Taxation Review Lecture

TAXATION
REVIEW
Jisryl H. Raz, CPA
PHILIPPINE TAXATION
SYSTEM
Protection
GOVERNM
ENT
- Assessment
- Collection
- Enforcement of Taxes:
1.Summary Proceedings
2. Judicial Proceedings
CONFLICT
-----------REMEDIE
S
PEOPLE
- File and Paytaxes

- Protest the
assessment
Taxes
- Claim for Tax
Refund/Credit
GOVERNMENT
POLICE
POWER
TAXATION
POWER
EMINENT
DOMAIN
POWER
Comparisons
POLICE
TAXATION
EMINENT DOMAIN
Power to MAKE and

IMPLEMENT laws for
the general welfare
Power to ENFORCE
contribution to raise
government funds
Power to TAKE private

property for public use with
just compensation
Broader in application
Plenary, comprehensive,
and supreme BUT NOT
ABSOLUTE
Merely to take private

property
Property is taken or
destroyed to promote
general welfare
Money is taken to support

the government
Property is taken for public

use
Can be expressly
delegated
Cannot be delegated, if
delegated, it should be to
the legislative department
of the LGU (e.g. to make
ordinances)
Can be expressly
delegated
Comparisons
POLICE
Limited to the cost of
regulation, license
and other necessary
expense
TAXATION
Generally, NO limit on
amount
Relatively FREE from Subject to

Constitutional
Constitutional and
limitations
Inherent limitations
Superior to NonImpairment Clause
Inferior to NonImpairment Clause
EMINENT DOMAIN
No imposition as to
amount, instead, it is the
Government which is to
compensate the property
taken.
Superior to and may
override Constitutional
impairment provision
General Principles
1. Principles or Canons of a Sound Taxation System (FEA)
a. Fiscal Adequacy sufficiency to meet government
expenditures and other public needs (Government Budget
Balance). This is in consonance of the Lifeblood Theory.
i. Budget Deficit =
Government Revenues < Government Expenditures
ii. Budget Surplus =
Government Revenues > Government Expenditures
General Principles
b. Equality or Theoretical Justice based on the
taxpayers ability to pay; must be progressive
c. Administrative Feasibility capability of being
effectively enforced. Tax laws should not obstruct
business growth and economic development.
General Principles
2. Purpose
a. Primarily, to raise revenue
b. Regulatory - To regulate (inflation, economic
and social stability, social control, etc.)
c. Compensatory - To compensate the benefits
provided by the government to the people
General Principles
3. Characteristics of Taxation (ILS)
a.Inherent power of the state.
b.Exclusively lodged with the legislative
body
c.Subject to inherent and constitutional
limitations
General Principles
4. Nature
a.Plenary full and complete in all respect
b.Comprehensive it covers persons, businesses,
activities, professions, rights and privileges.
c.Supreme it is supreme ONLY insofar as the
selection of the subject of taxation is concerned
d.Not Absolute it is subject to limitations
General Principles
5. Limitations in Taxation Power
a. Inherent Limitations (PENTI)
a.1. Public purpose
a.2. Exemption of the Government
a.3. Non-delegability of the power to tax
a.4. Territoriality
a.5. International Comity
General Principles
b. Constitutional Limitations
b.1. Due process clause
b.2. Equal protection clause
b.3. Freedom of speech and of the press
b.4. Non-impairment of contracts
b.5. Rule requiring that appropriations,
revenue and tariff bills shall originate
exclusively from the House of
Represenatatives (Congress)
General Principles
b.6. Uniformity, equality, and progressivity of taxation
b.7. Tax exemption of the properties actually,
directly and exclusively used for religious,
charitable and educational purposes.
b.8. Voting requirement (2/3) in connection with the
legislative grant of tax exemption
b.9. Non-impairment of the jurisdiction of the Supreme
Court in tax cases
General Principles
b.10. Exemption from taxes of the revenues and
assets of educational institutions, including
grants, endowments, donations and
contributions
b.11. Power of the Presidentto veto any particular
item (item veto) or items in an appropriation,
revenue or tariff bill (pocket veto).
General Principles
b.12. Necessity of an appropriation before
money may be paid out of the public
treasury
b.13. Non-appropriation of public money or
property for the use, benefit or support of
any sect, church or system of religion
General Principles
Double Taxation
It is taxing the same property twice when it
should be taxed once.
Kinds of Double Taxation:
1. Direct Duplicate Taxation double taxation
in the objectionable or prohibited sense; not
allowed in the Philippines. This constitutes a
violation of substantive due process.
General Principles
Elements of Direct Duplicate Taxation:
1.Same property or subject matter is
taxed twice
2.Same purpose
3.Same taxing authority
4.Same taxing period
5.Same kind or character of tax
General Principles
2.
Indirect
Duplicate
Taxation
legal/permissible. The absence of one or

more of the above-mentioned elements.
This does not necessarily violate the equal
protection of laws.
General Principles
How to avoid Double taxation?
1.Tax Credits
2.Tax Refund
3.Specific provisions of the NIRC which
allows tax minimization like vanishing
deductions, input taxes, etc.
General Principles
Theories of Taxation
1.Necessity
Theory
(Theory
of
Taxation) the power to tax is an
attribute of sovereignty emanating from
necessity (national defense, health,
education, public facilities, etc.).
General Principles
2.Lifeblood Theory (Importance of
Taxation) without taxes, the
government would be paralyzed for
lack of the motive power to activate
and operate it.
General Principles
3. Benefits Protection Theory/
Reciprocal Duties (Basis of Taxation)
there is a symbiotic relationship
between the State and the citizens
whereby in exchange of the protection
and benefits that the citizens received
from the State, taxes are paid.
General Principles
Aspects of Taxation (shared by both
executive and legislative body)
1.Levy the imposition or making of tax laws
2.Assessment similar to audit
3.Collection enforcement of tax
General Principles
Note:
1.Levy is often called as tax legislation or
tax policy.
2.Assessment and collection are collectively
termed as tax administration.
3.Levy and assessment comprise the impact
of taxation, while tax collection comprises the
incidence of taxation.
General Principles
4. An impact of taxation is a point on
which tax is originally
imposed.
5. An incident of taxation is a point on
which the tax burden finally
rests or
settles down.
General Principles
Doctrines of Taxation
1. May the court interfere with tax legislation?
Answer: As long as the legislature, in imposing a tax,
does not violate applicable constitutional limitations or
restrictions, it is not within the province of the courts to
inquire into the wisdom or policy of the exaction, the
motives behind it, the amount to be raised or the persons,
property or other privileges to be taxed. The courts power
is limited only to the application and interpretation of the
law.
General Principles
2. Is the doctrine of equitable recoupment followed in
the Philippines?
Answer: No. A tax presently being assessed against a
taxpayer may not be recouped or set-off against an
overpaid tax, the refund of which is already barred by
prescription.
General Principles
3. May a tax be subject of compensation or
set-off?
Answer: Generally, no. Taxes cannot be the
subject of compensation or set-off. Taxes are
not contractual obligations but one arising out
of duty to the government
General Principles
4. What is a taxpayer suit?
Answer: It is a case fied by a bona fide
taxpayer impugning the validity, legality
or constitutionality of a tax law or its
implementation.
General Principles
5. What is the nature of our tax laws
Answer: Internal revenue laws are not
political in nature. In times of war, they are
deemed to be the laws of the occupied
territory and not of the occupying enemy. Tax
laws are civil and not penal in nature, although
there are penalties provided for their violation.
General Principles
6. A tax statute is construed against the government,
liberally in favor of the taxpayer; while tax
exemptions are construed against the taxpayer and
liberally in favor of the government.
7. Tax laws are special laws which prevail over a general
law.
8. Tax laws operate prospectively unless the purpose of
the legislature is to give a retrospective effect.
Concept of Tax
1. It
is
an
enforced
proportional
contribution from the persons and
property levied by the law-making body of
the State.
2. Taxation vs. Tax
a. Taxation is the process or means of imposing
and enforcing contributions.
b. Tax is the enforced contribution, itself, which
generally payable in money.
Concept of Tax
Characteristics of Taxes
1.Forced charge
2.Generally payable in money
3.Exclusively levied by the legislative body
4.Assessed
in
accordance
with
some
reasonable rule of apportionment (ability-to-pay
principle)
5.Imposed by the State within its jurisdiction
6.Levied for public purpose
Concept of Tax
Classification of Taxes
1. As to subject matter:
a.Personal tax imposed upon persons of certain class
with fixed amount (e.g. Community tax or poll tax)
b.Property tax assessed on property of certain class
(e.g. Real Property tax)
c.Excise tax imposed on the exercise of privilege (e.g.
income tax, donors tax, estate tax, etc.)
d.Custom duties charged upon the commodities being
imprted into or exported from a country (e.g. tariffs)
Concept of Tax
2. As to burden:
a. Direct tax both incidence or liability for the
payment of tax as well as the impact or burden of the
tax falls on the same person (e.g. income
tax)
b. Indirect tax the incidence or liability for the
payment of tax falls on one person but the
impact
or burden of the tax falls on another
person (e.g.
VAT)
Concept of Tax
3. As to purpose
a. General tax levied for the general or
ordinary purposes of the government
b. Special tax levied for special purpose
Concept of Tax
4. As to measure of application
a. Specific tax imposes a specific sum by the head
or number or by some standard of
weight or
measurement (e.g. excise tax
on cigarettes)
b. Ad Valorem tax tax upon the value of the article
or thing subject to taxation (e.g.
VAT of 12%
regardless of the value of sales)
Concept of Tax
5. As to taxing authority
a. National tax levied by the National
Government (e.g. income tax, business taxes,
transfer taxes)
b. Local tax imposed by the Local
Government (e.g. Poll tax, real property taxes)
Concept of Tax
6. As to rate
a. Progressive tax rate or amount of tax increases as the
amount of income increases (e.g.
normal/tabular/schedular tax of 5% - 32%, tabular
tax
for donors tax and estate tax)
b. Regressive tax rate dcreases as the amount of
income to be taxed increases (not applicable in the
Philippines)
c. Proportionate tax based on fixed proportion or rate of
the value of the property assessed (e.g. VAT of
12%)
Escape from Taxation

1. Tax Avoidance (Tax Planning) legal and
permissible means
a. Shifting the process by which the tax burden is
transferred from the statutory taxpayer to another
without violating the law.
b.Transformation the manufacturer or producer pays
the tax imposed upon him and endeavors to recoup
himself by improving his process of production, thereby
turning out his units of production at a lower cost.
Escape from Taxation

c. Capitalization a mere increase in the value of the
property is not an income but merely an unrealized
increase in capital.
d. Tax-exemption a grant of immunity to a particular
persons or corporations from the obligation to pay
taxes
2. Tax Evasion (Tax Dodging) the use of illegal or
fraudulent means to defeat or lessen the payment of
tax
Tax Laws, BIR Rulings and

Revenue Regulations
1. Tax laws
a. A tax law is a set of rules that provide means for the State
to raise revenues.
b. All revenue bills must originate from the House of
Representatives (Congress). After passing 3 readings
by a majority vote in technical committee, it shall be
elevated to the Senate which needs to pass the same 3
readings. The Presidents signature is necessary so that the
bill becomes a law.
c. In case of doubt, tax statutes are construed against the
Government in favor of the taxpayer.
d. In case of doubt, tax exemptions are construed against the
taxpayer in favor of the Government

Revenue Regulations
2. Revenue Regulations
a. These are interpretations of an administrative body
(BIR) intended to clarify or explain the tax laws
and
carry into effect its general provisions by
providing
details of administration and procedure.
b. It is promulgated (made) by the Secretary of Finance,
upon the recommendation of the Commissioner
of Internal Revenue (quasi-legislative function).
c. It must be reasonable, within the authority conferred,
not contrary to laws, must be published and
prospective in application.

Revenue Regulations
3. BIR Rulings
a. The BIR issues a general interpretation of tax
laws usually upon a requrest of a taxpayer to
clarify a provision of law.
INCOME
TAXATION
NATIONAL INTERNAL REVENUE TAXES
Transfer
Taxes
Income
Taxes
Tabular
(Individual)
Corporate
Passive
Gratuitous
Business
Taxes
Onerous
Mortis
Causa
Gifts
CGT
VAT
Percentage
Taxes
Excise
Documentary Stamp Tax
For INDIVIDUALS whose gross income solely includes

compensation, allowances and other remunerations
arising from the employer-employee relationship, passive
income and capital gains not subjected to final tax and
CGT:
Compensation income
Add: Passive Income, not subjected to FT
Capital Gains, not subjected to CGT
Gross Income
Less: Deductions for:
PHHI
Personal Exemptions
Taxable Income
xx
xx
xx
xx
(xx)
(xx)
xx
For INDIVIDUALS with business or professional income:

Gross receipts/sales
Less: Cost of service/sale
Gross income from business or profession
Itemized Deductions or OSD
NCLCO, if there is any
NOLCO, if there is any
Net income from business or profession
Less:
PHHI
Personal Exemptions
Taxable Income
xx
(xx)
xx
(xx)
(xx)
(xx)
xx
(xx)
(xx)
xx
For INDIVIDUALS whose income includes both compensation, business

income and passive incomes not subjected to final tax:
Less: Cost of service/sales
Add:
Passive Income, not subjected to FT
Total Gross Income before compensation income
NCLCO, if there is any
NOLCO, if there is any
Net Income from Business or Profession
Add: Compensation Income
Total Income
Less:
PHHI
Personal Exemptions
Taxable Income
xx
(xx)
xx
xx
xx
xx
(xx)
(xx)
(xx)
xx
xx
xx
(xx)
(xx)
xx
For CORPORATIONS, including business partnerships,

domestic corporations, resident foreign corporations,
joint ventures, and associations, except non-resident
foreign corporations (which is taxable at gross income):
xx
Less: Cost of service/sales (xx)
Gross income from business or profession xx
Add: Passive Incomes, not subjected to final tax
xx
xx
Total Gross Income
xx
(xx)
Net Operating Loss Carry-Over (NOLCO)
(xx)
Taxable Income
xx
*NCLCO is not applicable since the holding period is
also not applicable.
Income Taxation: Gross

Income Inclusions
4 Broad Types of Returnable Income:
1.Compensation Income
2.Business or Professional Incomes
3.Passive Income
4.Capital Gains
Gross Income:
Compensation Income
All remunerations paid to the employee arising from
an employer-employee relationship which
include, but not limited to:
a.
b.
c.
Salaries and wages except wages given to MWE

Bonuses and allowances except 13th month pay
and other bonuses not exceeding P 82,000.
Holiday pay, Overtime pay, Night shift differential, and
Hazard Pay received by persons other than an MWE.
Gross Income:
Compensation Income
d. De minimis and other fringe benefits not
subjected to fringe benefit tax (given to rankand-file), subject to P82,000 limit
e. Separation Pay, Retirement pay, and similar
remunerations which do not meet the
requirements
f. Fees, honoraria, emoluments, commissions, etc.
Remember
Every income is generally
taxable, unless, specifically
exempted by the law and the
requirements to be exempted
are met.
Example:
D, married with 4 qualified dependent children had the
following:
Compensation Income, (net of P19,000
SSS, PHIC, and HDMF Contributions) P 305,000
13th Month Pay
27,000
Productivity Bonus
27,000
Premiums on Health Insurance
2,400
Personal, family and living expenses
200,000
The taxable income of D:
1. Prior to 2015
_____________
2. 2015
_____________
55
Example:
A, resident citizen, single had the following during the year:
Gross compensation income
P 4000,000
Deductions from compensation income:
SSS Contributions
3,600
Pag-IBIG Contributions
1,200
PhilHealth Contributions
1,800
Union Dues
2,400
Premium Payments on Health Insurance (P250/month)
3,000
Other Incomes
Prizes and awards received as best athlete in the Palarong Pambansa 10,000
Prizes and awards received for the silver medal in the SEA Games
25,000
Prize won as a Lucky Home Viewer
10,000
Prize won in a Supermarket raffle
20,000
13th Month Pay
14,000
Christmas cash gift
10,000
Midyear Bonus
14,000
Interest on Bank Deposit (net of withholding tax)
16,000
Interest on Foreign Currency Deposit (net of withholding tax)
10,000
IMPORTANT
Situs of Compensation Income:
place where the services are
rendered
regardless
of
the
residence of payor (Sec. 155, RR
02-40)
57
Income Taxation: Individual

Exclusions from Gross Income
1. Holiday pay, Overtime pay, Night shift
differential, and Hazard pay (HONsHa) earned by
MWE (non-taxable).
2. 13th Month Pay, productivity incentives,
Christmas bonus and other bonuses and benefits
(de minimis) not exceeding PhP 82,000 (starting
January 2015 pursuant to Revenue Regulation
No. 3-2015)

3. Gifts, bequests and devises (subject to transfer
taxes) are not subject to income tax, but income
derived from the use of such gifts, bequests and
devises are subject to income tax.
4. Income derived by foreign government
5. Income derived by the Philippine government
or its political subdivisions.

6. De Minimis not exceeding their statutory limits.
7. Proceeds of life insurance paid to the heirs upon
death of the insured or whoever the beneficiary is (also
not subject to estate tax if the beneficiary is the third
person irrevocably designated as heir; subject to
estate tax if the beneficiary is the estate, administrator
or executor or if the designation to third persons is
revocable).

8. Retirement benefits under RA 7641
(private benefit plan), provided:
a. The employee is at least 50 years old at
the time of retirement;
b. The employee has rendered 10 years in
the same company
c. The employee availed it for the first time
d. Such private benefit plan is approved by
the BIR.

9. Separation pay paid to the employee for
causes beyond the control of said
employee (involuntary). If the cause of
separation is voluntary, such payment
shall be taxable.
10. Mandated contributions such as SSS,
GSIS, PHIC and HDMF contributions and
union dues.

11. Amounts received as a return of premiums paid.
12. Prizes and awards in recognition of religious,
charitable, scientific, educational, artistic, literary or
civic achievement as well as awards in authorized
sports competitions.
13. Gains from sale of bonds, debentures or other
certificates of indebtedness with a maturity of longer
than five years.
Example:
Dino purchased a life insurance annuity
for P 1,000,000 which will pay him P
100,000 per year. The life expectancy
of Dino is 12 years. How will the
amount be taxed?
Gross Income: Business or

Professional Income
Generally, arising from selling goods or services.
Whether individual or corporate taxpayer, may include:
Sale of goods and properties (real or personal)
Sale of services (professional services, lease of
properties, etc.)
Note: Withholding taxes from professional incomes and
other sale of services which are subject to CWT must be
correctly withheld.
65
Example:
A, married to M had the following during the taxable year:
Gross Income
From the Practice of profession
P 700,000
Rental Income of their conjugal property 300,000
Allowable Deductions
For the practice of profession
For the property rented to tenants
520,000
140,000
The taxable income of A before personal exemptions is

_________________.
Gross Income: Passive

Income
General Rule: Passive income earned within
the Philippines are taxable unless
specifically exempted by law.
Exception: If the passive income is not
subjected to final tax, such is added to
the gross income subject to normal tax.
67
Passive Income:
Individual Taxpayers
a. Interest on currency bank deposits, yield and other
monetary benefit from deposit substitute, trust and
similar arrangement; Royalty from patents and
franchises, prizes exceeding P10,000 and
winnings regardless of the amount: 20% final tax
b. Royalty from books, literary works and musical
compositions, and dividend from domestic
corporation: 10% final tax
a. Interest on FCD under the expanded FCDS: 7.5%,
except non-residents
Example:
Nina, a resident citizen, had the following incidental income
in 2009:
Interest on Philippine currency bank deposit
P 30,000
Interest on foreign currency deposit under the
Expanded foreign currency deposit system
50,000
Royalty from invention
150,000
Royalty from musical compositions
80,000
Dividend from domestic corporation
60,000
Share in net income of business partnership
100,000
How much is the total final taxes?
Passive Income:
Corporate Taxpayers
a. Interest on FCD under the expanded FCDS:
7.5%, except non-resident foreign corporation
b. Interest on currency bank deposits, yield and
other monetary benefit from deposit substitute,
trust and similar arrangement; Royalty from
patents and franchises, prizes exceeding
P10,000 and winnings regardless of the amount:
20% final tax.
b. Dividend from domestic corporation: exempt
70
Example:
Taxpayer received the following income in

Rent, Philippines
P10,000
2009:
Rent, Hongkong
20,000
Interest, peso deposit, PNB
Interest, US$ deposit, PNB ($1,000 x
P56)
Interest, deposit in Hongkong
(HK$1,000 x P7)
Prize (cash) won in a local contest
Prize (TV) won in a local lottery valued at
Prize won in contest in US
Lotto winning in US
Dividend, domestic company
10,000
56,000
7,000
8,000
15,000
30,000
10,000
60,000
Gross Income: Passive

Income
Not Subject to Final Withholding Tax
those which are not subjected to final tax like
those which are earned abroad, prizes not
exceeding P10,000, and interest from loans,
trade and accounts receivables and those
incomes earned outside the Philippines shall
be included in the computation of gross
income.
72
Example:
Maximo received the following income in
Business income, Philippines
P300,000
2009:
Business income, United States
Expenses, Philippines
Expenses, United States
Interest on deposit with Metrobank
Cash prize won in a local contest
Cash prize won in a contest in U.S.
Winnings in lotto
Winnings in lotto in U.S.
Dividends from SMC, a domestic company
Interest on deposit in U.S. ($1 = P48)
250,000
200,000
125,000
3,000
6,000
10,000
20,000
50,000
25,000
$500
Gross Income: Capital

Gains
Capital gains arising from the sale of capital assets (real or
personal assets) are taxable as follows:
a. If REAL property not used in business, subject to
capital gains tax of 6% of the selling price, or FMV, or
Zonal Value, whichever is the highest.
b.
If shares of stocks not traded in the local stock

exchange, subject to 5-10% capital gains tax.
c.
All other capital gains, which are not subject to CGT, are
subject to normal tax (5-32%), subject to the pertinent
rules in property.
74
Ordinary Assets vs. Capital Assets

a
Capital Assets
a. Inventories, stocks in trade held by

dealers, other property or in kind
included in inventory of the
taxpayer (e.g. work in process
inventory and finished goods
inventory, stocks)
b. Property held for sale to customers
in the ordinary course of business
(real estate developer)
c. Properties used in business which
is subject to depreciation or
amortization
(factory,
office
building, patents)
d. Real property used in business
(land which the factory stands)
a. Other than those enumerated as

ordinary assets
b. All properties not used in business
c. investment whether or not
connected with taxpayers trade are
capital assets (e.g. investment in
equity securities and investment in
subsidiary)
d. Residential house and lot
e. Family car
f. Receivables arising from sale of
inventory
Example:
1. Accounts Receivable
2. Securities Held as an investment
3. Inventories of raw materials, work-in process and
finished goods
4. Office Equipment
5. Land used in Business
6. Land held for investment purposes
7. Land for sale by a real estate dealer
8. Residential House
9. Business of sole proprietorship sold to a corporation
10. Interest of a partner in a partnership
11. Car used partly for business and partly for personal
purposes
Ordinary Assets vs. Capital Assets

Subject to CGT
Subject to Normal Tax
a. Sale of stocks not listed and

not traded in local stock
exchange (5%- 10% of capital
gains)
a. Other than those listed as

Major Capital Assets (stocks not
traded and listed, and real
properties subject to 6% CGT),
b. Sale of real capital properties all other capital gains are subject
NOT used in business (6% CGT to normal tax (added in the gross
based on FMV or SP, whichever income)
is higher).
b.
HOLDING
PERIOD
is
c. NO HOLDING PERIOD since
applicable ONLY to individual
the capital gains tax is a final tax
taxpayers
on the date of sale.
c. NO HOLDING period for
corporations.
d. GAINS or LOSSES are no
longer reportable since the sale d. Gains are reportable in full
77
subject to holding period clause.
was already subjected to final
Ordinary Gains and

Losses
Gains and losses derived from sale or exchange
of the ordinary assets are ORDINARY GAINS
and LOSSES which are included in determining
ordinary income subject to tax.
Gains/Losses shall be part of GROSS INCOME
of such seller (as other income) subject to
Normal Tax (5-32% or 30%).
Capital Gains and Losses

Capital gains are taxable, whether at 6%, 5%10% or normal tax.
Capital losses are ONLY deducted from
CAPITAL GAINS. No capital losses exceeding
capital gains may be deducted from ordinary
gains nor gross income.
Capital Gains and Losses

HOLDING PERIOD is applicable ONLY to individual
taxpayers.
Capital assets held for more than 12 months, the
taxable gain or deductible loss is 50% of such gain
or loss.
Capital assets held for not exceeding 12 months,
capital gains taxable in full, however, in case of
capital loss deductible in full, but limited only to the
extent of capital gains.
In case of net capital loss, such loss shall be carried
over to the succeeding year.
Example:
A, a resident citizen had the following data for the year 2011 to 2014:
2011
2012
2013
2014
Ordinary Taxable Income P 200,000 P 250,000
P 300,000
P 350,000
Gain from sale of CA
Held for 12 months 20,000
2,000
100,000
57,000
Held for 13 months
8,000
10,000
20,000
28,000
Loss from sale of CA
20,000
60,000
10,000
Status of the taxpayer
Single
Married
Married w/
Married w/
1 QDC
2 QDC
Required: Compute the taxable income of the taxpayer for each year.
Net Capital Loss Carry-Over

(NCLCO)
The net capital loss of one year
may be carried over to the
succeeding year, but not
exceeding the taxable income
of the year when such net
capital loss was sustained.
Example:
Mr. N, a citizen of the Philippines, single had the following
data:
Net income from business
Interest from notes of clients
Capital gain on shares of foreign
corporation held for 3 years
Capital gains on jewelry held for
10 months
Capital loss on bonds, held for
4 months
2010
P 80,000
4,000
2011
P 90,000
2,000
50,000
70,000
120,000
Solution:
2010
P 80,000
4,000
84,000
Net Income from Business

Interest income
Ordinary net income
Capital Gain (50%)
P25,000
Capital Gain (100%)
Capital Loss (100%)
(120,000)
Net Capital Loss
( 95,000)
NCLCO
Net Capital Gain
Total
Less: Basic personal exemption
(50,000)
Taxable Income
34,000
2011
P 90,000
2,000
92,000
P70,000
(34,000)
36,000
128,000
(50,000)
78,000
Note:
Corporate taxpayers are not
subject to holding period,
thus cannot carry-over its net
capital loss.
Example:
A, a domestic corp., had the following data for the year 2011 to 2014:
2011
2012
2013
Ordinary Taxable Income P 200,000
P 250,000
P 300,000
Gain from sale of CA
2,000
100,000
Held for 13 months
8,000
10,000
20,000
Loss from sale of CA
20,000
60,000
Required: Compute the taxable income of the taxpayer for each year.
2014
P 350,000
57,000
28,000
10,000
CAPITAL GAIN TAX

EXEMPTION: Requirements
To be exempted from Capital Gains Tax, especially in
the sale of residential dwellings (house and lot), the
following shall be observed:
1. The capital asset sold was a principal residence;
2. The taxpayer is a citizen of the Philippines or
resident alien;
3. The proceeds of the sale was invested in acquiring a
new principal residence;
4. Notice to make such utilization was given to the BIR
within 30 days from the date of sale;
CAPITAL GAIN TAX

5. Utilization of the proceeds of the sale was made
within eighteen (18) months from the date of sale;
6. A cash deposit is made with an accredited bank for
an amount equal to the capital gain tax, and answerable
for the capital gain tax should the conditions for the
exemption be not satisfied;
7. The exemption shall be availed of once only every
ten years.
CAPITAL GAIN TAX

If the entire proceeds of the sale is
invested, the entire capital gain is
exempt. The cost basis of the new
principal residence will be the basis
of the old residence.
CAPITAL GAIN TAX

If only a portion of the proceeds of the sale is invested in
the new residence, the cost basis of the new residence
shall be:
Proceeds of the sale invested
Entire proceeds of the sale
what should have been

the tax (CGT)
CAPITAL GAIN TAX

Capital gain tax, if the entire proceeds is not
utilized:
Proceeds of the sale not invested
Entire proceeds of the sale
what should have been

the tax (CGT)
CAPITAL GAIN TAX

If the amount invested is in excess of the
proceeds of the sale, the capital gain is exempt
and the basis for the new principal residence is
equal to the basis of the old residence plus the
additional investment
New Residence = Old residence + additional capital investment
Example:
A sold his principal residence at a selling
price of P5M but with a FMV of 6million.
The property sold was acquired for
P3million. He purchased his new residential
residence at a cost of P7million.
a.The capital gains tax is ______________.
b.The cost of the new principal residence is ________________.
c.If only P4million out of P5million was utilized in acquiring his new
principal residence, the capital gains tax is ____________.
d.Using the same assumption in letter c, the cost basis of the new
residence is _____________
Remember
Passive
incomes
not
subjected to final taxes and
Capital Gains not subjected
to capital gains taxes are
added to the Gross Income,
thus, subject to normal
tax.
94
Example:
Oliver, a resident citizen, has the following
transactions of not listed and traded shares
of stocks of a domestic corporation:
Date of Sale
February
2009
April 5, 2009
July 20, 2009
Date of
Acquisition
13, January 18, 2007
November
30,
2008
September 3, 2007
October 13, 2009 August 7, 2009
Cost
P 80,000
Selling
Price
P135,000
256,000
360,000
175,000
115,000
144,500
150,000
DEDUCTIONS
FROM FROM
GROSS INCOME
96
GENERAL RULES:
1. A
taxpayer
seeking
a
deduction must point to some
specific provisions of the
statute
authorizing
the
deduction.
2. Tax exemptions as well as
deductions
are
generally
disfavored
by
the
law.
(strictissimi juris)
Allowable Deductions:
1. Optional Standard Deduction
2. Itemized Deductions
Optional Standard Deduction

Optional standard deduction may be claimed in lieu of
the itemized deductions.
Individual taxpayers (RC, NRC, RA, taxable estates
and trusts) who are engaged in business or selling of
service may claim OSD, except NRAETB and
NRANETB.
For individual taxpayers, the 40% OSD is multiplied at
his gross sales or gross receipts. For purposes of
computing OSD for individuals, gross sales/receipts
shall mean after deducting sales discounts actually
taken, sales returns and sales allowances.
Optional Standard Deduction

Corporate taxpayers (domestic and resident foreign),
except non-resident foreign corporation, may claim 40%
OSD of its gross income (sales/receipts less cost of
sales/service plus other income not subjected to final tax).
The selection is not presumed; the taxpayer should
signify his election to claim OSD and such would be
irrevocable for the taxable year in which the return is
made.
The failure to indicate the election to avail the OSD shall
be considered as having availed of the itemized
deductions.
Example of Erroneous
Computation
1st Quarter
2nd Quarter
3rd Quarter
Annual
OSD
Itemized
Deduction
OSD
Itemized
Deduction
Itemized
Deduction
OSD
OSD
Itemized
Deduction
Example of Correct
Computation
1st Quarter
2nd Quarter
3rd Quarter
Annual
OSD
OSD
OSD
OSD
Itemized
Deduction
Itemized
Deduction
Itemized
Deduction
Itemized
Deduction
Itemized Deductions
General Rule: Expenses to be deductible should be
ORDINARY and NECESSARY for the business, and
must be SUBSTANTIATED.
Exception: Optional Standard deduction may be
claimed without substantiation. Take note:
1.RESIDENTS (RC and RA) and CITIZENS (RC and
NRC) can claim OSD.
2.DOMESTIC
and
RESIDENT
FOREIGN
corporations can claim OSD.
Itemized Deductions:
(Ex InTaLoBa DepDep ChaRD PeT)
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
General Business Expenses (salaries and wages,

supplies and repairs, operating expenses, rentals,
advertising, travelling expense, insurance premiums
against fire, EAR)
Interest
Taxes
Losses
Bad Debts
Depreciation
Depletion
Charitable and other contribution
Research and Development
Pension and Trust
General Business Expenses

Salaries: all remuneration, including wages
and other forms of compensation for services
actually rendered plus the grossed-up
monetary value of fringe benefits granted by
the employer to the employee. Provided, a
withholding tax should be imposed (FBT or
Wtax) so that the salaries may be claimed as a
deduction.

Materials and Supplies: cost of these expense
when actually consumed.
Travel Expenses: any expenses incurred for
transportation and allowances provided they are
incurred solely for carrying on the trade,
business or profession.
Rent Expense
LESSEE
LESSOR
ACCRUAL
BASIS
Rent is deductible when Rent is taxable when

INCURRED.
RECEIVED.
CASH BASIS
Rent is deductible when Rent is taxable when

INCURRED and PAID.* RECEIVED.**
*In cash basis, advance payments are not

deductible unless incurred.
**In cash basis, advance payments constitute a
taxable income the year received, irrespective of the
period earned.
Example:
On January 1, 2011, Marco leased his vacant lot for a
period of 12 years at P 240,000 per year to Isabel, the
lessee. It was agreed that the lessee will pay the following:
Rent of P 480,000 (for 2011 and 2012)
Security deposit of P 240,000
Real property tax at P 20,000 per year until the end of the lease
period
The lease contract provides among others that the lessee

will construct a three-storey building for parking purposes
at a cost of P 3,600,000 which shall belong to the lessor
upon expiration or termination of the lease. The building
was completed on July 1, 2011, and was readily available
for use. The estimated life of the building is 15 years.
Marco shall report for the year 2011, using the spread-out
method, a total income from lease of ____________
Example:
The rent expense of the lessee if he
is using accrual basis for income
tax purposes. _____________
The rent expense of the lessee if he
is using cash basis for income tax
purposes. _____________
109
Representation: entertainment, amusement and

recreation (EAR)
Subject to a limit of % of net sales if the taxpayer is
engaged in selling of goods; and 1% of the net
revenue if the taxpayer is engaged in selling services.
If the taxpayer is engaged in both selling of goods
and services, the total actual EAR shall be allocated
using the net sales or net revenue times the total of
net sales and net revenue subject to the limits
provided above.
Example:
A Corporation had a net sales of P1M. The actual
entertainment,
amusement
and
recreation
expense amounted to P20,000. The deductible
EAR expense is _____________.
C Corporation is engaged in the sale of goods and
services with net sales and net revenue of P2M
and P1M respectively. The actual, amusement
and recreation expense amounted to P18,000.
The
deductible
EAR
expense
is
________________.
Interest: must meet the requisites for

deductibility before can be claimed as
deduction
1. Subject to a limit, that is total interest less 33% of total
interest income (grossed-up) subjected to final tax.
2. The interest shall be deductible in full only if
a. there is no interest income subjected to final
tax (20%); or
b. Interest expense on tax delinquency or deficiency,
provided the tax is related to trade or business or
practice of profession, shall be 100% deductible.
The following interests are non-deductible:

a. Interests paid to persons classified as related
taxpayers
b. If the indebtedness is incurred to finance petroleum
exploration
c. Interest on preferred stocks.
Example:
A Corporation is engaged in trading business. The reported income and
expenses for taxable year 2014 are as follows:
Sales
P 10,000,000
Cost of Sales
6,000,000
1,000,000
Interest on Time Deposit
100,000
Interest from Installment Receivables
120,000
Interest Expenses Claimed:
On loans payable
180,000
On Deficiency Taxes
30,000
On a loan from B Corp., a parent
company
10,000
The net taxable income is _______________________.
Example:
In the taxable year 2012, Mrs. Gemma ClarinMendoza had an interest expense on notes
payable of 40,000 and on delinquency taxes of
P100,000. The taxpayer had an interest
income on bank deposits of P20,000 and
dividend from resident corporations of
P30,000. How much is her deduction for
interest expense?
Taxes: may be claimed as deduction if they are

not national Internal revenue taxes such as:
Income
transfer taxes
claimed as tax credit
percentage tax other than the 3% PT
VAT
Taxes not related to trade
Special assessment tax, surcharges and compromise
penalty
116
Example:
Taxes paid by a corporation within a year were:
National Income Taxes:
Normal tax
Improperly Accumulated Profit Tax
Capital Gain Tax
Final tax
Community Tax
Value-Added Tax
Local taxes and licenses
Interest for late payment of national and
local taxes
Surcharges for late payment of national
and local taxes
The deduction for taxes is:
P 500,000
300,000
740,000
50,000
10,500
89,000
10,000
40,000
60,000
Losses
The following losses may be claimed as
deduction:
Casualty losses
Capital losses and securities becoming
worthless
Special losses:
Losses from wash sales of stock or securities
Wagering losses
Abandonment losses
118
Requisites:
1.The loss arises from fires, storms,
shipwreck, or other casualties, or from
robbery, theft or embezzlement;
2.The property lost is connected with the
trade business or practice of profession.
3.Actually sustained during the taxable
year;
4.Not compensated for by insurance or
other forms of idemnity;
Requisites:
5. Incurred in trade, profession or
business;
6. Reported with the BIR within fortyfive days from the time of loss; and
7. Not claimed as deduction for
estate
tax purposes.
Example: (if Capital

Asset)
Cost or adjusted basis
Value of property before casualty
Value of property after casualty
Insurance recovered
P 18,000
15,000
10,000
3,000
Example: (if Ordinary

Asset Total
Destruction)
Acquisition Cost
Accumulated Depreciation
Insurance Recovered
P 10,000
4,000
2,500
122
Example: (if Ordinary Asset

Partial Destruction)
Acquisition Cost
P 100,000
Accumulated Depreciation
90,000
Replacement Cost to restore the
property back to its operating condition 20,000
Insurance Recovered
5,000
Estimated remaining useful life
5 years
123
Example:
A taxpayer engaged in business incurred a partial loss of property as
follows:
Asset 1
Asset 2
Book Value of the asset at the time of loss
P 200,000
P 200,000
Cost to restore the property back
to its normal operating condition
120,000
300,000
Insurance recovery
50,000
None
Salvage
None
40,000
Compute the deductible loss for asset 1 ________________
Compute the deductible loss for asset 2 ________________
124
NOLCO
Net operating loss means the excess of allowable
deductions over gross income of the business in a
taxable year.
The net operating loss of the business or enterprise for
any taxable year shall be carried over as a deduction
from gross income for the next three (3) consecutive
years immediately following the year of such loss.
Provided, that at the time of incurring net loss, the
taxpayer must not be exempted from income tax.
125
NOLCO
Provided, that for mines other than oil and
gas wells, any net operating loss incurred in
any of the first ten (10) years may be carried
over as deduction from taxable income for the
next five (5) years immediately following such
year when the loss is incurred.
NOLCO vs. NCLCO

1. NOLCO occurs when the deductions claimed
exceeds the gross income, while NCLCO
occurs when, in case of individual taxpayers,
capital loss exceeds capital gains.
2. NOLCO is available to both individual and
corporate taxpayers, whereas, NCLCO is
available only to individual taxpayers.
Example:
A Corporation taxpayer had the following:
Y5
Gross Income 900,000
Allowable
Deductions
980,000
Y6
900,000
Y7
880,000
Y8
840,000
Y9
980,000
880,000
900,000
830,000
900,000
Compute the income to be in every year.

Compute the income tax due per year assuming the company is in its fifth
year of operation.
Losses from wash sales of stocks or securities:

In case of any loss claimed to have been sustained
from any sale or other disposition of shares of stocks or
securities shall not be deductible if:
The seller is not a dealer in securities (shrinkage)
the loss should be ACTUAL.
Within a period of 30 days before the sale or 30
days after the sale, the seller either:
Acquired (by purchase or exchange) stock or
securities identical to the stock or securities sold;
or
Has entered into a contract or option to acquire
stock or securities identical to the stock or
securities sold.
In case of wagering transactions, the loss shall be allowed
only to the extent of the gains from
such transactions.
Example:
A sold, not a dealer in securities, has the following
transactions during the year:
1/15/2016
2/1/2016
2/28/2016
3/17/2016
Purchased 5,000 shares at P12 each from

ABC Corp.
Purchased 1,000 shares at P13 each month
from ABC Corp. (identical stocks).
Sold 1,800 shares from the first purchase at
P10 each.
Purchased 500 identical shares from ABC
Corp. at P11 each.
Bad Debts: must be ascertained worthless (actual

not estimated) and the corresponding receivable
should have been written off within the taxable year.
Amount deductible should be the actual amount
EXCLUSIVE of interest.
If the amount claimed as bad debt exceeds the current
income, the excess loss shall be carried over for the
next three years (as NOLCO).
If the amount is recovered or received subsequently, the
amount recovered shall be taxable in full in the year it
was recovered.
Depreciation: must be based on a reasonable

allocation of the cost of capital asset using the
methods recommended by the CIR.
1. If the asset is used in PETROLEUM Operations,
properties DIRECTLY used in the production of
petroleum shall be depreciated over 10 years or
shorter as provided by the CIR. All properties not
directly used in the production of petroleum
shall be depreciated under straight-line method
over 5 years.
2. If the asset is used in MINING Operations, ALL
properties shall be depreciated:
a.
b.
At a normal rate if the expected life is not more than

10 years.
Over years between 5 and the expected life if the
expected life is more than 10.
Exception:
Capital Expenses of a Private Educational
Institution: maybe capitalized subject to
depreciation or deducted at full.
Example:
The following information are from the record of Central Mindanao University Inc., a
proprietary educational institution, for fiscal year ended March 31, 2012:
Income: Tuition fees
P 5,000,000
Miscellaneous fees
2,500,000
Income from rental
150,000
Net Income, canteen

350,000
Intercorporate dividends
750,000
Interest on time deposit
100,000
Expenses: General & Administrative expenses
1, 500,000
Interest expenses, bank loan
50,000
Depreciation, for the year of new bldg. costing
1M Completed of 6 mos. ago (est. useful life of 20 yrs.)
50,000
The income tax due of the corporation for the fiscal year is if it opts to claim
depreciation expense from the new building is:
Exploration and Development Expenditures:

INTANGIBLE exploration, drilling and development
allowed as deduction in computing taxable income
during the year shall not be considered in computing
the adjusted cost basis.
Exploration and development costs, OTHER than the
intangible exploration, drilling and development may
be:
Computed as part of the adjusted basis for depletion (COST
OF GOODS SOLD); or
Deduction to compute taxable income from mining
operations (OPERATING EXPENSE)
135
If the taxpayer choose the second option, it shall

be subject to the following limits:
Amount claimed as deduction for the year shall NOT
exceed 25% of the net income from mining operations
without the benefit of any tax incentives under existing
laws.
The total actual amount of exploration and
development costs less the 25% limit above shall be
carried through succeeding years until fully deducted.
Contributions: Maybe subjected to limitations or deducted at full:

Charitable contributions made by an individual shall be subject
to a limit of 10% of his taxable income before deducting the
contributions.
Charitable contributions made by a corporation shall be
subject to a limit of 5% of its taxable income before deducting
the contributions.
Charitable contributions made by either of the two taxpayers
above to the government for the use of its priority program
shall be deductible at full. Priority programs are: education,
health, youth and sports development, human
settlements, science and culture
and economic
development.
Example:
Pio, married, with five minor children and Pia, single, with 2 legally adopted children
are partners, sharing profits and losses into 4:6. The following data pertain to the
partnership account and the accounts of the individual partners in their own business.
Partnership
Pio
Pia
Gross Income
P 570,000
P 280,000
P 190,000
250,000
150,000
70,000
Drawing Accounts
30,000
20,000
10,000
Other Income
20,000
10,000
Charitable partnership contribution: (not included above)
To:
UP
P 20,000
To:
Malate Church
50,000
a.If the partnership is a GPP, the taxable income of Pio is:
b.If the partnership is an ordinary partnership, the taxable income of the partnership is:
Pension Trust
Actual contribution to the
extent of pension
Amortization of Past Service Cost*
Total
xx
xx
xx
Past Service Cost is the excess of actual

contributions over the Normal Cost. It shall be
amortized over ten (10) years.
139
Example:
ABC put up a qualified retirement plan approved by the
BIR. It appointed B Corporation to administer the plan
which called for the payment of P200,000 to cover for the
retirement of employees for past services rendered and a
yearly contribution. The following amounts were paid for
the first three years of the plans operation:
Contribution for Services
Past Years Current Years
First Year
P 100,000
P 50,000
Second Year
60,000
50,000
Third Year
40,000
50,000
The pension expense each year is ______________.
CLASSIFICATIONS
OF TAXPAYERS
AND PERSONAL
EXEMPTIONS
141
Classification of
1. Resident Citizen
2. Non-Resident Citizen
3. Resident Alien
4. Non-Resident Alien Engaged in Trade or
Business
5. Non-Resident Alien Engaged in Trade or
Business
6. Special Taxpayers
Classification of
1. Resident Citizen (RC) taxable globally (within and
outside)
2. Non-resident Citizen (NRC) taxable for incomes
derived within the Philippines only
Who establishes to the satisfaction of the CIR the fact of their
physical presence abroad with a definite intention to reside
therein;
Who leaves the Philippines during the taxable year to reside
abroad, either as an immigrant or for employment on a
permanent basis;
Who stays outside the Philippines for more than 183 days
Classification of
A citizen who has been previously considered as nonresident citizen and who arrives in the Philippines shall
likewise be treated as a nonresident citizen for the taxable
year in which he arrives in the Philippines with respect to
his income derived from sources abroad until the date of
his arrival in the Philippines.
Overseas Contract Workers (OCWs). They are Filipino
citizens employed in foreign countries who are physically
present in a foreign country as a consequence of their
employment thereat. To be considered as an OCW or
OFW, he or she must be duly registered as such with
the Philippine Overseas Employment Administration
(POEA) with a valid Overseas Employment Certificate
(OEC).
Classification of
3. Resident Alien (RA) taxable for incomes derived within the
Philippines only
We generally consider as residents those whose length of assignments
are indefinite or exceeding two (2) years (BIR Rulings Nos. 051-81 and
052-81).
4. Non-resident Alien Engaged in Trade or Business (NRAETB)

taxable for incomes derived within the Philippines only.
The term trade or business shall not include performance of services
by the taxpayer as an employee.
A nonresident alien individual who shall come in the Philippines and
stay herein for an aggregate period of more than 180 days during any
calendar year shall be deemed as doing business in the Philippines
Classification of
5. Non-resident Alien Not Engaged in Trade or Business
(NRANETB) taxable for incomes derived within the Philippines
only
6. Special Taxpayer Taxed at their gross income at 15% when:
Any Filipino or Foreign individual employed, either holding a
managerial or supervisory position, or a rank-and-file, in any of
the following:
a. Offshore Banking Units (OBUs)
b. Regional Area Headquarter or Regional Operating Headquarter
of a multinational company
c. Petroleum contractor or subcontractor
Classification of
A special taxpayer, generally, shall be taxed at 15% of
his total GROSS COMPENSATION INCOME. Thus, he
cannot claim personal exemptions. However:
If a special taxpayer is a Filipino, he may opt to be taxed
at 15% final tax or using the tabular tax if his gross
compensation income is at least P 975,000.
Aliens are only taxed at 15%.
All other income shall be taxed according to pertinent

provisions of NIRC.
Example:
A, married, had the following data for the year:
Gross Income, Philippines
P 400,000
Gross Income, USA
300,000
200,000
Expenses, USA
150,000
a.If the taxpayer is a resident citizen, his taxable
income is:
Example:
Gross Income, Philippines P 400,000
Gross Income, USA
300,000
200,000
Expenses, USA
150,000
a.If the taxpayer is an NRC, married his taxable
income is:
Example:
P 400,000
Gross Income, USA
300,000
200,000
Expenses, USA
150,000
a.If the taxpayer is an RA, married with two
qualified children, his taxable income is:
Example:
P 400,000
Gross Income, USA
300,000
200,000
Expenses, USA
150,000
a.If the taxpayer is a NRAETB, and his country
allows reciprocity of P30,000, as personal
exemption his taxable income is:
Example:
P 400,000
Gross Income, USA
300,000
200,000
Expenses, USA
150,000
a.If the taxpayer is a NRANETB and his country
allows reciprocity of P35,000, as personal
exemption his taxable income is:
Individual
Personal Exemptions
Personal exemptions are only given to individuals
whether RC, NRC, RA and NRAETB subject to
reciprocity rule.
RC, NRC and RA may claim a basic personal
exemption of PhP 50,000 regardless of the status
(single, married, legally separated or head of the
family).
NRAETB can only claim basic personal exemption if
there is a reciprocity between Philippine laws and the
laws of his country where he resides. However, the BPE
cannot exceed Php 50,000, but may be lower instead.
Individual
Personal Exemptions
RC, NRC and RA may claim an additional personal

exemption of Php 25,000 for every qualified dependent
CHILD, but not exceeding four children, PROVIDED that
the child is:
Not more than 21 years old
Living with the taxpayer
Depending upon the taxpayer at least plus 1 for his
living.
Legitimate, illegitimate (recognized) or legally adopted
Unmarried and not gainfully employed
Individual
Personal Exemptions
Provided that, the taxpayer may also
claim an additional exemption even if
the child reaches above 21 years old
when such child is incapable of selfsupport because of mental defect.
NRAETB shall be entitled to personal exemption

in an amount equal to the exemption allowed by
the income tax law of the country of which he/she
is a subject or citizen but not to exceed the
amount fixed in the NIRC as the exemption for
citizens or residents of the Philippines. (Sec. 35
D)
*Take note: The law specifies that a resident or
citizen can claim personal and additional
exemptions.
Rules on determining the status of

the taxpayer who claim personal
exemptions:
Whether single, married, head of the family
separated, the taxpayer can claim only to the
amount of P 50,000 basic personal exemption.
If the taxpayer should marry or should have
dependents during the taxable year, he may
corresponding exemption in full for such year.
or legally
maximum
additional
claim the
Rules on determining the status of

the taxpayer who claim personal
exemptions:
If the taxpayer should die during the taxable year, his
estate may claim his corresponding exemptions (both
personal and additional) as if he died at the end of such year.
If the spouse or any of the qualified dependent should marry
or become twenty-one years old during the year, or should
become gainfully employed, the taxpayer may still claim the
exemption as if the spouse or dependent died or as if such
dependent married, became twenty-one years old or became
gainfully employed at the close of such taxable year.

SSS, PhilHealth, Pag-IBIG & PHHI
Aside from the allowable deductions and personal
exemptions, an individual taxpayer may also deduct
from his gross income
1.
2.
3.
4.
SSS contributions
PhilHealth (PHIC) contributions
Pag-IBIG (HDMF) contributions
PHHI contributions
Provided, that in the case of PHHI, the total family

income shall not exceed PhP 250,000 per year and
the total claimable amount shall not exceed PhP 2,400
per year.
Example:
Taxpayer married his girlfriend on December 30, 2013. The
following occured afterwards:
a.His wife gave birth to a baby girl on December 31, 2013
b.His wife gave birth to twins, both boys on November 1,
2014
c.His wife gave birth to triplets on October 1, 2015
d.His wife had a miscarriage on December 31, 2015
resulting to her death.
Required: Determine the personal and additional exemption
of the taxpayer in 2013, 2014, 2015.
Example:
A taxpayer, married, with five minor children, three of them are gainfully employed,
provided the following data:
Compensation Income
P 150,000
(gross of 10% SSS, Union dues, Pag -IBIG &
Philhealth, net of P45t 13 th mo. Pay and
gross of P10t xmas bonus)
Gross sales
500,000
Cost of Sales
320,000
Other income, (80% represents income from bank deposits, Phils.)
20,000
Expenses (15% represents personal expenses
and health insurance of P2,000 included
in the 15%)
50,000
Income treasury bills
40,000
Additional information: of business income and deductible business expenses is from
outside the Philippines.
If the taxpayer is a resident citizen, the taxable income is:
FRINGE
BENEFITS
162
Definition
Managerial Employee
Those who are vested with powers or prerogatives to lay
down and execute management policies and/or to hire,
transfer, suspend, lay-off, recall, discharge, assign or
discipline employees. (Labor Code of The Philippines)
Supervisory Employee
Those who, in the interest of the employer, effectively
recommend such managerial actions if the exercise of
such authority is not merely routinary or clerical in nature
but require use of independent judgment. (Labor Code of
The Philippines)
Rank-and-File
Those who are not managerial and supervisory employees.
De Minimis Benefits
Whether rank-and-file or managerial/supervisory employee,
the following de minimis benefits shall be non-taxable:
1.Monetized unused vacation leave credits of private
employees not exceeding 10 days during the year;
2.Monetized value of vacation and sick leave credits paid
to government officials and employees;
3.Medical cash allowance to dependents of employees not
exceeding P750 per employee per semester or P 125 per
month;
4.Rice subsidy of P 1,500 or one (1) sack of 50-kg. rice per
month amounting to not more than P 1,500;
5.Uniform and clothing allowance not exceeding P 5,000
per annum;
6.Actual yearly medical benefits not exceeding P 10,000
per annum;
De Minimis Benefits
7. Laundry allowance not exceeding P 300 per month;
8. Employees achievement awards which must be in the
form of a tangible personal property other than cash or gift
certificate, with an annual monetary value not exceeding P
10,000 received by the employee under an established
written plan which does not discriminate in favor of highly
paid employees;
9. Gifts given during Christmas and major anniversary
celebrations not exceeding P 5,000 per employee per
annum;
10. Daily meal allowance for overtime work not exceeding
twenty-five percent (25%) of the basic minimum wage.
De Minimis Benefits
All other benefits given by the employers which
are not included in the above enumeration
shall not be considered as de minimis
benefits, and hence, shall be subject to
income tax as well as withholding tax on
compensation.
Example:
A, during the 2015, received the following benefits:
Medical benefits
P 25,000 per year
Monetized leave credits:
Vacation (13 days)
13,000
Sick Leave (15 days)
15,000
Rice Subsidy, Sinandomeng
2,300 per month
Laundry Allowance
270 per month
Christmas cash gift
12,000
Performance-Based Bonus
20,000
Employee Achievement Awards, cash
12, 000
Uniform Allowance
6,000
13th Month Pay
50,000
Fringe Benefits
If given to rank-and-file employee, fringe benefits shall
constitute gross income subject to tabular tax rate (532%) and PhP 82,000 limit. Moreover, it shall be claimed
as a deductible expense INCLUDED in the salaries
expense on the part of the employer.
Entry:
Fringe Benefits Expense
xx
Cash (or fair value of property)
xx
168
Fringe Benefits
If given to an employee holding a managerial or
supervisory position, it shall be subject to fringe benefit
tax, as follows:
1.RC, NRC, RA, NRAETB 32%
2.NRANETB 25%
3.Special Taxpayer
a. OBUs
15%
b. ROH and RAH of a
15%
multinational company
c. Petroleum contractors and
15%
subcontractors
Fringe Benefit Tax

If given to managerial or supervisory employee, such fringe
benefits will be subject to fringe benefit tax, computed as
follows:
Gross Monetary Value
=
Monetary Value
(100% - Applicable rate)
Fringe Benefit Tax = Gross Monetary Value x Applicable %
Gross Monetary Value

It includes:
1.Monetary Value = actually give
2.Fringe Benefit Tax
*The gross monetary value is an EXPENSE of an
employer.
*The fringe benefit tax is a FINAL TAX on the income of the
managerial/ supervisory employee, withheld by the
employer.
Monetary Value:
Real Property
1. If the ownership is transferred to the employee
The total FMV or cost exclusive of interest,
whichever is applicable.
2. If the ownership is retained by the employer, and the
usufruct is only given to the employee:
FMV or cost, whichever is applicable, divided by 20
years divided by 2
Monetary Value:
Personal Property
1. If the ownership is transferred to the employee:
The total FMV or cost exclusive of interest,
whichever is applicable.
2. If the ownership is maintained by the employer and
only the usufruct is given to the employee:
FMV or cost, whichever is applicable, divided by 5
years divided by 2
Monetary Value:
Real or Personal Property
Where the purchase price is partially shouldered
by the employer
by
The actual (partial amount) cash given

the employer.
Monetary Value:
Cash and Interest
If Cash
Actual Cash Given
If an interest of an indebtedness is free of

interest
The monetary value shall be the interest forgone
Example:
JHR Company gave the following to B during 2015, his very competitive
manager:
House in Cebu, construction costs
shouldered by JHR
P 3,000,000
Lot where the house was erected,
where usufruct of 30 years is given
4,500,000
Car, where only the use of the car is given
700,000
Macbook
90,000
Cash
100,000
Grocery allowance of P 5,000 per month
70,000
Also during the year, JHR granted a loan to B amounted to P 100,000 on
June 1, 2015 where it was agreed that the interest of 10% will be
forgiven.
Tax Treatment and

Rank-and-File
Managerial and Supervisory
Computation
De
Minimis
Subject to their De Minimis
Subject to their
Statutory limits,
any
excess
thereof shall be
aggregated
together
with
other
fringe
benefits
and
bonuses subject
to P82,000 limit.
Statutory limits,
any
excess
thereof shall be
aggregated
together
with
other
bonuses
subject
to
P82,000 limit.
Fringe Benefits Subject

to Fringe Benefits Subject to Fringe
other than Fringe P82,000
limit, other than Fringe benefit tax (32%,
Benefits
any
excess Benefits
25% or 15%)
thereof shall be
subject to normal
tax
Example:
The following information are presented to you in connection with the
determination of the tax on the fringe benefits given to Earl, Vice-President
of the Pabebe Corporation:
Paid by the company with official receipts in the name of Pabebe
Corporation:
a.Laptop computer for Earls office use, P 80,000.
b.Air-conditioning unit for Earls office use, P 30,000.
c.Groceries for consumption of Earls family, P 10,000.
d.Plumbing materials for use in the repair of Earls residential house, P 5,000.
Paid by Earl and reimbursed by the company with official receipts in the
name of Pabebe Corporation:
a.Clothes and shoes for Earls daughter, P 15,000.
b.Samples of merchandise sold in the competitors store for marketing study, P
12,000.
How much is the fringe benefit tax due?
Example:
Ninja Corp. a regional operating headquarters of a multinational
Corporation, established in the Philippines provided its employees
cash and non-cash fringe benefits in 2010 as follow:
Total Fringe Benefits
P1,000,000
60% of said amount was given to rank and file employees
40% of said amount was given to corporate officers as follow:
To resident citizens
45%
To non-resident aliens not engaged
in business in the Philippines
35%
To special aliens and Filipino employees
20%
The fringe benefits tax due is
179
INCOME TAXATION
ON CORPORATE
TAXPAYERS
180
Overview:
The term corporation includes partnerships, no
matter how created or organized, joint-stock
companies, joint accounts (cuentas en participacion),
associations, or insurance companies, but does not
include
1. general professional partnerships (GPPs) and
2. joint venture or consortium formed for the purpose of
undertaking construction projects or engaging in
petroleum operation, coal, geothermal and other energy
operations pursuant to an operating or consortium
agreement under a service contract with the Government.
Pro-Forma Computation
Less: Cost of service/sales
Add:
Passive Incomes, not subjected to final tax
Total Gross Income
Taxable Income
*NCLCO is not applicable since the holding period
applicable.
xx
(xx)
xx
xx
xx
xx
(xx)
(xx)
xx
is also not
Note:
In the computation of GROSS INCOME, the same rule
shall be observed as in the case of an individual
taxpayer, except that a corporation has no compensation
income and does not have winnings and prizes.
In the computation of ALLOWABLE DEDUCTIONS, the
same ruling shall be observed as in the case of an
individual, except those specific items which has a
different statutory ceilings such as the charitable
contributions (5%).
No Personal exemptions.
Example: NIRC vs. GAAP

ABC is a domestic corporation engaged in merchandising business. For the
calendar year 2014, it had a net income per books of P500,000, after
considering among others, the following:
a.Dividend received from a domestic corporation
P 30,000
b.Provision of doubtful accounts
10,000
c.Dividend received from foreign corporation
20,000
d.Portion of P150,000 advance rental already earned
100,000
e.Recovery of receivables previously written off (included
As part of the net income above):
Allowed by the BIR as deduction
10,000
Disallowed by the BIR as deduction
30,000
g. Refund of taxes (included as part of net income above):
Allowed by the BIR as deduction
25,000
Disallowed by the BIR as deduction
15,000
h. Bank interest income
a. Philippine Bank
b. USA Bank
80,000
100,000
Classification of Corporate
Taxpayers
1. Domestic corporations are taxed on worldwide income, at
30% of the taxable income.
2. Resident foreign corporations are taxed on incomes from the
Philippines only, at 30% of the taxable income.
3. Non- Resident foreign corporations are taxed on incomes
from the Philippines only, at 30% of the gross income.
Note:
GPPs are partnerships formed by persons for the sole purpose
of exercising their common profession, no part of the income
of which is derived from engaging in any trade or business
185
Corporate Taxes
1. Gross Income Tax (GIT)
2. Normal Corporate Income Tax (NCIT)
3. Minimum Corporate Income Tax
(MCIT)
4. Improperly Accumulated Earnings
Tax (IAET)
1. Gross Income Tax

(GIT)
It is an optional income tax given to corporate
earners equivalent to 15% of its gross income
instead of the 30% net income tax.
Only domestic corporations and resident
foreign corporations may avail such GIT.
Requirements:
A tax ratio of 20% of Gross National Products
A ratio of 40% income tax collection of total tax
revenues
1. Gross Income Tax

(GIT)
A VAT tax effort of 4% of GNP

A 0.9% ratio of consolidated public sector financial
position to GNP
Available only to firms whose ratio of cost of sales to
gross sales or receipts from all sources is 55%.
The election shall be irrevocable for three (3)
consecutive year
Recommendation from the Secretary of Finance
Subject to approval of the Office of the President
2. Normal Corporate Income

Tax (NCIT)
1998
1999
January 1 , 2000 to October 31, 2005
November 1, 2005 to December 31, 2008
34%
33%
32%
35%
January 1, 2009 and onwards
30%
Example:
ABC Corp. a domestic corporation, in its fifth year of operation in 2014, which
had a tax refundable of P10,000 for the preceding year for which there is a
certificate of tax credit, had the following cumulative data:
Q1
Q2
Q3
Q4
Gross profit from sale
P800,000 P1,600,000 P2,400,000 P3,100,000
Capital gain on sale
Directly to buyer of shares
Of a domestic Corporation 50,000
50,000
50,000
50,000
Dividend from Domestic
corporation
10,000
10,000
20,000
20,000
Interest on Peso Deposit
5,000
10,000
15,000
20,000
Business Expenses
600,000
1,200,000
1,700,000
2,100,000
Income tax withheld
15,000
35,000
65,000
115,000
Compute the income tax due for each quarter.
3. Minimum Corporate Income

Tax
The following are liable to MCIT beginning the 4th
taxable year in which such corporation commenced its
business operations:
Domestic Corporations
Resident foreign corporations
The 2% of gross income is imposed whenever a
company:
Has no taxable inocome; or
Has taxable income but the amount of MCIT is
greater than the NCIT (30%)
191
3. Minimum Corporate Income

Tax
The MCIT shall be carried over and credited against
the normal tax for the next three (3) years following
the taxable year where the corporation is taxed at MCIT.
Provided, that if the corporation is still taxed at MCIT
following such year, the previous MCIT shall be
DEFERRED and cannot be credited against the
years MCIT.
The three-year carry-over provision shall be counted
continually regardless whether the corporation pays
MCIT or NCIT.
Example: Annual Filing

A domestic corporation organized in 1998 provided the following information:
2006
2007
2008
2009
2010
Net Sales
P4,000,000 P5,000,000 P6,000,000 P7,000,000 P9,000,000
Cost of Sales
2,000,000 3,500,000
4,200,000
5,000,000 5,200,000
Business
Expenses
1,900,000 1,550,000
1,820,000
2,100,000 2,300,000
Compute the income tax due for each year.
Solution:
A domestic corporation organized in 1998 provided the following information:

2006
2007
2008
2009
2010
Net Sales
P4,000,000 P5,000,000
P6,000,000
P7,000,000
P 9,000,000
Cost of Sales
2,000,000
3,500,000
4,200,000
5,000,000
5,200,000
Gross Income
2,000,000
1,500,000
1,800,000
2,000,000
3,800,000
Business
Expenses
1,900,000
1,550,000
1,820,000
2,100,000
2,300,000
Operating
Income (loss)
100,000
(50,000)
(20,000)
(100,000)
1,500,000
NOLCO
(170,000)
Taxable Income
100,000
0
0
0
1,330,000
Normal Tax
MCIT
35,000
40,000
0
30,000
0
36,000
0
40,000
399,000
76,000
Solution:
Normal Tax
MCIT
Tax Due
Less: Excess
MCIT
2006
35,000
40,000
2007
0
30,000
2008
0
36,000
2009
0
40,000
2010
399,000
76,000
40,000
30,000
36,000
40,000
399,000
2007
2008
2009
The excess MCIT in 2006 of 5,000 can no longer be credited.
(30,000)
(36,000)
(40,000)
293,000
Example: Quarterly Filing

A domestic corporation has the following non-cumulative data for 2012:
NCIT 2011
30,000
MCIT 2011
40,000
Q1
Q2
Q3
Q4
Income, net of 1%
withholding tax
495,000
792,000
594,000
940,500
Deductions
480,000
700,000
450,000
770,000
Solution: Non-cumulative
Excess MCIT in 2011 P 10,000
Q1
Q2
Q3
Q4
Income,
500,000
800,000
600,000
950,000
Deductions
480,000
700,000
450,000
770,000
Net Taxable Income 20,000
100,000
150,000
180,000
NCIT (30%)
6,000
30,000
45,000
54,000
MCIT (2%)
10,000
16,000
12,000
19,000
Tax Due
10,000
30,000
45,000
54,000
Less: Tax Withheld ( 5,000)
(8,000)
(6,000)
(9,500)
MCIT last year
(10,000)
MCIT Last quarter
( 4,000)___________
_________
Tax still payable
5,000
8,000
39,000
44,500
Solution: Cumulative
Excess MCIT in 2011 P 10,000
Q1
Q2
Q3
Q4
Income,
500,000
1,300,000
1,900,000
2,850,000
Deductions
480,000
1,180,000
1,630,000
2,400,000
Net Taxable Income 20,000
120,000
270,000
450,000
NCIT (30%)
6,000
36,000
81,000
135,000
MCIT (2%)
10,000
26,000
38,000
57,000
Tax Due
10,000
36,000
81,000
135,000
Less: Tax Withheld ( 5,000)
(13,000)
(19,000)
(28,500)
MCIT last year
(10,000)
(10,000)
(10,000)
Tax paid last Qtr
_ ( 5,000)___
(13,000)__
(52,000)
Tax still payable
5,000
8,000
39,000
44,500
Improperly Accumulated
Earnings
Tax
It is a tax imposed on improper accumulation of
earnings. Improperly accumulated earnings
(IAE) are the profits of a corporation that are
permitted to accumulate instead of being
distributed by a corporation to its shareholders
for the purpose of avoiding the income tax with
respect to its shareholders or the shareholders
of another corporation.
The rate of 10% of the Improperly Accumulated Taxable

Income,
computed
as
follows:
Taxable Income for the Year
Add:
Income exempt from tax
Income excluded from gross income
Income subject to final tax, net
NOLCO
Less:
Income tax paid for the taxable year
Dividends actually or constructively paid/issued
from the applicable years taxable income
Amount reserved for the reasonable needs
Tax Base for IAET
xx
xx
xx
xx
xx
(xx)
(xx)
(xx)
xx
Note: Earnings for the reasonable needs are enumerated

as follows [Revenue Regulation No. 2-2001]:
Allowance for the increase in the accumulation of earnings up to 100% of
the paid-up capital of the corporation as of the balance sheet date,
inclusive of accumulation taken from other years;
Earnings reserved for definite corporate expansion or projects as
approved by the board;
Earnings reserved for building, plants or equipment acquisition as
approved by the board;
Earnings reserved for compliance with any loan covenant or pre-existing
obligation established under a legitimate business agreement;
Earnings required by law or applicable regulations to be retained by the
corporation;
In case of subsidiaries of foreign corporations in the Philippines, all
undistributed earnings intended or reserved investments within the
Philippines as can be proven by corporate records.
Applicability of IAET
Shall apply to every corporation formed or
availed for the purpose of avoiding the income
tax with respect to its shareholders or
shareholders of any other corporation, by
permitting earnings and profits to accumulate
instead of being divided or distributed. These
are:
Domestic corporations
Closely-held corporations
Exceptions from IAET

Publicly-held corporations
Banks and other non-banks financial intermediaries
Insurance companies
Taxable (business) partnerships (deemed to have actually
or constructively received the taxable income under Sec.
73D)
General professional partnerships
Non-taxable joint ventures
Enterprises duly registered with the Philippine Economic
Zone Authority under R.A. 7916 and enterprises
registered pursuant to the Bases, Conversion and
Development Act of 1992 under R.A. 7227
Example:
The records of a closely-held domestic corporation show the following
data for 2014:
Gross Income
1,500,000
Business Expenses
600,000
Gain on Sale of Business Assets
60,000
Interest on deposits with Metrobank, net of tax
5,000
Sale of Shares of stocks, not listed and traded
Selling Price
150,000
Cost
115,000
Dividends from Victory Corporation, domestic
35,000
Dividends paid during the year
120,000
Reserved for Building acquisition
300,000
In 2013, the corporation suffered an operating loss of 130,000. this
amount was carried forward and claimed as deduction from gross
income in 2014.
The income tax due is ________________
The improperly accumulated earnings tax is _______________
INCOME TAX
RETURN FILING
AND PAYMENT OF
INCOME TAX
205
Income Tax Return (BIR Form)
Deadline for Filing and Payment
Annual Income Tax Return On or before the 15th day of the

Corporate
4th month of the following the
(BIR Form 1702)
close of the taxable year
Quarterly Income Tax Return Within 60 days after the end of
(BIR Form 1702Q)
each first 3 quarters of the taxable
year
Annual Income Tax Return April 15 of the succeeding year, an
Self-Employed Individual (BIR individual can only use calendar
Form 1701)
year
Quarterly Income Tax Return - every 15th day on April, August,
Self-Employed Individuals and November and April of the
Mixed Income Earners (BIR succeeding year.
Form 1701 Q)
BIR Issuances and

Court Decisions Related
to Income Tax
1. Valuation of Contributions or Gifts Actually

Paid or Made in Computing Taxable Income
Revenue Memorandum Circular (RMC) No. 86-2014 dated December
5, 2014
This circular is issued to clarify the valuation of contributions or
gifts actually paid or made in computing taxable income as part of the
substantiation requirement under Revenue Regulations No. 13-98:
Information
Required
in
Certificate of Donation (BIR
Form No. 2322)
a.
Actual receipt by the accredited NSNP/

NGO of the donation or contribution
Date of the receipt of donation, and
Amount of donation
Amount of donation or contribution if
cash
b. Acquisition cost if real or personal
property
Allowable
income
tax Net book value of the property donated as
deduction (on the part of the reflected in the financial statements of the
donor)
donor.
2. Requirements for Deductibility of

Certain Income Tax Payments
Revenue Regulation No. 12- 2013 dated July 12, 2013
Requirements for deductibility: Any income payment
which is otherwise deductible under the Code shall be
allowed as a deduction from the payors gross income
only if it is shown that the income tax required to be
withheld has been paid to the Bureau in accordance
with Sections 57 and 58 of the Code.
No deduction will also be allowed notwithstanding
payments of withholding tax at the time of audit
investigation or reinvestigation/reconsideration in cases
where no withholding of tax was made in accordance with
Sections 57 and 58 of the Code.
3. Validity of Principal and

Supplementary Receipts/Invoices
Revenue Regulations No. 18- 2012 dated October 22, 2012
All taxpayers are mandated by the BIR to make new sets of
ORs and Sales invoices wuth special security marking
features printed by BIR Accredited printers only.
All ORs and Sales invoices shall be valid only until full
usage of the approved serial numbers or five years from its
issuance whichever comes first.
This should be effective starting January 18, 2013
4. Taxability of Associations Dues, Membership Fees

Received by Condominium Corporations
Revenue Memorandum Circular (RMC) No. 65-2012
dated October 31, 2012
Amounts paid in as dues or fees by members or tenants
of a condominium corporation form part of the gross
income of such corporation subject to income tax. This
is because the condominium corporation furnishes its
members and tenants with benefits, advantages, and
privileges in return for such payments.
4. Taxability of Associations Dues, Membership Fees

Received by Condominium Corporations
For tax purposes, the following constitute income tax payment or
compensation which are subject to income tax:
Association dues
Membership fees
Other assessments/charges
The previous interpretation that the assessment dues are funds
which are merely held in trust by a condominium corporation
lacks legal basis and is hereby abandoned.
Note: The same rule applies to homeowners association per
RMC No. 9-2013 dated January 9, 2013
5. Rules on Deductibility of Depreciation

Expenses on Vehicles
Revenue Regulation No. 12 2012 dated October 12, 2012
Limitations on deductions:
Only one (1) vehicle for land transportation is allowed for the use of an
official or employee, the value of which should not exceed P2.4 million
No depreciation shall be allowed for yachts, helicopters, airplanes
and/or aircrafts, and land vehicles which exceed the said threshold.
All related maintenance expenses on account of a non-depreciable
vehicle for taxation purposes are also disallowed in its entirety.
Loss to be incurred from sale of non-depreciable vehicle shall not be allowed
as deduction from gross income [Revenue Memorandum Circular (RMC)
No. 2 -2013 dated December 8, 2012]
5. Rules on Deductibility of Depreciation

Expenses on Vehicles
Exception:
Unless the taxpayers mainline of business is
transport operations or lease of transportation
equipment and the vehicles purchased are used
in the said operations.
This regulation shall take effect immediately.
(Published in October 17, 2012)
6. Clarifying the Taxability of Clubs Organized and Operated

Exclusively for Pleasure, Recreation and Other Non-Profit
Purposes
Revenue Memorandum Circular (RMC) No. 35 2012 dated

August 3, 2012
Clubs which are organized and operated exclusively for
pleasure, recreation and other non-profit purposes are
subject to income tax under the Tax Code, as amended.
Background:
The provision in the NIRC of 1977 which granted income tax
exemption to such recreational clubs were omitted in the current of
tax exempt corporations under NIRC of 1997, as amended.
HENCE, the income of recreational clubs from whatever

source, including but not limited to membership fees,
assessment dues, rental income, and service fees are
subject to income tax.
ESTATE TAX
216
Transfer Taxation:
Gratuitous
A transfer may be gratuitous (without
consideration) or onerous (with consideration).
Donacion mortis causa and donacion inter
vivos are gratuitous transfer.
CONCEPT OF TRANSFER TAXATION

Gratuitous
1. Donacion inter vivos
(death)
2. Donacion mortis causa
(during lifetime)
Onerous (Business Taxes)

1. Value-added Tax
2. Other Percentage Taxes
3. Excise Taxes
with applicable Documentary Stamp Tax
An estate tax is a tax on the right to transfer certain

property at death and on certain transfers which are
made by law equivalent to testamentary disposition (in
contemplation of death).
It is an excise tax (a tax impose upon the right or
privilege), the object of which is the shifting of
economic benefits and the enjoyment of the property
from the deceased to the living.
It accrues as of the time of death of the deceased.
The taxpayer in estate taxation is the estate of the
decedent represented by the administrator, executor
or legal heirs.
Concept of Succession
a mode of acquisition by virtue of
which the property, rights and
obligations to the extent of the value of
the inheritance, of a person are
transmitted through his death to
another or others by will or by
operation of law.
Concept of Will
Will is an act whereby a person is
permitted with the formalities prescribed by
law, to control to a certain degree the
disposition of his estate, to take effect after
his death. From the moment of death of the
decedent, the rights to the succession are
transmitted, and the possession of the
hereditary property is deemed transmitted to
the heir.
Kinds of Will
1. Notarial or Ordinary Will one which is executed in accordance with
the formalities prescribed by Art. 804 to 808 of the New Civil Code. It is
the will that is created for the testator by a third party, usually his
lawyer, follows proper form, signed and dated in front of the required
bumber of witnesses and acknowledged by the presence of a notary
public.
2. Holographic Will is a written will which must be entirely written ,
dated and signed by the hand of the testator himself, without the
necessity of any witnesses.
3. Codicil A supplement or addition to a will, made after the
execution of a will and annexed to be taken as part thereof, by which
any disposition made in the original will is explained, added or altered.
Elements of Succession
1. Decedent the person whose property is
transmitted
through
succession,
whether
testamentary, intestate, or mixed.
2. Heir the person called to the succession
either by the provision of a will or by operation of
law.
3. Estate refers to all property, rights and
obligations of a person which are not
extinguished upon his death.
Types of Succession
1. Testamentary Succession
2. Intestate Succession
3. Mixed Succession
Testamentary Succession
It results from the designation of an heir,
made in a will executed in the form prescribed
by the law.
The descedent may dispose his properties in
his last will and testament in the manner he
wants, however, he must reserve some for
certain persons who are called by the law as
compulsory heirs.
Definition
Legitimate Child
Born within marriage
Includes legally adopted child; the share of the legally
adopted child is equal to the share of the legitimate child.
Includes legitimated child (that who is originally a natural
child but subsequently legitimated by virtue of actual
marriage)
Illegitimate child
Born outside marriage (spurious, bastard)
Natural child (child before born before actual marriage)
Compulsory heirs are:
1.Legitimate children and their descendants, which
include legally adopted children
2.In the absence of legitimate children and their
descendants, the legitimate parents or ascendants.
3.Surviving spouse
4.Illegitimate child, both natural and spurious
In the absence of compulsory heirs, the
successors would be:
Relatives up to 5th degree of consanguinity
If there were no relatives, the government shall
inherit the whole estate.
If there is a will, the decedent may name other
persons to inherit the free portion of the net
distributable estate
Example:
A died leaving the following surviving relatives:
B
Wife
L
C
Only Son
M
D
Only Daughter
N
E
Mother
O
F
Father
G
Cs daughter
H
Ds son
I
Brother
J
Nephew (Is Son)
K
Js son
Sister
Ls granddaughter
Ms Son
Es Mother
Under testamentary succession, properties left by the

decedent are classified into:
Legitime portion of the testators property which could
not be disposed freely because the law has reserved it for
the compulsory heirs.
Free portion part of the whole estate which the testator
could dispose of freely through a written will irrespective of
his relationship to the recepient
230
General Rules:
If there is a legitimate child, his share is usually one-half
of the total distributable estate.
If there are legitimate children, their share (in aggregate)
will equal to one-half of the total distributable estate.
The share of the surviving spouse if there is a legitimate
child is one-fourth, while if there several legitimate
children, the share of the surviving spouse is normally
equal to the share of one legitimate child.
General Rules:
No share shall be given to the parents
or their ascendants, if there is a
legitimate child, unless the will of the
testator provides that the free portion
shall be given to the parents or their
ascendants.
Illegitimate children has a share but only
to the extent of one-half of the share of
legitimate child.
Example:
If the hereditary estate of the testator is P
12,000,000 and the surviving heirs or relatives
are: mother, spouse, four legitimate children, one
legally adopted son, one illegitimate child, and a
brother and in his will, the testator is giving all
free portion equally to the surviving heirs. The
share of the surviving spouse, four legitimate
children and one illegitimate child shall be:
________, _________ and ________.
Intestate Succession
It transmission of properties where there is no will, or if
there is a will, such is void or lost its validity, or nobody
succeeds the will.
In the intestate succession, the entire estate of the decedent is
distributed to the heirs. The compulsory heirs in testamentary
succession are also the heirs in intestate succession. However,
intestate heirs include brothers and sisters, collateral relatives
within the fifth degree of consanguinity and the state.
Administrator (administratrix) is the person

appointed by the court, in accordance with the
governing statute, to administer and settle intestate
estate and such testate estate as no competent
executor designated by the testator.
Intestate Succession
1. No free portion under intestate succession, hence
the 100% shall be given to the child, the surviving
spouse and illegitimate child (if there is any).
2. f child only, 100%
3. If there are several children, 100% divided equally by
them.
4. If children and spouse, the share of the spouse is
equivalent to the share of one child (unit).
5. If there is a child, no share for parents.
6. The share of illegitimate child is equal to one half of
the share of the legitimate child.
Example:
The net distributable estate of Mr.
Geronimo who died intestate is P
5,000,000. The surviving relatives are
the spouse and the 4 children, and the
mother of the deceased. How much
would be the inheritance of the
spouse? ____________
Mixed Succession
It is a transmission of properties,
which is effected partly by will
and partly by operation of law
237
Example:
The hereditary estate is P3,000,000.
The surviving relatives are the parents,
the spouse and the 4 children. The
testator is giving 20% of the free
portion to his sister-in-law. How much
could be designated to the sister-inlaw? _____________
Example:
If the hereditary estate is P 15, 000, 000 and
the surviving heirs are three legitimate
children, a surviving spouse, and a brother, the
share of the surviving spouse shall be :
The free portion that can be distributed as a
legacy or devise, and the share of the brother
shall be :
239
Gratuitous Transfer
The classification of taxpayers as to
situs in estate tax and donors tax is
the
SAME.
(Residents
and
Citizens are taxable globally; Nonresident aliens are taxable within
the Philippines only)
240
Computation of Estate Tax

For single decedents
Gross estate
Less: Ordinary Deductions
Special Deductions
Net Taxable Estate
xx
(xx)
(xx)
xx
Estate Tax Due

Less: Estate Tax Credit
Estate Tax Payable
xx
(xx)
xx
Exclusive Conjugal/Communi
Properties
ty Properties
Gross Estate
Less: Allowable Deductions
1. Ordinary (ELITE)
Net
Estate
before
Special
Deductions
1. Special Deductions
Family Home
Medical Expenses
Standard deduction
Benefits received under RA
4917
Share of the Surviving Spouse
(1/2
of
the
net
conjugal/community
estate
before special deductions)
Net Taxable Estate
Estate Tax Due
Less: Estate Tax Credit
Estate Tax Payable
Total
xx
xx
xx
(xx)
xx
(xx)
xx
(xx)
xx
(xx)
(xx)
(xx)
(xx)
(xx)
xx
xx
(xx)
xx
Remember
As a general rule, obligations contracted during
the marriage are presumed to have benefited
the marriage, and are charges againts the
community/conjugal property (e.g. funeral
expenses, judicial expenses, claims against the
estate).
Vanishing deduction may be a dedcution against
exclusive
or
community/conjugal
property,
depending on the classification of the property
to which it is related, if exclusive or
community/conjugal.
Remember
A deduction, whether against exclusive or
community/conjugal
estate
follows
the
classification of the property in the gross
estate. If the property to which the deductioon
is related is exclusive property in the gross
estate, the deduction is against the exclusive
gross estate. If the property to which the
deductioon is related is community/conjugal
property in the gross estate, the deduction is
against the community/conjugal gross estate.
Gross Estate Valuation

Residents and Citizens
Non-Resident Aliens
1. ALL real properties 1. Real properties located

wherever situated.
ONLY in the Philippines
2. ALL personal properties 2.
Personal
wherever situated:
located
ONLY
a. Tangible
Philippines:
b. Intangible
a. Tangible
b. Intangible
situated
only
Philippines,
exempted on the
reciprocity
properties
in
the
properties
in
the
UNLESS
basis of
Gross Estate Valuation:

Real Properties
General Rule: The gross estate shall be valued at its
fair market value at the time of death of the decedent.
Real Properties are valued (at the time of death) at:
a.Assessed Value (per City Assessor); or
b.Zonal Value (per BIR Commissioner), whichever is
higher
Either of the two will approximate the fair market
value.

Personal Properties
1.
2.
3.
4.
Current Market Price (for recently acquired properties)

Second-hand market price (for previously acquired properties)
Grossed-up loan value (for loaned or pawned properties)
Fair Value plus accrued interest (for interest-bearing
receivables and bank deposits)
5. Discounted value (for non-interest bearing notes receivables
6. Face Value (for Philippine Currency)
7. Converted Philippine Peso Value (for foreign currencies)

Usufruct
Usufruct is the legal right to use and enjoy the benefits and
profits of property belonging to another.
To determine the value of the right of usufruct, use of
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
(BSMT), to be approved by the Secretary of Finance, upon
the recommendation of the Insurance Commission. [Sec.
88(A), NIRC]

Usufruct
Example:
A, a Filipino, inherited a usufructuary right over a
family apartment building with an annual rent
income of P 300,000. The property is registered in
the name of As sister, B (owner of naked title).
After 7 years of enjoying the usufruct, A died at the
age of 70 and his son, C, who is 39 years old, will
inherit the usufruct.

Usufruct
Continuation...
Additional Information:
Zonal Value of the apartment at As death
Assessed Value of the apartment
Prevailing effective interest rate per year
BSMT life expectancy of male with 40 age
(Cs next birthday)
PV of P1 over 3 years at 10%
P 5M
3M
10%
37.36 years
2.487
9.706

Usufruct
Continuation...
Required: Compute for the reportable usufruct value
in the gross estate of A and bare dominium value of
B assuming that the right to use the apartment
(usufructuary) is:
1.Within 10 years
2.Life-long, without term limit

Usufruct
Solution: IF within 10 years
Annual Value (5M x 10%)
P 500,000
Times PV of P1 over 3 years
2.487
Usufruct Value in the gross estateP 1,243,500
FMV of property (higher)
Less: Usufruct Value
Bare Dominium Value of B
P 5,000,000
( 1,243,500)
P 3,756,000

Usufruct
Solution: IF life-long, without limit
Usufruct Value in the gross estate
500,000
9.706
P 4,853,000
P 5,000,000
( 4,853,000)
P 147,000

Usufruct
1. When A, died, under the first assumption, C, the
son, has still 3 years to enjoy the usufruct until
tenth year. It is only until such time that the
property shall revert to the owner of the naked
title (B).
2. A bare dominium value means that a property is
merely registered in that persons name.

Shares of Stocks
In case of shares of stocks:
1. If traded in the local stock exchange,
a. The closing price on the date of death
b. Trading price at the date nearest to the date of death (Rev.
Reg. 6-2008)
2. If not traded in the local stock exchange:

Ordinary shares Adjusted Net Asset Method
Preferred shares Adjusted Net Asset Method

Shares of Stocks
The old ruling Revenue Regulation No.
2-2003 was abandoned.
Under the old ruling:
1. If traded, the mean of the highest and
lowest quotation
2. If not traded,
a. For ordinary stocks, book value
b. For preferred stocks, par value

Shares of Stocks
Traded
Example:
On September 10, 2015, Nata Yen died leaving to her husband 10,000 equity
share investments in Jollibee Corporation. The FMVs of the Jollibee equity shares
by Philippine Stock Exchange (PSE) on September 10, 2015 are reported as
follows:
Par
Stocks of
Jollibee
Value
P 1.00
Open
P 188.00
Market Prices as of September 10, 2015
High
P 188.40
Low
Close
P 186.50P 187.10
10,000 shares times P187.10 = P 1,871,000 gross value to be included in the

gross estate

Shares of Stocks
If not traded
Example:
The executor of Mr. Ernesto, who died on November 1,
2015, determined that the decedent has the following
investments in the stocks of XYZ Corporation:
Classification
Number of Shares
Acquisition
Common Shares
20,000 shares
P 500,000
Preferred Shares
1,000 shares
P 300,000
XYZ Corporation reported the following information:

Shares of Stocks
Continuation...
Per Book
Total Assets
P 90,000,000
Total Liabilities
36,000,000
Shareholders Equity
54,000,000
Common shares (par value of P10;
1,000,000 shares outstanding)
Preferred shares (par value of P20;
100,000 shares outstanding)

Shares of Stocks
Continuation...
All of XYZs assets and liabilities are stated as fair market value with the exception
of its land and building stated at P30,000,000 book value. The following are the fair
market values of the real property of XYZ Corporation:
BV
AV
ZV
Independent
Land
P 10 M
P 15 M
P 20 M
P 18 M
Building
20 M
12 M
15 M
16 M
P 30 M
P 27 M
P 35 M
P 34 M
There was an increase of 6M in the total assets from P30 M to P 36M.

Shares of Stocks
Continuation...
Total Assets
P90,000,000
Increase in FV
6,000,000
Less: Fair Value of Liabilities
Adjusted net asset values
P 96,000,000
36,000,000
P 60,000,000

Shares of Stocks
Continuation...
Preferred
P 60,000,000
____2/12

Allocation using par value
per class of stocks
P 10,000,000
Divided by number of shares
outstanding
100,000
Adjusted Net Asset value
per Share
P 100
Common
P 60,000,000
10/12___
P 50,000,000
1,000,000
P 50

Shares of Stocks
Lastly,
Adjusted net value of
Common shares (20,000 x P 50)
Adjusted net value of
Preferred shares (1,000 x P100)
Total Gross Value of the Estate
Of Ernesto
P 1,000,000
100,000
P 1,100,000
Gross Estate
What intangible properties are considered as situated
within the Philippines?
1.Franchise which must be exercisable in the Philippines;
2.Shares, obligations or bonds issued by domestic
corporations;
3.Shares, obligations or bonds issued by any foreign
corporation, 85% of business of which is in the
Philippines;
4.Shares, obligations or bonds issued by any foreign
corporation, if such shares, obligations or bonds have
acquired business in the Philippines;
5.Shares or rights in any partnership, business or industry
established in the Philippines.
Additions
to
Gross
Estate
1. Taxable Transfers (during the lifetime)
1.
2.
3.
4.
5.
Transfer in Contemplation of death

Revocable Transfers
Transfer passing under General Power of Appointment
Transfers for insufficient consideration
Proceeds of life insurance with revocable beneficiary
2. Others
1.
2.
3.
4.
Decedents interest accrued at the date of death

Usufruct right transferrable to the decedents heirs
Claims against insolvent person
Amount received by the heirs under RA 4917 (DISCUSSED
EXHAUSTIVELY UNDER DEDUCTIONS)
Additions to Gross Estate:

In Contemplation of Death
Death must be contemplated and the thought of
death must be the impelling cause of transfer
1. Where a donation was made concurrently with the
execution of the will
2. Where donation was made due to the decedents
age and/or the decedents known serious illness at
the time of gift
3. Where the time between the making of a gift and the
death of the donor was relatively close
Example:
On November 10, 2015, due to severe
prostate cancer (terminal stage), C donated
his land to X, his paramour. A week after, C
died. The land, although already in the
hands of X, shall be included in the
computation of gross estate of C.
Additions to Gross
Estate:
Revocable
Transfers
Transfer of property
with retention or reservation
of rights over the property by the donor

(decedent) while he still lives
By gift where the donor has reserved the power to
alter, amend and revoke donation.
The donor retains the option to relinquish such power
in contemplation of death
Conditional transfers where attached conditions are
not completed by the donee prior to the donors death
Example:
On June 1, 2015, B gave his car to D,
younger brother whos going to take the
CPA board exam on October 2015, with a
condition that when B should fail to become
a CPA within two years, the car shall be
taken back by him (D). D, however, died
on September 30, 2015. The transfer is
revocable, thus included in the gross estate
of D.
Additions to Gross
Estate:
General
Power
of Appointment
Transfer
under
GPA means that
the decedent must have a power

exercisable in favor of himself, his estate or
creditors of his estate.
A power is special if it is expressly not
exercisable in favor of the decedent, his
estate or creditors of his estate.
Example:
P died leaving his residential house to his
only son (M), with a will, giving the latter a
condition that should he die (son), he can
only choose from J, H and R as the next
successor of the residential house. In this
case, the power is special, thus, the
residential shall not be included in the
computation of gross estate of the son.

Sale or Transfer for Inadequate Consideration
1. If it is a bona fide or valid sale made

during the lifetime of the decedent
with full and adequate consideration,
NO AMOUNT shall be included in
the gross estate.

2. If it is a sale during the lifetime of the

decedent but the consideration received
is less than adequate, the amount to
included in the gross estate is the
difference between the FMV at the
time of death less the consideration
received.

3. If the transfer made during the

lifetime of the decedent is without
consideration, as in the case of in
contemplation of death, revocable
transfers and transfer under the
general power of appointment, the
amount to be included is the FMV at
the time of death.
Example:
G, in contemplation of death, sold his
properties to H for P 250,000 on
November 26, 2015. G died on
December 10, 2015.
If the fair market value at the time of sale was P
200,000 and the fair market value at the time of
death is P 400,000, how much would be included
in the gross estate?
Example:
December 10, 2015.
death is P 300,000, how much would be
included in the gross estate?
Example:
December 10, 2015.
death is P 150,000, how much would be
included in the gross estate?
Example:
Ben died on October 20, 2014. During his
lifetime, upon knowing that he had Stage 4
cancer, sold his Lamborghini car to his son for P
4, 000, 000. The fair market value of the car at
the time of sale is P 3, 000,000 while it is already
valued at P 5,000,000 at the time of death. The
amount will be added to gross estate is :
278

Proceeds of Life Insurance
1. If the beneficiary is any third person other than
the estate, executor or administrator and the
designation is REVOCABLE, included in the
gross estate.
2. If the beneficiary is any third person other than
the estate, executor or administrator and the
designation is IRREVOCABLE, excluded in
the gross estate.
279

Proceeds of Life Insurance
If the beneficiary is the estate, executor
or administrator, regardless whether
the designation is revocable or
irrevocable, included in the gross
estate.
Exclusions from Gross Estate

What are excluded from gross estate?
1.Proceeds of life insurance taken by the decedent
on his own life if the beneficiary is any third person
and the designation is irrevocable. If the
beneficiary is the estate, administrator or executor,
the proceeds of life insurance is included in the
gross estate, whether revocable or irrevocable. If
the beneficiary is any third person but the
designation is revocable, the same shall be
included in the gross estate.

Under Section 85 and 86 of NIRC
a. Capital or exclusive property of the
surviving spouse
b. Properties outside the Philippines of a
non-resident alien decedent
c. Intangible personal property of a nonresident alien in the Philippines when the
rule of reciprocity applies.

Under Section 87 of NIRC
a. Merger of usufruct in the owner of the
naked title
b. Transmission or delivery of the
inheritance or legacy of the fiduciary heir
or legatee to the fideicommissary
c. Transmission from the first heir, legatee
or donee in favor of another beneficiary,
in accordance with the will of the
predecessor
Example: Merger of
Usufruct in the Naked Title
Jojo died in 2015 leaving his only
property, house and lot, to Nancy and
Mar, his daughter and son, with the
stipulation that Nancy shall inherit the title
of ownership while Mar will benefit the
use of property (usufruct).
Example: Merger of
If Nancy died after the father (Jojo) and there
was no heir other than her brother Mar, there
would a merger of usufruct in the owner of the
naked title (Mar), hence, non-taxable.
Example: Merger of
If Mar died before Nancy and there
was no heir other than Nancy, the
latter will inherit the property.
However, this time it would be
subject to estate tax.
All bequests, devices, legacies or transfers to

social welfare , cultural and charitable
institutions, provided:
a. No part of the net income of said institution
inure to the benefit of any individual;
b. Not more than 30% of such transfers shall be
used for administration purposes.
Exclusions from Gross

Estate
Under Special Laws
a. Proceeds of life insurance and benefits received by
members of the GSIS (RA 728)
b. Benefits received by members from SSS by reason of
death (RA 1792)
c. Amounts received from Philippine and United States
governments for war damages
d. Amounts received from United States Veterans
Administration

Retirement benefits of officials/employees of a
private firm (RA 4917), provided they are
Payments from the Philippines and US
governments to the legal heirs of deceased of
World War II Veterans and deceased civilian for
supplies/services furnished to the US and
Philippine Army (RA 136)
Example:
Ben, a non resident alien, died on September 21, 2008,
leaving the following properties to his heirs.
Shares of stocks, Meralco
Shares of stock, foreign Corp. 85 % of its
business conducted in Phils.
Dollar deposit accnt. HSBC. Phil.
Car Manila
P 250, 000
400, 000
800, 000
550, 000
Assuming the rule of reciprocity is applicable to Ben,

the taxable gross estate shall be :
Rules in determining the property of

relationship
Agreement on marriage settlement
If there was no prenuptial agreement and:
1. The date of marriage took place before August 3,
1988, conjugal partnership of gains.
2. The date of marriage took place on or after August
3, 1988, absolute community of property.
291
Property Relations
Conjugal
Partnership
Absolute
Community
a. Gratuitous
Exclusive
Communal
b. Onerous
Exclusive
Communal
c. Where the spouse has a legitimate descendant

from a previous marriage
Exclusive
Exclusive
a. Gratuitous title
Exclusive
Exclusive
b. Onerous Title
Conjugal
Communal
c. In exchange of EXCLUSIVE property
Exclusive
Exclusive
d. In exchange of conjugal/ communal property
Conjugal
Communal
e. Fruits or income from EXCLUSIVE property
Conjugal
Exclusive
f. Fruits or income from conjugal/ communal

property
Conjugal
Communal
I. Property acquired BEFORE Marriage
II. Property acquired DURING marriage
General Assumptions:
In the absence of any contract or marriage settlement
executed before marriage, the property relations shall be
either conjugal (before August 3, 1988) or communal (on
or after August 3, 1988).
Property for personal and exclusive use of either the
spouse shall be exclusive, however, jewelry shall form
part of the communal property.
Property acquired in exchange of exclusive property
shall be exclusive.
Any property acquired during marriage are presumed to be
communal, unless proven otherwise.
Example:
Mr. Jose, Filipino, married died leaving the following estate:
Car acquired before marriage by Mr. Jose
P 400,000
Car acquired before marriage by Mrs. Jose
350,000
House and lot acquired during marriage
1,500,000
Jewelries of Mrs. Jose, acquired before marriage
200,000
Personal properties inherited by Mr. Jose before marriage 550,000
Land inherited by wife during marriage
1,000,000
Funeral expenses
405,000
Medical Expenses incurred 2 years ago
550,000
1. How much is the gross estate under Conjugal Partnership of Gains?
Example:
Mr. Jose, Filipino, married died leaving the following estate:
Car acquired before marriage by Mr. Jose
P 400,000
Car acquired before marriage by Mrs. Jose
350,000
House and lot acquired during marriage
1,500,000
Jewelries of Mrs. Jose, acquired before marriage
200,000
Personal properties inherited by Mr. Jose before marriage 550,000
Land inherited by wife during marriage
1,000,000
Funeral expenses
405,000
Medical Expenses incurred 2 years ago
550,000
2. Under the same problem, how much is the gross estate under Absolute
Community of Property?
295
Example:
A decedent left the following properties:
Land in Italy (with P 750,000 unpaid mortgage) P 2,000,000
Land in Laguna, Philippines
500,000
Franchise in USA
100,000
Receivable from debtor in Philippines
70,000
Receivable from debtor in USA
100,000
Bank deposits in USA
80,000
Shares of Stocks of PLDT, Philippines
75,000
Shares of stock of ABC, foreign corporation 75%
of the business in the Philippines
125,000
Other personal properties in the Philippines
300,000
Zonal value of the Land in Laguna
750,000
If the decedent is a nonresident citizen, his gross estate is
296
Example:
A citizen of Malaysia residing in Vietnam, with properties in the Malaysia
and the Philippines, had the following data on properties and rights at
the time of death and values.
Real estate, Malaysia
P 1, 000, 000
Real estate, Philippines
2, 000, 000
Shares of stock of a domestic corporation
200, 000
Shares of stock of a Malaysian corporation
300, 000
Shares of stock of an Indonesian corporation
Doing business in the Philippines only
100, 000
Philippine peso deposit in BDO bank
500, 000
Receivable under a life insurance with an insurance
Company doing business in Malaysia
250, 000
The gross estate that should be reported in the Philippines is
297
ALLOWABLE
DEDUCTIONS
298
ALLOWABLE DEDUCTIONS
O
R
D
I
N
A
R
Y
Residents
or Citizens
NRA
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
2. Transfer for Public Use
Yes
Yes
3. Vanishing Deduction
Yes
Yes
1.
a.
b.
c.
d.
ELITE
Funeral expenses
Judicial expenses
Claims against the estate
Claims against insolvent
person
e. Unpaid mortgages and
indebtedness
f. Taxes
g. Losses
(PGE/WE)
X
WORLD
ELITE
ALLOWABLE DEDUCTIONS
S
P
E
C
I
A
L
Residents or
Citizens
NRA
4. Family Home
Yes
No
5. Medical Expenses
Yes
No
6. Amounts received by heirs

under RA 4917 (Retirement
Benefits Act)
Yes
No
7. Standard Deduction
Yes
No
8. Share of Surviving Spouse
Yes
Yes
Remember
1.
2.
3.
4.
Deductions are only classified as either

Ordinary or Special.
Ordinary deductions are ELITE, Transfer for
Public Use and Vanishing Deduction.
Special Deductions are Standard Deduction,
Family Home, Medical Expenses and RA
4917.
There shall also be a deduction for the Share
of the Surviving Spouse in the Net Taxable
Estate of the decedent.
Remember
1. Deductions whether Ordinary or Special,
generally, FOLLOW the classification of the
property (exclusive or conjugal).
2. Deductions which are non-accountable
whether exclusive or conjugal are generally
deductible from conjugal property (e.g.
Funeral expenses, Judicial Expenses)
Remember
1. Deductions like vanishing deduction,
transfer
for
public
use,
losses,
indebtedness and others which can be
attributed to either exclusive or conjugal
property are classified accordingly.
Deductions from gross estate
1. Residents and Citizens:
ELITE + PP + VD + FH + STD + R + M +
2. Nonresident Aliens:
ELITE + PP + VD + Share of the Surviving
Spouse
Expenses, losses, indebtedness and taxes (please see discussions

below).
If decedent was a citizen or resident alien, deduct all ELITE.
If decedent was a non-resident alien, prorate ELITE as follows:
Phil. Gross Estate

World Estate
Total ELITE
Transfers for PUBLIC PURPOSE. These are bequests, legacies,

devises or transfers for the use of the government of the Phil. or any
political subdivision thereof, exclusively for public purpose.
Deduction for property previously taxed (VANISHING DEDUCTION).
The family home not exceeding P1,000,000.
Standard deduction for citizen or resident alien decedent
only of P1,000,000.
Retirement benefits received by employees of private firms
from private pension plan approved by the BIR under R.A.
4917.
Medical expenses paid or incurred within 1 year prior to
decedents death duly substantiated with receipts but not to
exceed P500,000 for citizen or resident decedent.
Net share of the surviving spouse in the conjugal
partnership property or community property as diminished
by the expenses properly chargeable to such property shall
be deducted from the estate.
General Rule: All items claimed as

deductions against the gross estate
shall be duly substantiated.
Exception: Standard deduction
Ordinary Deductions
1. ELITE: Expenses, Losses, Indebtedness,
Taxes, Etc.
a. Funeral expenses: Limited to the lowest of
the actual, 5% of the gross estate and P
200,000. Excess funeral expense incurred
but not yet paid cannot be claimed as
indebtedness. Any funeral expense defrayed
by relatives or other parties cannot be
claimed as expense.
Example:
The gross estate of JR, who was a married
decedent, was P 3, 500, 000, wherein P 820, 000
was inherited from his mother who died four years
ago. The inherited property has an unpaid
mortgage of p 200, 000, whereby 60 % of it was
paid during the lifetime of JR. The total allowed
expenses amounted to P 1, 505, 000 including the
actual funeral expenses of P 180, 000 but
excluding the share of the surviving spouse and
the vanishing deduction. The allowed funeral
expenses shall be :
Example:
Properties in the Philippines - P500,000;
Properties outside the Philippines P300,000; Actual funeral expenses in the
Philippines - P20,000;
Actual funeral
expenses outside the Philippines P10,000.
If the decedent was a citizen or resident of
the Philippines, the deductible funeral
expenses is:
310
Example:
Properties in the Philippines - P500,000;
Properties outside the Philippines - P300,000;
Actual funeral expenses in the Philippines P20,000; Actual funeral expenses outside the
Philippines - P10,000.
If the decedent was a non-resident, not citizen of
the Philippines, the deductible funeral expenses is:
311
Ordinary Deductions
b. Judicial Expense: No limit as to amount,

however, the expense must only be relating to
settlement of the estate. Any expense incurred by
the heir to establish his claim cannot be claimed
as judicial expense. Expenses allowed in this
category are:
Expenses incurred in inventory-taking of assets
comprising the gross estate
Administration
Expenses incurred in the distribution of the estate.
312
Ordinary Deductions
c. Claims against the Estate: Personal

obligation of the deceased existing at the
time of death, contracted in good faith and
for full and adequate consideration, which is
valid and enforceable in court and that must
not have been condoned by the creditor or
the action to collect must not have been
prescribed.
Ordinary Deductions
d. Claims against Insolvent Person: the

amount thereof must have been initially
included as part of the estate and the
incapacity of the debtor to pay his
obligation must have been proven. If only a
portion is uncollectible, then only such
portion may be claimed as deductible.
Ordinary Deductions
e. Unpaid Mortgages: a verification as to the beneficiary

of proceeds must be made. In case of accommodation
only, the amount must also be claimed as receivable
f. Taxes: must have accrued but not paid as of the time of
death. The following are non-deductible:
Income tax for income received after death
Property tax not accrued prior to death
Estate tax
Example:
Mr. B died on June 30, 2013 leaving among

others, the following charges and obligations :
Real property tax for the calendar year 2013 P
20, 000. On an interest bearing promissory
note ( notarized ) face value of the note P 10,
000, accrued interest on the note at the time of
death P 600 and interest to accrue on the note
from the date of death to the date of maturity
P 400. The deduction from the gross estate is
Ordinary Deductions
g. Losses: arising from storm, fire, shipwreck, or
other casualty, robbery, theft or embezzlement.
Losses must not be compensated by insurance
and not claimed as deduction in income tax
return. If compensated by insurance, the amount
deductible against the gross estate shall only be
limited to the amount not compensated. The loss
must have occurred after death but not later than
the last day of filing for estate tax return (6
months after death).
317
Ordinary Deductions
2. Transfer for Public Use: the disposition must

be in the last will and testament which shall take
effect after death in favor of the Philippine
Government and for exclusive public purpose.
Bequest, legacies and other charitable disposition
of the estate in favor of social, cultural, and other
charitable institutions can be claimed as transfer
for public use, provided, that not more than 30%
of the said bequest or legacies is used for
administrative purpose.
Ordinary Deductions
Transfer for Public Use:
- are donations and contributions, by virtue of
death, to:
1.Government or its political subdivisions;
2.Non-government organizations (accredited)
3.Charitable and religious institutions
- are actually exemptions from estate tax provided
that not more than 30% are used for administrative
purposes and the income of such institutions does not
inure to the benefit of private individuals (such as
distribution of profits through dividends).
Ordinary Deductions
Transfer for Public Use
-However, to be exempted, the executor or
administrator should also add the amount donated
or contributed to the gross estate.
-Likewise, the deduction is also allowed as
ordinary deduction.
Example:
Mr. B died on June 30, 2010, leaving among other,

the following charges and obligations: real
property tax for the calendar year 2010 P20,000;
on an interest-bearing promissory note (notarized)
face amount of the note P20,000; accrued interest
on the note at the time of death P600; and the
interest to accrue on the note until maturity, P400.
The total deduction form the gross estate is
______________________
Example:
Compute the allowable deduction from the

gross estate of a deceased nonresident
alien having properties situated in the
Philippines which valued for P2 million and
properties situated abroad valued at P10
million, and the deductions claimed for
expenses, losses, indebtedness and taxes
amounted
to
P1800,000.
____________________
Example:
Alicia died with a receivable from Bertol.

Bertol has properties worth P220,000 and
obligations of P320,000. Included in the
obligations are P20,000 owed to the
Government of the Republic of the
Philippines for unpaid taxes and P60,000
owed to Alicia. The estate of Alicia has a
deduction for claim against insolvent person
of ___________________
Ordinary Deductions
3. Vanishing Deductions: only
allowed for properties included in the
gross estate which have been
previously taxed (donors or estate
taxes. To be allowed for vanishing
deduction, the present death must
be within 5 years from the prior
transfer.
Ordinary Deductions
Purpose - to minimize the effects of a double tax on
the same property within a short period of time.
Conditions for allowance:
There is a property forming a part of the gross
estate of the present decedent situated in the
Philippines;
The present decedent acquired the property by
inheritance or donation within 5 years prior to
his death;
Ordinary Deductions
The property subject to vanishing deduction can be

identified as the one received from the prior decedent, or
from the donor, or can be identified as having been
acquired in exchange for the property so received;
The property acquired formed part of the gross estate of
the prior decedent, or of the taxable gift of the donor;
The estate tax on the prior transfer or the gift tax on the gift
must have been paid; and
The estate of the prior decedent has not previously availed
of the vanishing deduction.
Ordinary Deductions
Percentage of vanishing deduction - the rate
depends on the interval between the death of
present decedent and death of prior decedent
(if the property was acquired by inheritance) or
death of present decedent and date of gift (if
the property was acquired by donation), as
follows:
Percentages for
Vanishing Deductions
More than
xxx
1 years
2 years
3 years
4 years
5 years
Not more
than
1 years
2 years
3 years
4 years
5 years
Xxx
Percentage
100%
80%
60%
40%
20%
Xxx
Procedures in computing
vanishing deductions
Determine the initial value by comparing the FMV of the
property used in computing the first transfer tax paid with
the FMV of the property in the present decedent. The lower
of the two is the initial value.
From the initial value taken, deduct any mortgage or lien on
the property previously taxed which was paid by the present
decedent prior to his death, where such mortgage or lien
was a deduction from the gross estate of the prior decedent
or gross gift of the donor. This is the initial basis.
The initial value taken, as reduced by Step (b),
shall be further reduced by prorated deductions for
expenses, losses, indebtedness, taxes (ELIT) and
transfers for public purpose (PP) only, allocable to
the property previously taxed as follows:
Initial Basis
x
(ELIT + TPP)
Gross Estate
Determine the time interval between the death of
present decedent and death of prior decedent (if the
property was acquired by inheritance) or death of
present decedent and date of gift (if the property
was acquired by donation) to find the applicable
percentage of vanishing deduction.
Multiply the final basis by the percentage of
vanishing deduction to arrive at the VANISHING
DEDUCTION
Computing Vanishing Deduction:

INITIAL VALUE
MORTGAGE
PAID
lower of FV at death or at transfer

Less:
if the property is mortgaged.
NEW INITIAL
VALUE
TOTAL GROSS
ESTATE
NEW INITIAL
VALUE
Divide:
plus Transfer
XELITE
= deductible
for Public Use
amount from NIV
Deductible
amount from NIV
NEW INITIAL
VALUE
The following information is provided by the

executor of a married decedent:
a. Exclusive property (fair market value of P145,000 when
inherited 3 years ago and was subjected to a
mortgage of P45,600 at that time) P130,000.
b. Conjugal properties of the decedent husband and
surviving wife, P170,000
c. Unpaid mortgage on inherited property, P15,600
d. Judicial expenses incurred after the death in connection
with the estate settlement, P12,000
e. Other obligations, P17,500
The amount of vanishing deduction is ______________
Example:
Property inherited four and one half years ago
(FMV P 5, 000, 000 when inherited and subject to a
Mortgage of P 1, 200, 000 )
P 7, 000, 000
Property received as gift 3 and years ago
(FMV when of P 5, 000, 000 when inherited ) 3, 000, 000
Unpaid mortgage on inherited property
200, 000
Funeral expenses
300, 000
Judicial expenses
500, 000
Claims against the estate
( not including mortgage)
1, 100, 000
Vanishing deduction ?
334
Special Deductions
4. Family Home: must be the actual residential home of
the decedent and his family at the time of his death, as
certified by the Barangay Captain. Allowable deduction
must be an amount equivalent to the fair value declared in
the gross estate, to the extent of the decedents interest but
not to exceed P 1,000,000
5. Standard Deduction: there shall be a standard
deduction of P 1,000,000 without the need of
substantiation.
335
Example:
B died leaving his only property, residential house and lot,
to his wife, S. The following information were given:
Lot acquired by B during marriage
thru gift from Father of B
P 500,000
House constructed using conjugal funds
Construction Cost (10 years ago)
1,500,000
Assessed Value per tax declaration 1,200,000
Solution:
Lot (EXCLUSIVE)
House (CONJUGAL)
Assessed Value:
1,200,000/2
LIMIT
500,000
600,000
P 1,100,000
P 1,000,000
Special Deductions
6. Medical Expense: must be incurred within one year
prior to the death of the decedent and shall not exceed
P500,000. Any amount in excess of the ceiling shall not
be allowed as creditable as indebtedness.
7. RA 4917 (Retirement Benefits Act): Any amount
received by the heir under this act shall be allowed as
deduction from gross estate, provided that the same
must also have been included in the gross estate.
Special Discussion: RA 4917

The following are not subject to any tax under RA 4917:
1. Retirement Benefits received by officials and employees of
private firms, whether individual or corporate, provided that
the employee has rendered service to the same employee
for 10 years and has been 50 years old at the time of
retirement and has availed this benefit for once;
2. Benefits granted in case of separation of any official or
employee from the service of the employer due to death,
sickness or other physical disability or for any cause beyond
the control of the said official or employee.

Treatment:
1. Exemption and exclusion: Not added to the
gross estate, consequently, no deduction is also
allowed.
2. Deduction from gross estate: Under Sec. 86 (A)
(7) of the NIRC, said amount is to be treated as
deduction from the gross estate of the decedent
provided that the same was included in the gross
estate of the deceased.
If added in the gross estate, the deduction

may be treated as follow:
1. Ordinary Deduction Method
2. Exclusive Special Deduction Method

ORDINARY DEDUCTION METHOD
1.The amount of benefits received under RA 4917 is
added in the gross estate and classified as conjugal or
community property.
2.At the same time, before dividing the net estate in the
computation of the share of the surviving spouse, the
same amount of RA 4917 is deducted as an ORDINARY
deduction.
Example:
Assume that Juanito, a married Filipino citizen, died
leaving the following properties and obligations:
Residential House and Lot (family home)
Personal Properties (exclusive)
Amount Received under RA 4917
ELITE Deductions
P 4,000,000
3,000,000
2,000,000
500,000
Solution:
Under the first treatment, RA 4917 is excluded in the gross estate, thus:
Exclusive
Conjugal
Total
Family Home
P 4,000,000
Personal Properties
P 3,000,000
P 7,000,000
Gross Estate
3,000,000
4,000,000
7,000,000
ELITE Deductions
( 500,000)
(500,000)
Net estate after Ordinary
3,000,000
3,500,000
6,500,000
Less: Special Deductions
Family Home
(1,000,000)
Standard deduction
(1,000,000)
(3.5 M/2)
(1,750,000)
Net taxable Estate
2,750,000
Solution: Ordinary Deduction

Under the second treatment, RA 4917 is classified as conjugal propert in the gross estate,
thus:
Exclusive
Conjugal
Total
Family Home
P 4,000,000
Personal Properties
P 3,000,000
RA 4917
2,000,000
P 9,000,000
Gross Estate
3,000,000
6,000,000
9,000,000
ELITE Deductions
( 500,000)
RA 4917
(2,000,000)
(2,500,000)
3,000,000
3,500,000
6,500,000
Family Home
(1,000,000)
Standard deduction
(1,000,000)
(3.5 M/2)
(1,750,000)
Net taxable Estate
2,750,000
Solution: Exclusive Special

Under the second treatment, RA 4917 is classified as exclusive property in the gross estate,
thus:
Exclusive
Conjugal
Total
Family Home
P 4,000,000
Personal Properties
P 3,000,000
RA 4917
2,000,000
P 9,000,000
Gross Estate
5,000,000
4,000,000
9,000,000
ELITE Deductions
( 500,000)
( 500,000)
5,000,000
3,500,000
8,500,000
Family Home
(1,000,000)
Standard deduction
(1,000,000)
RA 4917
( 2,000,000)
(2,000,000)
Net estate after Special
4,500,000
(3.5 M/2)
(1,750,000)
Net taxable Estate
2,750,000
8. Share of the Surviving Spouse: the
share of the surviving spouse from the
conjugal or communal property is also
allowed as deduction from total gross
estate to arrive at net taxable estate.
Example:
Mr. A, non-resident Japanese, died leaving the following:
Exclusive Properties, Philippines P 560,000
Conjugal Properties, Philippines
420,000
Conjugal Properties, Japan
1,820,000
Deductions claimed:
Funeral expenses
100,000
Judicial expenses 100,000
Unpaid expenses 150,000
Losses, occurring 3 months after death
Due to fire
50,000
Donation mortis causa to Makati City
180,000
Family Home (included above)
2,000,000
Standard Deduction
1,000,000
The taxable net estate is: _________________
Example:
A citizen of the Philippines, single, died a resident of the United States, leaving the
following properties:
Real property in the United States, inherited
from the father one and one-half years ago
P 2,000,000
Personal property in the Philippines inherited from the father
1,600,000
Family home in the United States
1,400,000
and only the following expenses and obligations:
Actual funeral expenses paid in the United States
100,000
Other obligations contracted within the last two years
250,000
1. The gross estate subject to Philippine estate tax is:
2. The deduction for family home is:
3. The vanishing deduction is:
4. The taxable net estate is:
5. The estate tax due is:
349
COMPLIANCE
REQUIREMENTS
350
Compliance Requirements
Notice of death shall be given when the value of
the gross estate exceeds P 20,000
The executor, administrator or any of the legal
heirs shall file the notice of death:
a. within 2 months after the decedents death
(EXTRAJUDICIAL SETTLEMENT); or
b.
within 2 months after the executor or
administrator
has
qualified
(JUDICIAL
SETTLEMENT).
Compliance Requirements
The estate tax return shall be filed within 6 months after
the decedents death, but may be extended to not
exceeding 30 days if authorized by the BIR Commissioner.
When the estate tax return shows a gross value
exceeding P 2,000,000, it shall be supported with a
statement duly certified by a CPA.
The payment of estate tax shall be made at the time the
return is filed. However, the CIR may allow an extension
of until 5 years if settled judicially or 2 years if settled
extra-judicially.
Example:
A died on January 31, 2010 leaving a house
and lot, which have a gross value of P
800,000, to B. When shall be the last day to
notify the CIR?
Example:
A died on January 31, 2010 leaving a
house and lot, which have a gross
value of P3,800,000, to B. When
shall be the last day to file the estate
tax return?
354
Example:
A died on January 31, 2010 leaving a
house and lot, which have a gross value
of P3,800,000, to B. When shall be the
last day to file the estate tax return if the
Commissioner grants an extension of
filing due to hardship in valuation the
estate?
355
Example:
and lot, which have a
gross value of
P3,800,000, to B. The executor of A filed the
estate tax return on June 30, 2010. However,
he failed to pay the estate tax due to liquidity
problems. If the estate is settled judicially,
when shall be the last day for the BIR to
collect the estate tax?
356
Example:
and lot, which have a gross value of
P3,800,000, to B. The executor of A filed
the estate tax return on June 30, 2010.
However, he failed to pay the estate tax due
to liquidity problems. If the estate is settled
extra-judicially, when shall be the last day
for the BIR to collect the estate tax?
357
Example:
Taxpayer died February 2, 2010. No
judicial proceedings were instituted for the
settlement of his estate. Return was filed
and tax of P 20,000 was paid November 2,
2010. The estate tax due, including
increments, as of November 2, 2010 is:
________________
358
Example:
Mr. Joacquin Gamboa died on April 23, 2009 leaving a
total net taxable estate of P 1,250,000. The executor filed
the estate tax return on August 8, 2009. However, due to
undue hardship, the executor asked for the extension of
payment of estate tax which was granted by the
Commissioner of Internal Revenue. When will the last day
of payment of estate tax if the CIR grants the maximum
period and the estate is settled judicially?
359
Example:
Assuming that the executor filed the
estate tax return on January 23,
2010 for a fraudulent reason, how
much would be the total amount
payable on January 23, 2010?
360
Example:
Ms. Laureen McDonald, a citizen and resident of Brisbane, Australia,
died leaving properties and obligations in Australia and in the
Philippines:
Properties in Australia (inherited within
the year of which P1000,000 is family home)
P 3,000,000
Properties in the Philippines
1,000,000
Investment in stocks of San Miguel Beer, Inc.
550,000
Investment in Foreign Corporation
400,000
Funeral Expenses in Australia
250,000
Unpaid obligations in Australia, duly notarized
700,000
Medical expenses in the Philippines
200,000
The net taxable estate in the Philippines is:
361
Question: If the decedent is a

Filipino, how much would be the
estate tax payable?
_____________________
362
ESTATE TAX TABLE

0
- 200,000 Exempt
200,000 - 500,000
0
500,000 - 2,000,000
15,000
2,000,000 - 5,000,000 135,000
5,000,000 - 10,000,000 465,000
10,000,000 - above
1,215,000
+
+
+
+
+
5%
8%
11%
15%
20%
DONORS TAX
Overview
Nature of Donors Tax a tax on the privilege of
the donor to give; it is not a property tax but is a
tax imposed on the transfer of property by way of
gift during the life time of the donor. The donors
tax shall not apply unless and until there is a
completed gift.
It is an excise tax imposed upon the right of a
person to transfer property gratuitously during his
lifetime.
Overview
Donation takes place only when there is a concurrence of
the following:
1.Capacity of the donor
2.Donative intent
3.Delivery of the gift
4.Acceptance by the donee
- completed
- perfected
Note:
The composition and valuation of gross gift is the same as
the composition and valuation of gross estate.
Elements of Donation:
Capacity of the Donor
The donor must be capacitated at the
time of the donation:
he has the right to transfer or dispose the
property (ownership)
he is mentally capable of entering into
donation, being a real contract (COCD)
he does not deprive his legal heirs.
It is not necessary that the donee is capacitated

at the time of the donation as long as the
guardian, in favor of the donee, is capacitated.
Donative Intent
The donation must be construed strictly and is

not presumed.
The donative intent is evidenced by complying
certain legal requirements:
Donation of Real Properties must be in public
instrument (notarized and registered)
Donation of Personal Properties:
if the amount is not more than P 5,000.00, may be done
orally, but a concurrent delivery of the thing should be made.
if the amount is more than P 5,000.00 must be in writing,
whether in public or private instrument.
Donative Intent
Donative intent is only necessary for direct

gifts:
casual donations (A to B)
It is not necessary for indirect gifts:

creation of a trust ( A to B for the benefit of C)
inadequate consideration in a sale transaction
Illustration:
Real Property not
used in Business
Personal Property not
used in Business
Real Property
used in Business
(Inventory)
Personal Property
used in Business
(Inventories and
Depreciable Assets
Sale is subject to 6%, no

amount will be included as Gift
If the sale is inadequate:
1. If in contemplation of death, revocable
transfer and the donor died, part of the
Gross Estate.
2. If the donor did not die, part of the
Gross Gift
1. All sales of ordinary assets are subject
to business taxes (VAT) based on
Gross Sales (FMV, ZV, AV, or SP).
2. If it is not a sale, subject to donor's tax
(unless it is a deemed sale) or estate tax (for
individuals only).
3. If the donor is engaged in business, contributions
may be claimed as deduction (either subject to 5%
or 10% limit or deductible in full - for priority
programs).
Delivery of the Gift
As a real contract (COCD), there must be

a delivery of the gift so that the donation is
completed (on the part of the donor).
Upon delivery, the donor's tax shall
accrue.
Delivery may be actual or constructive:
symbolic delivery (delivery of the key or title)
Traditio brevi mano (short hand)
Traditio longa mano (long hand; pointing the
property)
Acceptance of the Gift
The donee should accept the gift for the

perfection of the contract of donation.
The acceptance may be made in the same
instrument of donation or in a separate paper.
Acceptance by a guardian in favor of the ward
maybe done.
The donation is only perfected upon the
knowledge of the donor of the acceptance of the
donee.
Nevertheless, the donor's tax should accrue
upon completion.
Remember
The transfer of property is completed by
delivery, either actually or constructively, of
the donated property to the donee.
The transfer of property by gift is perfected
from the moment the donor knows of the
acceptance of the donee.
Classification of Donors
1. Residents and Citizens taxable globally
2. Non-resident Alien:
a. With reciprocity
b. Without reciprocity
Similar as to the classifications in Estate
Taxation.
Computation of Gift Tax

(Donors Tax - Relative)
On first donation:
Gross Gift
Less: Deductions from gross gift
Net gift
Times the Applicable rate
Donors tax due and payable
xx
xx
xx
%
xx
Computation of Gift Tax

(Donors Tax - Relative)
On subsequent donation:
Gross gift made this month
Less: Deductions from gross gift
Net gifts
Add: ALL prior net gift w/in the year
Aggregate net gifts
Times applicable Tax rate
Donors Tax Due
Less: Donors Tax paid on prior gifts
Donors Tax Due and Payable
xx
(xx)
xx
xx
xx
%
xx
(xx)
xx
Who are Relatives?

1. Brothers, sisters (whether by whole or half-blood),
spouse, ancestors and lineal descendants.
2. Legally adopted children are considered as
relatives, hence they are entitled to the same rights,
privileges and obligations of legitimate children, as
provided by law.
3. Relative by consanguinity (by blood) in the collateral
within fourth degree of relationship.
Example:
Determine whether the following is a relative or
stranger to a donor:
Grandson
Sister-in-Law
Granddaughter of the grandson
Mother's Grandfather
First cousin's daughter
Half-sister
Stepbrother
Spouse
Remember
ONLY gifts to relatives are computed using the

cumulative basis.
Donation to strangers (beyond 4th degree) is
computed using individual basis since the rate
(30%) will be the same regardless of the amount.
The classification of taxpayers are still the same
in estate tax.
The reciprocity rule shall also be considered for
intangible personal property of Non-Resident
Aliens in computing gross gift.
Gross Gift
1.
2.
3.
4.
Direct Gift (donor to donee)

Gift through creation of trust (indirect)
Condonation of debt
Repudiation of inheritance if:
1. Specifically and categorically done in favor of
identified heirs; and
2. To the exclusion or disadvantage of other coheirs.
Gross Gift
5. Renunciation by the surviving spouse of his/her share
in the conjugal partnership or absolute community after
the dissolution of the marriage in favor of the heirs of the
deceased spouse or any other person/s
6. Transfer for insufficient consideration, provided that it
is not in contemplation of death, revocable transfer or
transfer under general power of appointment. Otherwise,
it will be subject to estate tax.
Gross
Gift
1. As a rule, the value of the property/right donated shall
be the fair market value existing when the gift was
made (as of the time of donation).
2. The time to value is the moment when the donation
has been completed and perfected (delivered and
accepted).
3. When the donation is subject to a suspensive
condition, the value of the gift is to be determined
only at the time when the stipulated condition is
fulfilled, subject to the time of delivery and
acceptance of the gift.
Valuation
Methods
1. Real properties are valued at the assessed value or zonal
2.
3.
4.
a.
b.
value, whichever is higher.

Personal properties are valued at current market price or
fair market value.
Right to use or usufructuary is valued based on the
Basic Standard Mortality Rate Table (BSMT) with the
consideration of the present value using the prevailing
market interest rate at the time of donation.
Shares of stocks are valued at:
If traded Closing price
If not traded using the adjusted net asset method
Valuation: Usufruct
Usufruct is the legal right to use and enjoy the benefits and
profits of property belonging to another.
To determine the value of the right of usufruct, use of
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
(BSMT), to be approved by the Secretary of Finance, upon
the recommendation of the Insurance Commission. [Sec.
88(A), NIRC]
Valuation: Usufruct
Example:
Z, Father, donated to A, a Filipino, a usufructuary
right over a family apartment building with an
annual rent income of P 300,000. The property is
registered in the name of As sister, B (owner of
naked title). A, who is 39 years old, will enjoy the
usufruct.
Valuation: Usufruct
Continuation...
Additional Information:
Zonal Value of the apartment at donation
Assessed Value of the apartment
Prevailing effective interest rate per year
BSMT life expectancy of male with 40 age
(As next birthday)
P 5M
3M
10%
37.36 years
2.487
9.706
Valuation: Usufruct
Continuation...
Required: Compute for the reportable usufruct value
of A and bare dominium value of B assuming that the
right to use the apartment (usufructuary) is:
1.Within 10 years
2.Life-long, without term limit
Valuation: Usufruct
Solution: IF within 10 years
P 500,000
2.487
Usufruct Value in the gross gift
P 1,243,500
P 5,000,000
( 1,243,500)
P 3,756,000
Valuation: Usufruct
Solution: IF life-long, without limit
Usufruct Value in the gross gift
500,000
9.706
P 4,853,000
P 5,000,000
( 4,853,000)
P 147,000
Donation Between Husband

and Wife
Gift from common property the gift is taxable
one-half to each donor spouse.
General Rule: Donation between husband and
wife is not taxable as it is declared void by law.
Exception: Moderate gifts between the spouse
are valid.
Donation Between Husband

and Wife
Husband and wife are considered as separate and distinct
taxpayers for purposes of the donors tax.
However, if what was donated is a conjugal or community
property and only the husband signed the deed of
donation, there is only one donor for donors tax purposes,
without prejudice to the right of the wife to question the
validity of the donation without her consent pursuant to the
pertinent provision of the Civil Code of the Philippines and
the Family Code of the Philippines.
Example:
Donations of properties, with fair market values:
Land in Indonesia
P 1,000,000
Land and Building in the Philippines
1,500,000
Shares of stock of a domestic corporation
500,000
Shares of stock of a foreign corporation
400,000
Receivable from a friend (residing in the same
country as that of donor)
50,000
There was a transfer inter vivos (to take effect during the
lifetime of the transferor) of property in the country of the
transferor. Consideration received P 90,000;
Fair Market Value of the property at the time of transfer was
200,000
Cancellation of indebtedness of a resident of the country where
the transferor resides, as an act of liberality
20,000
Gross gift if the donor was a citizen or resident of the Philippines?
Example:
Mr. and Mrs. Matulungin made the following donations during the current calendar
year:
February 13
To X - eldest son on account of marriage

to be celebrated on June 12, 2015, car with
a condition that X is to assume the unpaid
chattel mortgage of P150,000
April 10 To Y eldest daughter, on account of marriage

to be celebrated on December 28, 2015, house
and lot with the condition that Y is to assume
the following:
Unpaid Mortgage P 300,00
Unpaid Taxes
12,000
P 850,000
2,100,000
Required: Compute the donors tax due and payable on the donation.
393
Political Contributions
(Omnibus Election Code (OEC) and Repulic Act No. 7166)
As a rule, any contributions given to candidates, political

parties or coalition of parties are not subject to donors
tax as long as the following conditions are met:
The contribution is for campaign purposes; and
The donation is duly reported to the Commission on
Election (COMELEC)
The campaign contribution is subject to donors tax on
the part of the donor, if such contributions are not
reported to the COMELEC.
394
On the part of the political candidate or party (as donee),

it is also exempt from income tax if:
1. The campaign contributions must have been utilized to
cover the candidates expenditures for his electoral
campaign.
2. Any unutilized/excess funds, that is, campaign
contrubutions net of the campaign expenditures, shall be
considered as subject to income tax, and such must be
included in the candidates income tax return. (Rev. Reg.
007-11)
Furthermore, RR 007-11 provides that any

candidate (winning or losing) who fails to
file with the COMELEC the appropriate
Statement of Expenditures required under
the Omnibus Election Code, shall be
automatically precluded from claiming
such expenditures as deductions from
his/her campaign contributions. As such,
the entire amount of such contributions
shall be considered as directly subject to
income tax.
Aside from the above income tax liability, Rev.

Reg. 008-09 obligates the candidates and the
political parties to act as withholding agent for
the creditable withholding tax (5%) due on
income payments made for all campaign
expenditures, and on contributors/supporters for
purchases of goods and services intended to be
given to political parties and candidates.
Exemptions under
Special Laws
International Rice Research Institute

Ramon Magsaysay Foundation
Integrated Bar of the Philippines
Development Academy of the Philippines
National Museum
National Library
Archives of the National Historical Institute
Musuem of Philippine Costumes
Intramuros Administration
Destroyed Donations
Donors tax accrues upon the completion of the
donation, meaning upon delivery.
Gifts destroyed after they have been delivered
are considered as valid donations. Thus, even if it
had been destroyed already, the donation shall
be subject to donors tax still.
Total destruction has nothing to do with the
donors tax liability when the thing donated is
already delivered.
Deduction from Gross Gift

DEDUCTION
RC, NRC, RA
NRA
YES
NO
2. Gifts to the National Government
YES
YES
3. Gifts in favor of educational, charitable,

religious, cultural and social welfare
institutions, etc. (subject to 30% rule)
YES
YES
4. Encumbrance on property donated

(mortgages, if any)
YES
YES
5. Diminution in the value of property
YES
YES
1. Dowries or gift made on account marriage

of a son or daughter, legitimate,
illegitimate or legally adopted, to the extent
of P10,000 per child per marriage. The gift
must be made before marriage or within one
year thereafter.
Example: Dowry
Manny P made the following donations during the current
calendar year:
January 21, 2015
To A, eldest son, on account of his
marriage to be celebrated on February
14, 2015, a brand New Honda Civic
P 850,000
March 10, 2015
To B, older brother, on account of his
marriage to be celebrated on
May 1, 2015, a brand new passenger
Jeepney
450,000
The net gift is:
Tax Rates Applicable

If given to relatives, 2% - 15% tabular tax
If given to stranger, 30%.
402
Example:
Mr. and Mrs. K, made the following donations of conjugal
funds and properties in 2014 (unless stated otherwise) as
follows:
February 14:
To L, a legitimate son, a piece of land with a
graduation
FMV of P 400,000 on account of

from college.
May 14:
To M, a legitimate daughter, on account of Ms
Ls
marriage to be celebrated on December 25,

2014, house and lot with FMV of P 1,000,000.
June 14:
To N, a brother of Mrs. K, P 200,000.
Example: (continuation)
September 14:
To O, the efficient and beautiful secretary of Mr. K for
taking care of K while Mrs. K is on vacation in USA, jewelry worth P
300,000.
October 14: To P, the honest and good looking driver of Mrs. K who
accompanied Mrs. K on her trip to USA, a diamond ring worth P 500,000.
December 14: To Q, the daughter of O on account of Qs birthday, pieces
of jewelry inherited by Mr. K during marriage, with a FMV of P 400,000.
December 25:
To R, a legitimate son, a residential house and lot with
FMV of P1,200,000 but subject to the condition that R would assume the
mortgage indebtedness in the amount of P400,000.
Determine the donors tax due on each donation for each spouse.
Example:
MAX, after winning the Jackpot prize of Mega Lotto, made the following donations
during the current calendar year:
February 14, 2015
- To City of Manila, Cash for the construction
of boxing gym
P 1,000,000
June 12, 2015
- To Mom, his widowed mother on account

of her second marriage to be celebrated
on July 4, 2015, cash
500,000
- To International Rice Research Institute for the
discovery of new breed of rice, Cash
500,000
September 21, 2015
- To the national library, for the acquisition of latest

books on science and mathematics
450,000
- To Deo, his only brother, on account of his
marriage on December 1, 2015, a new car
850,000
Example: (continuation)
On September 30, 2015 the car was totally
damaged by fire in a freak accident inMakati
City while Deo was on a date with his
girlfriend. The donor has not yet filed te
donors tax return on the September 21, 2015
donation.
406
COMPLIANCE
REQUIREMENTS FOR
DONATION
Filing and Payment of

Donors Tax
The deadline for the filing of donors tax return (BIR Form
1800) will be 30 days after the donation was made.
The payment for donors tax shall be the same day as of
that the day the return was filed (Pay-as-You-File
System)
When the Commissioner gives an extension, the payment
of the tax due may be made on such day as extended by
the CIR, but not to exceed six (6) months.
Filing and Payment of

Donors Tax
The filing of returns for donors tax is with the Revenue
District Office or duly authorized collection (e.g. City
Treasurer) in which the donor resided at the time of
transfer.
If there is no legal residence in the Philippines, filing should
be made with the Office of the Commissioner on Internal
Revenue.
Attachments to the Donors

Tax Return
Based on the BIR Form 1800, the following documents shall be
attached:
1. Sworn statement of the relationship of the donor to the donee;
2. Proof of tax claimed tax credit, if applicable;
3. Certified true copy of the Original/Transfer/Condominium
Certificate of Title (OCT, TCT, CCT) of the donated property (for
real properties);
4. Certified true copy of the latest Tax Declaration of lot and/or
improvement, if applicable (for market value purposes);
5. Certificate of No Improvement issued by the Assessors Office
where the donated real property/ies have not declared
improvements, if applicable;
Attachments to the Donors

Tax Return
1. Proof of valuation of shares of stock at the time of
donation, if applicable;
1. For listed stocks newspaper clippings/certification issued by
the Stock Exchange as to the value of per share
2. For unlisted stocks latest audited Financial Statements of the
issuing corporation with the computation of the book value per
share.
2. Proof of valuation of other types of personal properties,

if applicable;
3. Proof of claimed deductions, if applicable; and
4. Proof of the Tax Debit Memo used as payment.
BUSINESS
TAXES
Concept of Business
A business is described as trade or
commercial activities which are regularly
engaged in as means of livelihood or with a
viewpoint of obtaining profit.
The sales of goods and services related to
trade, profession or business in the
Philippines are generally subject to business
taxes, except when exempted as provided by
law.
Characteristics of Taxable
Business Transactions
1.
2.
3.
4.
Regular Transactions;
Incidental transactions;
Transactions for profit or for non-for-profit;
Transactions consummated within the Philippines;
and
5. Lawful transactions
1. Regular Transactions
A business is generally characterized as performing habitual
systematic, continuous, and regular income generating
activities such as selling of goods or services tp customers
or clients.
It is not a performance of a single disconnected act or transacton
to obtain a gain.
The rule of regularity generally determines whether or not an
economic transaction is subject to business tax.
Exceptions:
a. Sale of services by a non-resident foreign person; and
b. Sale of goods by a non-resident foreign person
The sale of goods and services of these foreign individuals,
although not regular, are considered as being rendered in the
course of business and therefore, subject to VAT. (Sec.105,
NIRC, R.A. 9337; Sec. 4 105-3 Rev. Regs. 16-2005)
2. Incidental Transactions
In the course of Trade or Business is a phrase to describe
the regular conduct or pursuit of a commercial or
economic activity, including transactions incidental
thereto, to achieve the purpose for which the business is
created. (Sec. 105, NIRC)
Some incidental transactions subject to business taxes are:
a. Sale of scrap materials;
b. Sale of ordinary assets used in business other than
inventory
c. Transaction deemed sales
3. Transactions for Profit or for

Non-for-Profit
The business may be pursued by any person, regardless of whether or not
the business is a non-stock, non-profit private organization (irrespective of
the disposition of its net income and whether or not it sells exclusively to
members or their guests), or government entity.
Even a non-stock, non-profit organization or government entity is liable to pay
VAT on the sale of services or goods. The primary purpose of a corporation is
immaterial... As long as the entity provides services for a fee, remuneration or
consideration, then the service rendered is subject to VAT. (CIR vs. C.A. G.R.
No.125355, March 30, 2000)
RMO No. 20-2013 provided that tax exemption ruling granted to exempt
entities, prior to June 30, 2012 shall be valid until 30 December 2013 and those
issuances issued after 30 June 2012 shall continue to be valid for 3 yeards
from the date of issuance unless sooner revoked or cancelled.
417
4. Transactions Consummated
within the Philippines
Business tax is imposed on transactions involving the use
or the consumption of goods or services. The imposition of
business tax follows the consumption or destination
principle. The place of sale is presumed to be the place of
consumption.
In addition, the Doctrine of Cross Border provides that
no business tax (particularly VAT) shall be imposed on
sales of products or services destined for the consumption
outside of the territorial border if the taxing authority. (RMC
No.74-99)
5. Lawful Transactions
Legally registered. Non-reregistration
of business
makes the business illegal; however, non-registration is
not a valid excuse to absolve the business from the
imposition of income and business tax.
Engaged in activities not contrary to law, morals,
good customs, public order or public policy.
As a rule, anything sold in the course of business must be
within the commerce of men and therefore, subject to
business tax. Taxpayers engaged in unlawful or illegal
transactions are not absolved income and business tax
plus corresponding surcharges and penalties.
Business:
1. Regular Transactions;
2. Incidental transactions;
3. Transactions for profit or
for non-for-profit;
4. Transactions consummated
within the Philippines; and
5. Lawful transactions
Subject to Business Taxes:

1. VAT (12% and 0%)
2. Other Percentage Taxes
3. Excise Taxes
BUSINESSES
Non-Business:
1. Sale of Goods of a
non-residentsforeign person
(individual and corporation)
2. Sale of services of a
non-resident foreign person
(individual and corporation)
Not Subject to Business

Taxes:
1. Exempt commercial
transactions within;
2. Subsistence or livelihood
activities;
3. Privilege stores;
4. Casual sales other than
ordinary assets;
5. Compensation and other
benefits from employment
Concept of Business Taxes

Value-Added Tax (12% and 0%)
Percentage Taxes (0% -30%, usually 3%)
Excise Taxes (for manufacturers and importers
luxurious and sin products)
of

Non-Business Transactions Subject to Business
Taxes
1.Importation of goods or services (in general), whether for
business or not, is subject to 12% VAT.
2.Sale of Shares of Stock through stock exchange is subject to
of 1% of other percentage tax (OPT) based on selling price
or gross value in money.
3.Overseas dispatch, communication originating from the
Philippines is subject to 10% OPT
4.Horse race winning is subject to 10% OPT; jai-alai is subject
to 30% OPT.

Economic Activities not Subject to Business
Taxes
1.Sale of goods or services outside the Philippines
(Doctrine of Cross Border);
2.Exempt commercial transactions within;
3.Subsistence or livelihood activities;
4.Privilege stores;
5.Casual sales other than ordinary assets;
6.Compensation and other benefits from
employment

1. Sale of goods or services outside the
Philippines (Doctrine of Cross Border)
Export sales or sales outside the Philippines are
either zero-rated or VAT-exempt
a.Subject to VAT of 0% rate, if made by a VATregistered persons
b.VAT-exempt and OPT-exempt,if made by a non-VAT
registered person.

2. Exempt Commercial Transactions Within
Exempt commercial transactions within as
provided in Section 109 of the NIRC and Special
Laws are exempt from business tax.
Example: Sales of agricultural and marine food
product in their original state, sale to senior
citizen

3. Subsistence or Livelihood Activities
Marginal Income Earners (MIE) are unemployed
individuals or unlicensed professionals that do not realized
gross sales or receipts exceeding P 100,000 in any 12month period. MIE includes the following:
a.Agricultural growers/producers (farmers/fishermen) selling
directly to ultimate consumers;
b.Small sari-sari stores
c.Small carinderias
d.Drivers/operatos of a single unit tricycle.
MIE are subject to income taxes but exempt from payment

of business taxes. (RMC No. 7-2014)

4. Privilege stores
Privilege stores or tiangges are temporary stalls for the
purpose of selling variety of goods or services for
special events such as fiestas for not more than 15
days in a year. These stores are not subject to business
tax. They are only required tofile annual income tax
return.
Organizers of events are required to provide these
privilege store operators with central cash register or
point-of-sale machines, or manual official receipts or
invoices for their uses. (Rev. Regs. No. 16-2013)

5. Casual sales other than ordinary assets
A casual sale is an occasional sale of goods or services
by a person who is not engaged in business. It involves
selling of personal properties or belongingnes used in
business, such as:
a.Sale of house and/or lot classified as capital asset (not
used in business); and
b.Sale of personal assets not used in business tax but
subject to income tax.

6. Compensation and other benefits from
employment
As a rule, compensation income and other benefits
dervied from an employer-employee relationship
are subject to income tax but exempt from business
tax. (Sec 10(I), NIRC)
Additional compensation in the form of commission
income received by an employee from his
employee is not subject to VAT.
BUSINESS REGISTRATION
For regulation purposes, the State, through exercise
of its police power, requires a business to be
registered first before the commencement of its
economic activities. Non-compliance to business
registration renders the business illegal.
At the time the business is being registered, the
taxpayer will indicate in the BIR Form whether the
business is subject to VAT or OPT. If the products of
the business is harmful or non-essential, in addition
to VAT or OPT , the excise tax shall also ne imposed.
Initial Registration
The application for registration must be filed with the RDO
(Revenue District Office) where the principal place of
business, branch, storage place or premise is located, as the
case may be, before the start of the business.
The regsitration shall include the taxpayers name, residence,
business, the place where such business is carried on, and other
information as may be required by the Commissioner of the
Internal Revenue.
For identification purposes, a person who is subject to internal
revenue tax is issued with a Taxpayers Identification Number
(TIN).
Only one TIN will be assigned by the BIR for each person. Any
person who secures more than one TIN or who fails to indicate
his correct TIN on documents specified to be indicated with TIN
shall be subject to applicable criminal sanctions (Sec. 274,
NIRC).
Initial Registration
Upon registration, the person must pay an annual
registration fee in the amount of P500 for every
separate or distinct establishment or place of
business, before the start of such business and every
year thereafter on or before the 31st day of January.
(Sec. 236, NIRC)
The phrase separate or distinct establishment or place
of business includes the head office, branch, facility
and/or warehouse
BUSINESS TAXES
Under the NIRC (RA 8424), business taxes are classified as follows:
1. Value-Added Tax (VAT). It is a general consumption tax that
requires a 12% additional tax on the sales price of goods and/or
services by VAT-registered seller or VAT-registrable seller required
by law to be under VAT-system. As rule, businesses with gross
sales/receipts exceeding P1,919,500. Otherwise, subject to other
percentage tax.
2. Other Percentage Taxes (OPT). These are general consumption
taxes imposed to Non-VAT registered business whose total annual
gross sales/receipts do not exceed P1,919,500 or business
transactions specifically subject to OPT regardless of the total
amount of annual gross sales/receipts as provided by law. The
imposition of VAT and OPT are not simultaneously, rather they are
mutually exclusive.
BUSINESS TAXES
3. Excise Taxes (ET). The excise tax may still be
imposed in addition to VAT or OPT (Sec.129, NIRC).
Excise taxes are imposed on production or sales of
products that are:
a.Harmful to health such as alcohol or tobacco or sin
products;
b.Goods that are non-essential such as jewelries, perfumes,
and cars;
c.Products that deplete natural resources such as golds,
silver, copper and other mineral products that are
manufactured or produced in the Philippines; and
d.Some imported products to protect local industries.
Comparison:
VALUE-ADDED TAX
PERCENTAGE TAX
EXCISE TAX
An indirect tax which may

be shifted or passed on
the buyer, transferee or
lessee of the goods,
properties or services.
A tax imposed on sale of

services; Persons who are
not registered under VAT
system shall also be subject
to percentage tax.
A
tax
imposed
on
manufacturers
or
importers of sin products
and/or luxurious products
12% on sale of goods, Vary depending

properties or services, or object
0% on export of goods and
properties,
or
services
performed to an exportoriented companies
on
the Vary depending

object
Gross sales or receipts Taxes on winnings, stock

exceeding P 1,919,500
transactions, amusement,
life insurance, agents of
foreign
insurance
companies, banks and nonbanking institutions, etc.
on
the
Taxes
on
MANUFACTURERS
or
IMPORTERS of cigars,
cigarettes, distilled spirits,
tobacco, wines, etc.
VALUE
ADDED TAX
When should a business required

to register under VAT system?
The business is required to registed under VAT system
when it is not categorized as VAT-exempt and:
a. Its gross sales/receipts are categorized under
mandatory VAT-registration (annual gross sales
exceeding P 1,919,500 and the goods or services sold
are non-VAT exempt), or
b. The business opted to register under VAT system
despite the fact that its transactions are classified VATexempt as provided by law
Mandatory Registration
A taxpayers registration under VAT system becomes
compulsory when:
a. A taxpayer has realized gross sales/receipts of more
than P1,919,500 a year and these sales are not
exempted transactions under Section 109 (A) to (U)
of the NIRC.
b. His expected annual gross sales or receipts exceed
P1,919,500. (Rev. Regs. No. 16-2011, as amended)
There are reasonable grounds to believe that his
gross sales/receipts for the next 12 months shall
exceed P 1,919,500. (RMC No. 62 -2005)
Optional VAT-Registration
Optional VAT-registration may be accomplished by:
a. Persons with taxable business transactions that do not exceed
P1,919,500 per year but instead chose to register under VAT
system; or
b. VAT persons with mixed transactions who opted to apply VAT on
his VAT-exempt transactions. These are VAT-exempt persons
under Section 109 (A) to (U) of NIRC that chose to register under
VAT system upon business registration.
c. Franchise grantees of radio/TV broadcasting whose annual gross
receipts do not exceed P10 million may also elect to register under
VAT system.
Once registered as VAT person, the taxpayer shall be liable to output
VAT and be entitled to input VAT credit beginning on the first day of
the month following registration.
Example:
Gipit Merchandising had a gross sales in 2011 (initial year of
operations) of P1,450,000. In January 2012, it had the
following data (all figures do not include any taxes):
Inventory, January 1, purchased from
non-VAT suppliers P 15,000
VAT suppliers
20,000
Purchases for the month from VATregistered persons
70,000
Sales for the month 200,000
Percentage tax out of the transactions of January
Example:
Gipit Merchandising had a gross sales in 2011 (initial year
of operations) of P1,450,000. In January 2012, it had the
following data (all figures do not include any taxes):
non-VAT suppliers P 15,000
VAT suppliers
20,000
Purchases for the month from VATregistered persons
70,000
Sales for the month
200,000
VAT payable for January, if the taxpayer opted to be VATregistered.
441
Non-VAT Registration
A taxpayer who did not opt to register under
VAT system or whose gross sales/receipts does
not exceed P1,919,500 must register under nonVAT system. Such taxpayer is generally to other
percentage tax (OPT).
Example:
APPLE Trading is registered under non-VAT
business in 2015. in year, 2016, it generated P 2,000,000
sales. What are the implications to APPLE Trading
regarding its subsequent renewal of registration?
442
OUTPUT
VAT
On Sale of Goods or Properties
On Importation
On Sale of
Services or Lease
of Properties
Gross Selling Price of the goods

or Properties sold, exchanged
or bartered, which may be:
a. Real properties held for sale
b. Right to use patent, copyright,
design or model
c. Radio,
television,
satellite
transmission, etc.
Landed value or cost

plus excise taxes,
custom duties, and
other charges paid by
the importer prior to
the release of goods
from customs custody
Gross
Receipts
derived from the
sale or exchange
of
services,
including the use or
lease of properties
INPUT
VAT
Purchase or Importation of
goods
Purchase of services on which
VAT has been actually paid.
Purchase of real properties
Transitional input tax
Presumptive Input VAT
Tax credits and VAT carry-over
No Input tax upon -same as in sale of

importation;
goods
or
however, INPUT VAT propertiesarising
from
importation shall be
creditable once the
goods are sold.
NON-VAT Supplier
of GOODS &
SERVICES
VAT Supplier of
GOODS &
SERVICES
VAT Customers of
SERVICES
PRESUMPTIVE
TRANSITIONAL
SELLER
STANDARD
(to Government)
CAPITAL GOODS
VAT Customers
of GOODS
NON-VAT
Customers
EXPORTS
IMPORTATIONS of
Goods for SALE
DEEMED SALES
Sources of OUTPUT VAT

Specifically, VAT-registered persons/taxpayers maybe classified
as (1) 12% Regular VAT, and (2) Zero-rated VAT
1. 12% Regular VAT An output VAT is a tax added to the
value of goods/services collected from the buyers. It is to be
treated as a current liability of the taxpayer-seller to the
BIR because he is only a collecting agent of the tax. While
an input VAT is a tax added to the value of goods or
services purchased by a VAT-registered person from a VATregistered supplier. It is to be treated as a current asset of
the taxpayer-buyer because it is an advance payment of
VAT.
2. Zero-Rated VAT - these taxpayers are subject to 0% VAT
rate or effectively zero-rated sales/receipts as provided by
Sections 106 (A)(2) of the NIRC.
445
OUTPUT VAT: 12% VAT

The Output VAT on sale of goods or properties
shall be computed at 12% of the gross
selling price of the following:
a.All tangible and intangible objects
b.Real properties held primarily for sale;
c.Right or privilege to use patent, copyright, design or
model, plan secret formula or process, goodwill,
trademark, trade brand or other like property or right;
d.Right to use motion picture films, tapes, and discs;
e.Radio, television, satellite transmission and cable
television time
OUTPUT VAT: 12% VAT

The term gross selling price means the total
amount of money or its equivalent which the
purchaser pays or obligated to pay to the seller in
consideration of the sale, barter or exchange, excluding
VAT.
Sales returns and allowances are deductible from gross sales
or receipts if a proper credit or refund was made during the
month/quarter.
Sales discounts may only be deducted if (1) it was granted at
the time of sale, (2) expressly indicated in the invoice, and (3) the
granting of the discount does not depend on the happening of a
future event.
OUTPUT VAT: 12% VAT

Importation
All importations are subject to VAT of 12%, except
those exempt under Sec. 4 of RR No. 6-97.
Importations made by a tax-exempt taxpayer shall,
likewise, be exempt from VAT. However, the subsequent
purchaser, transferee or recepient who are not taxexempt shall pay the VAT on the imported goods as if he
was the importer.
The tax base of imported good for VAT purposes include
total value of importation or its landed cost plus excise
and ad valorem tax and other charges on importation.
OUTPUT VAT: 12% VAT

IMPORTED
GOODS
TREATMENT
1. Importation of Non-VAT
Exempt Goods by a VAT
person for business use
Subject to Output VAT

Can Claim Input VAT
Exempt Goods by a VAT
person for personal use

No Input VAT
Exempt Goods by a Non- VAT
person for business use

No Input VAT
Exempt Goods by a Non- VAT
person for personal use

No Input VAT
Example:
An importer wishes to withdraw his importation
from the Bureau of Customs. The imported
goods were subjected to a 10% customs duty
in the amount of P12,500 and to other charges
in the amount of P9,500. The value-added tax
due is:
450
VAT- Exempt Transactions

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;
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
residents of the Philippines returning from abroad and non-resident
citizens coming to resettle in the Philippines; provided, that such
goods are exempt from customs duties;

d. Importation of professional instruments and
implements, wearing apparel, domestic animals, and
personal household effects (except any vehicle, vessel,
aircraft, machinery and 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 of
Internal Revenue, 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 taxes
f. Services by agricultural contract growers and milling for
others of palay into rice, corn into grits and sugar cane into raw
sugar.
Agricultural Contract Grower:
Refers to persons producing for others poultry, livestock or
other agricultural and marine foods products in their original
state such as contract for a package of services of receiving
eggs from breeder farm, sorting, fumigating, setting, hatching,
sexing of day-old broilers, sorting and delivering them to other
contract grower.

g. Medical, dental, hospital and veterinary services,
EXCEPT those rendered by professionals
- laboratory fees are exempted
- if the hospital or clinic operates a pharmacy or
drugstore, the sale of drugs and medicines are
subject to VAT.
- hospital bills constitute medical services. The sale
of drugs and medicines to in-patients which are
included in the bill is not subject to VAT.
- Sale to out-patients are subject to VAT.

h. Educational Services rendered by:
-Private educational institution, accredited
by:
a. Department of Education
b. Commission on Higher Education
c. Technical Education and Skills
Development Authority
-Government Educational Institutions

i. Compensation incomes
j. Services rendered by regional area headquarters
k. Transactions
which
are
exempt
under
international agreements to which the Philippines
is a signatory or under special laws
l. Agricultural cooperatives:
a.
b.
c.
Sale to their members

Sale to non-members if the cooperative is the producer (if not
subject to VAT)
Importation of direct farm inputs, machineries and equipment,
including spare parts

m. Gross receipts from lending activities by
credit or multi-purpose cooperatives:
a. To members, exempt
b. To non-members, exempt
c. To non-members for non-lending activities,
subject to VAT

n. Sale by non-agricultural, non-electric and
non-credit cooperatives, provided that the
share capital contribution of each member
does not exceed P15,000
OUTPUT VAT: 12% VAT

Transactions Deemed Sales
a.
b.
c.
d.
Transfer, use or consumption not in the course of business of goods

or properties originally intended for sale (Inventories);
Distribution or transfer to: (1) shareholders or investors as share in
the profits (dividend), (2) creditors in payment of debt (dacion)
Consignment of goods if the actual sale is not made within 60 days
following the date of consignment
Retirement from business or cessation of business with respect to
inventories of taxable goods existing of such retirement or cessation.
If the seller is a VAT-registered person, the sale of his ORDINARY

ASSET and other incidental sales (real or personal) shall be
subject to VAT. (RR 4-07)
459
OUTPUT VAT: 12% VAT

Transactions not Deemed Sales
Change of corporate control (ParentSubsidiary)
Change in the trade or corporate name of
the business
merger or consolidation of corporations
OUTPUT VAT: 12% VAT

Sale of Scrap Materials
1. Sale of scrap such as empty drums, plastic
bags, cartons, and wood crates; obsolete
inventories and fully depreciated fixed assets
at a minimal prices or lower than the purchase
price are subject to VAT.
2. Ordinary assets, other than inventories held
for sale, which are originally subject to
depreciation are are likwise subject to VAT,
when sold.
Example:
JD, a trader, is VAT taxpayer having the following
information regarding his sales during the month of
September 2014, exclusive of VAT:
Cash sales
P 200,000
Open Account Sales
500,000
Installment Sales
100,000
Note: Collection during the month for this sale
30,000
Consignment sales (net of VAT):
0-30 days old (on which there were remittances
from consignees of P200,000)
600,000
31 to 60 days old
700,000
61 days old and above
900,000
How much is the taxable sales?______________________
OUTPUT VAT: 12% VAT

Sale of Properties
Sale of real property classified as capital asset is not
subject to VAT. Such transaction is subject to capital gains
tax of 6% based on sales price or FMV, whichever is higher.
In general, sale of real property primarily held in the
normal course of business (inventory/ordinary asset) is
subject to VAT, except:
Residential lot with selling price of P 1,919,500 and below; and
Sale of house and lot and other residential dwellings with selling
price at P 3,199,200 and below.
463
Illustration
Capital Assets
(Real Properties)
Capitals Gains
Taxes 6%
Capital Assets
(Personal Properties)
Normal Tax
Ordinary Assets
(Inventories)
Ordinary Assets
Other than Inventories
Residental Lot
If the gross price is more

than P 1919,500, VAT
Residential House
and Lot
If the gross price is more

than P 3199,200, VAT
Commercial Lots
Regardless of the
price, VAT
Depreciable Assets,
used in Business
VAT
OUTPUT VAT: 12% VAT

Sale of Real Properties
In computing the VAT, the basis shall be the
selling price or the FMV, or ZV whichever is the
highest.
If the selling price is given, but the VAT is not
billed separately in the sales document, and
such selling price is higher than the zonal value
or FMV, it is deemed to be VAT-Inclusive.
If the gross selling price is based on the zonal
value or FMV, such is deemed to be VAT
exclusive.
OUTPUT VAT: 12% VAT

Sale of Two or More Adjacent Residential
Dwellings
Any sale of two or more adjacent
residential lots and residential dwellings
disposed within 12-month period in favor
of one buyer, the aggregate value shall be
considered when determining whether the
threshold
limit
of
P1,919,500
or
P3,199,200 is breached or not.
OUTPUT VAT: 12% VAT

Sale of real properties in the course of trade or business
On installment plan (initial payments do not exceed 25% of the
gross selling price)
Installments received
Xxx
Add:
Interest
xxx
Other charges
xxx
Xxx
Tax base
Xxx
Note: Upon full payment, if the zonal or market value is
higher than the total receipts or collections, the additional
VAT shall be paid accordingly.
OUTPUT VAT: 12% VAT

On cash basis or deferred payment plan (initial
payments exceed 25% of the gross selling
price)
The tax base shall be the higher between selling
price stated in the sales document and zonal or
market value, regardless of the installment
agreement. Any additional receipts from interests
and charges shall also be subject to VAT.
.
Example:
Marimar, a dealer of real properties,
during the taxable year:
Item
Classification
Residential Lot
Inventory
Residential Lot
Inventory
Residential Dwelling Own dwelling
House and Lot
Inventory
Commercial Lot
Inventory
How much is the Output VAT?
sold the following

Price
P 1,500,000
P 2,199,500
P 3,600,000
P 4,000,000
P 1,200,000
OUTPUT VAT: 12% VAT

Sale of Service
In general, all kinds of sale, exchange or supply of services
rendered in the Philippines are subject to 12% VAT, except
those which are classified and qualified as zero-rated or VATexempt.
Under the situs of service: Consumption/Destination
Principle
Tax Base:
Total amount of money or its equivalent representing the contract price,
compensation service fee, rental or royalty.
Amount charged for materials supplied, with the services and deposits and
advance payments actually or constructively received during the taxable
quarter, excluding VAT.
OUTPUT VAT: 12% VAT

VAT in Professional Fees
1. As a rule, earnings from a practice of profession will be
subject to VAT if:
1. The professional is a VAT-registered person; or
2. A non-VAT registered but his total gross receipts

exceed P 1,919,500.
3. Also, aside from VAT is subject to 10% creditable
withholding tax if the aggregate amount per year is
P720,000 and below, and 15% creditable
withholding tax if exceeding P720,000.
OUTPUT VAT: 12% VAT

VAT on Service Contractors
1. Subject to 12% VAT
1. If the contract is with the government, the
government shall withhold final withholding VAT
of 5%.
2. Also subject to 2% creditable withholding

tax for sale of services and 1% creditable
withholding tax for sale of goods.
OUTPUT VAT: 12% VAT

VAT on Security Agency
Agency fees are subject to 12% VAT,
excluding the salary of the guards.
Subject to a 2% creditable withholding tax for
sale of service based on the agency fee.
If the contract does not separate the agency
fees from the salary of the guards, the whole
amount will be subjected to VAT and 2%
creditable withholding tax.
OUTPUT VAT: 12% VAT

VAT on Real Estate Brokers
The commission income of real estate
brokers are subject to VAT of 12% if he
is VAT-registered and/or his total
commission exceeds P1,919,500 per
year.
OUTPUT VAT: 12% VAT

VAT on Dealers in Securities
Dealers in securities are subject to VAT
based on their gross receipts (gross
selling price less cost of securities
sold).
OUTPUT VAT: 12% VAT

VAT on Pre-Need Companies
Companies selling pre-need plans (educational
plan, life plan, etc.)
Subject to 12% VAT on their gross income
actually or constructively received.
Gross Income shall mean actual receipts on
contract price minus contributions to trust
funds to be set up independently.
OUTPUT VAT: 12% VAT

VAT on Non-Life Insurance
Non-life insurance premiums shall be subject to
12% VAT when:
Collected by a foreign company authorized to transact
business in the Philippines
Collected by a domestic corporation
Life Insurance shall be subject to 2% if collected

by a domestic or foreign corporation authorized to
transact business in the Philippines
OUTPUT VAT: 12% VAT

VAT on Lending Investors
Lending investors includes all persons, but does
not include
banks (depository and savings),

non-bank financial intermediaries,
finance companies,
pawnshops, and
other financial intermediaries not performing quasibanking.
Subject to VAT of 12% on their interest

incomes.
OUTPUT VAT: 12% VAT

VAT on Domestic Transportation Services
1. Subject to VAT of 12% on:
1. Transport of goods and cargoes originating in the
Philippines whether by land, air and sea
2. Transport of passengers by AIR and SEA originating in
the Philippines.
2. Transport of passengers by land are subject

to 3% OPT.
OUTPUT VAT: 12% VAT

VAT on Lessor of Commercial and Residential
Units
1. If the monthly rent per unit does not exceed P12,800,
regardless of the aggregate amount, the lessor is
exempted from VAT and OPT.
2. If the monthly rent per unit exceeds P 12,800, but the
aggregate amount does not exceed P1,919,500, the
lessor is only subject to OPT, not to VAT.
3. If the monthly rent per unit exceeds P 12,800 and the
aggregate amount exceeds P1,919,500, the lessor is
only subject to VAT.
OUTPUT VAT: 12% VAT

VAT on Hotels, Restaurants and Caterers
The taxable base includes:
Charges for rooms
laundry
valet services
food and beverages
corkage
handling charges for telephone, telex cable or fax services
cake shop sales
lease to concessionaires, and other services fee
But does not include:

service charges billed separately and actually distributed to waiters
and employees;
actual cost of long distance and overseas telephone calls and other
charges of the telecommunication companies;
local taxes
OUTPUT VAT: Zero-Rated VAT

Export sales
1. The sale and actual shipment of goods from the
Philippines to a foreign country.
2. Sale of raw materials or packaging materials to
a nonresident buyer for delivery to a resident
local export-oriented enterprise.
3. Sale of raw materials or packaging materials to
export-oriented enterprises whose export sales
exceed 70% of total annual aproduction.

1. Sale of gold to the Bangko Sentral ng Pilipinas.
2. Those considered export sales under the Omnibus
Investment Code of 1987 (E. O. No. 226) and other
special laws, e.g., sales to diplomatic missions and
other agencies and/or instrumentalities granted tax
immunities.
3. Sale of goods, supplies, equipment and fuel to
persons engaged in international shipping or
international air transport operations.

Foreign currency denominated sale (FCDS)
Sale to non-resident, paid in acceptable foreign
currency and accounted in accordance with the
rules and regulations of the BSP

Effectively zero-rated sales
Effectively zero-rated sales of goods and properties shall
refer to the local sale (constructive export) by a VATregistered person to a person or entity who was granted
indirect tax exemptions under special laws or international
agreement, such as:
1. Sale to Asian Development Bank (ADB);
2. Sale to International Rice Research Institute (IRRI);
3. Sale to duly registered and accredited enterprises with Subic
Bay Metropolitan Authority (SBMA); and
4. Sale to duly registered and accredited enterprises with
Philippine Economic Zone Authority (PEZA).

Zero- Rated Services
The following services performed by a VAT-taxpayer in the
Philippines shall be subject to zero rate (0%) VAT:
a.Processing, manufacturing, repacking goods for other
persons doing business outside the Philippines which are
subsequently exported, where the services are paid for in
acceptable foreign currency and accounted in accordance with
the rules and regulations of BSP;
b.Services rendered to persons or entities whose exemption
under special laws or international agreements to which
Philippines is a signatory effectively subjects the supply of such
services to zero-rate;

b. Services rendered to persons engaged in international
shipping or international air transport operation, including
leases of property for the use thereof;
c. Services performed by subcontractors and/or contractors in
processing converting, or manufacturing goods for an enterprise whose
export sales exceed 70% of the total annual production;
d. Transport of passengers and cargo by air or sea vessels from the
Philippines to a foreign country;
e. 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.
OUTPUT VAT: Zero Rated

A seller engaged in zero-rated VAT transactions charges
no output tax, but he can:
a. Claim creditable input VAT (for the VAT previously
charged by the suppliers) against the Output VAT on
other sales subject to regular VAT.
b. Carry-over the excess input VAT, in case the
creditable input VAT is not fully utilized, to the
succeeding quarter or quarters. There is no
prescription period for the input VAT carry-over.
c. Claim as VAT refund or convert to Tax Credit
Certificate (TCC) the excess input VAT which may be
used as payment for direct internal revenue taxes.
Sources of Input VAT

Purchases or importation of goods (for business use
only):
a.Goods for sale
b.Goods for conversion into finished product (including
packaging materials)
c.Goods for use as supplies
d.Goods for use as materials supplied in the sale of
services
e.Goods for use in trade or business for which
depreciation or amortization is allowed
f.In case of importation, an input tax may be claimed for
the importation of goods for business use by a VATregistered taxpayer. Input tax paid by a non-VAT person,
whether for personal or business use, are not creditable.
Also, input VAT paid by a VAT registered on goods
imported for personal use are not creditable.
Example:
Christine is a VAT-registered taxpayer engaged in buying and selling
business. During the year, she has the following information, VAT not
included:
Gross Sales (all sold on account)
P700,000
Sales returns and Allowances
30,000
Sales Discounts granted at the time of sale
(net method is used)
40,000
Warranty allowance for defective products
10,000
Cash discount given if credit is paid within 15 days
2% of net
sales
Purchases
210,000
Purchase returns and allowances
20,000
Purchase Discounts taken
10,000
The output VAT is
____________________
The input VAT is
____________________
490

Purchase of services on which a value-added tax has
been actually paid
Professional fees paid
Repairs and construction services
Other purchases of services except compensation paid to
employees

Purchase of Capital Goods
Applies only to domestic purchase or importation of
capital goods subject to depreciation for income tax
purposes.
Where the aggregate acquisition cost (exclusive of
VAT) of depreciable capital goods during any calendar
month does not exceed P1,000,000, the total input tax
is creditable against output tax in the month acquired
(Outright Credit)
Where the aggregate acquisition cost (exclusive of VAT) of

depreciable capital goods during any calendar month exceeds
P1,000,000, the total input tax is creditable against output tax, as
follows:
Spread evenly over 60 months (starting in the

calendar month acquired) the input tax, if the
estimated useful life of the depreciable capital good
is 5 years or more.
Spread evenly over the actual number of months of
estimated useful life (starting in the calendar month
acquired) the input tax, if the estimated useful life of
the depreciable capital good is less than 5 years.

If the depreciable capital good is sold or
transferred within a period of 5 years or prior to
the exhaustion of the amortizable input tax
thereon, the entire unamortized input tax on the
capital good sold or transferred can be claimed
as input tax credit in the month/quarter when the
sale or transfer was made.
Example:
A VAT taxpayer made the following purchases of capital
goods from VAT registered sellers for use in his business
(amounts are net of VAT) for the 3rd quarter:
Year 2011
Estimated Life
Cost
July 10 Machine 1
2 years
P 200,000
16 Machine 2
6 years
900,000
Aug. 8 Machine 3
2 years
400,000
20 Machine 4
6 years
500,000
Sept. 14 Machine 5
7 years
2,000,000
Machine 1 was retired on September 30, 2011. The input
tax in September is:
Example:
The taxpayer is a VAT taxpayer
Date in a month, VAT not included:
Sales of goods
Sales of fixed assets
No. 1, purchased from VAT taxpayer
No. 2, purchased from non-VAT taxpayer
Purchases of goods, from VAT supplier
Purchases of fixed assets from VAT suppliers:
No. 3, with useful life of 6 years
Value-added tax payable
______________________
1,500,000
200,000
100,000
400,000
900,000
2,000,000
1,300,000
496

Transitional Input VAT (TIV)
A person who becomes liable to VAT or any
person who elects to be a VAT-registered person
shall be allowed input tax on his beginning
inventory of goods, materials and supplies
which is equivalent to 2% of such inventory or the
actual VAT paid on such goods, materials and
supplies, whichever is HIGHER.

In computing the TIV, do not include those
beginning inventories (goods, materials and
supplies) which are exempt from VAT.
Remember, that TIV and PIV cannot be
converted or allowed for tax credit certificate, to
be paid against any other direct tax, but may be
allowed as creditable input VAT only.

Presumptive Input VAT (PIV) any persons or firms
engaged in PROCESSING (SaMaMi):
- Sardines, Mackerel, Milk
or MANUFACTURING (ReSuCOPa);
- Refined Sugar, Cooking Oil, Packed
Noodle-based instant meals
shall be allowed a presumptive input VAT

equivalent to 4% of the gross value in money of
their purchases of primary agricultural
products which are used as inputs to their
production.
499
Example:
Virgin is a producer of cooking oil from coconut and corn. Previously exempt
from the value-added tax, he became subject to the value-added tax on
January 1, 2010. For January 2010, with sales, value-added tax not included, of
P700,000, he had the following other data for the month:
Inventory, January 1, 2010:
NRV
Cost
Corn and coconut purchased
from farmers
P120,000
P100,000
Packaging materials purchased
from VAT suppliers
24,640
22,400
Supplies purchased from VAT
suppliers
11,200
13,440
Purchases during the month of coconut
and corn from farmers
330,000
Purchases during the month from VAT suppliers:
Packaging materials
56,000
Supplies
16,800
The value-added tax payable for the month is:

Standard Input VAT (Sale to Government)
The sale to Government or its political subdivision by VATregistered person shall be subject to 12% VAT, provided
that:
The government shall withhold 5% final withholding
VAT upon payment to the VAT registered person;
The VAT-registered person may claim a Standard Input
VAT of 7% against its output VAT from the sale to
government. The Actual Input VAT attributable to sales
of goods and services to the government shall not be
credited against the Output VAT arising from sales to
non-government entities.
501
Example:
A taxpayer, engaged in processing and selling of sardines and mackerel, is
registered under the VAT system of January 1, 2014. His records during the
month show:
Value of inventory as of December 31, 2013,
Purchased from VAT-registered persons
P 370,000
VAT paid on inventory as of December 31, 2013
7,500
Value of inventory as of December 31, 2013
Purchased from non-VAT persons
200,000
Gross Cash Sales, net of VAT
340,000
Gross Credit Sales, inclusive of VAT
250,000
Export Sales of Sardines
500,000
Purchases of Raw sardines and mackerel used in the process 150,000
Imported Equipment from Germany on January 5, 2014
Cost, exclusive of VAT
1,100,000
Excise Taxes and Custom Duties
70,000
Useful Years
5 and a half year
Purchases of VAT-exempt goods
120,000
OTHER
PERCENTAGE
TAXES
Overview
To compliment the imposition of VAT, percentage taxes are
imposed:
1.If the gross sales or receipts of a non-VAT taxpayer
engaged in selling goods and services does not exceed P
1,919,500, and
2.If the taxpayer does not register himself under VAT
system
3.If the same non-VAT taxpayer breached the limit, he shall
be taxed at 12% even if not registered under VAT system.
His gross sales or receipts shall be subject to 3%
percentage tax. The tax is an expense to the taxpayer,
Return and Payment of Other

Percentage Taxes
General rule: Every person liable to pay
percentage taxes shall file a monthly
return of the amount of his gross sales,
receipts or earnings and pay the tax
thereon within twenty (20) days after the
end of each taxable month.

Percentage Taxes
The taxpayer may 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 maybe.

Percentage Taxes
Exceptions:
The tax on overseas dispatch, message or
conversation
originating
from
the
Philippines shall be paid by the person
rendering the service within twenty (20)
days after the end of each quarter.
Amusement taxes shall be paid by the
proprietor, lessee, operator or any party
liable within twenty (20) days after the
end of each quarter.

Percentage Taxes
The tax on winnings shall be deducted and

withheld by the operator, manager or person in
charge of the horse races and remitted to the
Bureau of Internal Revenue within twenty (20)
days from the date the tax was deducted and
withheld.
The stock transaction tax of 1/2 of 1%, shall be
collected by the stock broker and remitted to the
Bureau of Internal Revenue within five (5)
banking days from the date of collection.

Percentage Taxes
The stock transaction tax of 4%, 2% and 1%, in
case of primary offering, shall be paid by the
corporation within thirty (30) days from the date of
listing of the shares of stock in the local stock
exchange. In case of secondary offering, the tax
shall be collected by the stockbroker and remitted to
the Bureau of Internal Revenue within five (5)
banking days from the date of collection.
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.
Other Percentage Taxes

OPT for VAT-Exempt Persons (3%)
Domestic Carriers and Keepers of Garage
(3% of actual receipts or MQR)
International Air Carrier (Exempt, 3% or VAT)
Franchises
Gas and Water (2%)
Radio and Television Broadcasting (3% or 12%)
PAGCOR 5% of gross receipts from gaming
operations (RMC 33 2013)

Overseas calls, dispatch, messages or
conversations, except DING (10%)
Diplomatic Services by foreign persons
International Organizations
News Services
Government
Gross Receipts of Banks and Non-Banks

performing banking and pawnshops (5%,
1%, 0% or 7%)

Life Insurance
Related Income - premiums(2%)
Unrelated Income - management fees, rent,
etc. (12%)
Investment Income ( Exempt or 7%)
Agents of Foreign Insurance (4%), if

directly to Foreign Company (2%)

Amusement Taxes (Tax on Proprietor)
Jai-alai and Race Tracts (30%)
Cabarets, night or day clubs (18%)
Cockpits (18%)
Professional Basketball games (15%)
Boxing Exhibitions (10%), except for
World or Oriental Championships,
provided that:
One contender is a Filipino; and
the promoter is a Filipino or if corporation, 60% of
such is owned by Filipinos

Horce Race Winnings (Tax on Operators)
Owners of winning horse (10%)
Wagerers
Winnings or dividends (Winnings less the cost of
winning ticket) - 10%
Double, Forcastiquinnella, Trifecta - 4%

Issuance of Shares of Stock through Initial
Public Offering (IPO)
IPO to Outstanding Shares after the IPO
Up to 25%
Over 25% to 33.33%
Over 33.33%
4% of the GP
2% of the GP
1% of the GP

Sales of Stocks in Local Stock Exchange
(1/2 of 1%)
Example:
Matuti operates a cockpit. Inside the cockpit, he also operates a
restaurant. Data for a particular quarter follow:
Gross receipts:
Cockpit operation
P 500,000
Restaurant operation:
Sale of food
100,000
Sale of liquor
150,000
The amusement tax due from Matuti is: _________________
Example:
Gloria invested P 500,000 in the shares
of stock of Tabako Corp. The
corporations shares are listed and are
traded in the local stock exchange.
Gloria sold the shares for P350,000
through the local stock exchange. The
percentage tax on the sale is:
_______________
518
Example:
As franchisee, it had the following data on revenues and receivables, taxes
not included:
Quarter ended 3/31/2009 operations: Revenues
Covered by the franchise
P 2,000,000
Not covered by the franchise
600,000
Receivables
Beginning
End
P 300,000
P 400,000
80,000
The business taxes, before any tax credit, if generating and selling
electricity: _______________
The business taxes, before any tax credit, if generating and selling gas and
water utilities: _____________
519
Example:
Marino is an owner of a small variety store. His gross
sales in any one year do not exceed P1,500,000. He is
not VAT-registered. The following data are taken from the
books of the variety store for the quarter ending March 31,
2009:
Merchandise inventory,
December 31, 2008
P 10,000
Gross sales
45,000
Purchases from VAT-registered supplier
38,500
The percentage tax due is:___________________
520
COMMUNITY
TAX
521
Overview
A community tax is a tax levied by cities
and municipalities on qualified individuals
and juridical persons who are domiciled in
the Philippines.
Community Tax: Individual

Every inhabitant of the Philippines who are at
least 18 years old are required to pay
community tax when:
He has been regularly employed on a wage or
salary basis for at least thirty (30) consecutive
working days during any calendar year;
He has been engaged in business or occupation;
He owns real property with an aggregate value of
P1,000.00 or more; or
He is required by law to file an income tax return.

However:
No person shall be imprisoned for
debt or nonpayment of poll tax.

Amount Applicable:
Basic Tax P5.00
Additional Tax P1.00 for every P1,000.00 of income
regardless of whether from business, exercise of
profession or from property.
Maximum Additional Tax is only limited to P5,000.00.
In the case of husband and wife, the additional tax shall
be based upon the total property owned by them and the
total gross receipts or earnings derived by them.
Community Tax: Corporate

Every corporation no matter how created or organized,
whether domestic or resident foreign, engaged in or doing
business in the Philippines.
Amount Applicable:
Basic Tax
- P500.00
Additional Tax:
P2.00 for every every P5,000.00 worth of real property in the
Philippines owned by it during the preceding year based on the
valuation used for the payment of the real property tax under
existing laws, found in the assessment rolls of the city or
municipality where the real property is situated.
The LGU described tha basis for additional community for real
property owned as the valuation used for the payment of real
property tax found in the assessment rolls of the municipality or city
where the real property is situated.
Community Tax: Corporate

P2.00 for every P5,000 of gross receipts or earnings
derived by it from its business in the Philippines during the
preceding year.
Maximum Additional Tax is only limited to P10,000.00.
Dividends received by a corporation from another
corporation shall, for the purpose of the additional tax, be
considered as part of the gross receipts or earnings of said
corporation.
Exemptions from Community Tax:
Diplomatic and consular representatives
Transient visitors when their stay in the Philippines does not
exceed three months.
Optional Community Tax

One peso (P1.00) for an individual or
corporation which is exempt from
community tax but who desires to pay a
community tax for whatever legal
purposes they may desire to make use of
it.
Payment of the Community Tax

The following rules are applicable when to
pay community tax:
If the individual or coporation is liable to pay
community tax as of January 1 of the year, the the
community tax should be paid not later than the last
day of February of the same year.
If the taxpayer becomes liable after end of February
and any day thereafter up to March 31 of the year,
then the community tax shall be paid within twenty
days from the date the taxpayer becomes liable.
Payment of the Community Tax

If the taxpayer becomes liable after March 31 of the
year and any day thereafter up to June 30, then the
community tax shall be paid on the date the taxpayer
becomes liable.
If the taxpayer becomes liable after June 30 of the
year, then for the current year the taxpayer is exempt,
the payment shall be on or before February 28 of the
following year.
Late payment of community tax is subject to additional
25% surcharge on the basic amount of tax, or 50% if
due to willful neglect; and 2% interest per month from
the last day of the required date of payment.
INTERESTS,
PENALTIES AND
SURCHARGES
Overview: Civil Penalties

Civil Penalties are as follow:
1. Interests
2. Surcharges
a. Simple Neglect
b. Willfull or Fraudulent
Interest
In general, there shall be assessed and collected on any unpaid
amount of tax, interest at the rate of 20% per annum, or such
higher rate as may be prescribed by rules and regulations, from
the date prescribed for payment until the amount is fully paid.
1. Deficiency Interest Any deficiency in the tax due, as the term is
defined in the Tax Code, shall be subject to the interest at the rate
of 20% per annum, which interest shall be assessed and collected
from the date prescribed for its payment until the full payment
thereof.
Interest
2. Delinquency Interest Delinquency interest in case of
failure to pay:
1. The amount of the tax due on any return required to be
filed, or
2. The amount of the tax due for which no return is
required, or
3. A deficiency tax, or any surcharge or interest thereon on
the due date appearing in the notice and demand of the
CIR, there shall be assessed and collected on the unpaid
amount interest at the rate of 20% per annum until the
amount is fully paid, which interest shall form part of the
tax.
Interest
3. Interest on extended payment If any person
required to pay the tax is qualified and elects to pay the
tax on installment under the provisions of the Tax Code,
but fails to pay the tax or any installment thereof, or any
part of such amount of installment on or before the date
prescribed for its payment, or where the CIR has
authorized an extension of time within which to pay a tax
or a deficiency tax or any part thereof, there shall be
assessed and collected interest at the rate of 20% per
annum on the tax or deficiency tax or any part thereof
unpaid from the date of notice and demand until it is paid
Example:
Taxpayer was assessed deficiency income tax of
P200, 000 payable on or before June 15, 2012.
Within the period however, he was only able to
pay P100, 000 and the balance only on August
30, 2012. The total tax due that he is liable
should be:
Example:
X filed his ITR and paid the tax shown thereon in
full on April 15, 2011. On April 15, 2012, X
received an assessment notice and demand from
BIR to pay a deficiency tax of P20, 000 excluding
surcharge and interest on or before April 30,
2012. How much is the total amount of tax
payable as shown in the assessment notice if
BIR found out fraud?
537
Surcharges
1. Simple Neglect (25%)
Failure to file any return and pay the tax due thereon.
If the return is not filed with the proper internal revenue
officer.
Failure to pay on time the deficiency tax shown in the
notice of assessment.
Failure to pay the full or part of the amount of tax shown on
any return required to be filed, or the full amount of tax due
for which no return is required to be filed, on or before the
date prescribed for its payment.
538
Surcharges
2. Willful Neglect (50%)
Willful neglect to file the return on time.
False or fraudulent return is willfully filed (failure to report
sales, receipts or income in an amount exceeding 30% of
that declared per return, and a claim of deductions in an
amount exceeding 30% of actual deductions, shall render
the taxpayer liable for substantial under-declaration of
sales, receipts or income or for substantial overstatement
of deductions, thus making the return filed false or
fraudulent).
Example:
Miramars income tax for 2010 was P75, 000,
as shown in her income tax return (ITR). She
filed her return only on July 15, 2012 and paid
the total amount upon filing the return. The total
amount payable assuming there was fraud
should be:
Example:
Mirant Corporation filed its final adjustment income tax return for
calendar year 2007 with a taxable income of P500,000. At the
applicable income tax rate of 35% for the year 2007, its income tax
amounted to P175,000. However, upon investigation, it was disclosed
that its income tax return was false or fraudulent because it did not
report a taxable income amounting to another P500,000. On its taxable
income of P1,000,000, per investigation, the income tax due is
P350,000. Deducting its payment per return filed, the deficiency,
excluding penalties, amounted to P175,000. It was duly informed of
this finding through a Preliminary Assessment Notice. Failing to protest
on time against the preliminary assessment notice, a formal letter of
demand and assessment notice was issued on May 31, 2009 calling
for payment of the deficiency income tax on or before June 30, 2009.
The total amount due per the assessment notice is:
541
TAX
REMEDIES
542
Overview
The basic purpose of remedies is to maintain

equilibrium between the interest of the state and the
taxpayer.
Remedies can be either administrative or judicial.
Administrative remedies involves assessment and
collection, protest and refund.
Judicial remedies may either be a civil suit or
criminal suit, appeal to CTA, injunction/ temporary
restraining order, or criminal suit against erring BIR
officials.
Overview
Remedies to the
State
Common
Remedies
Remedies to the
Taxpayer
1. ADMINISTRATIVE LEVEL (BIR)

Assessment
Compromise
Protest
Collection
Abatement
Refund
2. JUDICIAL LEVEL
Civil Suit/Action
Appeal to CTA
Criminal Suit/
Action
TRO/ Injunction
Criminal Suit
against erring BIR
officials
Remedies to the State: Administrative

Level Assessment
It is a finding by the taxing authority that the taxpayer has
not paid the correct taxes.
An assessment contains not only a computation of tax
liabilities but also a demand for payment within a
prescribed period. It also signals the time when penalties
and interests begin to accrue against the taxpayer.
Time of assessment (statute of limitation or prescriptive
period) national internal revenue taxes shall be
assessed within 3 years:
After the due date for the filing of the return (a return filed before
the due date shall be considered as filed on such due date);
From the day the return was filed, where the return is filed beyond
the due date; and
From the filing of the amended return, if the return was amended
substantially.
Remedies to the State:

Administrative Level Assessment
EXCEPTIONS - The 3-year prescriptive period of assessment
is extended if:
False or fraudulent return with intent to evade the tax was filed - the
assessment may be made within 10 years from the discovery of
the falsity or fraud;
No return is filed - assessment may be made within 10 years after
the discovery of the failure or omission to file the return; and
Before the expiration of the 3-year prescriptive period for assessment
of the tax, both the taxpayer and the CIR have agreed in writing
(waiver) to its assessment after such time, the tax may be
assessed within the period agreed upon. The period so agreed upon
may be extended by subsequent written agreement made before the
expiration of the period previously agreed upon.

If the government tries to assess a tax beyond
the prescriptive periods, the taxpayer may claim
defense of prescription of the right of the
government to assess. The defense of
prescription, however, is not jurisdictional and
must be raised seasonably, otherwise it is
deemed waived.
If the return is not false nor

fraudulent:
Collection by Judicial proceedings only
Date return was filed, or the last day
required by law for filing, if filed
before the last day.
3 years
Last day to collect, by

judicial proceedings, if
there is no assessment
If the return is not false

nor fraudulent:
Assessment followed by Collection by Summary or Judicial proceeding

Date return was filed, or the last day
required by law for filing, if filed
before the last day.
3 years
5 years
Last day to assess

Last day to collect by summary (levy
or distraint) or judicial proceedings
Example:
Anita filed her annual income tax return
on April 3, 2015 for her income last
2014. Until what day can the Bureau of
Internal Revenue make its assessment?
Example:
Anita filed her annual income tax return
on May 3, 2015 for her income last 2014.
Until what day can the Bureau of Internal
Revenue make a collection if there
should be an assessment?
551
If the return is false or fraudulent:

Collection by Judicial proceedings only
Date of discovery of the falsity,
fraud or omission
10 years
Last day to collect, by judicial
proceedings, if there is no assessment
552
If the return is false or fraudulent:

Assessment followed by Collection by Summary or
Judicial proceeding
Date return was filed, or the last day required by law for
filing, if filed before the last day.
10 years
5 years
Last day to assess

Last day to collect by
summary (levy or distraint) or
judicial proceedings
Example:
XYZ Corporation filed its annual income
tax return on April 10, 2015. On October 3,
2016, it was found out that the return filed
was fraudulent. Until what day can the
Bureau of Internal Revenue make a
collection?
Example:
XYZ Corporation filed its annual income
tax return on April 10, 2015. On October
3, 2016, it was found out that the return
filed was fraudulent. Until what day can
the Bureau of Internal Revenue make a
collection if there should be an
assessment?
555
Pre-Assessment Notice
The PAN is not required in the following cases:
a. When the deficiency tax is a result of mathematical errors in the
computations appearing on the face of the return;
b. When a discrepancy has been determined between the tax
withheld and the amount actually remitted by the withholding
agent;
c. When a taxpayer who opted to claim tax refund or credit of
excess creditable withholding tax for a taxable period was
determined to have carried over and automatically applied the
same amount against the estimated tax liabilities for the taxable
quarter or quarters of the succeeding taxable years;
d. When the excise tax due on excisable articles has not been paid;
e. When an article locally purchased or imported by an exempt
person has been sold, traded or transferred to non-exempt
persons.
556

How are tax audits/investigations initiated?
1.
2.
3.
Issuance of Electronic Letter of Authority (eLA), Tax Verfication

Notice (TVN) and/or Letter of Notice (LN) is considered as a
notice of audit or investigation that prohibits amendment to any
return covering period referred to in the eLA, TVN and/or LN
RMO No. 62 2010 discontinued the manual issuance of Letter
of Authority (LA) and TVNs
There must be a grant of authority before any revenue officer
can conduct an examination or issue an assessment. Thus, the
BIR cannot extend its examination or assessment beyond the
period covered by the Letter of Authority (LA).
LA should cover a taxable period not exceeding one taxable

year. The practice of issuing an LA covering audit of
unverified prior years is prohibited.

Place of Examination
1. The primary place of examination is the
taxpayers place of business.
2. The secondary place of examination is at
the Office of the BIR
Only duly authorized Revenue Office can audit

Submission of documents
Use of best evidence available when:
1.The reports or records of the taxpayer are not available (i.e. lost
or destroyed; unreasonably refuses to submit records); or
2.The reports and records submitted by the taxpayer are
determined to be false, incomplete or erroneous or cannot be
understood. [Sec. 6(B), Tax Code]
End of Audit/Investigation
Preparation of report of investigation showing preliminary findings
Notice of Informal Conference RR No. 18 -2013 removed the
requirement for the issuance of a letter of informal conference
before a Preliminary Assessment Notice (PAN) is issued.

Administrative Level Collection
Collection means enforcing the payment of tax. The
following are the administrative collection remedies of the
government:
I. Summary proceedings
1.
2.
3.
4.
5.
6.
Distraint (actual or constructive)

Levy
Tax lien
Forfeiture
Suspension of business operations in violation of VAT
Enforcement of an administrative fine
II. Judicial proceedings

Time of collection (statute of limitation or prescriptive period):
Return filed was not false or fraudulent
Collection with prior assessment - within 5 years from the date of assessment,
either by summary proceedings of distraint and levy or by judicial
proceedings.
Collection without prior assessment - within 3 years from the date of filing the
return or from the last day required by law for filing, if the return was filed on
or before such last day, by judicial proceedings only.
Return filed was false or fraudulent with intent to evade the tax or no
return is filed.
Collection with prior assessment - within 5 years from the date of assessment,
either by summary proceedings of distraint and levy or judicial proceedings.
Collection without prior assessment - within 10 years after the discovery of the
falsity, fraud or omission to file the return, by judicial proceedings only.

Any internal revenue tax, which has been assessed within
the period agreed upon by the taxpayer and the CIR, may
be collected by distraint or levy or by a proceeding in court
within the period agreed upon in writing before the expiration
of the 5 years prescriptive period to collect. The period so
agreed upon may e extended by subsequent written
agreement made before the expiration of the period
previously agreed upon.
If the government tries to collect by any of the above
remedies beyond the prescriptive periods, the taxpayer may
claim defense of prescription of the right of the government
to collect. The defense of prescription, however, is not
jurisdictional and must be raised seasonably, otherwise it is
deemed waived

Distraint: seizure (taking) by the government of
personal property (tangible of intangible)
to enforce payment of taxes.
ACTUAL DISTRAINT
CONSTRUCTIVE DISTRAINT
Made only on the property of a

delinquent taxpayer
Made on the property of any

taxpayer, whether delinquent
or not.
There is taking of possession.
The taxpayer is merely

prohibited from disposing of his
property.

Levy: seizure (taking) by the government of real property
to enforce payment of taxes.
DISTRAINT
LEVY
Personal Property
Real Property
Forfeiture by the
government is not provided.
Forfeiture is authorized
The taxpayer is not given

the right of redemption with
respect to the distrained
personal property
The right of redemption is

granted in case of real
property levied upon and
sold or forfeited to the
government.
Levy vs. Garnishment

Levy
1. As to subject matter
Garnishment
Real property owned by Personal property owned

and in possession of the by the taxpayer but in
taxpayer.
the possession of a
third party.
2. As to disposition for
Forfeited in favor of the Purchased
by
the
want of bidders or bids government then sold to government then resold
inadequate to satisfy tax meet the deficiency.
to meet the deficiency.
deficiency
3. As to advertisement for Advertisement once a No advertisement
sale
week for three weeks.
required.
is

c. Tax Lien: a legal claim or charge on property, either
real or personal, established by law as security in
default of the payment of taxes. The extent of lien shall
be the tax together with the interests, penalties, and
costs that may accrue. The lien attaches not only from
the service of warrant of distraint but from the time the
tax become due and payable.

d. Forfeiture: If there is no bidder in the
public sale or if the amount of the highest
bid is insufficient to pay taxes, penalties
and costs, the real property shall be
forfeited to the Government. The effect
is to transfer the title of the specific
thing from the owner to the Government.
Run After Tax Evaders (RATE)

It is a program initiated by the DOF and BIR to
investigate and prosecute individuals and entities
engaged in tax evasion and other criminal
violations of the National Internal Revenue Code
of 1997
The objectives of the RATE program are:
1. generate the maximum deterrent effect on the
taxpaying public by impressing the fact that tax
evasion is a crime and violators will be caught and
punished
2. enhance voluntary compliance among taxpayers
3. promote confidence of the public in the tax system.
Run After Tax Evaders

(RATE)
Background
In March 2005, the BIR and the DOF launched the Run After
Tax Evaders (RATE) Program.
Since March 2005, 87 complaints of tax evasion have been
submitted to the Department of Justice (DOJ) for preliminary
investigation under the RATE Program, including those filed
against actors, businessmen, public officials and other high
profile personalities.
The BIR registered a record income tax collection in 15 April
2005 of P21.4 Billion or a 43.6% increase from the P14.8
Billion collected compared to the previous year.
But almost 5 years after the programs launch, only 6 out of
the 87 complaints for tax evasion submitted to the DOJ
progressed to the filing of criminal cases in court.

Fraudulent activities or criminal tax violations
covered by the RATE Program
Offenses relating to income:
1. Failure to file tax returns
2. Failure to pay taxes
3. Deliberate underdeclaration of income by more than 30% of
that declared per return (substantial underdeclaration)
4. Hiding or transferring assets or income
5. Non-remittance of withholding taxes
Offenses relating to deductions:

1. Deliberate overstatement of amountof deductions by more
than 30% of actual deductions (substantial overstatement
of deductions)
2. Claiming personal expenses as business expenses
3. Claiming false deductions

Other violations:
1. Use of fake Certificate Authorizing Registration
(CAR), Tax Clearance Certificate (TCC) or other
accountable forms.
2. Failure to register with the BIR
3. Keeping more than one (1) set of books of
accounts
4. Making false entries in books and records
Run After The Smugglers (RATS)

In 2005, the Bureau of Customs launched an aggressive
battle against smugglers who pose serious and direct
threat to the national economy by depriving the
government of its much- needed revenues.
To boost its collection, the BOC introduced the Run After
the Smugglers (RATS) Program which aimed to file
customs cases against high profile smugglers.
It is designed not only to collect taxes but also to ensure
that importers comply with existing laws and regulations on
tariff and customs which complements the post-audit
power of the BOC under RA 9135, which took effect on
June 2, 2001.
Oplan Kandado
On January 23, 2009, the BIR issued Revenue
Memorandum Order No. 3 2009 to implement a
nationwide Oplan Kandado Program
Under the program, business operations of non-compliant
taxpayers will be suspended and their establishments will
be temporarily closed if they will be found to have violated
certain tax laws.
The programs aims to intensify the Bureaus enforcement
operations through strict imposition of prescribed
administrative sanctions for non-compliance with the basic
tax requirements.
Oplan Kandado
Grounds for suspension:
Failure to issue receipts or invoices by a VATregistered or registrable taxpayer;
Failure to file a VAT return;
Understatement of taxable sales or receipts by
30% or more of the correct amount thereof in the
case of a VAT-registered or registrable taxpayer;
Failure to register
Oplan Kandado
The closure of the business establishment shall last for a
period of not less than five (5) days, and shall be in force
until the violation is rectified by the concerned taxpayer.
The suspension and temporary closure of business shall
not preclude the BIR from filing the appropriate charges
under the RATE Program of the Bureau, if evidence so
warrants the taxpayer concerned or responsible office of
the corporations.
Oplan Kandado
The closure order shall only be lifted by the BIR when there
has been:
1. A subsequent filing or amendment of returns with the
payment of the tax inclusive of statutory penalties;
Subsequent registration with the payment of the
corresponding compromise penalties
Payment of deficiency taxes inclusive of penalties
corresponding to the sales where no invoices/receipts have
been issued; and
Payment of deficiency taxes inclusive of penalties
corresponding to the understatement of taxable sales or
receipts.
Summary of Remedies to
Government
Administrative Remedies
Assessment
Collection
Distraint (Actual or Constructive)

Levy
Garnishment
Forfeiture
Tax Lien
RATE, RATS and OPlan Kandado
Judicial Remedies
Remedies to the Taxpayer:

Administrative Level Protest
Protest is a challenge against assessment.
The filing of a petition for reconsideration or
reinvestigation shall be made within 30 days
from the receipt of the assessment with the CIR.
Within 60 therefrom, all relevant supporting
documents should have been submitted,
otherwise the assessment shall become final.
Protesting an Assessment
Notice of Informal
Conference
Assessment and
Respond
Demand
Protest the assessment

Pre-assessment
Notice
15 days
Respond
15 days
30 days 60 days
Submit supporting
documents
Decision of the CTA
Supporting
Documents
Decision of the BIR

Appeal to CTA
30 days
Decision of the CTA

Appeal to SC
15 days
submitted
Appeal to CTA
180 days, no decision of the BIR 30 days
Decision of the CTA

Appeal to SC
15 days
Example:
Date assessment was received - February 8, 2009.
Petition for reconsideration was filed with the Bureau of
Internal Revenue of February 18, 2009. Documents
supporting the petition were filed with the Bureau of
Internal Revenue on February 28, 2009. Decision of
denial of the petition was received on March 11, 2009.
Second request for reconsideration was filed with the
Bureau of Internal Revenue on March 21, 2009. Date
revised assessment was received was April 2, 2009. Last
day to appeal to the Court of Tax Appeals:
Example:
Assessment received - January 5, 2015. Petition for

reconsideration filed with the Bureau of Internal Revenue February 1, 2015. Documents supporting the petition filed
by the taxpayer - February 7, 2015. Decision of the
Bureau of Internal Revenue denying the petition was
received - March 22, 2015. Second request for
reconsideration filed with the Bureau of Internal Revenue March 30, 2015. Decision of denial of second request for
reconsideration was received - April 12, 2009. Last day to
appeal to the Court of Tax Appeals:
581
Example:
Date assessment was received - January 2, 2009.

Petition for reconsideration was filed with the
Bureau of Internal Revenue - January 12, 2009.
Documents
supporting
the
petition
for
reconsideration was filed with the Bureau of
Internal Revenue - January 22, 2009. No decision
on the protest by July 12, 2009. Last day to
appeal to the Court of Tax Appeals:
582
Example:
On January 20, 2008, a taxpayer filed a protest on/request
for reconsideration of an assessment of a tax. He received
a final decision of the Bureau of Internal Revenue on the
protest on April 30, 2008. He failed to appeal to the
decision to the Court of Tax Appeals. The Bureau of
Internal Revenue was collecting the tax by summary
proceedings on June 20, 2013. The taxpayer was
opposing the collection of the tax on the ground of
prescription of the government to collect. When shall be
the last day to collect?
583

Administrative Refund
A taxpayer may file for tax refund in case
of excessive or erroneous payment of a
tax with the BIR:
a. Tax is collected erroneously or illegally.
b. Penalty is collected without authority.
c. Sum collected is excessive
584

The claims must be in writing.
It must be filed with the CIR within 2
years after the payment of the tax or
penalty.
There must be a proof of payment.

Tax credit or refund
a. No credit or refund of taxes or penalties shall be allowed
unless the taxpayer files in writing with the CIR a claim for
credit or refund within 2 years after the payment of the tax
or penalty.
b. A return filed showing an overpayment shall be considered
as a written claim for credit or refund.
c. A Tax Credit Certificate (TCC) validly issued under the
provisions of the Tax Code may be applied against any
internal revenue tax (except withholding taxes) for which the
taxpayer is directly liable.
Refund for Tax Illegally or Erroneously Collected

(Illustrative Summary)
Case 1:
Date of
Claim for refund
Denial
Payment
filed with BIR
Last to appeal to CTA

received
30
days
2 years
Refund for Tax Illegally or Erroneously Collected

(Illustrative Summary)
Case 2:
Date of
Payment
Claim for refund

Denial
filed with BIR
received
30 days
Last day to appeal to

the CTA
Example:
Date of tax erroneously paid
June 10, 2013
Date of claim for refund was filed
with BIR
March 3, 2015
Date of BIR decision of denial was
received
April 5, 2015
Last day to appeal to the Court of Tax Appeals is on:
Example:
Date the national internal revenue tax was

erroneously paid - April 10, 2007. Claim for
refund was filed with the Bureau of Internal
Revenue - March 10, 2008. Date decision of
denial of refund was received March 21, 2009.
Last day to appeal to the Court of Tax Appeals:
590
Forfeiture of Refund or Tax

Credit
Forfeiture of refund - a refund check or warrant, which
shall remain unclaimed or uncashed within 5 years from
the date the said check or warrant was mailed or
delivered, shall be forfeited in favor of the government and
the amount shall revert to the General Fund.
Forfeiture of tax credit - a tax credit issued in accordance
with the provisions of the Tax Code, which shall remain
unutilized after 5 years from the date of issue shall,
unless revalidated, be considered invalid, and shall not
be allowed as payment for internal revenue tax liabilities of
the taxpayer, and the amount covered by the certificate
shall revert to the General Fund.
591
Remedies to the State: Judicial

Remedies Civil and Criminal
Action
1. Civil action is resorted to when a tax liability becomes collectible,
that is, the assessment becomes final and unappealable, or the
decision of the CIR has become final, executory, and demandable.
2. Criminal action, like civil action, cannot be instituted without the
approval of the CIR. It is resorted to not only for collection of taxes
but also for enforcement of statutory penalties of all sorts. The
judgment in the criminal case shall not only impose the penalty but
shall also order the payment of the taxes.
3. The extinction of a taxpayers criminal liability does not necessarily
result in the extinguishment of his civil liability. Conversely, the
subsequent satisfaction of a tax liability will not operate to
extinguish the criminal liability.
Remedies to the Taxpayer: Judicial

Remedies Civil Action
a. Appeal to the CTA within 30 days from the
receipt of decision on the protest or from the
lapse of 180 days due to inaction of the
Commissioner, whichever comes earlier.
b. Action for damages against a revenue
officer by reason of any act done in the
performance of official duty

Remedies Criminal Action
a. Filing of criminal complaint against

erring BIR officials and employees.
b. Injunction, when the CTA in its
opinion the collection by the CIR may
jeopardize the taxpayer.

Remedies Criminal Action
General Rule: No action shall suspend the collection,
payment, levy or distraint, and/or sale of any property of the
taxpayer.
Exception: The CTA is empowered to suspend the collection
of internal revenue taxes and custom duties only when
there was a:
a.Showing that collection of the tax liability may jeopardize the
interest of the government and/or the taxpayer;
b.Deposit of the amount claimed or file a surety bond for not
more than twice the amount of tax with the Court when required;
and
c.Showing by the taxpayer that appeal is not frivolous nor
dilatory
Remedies to Both Government

and Taxpayer: Compromise
Mutual concession between the taxpayer and the
government in setting a tax deficiency amicably.
What cases may be compromised?
a.
b.
c.
d.
e.
Delinquent accounts
Cases under administrative protests
Civil tax cases being disputed before the courts
Collection cases filed in courts
Criminal violation, other than those already filed in court or
those involving criminal tax refunds.

What cannot be compromised?
a. Criminal violation of NIRC already filed in court.
b. Cases involving fraud.
What are the grounds for compromise?
a. A reasonable doubt as to the validity of the claim
against the taxpayer exists; or
b. The financial position of the taxpayer demonstrate a
clear inability to pay the assessed tax

Prescribed minimum compromise rates:
a. Financial incapacity - 10% of the basic assessed tax
b. Other cases - 40% of the basic assessed tax
Compromised settlement subject to approval of the Evaluation

Board, composed of the CIR and the 4 Deputy
Commissioners:
a. Where the basic tax exceeds P1,000,000, or
b. Where the settlement offered is less than the prescribed minimum
rates above.
Remedies to Both Government and

Taxpayer: Abatement
A tax may be cancelled or obliterated upon the
authority of the BIR under certain circumstances.
What are the grounds for abatement?
a. The tax or any portion thereof appears to be unjustly
or excessively assessed;
b. The administration and collection costs involved do
not justify the collection of the amount due; and
c. The Commissioner may also, even without claim
therefore, refund or credit any tax where on the face
of the return upon which payment was made such
payment appears clearly to have been erroneously
paid.
End of
Discussion

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TAXATION

- File and Paytaxes

- Claim for Tax

Power to MAKE and

Power to TAKE private

Merely to take private

Money is taken to support

Property is taken for public

Relatively FREE from Subject to

Inferior to NonImpairment Clause

legal/permissible. The absence of one or

Escape from Taxation

Escape from Taxation

Tax Laws, BIR Rulings and

Tax Laws, BIR Rulings and

Tax Laws, BIR Rulings and

NATIONAL INTERNAL REVENUE TAXES

For INDIVIDUALS whose gross income solely includes

For INDIVIDUALS with business or professional income:

For INDIVIDUALS whose income includes both compensation, business

For CORPORATIONS, including business partnerships,

Income Taxation: Gross

Salaries and wages except wages given to MWE

Income Taxation: Individual

Income Taxation: Individual

Income Taxation: Individual

Income Taxation: Individual

Income Taxation: Individual

Income Taxation: Individual

Gross Income: Business or

The taxable income of A before personal exemptions is

Gross Income: Passive

Taxpayer received the following income in

Gross Income: Passive

Gross Income: Capital

If shares of stocks not traded in the local stock

Ordinary Assets vs. Capital Assets

a. Inventories, stocks in trade held by

a. Other than those enumerated as

Ordinary Assets vs. Capital Assets

Subject to Normal Tax

a. Sale of stocks not listed and

a. Other than those listed as

Ordinary Gains and

Capital Gains and Losses

Capital Gains and Losses

Net Capital Loss Carry-Over

Net Income from Business

CAPITAL GAIN TAX

CAPITAL GAIN TAX

CAPITAL GAIN TAX

CAPITAL GAIN TAX

what should have been

CAPITAL GAIN TAX

what should have been

CAPITAL GAIN TAX

October 13, 2009 August 7, 2009

Optional Standard Deduction

Optional Standard Deduction

General Business Expenses (salaries and wages,

General Business Expenses

General Business Expenses

Rent is deductible when Rent is taxable when

Rent is deductible when Rent is taxable when