
and other related laws, such as RA No. 7835 and
RA No. 8763.
o Low-cost housing" refers to housing projects
intended for homeless low-income family
beneficiaries, undertaken by the Government
or private developers, which may either be a
subdivision or a condominium registered and
licensed by the Housing and Land Use
Regulatory Board/Housing (HLURB) under
 BP Blg. 220, PD No. 957 or any other similar
law, wherein the unit selling price is within the
selling price ceiling per unit of P750,000.00
under RA No. 7279, and other laws, such as
RA No. 7835 and RA No. 8763.
c. Sale of real properties utilized for socialized
housing as defined under RA No. 7279, and other
related laws, such as RA No. 7835 and RA No.
8763, wherein the price ceiling per unit is
P225,000.00 or as may from time to time be
determined by the HUDCC and the NEDA and
other related laws.
o "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 RA No.
7279 and RA No. 7835 and RA No. 8763.
o "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 (UHLP) or
any equivalent housing program of the
Government, the private sector or non-
government organizations.
d. Sale of residential lot valued at P1,919,500 and
below, or house & lot and other residential
dwellings valued at P3,199,200 and below
o If two or more adjacent residential lots are sold or
disposed in favor of one buyer, for the purpose of
utilizing the lots as one residential lot, the sale shall
be exempt from VAT only if the aggregate value of
the lots does not exceed P1,919,500. [RR 13-2012]
o 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 one
residential lot. [RR 16-2005]
o Sale, transfer or disposal within a 12-month period
of 2 or more adjacent residential lots, house and
lots or other residential dwellings to one buyer,
whether from the same or from different sellers
shall be considered one single transaction. Hence,
the sale of the adjacent lots shall be subject to VAT
if the aggregate value exceeds P1,919,500 for
residential lots and P3,199,200 for residential house
lots or residential dwellings, notwithstanding that
the value of the individual properties do not exceed
the VAT exemption thresholds.
o Sale/purchase of parking lots shall not be
considered a sale of residential lot/dwelling.
Hence, it shall be subject to VAT regardless of its
selling price. [RR 13-2012]
37
17. Lease of residential units with a monthly rental per unit
not exceeding P12,800, regardless of the amount of
aggregate rentals received by the lessor during the year.
Lease of residential units where the monthly rental
per unit exceeds P12,800 but the aggregate of such
rentals of the lessor during the year do not exceed
One Million Five Hundred Pesos P1,919,500 shall
likewise be exempt from VAT, however, the same
shall be subjected to three percent (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 P12,800 while others are
leased out for more than P12,800 per unit, his tax
liability will be as follows:
a. The gross receipts from rentals not exceeding
P12,800 per month per unit shall be exempt from
VAT regardless of the aggregate annual gross
receipts.
b. The gross receipts from rentals exceeding P12,800
per month per 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 P12,800 ) exceeds P1,919,500 .
Otherwise, the gross receipts will be subject to the
3% tax imposed under Section 116 of the Tax
Code.
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 and
hotel rooms.
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. [RR 16-2005]
18. 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;
19. Transport of passengers by international carriers
Added by RA 10378
20. Sale, importation or lease of passenger or cargo vessels
and aircraft, including engine, equipment and spare
parts thereof for domestic or international transport
operations [added by RA 9337];
The exemption from VAT on the importation and
local purchase of passenger and/or cargo vessels
shall be limited to those of 150 tons and above,
including engine 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
vessel's original commissioning, as follows:
o for passenger and/or cargo vessels, the age
limit is 15 years old,
o for tankers, the age limit is 10 years old, and
 o for high-speed passenger crafts, the age limit is
5 years old [RR 16-2005]
21. Importation of fuel, goods, and supplies by persons
engaged in international shipping or air transport
operations; [added by RA 9337]
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 without stopping at any
other port in the Philippines;
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 12% VAT starting Feb. 1, 2006.
[RR 16-2005]
22. Services of banks, non-bank financial intermediaries
performing quasi-banking functions and other non-bank
financial intermediaries; and
23. Sale or lease of goods or properties or the performance
of services other than the transactions mentioned in the
preceding paragraphs, the gross annual sales and/or
receipts do not exceed the amount of P1,919,500
For purposes of the threshold of P1,919,500, 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.
The VAT-exempt sales shall NOT be included in
determining the threshold. [RR 16-2005]
Other Services Exempt from VAT such services are
those subject to percentage tax (infra)
1. Services rendered by domestic common carriers by land
for the transport of passengers and keepers of garages;
2. Services rendered by international air/shipping carriers;
3. Services rendered by franchise grantees of radio and/or
television broadcasting whose annual gross receipts of
the preceeding year do not exceed P10,000,000 and by
franchise grantees of gas and water utilities;
4. Services rendered for overseas dispatch, message, by
franchise grantees or conversation originating from the
Philippines;
5. Services by any person, company or corporation (except
purley cooperative companies or associations) doing life
insurance business of any sort in the Philippines;
6. Services rendered by fire, marine or miscellaneous
insurance agents of foreign insurance companies;
7. Services rendered by proprietors, lessees or operators of
cockpits, cabarets, night or day clubs, boxing
exhibitions, professional basketball games, jai-alai and
race tracks; and
8. Receipts on sale, barter for exchange of shares of stock
listed and traded through the local stock exchange or
through initial public offering.
Zero-Rating Tax Exemption
38
Seller is entitled to claim No claim of any tax
input tax credit/refund credit/refund
All VAT is removed from Exemption only removes the
the good, propery or service. VAT at the exempt stage.
It is completely freed from
VAT.
PAGCOR v BIR (2011)
Facts: PAGCOR contested the constitutionality of RA
9337. The new law enumerates the GOCCs exempted from
payment of corporate income tax, of which PAGCOR was
not included (while a previous law, PD 1067-B, exempts
PAGCOR from payment of any type of tax except franchise
tax.) The SC upheld the constitutionality of the law. Thus,
BIR issued a RR identifying PAGCOR as one of the
franchisees subject to VAT.
Held: The RA is valid, while the RR is null and void insofar
as it subjects PAGCOR to VAT. Nowhere in the RA is it
stated that PAGCOR can be subjected to VAT, as it is clear
only as to PAGCORs removal from exemption from
payment of corporate income tax. The charter creating
PAGCOR, PD 1869, gives PAGCOR a blanket exemption to
taxes, both direct and indirect. Therefore, in effect, services
rendered to PAGCOR are considered zero-rated
TAX CREDITS OR REFUNDS
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 (P1,000,000): 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-add 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 preceeding 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 and the
Bureau of Customs.
INPUT TAX AND OUTPUT TAX, DEFINED
Output tax the VAT 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 the Code.
Input tax 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.
1. It includes the transitional input tax and the
presumptive input tax as determined in accordance
with Section 111 of the Code.
2. It includes input taxes which can be directly
attributed to transactions subject to the VAT plus a
ratable portion of any input tax which cannot be
directly attributed to either the taxable or exempt
activity.
3. Input tax must be evidenced by a VAT invoice or
official receipt issued by a VAT-registered person
in accordance with Secs. 113 and 237 of the Code.
[RR 16-2005]
Source of Input 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 materials supplied in the sale of
service; or
39
e. For use in trade or business for which
deduction for depreciation or amortization
is allowed under the Code.
2. Purchase of real properties for which VAT has
actually been paid
3. Purchase of services in which VAT has actually been
paid
4. Transactions deemed sale
5. Presumptive Input Tax
6. Transitional Input Tax
CIR v SONY (2010)
Facts: CIR issued assessment for deficiency taxes against
Sony. Upon Sonys petition for review, CTA disallowed the
deficiency VAT assessment on Sonys subsidized
advertising expense, because this was covered by a VAT
invoice that resulted in an input VAT credit.
Held: CIR's argument that Sony's advertising expense could
not be considered as an input VAT credit because the same
was eventually reimbursed by Sony International Singapore
(SIS) is erroneous. CIR said Sony thus never incurred any
advertising expense, so Sony is not entitled to a tax credit.
But under Sec. 110 of the Tax Code, an advertising expense
covered by a VAT invoice is a legitimate business expense.
Where the money came from is another matter but will not
change that fact.
CIR said that Sony itself admitted that the reimbursement
from SIS was income and thus, taxable. While the Court
agrees that the subsidy may be considered as income, it does
not agree that the same should be subject to VAT. The
subsidy was not even exclusively earmarked for Sony's
advertising expense, as it was only an assistance in view of
dire economic conditions and was only equivalent to Sony's
advertising expenses.
Sec. 106 of the Tax Code states that VAT may be imposed
on every sale, barter or exchange of goods or property.
There must be a sale, barter or exchange of goods or
properties before VAT may be levied. In this case, there was
none in the subsidy, which was only a dole out.
Transitional Input Tax
SEC. 111. Transitional/ Presumptive Input Tax Credits. -
(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.
1. 2% of the value of the beginning inventory on hand or
actual VAT paid on such, goods, materials and supplies,
whichever is HIGHER, which amount shall be
creditable against the output tax of VAT-registered
person.
2. 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 Sec. 109 of the Tax Code. (RR
16-2005)
3. A real estate dealer is entitled to claim transitional input
VAT based on the value of the entire real property sold
regardless of whether there was in fact actual payment
of VAT on the purchase of the real property. At the time
the purchase was made, there was still no VAT
imposed. (Fort Bonifacio Development Corp. v. CIR)
FORT BONIFACTIO v CIR
Facts: Fort Bonifacio Development Corp. (FBDC) acquired
land from the national government without payment of
VAT. VAT law was later imposed. FBDC then sold 2
parcels of land to Metro Pacific Corp. In reporting the sale
for VAT purposes, FBDC claimed transitional input VAT
corresponding to its inventory of land. The BIR disallowed
the claim of presumptive input VAT and assessed FBDC for
deficiency VAT.
Held: FBDC is entitled to claim the transitional input VAT
on its sale of real properties given its nature as a real estate
dealer, and the transitional input VAT should be based on
the value of not just the improvements but of the entire real
property, and regardless of whether there was in fact actual
payment of tax on the purchase of the real property or not.
The amendments to the VAT law do not show any intention
to make those in the real estate business subject to a different
treatment from those engaged in the sale of other goods or
properties. The CIR has no power to limit the meaning and
coverage of the term goods in sec. 105 of the Tax Code
without basis, with regard to the scope of the basis of
determining the available transitional input VAT. The
transitional input tax credit operates to benefit newly VAT-
registered persons, WON they previously paid taxes in the
acquisition of their beginning inventory.
Presumptive Input Tax
(B) Presumptive Input Tax Credits. -
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.
Persons or firms engaged in the processing of sardines,
mackerel and milk, and in manufacturing refined sugar
and 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.
Claiming of input Tax on motor vehicles subject to the
ff conditions:
1. Purchase of vehicle must be substantiated with
official receipts and other records;
40
2. Taxpayer has to prove the direct connection of the
motor vehicle to the business;
3. Only one vehicle for land transport is allowed for
the use of an official/employee with value not
exceeding P2.4 million;
4. No depreciation shall be allowed for yachts,
helicopters, airplanes or land vehicles over P2.4
million unless the vehicle is used in the
company's transport operations or lease of
transport equipment. [RR 12-2012]
PERSONS WHO CAN AVAIL OF INPUT TAX
CREDIT
Input tax on domestic purchase or importation of goods or
properties shall be creditable:
1. To the purchaser upon consummation of sale and on
importation of goods or properties; and
2. To the importer upon payment of the VAT prior to the
release of the goods from the custody of the Bureau of
Customs.
a. 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 the 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
(P1,000,000)
b. However, 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
3. To the purchaser of services or the lessee or licensee
upon payment of the compensation, rental, royalty or
fee.
4. Transitional tax- Any person liable for VAT or who
elects to be a VAT-registered person shall be allowed
INPUT TAX in his beginning inventory of goods,
materials and supplies
a. equivalent to TWO PERCENT (2%) of the
value of such inventory; OR
b. the actual VAT paid on such goods, materials
and supplies, whichever is HIGHER, which
shall be creditable against the OUTPUT TAX.
5. Presumptive input tax - Persons or firms engaged in the
processing of sardines, mackerel and milk, and in
manufacturing refined sugar and cooking oil and packed
noodle based instant meals, shall be allowed a
presumptive input tax, creditable against the output tax,
equivalent to 4% of the gross value in money of their
purchases of primary agricultural products which are
used as inputs to their production.
"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. [RR 16-05]
 Sale to gov't. subjected to 5% final VAT
CREDITABLE INPUT TAX w/holding 100,000.00
Spreading of input tax credit for Capital Goods Total sales for the month 400,000.00
Input tax on goods purchased or imported in a calendar
month for use in trade or business for which deduction The following were its input taxes (or passed on by its VAT
for depreciation is allowed under this Code, shall be suppliers):
spread evenly over the month of acquisition and the Input tax on taxable goods (12%) 5,000.00
fifty-nine (59) succeeding months if the aggregate Input tax on zero-rated sales 3,000.00
acquisition cost for such goods, excluding the VAT Input tax on sale of exempt goods 2,000.00
component thereof, exceeds One million pesos Input tax on sale to government 4,000.00
(P1,000,000). If the aggregate acquisition cost does not Input tax on depreciable capital good 20,000.00
exceed P1,000,000, the total input taxes will be not attributable to any specific activity
allowable as credit against output tax in the month of (monthly amortization for 60 months)
acquisition.
If the estimated useful life of the capital good is less Step 1: The creditable input tax for the month shall be
than five (5) years, as used for depreciation purposes, computed as follows:
then the input VAT shall be spread over such a shorter Input tax on sale subject to 12% P5,000.00
period:. Ratable portion of the input tax not directly attributable to
In the case of purchase of services, lease or use of any activity, computed below
properties, the input tax shall be creditable to the
purchaser, lessee or licensee upon payment of the Taxable sales (12%) Amount of input tax
compensation, rental, royalty or fee. x not directly
Total Sales attributable
Determination of Input Tax Creditable
1. The sum of the excess input tax carried over from the P100,000.00
preceding month or quarter and the input tax creditable P400,000.00 x P20,000.00 =P5,000.00
to a VAT-registered person during the taxable month or
quarter shall be reduced by the amount of claim for Total creditable input tax for the month: P10,000 (P5,000
refund or tax credit for value-added tax and other input + P5,000 ratable portion)
adjustments, such as purchase returns or allowances and
input tax attributable to exempt sale. VAT PAYABLE: P12,000 (output) P10,000 (input) =
2. The claim for tax credit referred to includes not only P2,000
those filed with the BIR but also those filed with other
government agencies, such as the Board of Investments Step 2: The creditable input tax to zero-rated sales for the
the Bureau of Customs. month shall be computed as follows:
Input tax on zero-rated sale 3,000.00
Allocation of input tax on mixed transactions Ratable portion of the input tax not directly attributable to
A VAT-registered person who is also engaged in any activity, computed below
transactions not subject to VAT shall be allowed to
recognize input tax credit on transactions subject to VAT as Amount of input tax
follows: Taxable sales (0%)
x not directly
1. All the input taxes that can be directly attributed to Total Sales attributable
transactions subject to VAT may be recognized for
input tax creditInput taxes that can be directly P100,000.00
attributable to VAT taxable sales of goods and services x P20,000.00 =P5,000.00
P400,000.00
to the Government or any of its political subdivisions,
instrumentalities or agencies, including GOCCs shall
Total creditable input tax for the month: P8,000 (P3,000
not be credited against output taxes arising from sales to
input + P5,000 ratable portion)
non-Government entities
2. If any input tax cannot be directly attributed to either a
VAT REFUND: P0 (output) P8,000 (input) = P8,000
VAT taxable or VAT-exempt transaction, the input tax
refund
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 Step 3: The input tax attributable to VAT-exempt sales for
input tax credit. the month shall be computed as follows:
Input tax on VAT-exempt sales P2,000.00
Illustration: ERA Corporation has the following sales
during the month: Ratable portion of the input tax not directly attributable to
Sale to private entities subject to 12% 100,000.00 any activity, computed below:
Sale to private entities subject to 0% 100,000.00
Sale of exempt goods 100,000.00 VAT-exempt sales Amount of input tax

41
 Total Sales x not directly
attributable
P100,000.00
P400,000.00 x P20,000.00 = P5,000.00
Total input tax attributable: to VAT-exempt sales: P7,000.00
(P2,000 input + P5,000 ratable portion)
***These amounts are not available for input tax credit but
may be recognized as cost or expense.
VAT PAYABLE: P0 (output) P0 (input) = P0
UNRECOVERABLE INPUT: P7,000
Step 4: The input tax attributable to sales to government for
the month shall be computed as follows:
Input tax on sale to gov't. P4,000.00
Ratable portion of the input tax not directly attributable to
any activity, computed as follows:
Taxable sales Amount of input tax
not directly
Total Sales x
attributable
P100,000.00
P400,000.00 x P20,000.00 = P5,000.00
Total input tax attributable to sales to government:
P9,000.00 (P4,000 input + P5,000 ratable)
***These amounts are not available for input tax credit but
may be recognized as cost or expense. That is because as far
as sales to government are concerned, there is a VAT that is
finally withheld (at 5%).
VAT PAYABLE: P5,000 (5% withholding on sales to
government)
UNRECOVERABLE INPUT: P2,000 treated as part of the
cost. P2,000 is the difference between the output VAT it
paid (5,000) and the output VAT it should have paid if it
were dealing with a regular buyer (P3,000). In short, it was
prejudiced by P2,000 for dealing with the government,
which is to be treated as part of the cost.
DETERMINATION OF VAT PAYABLE/EXCESS
TAX CREDIT
Output VAT Input VAT = VAT Payable
If at the end of any taxable month or quarter:
o The output tax exceeds the input tax, the excess
shall be paid by the VAT-registered person
o The input tax exceeds the output tax, the excess
shall be carried over to the succeeding quarter
or quarters
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.
Under the gross products type-VAT, only the input tax
on puchase of goods for sale or for conversion into other
42
finished goods for sale is allowed as tax credit in
determining VAT liability.
OUTPUT VAT
How output tax computed: [RR 16-05]
In a sale of goods/properties
GROSS
REGULAR
SELLING X = OUTPUT
RATE OF VAT
PRICE TAX
For sellers of services
GROSS REGULAR RATE
X = OUTPUT
RECEIPTS OF VAT
TAX
INPUT VAT
Substantiation of Input VAT
1. INPUT TAXES must be substantiated and supported by
the following documents, and must be reported in the
information returns required to be submitted to the
Bureau:
a. For the importation of goods = Import entry or
other equivalent document showing actual
payment of VAT on the imported goods.
b. For the domestic purchase of goods and
properties = Invoice showing the information
required under Secs. 113 (Invoicing and
Accounting Requirements for VAT-Registered
Persons) and 237 (Issuance of Receipts or
Sales or Commercial Invoices) of the Tax
Code.
c. For the 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.
d. For the purchase of services = official receipt
showing the information required under Secs.
113 and 237 of the Tax Code.
A cash register machine tape issued to a registered
buyer shall constitute valid proof of substantiation of tax
credit only if it shows the information required under
Secs. 113 and 237 of the Tax Code.
2. TRANSITIONAL INPUT TAX shall be supported by
an inventory of goods as shown in a detailed list to be
submitted to the BIR.
3. Input tax on "deemed sale" transactions shall be
substantiated with the invoice required.
4. Input tax from payments made to non-residents (such as
for services, rentals and royalties) shall be supported by
a copy of the Monthly Remittance Return of Value
Added Tax Withheld (BIR Form 1600) filed by the
resident payor in behalf of the non-resident evidencing
remittance of VAT due which was withheld by the
payor.
5. Advance VAT on sugar shall be supported by the
Payment Order showing payment of the advance VAT.
REFUND OR TAX CREDIT OF EXCESS INPUT
TAX/ VAT REMEDY
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.
Who may claim for refund/apply for issuance of tax
credit certificate
1. Zero-Rated Sales (Sec. 112(A), NIRC)
a. Any VAT-registered person, whose sales are
zero-rated or effectively zero-rated may apply
for the issuance of a tax credit
certificate/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, within two (2) years after the close of the
taxable quarter when the sales were made. 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.
b. The acceptable foreign currency exchange
proceeds must have been duly accounted for in
accordance with the rules and regulations of
the Bangko Sentral ng Pilipinas (BSP) in the
43
case of zero-rated transactions paid for in
acceptable foreign currency and requiring that
such be accounted for in accordance with BSP
rules & regulations (Secs. 106(A)(2)(a)(1) and
(2), and Sec. 106(A)(2)(b) and Sec. 108(B)(1)
and (2), NIRC).
c. 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.
d. In the case of a person engaged in the transport
of passenger and cargo by 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).
(RR 16-2005)
2. Cancellation of VAT Registration.
a. 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 the 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.
b. He shall be entitled to a refund if he has no
internal revenue tax liabilities against which
the tax credit certificate may be utilized.
Period to file claim/apply for issuance of tax credit
certificate this periods must be distinguished from normal
tax refunds for erroneous payments where an administrative
claim and judicial claim may be made together, and the
reckoning point of the 2 years is from the date of the
erroneous payment.
1. Application for issuance of tax credit certificate or
refund of creditable input tax (except transitional
input tax)
o 2 years after the close of the taxable quarter
when the sale was made.
o If the VAT registration has been cancelled due
to retirment or cessation of business, or change
of status, the 2 year period shall be after the
date of cancellation
2. Administrative Claim
o The CIR shall grant the tax credit/refund within
120 days from the date of submission of
complete documents in support of the
application
o Complete Documents is determined by
taxpayer himself.
o Taxpayer may only resort to a Judicial Claim
either after the end of the 120 day period or
after a decision is made by the Commission,
whichever comes first.
 3. Judicial Claim
o In case of denial of the application or the
expiry of the 120 days, the taxpayer may
appeal to the CTA within 30 days from the
receipt of said denial or inaction.
CIR v. Aichi (2010)
Facts: Aichi Forgin is a VAT-registered company,
registered with the BOI under a pioneer status. Aichi filed its
claim for creditable input VAT for the quarter ending Sept.
30, 2002 on Sept. 30, 2004. It simultaneously filed its
judicial claim on the same date.
Held: The reckoning period betins at the end of the taxable
quarter, regardless of whether the tax was paid or not. This is
different from Sec. 229 which only applies to erroneous
payments of tax.
The Court ruled that leap years do not affect the 2 year
reckoning point. Even though the Civil Code provides a year
to be 365 days, the Administrative Code of 1987, which was
a later legislation, counts a year as 12 months.
The court also explained that the judicial claim was
premature since such judicial claim may only be filed after
the adminsitrative claim is dispensed with or after the end of
the 120 day period.
CIR v. San Roque Power Corporation (2013)
Facts: San Roque filed its judicial claim 13 days after it
filed its amended adminsitrative claim.
Taganito filed its judicial claim before the end of the 120
days for its administrative claim.
Philex Mining filed its judicial claim 426 days after the last
day of filing its judicial appeal.
Held: Compliance with the 120 day period is both
mandatory and jurisdictional. Fialure to comply violates the
doctrine of exhaustion of administrative remedies and
renders the petition premature and without a cause of action.
However, the court granted Taganitos claim since it relied
on BIR Ruling No. DA 489-03 which stated that the
taxpayer need not wait for the lapse of the 120 day period
before seeking relief with the CTA. Section 246 of the Tax
Code provides that a reversal of a BIR regulation cannot
adversely prejudice a taxpayer who in good faith relied on
the regulation. Therefore, the BIR is estopped.
Illustration:
Refund for Sales Accumulated from Jan March 2013
STEP 1: File Claim for refund 2 years after the close of the
taxable quarter when the sale was made. Claim is filed with
the Commissioner.
o March 31, 2013 is the reckoning point.
o Therefore, deadline of claim for Sales of Q1
2013 is March 31, 2015.
STEP 2: Administrative Claim- Commissioner has 120 days
after the filing of complete documents to decide on the
claim.
44
o Example he files a claim on June 1, 2013, and
completes all documents on June 30, 2013.
June 30 is the reckoning point for the
120 days.
Code is silent on what complete
documents is. Maam says its up to
the taxpayer to determine if it is
complete or not
o Commissioner has 120 days or up to October
28, 2013 to decide.
STEP 3: Judicial Claim - If Commissioner has no decision
by October 28, or has denied the claim anytime before the
end of the 120 days, taxpayer has 30 days to appeal the
decision to the CTA.
o If no decision was made on October 28, 2013,
taxpayer has 30 days or until November 27,
2013 to file his judicial claim.
o Failure to file within the 30 day period means
the decision is final and executory.
o As emphasized by the cases, the taxpayer has
to wait for the 120 days to end or a decision by
the commissioner, before he can go up to the
CTA.
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 notwithstanding: provided that
refunds shall be subject to post audit by the Commission on
Audit.
COMPLIANCE REQUIREMENTS
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 taxpayer's 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;
(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 b. If the sale is exempt from VAT, the term "VAT-
separate invoices or receipts for the taxable, exempt, and zero-rated
components of the sale.
exempt sale" shall be written or printed prominently
(3) The date of transaction, quantity, unit cost and description of on the invoice or receipt;
the goods or properties or nature of the service; and c. If the sale is subject to zero percent (0%) value-
(4) In the case of sales in the amount of one thousand pesos added tax, the term "zero-rated sale" shall be
(P1,000) or more where the sale or transfer is made to a VAT-registered
written or printed prominently on the invoice or
person, the name, business style, if any, address and taxpayer identification
number (TIN) of the purchaser, customer or client. receipt;
d. If the sale involves goods, properties or services
(C) Accounting Requirements. - Notwithstanding the provisions of Section some of which are subject to and some of which are
233, all persons subject to the value-added tax under Sections 106 and 108 VAT zero-rated or VAT-exempt, the invoice or
shall, in addition to the regular accounting records required, maintain a
subsidiary sales journal and subsidiary purchase journal on which the daily receipt shall clearly indicate the breakdown of the
sales and purchases are recorded. The subsidiary journals shall contain such sale price between its taxable, exempt and zero-
information as may be required by the Secretary of Finance. rated components, and the calculation of the value-
added tax on each portion of the sale shall be
(D) Consequence of Issuing Erroneous Vat Invoice or Vat Official
Receipt. - shown on the invoice or receipt. The seller has the
(1) If a person who is not a VAT-registered person issues an invoice or option to issue separate invoices or receipts for the
receipt showing his Taxpayer Identification Number (TIN), followed by the taxable, exempt, and zero-rated components of the
word "VAT":
sale.
(a) The issuer shall, in addition to any liability to other
percentage taxes, be liable to: 3. The date of transaction, quantity, unit cost and
(i) The tax imposed in Section 106 or 108 without the description of the goods or properties or nature of the
benefit of any input tax credit; and service; and
(ii) A 50% surcharge under Section 248 (B) of this
code;
4. In the case of sales in the amount of one thousand pesos
(b) The VAT shall, if the other requisite information required (P1,000) or more where the sale or transfer is made to a
under Subsection (B) hereof is shown on the invoice or receipt, be VAT-registered person, the name, business style, if any,
recognized as an input tax credit to the purchaser under Section 110 of this address and taxpayer identification number (TIN) of the
Code.
purchaser, customer or client.
(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 Invoicing and Recording Deemed Sale Transactions
account for the tax imposed in Section 106 or 108 as if Section 109 did not
apply. Transaction Invoicing Requirement
(E) Transitional Period. - Notwithstanding Subsection (B) hereof, taxpayers
may continue to issue VAT invoices and VAT official receipts for the Transfer, use or Memorandum entry in the
period July 1, 2005 to December 31, 2005, in accordance with Bureau of consumption not in the subsidiary sales journal to
Internal Revenue administrative practices that existed as of December 31,
course of business of goods record withdrawal of goods
2004.
or properties originally for personal use
Invoicing requirements in general intended for sale or for use
in the course of business
A VAT-registered person shall issue:
1. A VAT invoice for every sale, barter or exchange of Distribution or transfer to Invoice, at the time of the
goods or properties; and shareholders/investors or transaction, which should
2. A VAT official receipt for every lease of goods or creditors include all the info prescribed
properties, and for every sale, barter or exchange of above; data in the invoice
services shall be duly recorded in the
subsidiary sales journal
Only VAT-registered persons are required to print their TIN Consignment of goods if Invoice, at the time of the
followed by the word VAT in their invoice or ORs. Said actual sale is not made transaction, which should
documents shall be considered as a VAT Invoice or VAT within 60 days include all the info prescribed
official receipt. All purchases covered by invoices/receipts above; data in the invoice
other than VAT Invoice/VAT OR shall not give rise to any shall be duly recorded in the
input tax. [RR 16-05] subsidiary sales journal
Retirement from or An inventory shall be
Information Contained in the VAT Invoice or VAT cessation of business with prepared and submitted to the
Official Receipt: respect to all goods on RDO who has jurisdiction
1. A statement that the seller is a VAT-registered person, hand over the taxpayers principal
followed by his taxpayer's identification number (TIN); place of business not later
2. The total amount which the purchaser pays or is than 30 days after retirement
obligated to pay to the seller with the indication that or cessation from business.
such amount includes the VAT: An invoice shall be prepared
a. The amount of the tax shall be shown as a separate for the entire inventory, which
item in the invoice/receipt; shall be the basis of the entry
into the subsidiary sales
journal. The invoice need not
45

Transaction Invoicing Requirement
enumerate the specific items
appearing in the inventory
regarding the description of
the goods. 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.
Consequences of issuing erroneous vat invoice or vat
official receipt
Issuance of a VAT Invoice or VAT Receipt by a non-
VAT person - 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", the erroneous issuance shall result to the
ff:
o The non-VAT person shall be liable to:
Percentage taxes applicable to his transactions;
VAT due on transactions under Section 106 or
108 of the Code, without the benefit of any
input tax credit; and
A 50% surcharge under Section 248 (B) of the
code;
o The VAT shall, if the other requisite information
required is shown on the invoice/receipt, be
recognized as an input tax credit to the purchaser.
Issuance of a VAT Invoice or 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 term
"VAT-exempt Sale", the transaction shall become
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. [RR 16-05]
FILING OF RETURN AND PAYMENT
SEC. 114. Return and Payment of Value-Added Tax. -
(A) In General. - Every person liable to pay the value-added tax imposed
under this Title shall file a quarterly return of the amount of his gross sales
or receipts within twenty-five (25) days following the close of each taxable
quarter prescribed for each taxpayer: Provided, however, That VAT-
registered persons shall pay the value-added tax on a monthly basis.
Any person, whose registration has been cancelled in accordance with
Section 236, shall file a return and pay the tax due thereon within twenty-
five (25) days from the date of cancellation of registration: Provided, That
only one consolidated return shall be filed by the taxpayer for his principal
place of business or head office and all branches.
(B) Where to File the Return and Pay the Tax. - Except as the
Commissioner otherwise permits, the return shall be filed with and the tax
paid to an authorized agent bank, Reveenue Collection Officer or duly
authorized city or municipal Treasurer in the Philippines located within the
revenue district where the taxpayer is registered or required to register.
(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
46
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.
The value-added tax withheld under this Section shall be remitted within ten
(10) days following the end of the month the withholding was made."
VAT returns - VAT paid on a monthly basis. Payments in
the monthly VAT declarations shall be credited in the
quarterly VAT return to arrive at the net VAT payable or
excess input tax/over-payment as of the end of a quarter.
1. Filed by person liable to pay the VAT
2. Quarterly return of the amount of his gross sales or
receipts within twenty-five (25) days after the close of
each taxable quarter prescribed for each taxpayer.
3. The monthly VAT Declarations 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.
Administrative and Penal Provisions
SEC. 115. Power of the Commissioner to Suspend the Business Operations
of a Taxpayer. - The Commissioner 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) 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.
1. Suspension of business operations. In addition to other
administrative and penal sanctions provided for in the
Tax Code and implementing regulations, the
Commissioner of Internal Revenue or his duly
authorized representative may order suspension or
closure of a business establishment for a period of not
less than five (5) days for any of the following
violations:
a. Failure to issue receipts and invoices.
b. Failure to file VAT return as required under the
provisions of Sec. 114 of the Tax Code.
c. Understatement of taxable sales or receipts by 30%
or more of his correct taxable sales or receipt for
the taxable quarter.
d. Failure of any person to register as required under
the provisions of Sec. 236 of the Tax Code.
2. 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 (VAT).
Withholding of Final VAT on Sales to Government
1. The Government or any of its political subdivisions,
instrumentalities or agencies, including GOCCs shall,
before making payment on account of each purchase of
goods and services which are subject to the VAT (Secs.
 106 and 108, NIRC), deduct and withhold a final VAT
due at the rate of five percent (5%) of the gross payment
thereof.
2. The payment for lease or use of properties or property
rights to nonresident owners shall be subject to 12%
withholding tax at the time of payment.
a. The payor or person in control of the payment is
considered as the withholding agent.
b. The VAT withheld shall be remitted within ten (10)
days following the end of the month the
withholding was made.
The 5% final VAT shall represent the net VAT payable of
the seller. The remaining 7% effectively accounts for the
standard input VAT, in lieu of the actual input VAT directly
attributable or ratably apportioned to such sales.
(This means that where the 5% final VAT applies, the basic
formula of output tax less input tax does not apply.)
Should actual input VAT exceed 7% of the gross
payments, the excess may form part of the sellers
expense or cost.
On the other hand, if actual input VAT is less than 7%
of gross payment, the difference must be closed to
expense or cost, in effect reducing it.
Illustration:
DOTC contracts the services of ABC for P100M, who
subcontracts the service to DEF for P80M.
**This is a sale of service, DEF rendering service to ABC,
and ABC rendering service to DOTC.
DOTC ABC DEF
Income: P100M Income: P80M
- Input: 0 -
Output: Output: P5M Output: P9.6M
withheld
Remittance: P5M Remittance: 0 Remittance:
P9.6M
Scenario 1: If DOTC were a normal buyer
ABC Input VAT: P9.6M
Output VAT: P12M
Remittance: P2.4M
Scenarion 2: DOTC as govt
ABC Input: 0
Output VAT: P5M withheld
Remittance: P5M
* The P2.6M difference (P5M actually paid as opposed to
the P2.4 it should have paid if DOTC were a normal buyer)
is to be treated as part of the cost of dealing with the
government.
MICROSOFT v CIR (2011)
Facts: Microsofts services are paid for in acceptable
foreign currency and qualify as zero-rated sales for VAT
purposes under Sec. 108(B)(2). Microsoft filed an
administrative claim for tax credit of VAT input taxes, but
the CTA denied it, saying that Microsoft failed to comply
with the invoicing requirements of secs. 113 and 237 and of
47
RR 7-95, which say that official receipts must have the
imprinted word zero-rated on its face to be valid.
Held: The invoicing requirements for a VAT-registered
taxpayer as provided in the NIRC and revenue regulations
are clear. A VAT-registered taxpayer is required to comply
with all the VAT invoicing requirements to be able to file a
claim for input taxes on domestic purchases for goods or
services attributable to zero-rated sales. A "VAT invoice" is
an invoice that meets the requirements of Section 4.108-1 of
RR 7-95. Contrary to Microsoft's claim, RR 7-95 expressly
states that "[A]ll purchases covered by invoices other than a
VAT invoice shall not give rise to any input tax."
Microsoft's invoice, lacking the word "zero-rated," is not a
"VAT invoice," and thus cannot give rise to any input tax.
AT&T v CIR (2010)
Facts: AT&T is domestic corporation engaged in providing
information and liason services for AT&T International. It is
paid in dollars which is remitted to it. It is claiming input
VAT for its zero-rated sales in connection with its service
agreements and other purchases.
Held: AT&T can claim tax refund based on its unutilized
input VAT attributable to its zero-rated sales. It complied
with the following requirements: 1) taxpayer is engaged in
sales which are zero rated (i.e. export); 2) taxpayer is VAT
registered; 3) claim must be filed within 2 years after sales
were made; 4) creditable input tax must be attributable to
such sales, except the transitional input tax, to the extent that
such input tax has not been applied against the output tax;
and 5) in case of zero-rated sales, the acceptable foreign
currency exchange proceeds have been duly accounted for in
accordance with BSP rules and regulations.
Court ruled that under Rev. Regs and Sec. 113 of the Tax
Code, there is no distinction made between sales invoices
and official receipts in the claiming of input VAT. Either
may be submitted to substantiate its claim.
KEPCO v CIR (2010)
Facts: KEPCO filed VAT returns declaring zero-rated sales,
claiming tax refund.
Held: KEPCO did not comply with the substantiation
requirements under the appropriate RR and Sec. 113 of
NIRC, when the word zero-rated was not printed on its
VAT invoices and receipts. Non-compliance in invoicing
requirements result in denial of the refund claim.
There is a distinction between a VAT invoice and a VAT
receipt such that only a VAT invoice might be presented to
substantiate a sale of goods or properties, while only a VAT
receipt could substantiate a sale of services. These cannot be
used interchangeably for purposes of substantiation.
SILICON PHIIPPINES v CIR (2011)
Facts: Silicon applied for tax credit/refund 1) on their tax
paid on its purchase of capital equipment, and 2) on its zero-
rated export sales. The CTA only partially granted #1,
 saying that the other items such as office supplies were not Illustration
considered capital goods. #2 was denied because Silicon
failed to present an Authority to Print (ATP) from the BIR,
and it did not print on its export sales invoices ATP and
also the word zero-rated.

Held: As to #1, SC affirmed CTA. The requisites for

credit/refund of input VAT on capital goods are: 1) claimant
must be a VAT registered person; 2) Input taxes claimed
must have been paid on capital goods; 3) Input taxes must
not have been applied against any output tax liability; and 4)
Administrative claim for refund must have been filed within
2 years after the close of the taxable quarter when the
importation or purchase was made.

As to #2, SC also affirmed. The requisites for credit/refund

of input VAT on zero rated sales are: 1) Taxpayer must be
VAT registered; 2) Taxpayer must be engaged in sales
which are zero-rated or effectively zero-rated; 3) Claim must
be filed within 2 years after the close of the taxable quarter
when such sales were made; and 4) Creditable input tax
due or paid must be attributable to such sales, except the
transitional input tax, to the extent that such input tax has not
been applied against the output tax. The Court noted
however that printing the ATP on the invoices is not
required. NIRC only requires that the person engaged in
business secure an ATP from the BIR prior to printing
invoices or receipts. Failure to print the word zero-rated
on the other hand is fatal to a claim for credit/refund.

CONTRACT MANUFACTURERS: SUPERMARKET: SARI-SARI: CONSUMER:

GROWERS: Buys spices worth P30k Buys P20k can and sells Buys 5 cans and Buys 5 cans
SP P10K each for P4/can. Sells 5 cans. Sells for P8/can Total Bill:
Input VAT: P 8 x 5=40
Sells 3 pigs to 30k x 12% = P3.6k Input VAT per can: *determine if +VAT (12%)
Manufacturer P2 x 12% = P.24/can Gross reaches P 44.8
Turns the pigs into Output VAT per can: 1,919,500 to
Output VAT: Maling and sells P4 x 12% = P.48/can know if VATable
P30k x 12% = P3.6k 60k cans for P2/can. Remittance:
20k cans per buyer (.48-.24) x 5 cans = P1.2 If VATable
Remittance: Input VAT per can:
P3.6k Input VAT per can: P4 x 12% = P.48/can
3.6/60,000 = .06/can GOVERNMENT: Output VAT per can:
Buys P20k cans P8 x 12% = P.96/can
Remittance:
Computations: Remittance: (.96-.48) x 5 cans = P2.4
1. Supermarket (20k x P2) x 5% withholding
Input VAT: = P2,000
2ok x .06/can = 1,200
Output VAT:
(20k x P2) x 12% = 4,800 EXPORT:
Remittance: P3,600 Buys P20k cans to export

2. Government
Input VAT: 0
Output VAT:
(20k x P2) x 5% withheld = P2,000
Profit: P1,600 [compare how much paid if govt (2,000) vs. supermarket (3,600)]

3. Exports
Input VAT:
20k x .06/can = 1,200 48
Output VAT:
0 (zero-rated sales)
Refund: P1,200
49

PERCENTAGE TAXES
- Percentage tax is a business tax. It is imposed mostly on
sale of services. It is an ad valorem tax
- Businesses subject to VAT may not be subjected to
percentage tax, but excise tax and percentage tax may
be imposed at the same time
- If it is not identified under the percentage tax
provisions, it is subject to VAT
SEC. 116. Tax on Persons Exempt from Value-Added Tax (VAT). -
Any person whose sales or receipts are exempt under Section 109(z) of this
Code from the payment of value-added tax and who is not a VAT-registered
person shall pay a tax equivalent to three percent (3%) of his gross quarterly
sales or receipts: Provided, That cooperatives shall be exempt from the
three percent (3%)gross receipts tax herein imposed.
This provision should now read Section 109(w) as per RA
10378 (An Act Recognizing the Principle of Reciprocity as
Basis for the Grant of Income Tax Exemptions to
International Carriers and Rationalizing Other Taxes
Imposed Thereon by Amending Sections 28(A)(3)(a), 109,
118 and 236 of the NIRC, as amended.) The provision now
reads:
SEC. 109. Exempt Transactions. - The following shall be exempt from
the value-added tax:
xxx
(W) Sale or lease of goods or properties or the performance of services
other than the transactions mentioned in the preceding paragraphs, the gross
annual sales and/or receipts do not exceed the amount of One million five
hundred thousand pesos (P1,500,000): 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);
xxx
CARRIERS TAX: TRANSPORT OF PERSONS
BY DOMESTIC CARRIERS
SEC. 117. Percentage Tax on Domestic Carriers and Keepers of
Garages. - Cars for rent or hire driven by the lessee, transportation
contractors, including persons who transport passengers for hire, and other
domestic carriers by land, air or water, for the transport of passengers,
except owners of bancas and owner of animal-drawn two wheeled vehicle,
and keepers of garages shall pay a tax equivalent to three percent (3%) of
their quarterly gross receipts.
The gross receipts of common carriers derived from their incoming and
outgoing freight shall not be subjected to the local taxes imposed under
Republic Act No. 7160, otherwise known as the Local Government Code of
1991.
In computing the percentage tax provided in this Section, the following
shall be considered the minimum quarterly gross receipts in each particular
case:
Jeepney for hire -
1.Manila and other cities P2,400
2.Provincial 1,200
Public utility bus -
Not exceeding 30 passengers 3,600
Exceeding 30 but not exceeding 50 passengers 6,000
Exceeding 50 passengers 7,200
Taxis -
1.Manila and other cities P3,600
2.Provincial 2,400
Car for hire (with chauffer) 3,000
50
Car for hire (without chauffer) 1,800
- This only covers the transport of passengers by land,
ordinarily. The transport of cargo (by land, sea or air),
and domestic transport of passengers by air or sea, are
covered by VAT under Sec. 108(A)
o Ordinarily because the transport business may
have a franchise, in which case it would have its
own tax regime
SEC. 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.
The phrase 'sale or exchange of services' means the performance of all kinds
or services in the Philippines for others for a fee, remuneration or
consideration, including xxx transportation contractors on their transport of
goods or cargoes, including persons who transport goods or cargoes for hire
another domestic common carriers by land, air and water relative to their
transport of goods or cargoes; services of franchise grantees of telephone
and telegraph, radio and television broadcasting and all other franchise
grantees except those under Section 119 of this Code; xxx (emphasis
supplied)
CARRIERS TAX: TRANSPORT OF CARGO BY
INTERNATIONAL CARRIERS
SEC. 118 Percentage Tax on International Carriers. -
(A) International air carriers doing business in the Philippines shall pay a
tax of three percent (3%) of their quarterly gross receipts.
(B) International shipping carriers doing business in the Philippines shall
pay a tax equivalent to three percent (3%) of their quarterly gross receipts.
This provision has now been amended by RA 10378. It now
reads:
SEC. 118. Percentage Tax on International Carriers.
(A) International air carriers doing business in the Philippines on their gross
receipts derived from transport of cargo from the Philippines to another
country shall pay a tax of three percent (3%) of their quarterly gross
receipts.
(B) International shipping carriers doing business in the Philippines on their
gross receipts derived from transport of cargo from the Philippines to
another country shall pay a tax equivalent to three percent (3%) of their
quarterly gross receipts. (emphasis supplied)
Thus, this tax for international carriers is derived only from
transport of cargo. Transport of passengers by international
carriers is no longer taxed under this provision. Moreover,
RA 10378 also amended Sec. 109 to read as follows:
SEC. 109. Exempt Transactions. - The following shall be exempt from
the value-added tax:
xxx
(S) Transport of passengers by international carriers;
xxx
FRANCHISE TAX
SEC. 119. Tax on Franchises. - Any provision of general or special law
to the contrary notwithstanding, there shall be levied, assessed and collected
in respect to all franchises on radio and/or television broadcasting
companies whose annual gross receipts of the preceding year does not
exceed Ten million pesos (P10,000,000), subject to Section 236 of this
Code, a tax of three percent (3%) and on gas and water utilities, a tax of two
percent (2%) on the gross receipts derived from the business covered by the
law granting the franchise: Provided, however, That radio and television
broadcasting companies referred to in this Section shall have an option to be
registered as a value-added taxpayer and pay the tax due thereon: Provided,
further, That once the option is exercised, said option shall be irrevocable.
The grantee shall file the return with, and pay the tax due thereon to the
Commissioner or his duly authorized representative, in accordance with the
provisions of Section 128 of this Code, and the return shall be subject to
audit by the Bureau of Internal Revenue, any provision of any existing law
to the contrary notwithstanding.
- Franchise is a special privilege or right granted to
persons or corporations by the State through the
legislature, subject to such conditions, regulations, and
restrictions as the government may impose in the public
interest.
- The term franchise has a meaning different from a
certificate of public convenience, which operators of
public utility vehicles may secure without securing a
franchise (municipal or legislative).
- The franchise grantees referred to here are only the
legislative franchise grantees pertaining to radio and/or
television broadcasting companies, and on gas and
water utilities. If the franchise is not embraced in this
section, the sale or exchange of sercices is subject to
VAT under Sec. 108.
- Franchise grantees of electric utilities are subject to
VAT under Sec. 108(A). Radio and television
companies on the other hand are given the option to
register as VAT-taxpayers. Once exercised, the option is
irrevocable.
OVERSEAS COMMUNICATIONS TAX
SEC. 120. Tax on Overseas Dispatch, Message or Conversation
Originating from the Philippines. -
(A) Persons Liable. - There shall be collected upon every overseas dispatch,
message or conversation transmitted from the Philippines by telephone,
telegraph, telewriter exchange, wireless and other communication
equipment service, a tax of ten percent (10%) on the amount paid for such
services. The tax imposed in this Section shall be payable by the person
paying for the services rendered and shall be paid to the person rendering
the services who is required to collect and pay the tax within twenty (20)
days after the end of each quarter.
(B) Exemptions. - The tax imposed by this Section shall not apply to:
(1) Government. - Amounts paid for messages transmitted by the
Government of the Republic of the Philippines or any of its political
subdivisions or instrumentalities;
(2) Diplomatic Services. - Amounts paid for messages transmitted by any
embassy and consular offices of a foreign government;
(3) International Organizations. - Amounts paid for messages transmitted by
a public international organization or any of its agencies based in the
Philippines enjoying privileges, exemptions and immunities which the
Government of the Philippines is committed to recognize pursuant to an
international agreement; and
(4) News Services. - Amounts paid for messages from any newspaper, press
association, radio or television newspaper, broadcasting agency, or
newstickers services, to any other newspaper, press association, radio or
television newspaper broadcasting agency, or newsticker service or to a
bona fide correspondent, which messages deal exclusively with the
collection of news items for, or the dissemination of news item through,
public press, radio or television broadcasting or a newsticker service
furnishing a general news service similar to that of the public press.
GROSS RECEIPTS TAX Secs. 121-122
51
Sec. 121 on Tax on Banks and Non-Bank Financial
Intermediaries Performing Quasi-Banking Functions was
amended a number of times. RA 7716 (July 26 1993)
removed the imposition of the tax on banks and non-bank
financial intermediaries, and imposing instead a tax on life
insurance premium. RA 9238 (January 1 2004) restored and
amended the tax. RA 9337 (July 1 2005) amended it again.
Gross receipts are entire receipts without any deductions
(China Banking v Court of Appeals)
Tax on Banks and Financial Intermediaries
SEC. 121. Tax on Banks and Non-Bank Financial Intermediaries
Performing Quasi-Banking Functions. - There shall be collected a tax
on gross receipts derived from sources within the Philippines by all banks
and non-bank financial intermediaries in accordance with the following
schedule:
(a) On interest, commissions and discounts from lending activities as well
as income from financial leasing, on the basis of remaining maturities of
instruments from which such receipts are derived:
Maturity period is five years or less 5%
Maturity period is more than five years 1%
(b) On dividends and equity shares and
net income of subsidiaries 0%
(c) On royalties, rentals of property, real or personal,
profits, from exchange and all other items treated as
gross income under Section 32 of this Code 7%
(d) On net trading gains within the taxable year on
foreign currency, debt securities, derivatives,
and other similar financial instruments 7%
Provided, however, That in case the maturity period referred to in paragraph
(a) is shortened thru pre-termination, then the maturity period shall be
reckoned to end as of the date of pre-termination for purposes of classifying
the transaction and the correct rate of tax shall be applied accordingly.
Provided, finally, That the generally accepted accounting principles as may
be prescribed by the Bangko Sentral ng Pilipinas for the bank or non-bank
financial intermediary performing quasi-banking functions shall likewise be
the basis for the calculation of gross receipts.
Nothing in this Code shall preclude the Commissioner from imposing the
same tax herein provided on persons performing similar banking activities.
What are quasi-banking activities?
It means borrowing funds from twenty (20) or more personal
or corporate lenders at any one time, through the issuance,
endorsement, or acceptance of debt instruments of any kind
other than deposits for the borrower's own account, or
through the issuance of certificates of assignment or similar
instruments, with recourse, or of repurchase agreements for
purposes of relending or purchasing receivables and other
similar obligations: Provided, however, That commercial,
industrial and other non-financial companies, which borrow
funds through any of these means for the limited purpose of
financing their own needs or the needs of their agents or
dealers, shall not be considered as performing quasi-banking
functions. (Sec. 22 [X])
- The rates implemented by Sec. 121 vary from 0% to
7%, and divides the types of income that an
intermediary usually receives.
- It is similar to income tax in that the longer the maturity, 2005 3 100k 5% 5,000
the lower the tax rate. This encourages banks to lend for 2006 2 100k 5% 5,000
a longer period of time 2007 1 100k 5% 5,000
- If loan is pre-terminated, the tax rate applicable would 2008 Less than 1 100k 5% 5,000
depend on the remaining period of maturity. year
Total Gross Receipts Tax P25,000
Wrong Example
Bank extended a loan on January 1, 2014. Total Gross Receipts Tax P25,000
Principal amount: P10M Less: Gross Receipts previously paid
Interest rate per annum: 2% 9,000
Term: 6 years Gross Receipts Tax Due as recomputed
How much is received every year? P200k P16,000

Year Interest Rate Tax on Finance Companies

January 1 2014 200k 1% SEC. 122. Tax on Finance Companies. - There shall be collected a tax
January 1 2015 200k 1% of five percent (5%) on the gross receipts derived by other non- bank
January 1 2016 200k 5% financial intermediaries doing business in the Philippines, from interest,
commissions, discounts and all other items treated as gross income under
January 1 2017 200k 5% this code: Provided, that interests, commissions and discounts from lending
January 1 2018 200k 5% activities, as well as income from financial leasing, shall be taxed on the
January 1 2019 200k 5% basis of remaining maturities of the instruments from which such receipts
are derived, in accordance with the following schedule:
According to Maam Tax, the manner in which the tax rate
was determined as illustrated in the table above is the wrong Maturity period is five (5) years or less 5%
interpretation of the provision. The proper way of Maturity period is more than five (5) years 1%
interpreting the provision is found in RR 9-2004
Provided, however, that in case the maturity period is shortened thru
(Implementing Certain Provisions of RA 9238, Re-imposing pretermination, then the maturity period shall be reckoned to end as of the
the Gross Receipts Tax on Banks and Non-Bank Financial date of pretermination for purposes of classifying the transaction and the
Intermediaries Performing Quasi-Banking Functions and correct rate shall be applied accordingly.
Other Non-Bnak Financial Intermediaries Beginning January
Provided, finally, that the generally accepted accounting principles as may
1 2004): be prescribed by the Securities and Exchange Commission for other non-
bank financial intermediaries shall likewise be the basis for the calculation
Sec. 5. Pretermination. In case of pretermination, the maturity period of gross receipts.
shall be reckoned to end as of the date of pretermination for purposes of
classifying the transaction and applying the correct rate of tax. Any Nothing in this code shall preclude the Commissioner from imposing the
adjustment in tax due caused by preterminations of existing agreements same tax herein provided on persons performing similar financing activities.
shall be reflected as a separate item in the GRT return covering all
transactions of the month in which the preterminations take place.
(emphasis supplied)
Lending activities under this provision are treated similarly
to banks, with a tax of 5%.
Correct Example!
Credit card companies are finance companies not doing
Fifi executed on November 10 2003 a long-term loan from a quasi-banking functions, and therefore subject to gross
bank for P5M, payable within 10 years, with installments
receipts tax
due every November 10 from 2004 onwards. Assume that on
November 10 2008, the loan was preterminated and the
Republic v Sunlife (2005)
interest paid from 2004 to 2008 was P100k annually.
Facts: Sun Life wanted a tax credit, citing a decision of the
SC declaring mutual life insurance companies exempt from
Year Remaining Interest Tax Rate GRT
the payment of premium taxes and DST. CIR said that it had
Maturity
to register as a cooperative before it could be exempted.
2004 9 100k 1% P1,000
CTA disagreed, ruling in favour of Sun Life.
2005 8 100k 1% 1,000
2006 7 100k 1% 1,000 Held: As did the SC. Sun Life is clearly a cooperative.
2007 6 100k 1% 1,000 While the CIR issued a Circular saying that registration was
2008 5 100k 5% 5,000 required, the Tax Code does not so require. The circular
Total Gross Receipts Tax P9,000 cannot prevail over the code. Besides, Sun Life is not the
kind of cooperative that needs to register in the first place. It
In 2008, upon pretermination, the loan agreement shall be is tax exempt.
reclassified and the correct gross receipt tax, including prior
years, shall be recomputed on the basis of the new category. CIR v Michel J. Lhuillier Pawnshop, Inc. (2003)
Facts: The CIR assessed Lhuillier a 5% percentage tax
Year Remaining Interest Tax Rate GRT based on Sec. 116 of the NIRC of 1977, saying that the said
Maturity provision was broad enough to cover pawnshops within the
2004 4 100k 5% P5,000 definition of lending investor.
52

Held: After examining the relevant legal provisions and the
NIRC versions from which they were taken, the Court held
that it was clearly Congress intent to treat pawnshop owners
as different from lending investorsthe specific class which
is subject to the 5% percentage tax. Pawnshops, on the other
hand, should remain subject to a fixed tax.
First Planters Pawnshop v CIR (2008)
Facts: FPPI was assessed VAT and documentary stamp tax
(DST) deficiencies. FPPI argues that it is not a lending
investor within the purview of Section 108(A) of the NIRC,
and therefore not subject to VAT. It also contends that a
pawn ticket is not subject to DST because it is not proof of
the pledge transaction, and even assuming that it is so, still,
it is not subject to tax since a DST is levied on the document
issued and not on the transaction.
Held: Not liable for VAT. FPPI is a non-bank financial
intermediary, it is subject to 10% VAT for the tax years
1996 to 2002; HOWEVER, with the levy, assessment and
collection of VAT from non-bank financial intermediaries
being specifically deferred by law, then petitioner is not
liable for VAT during these tax years. But with the full
implementation of the VAT system on non-bank financial
intermediaries starting January 1, 2003, petitioner is liable
for 10% VAT for said tax year. And beginning 2004 up to
the present, by virtue of R.A. No. 9238, petitioner is no
longer liable for VAT but it is subject to percentage tax on
gross receipts from 0% to 5%, as the case may be.
It is liable for DST. A DST is an excise tax on the exercise
of a right or privilege to transfer obligations, rights or
properties incident thereto. A pledge is an accessory, real
and unilateral contract by virtue of which the debtor or a
third person delivers to the creditor or to a third person
movable property as security for the performance of the
principal obligation, upon the fulfillment of which the thing
pledged, with all its accessions and accessories, shall be
returned to the debtor or to the third person. This is
essentially the business of pawnshops which are defined
under the Pawnship Regulation Act as persons or entities
engaged in lending money on personal property delivered as
security for loans. Pledge, which is an exercise of a privilege
to transfer obligations, rights or properties incident thereto,
is also subject to DST.
TAX ON INSURANCE PREMIUMS
Section 123. Tax on Life Insurance Premiums. - There shall be
collected from every person, company or corporation (except purely
cooperative companies or associations) doing life insurance business of any
sort in the Philippines a tax of two percent (2%) of the total premium
collected, whether such premiums are paid in money, notes, credits or any
substitute for money; but premiums refunded within six (6) months after
payment on account of rejection of risk or returned for other reason to a
person insured shall not be included in the taxable receipts; nor shall any tax
be paid upon reinsurance by a company that has already paid the tax; nor
upon premiums collected or received by any branch of a domestic
corporation, firm or association doing business outside the Philippines on
account of any life insurance of the insured who is a nonresident, if any tax
on such premium is imposed by the foreign country where the branch is
established nor upon premiums collected or received on account of any
reinsurance, if the insured, in case of personal insurance, resides outside the
Philippines, if any tax on such premiums is imposed by the foreign country
where the original insurance has been issued or perfected; nor upon that
53
portion of the premiums collected or received by the insurance companies
on variable contracts, in excess of the amounts necessary. to insure the lives
of the variable contract owners.
Cooperative companies or associations are such as are conducted by the
members thereof with the money collected from among themselves and
solely for their own protection and not for profit.
TAX ON AGENTS OF FOREIGN INSURANCE
COMPANIES
SEC. 124. Tax on Agents of Foreign Insurance Companies. - Every
fire, marine or miscellaneous insurance agent authorized under the
Insurance Code to procure policies of insurance as he may have previously
been legally authorized to transact on risks located in the Philippines for
companies not authorized to transact business in the Philippines shall pay a
tax equal to twice the tax imposed in Section 123: Provided, That the
provision of this Section shall not apply to reinsurance: Provided, however,
That the provisions of this Section shall not affect the right of an owner of
property to apply for and obtain for himself policies in foreign companies in
cases where said owner does not make use of the services of any agent,
company or corporation residing or doing business in the Philippines. In all
cases where owners of property obtain insurance directly with foreign
companies, it shall be the duty of said owners to report to the Insurance
Commissioner and to the Commissioner each case where insurance has
been so effected, and shall pay the tax of five percent (5%) on premiums
paid, in the manner required by Section 123.
AMUSEMENT TAXES
SEC. 125. Amusement Taxes. - There shall be collected from the
proprietor, lessee or operator of cockpits, cabarets, night or day clubs,
boxing exhibitions, professional basketball games, Jai-Alai and racetracks, a
tax equivalent to:
(a) Eighteen percent (18%) in the case of cockpits;
(b) Eighteen percent (18%) in the case of cabarets, night or day clubs;
(c) Ten percent (10%) in the case of boxing exhibitions: Provided, however,
That boxing exhibitions wherein World or Oriental Championships in any
division is at stake shall be exempt from amusement tax: Provided, further,
That at least one of the contenders for World or Oriental Championship is a
citizen of the Philippines and said exhibitions are promoted by a citizen/s of
the Philippines or by a corporation or association at least sixty percent
(60%) of the capital of which is owned by such citizens;
(d) Fifteen percent (15%) in the case of professional basketball games as
envisioned in Presidential Decree No. 871: Provided, however, That the tax
herein shall be in lieu of all other percentage taxes of whatever nature and
description; and
(e) Thirty percent (30%) in the case of Jai-Alai and racetracks of their gross
receipts, irrespective, of whether or not any amount is charged for
admission.
For the purpose of the amusement tax, the term "gross receipts" embraces
all the receipts of the proprietor, lessee or operator of the amusement place.
Said gross receipts also include income from television, radio and motion
picture rights, if any. A person or entity or association conducting any
activity subject to the tax herein imposed shall be similarly liable for said
tax with respect to such portion of the receipts derived by him or it.
The taxes imposed herein shall be payable at the end of each quarter and it
shall be the duty of the proprietor, lessee or operator concerned, as well as
any party liable, within twenty (20) days after the end of each quarter, to
make a true and complete return of the amount of the gross receipts derived
during the preceding quarter and pay the tax due thereon.
RMC 8-88
Sec. 125 only includes gross receipts of amusement places
from sources other than admission tickets, since the power to
impose amusement tax on gross receipts derived from
admission tickets was exclusive with the local government
units.
TAX ON WINNINGS
SEC. 126. Tax on Winnings. - Every person who wins in horse races
shall pay a tax equivalent to ten percent (10%) of his winnings or
'dividends', the tax to be based on the actual amount paid to him for every
winning ticket after deducting the cost of the ticket: Provided, That in the
case of winnings from double, forecast/quinella and trifecta bets, the tax
shall be four percent (4%). In the case of owners of winning race horses, the
tax shall be ten percent (10%) of the prizes.
The tax herein prescribed shall be deducted from the 'dividends'
corresponding to each winning ticket or the 'prize' of each winning race
horse owner and withheld by the operator, manager or person in charge of
the horse races before paying the dividends or prizes to the persons entitled
thereto.
The operator, manager or person in charge of horse races shall, within
twenty (20) days from the date the tax was deducted and withheld in
accordance with the second paragraph hereof, file a true and correct return
with the Commissioner in the manner or form to be prescribed by the
Secretary of Finance, and pay within the same period the total amount of
tax so deducted and withheld.
PERCENTAGE TAX ON IPOs
Two kinds: 1) IPO (initial public offering) tax and 2) stock
transactions tax
Stock Transactions Tax
- If subjected to tax under Sec. 127, the transaction will
no longer be subject to capital gains tax
- It is imposed only on sales of shares of capital assets
- Transaction must be done through the stock exchange
for it to be subject to stock transaction tax
- The sale of shares of stock listed and traded through the
Philippine Stock Exchange is subject to percentage tax,
known as stock transactions tax, and to documentary
stamp tax. The percentage tax is based on the gross
selling price or gross value in money of the shares of
stock sold without taking into account the cost to the
seller, whether he suffers a gain or loss. The tax is .5%
IPO Tax
- This is only imposed on closely held corporations (not
the same as close corporations in the Corporation
Code!). An Initial Public Offering refers to a public
offering made for the first time in the local stock
exchange
o Under 127(B), the more a corporation offers to the
public, the lower the tax is. This encourage
corporations to go public, and allows for
distribution of wealth
- This tax is based on the gross selling price or gross
value in money of the shares of stock, in accordance
with the proportion of shares disposed of to total
outstanding shares of stock after the listing in the local
stock exchange. The different rates are 4%, 2% and 1%.
SEC. 127. Tax on Sale, Barter or Exchange of Shares of Stock
Listed and Traded through the Local Stock Exchange or through
Initial Public Offering. -
(A) Tax on Sale, Barter or Exchange of Shares of Stock Listed and
Traded through the Local Stock Exchange. - There shall be levied,
assessed and collected on every sale, barter, exchange, or other disposition
of shares of stock listed and traded through the local stock exchange other
than the sale by a dealer in securities, a tax at the rate of one-half of one
percent (1/2 of 1%) of the gross selling price or gross value in money of the
shares of stock sold, bartered, exchanged or otherwise disposed which shall
be paid by the seller or transferor.
(B) Tax on Shares of Stock Sold or Exchanged Through Initial
Public Offering. - There shall be levied, assessed and collected on every
sale, barter, exchange or other disposition through initial public offering of
54
shares of stock in closely held corporations, as defined herein, a tax at the
rates provided hereunder based on the gross selling price or gross value in
money of the shares of stock sold, bartered, exchanged or otherwise
disposed in accordance with the proportion of shares of stock sold, bartered,
exchanged or otherwise disposed to the total outstanding shares of stock
after the listing in the local stock exchange:
Up to twenty-five percent (25%) 4%
Over twenty-five percent (25%) but not over
Thirty-three and one third percent (33 1/3%) 2%
Over thirty-three and one third percent (33 1/3%) 1%
The tax herein imposed shall be paid by the issuing corporation in primary
offering or by the seller in secondary offering.
For purposes of this Section, the term 'closely held corporation' means any
corporation at least fifty percent (50%) in value of outstanding capital stock
or at least fifty percent (505) of the total combined voting power of all
classes of stock entitled to vote is owned directly or indirectly by or for not
more than twenty (20) individuals.
For purposes of determining whether the corporation is a closely held
corporation, insofar as such determination is based on stock ownership, the
following rules shall be applied:
(1) Stock Not Owned by Individuals. - Stock owned directly or indirectly by
or for a corporation, partnership, estate or trust shall be considered as being
owned proportionately by its shareholders, partners or beneficiaries.
(2) Family and Partnership Ownerships. - An individual shall be considered
as owning the stock owned, directly or indirectly, by or for his family, or by
or for his partner. For purposes of the paragraph, the 'family of an
individual' includes only his brothers and sisters (whether by whole or half-
blood), spouse, ancestors and lineal descendants.
(3) Option. - If any person has an option acquire stock, such stock shall be
considered as owned by such person. For purposes of this paragraph, an
option to acquire such an option and each one of a series of options shall be
considered as an option to acquire such stock.
(4) Constructive Ownership as Actual Ownership. - Stock constructively
owned by reason of the application of paragraph (1) or (3) hereof shall, for
purposes of applying paragraph (1) or (2), be treated as actually owned by
such person; but stock constructively owned by the individual by reason of
the application of paragraph (2) hereof shall not be treated as owned by him
for purposes of again applying such paragraph in order to make another the
constructive owner of such stock.
(C) Return on Capital Gains Realized from Sale of Shares of
Stocks. -
(1) Return on Capital Gains Realized from Sale of Shares of Stock Listed
and Traded in the Local Stock Exchange. - It shall be the duty of every
stock broker who effected the sale subject to the tax imposed herein to
collect the tax and remit the same to the Bureau of Internal Revenue within
five (5) banking days from the date of collection thereof and to submit on
Mondays of each week to the secretary of the stock exchange, of which he
is a member, a true and complete return which shall contain a declaration of
all the transactions effected through him during the preceding week and of
taxes collected by him and turned over to the Bureau Of Internal Revenue.
(2) Return on Public Offerings of Share Stock. - In case of primary offering,
the corporate issuer shall file the return and pay the corresponding tax
within thirty (30) days from the date of listing of the shares of stock in the
local stock exchange. In the case of secondary offering, the provision of
Subsection (C)(1) of this Section shall apply as to the time and manner of
the payment of the tax.
(D) Common Provisions. - any gain derived from the sale, barter,
exchange or other disposition of shares of stock under this Section shall be
exempt from the tax imposed in Sections 24(C), 27(D)(2), 28(A)(8)(c), and
28(B)(5)(c) of this Code and from the regular individual or corporate
income tax. Tax paid under this Section shall not be deductible for income
tax purposes.
Revenue Regulation 6-2008
Who are exempt
a. Dealers in securities. provided that, they shall be subject
to Value Added Tax (VAT) on the basis of their gross
receipts and Income Tax from their sale or exchange of Corporations total issued shares increased from 25,000,000
securities (RR 16-2012); to 50,000,000 shares.
b. Investors in shares of stock in a mutual fund company, as
defined in Section 22(BB) of the Tax Code, as amended and At the IPO, one of the existing stockholders, Mrs. Linda O.
Section 2(s) of these Regulations, in connection with the Evangelista, has likewise decided to sell her entire 5,000,000
gains realized by said investor upon redemption of said shares to the public. Thus, 25,000,000 shares have been
shares of stock in a mutual fund company; and offered in the primary offering and 5,000,000 shares in the
c. All other persons, whether natural or juridical, who are secondary offering.
specifically exempt from national internal revenue taxes
under existing investment incentives and other special laws. Computation of the percentage to be used:
(i) Total Number of Shares Outstanding
Who collects the tax
a. Tax on sale of shares of stock listed and traded through Number of shares issued by RFB prior 25,000,000 shares
the LSE The stockbroker who effected the sale has the to IPO
duty to collect the tax from the seller upon issuance of the Add: Number of additional shares 25,000,000 shares
confirmation of sale, issue the corresponding official receipt through primary offering for IPO
thereof and remit the same to the collecting bank/officer of Total shares outstanding after listing 50,000,000 shares
the Revenue District Officers (RDO) where the broker is at the stock exchange or IPO
registered within 5 banking days from the date of collection
thereof, and to submit on Mondays of each week to the (ii) Computation of Percentage Ratio to the Total
Secretary of the LSE, of which he is a member, a true and Outstanding Shares
complete return, which shall contain a declaration, that he
made under the penalties of perjury, of all the transactions ii.a. For Primary Offering:
effected through him during the preceding week and of taxes
collected by him and turned over to the concerned RDO. The Number of shares offered by RFB to 25,000,000 shares
Secretary of the LSE shall reconcile the records of the LSE the public
with the weekly reports of stockbrokers and, in turn, transmit Divide by number of shares 50,000,000 shares
to the RDO, on or before the 15th day of the following outstanding after listing at the stock
month, a consolidated return of all transactions effected exchange
during the preceding month through the LSE. Ratio of percentage 50%
b. Tax on shares of stock sold or exchanged through IPO
Percentage ratio is 50% which is over 33 1/3 % so the rate of
The corporate issuer in Primary Offering shall file the return
tax to be used for Primary Offering (IPO) of shares is 1%.
and pay the corresponding tax to the RDO which has
jurisdiction over said corporate issuer within 30 days from
ii.b. For Secondary Offering:
the date of listing of the shares of stock in the LSE. The
return shall be accompanied with a copy of the instrument of
Number of shares offered by existing 5,000,000 shares
sale. In the case of shares of stock sold or exchanged
stockholder of RFB to the public
through Secondary Offering at the time of listing at the LSE
Divide by the number of shares 50,000,000 shares
of shares of closely-held corporations, the provisions in (a)
outstanding after the listing at stock
above shall apply as to the time and manner of the payment
of the tax on the sale thereof. exchange
Ratio of percentage 10%
Illustration from RR 6-2008
RFB Corporation, a closely-held corporation, has an Percentage ratio is 10% which is under 25%, so the rate of
authorized capital stock of 100,000,000 shares with par tax to be used for Secondary Offering (IPO) of shares is 4%.
value of Php1.00/share as of January 1, 2008.
(iii) Computation of the Tax
Of the 100,000,000 authorized shares, 25,000,000 thereof is
subscribed and fully paid up by the following stockholders: iii.a. RFB newly issued shares

Mr. Zabala 5,000,000 (25,000,000 shares x P1.50/share x 1%) = P375,000

Mrs. Posadas 5,000,000
Mr. Cruz 5,000,000 iii.b. Mrs. Evangelistas shares
Mr. Sison 5,000,000
Mrs. Evangelista 5,000,000 (5,000,000 shares x P1.50/share x 4%) = P300,000
Total Shares Outstanding 25,000,000
If in June 2008, RFB Corporation again decides to increase
RFB Corporation finally decides to conduct an IPO and capitalization by offering another 30,000,000 of unissued
initially offers 25,000,000 of its unissued shares to the shares to the public at Php 2.00/share consequently bringing
investing public. After the IPO in March 2008, RFB the total issued shares to 80,000,000 shares, such follow-

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on/follow-through sale which are shares issued subsequent
to IPO shall no longer be taxed pursuant to Section 6
hereof. The transaction, however, is subject to Documentary
Stamp Tax similar to the transaction covered by Primary
Offering as well as Secondary Offering of shares of stock.

Nonetheless, in case another existing shareholder decides to

offer his existing shares to the public subsequent to IPO, as
in the above illustration, if Mr. Benedict O. Sison ever
decides to sell his 5,000,000 shares to the public at Php 2.00
per share (for the Php 10,000,000 he received as
consideration for the shares he sold), he shall be taxed
pursuant to Section 127(A) of the Tax Code as implemented
by Sec. 5 of these Regulations which is 12 of 1% of the
gross selling price or Php P50,000 (i.e., 5,000,000 shares x
Php 2.00/share = Php10,000,000 x 12 of 1% ).

RETURNS AND PAYMENT

SEC. 128. Returns and Payment of Percentage Taxes. -

(A) Returns of Gross Sales, Receipts or Earnings and Payment of

Tax. -
(1) Persons Liable to Pay Percentage Taxes. - Every person subject to the
percentage taxes imposed under this Title shall file a quarterly return of the
amount of his gross sales, receipts or earnings and pay the tax due thereon
within twenty-five (25) days after the end of each taxable quarter: Provided,
That in the case of a person whose VAT registration is cancelled and who
becomes liable to the tax imposed in Section 116 of this Code, the tax shall
accrue from the date of cancellation and shall be paid in accordance with
the provisions of this Section.
(2) Person Retiring from Business. - Any person retiring from a business
subject to percentage tax shall notify the nearest internal revenue officer,
file his return and pay the tax due thereon within twenty (20) days after
closing his business.
(3) Exceptions. - The Commissioner may, by rules and regulations,
prescribe:
(a) The time for filing the return at intervals other than the time prescribed
in the preceding paragraphs for a particular class or classes of taxpayers
after considering such factors as volume of sales, financial condition,
adequate measures of security, and such other relevant information required
to be submitted under the pertinent provisions of this Code; and
(b) The manner and time of payment of percentage taxes other than as
hereinabove prescribed, including a scheme of tax prepayment.
(4) Determination of Correct Sales or Receipts. - When it is found that a
person has failed to issue receipts or invoices, or when no return is filed, or
when there is reason to believe that the books of accounts or other records
do not correctly reflect the declarations made or to be made in a return
required to be filed under the provisions of this Code, the Commissioner,
after taking into account the sales, receipts or other taxable base of other
persons engaged in similar businesses under similar situations or
circumstances, or after considering other relevant information may
prescribe a minimum amount of such gross receipts, sales and taxable base
and such amount so prescribed shall be prima facie correct for purposes of
determining the internal revenue tax liabilities of such person.

(B) Where to File. - Except as the Commissioner otherwise permits, every

person liable to the percentage tax under this Title may, at his option, file a
separate return for each branch or place of business, or a consolidated return
for all branches or places of business with the authorized agent bank,
Revenue District Officer, Collection Agent or duly authorized Treasurer of
the city or municipality where said business or principal place of business is
located, as the case may be.

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