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DONOR’S TAXATION
Definition of Donor’s Tax
Donor’s tax is a tax on a donation or gift and is imposed on the gratuitous transfer of property
between 2 or more persons who are living at the time of the transfer.
Before TRAIN: Donees are classified into 2: stranger (30%) or non-stranger (graduated rates)
TRAIN: all fixed at 6%
Basic Principles on Donor’s Tax
§ A donor’s tax is a tax levied, assessed, collected and paid upon the transfer by any person,
resident or non-resident, of the property by gift. (Sec. 98, NIRC)
§ It shall apply whether the transfer is in trust or OW, whether the gift is direct or indirect,
and whether the property is real or personal, tangible or intangible.
Gifts in trust
We are referring to the transfer of ownership and economic benefit to the trustee. If this is just a
normal trustor-trustee agreement where there is no transfer of ownership, then do not subject it
to donor’s tax. The heading of the document will not prevail even if nakalabel na as declaration of
trust. Look at the content. If the true intent is to transfer ownership, then that is considered a
donation if there is no consideration involved and the parties are alive at the time of transfer.
§ Donor’s tax is imposed upon donations inter vivos only, not donations mortis causa.
Purposes
1. To control tax evasion of the estate tax
2. To control tax evasion on income tax
3. To recoup future loss of income tax revenue
Nature of Donor’s Tax [RAVEN]
1. It is a privilege/excise tax
- an excise tax imposed on the privilege of the owner to give
- although it involves properties, it is not a property tax (e.g. real property tax)
- imposed upon the conduct or exercise of transfer of property from one person to another
- given the privilege to transfer your property
2. It is an annual tax
- TN: The 250k exemption is applicable for the entire taxable year.
- The filing of donor’s tax return is within 30 days after the donation. It doesn’t mean na
kay annual tax siya, iconsolidate ang filing. You don’t do that, OW you cannot process the
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transfer of title of the property. However, for purposes of computation for the tax
liability, cumulative kay annual tax man.
3. Ad valorem tax
- Basis: FMV of property at the time of donation (FMV – price at which any seller will sell
and any buyer will buy, both willingly without any force or intimidation)
- Real property valuation: HIGHER of FMV (1) as determined by the Commissioner of
Internal Revenue (zonal value), or (2) as shown in the schedule of values fixed by the
Provincial and City Assessors (assessed value).
4. National tax
- The national government collects the tax through the BIR
5. Revenue or fiscal tax
- The primary purpose is to raise revenue
TN: Before TRAIN, donor’s tax is also described as a progressive tax because before, we consider
the relationship of the donor and the donee. If the donee is a non-stranger, the donor’s tax
table ranges from 0-15%. So, in that sense, the donor’s tax is progressive. As the value increases,
the tax rate can go from 0-15% although upon reaching the maximum level, it becomes fixed at
15% in which case, it becomes degressive.
Applicable Law in Donor’s Taxation
§ The law in force at the time of the perfection and completion of the donation.
Donation – gratuitous transfer of property from one person to another, as distinguished from
an onerous transfer where there is a transfer for a sufficient consideration.
Parties
Donor – owner of the property; transfers the property out of generosity
Donee – accepts the donation
Art. 275, NCC
Donation is an act of liberality which could happen:
• during the lifetime (donation inter vivos) – donor’s tax
• upon death (donation mortis causa) – estate tax
Classification Rule
§ the motive of the donation is the controlling rule
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§ if the motive is associated with the existence of life out of love, generosity, liberality –
donation inter vivos
§ if the motive is due to an impending death – donation mortis causa
Prior to TRAIN: for purposes of computing the donor’s tax, a distinction must be made WON
the donee is a stranger or not.
TRUE or FALSE: One of the advantages of TRAIN is that it is easier now to compute for the tax
since there is already no need to distinguish whether the donation is an inter vivos or a mortis
causa transfer since both estate tax and donor’s tax have the same tax rate of 6%.
FALSE. There is still a need to distinguish because the tax base is different. As to donor’s
taxation, the tax base is total gifts, in excess of 250k; whereas in estate taxation, the tax base is
net estate. ‘Net’ presupposes that the gross estate was further deducted by the allowable
deductions. Furthermore, they have different deadlines as to the filing of their returns. And
obviously, they also use different BIR forms.
Requisites of a Taxable Gift [DI ADIC]
1. Decrease in the patrimony of the donor
2. Increase in the patrimony of the donee
3. Acceptance by the donee during lifetime of the donor
4. Delivery (whether actual or constructive) – “donative act”
5. Intent to donate or donative intent
6. Capacity of the donor
Acceptance by the donee during lifetime of the donor
This is important because nobody can be compelled to accept the generosity of another. As a
general rule, acceptance must be made personally, except if made through an authorized
person with a special power, or general power sufficient for the purpose of accepting the
specific donation. The acceptance must also be made known to the donor. Taking all of these
in consideration, we can conclude that there is only a perfected donation when it happens
during the lifetime of the donor and the donee.
Formalities of acceptance
§ depends on the kind and the value of the property donated
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§ The formalities of donation go hand in hand with the formalities of acceptance (ex. if the
donation must be in writing, then the acceptance must be in writing, etc.)
§ Effect of non-compliance: donation is void and unenforceable; hence, not subject to donor’s
tax. But the transfer will now be subject to income tax on the part of the supposed donee
since income taxation is source blind. VAT or OPT cannot be imposed on such transaction
because these tax impositions presuppose that there is an ordinary business transaction.
Personal property – depends on the value of the property:
§ Tangible – can be perceived by senses; in taxation, it is the same as movable properties
o 5k or less – may be done orally or in writing; acceptance must be simultaneous
o more than 5k – the donation and acceptance must be in writing
§ Intangible – ex. franchise, copyrights, royalties, shares of stock in a DC; like RP, it must be
made in a public instrument.
Illustration
Laptop worth 50k is donated. Is it still required to file a return even if it is not subject to
donor’s tax?
Yes, for purposes of declaration. It is possible man gud na you will donate again within the
same taxable year and when you accumulate all your donations, it already exceeded the 250k
exemption which is good for 1 taxable year. In this case, you already have to pay donor’s tax.
Real property – regardless of value, it must be in a public instrument, and acceptance may be
made on the same instrument or in another public instrument, in which case the donor must
be informed of such fact.
Land is donated and it is only written in a private instrument. Can the donee compel the donor
to deliver it to him?
No, since the donation is void and unenforceable. What can the donee do is to compel the
supposed donor to get the document notarized.
Delivery or “Donative Act”
This COMPLETES the donation; as distinguished from the acceptance made known to the donor
which merely PERFECTS the donation. If the acceptance and delivery are made simultaneously,
then the donation is deemed perfected and completed. Donor’s tax shall not apply unless and
until there is a completed gift.
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o General renunciation – no specific beneficiary. The heir simply says that he will not avail his
Actual delivery inheritance. In this case, it will automatically go to the other heirs, following the rules in
Delivery by physically placing the thing donated in the hands of the donee (movables) or succession.
physically placing it in his possession and control (immovables). o Specific renunciation – the heir who renounced his share specifically identifies to whom his
share will go.
Constructive delivery
a) By legal formalities – when the donation is made through a public instrument, the execution Intent to donate or Donative Intent
thereof shall be equivalent to delivery of the thing donated.
b) Symbolic delivery (traditio symbolica) – by delivering the keys of the place or depository
where the movable is stored or kept (wrong ex: key of the car and the thing donated is the This pertains to the intent of the donor to donate without consideration since it’s a gratuitous
car itself; correct ex: key of the warehouse where the thing donated is stored) transfer (act of liberality).
c) Traditio longa manu (delivery by the long hand) – by mere consent or agreement of the
parties if the thing cannot be transferred to the possession of the donee at the time of TN: Consideration means money or equal value or some goods or service capable of being
donation; usually by pointing at the thing; applies to movables only evaluated in money. Hence, love and affection does NOT amount to consideration.
d) Traditio brevi manu (delivery by the short hand) – the donee is already in the possession of
the thing donated even before the donation and thereafter continues in possession thereof When it comes to donation, and insofar as the NIRC is concerned, it covers both direct and
in the concept of an owner; applies to movables only indirect donation. We need to cover indirect donation because one of the purposes in levying
e) Traditio constitutum possessorium – the donor continues in possession of the thing donated donor’s tax is to avoid income tax evasion. And one way of evading income tax is to undervalue
after the donation but in another capacity such as that of a lessee or depositary; applies to the property you are going to sell.
both movables and immovables
IOW, donative intent is only required in a direct gift. If a gift is indirect taking place by way of
TYPE OF RENUNCIATION GENERAL SPECIFIC sale, exchange or other transfer of property as contemplated in Section 100 of the Tax Code,
More than 2 heirs Exempt Taxable donative intent is not necessary. Among all the other essential requisites, this is the only
Only 2 heirs Exempt Exempt requisite which can be dispensed with in some circumstances such as:
By the surviving spouse (s.s.) Taxable Taxable a. Transfer for insufficient or inadequate consideration
of his/her share in the b. Condonation of debt
common/conjugal § Not all under circumstances that your condonation will be subject to donor’s tax
properties because it will only be subjected to it if the condonation is out of generosity (without
consideration). However, if the reason is because there’s a past service or future service
Gross estate P10M rendered or to be rendered by the debtor, such will be subjected to income tax because
Deductions (4M) it will already be considered as condonation with consideration.
Net Estate P 6M
If the s.s. GENERALLY/SPECIFICALLY renounces her share here,
½ share of S.S (3M) – taxable already since this is considered as her exclusive property.

Net Distributable Estate P 3M – If the s.s. GENERALLY renounces her share here, it is still exempt.

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Illustration the fair market value of the property exceeded the value of the consideration shall, for the
Mr. X – individual transferred: purpose of the tax imposed by this Chapter, be deemed a gift, and shall be included in
computing the amount of gifts made during the calendar year: Provided, however, that a sale,
A. Car (used in business) – since the car is used in business, it is an ordinary asset (OA). exchange, or other transfer of property made in the ordinary course of business (a transaction
which is a bona fide, at arm’s length, and free from any donative intent) will be considered as
FMV 800k 300k subject to 6% donor’s tax
made for an adequate and full consideration in money or money’s worth.
SP 500k
Cost 700k This proviso provides a defense on the taxpayer assessed with donor’s tax why the SP is lesser
Income (Loss) (200k) – no income tax liability kay loss man than the FMV. The taxpayer must have to prove in this case that the salse was a bona fide sale
at arm’s length by proving that (1) there is no relation between seller and buyer (e.g. blood
B. House & Lot – this is a real property which is a capital asset (CA) relatives, affiliate, or the other corporation does not have a control of the buyer or seller) and
(2) the transfer is free from donative intent (easy to prove because you did not execute a deed
FMV 10M 6% CGT, whichever is HIGHER of donation). So, it will then be subjected to income tax and business tax, but not donor’s tax.
SP 5M
Cost 4M Donation with reserved powers
1M – not subject to income tax since it is a CA These are incomplete transfers because the transferee cannot exercise full dominion over the
property. As a general rule, donor’s tax is imposed at the time the donation is perfected and
No donor’s tax since wa man na-alkansi ang government because the tax base of CGT is completed, and such is considered completed by delivery. However, there are instances that
whichever is higher between the FMV and SP. despite delivery, the transfer will not yet be subjected to tax:
§ Conditional donation – Ownership will transfer only upon the happening of a future event,
C. Commercial Building – OA kay commercial man as specified by the donor. Only upon the happening of such event will the transaction be
held liable for donor’s tax. The condition must be other than the death of the donor. OW,
FMV 20M the imposition will be estate tax.
10M subject to 6% donor’s tax
SP 10M § Revocable transfers – The donor executes a deed of donation but there is a provision where
Cost 9M the donor reserves his or her power to revoke the transferee’s ownership. The donation will
Income (Loss) 1M – subject to 0-35% GITR be deemed completed only upon the death of the transferor (estate tax) because at such
time will only his power to revoke be irrevocable UNLESS the donor during his lifetime:
D. Shares of stocks in a corporation; not listed – CA o Renounces his power to revoke; or
o Becomes incapacitated (insanity) to exercise his right to revoke and never regained
NABV 1M the capacity before death
600k subject to 6% donor’s tax
SP 400k
Cost 200k Quasi-Transfers
200k – subject to 15% NCG These are the other instances where the delivery of the property to another will not be
subjected to donor’s tax because ang gi-deliveran, sya naman daan ang rightful owner of the
Amendment by TRAIN: (Sec. 16, RR 12-2018) property. The transfer has already been subjected to estate tax before (during the first transfer)
Where property, other than real property referred to in Section 24(D), is transferred for less but the transferee during that time held the property as a trustee. (Caveat: naghimu2x ra kog example
than an adequate and full consideration in money or money's worth, then the amount by which based on my understanding kay mangayug example si sir usahay)

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(A) The merger of usufruct in the owner of the naked title;
It must be during the lifetime of the usufructuary kay if patay na sya, mahug na sya as example of a transfer exempt from
estate tax. Exemption from donor’s tax pa man ta J
Usufructuary has the right to the use and fruits of the property but he doesn’t have the legal title to it. The owner of the
naked title can exercise all the rights of ownership (remember the discussions in partnership) consistent with the enjoyment
of the things by the usufructuary. There is merger of the usufruct in the owner of the naked title when the naked ownership
and the usufruct come to be held by the same person.
Illustration:
Mair died testate on July 5, 2018. The will provides that the usufruct over her land shall be inherited by Samantha while the
naked title shall go to Alex. The term of the usufruct will last only until January 1, 2025. What happens upon the arrival of the
term?
On January 1, 2025, there will be a merger of the usufruct in the owner of the naked title because Alex will be the absolute
owner of the property. In this case, the transfer from Samantha to Alex is exempt from donor’s tax. The exemption is
premised on the fact that there is only one transmission of property (from Mair to Alex). Moreover, the reason of the law is
that the transfer had been previously subjected to estate tax; hence, the exemption.
What happens if Alex predeceases Samantha?
If this happens, heirs of Alex will inherit the property, with the corresponding obligation to respect the rights of Samantha
(usufructuary) during the term of the usufruct. On January 1, 2025, the merger will happen. The transfer from Samantha to
the heirs of Alex will still be exempt from donor’s tax. Take note that the estate taxes involving the same property are
imposed on the transfers from Mair to Alex and from Alex to his heirs; but there is no donor’s tax liability on the transfer
from Samantha (usufruct) to the heirs of Alex.
(B) The transmission or delivery of the inheritance or legacy by the fiduciary heir or legatee to
the fideicommissary;
It must also be during the lifetime of the fiduciary heir kay if patay na sya, mahug na sya as example of a transfer exempt
from estate tax. Exemption from donor’s tax pa man ta J
Fideicomissary substitution is that by virtue of which a testator institutes a first heir, and charges him to preserve and
transmit the whole or part of the inheritance later on to a second heir. The relationship of the fiduciary heir and the
fideicomissary must be one degree such that of parent and child, vise versa.
Illustration:
Katya instituted Mella as first heir, and Mella’s youngest daughter, Nika, as second heir. The will requires Mella to preserve
and transmit the property by the time Nika reaches the age of majority. Nika turned 18 now. Will the transfer from Mella to
Nika be subjected to donor’s tax?
No, the transfer is exempt because a fideicomissary substitution is given tax exemption by the Code. The transfer from Katya
to Mella has already been subjected to estate tax. To tax both transfers would amount to double taxation.
(C) The transmission from the first heir, legatee or donee in favor of another beneficiary, in
accordance with the desire of the predecessor; and
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Since it says ‘in accordance with the desire of the predecessor,’ this presupposes that the predecessor executed a will. It is
possible that in the will, the deceased gives a power of appointment to a certain person. This is the right to designate the
person or persons who will receive the property. A power of appointment may be:
o Special Power of Appointment – must be exercised only in favor of a restricted or designated class of persons other than
the first heir, legatee or donee
Illustration:
Katie devised in her will that her farmland in Ormoc shall go to Ellie until such time that Nikki passes the bar exam. On
April 26, 2021, Nikki passed the bar exam. What are the tax implications?
Upon the death of Katie, estate tax will be imposed. However, the transfer of the farmland from Ellie to Nikki when the
latter passed the bar exam is exempt from donor’s tax.
o General Power of Appointment – may be exercised in favor of anybody.
Illustration:
Katie devised in her will that her farmland in Ormoc shall go to Ellie but it was not specified to whom should Ellie transfer
the property upon Nikki’s passing the bar exam. When Nikki passed the bar exam, Ellie transferred the farmland to Kennie
without any consideration. What are the tax implications?
In this case, estate tax should be imposed on the transfer from Katie to Ellie. Since Katie gave Ellie a GPA, Ellie can
exercise full ownership because her right to dispose the property is not limited to a specific person(s) only. She has an
option to whom will she transfer the property. In fact, she can appoint herself as the beneficiary if she wants to. Hence,
the transfer from Ellie to Kennie is subject to donor’s tax, considering that it was transferred without any consideration.
(D) All bequests, devises, legacies or transfers to social welfare, cultural and charitable
institutions, no part of the net income of which inures to the benefit of any individual:
Provided, however, that not more than thirty percent (30%) of the said bequests, devises,
legacies or transfers shall be used by such institutions for administration purposes.
Capacity of the Donor
Take note that we refer to the capacity of the donor, NOT of the donee, because it is his
patrimony which will be decreased.
Incapacitated donors
1. Insane persons, except if donation is made during a lucid interval
2. Minors
3. Those under civil interdiction
4. Spouses to each other; common law spouses and mistresses and paramours
GR: Only the capacity of the donor is required.
Exc: Instances when the donee is considered incapacitated (enumerated below)
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Void Donations
Despite delivery, there is no transfer of ownership. Hence, there can be no donor’s tax liability. B. Juridical donors
However, the recipient may be subjected to income tax since income taxation is source blind. 1. Domestic Corporation (DC)
2. Resident Foreign Corporation (RFC)
(1) Donations to incapacitated persons: 3. Non-Resident Foreign Corporation (NRFC)
§ Those under civil interdiction
- an accessory penalty to those crimes involving moral turpitude Reciprocity Rule
§ Spouses and man and woman living together without the benefit of marriage (to avoid Our country will exempt intangible personal properties from donor's tax if the country of origin
undue influence) of the NRA or NRFC will also exempt from donor's taxation intangible personal properties
§ Lawyers who notarized the will donated by Filipinos who are considered non-resident in their country. In short, bawsanay. But
§ Public officers or their spouses if the gift was given by reason of their public office that only applies to intangible personal properties.
§ Those incapacitated to receive in succession due to undue influence (i.e. priests, doctors,
etc.) Exemptions vs. Deductions
o Exemption – not included in the gross amount
(2) Donation of future property. o Deduction – include it in the gross amount and later on make it appear as a deduction

(3) Donation between spouses during the marriage or persons living together as husband &
wife without a valid marriage, except: (Art. 87, FC)
a. Moderate gifts on the occasion of any family rejoicing.
b. Donation mortis causa
(4) Donations enumerated in Art. 739, NCC:
§ between persons who were guilty of adultery or concubinage at the time of the
donation;
- the action for declaration of nullity may be brought by the spouse of the donor or donee; and the guilt
of the donor and donee may be proved by preponderance of evidence in the same action.
§ between persons found guilty of the same criminal offense, in consideration thereof;
§ made to a public officer or his wife, descendants and ascendants, by reason of his office.
Kinds of Donors
A. Individual donors
1. Residents or Citizens (RC, NRC, RA) – taxable on all property located within and without
the Philippines.
2. Non-Resident and Non-Citizen (NRA) – taxable on all real and tangible properties within
the Philippines, and intangible personal property, subject to the reciprocity rule.
In estate tax, naa juy computation of the taxable estate. There is a specific portion for
deductions but here in donor’s taxation wala. If there is a deduction, we will just have to deduct
it immediately in the value of the property before you add it to the gross gift. If you notice sa
RR, it says “6% of the total gift in excess of 250,000.” It is not termed “net gift” because if ever
there are deductions you do not present it separately. (ex. FMV: 1M; mortgage paid by donee:
100k; total gift: 900k)
DEDUCTIONS FROM GROSS GIFTS
§ Encumbrances – claims or liabilities attached to a property; to be deductible, must be
assumed by the donee(i.e. mortgage, security interest, costs of rights, accrued and unpaid
taxes)
Jabar donated to Tine a parcel of land worth 2M. At the time of donation, the property was mortgaged to a bank
for 400k. If Tine will assume the mortgage indebtedness on the land, then said amount shall be deducted from
2M. In that case, the total gift would amount to 1.6M.
§ Diminutions – conditions or amounts that need to be shouldered by the donee in order to
effect the donation. This is the decrease in the value of property donated as a result of a
condition made by the donor to the donee.
Sammy gave cash of 600k to Vanda as a birthday gift. There is a condition, however, that Vanda shall pay his debt
with Najen in the amount of 65k which Vanda agreed. In this case, the payment made by Vanda to Najen has
diminished the amount of gift which she received from Sammy. Hence, the amount of 65k shall be deducted
from 600k to get the amount of the total gift.

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EXEMPTION OF CERTAIN GIFTS
When we talk of exempted gifts, these are not subject to donor’s tax. Since this talks about
exemption from tax liability, the rules must be strictly construed against the taxpayer.
Exemption is NOT automatic. The taxpayer must first file a request for a ruling from the BIR
showing its compliance with the requisites. OW, it might be assessed.
A. For residents and citizens (Sec. 17, RR. 12-2018)
1. Gifts made to or for the use of the National Government or any entity created by any of its
agencies which is not conducted for profit, or to any political subdivision of the said
Government;
GOCCs are not included.
2. Gifts in favor of an educational and/or charitable, religious, cultural or social welfare
corporation, institution, accredited nongovernment organization, trust or philanthropic
organization or research institution or organization [ERC-SCARP]. (no athletic or sports
association)
Requisites:
o not more than 30% of said gifts shall be used by such donee for administration purposes
o incorporated as a non-stock entity
o no payment of dividends (this fact, in so far as the BIR is concerned, must be reflected in
the Articles of Incorporation and by-laws)
o governed by trustees who receive no compensation (Board of Directors receive
honorarium every meeting)
o donation must be used for the purpose to which the ERC-SCARP is organized
o if the donee is an NGO, it must be accredited.
If you’re into social welfare then get accreditation from DSWD; if education then get from DePEd or CHed.
But other than these accreditations from these agencies, we have the accreditation of the PCNC.
B. Non-resident aliens
1. Gifts made to or for the use of the National Government or any entity created by any of its
agencies which is not conducted for profit, or to any political subdivision of the said
Government.
2. Gifts in favor of an educational and/or charitable, religious, cultural or social welfare
corporation, institution, foundation, trust or philanthropic organization or research
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institution or organization: Provided, however, that not more than thirty percent (30%) of
said gifts shall be used by such donee for administration purposes.
Mas daghag requisites sa resident or citizen. Here, the only requisite is that not more than 30% of the donation
shall be used for administration purposes. In practice, if an NRA makes a donation, to easily ascertain if ma-
exempt ba na for donor’s tax, ang tanawn ni NRA is if ang entity is registered with the PCNC ba. Most probably,
the reason is really kay mas ganahan ta na ang mu donate is NRA because if mu-donate sila, dollars gud na.
Donation of conjugal or community property
Neither spouse may donate any conjugal or community property without the consent of the
other. If such is donated and only the husband signed the deed of donation, there is only one
donor, without prejudice to the right of the wife to question the validity of the donation without
her consent (NCC & FC). H and W are considered as distinct taxpayers for donor’s tax purposes.
Thus, in case a gift is made by the spouses out of conjugal or community property, each of them
is a donor out of the respective share in the property. Since they are considered separate
donors, then the computation of the donor's tax and the 250k exemption would also be applied
separately. Accordingly, the donor's tax return will also be filed separately.
Principle of Accumulation
The computation of the base is cumulative. To arrive at the taxable base, all the gifts previously
made in the same calendar year must be added to the present gift. However, the donor’s taxes
paid on the previous donations are allowed as tax credits.
TN: Donor's taxation – calendar year under all circumstances even if corporate.
Tax credit for donor’s taxes paid to a foreign country
A tax imposed upon a donor who was a citizen or resident at the time of donation shall be
credited with the amount of any donor’s tax on any character and description imposed by the
authority of a foreign country (Sec. 101 [C], NIRC). However, the amount of tax credit shall be
subject to each of the ff limitations:
1. Global Limitation – applicable if (1) there is only one foreign country involved; and (2) if
there are 2 or more foreign countries involved [in addition to per country limitation]
Total Foreign Net Gifts Philippine = Tax credit
x
Global Net Gifts Donor’s tax
2. Per Country Limitation – applicable ONLY if there are 2 or more foreign countries involved
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SOLUTION:
Net Gifts Per Country x Phil Donor’s tax = Tax credit
Global Net Gifts Date of Donation Amount Donor’s Tax
June 6, 2018 484k
16k 500k
See illustration in estate tax. Same ra man ug concept J Share of spouse 1/2
250k
Less: Exempt Gift (250k)
Illustrations:
Tax due/payable on the June donation 0

1. Joseph donated P4.5M cash to Ericka. How much should be the Donor’s tax due if: October 8, 2018 100k 100k
§ Ericka is Joseph’s sister Add: June donation 500k
Before TRAIN: use the 0-15% graduated tax rates 600k
TRAIN: Share of spouse 1/2
300k
Value of Gift P 4.5M
Less: Exempt Gift (250k)
Deduction (250k) Total 50k
Net Value of gift P 4.25M Tax due 6% 3k
Tax rate x 6% Less: Tax paid on June donation 0
Tax Due P 255K Tax due/payable on the Oct donation 3k
§ Ericka is Joseph’s girlfriend
April 4, 2019 700k 700k
Before TRAIN: 30% tax rate (considered as stranger)
Share of spouse 1/2
TRAIN: same as above – 225k 350k
Less: Exempt Gift (250k)
2. Mr. and Mrs. Steven Otida, citizens and residents of the Philippines, made the following Total 100k
donations: Tax due/payable on the April donation 6% 6k

June 6, 2018 To Jericho, a legitimate son, on
account of marriage
To Bettina, a legitimate daughter,
property with mortgage of 4,000
which was assumed by Bettina
October 8, 2018 To Renato, a legitimate son of Mrs.
Otida by prior marriage, on
account of marriage
April 4, 2019 To the Cebu Catholic Church
To Cynthia, a family friend
484, 000 Filing of Donor’s Tax Return
20,000 § Time of filing: within 30 days after the date the gift is made
§ Time of payment: date of filing since we follow ‘pay as you file system’
100,000 § Place of filing and payment: Except in cases where the Commissioner of Internal
Revenue (CIR) OW permits, the return shall be filed and the tax paid to either
- Authorized agent bank (AAB); or
100,000 - Revenue District Officer (RDO); or
700,000
- Revenue Collection Officer; or
- Duly authorized treasurer of the city or municipality where the donor was domiciled
at the time of transfer; or
- If no legal residence in the Phil: Office of the CIR

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§ If by non-resident: ESTATE TAXATION
- Philippine Embassy; or
- Consulate in the country where he is domiciled at the time of transfer; or Nature of Estate Tax
- directly with the Office of the CIR
1. Excise tax – tax on the privilege of transmitting one’s property.
Accreditation of corporations, associations or NGOs 2. National tax – collected by the BIR.
3. Fiscal – helps to raise revenue for the government.
When we talk about accreditation of the NGO, primarily you are going to ask for accreditation 4. Ad valorem – values to which the tax imposed are based on the FMVs of the property at the
from the concerned or relevant government agency. But then, because of the proliferation of time of death or time of donation.
the NGOs and because of the Napoles scandal, the Philippine Council for NGOs Certification 5. Annual Tax
(PCNC) was formed. This is actually a private entity, not a government entity. This is composed TN: No longer progressive; currently taxed at a fixed rate of 6%. Prior to TRAIN, progressive sya
primarily of NGOs which formed a governing body, a licensing body where the NGOs go for kay subjected to graduated tax rates of 5%-20%, exempting the first P200k, depending on the
accreditation. To encourage these NGOs to register with PCNC, tax-exempt status can be value of the estate. Before, the greater the value of the property, the higher the tax rate.
availed upon accreditation. But before you can be registered or accredited by the PCNC, it is a
requirement that you must have the vision/mission and dapat gi-apply nah nimo. There is Notice of Death:
proper segregation of authority between the officers, proper financial reporting, among others. In all cases of transfers subject to tax, the executor or administrator or any of the legal heirs, as
the case may be, within 2 months after the decedent’s death, OR within a like period after
However, there was an RMO issued by the BIR sometime 2015 or 2016, where it was stated qualifying as such executor or administrator, must give a written notice thereof to the
that accreditation in the PCNC is not the sole way for an NGO to be exempted from income tax. Commissioner.
It's just one of the many ways to get an accreditation. This is because many NGOs complained.
They said that such accreditation with PCNC is very difficult and costly since the price ranges BUT according to KMA, this only applies prior to TRAIN. Such is no longer provided in the current
around 10k-25k and that is only valid for a year or two and they have to re-accredit and pay law.
again. So because of that clamor from the NGOs, the BIR issued an RMO which says that if you
don't want to be accredited by the PCNC then you can get an accreditation from the Purposes
government agency. § To raise revenue to defray government expenses.
§ To facilitate the distribution of wealth
Donee's status If there is no transfer of properties from the deceased to the heirs, the property becomes stagnant and useless,
If the donee is a non-stock non-profit NGO, the donor can receive tax deductible and tax- so there is no economic movement.
exempt contributions under the law. So, if I am the donor, then one way of shielding the § To prevent undue accumulation of wealth.
transfer from taxation is to make donations to these PCNC-accredited NGOs. Take note that it
is not automatic na once accredited ka sa PCNC, exempted na ka from taxation. You still need Underlying Theories of Estate Tax [BRASE]
to submit that certificate of accreditation from PCNC to the BIR and the BIR will issue exemption 1. Benefit-Received Theory – Government protects and provides services in the accumulation
ruling or certification. Such issuance is considered most like mandatory on the part of the BIR. of properties transferred gratuitously, thus there must be an equivalent compensation for
If you can also recall in income taxation, when it comes to donation to charitable institution, the protection and services.
the transfer can be deducted either by limited or full deduction. And one of the requisites for 2. Redistribution of Wealth Theory – Properties given for free contributes to the unequal
full deduction is that it must be contributed to an accredited NGO. distribution of wealth and earning because the recipient has not actually worked for it.

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3. Ability-to-Pay Theory – Effect of inheritance increases wealth of the heir thereby creating an
ability to pay the tax.
4. State Partnership Theory. State is the passive and silent partner in the accumulation of
wealth.
5. Equitable Recoupment Theory. To prevent unjust enrichment on the part of the taxpayer if
properties are gratuitously transferred.
An estate is a separate juridical being. This can be shown by the fact that upon the death of the
decedent, his Tax Identification Number (TIN) will also die and another TIN will be given to the
estate for distribution and settlement purposes.
Kinds of Decedent
1. Resident Citizens – regardless of location
2. Non-resident Citizens – regardless of location
3. Resident Alien – regardless of location
4. Non-resident Alien – only within; however, intangible personal properties are subject to
reciprocity rule
Properties covered by Gross Estate
The gross estate of a RESIDENT OR CITIZEN of the Philippines includes all properties, regardless
of location (as opposed to income tax na sa resident citizen ra mu-apply ang income within and
without). Thus, gross estate will include:
(a) Real Property; and
(b) Personal Property – tangible or intangible.
Reciprocity Rule
Intangible personal property located in the Philippines of the non-resident, not citizen of the
Philippines, will not be included in the gross estate. The law states: (a) if the decedent at the
time of his death was a citizen and resident of a foreign country which at the time of death did
not impose a transfer or death tax of any character in respect of intangible personal of citizens
of the Philippines not residing in that foreign country, or (b) if the laws of the foreign country
of which the decedent was a citizen and resident at the time of death allow a similar exemption
from transfer taxes or death taxes of every character in respect of intangible personal property
owned by citizens of the Philippines not residing in that foreign country.
GR: real properties – lex rei sitae; personal properties – mobilia sequuntor personam
EXC: NRA’s intangible personal properties subject to reciprocity rule
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Intangible Personal Properties located in the Philippines: [PDF 2F]
(a) Franchise which must be exercised in the Philippines;
(b) Shares, obligations or bonds issued by a domestic corporation;
(c) Shares, obligations or bonds issued by a foreign corporation 85% of the business of which
is located in the Philippines;
(d) Shares, obligations or bonds issued by a foreign corporation, if such shares, obligations or
bonds have acquired a business situs in the Philippines;
(e) Shares or rights in any partnership, business or industry in the Philippines.
TN: the list is not exclusive. Any other intangible property (e.g. receivables) in the Philippines
will be included in the GE.
Valuation of the Gross Estate (Sec. 5, RR No. 12-2018)
The properties comprising the gross estate shall be valued according to their fair market value
(FMV) as of the time of decedent’s death.
§ Real Property
The appraised value as of the time of death shall be, whichever is the HIGHER of the FMV:
(1) as determined by the Commissioner, or
(2) as shown in the schedule of values fixed by the provincial and city assessors
§ Shares of stocks
o Unlisted common shares – based on their book value; appraisal surplus shall NOT be
considered as well as the value assigned to preferred shares, if there are any.
o Unlisted preferred shares – at par value
o Shares listed in the stock exchanges – the FMV shall be the arithmetic mean between the
highest and lowest quotation at a date nearest the date of death, if none is available on
the date of death itself.
§ Units of participation in any association, recreation or amusement club
The bid price nearest the date of death published in any newspaper or publication of general
circulation
§ Right to usufruct, use or habitation, annuity
taken into account the probable life of the beneficiary in accordance with the latest basic
standard mortality table, to be approved by the Secretary of Finance, upon recommendation
of the Insurance Commissioner.
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Formula
Illustration:
Inventory of properties at the time of death P xx Mr. B, a citizen and resident of the Philippines, had the ff data on the estate he left:
Less: Exempt Transfers
Properties not owned P xx Net taxable estate:
Properties owned but excluded by law xx Philippines P 570k
Inventory of taxable present properties xx Malaysia 2.1M
Add: Taxable transfers xx Indonesia 1.7M
Gross Estate P xx
Estate taxes paid:
Gross Estate P xx Malaysia P 200k
Less: Deductions ( xx ) Indonesia 100k
½ share of surviving spouse ( xx )
Net Estate P xx How much is Philippine estate tax due?
Rate 6% Computation:
Estate Tax Due P xx
Tax Credits ( xx ) Net taxable estate, Philippines P 570k
Estimated Tax Payable P xx Net taxable estate, Malaysia 2.1M
Net taxable estate, Indonesia 1.7M
Tax Credit for Foreign Estate Tax Paid Net taxable, world P 4.37M
Only the estate of a RESIDENT OR CITIZEN of the Philippines can claim a credit for foreign estate
tax paid. Estate tax P 262,200
Tax credit allowed (226,000)
Formulas on foreign estate tax credit. Estate tax still due P 36, 200

A. Per Country Limitation (Limitation A) Limitation A

Net Estate per country x Philippine = P xx
Global Net Estate Estate tax Malaysia:
Tax credit allowed P 126k
Compare: [2.1M/4.37M * 6% (570k+2.1M+1.7M)]
Foreign estate tax paid and tax credit allowed, whichever is LOWER Actually paid 200k P 126k

B. Global Limitation (Limitation B) Indonesia:

Total foreign NE Philippine Tax credit allowed P 102k
x = P xx
Global NE Estate tax [1.7M/4.37M * 262.2k)
Actually paid 100k 100k
Compare: Foreign estate tax paid, Limitation A and Limitation B, whichever is LOWEST Total, Lim. A P 226k
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end before his death (1) the possession or enjoyment of, or the right to the income from the
Limitation B property, or (2) the right, either alone or in conjunction with any person, to designate the
Tax credit allowed P 228k person who shall possess or enjoy the property or the income therefrom; except in case of
[(2.1M+1.7M)/4.37M)*262.2k] a bona fide sale for an adequate and full consideration in money or money's worth.
Actually paid 300k
This is a transfer motivated by their thought of death, although death may not be imminent.
Tax credit to apply (whichever is LOWEST) P226k
Manifestations:
GROSS ESTATE COMPOSITION o Age and state of health of the decedent at the time of gift, especially where he was aware
1. Decedent’s interest of a serious illness
2. Transfer in contemplation of death o Length of time between the gift and the date of death. A short interval suggests the
3. Revocable transfer conclusion that the thought of death was in the decedent’s mind, and a long interval
4. Property passing under the general power of appointment suggests the opposite. But there is no exact length of time.
5. Proceeds of life insurance o Concurrent making of a will or making a will within a short time after the transfer.
6. Prior interests
7. Transfers for insufficient consideration Revocable Transfers (Sec. 85(C), NIRC)
8. Capital of surviving spouse
9. Amount received under R.A. 4917 (Retirement Benefits Act)
(1) To the extent of any interest therein, of which the decedent has at any time made a
transfer (except in case of a bona fide sale for an adequate and full consideration in money
Decedent’s Interest (Sec. 85(A), NIRC)
or money's worth) by trust or otherwise, where the enjoyment thereof was subject at the
date of his death to any change through the exercise of a power (in whatever capacity
Ø To the extent of the interest therein of the decedent at the time of his death. exercisable) by the decedent alone or by the decedent in conjunction with any other
Ø It shall include the following: person (without regard to when or from what source the decedent acquired such power),
o Dividends declared by a corporation before death of stockholder although paid after to alter, amend, revoke, or terminate, or where any such power is relinquished in
death, if the decedent was living on the record date. contemplation of the decedent's death.
o Partnership profits even if paid after death of partner (2) For the purpose of this Subsection, the power to alter, amend or revoke shall be considered
o Proceeds of life insurance policy payable to a revocable beneficiary to exist on the date of the decedent's death even though the exercise of the power is
o Right of usufruct if transferable to the heirs subject to a precedent giving of notice or even though the alteration, amendment or
revocation takes effect only on the expiration of a stated period after the exercise of the
Transfer in Contemplation of Death (Sec. 85(B), NIRC) power, whether or not on or before the date of the decedent's death notice has been given
or the power has been exercised. In such cases, proper adjustment shall be made
representing the interests which would have been excluded from the power if the
Ø To the extent of any interest therein of which the decedent has at any time made a transfer, decedent had lived, and for such purpose if the notice has not been given or the power has
by trust or otherwise, in contemplation of or intended to take effect in possession or not been exercised on or before the date of his death, such notice shall be considered to
enjoyment at or after death, or of which he has at any time made a transfer, by trust or have been given, or the power exercised, on the date of death.
otherwise, under which he has retained for his life or for any period which does not in fact
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This is a transfer where the terms of enjoyment of the property may be altered, amended,
revoked or terminated by the decedent. It is sufficient that the decedent had the power to
revoke, though he did not exercise the power. In this case, the transferee is not free to exercise
acts of strict dominion.
Illustration:
o The transferor imposes restrictions such as when he sets a condition that the income will
still be attributable to him or to any other persons he designates.
o There’s a condition that when the transferee predeceases, the property reverts back to the
transferor.
o A transferred property to B to be held in trust for C. However, (1) without taking back the
property, A can change B; or (2) without taking back the property, A can change C; or (3) A
can take back the property anytime he wants.
Exception:
§ If there’s a waiver to exercise the power to revoke during the lifetime of the transferor. The
renunciation of the right to revoke must be express in another document.
§ When the transferor becomes incapacitated during his lifetime, his right to revoke is
SUSPENDED until such time he recovers from such incapacity.
Property Passing Under General Power of Appointment (Sec. 85(D), NIRC)
Ø To the extent of any property passing under a general power of appointment exercised by
the decedent: (1) by will, or (2) by deed executed in contemplation of, or intended to take
effect in possession or enjoyment at, or after his death, or (3) by deed under which he has
retained for his life or any period not ascertainable without reference to his death or for any
period which does not in fact end before his death (a) the possession or enjoyment of, or
the right to the income from, the property, or (b) the right, either alone or in conjunction
with any person, to designate the persons who shall possess or enjoy the property or the
income therefrom; except in case of a bona fide sale for an adequate and full consideration
in money or money's worth.
A power of appointment is the right to designate the person or persons who will succeed to the
property of a prior decedent. A power of appointment may be:
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o General Power of Appointment (GPA) – may be exercised in favor of anybody. In this case,
the property shall form part of the gross estate (GE) of the transferee upon his death.
o Limited/Special Power of Appointment (SPA) – must be exercised only in favor of a restricted
or designated class of persons other than the transferee. In this case, the property shall not
form part of the GE of the transferee since he merely holds the property in trust. The first
transferor will be the one subjected to donor’s tax or estate tax, whatever the case may be.
Illustration:
K transferred property to D with a provision that if D transfers the property, such transfer may
be in favor of any body. This transfer will be subjected to donor’s tax if done gratuitously during
the lifetime of K. Now, if D transferred the property to A upon his death, it shall now form part
of D’s GE.
Distinguished from:
K transferred property to D, with a provision that if D transfers the property, such transfer must
be in favor of P or R only. Since D can only transfer it to a restricted class of persons, what he
has is only a special power of appointment. This first transfer will subject K to donor’s tax if
transferred during his lifetime or estate tax if transferred upon his death. If D now transfers it
to P or R upon his death, it will not form part of his GE as he merely held such property as a
trustee for P or R.
Proceeds of Life Insurance (Sec. 85(E), NIRC)
Ø To the extent of the amount receivable by the estate of the deceased, his executor, or
administrator, as insurance under policies taken out by the decedent upon his own life,
irrespective of whether or not the insured retained the power of revocation, or to the extent
of the amount receivable by any beneficiary designated in the policy of insurance, except
when it is expressly stipulated that the designation of the beneficiary is irrevocable.
Life insurance policies must be taken out by the decedent himself. It will constitute part of the
GE if the beneficiary is:
(a) The estate of the decedent, his executor or administrator; or
(b) A third person other than those mentioned in (a) AND the designation of the beneficiary
is REVOCABLE.
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Under the Insurance Code of the Philippines, a designation of beneficiary is revocable, unless
stated expressly in the policy that the designation is irrevocable.
Estate Taxation vs. Insurance Law
The Insurance Code provides that the proceeds in a life insurance policy exclusively belongs to
the beneficiary, regardless of the designation; and the beneficiary is not obliged to turn over
such proceeds to the heirs of the decedent. This rule does not run in conflict with the rule in
estate taxation wherein we consider the designation before concluding whether such will form
part of the GE of the decedent or not. The insurance law merely dictates to whom the proceeds
will go. Even if the designation was revocable, the fact that the decedent is already dead, he
can no longer exercise his right to revoke and the beneficiary will now enjoy the proceeds. The
death rendered the designation irrevocable in the eyes of the insurance law. On the other hand,
the estate taxation considers the designation because it wants to see who is in control of such
policy during the lifetime of the decedent. If the designation is irrevocable, then the decedent
during his lifetime has already given the right to the proceeds to the beneficiary, which the
latter can already consider such as a vested right. Whereas, if the designation is revocable, the
decedent still has the control and the true ownership of the proceeds because he can anytime
change the beneficiary during his lifetime. IOW, he can still exercise his rights of ownership over
it.
Proceeds not taxable:
1.) Accident Insurance
2.) If the beneficiary is other than the estate, administrator, executor in which the designation
is irrevocable
3.) Proceeds of the life insurance covered by GSIS or SSS
4.) Proceeds of a group insurance policy taken out by the company for his employees
5.) Proceeds of life insurance payable to heirs of deceased members of military personnel
TN: In computing for the taxable estate of a decedent who is married, consider (1) the source
of the funds in paying for the policy, and (2) the property regime applicable, whether governed
by absolute community, or conjugal partnership of gains, or complete separation. If the funds
used were from the decedent’s exclusive property, then the proceeds will be considered his
exclusive property. On the other hand, if the conjugal or common funds were used, the ½ share
of the surviving spouse will be taken into consideration.
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Prior Interests (Sec. 85(F), NIRC)
Ø Except as otherwise specifically provided therein, Subsections (B), (C) and (E) of this Section
shall apply to the transfers, trusts, estates, interests, rights, powers and relinquishment of
powers, as severally enumerated and described therein, whether made, created, arising,
existing, exercised or relinquished before or after the effectivity of this Code.
Prior to 1997 amendment, there was no provision regarding these (B) – transfer in
contemplation of death, (C) – revocable transfer, and (E) – proceeds of life insurance.
Transfers for Insufficient Consideration (Sec. 85(G), NIRC)
Ø If any one of the transfers, trusts, interests, rights or powers enumerated and described in
Subsections (B), (C) and (D) of this Section is made, created, exercised or relinquished for a
consideration in money or money's worth, but is not a bona fide sale for an adequate and
full consideration in money or money’s worth, there shall be included in the gross estate
only the excess of the fair market value, at the time of death, of the property otherwise to
be included on account of such transaction, over the value of the consideration received
therefor by the decedent.
§ If the real property is classified as a capital asset, it will no longer be subjected to estate tax
kay di man alkansi ang government. The higher between the GSP or FMV of the property has
already been subjected to 6% CGT.
§ The transfer for insufficient consideration must fall under [DR. G]: transfer in contemplation
of death or revocable transfer or property passing under GPA; OW, it will be subjected to
donor’s tax.
§ Compare the FMV at the time of transfer with the consideration received to determine the
adequacy of the consideration. If found to be inadequate, compare the consideration
received with the FMV at the time of death. The excess of the FMV at the time of death over
the consideration will be included in the GE.
§ FMV = in an arm’s length transaction, the price that the seller who is willing to sell, but not
compelled to sell; and a buyer not compelled to buy, but is willing to buy
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Illustration: Property passing under GPA for Insufficient Consideration
K transferred property to D with a provision that if D transfers the property, such transfer may
be in favor of anybody. In this first transfer, K will be subjected to donor’s tax. Since under GPA
man ni na transfer, D can exercise all the rights of ownership. Wa man gi-restrict ni K si D kung
ka kinsa lang pwede itransfer ang property. During his lifetime, D sold the property which has
an FMV of P1M for P100k. So, transfer for insufficient consideration sya kay FMV is way higher
than the SP. Upon D’s death, the FMV of the property increased to P1.5M. The value that will
be included in D’s GE is the excess of the FMV of the property at the time of his death over the
consideration received. In this case, it will be P1.4M (1.5M-100k). Take note na if not because
of the fact na gi-transfer ang property to D under GPA saona, the transfer for insufficient
consideration by D would have been subjected to donor’s tax. The value would be the excess
of the FMV at the time of the transfer over the consideration received (P1M-100k = P900k).
Capital of the Surviving Spouse (Sec. 85(H), NIRC)
Ø The capital of the surviving spouse of a decedent shall not, for the purpose of this Chapter,
be deemed a part of his or her gross estate.
Amount received by heirs under RA 4917 (Retirement Benefits Act)
(Sec. 86 (A), par. 7, NIRC)
Ø Any amount received by the heirs from the decedent-employee as a consequence of the
death of the decedent-employee in accordance with Republic Act No. 4917: Provided, That
such amount is included in the GE of the decedent.
Requisites: (1-10-50 Plan)
o Benefits granted under this Act were availed only once
o The decedent has been in the service of the same employer for at least 10 years
o The decedent is not less than 50 years of age at the time of his retirement
o In accordance with a reasonable private benefit plan
ACQUISITIONS & TRANSMISSIONS NOT SUBJECT TO ESTATE TAX (Sec. 87, NIRC)
(F) The merger of usufruct in the owner of the naked title;
(F) The transmission or delivery of the inheritance or legacy by the fiduciary heir or legatee to
the fideicommissary;
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(F) The transmission from the first heir, legatee or donee in favor of another beneficiary, in
accordance with the desire of the predecessor; and
(F) All bequests, devises, legacies or transfers to social welfare, cultural and charitable
institutions, no part of the net income of which inures to the benefit of any individual:
Provided, however, that not more than thirty percent (30%) of the said bequests, devises,
legacies or transfers shall be used by such institutions for administration purposes.
The value of property in exemption (a), (b) and (c) need not be included in the GE anymore.
With regard to the property in (d), the value of the property will be included in the GE, and the
same value will be deducted from the GE, so that the net taxable estate from it will be P0. Why?
Because to be exempt, 2 conditions must be satisfied: (1) no part of the income of the
institution will inure to the benefit of any individual; and (2) not more than 30% of the bequests,
legacies and transfers will be used for administrative purposes. The satisfaction of the
conditions is subject to verification by the BIR. If the conditions are not satisfied the
transmission is taxable and the value of the property will be in the net taxable estate, and will
pay the estate tax.
ALLOWABLE DEDUCTIONS
I. Citizens or Resident decedent
A. Ordinary deductions [CULIT Pa Rin]
§ CULIT:
o Claims against the estate
o Unpaid mortgage or indebtedness
o Losses (casualty, robbery, theft or embezzlement)
o Claims against insolvent persons
o Taxes
§ Transfer for public use
§ Amount received by heirs under Retirement Benefits Act
B. A deduction of its own (as per KMA)
§ Vanishing deductions
§ Share of the surviving spouse in the conjugal/community property
C. Special deductions [FS / Financial Statements]
§ Family Home
§ Standard Deduction
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II. Non-resident alien decedent (diff: CULIT proportion; no FH & retirement benefits; SD amt.) o Duly notarized certification from the creditor as to the unpaid balance of the debt,
A. Ordinary deductions including interest as of the time of death.
§ Proportionate deduction for CULIT o Proof of financial capacity of the creditor to lend the amount at the time the loan was
§ Transfers for public use granted, as well as its latest audited balance sheet with a detailed schedule of its receivable
B. A deduction of its own (as per KMA) showing the unpaid balance of the decedent-debtor. If the creditor is a non-resident, the
§ Vanishing deductions executor/administrator or any of the legal heirs must submit a duly notarized declaration
C. Special deductions by the creditor of his capacity to lend at the time when the loan was granted, authenticated
§ Standard Deduction or certified to as such by the tax authority of the country where the non-resident creditor
is a resident.
Deductions which are deductible only when also included in the GE: o Statement under oath executed by the administrator or executor of the estate reflecting
ü Capital of the surviving spouse the disposition of the proceeds of the loan if said loan was contracted within 3 years prior
ü Amount received by heirs under RA 4917 to the death of the decedent.
ü Claims against insolvent persons
ü Transfers for public use B. Arises from purchase of goods/services [LBC CD]
o Documents evidencing the purchase of goods or service (sales invoice/delivery receipt
I. Citizens or Resident decedent or contract for the services)
o Duly notarized certification from the creditor as to the unpaid balance of the debt,
Claims Against the Estate including interest as of the time of death
o Certified true copy of the latest audited balance sheet of the creditor with a detailed
schedule of its receivable showing the unpaid balance of the decedent-debtor.
Requisites for Deductibility: o Certified true copy of the updated latest subsidiary ledger/records of the debt of the
§ The liability represents a personal obligation of the deceased existing at the time of his debtor-decedent.
death; o If the settlement is made through the Court in a testate or intestate proceeding,
§ The liability was contracted in good faith and for adequate and full consideration in money pertinent documents filed with the Court evidencing the claims against the estate, and
or money’s worth; the Court Order approving the said claims, if already issued.
§ The claim must be a debt or claim which is valid in law and enforceable in court;
§ The indebtedness must not have been condoned by the creditor or the action to collect As to the balance in your credit cards, the billing statement of account can be presented as
from the decedent must not have prescribed. proof.
TN: if the condonation happens after death, it can still be allowed as a deduction since the debt
is still existing at the time of death.
Unpaid Mortgage or Indebtedness
Substantiation Requirements:
Requisites for Deductibility:
A. Simple loan [PIC 3] § Value of the property, undiminished by such mortgage or indebtedness, is included in the
o Duly notarized debt instrument at the time the indebtedness was incurred, except for value of the GE at FMV.
loans granted by financial institutions where notarization is not part of the business § Deduction is limited to the amount of mortgage contracted bona fide and for an adequate
practice/policy of the financial institution-lender; and full consideration in money or money’s worth. This presupposes that the full amount of
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the proceeds of the loan goes to the mortgagor-decedent. If he only mortgaged his property
to accommodate another person, such will not be considered as indebtedness. In fact, this
is considered as a receivable. The net effect is 0 since the decedent has (1) a receivable from
the accommodated party and (2) a liability to the bank for the loan. (As a review, an
accommodated party is a party to an instrument for whose benefit an accommodation party
signs and incurs liability on the instrument. He is the person for whose benefit an
accommodation is made.)
Losses
Requisites for Deductibility: [SAD Cause Loss]
§ incurred during the settlement of the estate
§ arising from acts of God, such as fires, storms, shipwreck or other casualties; or from acts of
man, such as robbery, theft or embezzlement
§ not claimed as a deduction in an income tax return of the estate subject to income tax
§ not compensated by insurance or otherwise (if naa but the FMV of the property lost is
greater than the amount of the insurance proceeds, only the difference will be deductible.)
§ incurred not later than the last day for payment of the estate tax
Claims against Insolvent Persons
Insolvency = liabilities exceed assets; properties are no longer sufficient to pay one’s obligations
To be deductible, the full amount of the receivables must be included in the GE. However, the
deduction shall only include the uncollectible portion.
Taxes
Requisites for Deductibility:
§ accrued PRIOR to the decedent’s death
§ unpaid as of the time of death
The NIRC enumerated taxes that cannot be deducted, as follows: (a) income tax on income
received AFTER death; (b) property taxes NOT accrued BEFORE death; and (c) estate tax. Estate
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tax accrues after death, hence not deductible from the GE. However, in the case of a decedent
who was a citizen or resident of the Philippines at the time of death, there shall be a Philippine
estate tax payment on his properties within and outside the Philippines, and a foreign estate
tax payment on his properties outside the Philippines. In this case, the law allows a tax credit
to reduce the Philippine estate tax. However, the Philippine estate tax cannot be deducted.
Transfers for Public Use
These are dispositions in a last will and testament, or transfer to take effect after death, in favor
of the Government of the Philippines, or any political subdivision thereof, for exclusively public
purposes. To be deductible, the whole amount must be included in the computation for the GE.
Political Subdivisions of the National Government:
o provinces
o cities
o municipalities
o barangays
Vanishing Deductions (Property Previously Taxed)
Property may change hands within a very short period of time by reason of the early death of
the owner who received it by inheritance or donation. This subjects the property to a very heavy
burden in taxes, because the transfer tax is imposed on each transfer. To provide a relief, VD is
allowed to reduce the GE of the recipient of the inheritance or donation.
Requisites for Deductibility: [DILPIN]
§ Death – died within 5 years from receipt of the property from a prior decedent or donor;
§ Identity of the property – can be identified as the one received from the prior decedent, or
from the donor, or something acquired in exchange for it. It must be (1) the very same
property or (2) the value received in exchange for it. Example, if you received a car before
then you sold it for 500k, the 500k will be used as the value on which the VD can be claimed.
However, if you already spent the money for something else, let’s say a bike, you can no
longer claim VD on such property.
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§ Location of the property – must be in the Philippines; if such is previously situated abroad Formula:
and the first tax was imposed and paid there, then it follows that it cannot be considered as
a property previously taxed here in the Philippines. Value taken for PPT (LOWER)
§ Previous taxation of the property – estate tax on the prior succession or the donor’s tax on (Mortgages or liens paid by the present decedent)
the gift had been finally determined and paid; Initial Basis
§ Inclusion of the property – part of the taxable estate of the prior decedent, or of the taxable (IB/GE x Ordinary Deductions)
gift of the donor; Final Basis
§ No VD on the property was allowable to the estate of the prior decedent. X VD %
Vanishing Deduction
Computation
Illustration:
1. PPT Value – LOWER of: Mr. DILPIN, Filipino, and a resident of Cebu City, died on June 19, 2018, leaving a GE of P4M. Included in
o Value at the time of the prior decedent’s death or prior donation his GE is a parcel of land in Cebu City, and a car which he inherited from his mother, who predeceased
o Value at the time of the present decedent’s death him on Nov. 2, 2015, currently valued at P1.2M and P120k, respectively. The properties were previously
taxed for estate tax purposes at the value of: Land – P1M; Car – P200k, with a mortgage liability on the
TN: where the property referred to consists of 2 or more items, the aggregate of the item
land of P40k which was paid by Mr. DILPIN in 2016. His wife, Mrs. DILPIN, claimed the ff deductions:
by item lower of 2 values will be the initial basis. 1. Funeral Expenses – P60k
2. Initial Basis (IB) – the PPT value (1) will be reduced by the mortgage or lien on the 2. Judicial Expenses – P40k
property paid by the PRESENT decedent. This mortgage or lien should have been 3. Claims against the estate – P50k
included in the deduction from the GE of the PRIOR decedent or gift of the donor. 4. Unpaid taxes – P80k
3. The IB (2) will be further reduced by: 5. Family Home – P1M
Initial Basis
x Ordinary Deductions Compute the VD.
GE

4. The remaining balance will be multiplied by the corresponding percentage: Solution:

Value taken for PPT P 1,120,000
Mortgage paid (40,000)
% If received by inheritance or gift Initial Basis P 1,080,000
100% Within 1 yr prior to the death of the decedent (1.08M/4M x 130k) (35,100)
80% More than 1 yr but not more than 2 yrs prior to the death of the decedent Final Basis P 1, 044,900
60% More than 2 yrs but not more than 3 yrs prior to the death of the decedent VD % 60%
40% More than 3 yrs but not more than 4 yrs prior to the death of the decedent VD P 626,940
20% More than 4 yrs but not more than 5 yrs prior to the death of the decedent
How to compute for the period:
Year Month Day
2018 17 06 18 19
2015 11 02
02 07 17
TN: if silent as to who paid the mortgage, qualify your answer!
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Share of the Surviving Spouse in the Conjugal/Community Property - If FH is a co-owned property, the full amount of FH shall be included in the GE but the
amount that can be claimed as a deduction is only the portion the decedent owns
- If FH is a mortgaged property, both FH and unpaid mortgage can be claimed as
The property regime of spouses may be: deductions
• complete separation of property;
• conjugal partnership of gains; Effect of temporary absence
• absolute community; or Temporary absence from the constituted FH due to travel or studies or work abroad, etc. does
• any other property relationship. not interrupt actual occupancy. The FH is generally characterized by permanency, that is, the
place to which, whenever absent for business or pleasure, one still intends to return.
In the absence of such pre-nuptial agreement or if such is void:
(a) Marriages contracted before Aug. 3, 1988 – conjugal partnership of gains Decedent’s Interest
(b) Marriages contracted on or after Aug. 3, 1988 – absolute community There is no problem if the deceased is the head of the family. But if he is married and there is a
surviving spouse, take into consideration only the decedent’s interest. If the family home is part
o Conjugal or community property – include everything as part of the GE and deduct the ½ of the conjugal property of the spouses, divide the value by two first.
share of the surviving spouse later on before arriving at the net taxable estate.
o Exclusive property – not be included in the computation of the GE Illustration
Mr. X died in 2018, leaving the ff: (1) House – P10M and (2) Lot – P6M
Family Home
Case 1 Case 2 Case 3
House Exclusive of Mr. X (+) Common Common
Prior to TRAIN Law: Maximum Limit is P1M Lot Common Exclusive of Mrs. X Exclusive of Mr. X (+)
TRAIN: 10M
Case 1:
This is the dwelling house where the person and his family reside, and the land on which it is Gross Estate % of Ownership FH
situated. Within the meaning of “family” are the spouse, parents, ascendants, descendants, House 10M 100% 10M
brothers and sisters, who are living in the FH and who depend upon the head of family for Lot 6M 50% 3M
support. Total 16M 13M

This deduction from the GE shall be allowed when the FH is certified to as such by the Brgy. Value: 13M vs. 10M
Captain of the locality where it is located. This requirement makes the FH located abroad not
deductible since it cannot satisfy such requirement. Case 2:
Gross Estate % of Ownership FH
Decedent is married under absolute community or conjugal partnership of gains House 10M 50% 5M
Ø the deduction for FH is ½ of the FMV of the FH but must NOT exceed P10M. Lot 6M 0%
Total 16M 5M
TN: - There can be one FH only.
- The max limit of 10M is applicable to both spouses separately; not 5M each
Value: 5M vs. 10M
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Case 3: required to be filed under Section 90 the value at the time of his death of that part of the gross
Gross Estate % of Ownership FH estate of the nonresident not situated in the Philippines.
House 10M 50% 5M
Lot 6M 100% 6M Illustration
Total 16M 11M
Mr. X, decedent, married and resident of the Philippines, died on Sept 12, 2018, leaving behind
Value: 11M vs. 10M his family home, which is a conjugal property with an FMV of P30M. Other conjugal properties
are composed of real and personal properties amounting to P14M. In addition, he has exclusive
properties amounting to 5M. Decedent has an unpaid mortgage amounting to 1M, and unpaid
Standard Deduction
taxes of another 1M. Compute the taxable estate.

Prior to TRAIN Law: P1M; no SD for NRA decedents Exclusive Conjugal Total
TRAIN: P5M for resident OR citizens; P500k for NRA Conjugal Properties:
Purpose: to ensure that the heirs will receive something Family Home 30M 30M
Real & Personal Properties 14M 14M
Deductions for a Non-Resident, Non-Citizen (NRA) Exclusive Properties 5M 5M
Gross Estate 5M 44M 49M
Less:
Its allowable deductions are the same as that of a resident or citizen decedent EXCEPT:
Ordinary Deductions
§ No family home
Conjugal OD (2M) (2M)
§ No amounts received by heirs under RA 4917
Net Conjugal Estate 42M
§ SD is only P500k
Special Deductions
§ CULIT is not at full amount; only proportion
Family Home (10M)
GE, Philippines Standard Deduction (5M)
x World CULIT
GE, World Total Deductions (17M)
Net Estate 32M
Tax Credit for Estate Taxes paid to a Foreign Country (Sec. 86 (E), NIRC) Less: ½ share of SS 21M
The tax imposed in the Philippines shall be credited with the estate tax paid abroad. The amount Conjugal Property 44M
of the credit taken shall be subject to per country and global limitations. Conjugal Deductions (2M)
Net Conjugal Estate 42M
Requirement to disclose all his GE not situated in the Philippines (42M/2)
Purpose: to be able to apply the formula; naa bayay ‘World’ NET TAXABLE ESTATE 11M

Sec. 86 (D), NIRC TN: if silent, ordinary deductions will be treated as conjugal except transfers for public purpose
No deduction shall be allowed in the case of a nonresident not a citizen of the Philippines, unless (presumption: exclusive)
the executor, administrator, or anyone of the heirs, as the case may be, includes in the return
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ADMINISTRATIVE MATTERS
Notice of Death
TRAIN: no longer required
Prior to TRAIN Law: the executor, administrator or any of the legal heirs, as the case may be,
within 2 months after the decedent’s death, or within a like period after qualifying as such
executor or administrator, must give a written notice thereof to the Commissioner.
Bank Deposits of a Decedent
Before: if it is a joint account and one of the joint depositors died, ma-freeze ang account. The
other depositor may only be allowed to withdraw P20,000 for daily sustenance.
Now: Pursuant to RR 12-2018, 2 options are already given:
(1) Withdrawal of the amount
Ø This option is subject to 6% FWT and can be availed only within 1 year from the
decedent’s death. Because of the concept of FWT (‘final’), it only means that it will no
longer be subjected to any other tax. Hence, it will no longer be part of the GE which will
be subjected to estate tax.
(2) Present the Certificate Authorizing Registration (CAR)
The CAR is the proof that the estate tax has already been paid. The imposition of FWT will
not be applied if the deposit has already been duly included in the GE which was subjected
to estate tax.
Better Option
If the amount is less than the allowable deductions, it may be better if such will be included as
part of the GE because you can still avail of the allowable deductions before subjecting it to 6%
estate tax; as opposed to the 1st option where the whole amount will automatically and fully be
subjected to 6% FWT.
TN: Pursuant to a Memorandum Circular, ang isubject to 6% FWT will only be the percentage
share of the decedent in the deposited account because it will be unfair and prejudicial on the
part of the other depositor(s) to subject their shares to FWT during his/their lifetime as well.
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Filing of Estate Tax Return
If the ETR shows a GE exceeding P5,000,000, it shall be supported with a statement duly
certified to by a CPA containing the following:
1. Itemized assets of the resident or citizen decedent with their corresponding gross value at
the time of his death. In the case of an NRA, those situated in the Philippines;
2. Itemized deductions from gross estate; and
3. The amount of tax due whether paid or still due and outstanding.
§ Time for Filing – within 1 year from the decedent’s death.
§ The Court approving the project of partition shall furnish the Commissioner with a certified
copy thereof and its order within 30 days after promulgation of such order.
§ Extension of time to file – not exceeding 30 days; power to grant: Commissioner or any
Revenue Officer authorized by him in meritorious cases
§ Time for payment of the estate tax – pay as you file system
§ Extension of time to pay estate tax – not to exceed 5 years if settled judicially, or 2 years if
settled extrajudicially. Power to grant: Commissioner, if he finds that the payment would
impose undue hardship upon the estate or any of the heirs
§ Any amount paid after the statutory due date of the tax, but within the extension period,
shall be subject to interest but NOT to surcharge.
§ Request for Extension of Time, Installment Payment and Partial Disposition of Estate – filed
with the Revenue District Officer (RDO) where the estate is required to secure its TIN and
file the estate tax return. This request shall be approved by the Commissioner or his duly
authorized representative.
§ Liability for payment – primarily liable: executor or administrator; subsidiarily liable: heir or
beneficiary only to the extent of his share in the inheritance
In case of insufficiency of cash for the immediate payment of the total estate tax due, the
estate has the following options:
(1) Extension (NIRC)
(2) Cash installment (TRAIN)
(3) Partial disposition (TRAIN)
Purpose of these additional provisions under TRAIN: to make it easier for the taxpayer to
comply and for the BIR to collect estate tax.
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v Cash installment
§ Send a letter request to the Commissioner within 1 yr from the date of death of the decedent
§ The installments shall be made within 2 years from the date of filing of the ETR
§ The frequency (monthly, quarterly, semi-annually or annually – depends on the agreement
between the taxpayer and the Commissioner), deadline and amount of each installment shall
be indicated in the ETR, subject to the prior approval by the BIR
§ In case of lapse of 2 years without the payment of the entire tax due, the remaining balance
shall be due and demandable subject to the applicable penalties and interest reckoned from
the prescribed deadline for filing the return and payment of the estate tax
§ No civil penalties or interest may be imposed but nothing prevents the Commissioner from
executing enforcement action against the estate after the due date of the estate tax
v Partial disposition of estate and application of its proceeds to the estate tax due
§ A written request shall be approved by the BIR, which shall be filed together with a notarized
undertaking that the proceeds shall be EXCLUSIVELY used for the payment of the total estate
tax due
§ Before, you file the appropriate tax return and pay the corresponding estate tax before the BIR
will issue a CAR. There will only be 1 CAR for all the properties. But usually, what happens is
that decedent only owns real properties. So, these are not liquid. Consequently, no enough
cash to pay the estate tax. That is why now, the BIR found ways through the RR for the estate
tax to be easily settled: the new provisions on the 6% FWT if you withdraw the bank deposits
of the decedent who is your co-depositor, and the new provisions on cash installment and
partial disposition of the assets. The RR states that this partial disposition covers both real and
personal properties of the decedent. If the BIR approves this request of partial disposition, it
will issue 1 CAR for that particular asset that will be sold kay kinsa may buyer ganahan mupalit
kung di ma-transfer sa iyang title diba. Remember that one requisite for a valid transfer of
ownership kay CAR baya. Under the TRAIN Law, once the partial disposition request has been
approved by the BIR, bayaran ni taxpayer ang estate tax pertaining to that asset partially
disposed and the BIR will now issue a CAR pertaining to that particular asset only. But it’s not
the same as the manual CAR before. Now, the BIR will issue the so-called electronic CAR (ECAR).
The usual manual CAR has an expiry date (1 yr man siguro) so dapat ka magpa-revalidate. But
now, as explained by the RDO, ang system sa BIR will be linked with the system of the ROD. So
once you pay the tax, iclick sa BIR ang print button but way paper mugawas, pero upon clicking,
your ECAR may be viewed already under the system of the ROD. What will be given to the
taxpayer kay reference number nalang. Ig adto sa ROD, mao nalang imu ipakita.
§ The computed estate tax due shall be allocated IN PROPORTION to the value of each property.
The rule is that the BIR will compute the estate tax of all the assets. The usual formula will be
used. Di kay mu-compute ug estate tax sa each property na ipartially dispose, na tagsa2x-on
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jud kay once lang pwede ma-claim ang deductions. Ma-alkansi ang BIR if every time you
dispose, mag compute ug estate tax kay maka-claim kag deductions (ex. 5M SD) sa each
property.
§ Upon payment of such proportion of the estate tax liability, you will be given a tax clearance
and ECAR pertaining to that asset.
§ In case of failure to pay the total estate tax due out from the proceeds of the said disposition,
the estate tax due shall be immediately due and demandable subject to the applicable
penalties and interest reckoned from the prescribed deadline for filing the return and payment
of the estate tax.
Can the BIR attach the properties of the estate in case of failure to pay estate tax?
Yes. This is a remedy on the part of the BIR. However, the BIR chooses not to avail this because
it is too costly and timely. Before it can attach, it has to have a formal assessment first. This
would require examination of the the properties involved, adto pas legal division, etc. So, better
remedies are the additional provisions under the TRAIN Law.
Place of filing the return and payment of the tax (RR 12-2018)
o Resident decedent – TIN will be secured from the RDO where the decedent was domiciled
at the time of his death. ETR must be filed and the corresponding estate tax be paid with:
ü the Accredited Agent Bank (AAB) or having jurisdiction on the place
ü Revenue District Officer or where the decedent was domiciled
at the time of his death
ü Revenue Collection Officer
o Non-resident decedent – TIN will be secured from and the ETR be filed in:
ü RDO where the executor or administrator is registered
ü RDO having jurisdiction over the executor or administrator’s legal residence – If the
executor of administrator is not registered
ü Office of the Commissioner through RDO No. 39-South Quezon City – without executor or
administrator in the Philippines
TN:
o The foregoing provisions notwithstanding, the Commissioner of Internal Revenue may
continue to exercise his power to allow a different venue/place in the filing of tax returns.
o The TRAIN Law only added the provisions on installments. As regards to other rules in filing,
still same rules in NIRC.
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to the value added to such goods properties or services by the seller, transferor or lessor.
VALUE ADDED TAXATION (CIR vs. Seagate Technology)
§ percentage tax – Imposed by law directly not on the thing or service but on the act (sale,
For self-employed individuals earning income purely from self-employment or practice of barter, exchange, lease, importation, rendering service).
profession, whose gross sales/receipts and other non-operating income does NOT exceed the § excise tax – a tax on the privilege of engaging in the business of selling goods or services or
VAT threshold of 3M shall have the option to avail of: in the importation of goods but unlike excise, it is not applied only to a few selected goods.
• GITR; or § ad valorem tax – the amount is based on the gross selling price or gross value in money of
• 8% tax on gross sales or receipts and other non- operating income in excess of P250,000.00 goods or and services.
in lieu of the GITR and the percentage tax
2018 TN: a zero-rated transaction is different from a VAT-exempt transaction because a zero-rated
transaction is described still as a VATable transaction, hence input tax can be claimed, as
Jan March June Oct Dec opposed to VAT-exempt transactions where there are no output and input taxes. If the supplier
passes the VAT to you and the transaction is VAT-exempt, cost-deduction method will be applied
1M 1.5M .5M 2M (include it in the purchases)
Non-VAT VAT
History
In April 2019, upon filing for the annual income tax return (ITR), the taxpayer may no longer § EO No. 273 – effectivity: Jan. 1, 1988
avail of the 8% option. The GITR must be used and the income tax paid from January to October - During this time, the constitutionality of the imposition of VAT was questioned.
using the 8% option may be claimed as tax credit. Moreover, within 1 month from the time you § Governed by RA 8424 (1997 Tax Code) as heavily amended by RA 9337 (EVAT Law) on May
exceeded the VAT threshold, you are already mandated to pay the corresponding VAT. IOW, in 11, 2005, RR 16-2011, RR 3-2012, RA 10963, RR 13-2018
April 15 2019, what will be reflected in your return will be: - ‘Expanded’ VAT (EVAT) – those transactions which were previously not subjected to VAT
o Income Tax = GITR (cannot avail 8%); and are now subjected to VAT. Controversial ning RA 9337 because the main author of this
o Business Tax = Jan-Sept (3M * OPT%); Oct-Dec (2M * 12%VAT) law is Sen. Ralph Recto. When the VAT law expanded, it included electricity, coal,
gasoline. So, there was really an increase in the prices of the commodities. So syay gi-
What is VAT? blame jud.
The value-added tax (VAT) is a tax on consumption levied on the sale, barter, exchange or lease § February 2006 – VAT rate was increased from 10% to 12%
of goods or properties and services in the Philippines and on importation of goods into the - During this time, famous ang question WON the President (Arroyo’s term) can increase
Philippines. (Sec. 4. 105-2, RR. 16-05) the rate. Was it a valid delegation of the legislative power? Yes. The SC ruled that there
was a valid delegation because the Congress under RA 9337 laid down the criteria for the
Nature and Characteristics President to be able to increase it to 12%. The President did not exercise her discretion,
§ indirect tax – liability to pay is on the seller; burden may be shifted or passed on to the buyer. rather, she followed what the legislature has already laid down. There was substantive
§ Viewed broadly, the VAT is a uniform tax ranging, at present, from 0% to 12% levied on (1) and procedural due process.
sales of goods or properties, (2) sales of services and (3) importation of goods to the Phil. (1) § Effective Jan 1, 2018 – VAT threshold is increased from P1,919,500 to P3M of gross sales or
and (2) must be in the ordinary course of trade or business and must happen here in the gross receipts.
Philippines while (3) need not be in the ordinary course of trade or business. The tax is - If your gross sales or receipts during the year exceeds this 3M threshold, you are now
imposed as they pass along the production and distribution chain, the tax being limited only mandatorily covered under the VAT system. You can now be held liable for VAT even if

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you did not register. On the other hand, if you did not exceed the threshold, you are not
subject to VAT unless you voluntarily registered under the VAT system.
Introduction to VAT
§ VAT rates: 0% and 12%
§ VAT Law adheres to Cross Border Doctrine / Destination Principle
- These terms are used interchangeably under the concept of VAT na kung di nimu i-
consume here in the Phil, then you will not subject it to VAT. But technically, there’s a
distinction:
o Cross Border Doctrine – gives more emphasis to the territorial jurisdiction of the
Philippines. If the goods or properties go out of the jurisdiction of the country, it
should not be subjected to VAT. The only exceptions are the economic zones and
the free port zones kay even if it’s within the physical territory of the Phil, you do
not subject them to VAT. These zones are by fiction of law deemed as foreign kay
outside the customs territory naman sila.
o Destination Principle – gives more emphasis on the place where the goods or the
properties will be consumed.
How is VAT computed?
Computation: Credit (invoice) Method
Output Tax – Input Tax = VAT Payable (Tax refund / tax credit / carry-over)
Amount of VATable receipts/sales * 12% = Output Tax
Amount of VATable purchases * 12% = Input Tax
So, it is possible that the input tax is greater than the output tax. It is possible that during the
taxable year, greater ang purchases than your sales. This usually happens in startup companies
na mag overpurchase then wa pay regular customers. Another example would be those
transactions that are zero-rated. That’s why when it comes to VAT refund or VAT credit, these
are more common to PEZA and free port companies.
Expanded Coverage of VAT
1. Non-Food agricultural, marine, and other forest products in their original state by the
primary producer or owner of the land (ex. sale of flowers, lumbers, etc);
Before RA 9337, both food and non-food ang exempt. Now, food nalang. If you are asked
if the transaction is VATable or not, you just don’t look at the product. Consider also if it
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exceeded the VAT threshold and in case it does not exceed, consider the fact of voluntary
registration.
2. Cotton and cotton seeds in original state;
3. Coal and natural gas in whatever form or state;
4. Petroleum products including raw materials for their production;
5. Sale by the artist of his works or art, literary works musical compositions and similar
creations, or his services performed for the production of such works;
- This amounts to ordinary course or trade of business.
6. Services by doctors (PRC) & Lawyers (IBP) (vs. Sec. 109 G &I);
- Not automatic ha. Don’t forget the VAT threshold!
7. Common carriers by air and sea as to transport of passengers within the Philippines;
- If by land, subject to OPT. Take note that VAT and OPT are mutually exclusive.
8. Toll road operations (Timbol vs. Sec. of Finance)
9. Electricity from “generation,” “transmission,” and “distribution” companies;
10. Sale by “electric” cooperatives including importation of machines and equipment, and
spare parts;
11. Effectively zero-rated exports upon the implementation of the enhanced VAT refund
system
- Under the TRAIN Law, provided the 90-day enhanced VAT refund system takes effect,
these will already be subject to 12% VAT.
- Prior to TRAIN, these are subject to 0%. These are the exports na wala ni gawas actually
sa Phils. These are the ‘deemed exports’ because the sales transaction happens within the
economic zone or within the free port zone. This is what you call as the intra-zone sales.
For example, ang finished product is furniture. There are some PEZA-registered
companies located within, ang gisell nila are raw materials of the furniture. So ang
baligyaan nila kay ang PEZA entity which manufactures furniture. Since it is considered as
sale in intra-PEZA, 0%. But the DOF is saying na wa man nah nigawas, so dapat subject
sya sa 12%. Mao nang naa sa TRAIN Law. But in the Trabaho Bill, naa na say provisions
na ‘except those located in the economic or free port zone.’
Tax on value added of taxpayer
§ Value Added – [Sales-Purchases] both are subject to VAT during the taxable quarter.
§ The taxpayer (seller) determines his tax liability by computing the tax on the gross selling
price (GSP) or gross receipt (GR) [output tax], and subtracting or crediting the earlier VAT on
the purchase or importation of goods or on the purchase of service [input tax] against the
tax due on his own sale.
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o Sale of goods – sales invoice
o Sale of service – official receipts
Broad-based tax on consumption of goods, properties and services in the Philippines relate
with “Destination” principle – tax imports, zero-rated exports
When it comes to importation, even it is not in the ordinary course of trade or business, you
subject it to VAT kay nisud man nas Phils. Presumption, i-consume diri. What if gi-import ni
company but then gi-use lang as raw material then the finished output will be subsequently
exported? In the NIRC, initially, you subject it to VAT. But if it is eventually exported, there is
this provision on the so-called ‘drawback’ which means you can get a refund from the
government for that portion that was previously subjected to VAT.
Tax is collected thru the tax credit method (also, invoice method):
§ Output Tax on Sales – Input Tax on Purchases
§ This is a peso for peso deduction
§ We don’t follow the “cost deduction method” – forms part of the cost; not peso for peso
kay imultiply pa sa tax rate
No cascading of tax in VAT system
§ “Cascading” – a tax on tax
§ GSP and GR definition excludes VAT passed on by the sellers to the buyers (PP vs. Tan)
§ X sells to Y then sells to Z. If X sold the product at P112, inclusive of VAT, ang patungan ra ni
Y dapat is ang P100 (exclusive of VAT), not P112 to avoid cascading. That’s why in the OR
and SI, there must be a separate indication of the value of the VATable sales and the 12%
VAT. Mao ni ang weakness na nakita sa 3% sales tax before because at that time, way
separate indication sa tax base ug sa tax. So makabuot2x ra si seller pila ra iya i-remit sa BIR.
§ Allows the credit of “input tax” against “output tax” applying the Principle of Recoupment
Tax – in effect, the VAT payable only pertains to the VAT of your profit margin.
§ Hence, it is not an argument against VAT that it increases the price of the goods or services
being sold because all taxes in business are passed on by the sellers to the buyers.
“Tax-inclusive method”
§ Adopted by the Phil
§ To get the VAT = Total Invoice amount * 3/28
§ The price displayed in public should include already the 12% VAT.
§ VAT is deemed included in total invoice amount in VAT invoice or receipt
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Indirect tax
§ Aspects of taxation: (1) Impact of taxation – seller; (2) Incidence of taxation – final consumer
§ Forward passing – Final consumer pays the tax. This happens when there’s a seller’s market.
The demand is greater than the supply. The products involved are usually basic necessities.
§ Backward passing – Seller pays the VAT. There is a buyer’s market wherein the supply is
greater than the demand or it involves luxurious products such as high-end machineries para
maka-attract sa market.
VAT is regressive!
In the case of Tolentino vs. Sec. of Finance, the petitioner is saying that VAT Law should be
invalidated because it is regressive in the sense that if I am a poor Filipino, 12% feels material
to me but if datu ko, it is immaterial. So, it is regressive insofar as the effect of the imposition is
concerned. If you go by the literal definition, VAT is not regressive because it literally means
that tax rate increases as the tax base decreases which is not clearly the case in VAT. But the SC
agreed that such is regressive because of its EFFECT to the taxpayers. Even though it agreed
with the petitioner, it ruled that it is not enough to invalidate the VAT Law. Resort to indirect
taxes should be minimized but not avoided entirely because it is difficult, if not impossible. In
the case of VAT, the law minimizes the regressive effects of this imposition by providing 0-rating
or exemptions to certain transactions. The SC is like saying na kung pobre ka, don’t eat at
restaurants kay maimposean kag VAT. If di ka ganahan makabayad ug VAT, paglutos inyo! Don’t
be confused sad why VAT is imposed on those products you buy in Rustans like fishes in their
original state, because VAT is imposed not on the fish in its original state, but on the service,
ambiance, etc.
VAT Transactions
§ 12% - transaction is taxable and rate imposed is 12%
§ 0% - transaction is taxable and rate imposed is 0%. Hence, there is no resulting output tax.
§ Exempt – transaction is not taxable. No output tax is computed.
Difference 12% VAT 0% VAT Exempt
Seller’s liability to Seller charge 12% Seller charge 0% VAT Seller does not
VAT VAT to customer to customer charge VAT to
customer
Treatment of input Can recognize input Can recognize input Cannot recognize
tax tax on VAT charged tax on VAT charged input tax on VAT
to him by his to him by his charged to him by his
suppliers suppliers suppliers – input
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treated as part of the
cost of goods or
service purchased
TAXABLE TRANSACTIONS
1. Sale, barter, exchange or lease of goods or properties (real or personal) or similar
transactions, in the course of trade or business;
§ Regular conduct including incidental but not isolated transaction whether non-stock,
non-profit or government entity (Sec. 105)
o Regular Transaction – day in day out transaction; without such, the business will not
exist
o Incidental Transaction – not day in day out transaction but necessary to accomplish
your regular transaction; without it, it will cause great inconvenience to the business
o Isolated Transaction – nothing to do with the business; one-time transaction
§ CIR vs. Magsaysay Lines Inc.: This case involves sale of ships or vessels. Magsaysay Lines’
normal course of business is shipping. However, there was this privatization law during
the time of Ramos, and the company had no other option but to sell out some of its
vessels. BIR is saying that such involved a sale of ordinary assets so it should be subjected
to VAT. Magsaysay Lines argued that it should not be the case because this is pursuant
to a law. If not because of the law, they would not have sold it out. The SC ruled in favor
of Magsaysay Lines. It is neither a regular nor an incidental transaction, rather an isolated
transaction. “Course of business” is what is usually done in the management of trade or
business. What is clear therefore is that “course of business” or “doing business”
connotes regularity of activity.
§ Power Sector Asset and Liabilities Management Corporation vs. CIR:
Is the sale of power plants by PSALM to private entities subject to VAT? No. Under the
EPIRA Law, PSALM – a GOCC was created to manage the orderly sale, disposition, and
privatization of the NPC generate assets and real estates and liquidate all of NPC’s
financial obligations. PSALM is not a successor-in-interest of the NPC; hence, the repeal
of NPC’s VAT exemption does not affect PSALM. In any event, the sale of the power plants
is not in pursuit of a commercial or economic activity but a governmental function
mandated by law to privatize NPC generation assets. As such, the sales of the power plant
are not within the regular course of business condition under Section 105 of the NIRC.
§ Mindanao II Geothermal Partnership vs. CIR/Mindanao: This involves a sale of Nissan
patrols. The Nissan patrols are used by the power plant for business purposes. Some were
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sold and the BIR subjected it to VAT because they are considered as ordinary assets of
the company and the threshold was exceeded. The company argued that these are
capital assets and what is present is an isolated transaction. Their main business involves
conversion of steam to electricity, not sale of Nissan patrols. The SC ruled that this was a
VATable transaction because the Nissan patrols are ordinary assets because the company
use it in their trade or business. In fact, such were included as PPE in the audited FS of
the company and were subjected to depreciation. Because of these and the fact that
there’s no special law requiring them to sell these patrols, the transaction is subject to
VAT.
Transactions covered by VAT
VAT covers transactions which are made “in the course of trade business.” The term “in the
course of trade or business” means the regular conduct or pursuit of a commercial or economic
activity, including transactions incidental thereto, by any person regardless of WON the person
engaged therein is a non-stock, nonprofit private organization (irrespective of the disposition
of its net income and WON it sells exclusively to members of their guests), or government
entity. (Sec. 4. 105-3, RR 16-05)
Determinants
§ “Incidental Transactions”
§ Incidental – something else as primary; something necessary, appertaining to, or depending
upon another, which is termed the principal
Isolated vs. Incidental Transactions
“in the course of trade or business”
o Frequency – regularly conducted
o Purpose – pursuit of a commercial or economic activity
§ Interest income on loans – VATable (CTA Case No. 8024, Waterfront Philippines Inc. vs. CIR)
§ Property, Plant & Equipment (PPE) – VATable (Mindanao II Geothermal Partnership vs. CIR)
Incidental Sales
§ The sale of an asset purchased and used in the furtherance of the business is an incidental
sale. – classified as PPE. PPEs are tangible assets held for use in the production or supply of
goods/services or for administrative purposes and with useful life of more than one period.
(PAS 16)
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Sale of Real Property (Ordinary Assets)
If capital asset is involved, you don’t subject it to VAT because it presupposes that it is not in
the ordinary course of business. If ordinary asset, di sad automatic na i-subject to VAT. Check
first if it exceeded the VAT threshold. If it exceeded, refer to Sec. 109 whether it is included in
the exempt sale of real property. Granting that it is an ordinary asset not exempted, subject sya
to VAT but the collection of VAT depends on the manner of payment insofar as the real property
is considered. It can be on:
i. Cash basis – entire selling price is taxable in the month of sale
ii. Installment plan (initial payment is 25% or less of GSP) – VAT on every installment
payments including interest and penalties (actual/constructive receipt)
iii. Deferred payment basis (initial payment exceeds 25% of GSP) – same as cash basis
2. Sale of services or similar transactions in the course of trade or business
It must be in the course of trade and business. NIRC did not provide for a definition of service,
rather it merely gives an enumeration of what is covered by the sales of service.
§ Lease/rent exceeding the exempt amount;
- Ex. Lease of residential units where gross receipts from rentals exceed 15k per month per
unit shall be subject to VAT if the aggregate annual gross receipts (GR) exceed 3M. OW,
the GR shall be subject to 3% percentage tax under Section 116 of the Tax Code.
§ Dining in restaurants
§ Lease of motion picture, films, discs (only the lease, it excludes showing or exhibiting the
film as it becomes subject to amusement tax)
- Only lease is considered vatable because the actual showing of the movie is already
subject to amusement tax under OPT. That’s why if muadto mo sa sinehan, they don’t
collect 12% VAT but OPT known as the amusement tax. But the companies like viva films,
star cinema, if they lease out their motion pictures to these cinemas, then that is
considered VATable sale of service.
§ Services of domestic carrier by air, sea, land (for land: if persons – 3% OPT; if cargo – 12%
VAT)
§ Sale of Electricity (as discussed under the E-Vat Law) is subject to VAT (generation,
transmission, etc.)
§ Non-life insurance
- Life insurance is not subject to VAT since this is already covered under OPT provision. It
may also be subjected to Documentary Stamp Tax (DST) for the entire insurance policy.
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Exception to rule on regularity: Service rendered by Non-Resident Persons – always treated as
“in the course of trade/business” hence VATable. Even if isolated-vatable. (Sec 105)
- If it is rendered by a non-resident person, that is considered as automatic as in the course
of trade or business, therefore, VATable, WON in the course of trade or business or even
if for a very short period of time.
- When we say VATable, it does not automatically mean nga subject na siya to 12% VAT. It
MAY be subject to 12% VAT because other than ascertaining nga musulod sya anang type
of transaction, we have to consider pa sad if ni-exceed siya sa 3M na threshold.
- Example: Nag concert si Dua Lipa diris Pinas, if mu-exceed ang proceeds sa threshold, it
is NOT subject automatic to 12% VAT because that is more on amusement tax. But if let’s
say for example, a service is rendered by a consultant who is a non-resident person in the
country, nya the proceeds from that service he rendered exceeded the threshold, then
he is now subject to VAT even if it is just an isolated transaction.
- This service rendered by the non-resident person is more or less the concept of
importation, although ang importation lang kay limited to goods and properties because
you cannot import service. The person who must render the service must come here to
the country.
- HOWEVER, there’s a possibility that it will not still be subject to VAT especially if the
country of residence of that NRP has a treaty with the PH and in that treaty, it is specified
nga ang business income niya from the service is exempt from both income tax and VAT.
But in the absence of application for a ruling, that can be considered as VATable sale of
service.
Summary:
GR: It must be in the ordinary course of business or trade.
EXC to the regularity: even if isolated transaction, if the one rendering the service is a non-
resident person.
CIR v. Sony Philippines Inc. GR. No. 178697, Nov 17, 2010:
§ Sony Phil engaged the services of several advertising companies. Due to Sony Phil’s dire
economic conditions, Sony Int’l Singapore (parent company) handed Sony Phil a dole-out to
answer for the expenses payable to the advertising companies. Because of this dole-out, the
book value of Sony PH increased. This was treated by the BIR as additional revenue or
additional receipts on the part of Sony PH. It considered the dole-out as part of its incidental
course. It was then assessed with deficiency VAT. In defense, Sony PH argued that there
should be no VAT because there was no actual sale between Sony PH and Sony SG.
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§ RULING: In resolving this, we should ascertain first if musulod ba sya sa 3 VATable
transactions. The Supreme Court ruled that the dole-out or subsidy from the Singaporean
company to the Phil Company neither constituted a sale of goods or properties nor sale of
services. In this case, the BIR just made presumptions. BIR must have based on factual basis
duly supported by the bureau, not just mere presumptions. If it’s just based on
presumptions, no matter how logical they are, that defeats the due process requirement
under the constitution. If SC would allow this VAT imposition in this case, it would
tantamount to undue taking of property.
3. Importation of goods WON in the course of trade or business
§ Only importation of goods/properties NOT service.
- How can you import a service without bringing here to the country the person who will
render the service? That’s why when it comes to importation of service, adto nimo sya
isulod sa sale of service exception to the rule on regularity. Mao to nga the service
rendered by NRP is considered vatable sale of service, WON in course of trade or business
§ VATable WON made in the ordinary course of business.
- pursuant to the destination principle; the goods or properties will go inside our territories
so ang presumption iconsume na nato dri sa PH.
§ Exempt importation – personal household effects of balikbayan or to resettle in the
Philippines with exceptions.
Sale of goods and properties
TAX BASE: Gross Sales
PROOF: Sales Invoice
Sale of service
TAX BASE: Gross Receipts
PROOF: Official Receipt
Importation
TAX BASE: Landed Cost – this usually includes the cost of shipping, bringing the goods to the
warehouse, etc.
PROOF: BIR Form No. 32 or the Import Entry Declaration
So again, there are different tax bases and substantiation or documentation requirements
among these three taxable transactions. These proofs are required for the availment of the
input tax.
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Two cases of tax free Importations:
1. Importation of tax-free product regardless of the status of the importer; subsequent sale
is still vat exempt.
Example: Once you import rice, that would not be subject to VAT because that is considered as agricultural
food product in its original state. If you’re going to sell that to somebody else, that is also not subject to VAT
because the exemption is on the product itself.
2. Importation of taxable products but exempted due to status of VAT-exempt importer;
subsequent sale to a VATable buyer is subject to VAT. This is true WON made in the course
of trade or business.
It can be exempt from VAT temporarily because the one importing it is exempted from VAT. But it would be a
different story if the product is VAT-taxable but ang VAT-exempt kay si importer (for ex. PEZA-registered
companies). These PEZA entities are subject to 5% on their gross income earned in lieu of all taxes (inc. VAT).
Lets say for example, a Peza-registered company imported a VAT-taxable machinery. Initially, the importation
would be exempted from VAT since the importer is VAT-exempt. However, once that importer sells the
product to somebody who is located in the customs territory or outside of the economic zone, VAT will now
be imposed. This sales transaction of a VAT-taxable product from a PEZA company to a company located in the
customs territory is what we call technical importation.
TECHNICAL IMPORTATION – a company located in a special economic zone or located in a free port zone will
sell a taxable product to somebody who is located in the customs territory. Since it is considered as importation
WON it is in the course of trade or business, then 12% vat should be collected (don’t forget the threshold).
Customs territory – within the jurisdiction of the bureau of customs; outside of the economic zone.
If the product is exempted, then we go to the first, even if the importer is also exempted.
TRAIN 1: 12% VAT will already be imposed (1) for every sales transaction intra-zone – within the PEZA or within
the economic or free port zone; and (2) for every sales going to the customs territory. Although refundan lang
daw sa govt tong intra-zone transactions within the period of 90 days. This system is called the enhanced VAT
refund system, which is supposed to start next yr. Sa karon kay only sales going to the customs territory are
subject to 12% VAT man. Kadtong intra-zone, exempt. FYI, not all PEZA-registered companies mu-export. There
are small and medium PEZA companies which produce the raw materials, then sell it to big companies within
the zone which are the ones na mag-actual export. So, murag na-alkansi ning mga small and medium na
supplier sa raw materials sa mga companies na muexport sa finished products.
When subject to VAT?
GR: (1) Persons whose gross annual sales or receipts during any year or in any 12-month period
exceeds the threshold (3M) OR (2) even if sales or receipts do not exceed but REGISTERED under
the VAT system.
Rule:
§ If VAT-registered: subject to VAT, regardless of amount
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§ If not: then Mr. Lloydie will be subject to VAT. However, the proceeds from the operation of jeepney
- Look at the transaction if musulod sa 3 taxable transactions shall not be included in the aggregation because it is subject to OPT. the nature of business will
- If yes, look at the threshold (3M) – subject to VAT not matter because if it is sole proprietorship, insofar as the BIR is concerned, you only have 1
TIN for the sole proprietor and when it comes to the filing of the ITR of the sole proprietor i-
Persons liable to VAT aggregate na nila ang sources of income from self-employment.

1. Seller – any person who, in the course of trade or business Corporation with branches
- Sells, barters, exchanges, leases goods or proeprties subject to VAT A corporation has a head office (HO) in Cebu City. The following are its branches: (1) Talisay
- Renders services subject to VAT Branch, generating 1M receipts in sale, (2) Liloan Branch, 1M, and (3) Consolacion branch, 2M.
Is the corporation-HO subject to VAT?
2. Importer Yes, because the accumulated proceeds of all its branches already exceeded the threshold. In
- He is the statutory taxpayer, not the seller. Since the seller is located abroad, he is beyond determining the threshold everything will be based with the aggregate amount of the receipts
the jurisdiction of the BIR. because they are considered as one entity only. Even though each of the branch will have their
- Importer is engaged or not engaged in business own TINs (their TINs will be based on the TIN of the HO; naa lang nay -001, depending ikapila
- Importation is to be used for business or non-business/personal purpose. sya na branch), all will be aggregated because when it comes to tax reporting for these
branches, it will be consolidated to the HO. Although they will have their own filing in their
Why the need to determine who is the statutory taxpayer? respective RDOs (location of the branch), eventually that will be consolidated with the HO.
The BIR runs after the statutory taxpayer if there is no remittance of 12% VAT. Moreover, only
the statutory taxpayer can claim refund for erroneous collection of tax, carry over, tax credit. Parent-Subsidiary
They are the proper claimants even if the final consumers are the ones actually being burdened The personality of the subsidiary is considered independent from the personality of the parent.
by such imposition. So in that in case, tax liabilities will be separate and distinct for each subsidiary company. Dili
na i-aggregate ang GR or GS ni subsidiary company to determine if ni-exceed na sya sa
VAT Threshold threshold. Subsidiary companies have their different TINs and different registration with the
Before TRAIN: P1,919,500; After TRAIN: P3M BIR.
Other than transactions which are VAT-exempt:
§ Gross annual sale of goods/properties; or Franchise
§ Gross receipts from performance of service; or The franchisor and franchisee have different tax reports. The franchisor, for example, reports
§ Landed cost of the property imported its franchise fees to franchisees as part of its sale of service. As to the franchisee, if magpa-
register siya as sole proprietor, different sad iyahang recording of gross sales/receipts.

Sole Proprietorship Transactions deemed sale (Section 106, NIRC)

A sole proprietor, Mr. Lloydie, has many businesses: retail or sale of goods and properties, sale
of services, and operator of jeepney. If the proceeds from each business amounted to 2M each, ‘Deemed’ presupposes that there is no actual sale of goods that took place, but such transaction
a total of 6M, what are the tax liabilities? is subject to VAT. The rationale is to recapture the VAT that was already claimed as input tax.
To ascertain whether a sole proprietor is subject to VAT, the aggregate of all VAT taxable
transactions will be considered. Since in this case, the proceeds (4M) from the two VAT taxable
transactions (retail or sale of goods & properties and sale of services), exceed the 3M threshold,
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Example: 10 pairs of slippers were purchased; but only 8 pairs were sold, while the other 2 were
only donated. The output vat will only be good for 8 pairs, but the input VAT claimed is for 10
pairs. So, without this provision deemed sale, alkansi ang gobyerno.
Sec. 106. Value-Added Tax on Sale of Goods or Properties:
(A) Rate and Base of Tax – there shall be levied, assessed and collected on every sale, barter
or exchange of goods or properties…
A transaction may be subject to VAT even if there was no actual sale of properties. [SO 3Cs]
1. Transfer, use or consumption not in the ordinary course of trade or business of goods and
properties originally intended for sale or for use in the course of trade or business;
Donations or gifts
In general, VATable, unless exempt.
§ If OA of the donor, the same shall be considered deemed sales subject to VAT
§ Corresponding input VAT attributed to the VAT portion of the cost of the donation must be
deducted from the accumulated input VAT of the donor.
§ Exempt if donor or donated properties are VAT-exempt {BIR Ruling [DA-(DT-016)116-10]}
The usual situation is when the owner withdraws the goods from his business for personal use or for donation. For
example, the business of the taxpayer is into baking. He took some of their inventories for the preparation sa birthday
sa iya anak. Kaning gi-withdraw na inventory, it will be subjected to 12% VAT.
2. Distribution or transfer to shareholders or investors as share in the profits of VAT-
registered persons;
• Property dividends in the form of stocks in trade or properties primarily held for sale
or lease (under current rules including those used in business)
• VAT base: zonal value or FMV at the time of distribution, whichever is applicable
3. Distribution or transfer of inventory to creditors in payment of debt or obligation;
• Condominium given to the architect as payment for architectural services.
• Land held for sale (realty company) transferred in payment of backwages and
separation pay of employees
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BIR Ruling DA-297-05
Floors of a building (owned by the company and used in business) contributed to the
employees’ retirement fund is NOT subject to VAT
§ Not a sale, barter or exchange of taxable goods made in the course of business
§ Not deemed sale transaction
• Not a payment to a creditor
• A transfer in the course of business
4. Consignment of goods if actual sale is not made within 60 days following the date such
goods were consigned.
• Consigned goods returned by the consignee within the 60-day period are not deemed
sold.
5. Retirement from or cessation of business – all goods on hand shall be deemed sold
• Whether capital goods, stock-in-trade, supplies or materials as of the date of retirement
• WON the business is continued by the new owner or successor
You have to formally dissolve your business before the BIR. If you are a VAT-registered person, the BIR expects
you to do a monthly and quarterly filing of your VAT tax returns. So if mu stop ka without properly filing a stop
filer notice to the BIR, ang system sa BIR mag continue na ug expect na dapat naka file ka. So automatic na mu
kwenta sa interest and surcharges and penalties for your failure to file. The BIR will not give you a clearance of
dissolution if you do not pay for those open cases. This clearance of dissolution is needed because it is a
requirement for dissolution in the SEC. One of the requirements to get a dissolution clearance from the BIR is
the audited financial statemens (AFS) as well as the inventory listing. So, the BIR will refer to these documents in
ascertaining the transactions that will be deemed sold. OW, ma-alkansi ang government because the company
already claimed the corresponding input tax for all those purchases.
PP vs. Katherine M. Lim and Edelyn Coronacion, CTA Criminal Case No. 0-113, Dec. 12, 2011
§ This is a tax evasion case. This involves the closure of a business but wala nila gibayaran ang
VAT for the ending inventory nila. The taxpayers here contended that they should not
anymore be subjected to VAT because their ending inventory was already garnished for the
payment as backwages to their employees etc. in a separate case. Wala na ni exist ang
ending inventory, but naka-report pa sa FS.
§ CTA: The closure of a business and/or cessation of one’s business operations does not
automatically imply or result in the absence of inventories or properties, which may be
subjected to VAT under Section 106 of the Tax Code. The Tax Code considered "retirement
of business" relative to the "inventories of taxable goods existing as of such retirement or
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cessation" as transaction deemed sale" subject to VAT, because the law contemplates the VAT BASE: Sale of goods
eventual sale and disposal by the taxpayer of its remaining goods. § Gross Selling Price – Total amount of money or its equivalent which the purchaser pays or
§ In the same vein, the CTA further explained that foreclosure and public sale of one’s is obligated to pay to the seller in consideration of the sale, barter, or exchange of the goods
properties do not necessarily mean non-existence of taxable goods in the absence of proof or properties, excluding VAT, but including the excise tax, if any. (Section 4 106-4 RR16-05,
to the contrary. as amended)
§ Existence of “inventories” and property, plant and equipment, as reported in the financial
statements of the company, despite that the company’s remaining inventories were already VAT BASE: Sale of Real Properties
disposed in favor of its erring employees, is evidenced of existence of inventories which may § Gross Selling Price – consideration stated in the sales document or the FMV, whichever is
be subject to VAT. HIGHER
§ FMV:
Retirement from of cessation of business… (1) HIGHER between:
i. Change of ownership of the business o FMV as determined by the CIR (zonal value), and
§ A single proprietor incorporates – inventories transferred from the single proprietorship o FMV as shown in the schedule of values of the Provincial or City Assessors (real
to corporation are deemed sold. Lahi naman silag TIN. property tax declaration)
§ The proprietor of a single proprietorship sells his entire business (2) In the absence of (1), market value shown in the latest RPT declaration
ii. Dissolution of a partnership and creation of a new partnership which takes over the business § IOW, GSP is whichever us the HIGHEST of the:
iii. Conversion of a branch to a wholly owned subsidiary = retirement from business o Consideration stated in the deed of sale;
The branch referred to is not the locational branch. It’s the branch of a foreign entity or foreign corporation. As o Zonal value; and
what we’ve discussed in Tax 1, FC can have its presence here by establishing a branch or a subsidiary or a o RPT declaration
representative office or a regional operating headquarter, etc. If it is a branch ang ni- establish, considered one
entity si FC, extension lang niya ang branch. But if we say subsidiary, considered as different entity nah sya from
the parent corporation located abroad. Kung ganahan sila mag branch to subsidiary, that will be considered also BASIS OF VAT for transactions deemed sale:
retirement from business. 1. market value at the time of the transaction
2. in the case of retirement of business – acquisition cost or the current market price,
Transfer of assets in the branch in exchange for shares of the subsidiary is generally VATable whichever is LOWER
§ goods on hand whether capital goods, stock-in-trade, supplies or materials as of the date 3. where the GSP is unreasonably lower than the FMV – the actual market value
of the reorganization – VATable
§ real property not held for sale or lease (1985 & 1991 ruling) - exempt Sale of real properties
§ If the GSP is based on the zonal value or market value of the property, the zonal or market
Closure of branch: value shall be deemed exclusive of VAT.
§ BIR Ruling No. DA-358-03: There is no change in ownership or retirement or cessation of § If the VAT is billed separately then the selling price stated in the sales document shall be
business in case of closure of a branch. Hence, closure of a branch should not be considered deemed inclusive of VAT.
“deemed sale.” § VATable sale of real property
§ The branch referred to here is the locational branch, as distinguished from what have been o held primarily for sale to customers or
discussed earlier. For ex, there is a domestic corporation (DC) na naay branch sa Talisay, and o held for lease in the ordinary course of trade or business of the seller
giclose toh nimong sa Talisay, so it’s not considered retirement or cessation of business kay § Installment sale – output VAT due on every installment payment, including interest and
nag exist pa man ang HO. penalties, actually and/or constructively received by the seller.

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In case of a sale by a real estate dealer in installments, the VAT can be computed in installments if the initial
payments do not exceed 25% of the SP.
§ Deferred-payment – treated as cash sale and entire selling price taxable in month of sale
Initial payments (downpayment + all payments within the 1st taxable year) exceed 25% of the SP
VAT BASE: Sale of Services
§ Gross Receipts – total amount of money or its equivalent representing the contract price,
compensation, service fee, rental or royalty, including the amount charged for materials
supplied with the services and deposits and advanced payments actually or constructively
received during the taxable quarter for the services performed or to be performed for
another person, excluding VAT.
VAT BASE: Lease of Property
§ Gross Receipts since this is sale of service, not sale of goods or properties.
§ Gross rental as appearing in the contract of lease, including advance payment in the nature
of pre-paid rent (VATable in the month received) and security deposit (VATable at the time
of application to rental)
§ If advance payment is a loan to lessor, or option money for the property – NOT subject to
VAT
§ Lease of property located in the Philippines is subject to VAT, regardless of the place where
the agreement was executed)
Allowable deductions from gross selling price
1. Discounts – deductible from gross sales within the same month or quarter it was given;
only cash discounts that are not dependent on a future event or condition or happening
are deductible; does not include trade discounts
Conditions for deductibility: [BEDS]
§ Determined and granted at the time of sale;
§ Grant not dependent upon the happening of a future event;
§ Expressly indicated in the invoice; and
§ Amount forms part of the gross sales recorded in the books.
Non-deductible discounts
o Prompt payment discount (BIR VAT Ruling No. 068-91, July 05, 1991; Goldstar Philippines
Sales Corporation v. CIR, CTA Case No. 5715, May 11, 2004)
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o Rebates for meeting pre-set monthly quota (BIR VAT Ruling Nos. 204-90, October 1 1990
and 224-89, September 6, 1989)
o Volume, bulk or quantity discount
2. Sales returns and allowances - deductible from gross sales or receipts in the month or
quarter in which the refund is made or the credit memorandum or refund is issued for
sales previously recorded as taxable sales (Sec 4 106-9, RR 1605)
VAT REGISTRATION & VAT INVOICING
VAT is a transparent form of sales tax because you are required to issue VAT OR or VAT invoice.
Mandatory Registration
Any person who, in the course of trade or business, sells, barters, exchanges goods or
properties, or engages in the sale of exchange of services, shall be liable to register for VAT if:
1. His gross sales or receipts for the past 12 months, other than those that are exempt under
Section 109(A) to (U), have exceeded P3M; or
2. There are reasonable grounds to believe that his gross sales or receipts for the next 12
months, other than those that are exempt), will exceed P3M.
Effects of voluntary registration
§ can claim input VAT
§ under NIRC, such registration is considered irrevocable for 3 years, bisag wa jud ka ni-exceed
sa threshold, EXCEPT for some special entities nga ang voluntary registration becomes
perpetual. These entities pertain to franchise grantees of radio and or television
broadcasting.
Effects of failure to register for those mandated to register
§ liable to pay the output tax as if he were a VAT-registered person, without the benefit of
input tax credits for the period in which he was not properly registered
§ will be assessed deficiency VAT on sales
§ since the taxpayer can no longer claim input tax, the output tax will be equivalent to his VAT
payable. And your VAT payable will be further increased by interest, surcharges and
penalties.
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Even though X is already mandated to register under VAT system, he did not do so; rather, he But aside from considering the location, you also check your BIR form 2303 or your BIR
opted to pay the 3% OPT. Can he claim this as a tax credit by the time masakpan na sya and certificate of registration (BIR COR). There are some companies man gud na mu-transfer from
be made liable to pay VAT? one location to another but fail to provide that update.
No, touch move na syas OPT. He cannot claim it as tax credit. He can also be held liable sa 12%
VAT na output without the benefit of input, then interest and surcharges pa. Annual VAT registration fee
§ only P500 using the form 0605
Optional VAT Registration § paid on or before the 31st day of January.

1. Any person who is VAT-exempt or who is not required to register for VAT.
§ Irrevocable for 3 years
Ex. Roasted chicken is considered in its original state. So, the roasted chicken is supposedly exempted from
12% VAT. But if mag dine-in ka, you are basically not just purchasing the roasted chicken. You are purchasing
the service as well because that is restaurant service naman, so subject sya to VAT. If take out, VAT-exempt
unta kay ang product in its original state ra man imu gi-buy. However, hasul na ni on the part sa restaurants
that’s why they opt to register under the VAT system. So mapa dine in or take out, subject nila tanan to VAT to
avoid confusion.
2. Any person who is VAT-registered but enters into transactions which are exempt from VAT.
§ Irrevocable for 3 years
3. Franchise grantees of radio and/or television broadcasting whose annual gross receipts of
the preceding year do not exceed 10M derived from the business covered by law granting
the franchise.
So, mandatorily covered lang if mu-exceed 10M. If not, subject to OPT. Pero pwede sila
mu-voluntarily register under the VAT system, but such will be irrevocable perpetually.
If you've read the RR for VAT, there was a transition period there because diba ang VAT karun
kay gi increase naman ang threshold from 1,999, 500 to 3M. So it turns out na before 2018,
there were some VAT-registered taxpayers nga wala na ni exceed sa 3M pag 2018 or did not
expect na muabot ug 3M. So, in the transitory provision, instead na icheck sa BIR imu AFS
covering 3 years, for you to rebirth from a VAT to non-VAT registered, 1 year na lang ang iya i-
check.
Where to register
The application shall be filed with the RDO where the principal place of business, branch,
storage place or premises is located, as the case may be, before commencement of business or
production or qualification as a withholding agent.
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Cancellation of Registration
A VAT-registered person may cancel his registration for VAT if:
1. If he makes written application and can demonstrate to the CIR satisfaction that his gross
sales or receipts for the following 12 months, other than those that are exempt, will not
exceed 3M.
Proof: 3-yr prior AFS.
2. He has ceased to carry on his trade or business and does not expect to recommence any
trade or business within the next 12 months.
Some other instances where a VAT-registered person may apply for cancellation of registration
are:
3. There is a change in ownership, in the case of a single proprietorship;
4. Dissolution of a partnership or corporation;
5. Merger or consolidation with the respect to the dissolved corporation;
6. A person who has registered prior to planned business commencement, but failed to
actually start is his business.
Invoicing Requirements
§ Sales invoice – sale, barter or exchange of goods or properties
§ Official receipt – lease of goods or properties and for every sale, barter or exchange of
services
§ Import Entry and Internal Revenue Declaration (IEIRD-BOC Form 236/ BOC Form 38-A (like
an official receipt coming from the bureau of customs) / other equivalent document)-
importation of goods or properties
TN: All these 3 must be in the name of the company because if it is in the name of its broker or
agent, it cannot claim Input VAT.
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Important information that needs to be in the sales invoice
1. Indicate the corporate name of the seller as well as the address of the seller and it must
indicate the TIN and the fact that the seller is a VAT registered. That is why you call it VAT
sales invoice or VAT official receipt.
There was one case involving an electric company. They tried to claim for an input VAT because it was a zero-
rated transaction. But it was denied by the BIR for the simple fact na the invoice or OR failed to indicate that it
is VAT zero rated transaction. Because if walay indication na zero-rated or vat exempt then the presumption is
that it is vatable.
2. Indicate the name, business style, and TIN of the buyer or client especially if the sale
amounts to at least 1,000.
404_Taxation 2 - KMA
Consequence of issuing erronoues VAT invoice or VAT OR
§ fine not less than P1k but not more than P50k;
§ may also lead to imprisonment of not less than 2 years but not more than 4 years
Summary:
§ Same requirement ang sale of goods and services: name of the seller, the TIN of the seller,
an indication that it is a VAT OR, the name of the customer, business style, iseparate ang
vatable, exempt ug zero-rated.
§ BOC 38-A – provides for the specification on the amount of the VAT. You have the import
duty and the BIR taxes portion for the VAT. This serves some sort of an OR ni BOC if pila ang
gibayaran nimo so that it can be used as a sufficient proof of your payment of the VAT.

o corporate name – the official name indicated in the articles of incorporation.

o business style – also indicated in the articles of incorporation but the difference is that in
the records of the SEC and when it comes to marketing, public sale relations, more known
ka using your business style. (Ex. Metro Retail Stores, Inc. is the corporate name but it is
known for 10 business styles such as Metro Supermarket, Tita Gwapa, etc.). It is intended
to avoid any error / confusion in identifying/ matching taxpayers under the relief system

This is important because the BIR has this so-called relief system. This is an online system which also covers
imports, income tax reports, withholding tax reports, etc. For VAT purposes, si buyer, mag file ug return for
input VAT. Si seller, on the other hand, mag report sad ug gross sales or receipt niya so kita ang output VAT.
What the system will do is ibangga. So if naay business style, ma reconcile siya.

Medicard 2017 case – there is a comprehensive discussion on the relief system

SC: If you say that there is a vatable sale, it must be based on facts. It must not be based on presumption, no
matter how logical it is. The purpose of the relief system is to guide you if there is a discrepancy. But you cannot
base the assessment unreported sale or receipt based on the discrepancy in the relief system. It must be based
on facts.

3. The description, quantity and unit cost must be specified separately. There must also be a
breakdown of the vatable, zero-rated and vat-exempt components of the sale. The total
amount to be paid by the buyer and the amount of the VAT must be shown separately.

4. If zero-rated sale, there must be an indication that it is a zero-rated sale, written or printed
prominently on the invoice receipt. Same rule applies to VAT-exempt transactions.

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The Tax Rates 2. Sale of raw materials or packaging materials to a non-resident buyer for delivery to a
The tax, applied on the gross selling price, is: resident local export-oriented enterprise to be used in manufacturing, processing or
(a) 12%; repacking in the Philippines in acceptable foreign currency and in accordance with the rules
(b) 0%. and regulations of the Bangko Sentral ng Pilipinas (BSP);
In the case of a sale to the Government of the Philippines or any of its political subdivisions,
instrumentalities or agencies, including GOCCs, the VAT is a 5% final tax, to be withheld as The difference between this export sale from the first one is that diri, wala migawas sa PH. This is limited only to
raw materials or packaging materials and the buyer must be a non-resident for delivery to a resident local export-
payment is made to the seller. oriented enterprise. Ang first export sale, walay gi qualify na packaging etc. basta it goes out of the country.

ZERO-RATED TRANSACTIONS Requisites:

§ It covers only raw materials or packaging materials
§ Buyer is non-resident – reason for this is because dapat bayaran man ka in foreign currency
As distinguished from exempt transactions where there are no output and input taxes, zero- § Deliver within the Philippines because it is delivered to a resident local export-oriented enterprise
rated transactions have an output tax but only at 0% and can claim input taxes rated at 12%. § Paid for in acceptable foreign currency
The primary requirement to avail of the provisions for zero-rated transactions is that you must § Accounted for in accordance with the rules and regulations of the BSP.
be a VAT-registered person.
Why is this considered an export sale?
The reason is because eventually, mugawas siya. Since raw materials siya or packaging materials, this will form
o zero-rated sale of goods or property part of the finished output or the final product which will eventually be exported because you deliver it to a
o zero-rated sale of service resident local export-oriented enterprise. So there are some PEZA companies, small and medium, na ga-produce
ug raw materials or packaging material. They enter into a contract with a foreign company abroad who has a
Zero-rated Transactions (Sale of goods) under TRAIN subsidiary here in the Philippines na ga-manufacture and nag export actually. So, the customer is the parent
company abroad but i-deliver nila sa subsidiary company of that company here in the Philippines.

Export Sales Export-oriented enterprise

An enterprise whose export sales exceed 70% of the total annual production. But under the 2nd package of the
§ There must be actual delivery Comprehensive Tax Reform Program, they are proposing to increase it to 90%.
§ In acceptable foreign currency
§ For 2-4, will be subject to 12% VAT upon implementation of enhanced VAT refund system 3. Sale of raw materials or packaging materials to export-oriented enterprise whose export
sales exceed 70% of total annual production;
1. Sale and actual shipment of goods from the Philippines to a foreign country;
Wala ni nigawas sa Philippines but since it will form part of the finished goods or output na i-export ni export-
oriented enterprise, then currently, it is subject to 0% VAT. But again, once the enhanced VAT refund system will
This is the primary activity or transaction subject to the 0% VAT for the zero-rated sale of goods and properties.
be implemented, it will be subject to 12% VAT. In this case, however, there is no requirement for payment of
acceptable foreign currency because you can be paid in Philippine peso since your buyer is a resident export-
Requisites:
oriented enterprise; hence, domestic or located here in the PH.
§ There must be sale and actual shipment of goods from the Philippines going out of the country.
§ It must be paid for in foreign currency accounted for in accordance with the rules of BSP.
4. Those considered export sales under Executive Order No. 226, otherwise known as the
TN: If it is an actual export then automatically zero-rated provided you are VAT-registered. If you are not VAT- “Omnibus Investment Code of 1987”, and other special laws; and
registered but you actually export, then dili ka maka avail sa provision under Sec. 106. Adto ka sa Sec. 109 which
covers exempt transactions. Wala gihapon kay output VAT pursuant to the cross-border doctrine, but you cannot
claim input VAT for your purchases.

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5. Sale of goods, supplies, equipment and fuel to persons engaged in international air transport
operations: Provided, that the goods, supplies, equipment and fuel shall be used for
international shipping or air transport operations.
Zero-rated transactions (Sale of goods)
404_Taxation 2 - KMA
1. Processing, manufacturing or repacking goods for other persons doing business outside
the Philippines which goods are subsequently exported;
This is the labor aspect of the sale of RM or PM na gi-deliver diri sa Phils. The point is diin gi-render ang service?
Diri sa Phils. Walay actual export of service. So mao to na currently 0% but currently moving na isubject na sya
to 12% VAT.

BEFORE
1. Sale of raw materials or packaging
materials to a non-resident buyer for
delivery to a resident local export-
oriented enterprise to be used in
manufacturing, processing, packing or
repacking in the Philippines in acceptable
foreign currency and in accordance with
the rules of the BSP
2. Sale of raw materials or packaging
materials to export-oriented enterprise
whose export sales exceed 70% of total
annual production
3. Those considered export sales under
Executive Order No. 226, otherwise
known as the “Omnibus Investment Code
of 1987”, and other special laws
4. Sale of goods, supplies, equipment and
fuel to persons engaged in international
air transport operations
TRAIN
Same rules, provided that the transaction
will be subject to 12%, value added tax and
no longer export sales subject to 0% upon
satisfaction of the enhanced VAT refund
system.
Same rules, provided that the transaction
will be subject to 12% value added tax and
no longer export sales subject to 0% upon
satisfaction of the enhanced VAT refund
system.
Same rules, provided that the transaction
will be subject to 12% value added tax and
no longer export sales subject to 0% upon
satisfaction of the enhanced VAT refund
system.
…Provided, that the goods, supplies,
equipment and fuel shall be used for
international shipping or air transport
operations.
2. Services rendered to a person engaged in business conducted outside the Philippines or to
a non-resident person not engaged in business who is outside the Philippines when the
services are performed;
3. Transport of passengers and cargo by domestic air or sea vessels from the Philippines to a
foreign country;
It must be a direct trip from the Phils. going abroad. It must not stop here in any local ports. This one is on the
transportation service.
4. Services rendered to persons engaged in international shipping or international air
transport operations, including leases of property for use thereof: Provided, that the
goods, supplies, equipment and fuel shall be exclusively used for international shipping or
air transport operations;
This is the labor aspect of the sale of goods, supplies, equipment and fuel to those engaged in international
shipping or international air-transport operations.
5. Services performed by subcontractors and/or contractors in contractors in processing,
converting, or manufacturing goods for an enterprise whose export sales exceed 70% of
total annual production;
This is also the labor aspect sa sale of RM or PM to export-oriented enterprise. So, same reasoning as
mentioned earlier. Since the service is rendered here in the PH, we can take it away without violating the cross-
border doctrine kay wa man nah nigawas sa border sa PH. Mao nang under the TRAIN Law, they will subject it
to 12% VAT once the enhanced VAT refund system will be implemented.

Zero-rated transactions (Sale of services) under TRAIN
§ For 1-3, services are rendered outside the country and must be in acceptable foreign
currency
§ 1 & 5 will be subject to 12% VAT upon implementation of enhanced VAT refund system
6. Services rendered to persons or entities whose exemption under special laws or
international agreements to which the Philippines is a signatory effectively subjects to the
supply of such services to 0% rate; and
This is more on the special agreements or treaties to which the Philippines enters into.

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7. Sale of power or fuel generated through renewable sources of energy such as, but not services. So, these types of services fall under this provision. Pwede sya ma-subject to 0%
limited to, biomass, solar, wind, hydropower, geothermal, ocean energy, and other VAT, provided, the one rendering the service is a VAT-registered person or entity.
emerging energy sources using technologies such as fuel cells and hydrogen fuels.
Automatic 0-rating vs. Effective 0-rating
BEFORE TRAIN
1. Processing, manufacturing or repacking Same rules, provided that the transaction Zero-rated Effectively zero-rated
goods for other persons doing business will be subject to 12% value added tax and Refer to export sale of goods of services Refer to sale of goods or services to persons
outside the Philippines which goods are no longer export sales subject to 0% upon or entities whose exemption under special
subsequently exported in acceptable satisfaction of the enhanced VAT refund Tax is at 0% laws or international agreements to which
foreign currency and in accordance with system. the Philippines is a signatory.
the rules of BSP The seller charges no output tax but can
2. Those considered export sales under Same rules, provided that the transaction claim a refund of or a tax credit certificate for The seller who charges zero output tax on
Executive Order No. 226, otherwise will be subject to 12% value added tax and the VAT previously charged by suppliers. such transactions can also claim a refund or
known as the “Omnibus Investment Code no longer export sales subject to 0% upon tax credit certificate for the VAT previously
of 1987”, and other special laws satisfaction of the enhanced VAT refund charged by suppliers.
system. Automatic zero rating generally applies to Effective zero rating applies to INDIRECT or
3. Services rendered to persons engaged in …Provided, that the goods, supplies, ACTUAL exports. CONSTRUCTIVE export sales i.e. sale to
international shipping or international air equipment and fuel shall be used for export-oriented enterprise.
transport operations, including lease of international shipping or air transport
property for use thereof operations. § ‘Automatic’ – because you don’t need to get a ruling or any certification from the BIR
because of the fact that it actually went out of the country. If it is automatically zero-rated,
TN: the seller will not charge VAT because it is subject to 0% VAT, but the seller can claim for
§ For sale of goods, supplies, equipment and even to those engaged in international shipping refund or credit of input VAT for the VAT previously charged by his suppliers.
or international air transport operation to be considered as zero-rated transaction, from § ‘Effective’ – Pwede bawiun ni government ang effective zero-rating because it is only zero-
docking in the Philippine port to get the goods, supplies, fuel and equipment, the vessel rated because of a law or by virtue of a treaty entered into by the country granting it. It does
must go out directly to an international port. And it must be used for the shipping or not necessarily pertain to the cross-border doctrine or the destination principle. Ex. sales
transport operation purposes. happening intra-zone or within a free port zone. VAT sales invoice or VAT OR gihapon ang
§ The service aspect sa engaged in international shipping or international air transport iissue but didto lang sa portion na VAT zero-rated sale ibutang ang figure, not under VATable
operations is zero-rated gihapon. Ang gidugang lang sa TRAIN is that the goods, supplies, sale, and the seller can consequently ask for the refund or credit for the input VAT portion.
equipment and fuel shall be used for international shipping or air transport operations. So, The effective zero-rating is more related to what we call as constructive exports – kadtong
the services portion should be for the international shipping or air transport operations. As exports na walay actual export, diri ra sud sa Philippines nahitabu, from a customs territory
to the sale of goods or properties, klaru unsay gi-refer – goods, supplies, equipment and to economic zone territory or those sales happening within the economic zone.
fuel. But here, services. What do we mean by ‘service aspect’? If it is a foreign vessel na
mudock sa Philippines, di nah sila kadiretso ug dock lang sa port. Usually, mu-contact nah ENHANCED VAT REFUND SYSTEM
sila ug domestic companies which provide tagging or docking services. Mao may mu-dala
nila padung sa port. So basically, that is the service aspect there. Tagging, docking and ferry § Grants refunds of creditable input tax within 90 days from the filing of the VAT refund
application with the BIR.
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§ The DOF shall establish a VAT refund center in the BIR & BOC that will handle the happened. There will be 120 days for the CIR to decide on that claim for refund. In practice, mas
processing and granting of cash refunds of creditable input tax. taas pa. It can go to 1-3 years to the point na ang uban, i-assign nalang nila ila right to claim for
§ All pending VAT refund claims as of December 31, 2017 shall be fully paid in cash by the refund or di gale, tax credit certificate (TCC) man nah if di sila ganahan mag-baligya. The
December 31, 2019. decision could either be approval or denial. But the problem here before the amendment by
TRAIN is when the CIR does not act within 120 days from the complete submission of the
Period within which refund of input taxes shall be made (Before TRAIN) document. Mao tong mu-extend ug 1-2 yrs kay naa pay additional documents na last minute
For applications filed before January 1, 2018 in relation RMC 54-2014 pangayuon. So, dili deemed complete ang gi-submit nimu, so di pa ka kacount sa 120 days. Now,
upon the complete submission of the documents, within 120 days, dili sad mandated si CIR to
Within 2 years Decision: give a decision whether favorable or not. Pwede inaction on its part but it will already be
After close of TQ Approval/Denial
deemed as denial. So deemed denial man, within 30 days from the lapse of the 120-day period,
Within 120 days Within 30 days you must appeal na to the CTA. Diri nahitabu na daghan ang ma-deny ig appeal na sa CTA kay
VAT Refund Inaction deemed denial ni-lapse na ang 120 days. In the first place, wa may klaru si CIR kung gi-deny na ba to niya or
Application Taxpayer may appeal
complete na ba to or unsa. Naa say uban na denied kay wa pa ni-lapse ang 120 day-period, ni
decision on denial to CTA
appeal na didto sa CTA kay naniguro na.

Period within which refund of input taxes shall be made (TRAIN) There are 2 relevant sections when it comes to refund nya same na 2 years ang period.
For applications filed starting January 1, 2018 in relation RMC 54-2014 o Sec. 112 – refund of excess input but not because of erroneous tax. Nilapas lang jud ang
input nimu over output. The 2-yr period covers only the admin part.
Within 2 years Decision: - Approval o Sec. 229 – also talks of refund of excess tax, not necessarily input tax, but that presupposes
After close of TQ - Denial: in case of partial/full denial, CIR must erroneous collection of tax. Meaning to say ang liability nimu 1M lang, ang gi-collect ni BIR
state in writing the legal and factual basis
sa imu kay 1.5M so magparefund kas .5M. The 2-yr period covers both admin and judicial or
Within 90 days Within 30 days
actions before the CTA.
VAT Refund Inaction: Agent or employee
Application punishable under the code Taxpayer may appeal As discussed, in the previous provision, pwede ra to dili i-act ni BIR, na wala ra syay irender na
decision on denial to CTA
decision. Muhuwat ra ka na mu-lapse ang 120-day period. But now, under the Enhanced VAT
Refund System, the CIR through its authorized representative MUST render a decision whether
As to the period when to claim for refund of input taxes, refer to Sec. 112 of the NIRC, as
to approve or to deny, not just implied denial. Sa previous provision kay implied denial man to
amended by the TRAIN Law. The enhanced VAT refund system tells us that refunds of creditable
kay way gi-issue within 120 days. Now, it must be express denial. So, if it will be denied by the
input tax will now be made within 90 days from the filing of the VAT refund application with
CIR, it can either be partial or full denial, but in such case, the CIR must state in writing the legal
the BIR. This is the meat of the provision under the TRAIN Law. There is already a concept of
and factual basis for the denial. When we say legal and factual basis, there has to have a
refund before, but the period of refunding the excess input tax is not 90 days but 120 days.
provision in the law in relation to the application or claim for refund of taxpayer. Dili nah pwede
When we say excess input, the input VAT is higher than the output VAT. This happens when you
nga muingon lang sila na ‘denied for lack of legal basis or for lack of merit.’ Before, if magpa-
are a VAT-registered person engaged in a VAT zero-rated transaction. The very first thing you
refund ka, everything goes to the central office because it will be processed by a particular
prove is that you are VAT-reg and the transaction na gi-enter nimu falls under any of the VAT
division in the central office. Now, in the enhanced VAT refund system, kung magpa-refund ka,
zero-rated transaction.
muadto nalang kas RDO because they will already establish a refund center in every RDO. Mao
nah kung mangutana mu if applicable na ba nah ron, dili pa because in the first place, they are
Before TRAIN Law, makakuha ka ug refund sa excess input over output nimu if you file for
still hiring personnel who can sit as processing officer for the refund. And it is quite a risky
refund within 2 years after the close of the taxable quarter when the sales transaction
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position because diba kinahanglan mu-decide siya either mu-approve or mu-deny. Kung i-deny EXEMPTIONS FROM VAT
niya, dapat naay proper reasons. What if di sya ka-render ug decision within a period of 90 days
from complete submission? In the TRAIN Law, there is a provision that an inaction of the agent Exemptions from VAT may be broadly categorized into:
or employee is punishable by administrative action under the court which is not present in the 1. Exempt persons – persons who are not liable to VAT.
previous provision. So, what you do now is kumpletuhon nalang nimu ang checklist sa BIR, then 2. Exempt transactions – transactions on certain goods, properties or services which are sold
submit it to the examiner or the processor for the refund and then in 90 days, there has to have by VAT-registered or non-VAT registered person and regardless of the annual gross sales
a decision. If walay decision, di na ka magkara2x muadto sa CTA, just file an admin complaint or receipts derived therefrom.
against the officer. So at least, good on your part kay hasul baya kung mag-appeal ka to the
CTA. You have to prepare your memorandum, etc. So, this time around, they made it more IOW, it is wrong to say that since the goods are VAT-exempt, automatic exempt jud nah siya
practical. because we still have to consider the entity or person selling it. If the entity or person selling it
voluntarily registered under the VAT system, then subject na nah to 12% VAT. For example,
The DOF shall establish a VAT refund center in the BIR and the BOC because we very well know marine food product in its original state is a VAT-exempt transaction unta, but you also have to
that the BOC collects VAT also. That will handle the processing and granting of cash refunds of consider kinsa sad ang person or entity na nagbaligya ana. Kay if ang nagbaligya ana is Rustans,
creditable input tax. Again, this presupposes dili erroneous, ni exceed lang ang input sa output for example, nya gi-register na nah voluntarily under the VAT system, then that becomes
nimu. However, ni-‘yayay’ na pud ang mga PEZA companies kay taas kaayo ang checklist. Di ra VATable.
sya simple filling up of a form and then submitting the sales invoice. Naay mga contract, tax
returns, etc. Medyo daghag requirements. And to make it more attractive, BIR promised that The most common example of a VAT-exempt person is a non-stock non-profit educational
all pending VAT refund claims as of Dec. 31, 2017 shall be fully paid in cash by Dec. 31, 2019. institution or a government educational institution.
However, let’s see if this can really be implemented. Imagine, full payment in cash. The most
common way of refund as of now man gud is the so-called TCC. Kung naa kay excess karon, 0% EXEMPT
pwede re ka mukuha ug certificate nya if naa kay liability the following period, iapply to nimu. 1. Registration Yes No
In that case, walay cash na gipagawas si government. 2. Pass-on/shifting No (because 0% VAT ang No (no VAT to speak of)
gi pass on nimu)
On the side of the BIR, the excess will give additional collection. The government can already 3. Claim for input VAT on purchases Yes No
use such. However, on the part of the taxpayer na affected, what if after 1 yr pa sya makapa- 4. Relief on the Taxpayer Total (since tax credit Partial (since cost deduction
refund, ang inflation for that year will greatly affect the time value of my money. method is used – input is method is used; tax savings will
deducted from output; only be up to the extent of your
peso for peso) liability tax rate)
Under this system also, a trust fund will be set aside for all refund claims. Mao nang promise
nila is to pay in cash rather than issuance of TCC. But actually, Congressman Cua sa Committee Illustration
on Ways and Means explained that the original proposal really of the DOF is wala nay refund. ABC Corporation, a VAT-registered entity, sold fuel to DEF Corporation, a corporation
I-subject na sila entirely to 12% VAT because its ground is that there is no really a violation engaged in international shipping but not VAT-registered. Inadvertently, ABC Corporation
against the cross-border doctrine or the destination principle since everything is rendered here shifted 12% VAT to DEF which was paid by the latter. Thereafter, ABC remitted the 12% VAT
in the PH. Even if you say there’s a zone there, even if a foreign territory is created by fiction of collected to the BIR. May DEF Corporation claim for VAT input refund on the 12% VAT passed
law, but precisely it’s by fiction of law, so basically, we can just change the law. Mao na ang to it considering that it is a VAT-exempt entity?
position initially ni DOF but then many violent reactions from stakeholders so gi-introduce balik No, it cannot claim for refund under Sec. 112 nor Sec. 229, obviously because it does not have
ang refund. The BIR wanted to stick with the 120 of the same provision but then again, heavily personality to claim for such since it is not VAT-registered. Sec. 112 presupposes na VAT-
criticized. So, they have now the enhanced VAT refund system. registered entity ka and you are engaged in a zero-rated transaction. On the other hand, Sec.
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229, even though muingon ka na error nah siya or sobra nah siya, still, di sya maka-claim since
this is VAT and the nature of VAT is that it is an indirect tax. And when it comes to indirect tax,
the one primarily liable or what we call as statutory taxpayer is the seller. The use of identifying
the statutory taxpayer is to know who is the proper claimant for the refund. So the proper way
would be for ABC Corp to claim the refund and DEF Corp will in turn claim refund from ABC.
Features of a VAT-Exempt Transaction
1. Not included in ascertaining the general threshold;
For example, the taxpayer has the following businesses with their corresponding gross receipts for the year:
(1) jeepney operations – 1M; (2) restaurant business – 2M; and (3) consultancy – 1M. To ascertain whether ni-
exceed siya sa threshold, don’t include the gross receipts from jeepney operations kay this is an exempt
transaction since this is subject to OPT. In this case, wa niya na-meet ang threshold kay exactly 3M ra man sya,
wa ni-exceed.
2. Not liable for VAT or 3% OPT;
3. No billing of output tax on every VAT exempt transaction
VAT Exempt Transaction (Section 109, NIRC)
Salient Points
(A) Sale or importation of agricultural and marine food products in their original state,
livestock and poultry of a kind generally used as, or yielding or producing foods for human
consumption; and breeding stock and genetic materials therefor.
Products classified under this paragraph shall be considered in their original state even if
they have undergone the simple processes of preparation or preservation for the market,
such as freezing, drying, salting, broiling, roasting, smoking or stripping (FDRBS3). Polished
and/or husked rice, corn grits, raw cane sugar and molasses, ordinary salt and copra shall
be considered in their original state
This was not amended. The amendment in the TRAIN Law starts in Sec. 109 (d). Under this provision, the
following are the transactions exempted from VAT:
o sale or importation of marine food products in their original state;
o sale or importation of agricultural food products in their original state; and
o sale or importation of livestock and poultry of a kind generally used as, or yielding or producing foods for
human consumption or breeding purposes.
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§ White/Refined Sugar – subject to VAT
§ only raw cane sugar, molasses – exempt;
§ Rice ‘in whatever form’ (refers to polished and/or husked rice) – exempt
§ Dried Fish, Copra – exempt
§ Freezing – ex. frozen meat bisag gihiwa na, considered gihapon in its original state
§ Drying – for example, dried fish or buwad. But if muingon kag dried mango, it is no longer considered as a
simple process of drying because as ruled by the BIR, once the marine or agricultural or livestock food
product undergoes drying but anti-oxidants or preservatives are being added to prolong the shelf life of
that particular product, it’s not anymore simple process lang of supplying. In that case, chemical process
na kay naa namay anti-oxidants or preservatives.
§ Broiling – not the same as boiling; use high heat for a short time; source of the heat is all-surround, top
and bottom
§ Roasting – use low heat for a long time; source of heat is only from the bottom (ex. roasted chicken)
§ Salting – ex. salted fish.
§ Smoking – ex. smoked ham, smoked bacon, smoked salmon; does not include steaming
§ Stripping – ex. chicken, deboned bangus pursuant to a BIR ruling
§ The means of wrapping the product will not affect the state of the food product; still considered in its
original state as long as wa sila ni undergo sa chemical process. For ex., shrink wrap vegetables, shrink wrap
fruits, vacuum or tetra packing
§ 2 conditions in order to exempt livestock: (1) it must be for breeding or genetic purposes and (2) it must
be for human consumption. The requirement of ‘original state’ is only applicable to marine or agricultural
food product.
Illustration
Berna imported boars (Landrace) and swine (Yorkshire) for breeding purposes. She also imported horses
(thoroughbred broodmares) for sports/racing. Are the importations subject to VAT?
Boars and swines importation – exempt from VAT; the importation of horses is taxable because such animals
are not generally used as or yielding or producing food for human consumption (BIR Ruling 039-91).
(F) Services by agricultural contract growers and milling for others of palay into rice, corn
into grits and sugar cane into raw sugar.
(A) pertains to the product mismo. It would be useless if the finished product is exempted but its labor or
service portion is not kay mupatong man sad to. For example, we have rice millers. Kung di to nimu i-exempt,
mapatungan gihapon so musaka ang price. That is why Sec. 109 (F) also exempts the service aspect of (A).
Illustration
Richard has a contract with Mongolia Corporation for a package of services receiving eggs from breeder
farm, sorting, fumigating, setting, hatching, sexing of day-old broilers, sorting and delivering them to other
contract growers. Are these services by Richard subject to VAT?
No. Richard is an agricultural contract grower. Hence, the transactions he had entered into with Mongolia
Corporation are exempt from VAT. Agricultural contract growers refer to those persons producing for others
poultry, livestock or other agricultural and marine food products in their original state.
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(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);
3 products exempted:
o Fertilizers
o Seeds, seedlings and fingerlings (mao ni sila ang small fish)
o Fish, prawn, livestock and poultry feeds – not the fish, prawn or livestock ang exempted but their feeds.
The fish, prawn and livestock are already exempted under Sec 109 (A).
Why exempted?
If the product is exempted and the service is exempted, then the necessary feeds or fertilizer to produce the
marine or agricultural food product should also be exempted because these marine and agricultural food
products will be used eventually for human consumption. But if it is specialty feeds, it is not exempted because
in the end, the product for which it is used is not for human consumption.
Specialty feeds – These are what you feed to the animals you do not eat or consume. It is provided there in (B)
that specialty feeds are what you feed to race horses, fighting cocks, aquarium fish, zoo animals and other
animals generally considered as pets. So the feeds of your dogs or cats do not fall under the exemption.
Ingredients
Aside from fertilizer, seeds, seedlings, fingerlings and feeds, included as well are the ingredients of the finished
feeds of those exempted. If you look at the way the law is constructed, after the word fertilizer, there is semi-
colon then the seeds, seedling, fingerlings, then another semi-colon, then you have feeds including ingredients
that is another semi colon. So if you look at it, the ingredients cover only the feeds. The ingredients of the feeds
actually became a problem in the implementation phase because most of the ingredients in the manufacture
of feeds may also be consumed by human, like feed sa baboy. Usually, the components of the feeds are also
edible. The raw material includes meat. There was a situation at the time of Henares wherein what is being
declared in the importation are ingredients for the manufacture of feeds. However, upon arriving here in the
Philippines, they don’t use it to manufacture feeds; instead, they sell it. That is why Henares included in the
regulation that other than declaring it as an ingredient for the manufacture of feeds, there must be a
certification also from the DFA that the particular ingredient is not fit for human consumption. This is to prevent
technical smuggling.
Illustration:
Organico Poultry Supply imports potassium nitrate (fertilizers) from China. They sell the imported fertilizers
to local dealers in the market. Are the importations subject to VAT? How about if it is importing raw materials
for use in the production of fertilizers in the Philippines?
Both the importation and the local sale of fertilizers are exempt from VAT (BIR Ruling 063-90). However, the
importation of raw materials is taxable. Thus, importation of diatomaceous earth which is used for formulation
of fertilizers is subject to VAT (BIR Ruling 15-88).
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(C) Importation of personal and household effects belonging to the residents of the Philippines
returning from abroad and nonresident citizens coming to resettle in the Philippines:
Provided, That such goods are exempt from customs duties under the Tariff and Customs
Code of the Philippines;
What is exempted
It refers to personal and household effects which must be for the personal use of the citizen coming to resettle
here in the Philippines. And when we say citizen, it is limited only to Filipino Citizen, either resident or non-
resident.
Illustration
A foreigner is planning to settle here in the Philippines and will be bringing with him his household effects
and household belongings. May he be exempted from VAT?
If under section 109 (C), he will not be exempted because it is only restricted to citizens, either resident or non-
resident. However, he may be exempted if all conditions in (D) are met.
(D) Importation of items of persons coming to settle in the Philippines or their families who
are overseas Filipinos, in quantities and of class suitable to the profession or position of
the persons importing said items for personal use and not for sale, accompanying the
persons or arriving within a reasonable time.
Provided, that the BOC may upon providing evidence that such persons are actually coming
to settle in the Philippines, exempt such goods from payment of duties and taxes: Provided
further that vehicles, vessels, aircrafts, machineries, and other manufacturing goods shall
not fall within the classification thereof.
BEFORE TRAIN:
(D) Importation of items of persons coming to settle in the Philippines (for personal use),
accompanying such persons, or arriving within ninety (90) days before or after their arrival,
upon providing evidence to the Commissioner, that such persons are actually coming to
settle in the Philippines.
It is considered a VAT-exempt transaction if it is an importation of household effects, among others, of any
person WITHOUT distinction. The ‘overseas’ Filipino there was mentioned to emphasize that they became a
citizen of another country. So in that sense, they are also considered foreigners. Thus, it is not only limited to
foreigners but also to Filipinos who became foreigners.
‘belonging to persons coming to settle in the Philippines’
That line did not qualify whether the persons should be Filipinos or aliens.
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‘arriving within a reasonable time’
Before, it was specific that it must arrive 90 days before or after the date of arrival of the foreigner. However,
it was amended to ‘arriving within reasonable time’. Since there are many instances na ma-delay kay usually,
it is not possible to bring all your household effects, the 90-day period was amended to within reasonable time
to make it more open to explanation.
‘providing evidence that such persons are actually coming to settle in the Philippines’
To be exempt from duties and taxes, the BOC must be convinced first that the foreigner has the intention of
settling here in the Philippines. He must produce satisfactory evidence that he is intending to settle here. The
proof there is first the declaration. Resident VISA is also a strong proof of planning to settle here, not just a
tourist VISA.
Exceptions
Unless the foreigner pays VAT, he cannot bring to the Philippines his vehicles, vessels, aircrafts, machineries,
and other similar goods for use in manufacture.
(E) Services subject to percentage tax;
VAT is also a percentage tax. That’s why under title V, the term used is ‘other’ percentage tax. Since both of
them are business taxes, they cannot be implemented at the same time. Take note however that these refers
to services specifically enumerated and indicated from section 117 onwards in the NIRC under the percentage
tax.
Illustration
Philtranco Transportation is a bus company plying the route from Matnog, Sorsogon to Manila and Naga
City to Legaspi City, and vice-versa. It is also engaged in transporting light cargoes. Is the bus company
subject to VAT?
Insofar as the transport of passengers is concerned, it is subject to Common Carrier’s Tax, which is a percentage
tax. Therefore, it is not subject to VAT. However, the services rendered in the transport of cargoes are subject
to VAT.
(G) Medical, dental, hospital and veterinary services except those rendered by professionals;
Exempt services
The hospital bills constitute medical services and this may include the professional fees of those attending
physicians during your confinement. As you can observe in the OR which is under the name of the hospital,
their professional fees are included. Moreover, the sales made by the drugstore to the in-patients which are
included in the hospital bills are part also of medical expenses. Hence, they are not subject to VAT.
Not exempt
Those services rendered by the professionals in their clinic. As you can observe, what is given upon payment is
an OR under the name of the doctor. The sales of the drug store to out-patients are taxable because they are
not part of the medical services of the hospital.
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Diagnostic Services (x-ray, laboratory, etc.)
Vat treatment depends on how service is provided
o When done by employees of diagnostic company – exempt from VAT
o When rendered by an independent professional (consultant) – subject to 12% VAT
(I) Services rendered by individuals pursuant to an employer-employee relationship;
Reason: Employment is not a business; hence, it shall not be subject to a business tax.
(J) Services rendered by regional or area headquarters established in the Philippines by
multinational corporations which act as supervisory, communications and coordinating
centers for their affiliates, subsidiaries or branches in the Asia-Pacific Region and do not
earn or derive income from the Philippines;
Reason: This presupposes that there are no operations in the PH which generate income. IOW, there are no
gross receipts here, so of course, it is exempted from VAT.
(K) Transactions which are exempt under international agreements to which the Philippines is
a signatory or under special laws, except those under Presidential Decree No. 529;
International agreements
Philippines has entered into treaties and double taxation agreements, in which the content usually pertains to
what we call as business profit or relief on income taxation, not much on business taxation. As independent
states, dili na sila maghilabtanay how they run their internal business. There’s not much content as regards to
VAT-exemption or VAT zero-rating. Usually, only agreements involving international organizations provide
rules on such. For example, the UN or those Asian development banks or the International Rice Research
Institute. Other than exempting them from income tax, there are also provisions that they are exempted from
VAT. They may also be exempt under special laws, such as the Special Economic Zone Act, which created PEZA
and provides that one of the PEZA-registered enterprise’s fiscal incentive is the 5% tax of its gross income
earned IN LIEU of all taxes including VAT.
Except those under PD 529
This refers to petroleum operators, concessionaires or subcontractors. Hence, if you’re a petroleum
exploration operator, you’re not anymore exempt from vat.
(L) Sales by agricultural cooperatives duly registered with the Cooperative Development
Authority to their members as well as sale of their produce, whether in its original state or
processed form, to non-members; their importation of direct farm inputs, machineries and
equipment, including spare parts thereof, to be used directly and exclusively in the
production and/or processing of their produce;
Implementation-wise, when a cooperative asks for a certificate of exemption from VAT from the BIR, the
bureau will not just settle that it presents its certificate of registration to the CDA. The BIR will also ascertain if
such is a member in good standing of the CDA, and one indication is submitting annual reports to the CDA.
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But when it comes to transactions entered into by an agricultural cooperative, the transactions exempted from Jan 1, 2021 onwards
VAT are the following: § Sale of House and Lot and other residential dwellings – P2M and below
o Sales to members – absolute; all types of sale, whether produce or non-produce
o Sales to non-members – relative; exempted from VAT only if such is a produce of the agricultural coop; § no more exemption on sale of residential lot
reason: the purpose of establishing a coop is for the sake and benefit of its members;
o Importation of importation of direct farm inputs, machineries and equipment, including spare parts Specific instances when the sale of real properties may be exempted:
thereof, to be used directly and exclusively in the production and/or processing of their produce.
1. If real property is not primarily held for sale to customers or held for lease in the
Illustration
Samahang Barangay Cooperative (SABACO), an agricultural cooperative duly registered with the CDA,
ordinary course of trade or business.
received a donation of farm equipment from abroad. Is the importation of the equipment subject to VAT?
Basically, you’re referring to a real property classified as a capital asset. However, sales involving such will be
No, provided that such equipment including spare parts thereof shall be used directly and exclusively in the
subject to CGT. It is considered as one-time transaction unless it will fall under habitual sale of real properties.
production and/or processing of its produce.
Since it is already subjected to CGT, it can no longer be subjected to another type of business tax such as VAT.
On the other hand, if the real property is classified as an ordinary asset, as a rule, it is VATable. However, 2-5
(M) Gross receipts from lending activities by credit or multi-purpose cooperatives duly are the instances where even real property classified as ordinary asset are exempted from VAT.
registered with the Cooperative Development Authority;
2. If real property is utilized for low-cost and socialized housing as defined by RA No. 7279,
§ The exemption is not only limited to the gross receipts on loans extended to the coop’s members but also
otherwise known as the Urban Development and Housing Act of 1992
to other persons who are not members.
§ It is still necessary to ask for a certificate of exemption from VAT from the BIR because such will be
On the part of the developer, it is included in his inventory (OA) for such is primary held for sale. But because
submitted as proof by the other party to the transaction upon claiming that the transaction involved is
it is classified as socialized or low-cost housing, it is exempted from VAT. These are housing projects which
VAT-exempt.
involve subdivisions. The Housing and Land Use Regulatory Board (HLURB) declares whether one is a socialized
housing or is a low-cost housing. The qualification matters especially when it comes to pricing. If the property
o Lending cooperative – basically for loan transactions; the proceeds are the interests.
is a subdivision, it should be registered in the Board of Investments (BOI) for it to be classified as socialized or
o Multi-purpose cooperative – can make investments; may engage in micro-insurance, lease,
low-cost housing. This registration grants not only an exemption from VAT but from income tax as well (income
marketing.
tax holiday). If such will not fall under socialized or low-cost housing, it may already be subject to VAT, but still
exempted from income tax. What is important is it must be duly declared and certified by HLURB as a low-cost
(N) Sales by non-agricultural, non-electric and non-credit cooperatives duly registered with the housing or a socialized housing. You have to qualify in the exam that for example the house is P2.8M, you do
Cooperative Development Authority: Provided, That the share capital contribution of each not automatically say that it is a low-cost housing unless there is a certification from HLURB.
member does not exceed Fifteen thousand pesos (P15,000) and regardless of the
aggregate capital and net surplus ratably distributed among the members; Socialized housing – housing programs undertaken by the government or private sectors for the
TN: Electric cooperatives are subject to VAT pursuant to EVAT law. underprivileged and homeless citizens (with long-term financing, liberated interest rates, and other benefits in
accordance with RA No. 7279)
(O) Export sales by persons who are not VAT-registered; Current Price Ceiling set by the HUDCC on Socialized and Low-Cost Housing
This is basically a fallback provision. As discussed, to be subject to 0% VAT, primary requirement is to be VAT-
Housing Category Price Range Lot Area Floor Area
registered. OW, the export sales will fall under exempt transactions pursuant to the cross-border doctrine, in
Socialized Housing P450k and below 30-50 sqm 18-30 sqm
which case, no input tax can be claimed.
Low Cost – Level 1 Above P450k – P1.7M 50-100 sqm 35-55 sqm
Low Cost – Level 2 Above P1.7M – P3M 100-150 sqm 80-120 sqm
(P) Jan 1, 2018 – Dec 31, 2020
§ Sale of Residential Lot – P1.5M and below 3. Sale of residential lot not exceeding the threshold of 1.5M
(BEFORE: P1,919,500 and below)
§ Sale of House and Lot and other residential dwellings – P2.5M and below
§ (BEFORE: P3,199,200 and below)
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4. Sale of residential house and lot and other dwelling not exceeding the threshold of
2.5M
For it to be considered residential, the primary purpose for buying it should be to build a residential house.
This is disadvantageous to the real estate industry because if the property was not registered as low-cost
housing, the entire contract or selling price will be subject to VAT, not just the excess of the 2.5M. The best
way to really know WON you are exempted is to ask for a BIR ruling (which could take years).
TN: Condominium is a real property. It will fall under the sale of house and lot and other residential dwelling.
(Q) Lease of a residential unit with a monthly rental not exceeding P15,000. (Before: P12, 800)
o Residential unit – apartments and houses & lots used for residential purposes, and buildings or parts units
thereof used solely as dwelling places (e.g., dormitories, rooms and bed spaces) except motels, motel
rooms, hotels and hotel rooms, lodging houses, inns and pension houses.
o Unit – an apartment unit in the case of apartments, house in the case of residential houses; per person in
the case of dormitories, boarding houses and bed spaces; and per room in case of rooms for rent.
Lease of residential unit VAT-exempt
Monthly rental per unit < P15k and aggregate annual rentals < P3M Yes (Q)
Monthly rental per unit < P15k and aggregate annual rentals > P3M Yes (Q)
Monthly rental per unit > P15k and aggregate annual rentals < P3M Yes (BB); but subject to 3% OPT
(Sec. 116)
Monthly rental per unit > P15k and aggregate annual rentals < P3M No; mandatorily covered under
VAT system
Monthly rental per unit:
Some P15k Yes
Some > P15k but aggregate annual rentals < P3M
Monthly rental per unit:
Some P15k Units > 15k – Yes
Some > P15k but aggregate annual rentals > P3M Units < 15k – No
Sec. 109 (BB), TRAIN:
Exempt Transactions – Sale or lease of goods or properties or the performance of services other than the
transactions mentioned in the preceding paragraphs, the gross annual sales and/or receipts do not exceed the
amount of P3M.
Sec. 116, TRAIN:
Tax on Persons Exempt from Value-added Tax (VAT) – Any person whose sales or receipts are exempt under Sec
109 (BB) of this Code from the payment of value-added tax and who is not a VAT-registered person shall pay a
tax equivalent to 3% of his gross quarterly sales or receipts: Provided, that cooperatives, and beginning Jan. 1,
2019, self-employed and professionals with total annual gross sales and/or gross receipts not exceeding P500k
shall be exempt from the 3% gross receipts tax herein imposed.
404_Taxation 2 - KMA
How does the BIR monitor these lease transactions?
In the Certificate of Registration, you have to indicate your main line of business. One of the requirements to
be submitted to the BIR is the summary list of units leased as well as lessees to the units.
(R) Sale, importation, printing or publication of books and any newspaper, magazine, review
or bulletin which appears at regular intervals with fixed prices or subscription and sale and
which is not devoted principally to the publication of paid advertisements;
Take note of the requirement ‘printing or publication’ because there was a case regarding sale of e-books. The
BIR in one ruling in 2008 said that e-books are covered under this provision which means it is exempt from VAT
as well. However, in 2013 during the time of Henares, she gave a stricter interpretation of this provision and
it’s not just a ruling but an RMC (RMC 75-2012) wherein the BIR said that electronic books, CDs, flash drives
are not covered under this provision. IOW, not VAT-exempt. Sale of e-books may still be exempt from VAT as
long as the gross receipts do not exceed P3M. However, the exemption is not under (R) but under (BB).
Take note also that even if the transaction is exempt from VAT, it is a different story if we look at the point of
view of the seller because if he is a VAT-registered person and he registered all his goods under the VAT system,
then it will consequently be subject to VAT.
(S) Transport of passengers by international carriers;
This is actually in connection with zero-rated sale of service, which means that if the international carrier failed
to register under the VAT system, then it cannot avail zero-rated VAT. It will be considered as VAT-exempt
transaction, instead. To be exempt, the international carrier must be:
o duly registered in the Philippines
o doing business here in the Philippines
o subject to common carrier’s tax of 3% on international carrier
(T) Sale, importation or lease of passenger or cargo vessels and aircraft, including engine,
equipment and spare parts thereof for domestic or international transport operations;
This covers both domestic and international transport operations. The purpose of this exemption is to
encourage more airline companies to establish here in the Philippines. Pursuant to an RR, there’s an additional
phrase “in accordance with the rules of the maritime industry.” The Marina has this so-called age limit
requirement as follows:
o Passenger and/or cargo vessels – 15 yrs old; shall be limited to those of 150 tons and above
o Tankers – 10 yrs old
o High speed passenger crafts – 5 yrs old
IOW, the sale of a second-hand vessel may already be subject to VAT if the purchase happened beyond the
age limit provided.

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(U) Importation of fuel, goods and supplies by persons engaged in international shipping or air a. VAT-registered
transport operations; Provided that the fuel, goods and supplies shall be used for Supposedly, the business tax to be remitted by Yummy to the BIR is the VAT; but since this transaction is
exempt, it will only be a matter of recording since there is no cash received from Mr. A.
international shipping or air transport operations.
Total Price, Inclusive of VAT (112%) P 1,120
This is a fallback provision. If you are into international shipping or airline service but you are not registered Divided by 112%
under the VAT system, and then you purchase goods, fuel and supplies, you cannot avail of the zero-rated Total Price, Exclusive of VAT (100%) P 1, 000
provision. However, you can still use this provision in order to be exempt from VAT. If we are talking about Net of Discount x 80%
international shipping and air transport operation, it must originate here in the Philippines. This presupposes Total amount to be paid P 800
that they are doing business here in the country and that they have landing rights here in the PH. And from the
Philippines, it must go outside the country. It does not include those international businesses not doing b. Non-VAT-registered
business here in the PH, such as those which merely sell through a ticketing agency, since they don’t have Since Yummy Inc is not VAT-registered, presumption is P1,120 is the total billing. No more VAT will be taken
landing rights here in the PH. out. Automatic less 20% sales discount so the amount payable by the PWD is P896 (P1120 x 20% = 896).
The SC and PWD are inly exempt from VAT, not from OPT. Hence, there will be a percentage tax due to the
(U) vs. the provision under the zero-rated sale of goods and properties (p. 36) government from such sale.
The provision under zero-rated talks about sale of goods, supplies, equipment and fuel (GSEF); but for here,
only goods, supplies and fuel (GSF). But the purchase of equipment (E) may still be covered by (T). However, it Sales/Receipts P 1,120
is more favorable if it is purchase of equipment because under (T), it covers both domestic and international Less: 20% SD 80%
shipping or airline; whereas in (U), it covers only international shipping or airline. For instance, if Cebu Pacific Total amount to be paid P 896
has domestic operations and it purchased equipment, it cannot be considered zero-rated transaction. OPT% x 3%
However, it is still exempted from VAT under (T). Percentage Tax Due P 27

(V) Services of bank, non-bank financial intermediaries performing quasi- banking functions, (X) Transfer of Property pursuant to Section 40(C)(2) of the Tax Code, as amended;
and other non-bank financial intermediaries;
Reason: They are subject to OPT. Sec. 40 (C) Exchange of Property.

(W) Sale or lease of goods and services to senior citizens and persons with disability, as (1) General Rule – Except as herein provided, upon the sale or exchange or property, the entire amount of the
provided under Republic Act Nos. 9994 (Expanded Senior Citizens Act of 2010) and 10754 gain or loss, as the case may be, shall be recognized.
(An Act Expanding the Benefits and Privileges of Persons with Disability), respectively; (2) Exception. – No gain or loss shall be recognized if in pursuance of a plan of merger or consolidation -
(a) A corporation, which is a party to a merger or consolidation, exchanges property solely for stock in a
The exemption from VAT here covers almost all VATable transaction that the PWD or the senior citizen enters
corporation, which is a party to the merger or consolidation; or
into. Examples are VAT in hotels and similar lodging entities, theaters and cinemas, drugstores, land air sea
(b) A shareholder exchanges stock in a corporation, which is a party to the merger or consolidation,
travel, medical, dental and laboratory services as well as funeral and burial expenses.
solely for the stock of another corporation also a party to the merger or consolidation; or
(c) A security holder of a corporation, which is a party to the merger or consolidation, exchanges his
Aside from VAT, another incentive for PWDs and senior citizens is the so-called 20% discount. These 2
securities in such corporation, solely for stock or securities in such corporation, a party to the merger
privileges, VAT exemption and 20% discount, are not mutually exclusive. Both can be availed of simultaneously
or consolidation.
by the SC or PWD (per head). However, in cases where the establishment also offers a promotional discount,
the SC or PWD can only avail whichever is higher; no double discounts for them.
No gain or loss shall also be recognized if property is transferred to a corporation by a person in exchange for
stock or unit of participation in such a corporation of which as a result of such exchange said person, alone or
Illustration
together with others, not exceeding four (4) persons, gains control of said corporation: Provided, That stocks
Yummy Inc. is a restaurant offering a birthday promo at 10% discount. Mr. A, physically incapacitated senior
issued for services shall not be considered as issued in return for property.
citizen, is celebrating his birthday at Yummy Inc. Total sale is P1,120, inclusive of VAT. How Should the seller
recognize the sale if the seller is:
The above-cited provision is under income taxation. Therefore, under these exceptions, there will be no
income tax. And those are also exempt from VAT because such are not deemed VATable transactions or sales
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for consideration in the ordinary course of business. If you look at it, it is more of capital investment on the § The excess of input taxes over the output taxes of the quarter will be carried over to the
part of the person buying, merging or consolidating; and these transactions don’t happen every day. These next quarter.
transactions are also exempt from DST. However, it is wrong to say that during merger or consolidation, the
exemptions from VAT, DST and income taxes will be automatic since under the Corp Code, transfer of shares § Effective January 1, 2023, the filing of the VAT will be on a quarterly basis, which shall be 25
of stocks from one entity to another can only be done if there is Certificate Authorizing Registration (CAR), days following the close of each taxable quarter.
which you can only get after paying the tax. IOW, there is still a need to get a ruling from the BIR. It is more of § Reason of change: to synchronize with the deadline for the filing of percentage tax which is
a confirmatory ruling which you can then bring to the RDO for the request of issuance of CAR. And when you also done quarterly.
have the CAR, the transfer to the new owner may already be properly done. Take note also that there is now
a need to get a certification from the National Competition Commission which states that the transaction
§ BIR Form No. 2550M – monthly VAT declaration; BIR Form No. 2550Q – quarterly VAT
maintains a fair competition. declaration.
§ Manual filer – patatakan nimo manually to the BIR; eFPS filer – submission is through an
(Y) Association dues, membership fees, and other assessments and charges collected by eFPS account; electronically
homeowners associations and condominium corporations;
§ Homeowner’s association – refers to subdivisions; covered under the Magna Carta for the Homeowners. eFPS filer Advantage
§ Condominium corporations – refers to condos; covered under the Condominium Act.
You can file earlier but pay later provided it will not go beyond the deadline set by law. Example
§ Take note that from 2012 up to 2017, these dues collected by homeowner’s association and condo
corporations were subjected to VAT by Henares. Her position was that they are collecting such fees to if I file on the 10th day of the month, it is not necessary that I should pay too on the same date.
render a service. The deadline of the payment will depend on what group you belong (Group A to E, according
to industry). On the other hand, if you are a manual filer, follow the pay as you file system.
(Z) Sale of gold to the Bangko Sentral ng Pilipinas;
Output tax rates
(AA) Sale of drugs and medicines prescribed for diabetes, high cholesterol, and hypertension § 12%; 0%.
beginning January 1, 2019 as determined by the Department of Health; and
Input tax rates
(BB) Sale or lease of goods or properties or the performance of services other than the § 12% standard rate
transactions mentioned in the preceding paragraphs, the gross annual sales and/or § 0%
receipts do not exceed the amount 3M. § 2% transitional or 12% actual input tax rate
applied to the value of the goods existing at the date a person commences business, and/or becomes liable to
Filing of return and payment of VAT VAT;
§ Pay as you file system. § 4% presumptive input tax
§ All persons liable to VAT must pay the tax for each of the first and second month of a quarter, applied to purchases of VAT-exempt goods used as inputs by a VAT-registered manufacturing or processing
based on the transactions of the month, reflected in a Monthly VAT Declaration (BIR Form “certain” food products;
No. 2550M), within 20 days after the end of the month. § 5% final withholding tax rate
§ VAT Payable – output taxes exceed the input taxes
§ Carry-over to the 2nd month – excess of input taxes over the output taxes in the first month Transitional input tax rate (TIT)
§ No carry-over of excess input taxes from the 2nd month to the 3rd month. § This is the input tax you can claim if:
§ Within 25 days after the end of the quarter, there will be a Quarterly VAT Return (BIR Form o The taxpayer, in p.y., except the last year, was previously exempt from VAT because his
No. 2550Q), reflecting the cumulative transactions of the quarter. sales did not exceed the threshold (3M) and his gross sales in the immediately p.y.
§ VAT shown and paid under the 1st and 2nd months’ declarations will be deducted from the exceeded that amount; OR (mandatory)
output taxes in the quarterly return. o The taxpayer in all p.y. did not have sales exceeding 3M but opted to be under the VAT
system. (voluntary)
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§ The amount of TIT to be allowed as tax credit shall be whichever is HIGHER between: § If the capital good is sold within 5 yrs – the entire unamortized input tax on the capital goods
o 2% of BI of goods, material and supplies sold can be claimed as input tax credit during the month/quarter when the sale was made
o Actual VAT paid (12%) § The amortization of the input VAT is an advantage on the part of the taxpayer because the
§ You can only claim of the 12% input tax if your purchases are properly substantiated. recognition will be staggered. However, it created complexity.
§ 2% basis of BI – value allowed for income tax purposes on inventories, excluding goods that
are exempt from VAT; refer to FS; no need for substantiation Illustration:
Charlene had the ff data in her books in the month of November:
§ No TIT on: Case A Case B
o Capital goods or fixed assets; Sales P 2M P 1.9M
o Goods that were VAT-exempt under Sec. 109, NIRC Purchase of goods for sale 1.5M 500k
Purchase of machines 1.4M 800k
Machine life 6 years 3 years
Presumptive input tax (PIT)
§ VAT registered persons or firms engaged in the processing of sardines, mackerel and milk, Compute the (1) VAT payable on each of the independent cases; (2) VAT payable in Case A, assuming the life of the
and in manufacturing refined sugar, cooking oil, and packed noodle-based instant meals machine is 4 years only.
(SM2-NCR) Solution:
1. Case A: Machine life is 6 years.
§ 4% of the gross value in money of their puchases of primary agricultural products which are
Output tax (2M x 12%) P 240k
used as inputs to their production (Sec. 111 (B), NIRC). Less: Input taxes
§ Primary agricultural products – agricultural products in their original state (exempted from Purchases (1.5M x 12%) (180k)
VAT when purchased from the owner of the land where produced) Machine (1.4M x 12%) / 60 (2.8k)
§ Original marine products are NOT within the meaning of original agricultural products. VAT payable P 57.2k
§ Processing – pasteurization, canning and activities which through physical or chemical
Case B: Machine cost does not exceed P1M
process alters the exterior texture or form or inner substance of a product in such a manner Output tax (1.9M x 12%) P 228k
as to prepare it for special use to which it could not have been put in its original form and Less: Input taxes
condition. Purchases (500k x 12%) (60k)
§ This is not really more on the benefit of the manufacturer or the canning company; this is Machine (800k x 12%) (96k)
VAT payable P 72k
more on the benefit of the final consumer.
2. Machine life in Case A is 4 years only.
Input VAT on capital goods Output tax (2M x 12%) P 240k
§ Capital goods or properties – refer to goods or properties with estimated useful life greater Less: Input taxes
than 1 yr and which are treated as depreciable assets, used directly or indirectly in the Purchases (1.5M x 12%) (180k)
Machine (1.4M x 12%) / 48 (3.5k)
production or sale of taxable goods or services (Sec. 4, 110-3, RR 16-05); hence, these are OAs. VAT payable P 56.5k
§ Aggregate acquisition cost – total price, excluding the VAT, agreed upon for one or more
assets acquired; NOT on the payments actually made Illustration
§ If aggregate acquisition cost of capital good, net of VAT, in a calendar month: Capital good – P2M; EUL – 5 yrs (60 months)
Solution: (2M*12%) / 60 months = P4k / month
o exceeds P1M – spread input VAT over 60 months or useful life of asset, whichever is
- P4k input tax credit claim shall commence in the calendar month the capital goods were acquired.
SHORTER.
o does not exceed P1M – the total input taxes will be allowable as credit against output tax
in the month of acquisition
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Expensing of input VAT
Issue: May input taxes be recognized outright as an expense for income tax purposes or added
to the acquisition cost upon purchase of capital asset subject to depreciation?
Unutilized creditable input taxes attributable to 0-rated sales can only be recovered through
the application for refund or tax credit. Hence, unapplied input taxes cannot be treated outright
as deductible expense for income tax purposes [RMC 57-2013 and BIR Ruling No. 123-2013]. That is the
essence of the VAT system. You have to record separately the purchase price of the item you
are buying from the tax that was passed on to you by the supplier. This is one way for the BIR
to check also if the supplier is properly collecting the VAT and recording it.
BIR Ruling allowing expensing of input VAT…
BIR allowed expensing of input VAT, subject to the following conditions: [BIR Ruling No. DA (VAT-
021) 121-2010, July 9, 2010]
1. The input taxes shifted or passed on by the local VAT-registered suppliers shall not be
recorded as input tax in the books.
2. The input taxes shall not be reflected/reported as input tax in its VAT returns.
3. The input taxes shifted or passed on is not claimed as tax refund or tax credit.
This presupposes that there is no proper substantiation (no proper OR / invoice). Remember, one of the
requirements in an invoice / OR is to indicate separately the vatable sales and the corresponding input vat.
Expensing of input VAT is also allowed in the following instances:
1. The claim for refund or credit was denied or rejected by the BIR for having been filed beyond
the 2-yr prescriptive period or for non-compliance with the invoicing/substantiation
requirements.
2. Claim for refund or credit is still pending with the BIR but voluntarily withdrawn by the
taxpayer.
[BIR Ruling No. DA (VAT-021) 121-2010, July 9, 2010]
ü Secure ruling for the company to treat input VAT as an expense to avoid possible issue
with the BIR.
In these cases where the input taxes are claimed as expense, it is more beneficial on the part of
the government because the tax shield is only up to the tax rate by which the taxpayer is
subjected.
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Withholding VAT – to be withheld by the payee
A) FWT – 5% on payment to Government
§ Payor or buyer is the government; regardless who are the suppliers
§ VATable sale but the government will not pay the entire 12%; it will instead withhold 5%
of the total billing which is already considered FWT.
§ Purpose: Expediency of collection (lifeblood)
§ Since it is already FWT, sales to the government will no longer be added to the sales to
other customers. They have to be accounted separately. That’s why if you look at the VAT
return, there is a separate line item for VAT withheld to sales to government. Such is no
longer included in the computation for your VAT payable, only shown for disclosure
purposes.
§ No recognition of output tax; no input tax allowed (7% is deemed as the standard input
VAT)
§ If the actual input exceeds 7%, you cannot claim the excess as creditable input tax. You can
only claim it as cost or expense. So on your part, it is just partial recovery.
§ If the actual input is below 7%, theoretically, the law says you have to adjust (lower) your
cost or expense as well.
B) CWT – on payments for VATable purchase of goods or services from non-resident
suppliers/sellers
§ Withheld at source by the payor/buyer since the seller is beyond the jurisdiction of the
country
§ Payor/buyer is either domestic corporation or resident person;
§ 12% is withheld even for isolated transaction;
§ To be remitted in 10 days to BIR;
§ If 0-rated transaction, the withholding payor/buyer may still claim the remittance as input
tax and avail of tax credit/refund.
§ Failure to withhold could mean disallowance of the corresponding expense that you are
trying to claim.
§ For example, you have a hotel and you contracted a foreign architect or designer. Then in
that case, you are supposed to withhold 12% VAT even if it is just an isolated transaction.
Pay the fee, net of 12% VAT.
Legal Basis
RR 13-2018:
The government or any of its political subdivisions, instrumentalities or agencies, including
GOCCs shall, before making payment on account of each purchase of goods and/or of services
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SY 2018-2019 404_Taxation 2 - KMA
taxed at 12% VAT deduct and withhold a final VAT due at the rate of 5% of the gross payment Apportionment of input tax on mixed transactions
thereof. Provided, that beginning January 1, 2021, the VAT withholding system shall shift When the establishment is engaged in mixed transactions such as when it is engaged in sales
from final to creditable system. So you will already include the sales to the government in your other gross to private persons or firms, to the govt and it is also selling goods which are exempt from VAT,
sales for purposes of computing for the output VAT. And the 5% withheld by the government will be deducted as tax the total input taxes shall be apportioned by applying the ff formulas:
credit. Taxable sales (Taxable sales / Total Sales) x Input tax not directly attributable to any activity
Zero-rated sales (Zero-rated sales / Total Sales) x Input tax not directly attributable to any activity
VAT liability computation VAT-exempt sales (Exempt sales / Total sales) x Input tax not directly attributable to any activity
In lieu of the actual input VAT directly attributable or ratably apportioned to sales to Sales to government (Sales to govt / Total sales) x Input tax not directly attributable to any activity
government, the seller shall be entitled to 7% of gross payment as standard input vat.
o Persons engaged in both zero-rated sales and non-zero rated sales, the aggregate input taxes shall be allocated
o actual input VAT > 7% standard input VAT – excess may form part of seller’s expense or cost ratably between the zero-rated sale and non-zero-rated sale.
o actual input VAT < 7% standard input VAT – difference must be closed to expense or cost. o Input tax cannot be directly attributed to either a VAT taxable or VAT- exempt transaction shall be pro-rated to
the VAT taxable and VAT exempt transactions and only the ratable portion pertaining to transactions subject to
Illustration VAT may be recognized for input tax credit.
Scenario A B C
Sales to government 100 100 100 Illustration (RR 4-2007)
Purchases (goods and services) 42 58 100 ERA Corporation has the following sales during the month:
Output VAT (100 x 12%) 12 12 12 Sale to private entities subject to 12% P 100,000.00
Input VAT (actual) 5 7 12 Sale to private entities subject to 0% 100,000.00
Standard input VAT (100 x 7%) 7 7 7 Sale of exempt goods 100,000.00
Difference between actual and standard input VAT 2 0 5 Sale to gov’t. subjected to 5% final VAT Withholding 100,000.00
Total Sales for the month P 400,000.00
v Landed Cost = invoice amount + freight+ customs duties+ insurance + excise taxes (if any)
The following input taxes were passed on by its VAT suppliers:
Input tax on taxable goods 12% 5,000.00
When to recognize?
Input tax on zero-rated sales 3,000.00
§ Output VAT – upon sales of goods and services
Input tax on sale of exempt goods 2,000.00
§ Input VAT – upon:
Input tax on sale to government 4,000.00
o Consummation – if purchase of goods or properties is supported by VAT invoice;
Input tax on depreciable capital good not attributable to
o Payment of compensation, royalty, rent – if purchase of service is supported by VAT OR;
any specific activity (monthly amortization for 60 months) 20,000.00
o Payment of VAT - prior to release in BOC – if supported by “import entry declaration” by BOC
Excess
Input tax > Output tax Input VAT
Input Input
Input VAT not directly Total Net
§ If not 0-rated sale – carry-over to next TQ (not time-bound) Sales
Output
directly Attributable Input
Creditable
VAT
VAT VAT Unrecoverable
VAT Input VAT for for input VAT
§ If it pertains to 0-rated sale: Attributable to any VAT Payable
carry- refund
o carry-over to next TQ (not time-bound); OR Activity
over
o claim for refund or credit within 2 yrs (time-bound) 12%
12k 5k 5k 10k 10k 2k 0 0 0
VAT
Refund seldom happens; usually, what will be issued is a Tax Credit Cert (TCC)
0% VAT 0 3k 5k 8k 8k 0 0 8k 0
§ As declared by the SC, irrevocability rule applies ONLY if the option exercised by the Exempt
0 2k 5k 7k 0 0 0 0 7k*
taxpayer is to carry over the excess input vat. IOW, you cannot claim for refund or credit Goods
until such time you’ve already exhausted or used up the excess input. Govt
(5% 12k 4k 5k 9k 7k** 5k*** 0 0 2k*
FWT)

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* These amounts are not available for input tax credit but may be recognized as cost or expense. Sec 112
** Standard input VAT of 7% on sales to Government as provided in SEC. 4. 114-2(a). § CIR – may (1) grant refund or (2) issue TCC within 90 days (3 months)
*** Withheld by Government entity as Final Withholding VAT.
§ if CIR denied – appeal to CTA within 30 days from receipt of adverse decision
Substantiation of purchases
§ For purchase of services
- Official receipt showing the information required TAX ADMNISTRATION AND ENFORCEMENT
§ For domestic purchase of goods and properties
- Invoice showing the information required Agencies involved in tax administration
§ For the importation of goods
- Import entry or other equivalent document showing actual payment of VAT on the imported goods, § BUREAU OF INTERNAL REVENUE (BIR)
government OR or bank-validated return - primarily tasked to implement the provisions of the NIRC when it comes to the collection of national taxes.
§ For the purchase of real property § BUREAU OF CUSTOMS (BOC)
- Public instrument i.e., deed of absolute sale, deed of conditional sale, contract/agreement to sell, etc. - primarily tasked to implement tariff and customs code but it overlaps because this agency is also authorized
to collect VAT when it comes to imported goods or articles prior to the release of these imported articles
Requirements for claiming input tax from the BOC jurisdiction.
Recognize input tax in the appropriate period (date of OR/invoice) § PROVINCIAL, CITY AND MUNICIPAL ASSESSORS AND TREASURERS
o Goods – upon issuance of VAT invoice - primarily tasked to implement the provisions under the Local Government Code (LGC) when it comes to the
o Services – upon receipt of payment as evidenced by VAT OR taxing power of the LGUs. Taxation, as a rule, is legislative in nature; but one of the exceptions to it is if the
legislature delegated it. Under our Constitution, there is a delegation given to the LGUs.

Input tax credit

General Powers and Duties of the BIR (Sec. 2) (AGEE)
§ To reduce the output tax in determining the VAT payable for the tax period;
1. Assessment and collection of all national internal revenue taxes;
§ Excess to be carried over to the succeeding taxable periods to reduce the VAT liability for This does not mean levying taxes as this power is of the legislature. It simply refers to the computation of the tax
such taxable periods liability based on existing tax laws and regulations, and eventually collect it.
2. Give effect to and administer the supervisory and police power conferred to it by the tax
Requisites to claim for VAT Refund/Credit: code and other laws.
1. VAT-registered person; 3. Enforcement of all forfeitures, penalties, and fines in connection therewith.
2. Claimed input taxes are directly attributable to zero-rated sale; 4. Execution of judgment in cases decided in its favor by the Court of Tax Appeals.
3. Duly supported with VAT invoice or VAT OR with proper content;
4. The claimed input tax were not applied against output tax nor carried over to Bottom line: The mandate of the BIR is revenue collection.
succeeding months/quarters;
5. Claim for refun/credit (admin) must be made within 2 yrs FROM close of the TQ when Setup
sales (0%) were made NOT when input tax was paid. The BIR is under the Department of Finance (DOF) which is under the Office of the Pres.
§ DOF Secretary – Carlos Dominguez III
Filing § Commissioner of Internal Revenue (CIR) – Caesar R. Dulay
§ Where: BIR OFFICE – large taxpayers; RDO; one stop shop center of DOF § Deputy Commissioner, Operations Group – Arnel SD. Guballa
§ When: within 2 yrs § Deputy Commissioner, Legal Group – Marissa O. Cabreros
§ Deputy Commissioner, Information Systems Group –
Lanee C. David
§ Deputy Commissioner, Resource Management Group – Celia C. King
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Officials of the BIR Office 10. To delegate power to subordinates.
1. CIR (1) head office of BIR located in Quezon City
2. Deputy Commissioners (4) head office of BIR located in Quezon City TN: Powers 2-10 are delegable powers of the CIR.
3. Assistant Commissioners head office of BIR located in Quezon City
4. Head Revenue Executive Assistants (HREA) head office of BIR located in Quezon City POWER TO INTERPRET THE TAX CODE AND OTHER TAX LAWS
5. Regional Directors (19) revenue region
6. Revenue District Officers every revenue district offices (RDOs)
§ This is an exclusive and original jurisdiction of the CIR. It cannot be delegated to the
7. Revenue enforcement officers or examiners
subordinate of the CIR, unless you question the constitutionality, in which case you go to
the regular courts.
Cebu City belongs to political region no. 7. But when it comes to revenue region, it belongs to
§ Interpretation refers to the revenue or tax rulings. If you are not sure that you fall under the
revenue region no. 13. Its regional office is located in Brgy. Luz, Archbishop Reyes Ave, Cebu
exemption, the best thing to do is to ask for a tax ruling. The ruling is an exclusive and original
City (near Grand Con). The 2nd floor is the regional office while the lower ground is the RDO 81.
jurisdiction of the CIR. Before Henares, the CIR usually delegates this power to the Regional
We need to know its location because when it comes to requests for rulings, they usually go
Directors. But when Henares sat, all requests for rulings are directed to the Office of the CIR.
through first with the regional office unless you direct or course through it to the head office.
The disadvantage with this arrangement, though, is that issuance of the rulings will take 2-3
yrs because everything is being signed and evaluated by the Office of the CIR alone. The
Each of the RDOs has its own jurisdiction. (Refer to BIR website for their respective jurisdictions)
advantage is that when there are a lot of requests for ruling involving the same issue, the
o RDO 80 – Lopez Jaena St., Mandaue City (lower ground where the regional office is located)
CIR will just issue a revenue memorandum circular or a revenue regulation clarifying it. As
o RDO 81 – Archbishop Reyes Ave, Cebu City (near La Tondena)
of now, when we ask for ruling, we course it through not through the Office of the CIR but
o RDO 82 – N. Bacalso Ave, Cebu City (across CITU)
through the so-called law and legislative division of the BIR
o RDO 83 – Highway Tabunok, Talisay, Cebu City (near Gaisano Tabunok)
Revenue Regulation Revenue Ruling or Opinion
General Powers of the CIR (Secs. 4-8, NIRC)
General interpretations of the tax laws More specific in nature; addressing needs of
The powers provided under the NIRC is primarily given to the CIR. There are provisions, though, that CIR OR his duly
authorized representative. These other officials, from deputy commissioners to revenue enforcement officers or seeking to explain the provisions of the law a taxpayer but is applicable only to the
examiners, are expected to do their job based only on the authority granted by the CIR, whose power and authority requesting taxpayer
is also granted under the NIRC. IOW, whatever action being done by these lower officials which is not authorized can Issued by the Secretary of Finance with Issued by the CIR subject to review by the
be considered an illegal or void action. recommending power from the CIR, being Secretary of Finance
1. Power to interpret the tax code and other tax laws (exclusive and original jurisdiction) the implementing agency. This is under the presumption that such ruling should
2. To obtain information, and to summon, examine and take testimony of persons; Reason: If you look at the legislating phase, the entity be in accordance with the revenue regulation which
3. To make assessments and prescribe additional requirements for tax administration and who primarily calls for a passage or an amendment of was issued by the DOF. The BIR publicizes this because
enforcement; a tax law raising revenue is the DOF. When it comes to this will at least provide guidelines to the public
tax revenue bill, it must start from the lower house, especially to those similarly situated. However, even if
4. To conduct inventory-taking, surveillance and to prescribe presumptive gross sales and you are similarly situated to the entity issued with a
that’s why from the DOF, they will tap a congressman
receipts; who can sponsor it. The one who knows really of the ruling for its exemption, it does not follow that you will
5. To terminate taxable period; intention and the purpose of the amendment is the be automatically be exempted as well. You still have to
6. To prescribe real property values; DOF, so it is only proper that it will be the one to issue request for a ruling applicable to your company.
7. To inquire into bank deposit accounts; a general interpretation through the Secretary of
Finance.
8. To accredit and register tax agents;
9. To prescribe additional procedural or documentary requirements; and
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POWER TO DECIDE DISPUTED ASSESSMENTS, REFUNDS, PENALTIES AND OTHER
MATTERS UNDER THE NIRC OR OTHER LAWS ADMINISTERED BY THE BIR
§ This is a delegable power. Usually, the CIR delegates this power to the regional director. As
of now, Regional Director Pagulayan is the RD of Revenue Region 13.
§ Disputed Assessments – there is an assessment, usually deficiency assessment, issued by the
BIR. Once that deficiency assessment is being validly protested by the taxpayer, that
becomes a disputed assessment. It is required to file an administrative protest first, which
shall be decided by the CIR, before you can proceed with the judicial action, pursuant to the
principle of exhaustion of administrative remedies.
§ The decision of the CIR must have a clear and unequivocal indication whenever the CIR’s
action on an assessment questioned by the taxpayer constitutes his final
decision/determination on the dispute. The assessment we are referring here pertains to
deficiency assessment. You disputed the computation made by the BIR.
§ Both the CIR and RD can decide the disputed assessments. If the RD decided adversely on
your protest, you have 2 options: (1) appeal to the CTA; or (2) file a request for
reconsideration to the CIR.
§ The Revenue District Officer does not usually decide on the rulings because the assessments
in the region are issued by the regional office.
§ Kinds of Remedies:
o Appeal to the Secretary of Finance – problems arising from interpretation of tax laws.
o Appeal to the Court of Tax Appeals – problems arising from assessments, refunds,
penalties or other matters regarding tax liabilities under the Tax Code.
o Regular courts – problems arising from constitutionality of tax laws.
o BIR – Administrative actions by taxpayers prior to judicial action before the CTA
OBTAIN INFORMATION AND TO SUMMON, EXAMINE AND
TAKE TESTIMONY OF PERSONS
Extent:
1. Canvass from time to time the revenue region or district office.
2. Obtain information on regular basis – information sourced from the taxpayer (self-
assessment) or 3rd party information
o It refers to the information obtained on a regular basis, which means the information contained in your tax
return as declared by the taxpayer since we follow self-assessment.
o The CIR can even get third party information. The CIR is empowered to ask from other persons your source of
income or the correct amount of your income.
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o For example, in a contract, the talent fee at P50M of an actor is provided but he only reported P10M in his
return. However, the entity who contracted with the actor will report the true amount as this would be
beneficial to them since such is considered as a deduction. In this case, the BIR would discover such
misstatement through what we call relief system. Under this system, the summary list of sales will be
compared with the summary list of purchases. In the summary list of sales, it is required to indicate the buyers,
etc. while in the summary list of purchases, the suppliers.
o The BIR can also actually ask for the list of properties from the city assessor's office. Usually, they will mark
those persons who have properties of very high value and they will counter check their ITRs.
o There was one 2014 case, wherein the spouses were assessed of deficiency tax by the CIR because of the simple
fact that only the husband is reporting an ITR of 1M annually, but they were able to purchase several real
properties in Tagaytay. They were asked to explain how they purchased those properties when they are only
reporting this much of income, and the wife was just a plain housewife with no income being reported. The
spouses failed to explain so the assessment of the BIR went up, and a criminal case of tax evasion was filed.
3. Take testimony of persons (under oath) as may be relevant or material to the inquiry.
4. Examine any book, record, data which may be relevant to the inquiry, subject to the period
to prescribe the keeping of books
5. To issue summons
§ The BSP is not exempt from internal revenue taxes; only DST exemptions.
§ The CIR and/or his subordinate may issue subpoena i.e. subpoena duces tecum pursuant to
the CIR’s power to obtain information and to summon under NIRC. However, this is not a
requisite before resorting to the best evidence obtainable.
§ Best evidence obtainable - When the BIR issues an assessment, the assessment should be
based on fact and law. If the taxpayer will not cooperate, the BIR can take any other
information from other sources. This rule of best evidence obtainable from 3rd party applies
only in default of the cooperation of the taxpayer, which in this case, the taxpayer is at a
disadvantage since he may no longer be able to defend himself especially if the information
come from reliable persons such as his supplier, customers, internet, and the like.
MAKE ASSESSMENTS
A. Examination of returns and determination of tax due – based on best evidence obtainable
General rule again is self-assessment. However, such is prone to abuse on the part of the taxpayer by
understating the income and overstating the expenses. This is where the classification comes into play. Those
who are prioritized when it comes to the review or audit of the tax returns are the large taxpayers, tamp
taxpayers, and medium taxpayers. You will receive a notice in case you are classified as such and will have
additional tasks. If you’re not classified as such, you will not be prioritized pursuant to the principle of
administrative feasibility and cost-benefit. However, even if you do not belong to any of these 3 classifications,
you may still be audited especially if the very reason that you are not classified as such is you did not declare
your proper income and your proper sales. The CIR can acquire such fact from 3rd party information or from a
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so-called anonymous complaint. The one who usually sends these anonymous letters are those disgruntled investigation served upon the taxpayer. If you are going to withdraw and amend your tax return, the period of
employees of the taxpayer. assessment could also extend. Take note that the BIR is only given 3 years (1) from the date of timely filing of
the tax return or (2) if filed late, from the date of actual filing. For instance, if the filing date is April 15, 2018
Sources: but only filed it on April 13, 2 days before the deadline, the period of assessment would be counted 3 years
ü Government offices/agencies from April 15, 2018. The BIR can assess you until 2021. If the assessment goes beyond 2021, then that is already
ü Corporations/employees a void assessment. If there’s a material amendment, the period to assess may be extended. To be material, it
ü Clients or patients must be that the previous tax liability you filed decreased/ changed.
ü Tenants, lessees, vendees and from other sources
Notice of audit or investigation
General Rule: Tax returns are confidential This commences as soon as you receive the LOA or LN from the BIR, informing you that you have deficiency
Exceptions: PA-EFEC – Instances when your tax returns may be examined by entities other than by the CIR. tax for this particular period’s filing.
1.) If there is written order of the President of the Philippines
2.) In aid of legislation of the Congressional Oversight Committee Basis in assessing the proper tax:
- usually applicable to entities exempted from taxation § Best evidence obtainable; OR
- the government wants to know the revenue forgone as regards the cooperatives and PEZA-registered § Use of the net worth method – an extension of the basic accounting formula: A = L + E
exempt from income taxation, which the legislatures can utilize in further legislations
3.) Material evidence in a criminal case where the government is interested in the result (usually tax evasion Conditions (use of the Net Worth Method):
cases) 1. Either there are:
4.) Inspection is authorized under Finance Regulation 33 (a) No books of accounts; or
- this is an old rule; instances when the BIR official/officer can examine the tax return (b) The books do not reflect the correct income; or
5.) Requests for exchange of information by foreign tax entities (c) The taxpayer refuses to produce the books; or
6.) Upon consent/authority of taxpayer (d) Books were destroyed.
2. There is evidence of possible sources of income causing an increase in net worth;
B. Assess the proper tax 3. There is fixed or opening net worth;
4. The method reflects taxpayer’s income with accuracy and certainty after various adjustment.
Concept of Assessment
§ Assess means to impose a tax, to charge with a tax; to declare a tax to be payable; to apportion a tax to be How does the BIR compute your net worth?
paid or contributed, to fix a rate; to fix or settle a sum to be paid by way of tax; to set, fix or charge a certain What usually happens is that the BIR will just compare your net worth this year versus your net worth in
sum to each taxpayer; to settle determine or fix the amount of tax to be paid. another previous year. If there is a big difference, the BIR will check primarily your ITR and will ask for an
§ An assessment is the notice to the effect that the amount therein stated is due from a taxpayer as a tax explanation. If you cannot explain, the BIR can acquire evidence from third parties.
with a demand for payment of the same within a stated period of time. (Commissioner vs. CTA, 27 SCRA
1159) C. Conduct of inventory-taking, surveillance, and to prescribe presumptive gross sales and
§ This is not synonymous with the levy or the imposition concept in Tax 1 for the latter refers to receipts
computation/application of the tax law to the taxpayer. § Prescription of presumptive gross sales and receipts happens if the taxpayer failed to maintain the
appropriate books of accounts, and failed to account for its correct sales and receipts. The basis of the CIR
Requisites for a valid assessment: here would be benchmarking (where same entities/companies having the same nature of operation as the
o The taxpayer shall be informed in writing of the law and the facts on which the assessment is made (Sec. taxpayer).
228, NIRC) § 3 types of surveillance:
o An assessment contains not only a computation of tax liabilities, but also a demand for payment within a o Covert Surveillance – surreptitious and undercover watch on business
prescribed period (CIR vs. PASCOR) o Overt Surveillance – commences from the inventory taking then actual business observation and close
o An assessment must be served on and received by the taxpayer (CIR vs. PASCOR) monitoring of the business; this is the time when you are asked to explain
o Short Duration Surveillance (Tax Compliance Check) – this is commonly termed as tax mapping. Here, there
Assessment Period is no direct target, unlike in covert and overt surveillance. The BIR officer will go to the taxpayer’s business
As a rule, returns, statements and declarations filed with the BIR may no longer be withdrawn by the taxpayer. place with a checklist and see for example if it has BIR COR, if such is displayed in a conspicuous place, if it
However, such may be withdrawn and amended within 3 years from filing and there is no notice of audit or
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has a BIR Ask for Receipt Notice, or it has a duly issued invoice or OR, etc. Failure to present those will
result to corresponding penalties
§ Aside from surveillance, the BIR may also conduct benchmarking. There will be some sort of
standard/comparatives if this taxpayer more or less is reporting the same as other taxpayers belonging to
the same industry. If you’re below the standard, then the BIR may prioritize you for audit. This benchmarking
is usually undertaken to determine the net VAT due and the net income tax due.
§ Benchmarking Guidelines:
a. shall be separate for corporations and individuals;
b. per area, per line of industry and per tax type basis;
c. done per RDO by preparing taxpayers’ profile per taxable year
d. based on tax returns and data from other sources within and outside the Bureau, RDOs shall determine
the specific industry coverage;
e. If LOA was issued, it will only be closed upon consideration of the prescribed benchmarks.
§ In several cases reaching the SC, if a BIR issues an assessment, it must not be based solely on the reports of
benchmarking but should be based on tax or law. In the case of Medicard, the Court said that you can use it
as basis in the issuance of LN or deficiency notice. But if not paired with other actual information, then you
cannot say that the taxpayer violated just because he is below the benchmarking standard.
D. Issue jeopardy assessments
§ GR: BIR Assessment only upon full audit
§ Exc: Jeopardy Assessment
§ This is a tax assessment made by an authorized Revenue Officer without the benefit of a complete or partial
audit in light of the Revenue Officer’s belief that the assessment and collection of the deficiency tax will be
jeopardized by delay due to taxpayer’s failure to:
1) comply with audit and investigation requirements to present his books and/or pertinent records or;
2) substantiate all or any of the deduction, exemption or credit claim in his return.
§ This is an assessment that will be issued by the BIR if the taxpayer will not cooperate with the Bureau in the
examination of the books and the period to assess is already about to lapse. If the taxpayer will still not
comply, the assessment becomes final and demandable and he can no longer appeal to the CTA.
§ The benefit of the issuance of a jeopardy assessment is that it will toll or suspend the running of the 3-yr
period. Protest is only allowed within 30 days from such issuance.
§ Other instances where jeopardy assessment may be issued:
o The taxpayer is about to retire his business
o The taxpayer is about to leave the country
Authority to terminate taxable periods
Instances when tax periods may be terminated: (LR-RA)
1. Intending to leave the Philippines
2. Retiring from business
3. Intends to remove/hide/conceal his properties in the Philippines
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4. Taxpayer is performing an act tending to obstruct the proceedings for collection of the
tax for past or current quarter or year or to render the same ineffective (totally or
partially)
Prescribe real property values - zonal valuation
Zonal valuation is used to compute the FMV of the property. We compare whichever is
HIGHER between (1) the zonal value and (2) the valuation by the city and the municipal
assessors. We can see the zonal valuation in the BIR website. The location of the property as
declared in the TCT will also matter.
Inquire into bank deposit account
§ GR: Bank Secrecy Law
The BIR is authorized to obtain information from the other persons than those whose internal revenue tax
liability is subject to audit or investigation. However, this power shall not be constructed as granting the
Commissioner the authority to inquire into bank deposits
§ Exc:
o Power to inquire into bank deposits of a decedent for purposes of determining his GE,
determining the correct estate tax due to the government – no need of waiver.
The fact that the deposit is a joint account will not preclude the Commissioner from inquiring thereon.
o In an application for tax compromise of tax liability due to financial incapacity to pay tax
liability. – need of waiver
In case a taxpayer applies for an application to compromise the payment of his tax liabilities on his claim that
his financial position demonstrates a clear inability to pay the tax assessed, his application shall not be
considered unless and until he waives in writings his privilege under R.A. 1405, and such waiver shall constitute
the authority of the Commissioner to inquire into the bank deposits of the taxpayer.
o Exchange of information by the BIR on tax matters pursuant to internationally agreed
standards (RA10012 and FATCA)
Accredit and register tax agents
If a CPA, for example, wants to represent his bookkeeping clients to the BIR, an accreditation
that he is the authorized representative of the taxpayer to transact with the Bureau is required.
However, if you are a lawyer, not suffering from suspension and disbarment, there is no more
a need to get such.
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Prescribe additional procedural or documentary requirements § This refers to inflagrante delicto; when the taxpayers are caught in the act, the
aforementioned officers can make the arrest.
§ Example: if you tried to bribe (UTT) a BIR official, he can arrest you and seize the instrument
The CIR, however, doesn’t have the power to prescribe penalties for the violation of the
used in committing the crime. The purpose of the seizure is for it to be presented later on in
regulation. Since the Secretary of Finance is the one who issues Revenue Regulations, he is only
a court hearing against you.
the one who can prescribe penalties. CIR merely has recommendatory powers.
Authority to assign internal revenue officers
Delegate power to subordinates
§ Those involved in excise tax functions
GR: The powers of the CIR are delegable. Limitation: Up to 2 years. After 2 years, they will be reassigned.
Exceptions: (RICA) § Assignment to other special duties
1. To recommend the promulgation of rules and regulation to the SOF; Limitations:
a. Internal revenue officers assigned to perform assessment or collection function shall not remain in the same
2. To issue rulings of first impression or to reverse, revoke or modify any existing ruling;
assignment for more than 3 years;
Revenue ruling is an exclusive and original jurisdiction of the CIR. Before Henares, the power to issue tax ruling
- Purpose: To avoid familiarity in the RDO where the officer is assigned.
is delegated to the RD especially if these rulings are not rulings of first impression and not about reversal,
b. Assignment to special duties shall not exceed 1 year.
revocation or modification of existing rulings. Now, under Dulay, the authority is in a different department of the
CIR, the law and legislative division. So, if you look at it, the power can already be delegated but only as to the
power to issue rulings that are not of first impression. Authority to impose duties on certain officers
3. To compromise or abate any tax liability (except assessments issued by the regional offices
involving basic deficiency taxes of 500,000 or less, and minor criminal violations) Unless there is a certification (CAR)
As a general rule, the CIR has the power to compromise tax liability; but he may delegate such power to a
Ø Register of Deeds – no registration of transfer in the Registry of Property transferring real
subordinate official with a rank equivalent to division chief or higher, provided the basic deficiency tax is 500k or
less. Take note that what is covered by the exception of 500k or less is only compromise. The power to abate rights or any chattel mortgage.
cannot be delegated to other BIR revenue official. Ø Debtor of the decease shall not pay to the administrator, heirs, legatee, executor,
o Compromise – still has tax collection; only at a very minimal amount administrator, heirs, legatee, executor, administrator, etc.
o Abatement – no tax collection; liability of taxpayer is absolutely forgiven Ø Bank shall not allow withdrawal.
4. Power to assign or reassign internal revenue officers to establishments where articles Ø Lawyer, notary public, or any government officer must furnish copies with the BIR.
subject to excise tax are produced or kept.
Example:
Authority to make arrests and seizures The Registrar of Deeds should not transfer the title of the property until and unless the owner of the property will
present a CAR from the Bureau. OW, he can be held liable.

§ Responsible officers: Authority to suspend business operation of the taxpayer

o CIR
o Deputy commissioners
o Regional directors § RMO 3-2009: Oplan Kandado. The closure of the business shall last for a period of no less
o Revenue District Officers than 5 days and shall be in force until the violation is rectified.
§ Reason: Violation of penal laws and rules or regulations administered by the BIR § RATE: Run Against Tax Evaders
§ Proceedings: before a competent court, to be dealt with according to law
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§ In connection with this, the business may be compelled to close for failure to register with
the Bureau, if you failed to issue the VAT OR or VAT COC invoice, if you evade tax like
understating your sales or overstating your expenses.
Authority to ask for reports or submission from the cooperatives
This is an added power of the CIR by TRAIN Law, pursuant to the Cooperative Development
Act.
4 Deputy Commissioners (plus 2) – During the time of Aquino, it became 6 DCs, but now it is back to FOUR.
1. Operations Group
2. Legal and Inspection Group
3. Resource Management Group
4. Information Systems Group
Plus 2 Deputy Commissioners for newly created positions
5. Tax Reform Administration Group
6. Social Concerns Group
Field Service – Regional Offices (headed by the Regional Director)
Power and duties of the Regional Director (Section 10 NIRC)
1. Implement laws, policies, plans, programs, rules, and regulations of the department or
agencies in the regional area;
2. Administer and enforce internal revenue laws, and rules and regulations, including the
assessment and collection of all internal revenue taxes, charges and fees;
3. Issues Letters of Authority (LOA) for the examination of taxpayers within the region;
4. Provides economical, efficient and effective service to the people in the area;
5. Coordinates with the Local Government in the area;
6. Coordinates with the other regional offices or other departments, bureaus and agencies in
the area;
7. Exercises control and supervision over the officers and employees within the region;
8. Performs such other functions as may be provided under the law and as may be delegated
by the CIR.
Revenue District Officers
§ implement program, methods and procedures necessary for the efficient, effective and
economical assessment and collection of your revenue taxes in the revenue district.
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§ Composition:
a. Field men and examiners
b. Collection agents and clerks
§ Authority of revenue officers (assessors/examiners) pursuant to a LOA issued by the RD:
o Examine taxpayers within the jurisdiction of the district in order to collect the correct
amount of tax;
o Recommend the assessment of any deficiency tax.
Nature of Assessment
§ ASSESSMENT is the official action of an officer authorized by law in ascertaining the amount
of tax due under the law from a taxpayer.
§ The term assessment involves:
- Giving notice of assessment
- Computation of the sum due
- Issuance of notice of demand upon the taxpayer for the payment of the tax or
deficiency stated
§ This primarily deals with the computation of the taxpayer’s correct tax liability. You can say
that you’re already assessed if you have received the Final Assessment Notice (FAN), NOT
the Preliminary Assessment Notice (PAN). Although the PAN is part of the due process aspect
in informing the taxpayer as to his/her correct tax liability, it is not the assessment that we
are talking about which must be within the prescriptive period of 3 years; rather it is the
FAN.
§ After the FAN, the next step that the government will do is collection of tax. Since you are
already assessed of your correct tax liability, you can counter and present defenses if you
have proper support to your case. But if none, the next recourse that the government will
do is collection. And take note, when it comes to collection, there is also a prescriptive
period.
SEC. 6. Power of the Commissioner to Make Assessments and Prescribe Additional
Requirements for Tax Administration and Enforcement. -
(A) Examination of Return and Determination of Tax Due. – After a return has been filed,
the Commissioner or his duly authorized representative may authorize the examination of any
taxpayer and the assessment of the correct amount of tax: Provided, however, that failure to
file a return shall not prevent the Commissioner from authorizing the examination of any
taxpayer.
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How long should I worry about a BIR tax audit or assessment? o Substantial underdeclaration (30%) constitutes prima facie evidence of false and
§ GR: 3 yrs counted from the date of filing (if filed late), or from the deadline (if filed on time fraudulent return
or earlier). (Sec. 203, Tax Code) - A taxpayer may have underremitted the withholding tax because the suppliers demanded to or that an
§ Exc: 10 yrs from discovery of: (Sec. 222, Tax Code) erroneous tax rate was used. The consequence of failure to withhold would be to disallow the taxpayer
from claiming the supposed corresponding expense. The proper thing to do is to ask for a sworn statement
o Failure to file return or affidavit from such supplier declaring that he himself requested such omission of withholding the tax.
o False return o Absence of income in the return (filing of deficient returns) tantamount to an omission
o Fraudulent return (with intent to evade tax) to file returns.
§ Who is in advantage of this prescriptive period? It actually benefits both sides, taxpayer and
the government. It benefits the government, which is the one implementing it, because it KINDS OF ASSESSMENT
promotes efficiency on the part of its officials. At the same time, it also benefits the taxpayer Ø By the taxpayer: Self-assessment
because the prescriptive period primarily gives him peace of mind na di sya kanunay gukud The most common is the self-assessment or the voluntary assessment. But even if it’s self-assessment, it is not
gukuron ni BIR especially if the taxpayer did not do anything wrong. Of course, it’s a different an assurance that the BIR will no longer review the computation.
story if the taxpayer evaded tax. Ø By the BIR, without authority: Illegal and void assessment
§ In connection to the prescriptive period, recall on the number of years when you can keep The assessment must be done within the prescriptive period; OW, the assessment is considered to be done
without authority and it becomes illegal or void assessment.
your books of accounts or records. If you look at the Tax Code, it requires you to keep your
Ø By the BIR, with authority:
books of account only for 3 years primarily because the period to assess is only 3 years from
- Deficiency Assessment
the date of filing or from the deadline if you filed on time. However, in a 2013 Memorandum Once you receive a final assessment, usually it is a deficiency assessment. This is issued when the taxpayer
Circular issued by Henares, the period to keep the books of accounts is extended from 3 yrs fails to pay the correct amount of taxes.
to 10 yrs primarily to coincide with the exceptional period to assess which is 10 years in case - Erroneous Assessment
of falsity, fraud or non-filing. So, in that case, the taxpayer is given the opportunity to defend If something is wrong in the assessment (computation, appreciation of facts, provisions in law), then it
himself. becomes an erroneous assessment.
- Jeopardy Assessment
Reckoning of 10-year prescriptive period If the assessment is issued without the benefit of full audit or issued with the benefit of a partial audit only
primarily because the taxpayer failed to provide the documents or failed to provide the requirements by
§ A false return was filed on April 15, 1990 and the falsity was discovered only on March 8 the examiner and the prescriptive period to assess is about to lapse, tendency is the BIR will issue what we
1991. The assessment for the 1989 deficiency income tax was issued on January 9, 1995. call as jeopardy assessment.
§ SC: The assessment was made well within the 10-year prescriptive period reckoned from - Disputed Assessment
March 8, 1991. (CIR vs. Estate of Benigno P. Toda, GR 147188, Sept. 14, 2004) This happens if the assessment is being questioned by the taxpayer; the taxpayer files a protest to a
deficiency assessment.
False vs Fraudulent Return
§ False Return – implies deviation from truth, whether intentional or not Reckoning of prescriptive period of assessment: Where do I begin?
§ Fraudulent return with intent to evade tax – implies intentional or deceitful entry with
intent to evade tax. It is a matter of state of mind so it cannot really be ascertained by just A. Returns filed earlier than the last day of filing shall be counted from the last day prescribed
looking at the tax return. for filing of the return.
§ In determining if there is intent to evade the payment of tax which would warrant the
application of the 10-yr prescriptive period, the following manifestations of the taxpayer’s Prescribed filing Actual date of
Type of return Reckoning period
intentions may be used as guidelines: deadline filing
ITR (1702) April 15 April 10 April 15
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Civil Code vs. Administrative Code
B. Returns filed beyond the period prescribed by law shall be counted from the day the return § Administrative Code of 1987 (Section 31, Chapter VIII, EO 292)
was filed. o A year is composed of 12 calendar months; the number of days is irrelevant
o The 3-yr prescriptive period consists of 36 months.
Prescribed filing Actual date of When it comes to counting the prescriptive period, we follow the rule under the Administrative Code, wherein
Type of return Reckoning period you will just add 3 to the date. We do not consider the number of days in a month. For example, ITR filed on
deadline filing
April 15, 2013 falls on April 15, 2016 (whether or not there is a leap year)
ITR (1702) April 15 April 20 April 20 § Supreme Court: Being the more recent law, EO 292 or the Administrative Code of 1987,
governs the computation of legal periods. (CIR v. Primetown Property Group Incorporated, G.R. No.
Date of filing varies per type of tax return 162155, August 28, 2007)
§ IOW, You can amend the return, provided you did not yet receive a notice of audit. The 3-yr
Type of Return Date of Filing prescriptive period to assess will not change as long as the amendment is not considered
1. Income tax return (BIR Form 1702) April 15 or 15th day of the fourth month substantial amendment. But if the amendment is substantial, then the date of filing the
following the close of fiscal year amended return will be the reckoning date for purposes of counting the 3-yr prescriptive
2. Creditable Withholding Tax (BIR Form Non-eFPS* – 10th day after the end of each period to assess.
1601E) month § Substantial – if it calls for a reduction or a change in the tax liability of the taxpayer. In one
eFPS** – 11th-15th depending on industry case, even a change of 1% was considered as substantial amendment of the return. This is
grouping different from substantial under-declaration which is considered as a manifestation of your
3. Quarterly VAT Return (BIR Form 2550Q) 25th day following the close of each taxable intent to evade payment of tax which must exceed 30%.
quarter
* For December return, filing and remittance is on every January 15 When an assessment is made
** For December return, e-payment due is on January 20 § An assessment is deemed made within the prescriptive period when the notice of
assessment is released, mailed or sent to the taxpayer within the prescriptive period.
Effect of filing of an amended return § Notice of Assessment = Final Assessment Notice (FAN)
§ The prescriptive period to assess commences from the filing of original return, if it is § Taxpayer received the eLA, informal conference and preliminary assessment notice (PAN)
sufficiently complete to enable the BIR to intelligently determine the proper amount to be all within the 3-yr prescriptive period, but the final assessment notice (FAN) was released,
assessed. mailed or sent beyond the 3-yr assessment period.
§ The fact that amended returns were filed later neither start anew the running of the statute § IOW, if the BIR releases, mails or sends the assessment beyond the 3-yr prescriptive period,
of limitations, nor extend its period. (A. I. Ammen Transportation, Co., Inc. v. CIR, CTA Case No. 540, such assessment is considered already as void or illegal assessment because the BIR has no
November 10, 1965) longer the authority to assess because of prescription. That’s why the first thing the
§ If amended return is substantially different from the original return, the prescriptive period taxpayers checks is the fact of releasing, mailing or sending. The manner of doing these must
is counted from the filing of the amended return. be through personal service but substituted service may be allowed if mailed to the last
known address of the taxpayer. If it is mailed via a registered mail, the BIR should be able to
Changes on reckoning of prescriptive period due to filing of amended tax return prove the said registry receipt and the return card.
Effect on prescriptive period of amended tax returns o registry receipt – proves that the notice was mailed
Last day prescribed Date of actual filing 3-yr prescriptive Filing date of New 3-yr o return card – proves that the notice was received by the taxpayer
for filing of return of return period amended return prescriptive period
April 15, 2010 April 15, 2010 April 15, 2013 June 15, 2010 June 15, 2013
§ Personal service – what matters is the date of sending and releasing; the taxpayer must
receive the notice within a period of 3 yrs.
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§ Substituted service (registered mail) – what is important is that the notice of assessment is
mailed within 3 yrs. The date of receipt by the taxpayer is immaterial.
Service of tax assessments
§ When notice is released, mailed or sent, it is not required that the notice be received by the
taxpayer within the prescribed period. But the sending of the notice must be clearly proven.
(Basilan Estate, Inc. vs. CIR, L-22429, Sept. 5, 1967)
§ Not prescribed:
End of 3-yr prescriptive period: August 31, 2012
Date of Service/Mailing: August 29, 2012
Date of Receipt: September 9, 2012
§ When a mail matter is sent by registered mail, there exists a presumption that it was
received in the regular course of mail.
§ A direct denial of the receipt of the assessment shifts the burden upon the BIR to prove that
the mailed letter was indeed received by the addressee. (Republic v. Court of Appeals, 149 SCRA
351)
If it is through registered mail, there exists a presumption that it was received in the regular course of mail. IOW,
absent any denial by the taxpayer, presumption is he was able to receive it. Despite the immateriality of the date of
receipt by the taxpayer (since it is not fatal if the taxpayer was only able to receive such beyond the prescriptive
period), it is still required that he was able to receive the assessment, pursuant to the due process clause under the
constitution. Once mailed, the running of the period to assess is suspended. However, the problem arises if the
taxpayer denies receipt of the mail. If the taxpayer denies, the burden of proof that the mail was properly done and
the fact of receipt by the taxpayer will fall upon the BIR. In this case, the BIR cannot prove receipt by just presenting
the registry receipt since this is only a proof of mailing. It has to present a return card, which is a proof of delivery
and receipt by the addressee. However, in default of this return card, it may instead present an affidavit or a
certification from the Bureau of Posts that the notice was delivered to the last known address of the taxpayer. If it
was indeed delivered but was not received by the addressee due to the fact of transferring address, it does not
necessarily follow that the due process clause was violated. It will matter if the BIR was notified of such fact of
transfer of address because absent such notification, as long as the BIR was able to prove the fact of mailing within
the prescriptive period to the taxpayer’s last known address, that is already considered a valid receipt by the
taxpayer. BIR Form No. 1905 is what is submitted for information updating. If the taxpayer changes address, he
should also amend his COR with the bureau. That’s a proof of notification to the BIR. Therefore, impliedly, if you fail
to notify the BIR, the assessment can become final and executory.
Facts to raise the presumption that mail was received in the regular course of mail are:
[Barcelon, Roxas Securities, Inc. vs. CIR, G.R. No. 157064, August 7, 2006 citing Protector’s Services, Inc. vs. Court of
Appeals, G.R. No. 386 Phil. 611, 623 (2000)]
(a) That the letter was properly addressed with postage prepaid; and
(b) That it was mailed.
Proof of fact of mailing
1. Registry receipt issued by the Bureau of Posts
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2. Registry return card (signed by taxpayer or authorized representative)
3. Certification issued by the Bureau of Posts and other documents executed with the
intervention of Bureau of Posts
How often can I be examined?
§ Only once for a taxable year, except in the following cases: [ROTC Commissioner]
1. When the Commissioner determines that fraud, irregularities, or mistakes were committed
by the taxpayer
2. When the taxpayer himself requests a re-investigation or re-examination of his books of
accounts
3. When there is a need to verify a taxpayer’s compliance with withholding and other internal
revenue taxes as prescribed in a Revenue Memorandum Order issued by the CIR
4. When the taxpayer’s capital gains tax liabilities must be verified
5. When the CIR exercises his power to obtain information relative to the examination of other
taxpayers (Secs. 5 and 235, NIRC).
Types of audit notices
1. Eletronic Letter of Authortiy (eLA)
2. Memorandum of Assignment (MOA)
3. Letter Notices (LN)
4. Mission Orders (MO)
When we say ‘types of assessments’ that a taxpayer receives, this is the initial document that he will receive for the
BIR to start auditing. Among these 4 audit notices, what is really required under the NIRC to commence the audit is
the LOA or eLA. There are some cases where the SC invalidated the assessment because of the fact that there was
no LOA or eLA because the purpose of this audit notice is some sort of a delegation notice from the CIR or RD to a
particular revenue examiner, authorizing the latter to examine the books or the records of a particular taxpayer for
a specific period.
Letter of authority
§ Scope:
1. Audit or investigation of all internal revenue taxes, including withholding taxes.
2. Claims for tax refund/credit, audit of taxpayers retiring from business or undergoing
corporate reorganization and other cases where TVNs were previously authorized for
audit/verification of tax liabilities and other audit-related activities.
- TVN stands for Tax Verification Notice. You usually receive this if you are going to retire your business. If
you want to dissolve your business, the application with the SEC is not only the requirement. You have to
dissolve your business with the LGU and BIR as well. If you just stopped operating, stopped filing the
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monthly and quarterly filings, without formally terminating, that would be considered as open case. It will head office, signed by the
continue to run until such time that you’re going to formally terminate it. And by this time, you will be Commissioner; or (2) the large
charged with fines and penalties.
taxpayer’s division; or (3) the RD. Take
§ Coverage: Only one taxable year (CY or FY) except:
note that before issuing a LOA, usually,
(a) Tax fraud cases authorized by the Commissioner or Deputy Commissioner
they have already an idea that there is
(b) Excise tax cases
In these exceptional cases, it can cover several years but the LOA must specify the years covered. But in most deficiency in the filings of that taxpayer.
cases, the LOA covers 1 yr only because before, there is this rule that within 120 days, the examiner should One basis may be from the RELIEF
have already finished examining the company. Kung baga, there is a deadline or expiration date ang LOA. system, wherein ibangga ang sales
Although, that rule is recently withdrawn already. But the rule is still strict as regards to the requirement of reported by the other party versus the
specifying the covered taxable year.
purchases reported and the importation
The BIR has already issued an RMO because this is the case na mapildihan niya usually because the SC can never generated from the system of BOC
validate a LOA covering a particular yr and unverified prior years because that is a violation of the due process clause versus the importation reported. When
in the constitution. It is as if the BIR is in a fishing expedition sa business nimu so dapat specific. So, in this RMO, the the BIR notes a material deficiency, that
BIR declared that…
usually triggers the issuance of a LOA. So
Rule on LAs with “unverified prior years” meaning to say, when you have the LOA,
§ Section C of Revenue Memorandum Order No. 43-90 dated September 20, 1990 provides: the next thing you receive is usually the
“3. A Letter of Authority should cover a taxable period not exceeding one taxable year. The LN. The Letter Notice details your
practice of issuing L/As covering audit of “unverified prior years” is hereby prohibited. If deficiency to tax liabilities. So the BIR has
the audit of a taxpayer shall include more than one taxable period, the other periods or already a computation kung unsa ang
years shall be specifically indicated in the L/A.” na-file and nabayaran nimu versus the
(CIR v. Sony Philippines, Inc., G.R. 178697, November 17, 2010; CIR v. De La Salle University, Incorporated, CTA EB
671, June 8, 2011) supposed na bayran unta nimu based on
their system. So, it’s up to the taxpayer
Letter of Authority now to prove to the BIR the correct
In an LOA, you have there a heading ‘LETTER OF AUTHORITY’. What is important here is that it amount of tax liability.
must be addressed to a taxpayer, it must specify the period covered and the examiner
authorized by the BIR to go to the taxpayer’s office. The named examiner is authorized to check An example of an invalid LOA is when it only covers UPY which stands for ‘Unverified Prior
the taxpayer’s books and to require from him supporting documents. If the BIR gives you an Years’. In the case of De La Salle, a 2017 case, the SC invalidated partly the BIR’s assessment. It
audit notice, you have to check whether it is only for tax mapping. If such is only the case, the only validated those assessments for a particular year. So, if ever the RD does this, he may be
BIR officer should present his ID, and must bring a checklist with him. This checklist covers only administratively sanctioned.
the compliance requirements of the Bureau, like let’s say for example i-check lang niya dapat if
the taxpayer’s BIR COR and Ask for Receipt Notice are displayed, if the company has ORs or Validity of LOAs
invoice with ATP. IOW, in tax mapping, the examiner will not check if the taxpayer is deficient § A LOA must be served upon the taxpayer or his authorized representative within 30 days
in paying his taxes. It’s more of an administrative aspect. He will not conclude how much is the from date of issue; OW, it becomes invalid.
correct tax liability and issue deficiency assessment because for that to be done by a BIR official, But usually, what the BIR does if mu-expire na is to revalidate it, extending the 30-day period.
LOA is required. So if the examiner demands from you supporting documents for your income § Rule that the examination should be completed within 120 days from the date of issuance
or expenses claimed for a particular year, that is no longer tax mapping. Before you comply with of LA and requirement for its revalidation of LAs in case of failure to complete the audit
such demand, ask first for a LOA. The officer who issues the LOA can either come from the (1) within the 120-day period – withdrawn. (RMO. 44-2010)
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Effect of failure to revalidate an LA the examining officer to look at the books of accounts and to recompute the tax liability of
§ Failure of the revenue officer to complete the audit within 120 days shall subject him/her to the taxpayer.
administrative sanctions. [RMC 23-09 (May 8, 2009) and RMO 44-2010 (May 12, 2010)]
LN same nature as LA
Memorandum of Assignment (MOA) “LN being served by the Bureau upon taxpayers who were found to have under-declared their
(Revenue Memorandum Order No. 069-10) sales or purchases through the Third Party Information Program can be considered a notice of
§ Coverage: audit or investigation which would in effect disqualify the taxpayers concerned from amending
1. Reassignment for the continuation of the audit/investigation to another RO due to any return which is the subject of such audit or investigation.”
resignation/retirement/transfer of the original RO. - RMC 40-03, July 3, 2003
- The BIR only issues MOA in case there is a reassignment of an examining officer because as discussed,
the LOA specifies the name of the examiner. So, if a new examiner will come in, there’s no need to issue Therefore, you can amend the return as long as you haven’t received a notice of audit. But although you have this
another LOA. Instead, MOA will be issued, informing the taxpayer that this previous officer is already RMC, it does not mean that an LN can substitute a LOA. In the, Medicard case, the BIR lost because it assessed the
reshuffled and a new officer will take charge of his case. Medicard 500M pursuant to an LN. In defense, Medicard argued that it is not a valid assessment because no LOA
was issued. BIR contended that LOA is not necessary because they are not examining the Medicard’s books of
2. Assignment to the original RO of returned cases by the reviewing office and accounts. They are simply referring to the RELIEF system, third party information and the tax reconciliation system.
reassignment to another RO of returned cases in case of Everything is being done in the BIR system and from there, they just noted the discrepancies. So, they argued that
resignation/retirement/transfer of the original RO. LN is enough since they no longer need to check the records. But the SC held that primarily, what is required by the
3. Reassignment to another RO due to referral of the case to another investigating office NIRC is a LOA. The Tax Code does not know of such thing as LN. So, even if there’s no actual examination in the books
of accounts of the taxpayer, due process dictates that a LOA should be issued to the taxpayer, informing him properly
(e.g., cases referred to SID by the RDO)
that it is being audited for this particular period.
4. ONETT cases (capital gains tax/creditable withholding tax and DST involving transfers
of real property or shares of stock and donor’s tax) Types of LN
- ONETT cases refer to one-time transactions. Remember the CGT, 6% and 15% for sale of shares of stocks.
The taxpayer may still be checked if he paid the correct amount of tax liability for these transactions. 1. RELIEF-SLIP & Third Party Matching (TPM) – Bureau of Customs (BOC) LN – computerized
Usually from the examining officer, you will pay the tax. And then it goes to the regional office where re- matching of information/data by third party (TP) sources against declarations per VAT return
evaluation may be done. If the computation by the examining officer was wrong, it will be remanded to (Relief-RMO 30-03, 42-03, 24-04, 32-05, 32-07, 36-08; TPM-BOC – RMO 34-04, 46-04, 32-05,
him and require him to make an explanation, furnishing a copy to the taxpayer. 32-07)
5. Protested cases/cases for reinvestigation 2. Taxpayer Reconciliation System (TRS) – LN – on information/data provided by withholding
6. Refunds of foreign embassies and its personnel (RMC 080-10) agents/payors and payees/income recipients against taxpayers’ declaration per
income/VAT/percentage/withholding tax returns (RMO 28-07 as amended by RMO 04-08)
Letter Notice (LN)
§ Coverage: LN – Sources of Discrepancies
o Issued for under-declaration of sales and over-claimed purchases discovered under the 1. Sales reported by seller vs purchases reported by the buyer (VAT and income tax)
Reconciliation of Listing for Enforcement System (RELIEF) and TPM-BOC Data Program - If it will not match, it either results to overstatement/understatement of sales/purchases. So an LN can
- This refers to the overstatement or understatement of your importation be issued. This is not always due to the fault of the taxpayer. The common defense when it comes to
o Covers only the tax indicated therein on a given particular period or quarter discrepancy in the sales and purchases reported is timing defense. As a seller, he may not yet record a
§ In an LN, there is a column showing the computation by the BIR and a column showing the particular transaction as sale because he still has a deliverable to the purchaser. But on the part of the
purchaser, it was already recorded as an expense since he already paid for it. This is where the discussion
filings of the taxpayer. Then there is a note as to the amount of the discrepancy. As settled
in accounting methods, accounting periods, and recognition aspect will be very important.
in the case of Medicard Philippines, LOA is different from LN because the LOA basically 2. CWT remitted by buyer vs CWT claimed by seller/supplier (CWT)
empowers or authorizes the officer to examine the books of the taxpayer; whereas the LN 3. Income reported vs. CWT or FT paid by payor
is just a summary of the deficiency. It does not in any case or in any way grants authority to
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4. Importations recorded by BOC vs importations reported in the Summary List of Sales
and Purchases (SLSP) (VAT and income tax)
- This source of discrepancy is very common among PEZA-registered companies since the system of the
BOC only recognizes actual importations from abroad. As discussed, PEZA-registered entities have
technical importation. They purchase something from the customs territory and bring it inside the PEZA.
This importation will not go through the BOC. So the tendency is that the importation record coming
from the BOC system is usually lower than the importation record of the PEZA-registered entity. This
creates discrepancy. But this may be explained by just presenting the supporting documents.
Mission Orders (MO)
§ Coverage: All surveillance and stock-taking activities
§ Purpose: To monitor taxpayers on non-compliance with requirements on issuance of
receipts, filing of returns, declaration of taxable transactions, taxpayer registration, and
payment of correct amount of taxes.
§ What differentiates an MO from a LOA and LN? LOA and LN usually come together,
pahimutang ang pag exercise. The finding of discrepancy is done in the office and in the
system of the Bureau. But when we say MO, this is issued with a sense of urgency pursuant
to a third party anonymous report that a fraud is being undertaken by a particular taxpayer
and pwede mawala na the following day or the following period. Because of this sense of
urgency, there is no more time for the issuance of LOA and LN. Usually, the RD is present
during the service of the MO. In the MO, the mission is specified, enumerating the things to
be done. Usually, it involves inventory-taking or stock-taking, checking whether the cash
register or the POS machine is duly registered with the BIR. If the officials go beyond the
mission, it may already be questioned. However, if in the process of implementing the MO,
the BIR determines that there is a fraudulent act which is being undertaken by the taxpayer,
it may right there and then be reprimanded by the officer implementing the MO.
§ If you look at it, MO is more like a search warrant. However, when it comes to a SW, a weight
of evidence is required first before it can be issued by the judge. But as regards to MO, it is
not apparent what is the weight of evidence required. It is more of discretionary on the part
of the RD especially if there is an anonymous report.
Assessment Process
It starts with the issuance of the LOA. Then an audit or tax investigation will be conducted by
the BIR. Based on that audit or tax investigation, the BIR will have to note deficiency. If there is
no deficiency, then there is no problem. But if there are, such will be noted and the taxpayer
will be informed. The BIR will issue a written report, LN, summary of the discrepancies, and the
BIR will call for a notice of informal conference. Before, for the years 2013-2017, the notice of
informal conference was taken out by Henares because according to her, this is a cause of
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corruption. But during the time of Dulay, he issued a revenue memorandum cicrular (RMC)
reinstating the notice of informal conference. What the BIR usually issues is an LN and at the
bottom part, there is a paragraph stating that a notice of informal conference will begin in a
certain period of time. So, a notice of informal conference is useful because this is the period
when the taxpayer will meet the examiner face to face. This is where they will discuss what is
the basis of the assessment and what are the possible defenses of the taxpayer. Taxpayers
already knew in advance what is the position of the BIR by referring to the LN issued to them.
So, before going to a notice of informal conference, they must already evaluate the correctness
of the computation of the BIR. For sure, it is not accurate since the computation was only based
from the system. The taxpayers will have to present their per line item defenses and supporting
documents. There will be a column based on the computation of the BIR, another column based
on the computation of the taxpayer, and another column for the remarks. You will present in
the remarks whether the basis of the reduction is from case law or from a particular supporting
document. For instance, there is an alleged overstatement of purchases (overstatement of
COGS; understatement of income). What the BIR will do is to disallow those purchases and the
taxpayer will be assessed for unpaid income. But we very well know that when we say taxable
income, you only subject it to tax if the elements are present, like the actual receipt or
constructive receipt of inflow or cash. The usual defense is the ‘all events test’; hence, based
on case law. Usually, if you’re trying to argue with the BIR, it is either you base it on facts and
you have supporting documents; or you base it on law; or if you want to cite ruling, you cite the
ruling of the CTA or the SC. It is a no-no to cite a BIR ruling; worse, to cite an RR or RMC because
these are issuances of the BIR. If there is somebody who knows the intention behind those
issuances, it is the BIR. It can even be overturned by the BIR. But it is a different story if what
you will cite is an SC ruling. So, during the notice of informal conference, this is where the
examiner and the taxpayer settle how much of the assessment the taxpayer is willing to pay
and how much is the disputed assessment. Partial payment is allowed but take note that such
is not done at the LN stage. Payment should only be done after the issuance of the FAN. If the
taxpayer disputes, then it will be reviewed by the assessment division of the regional office or
the CIR. Usually, if the one assessed is a large taxpayer, it goes to the head office. It will be
determined if the examiner’s computation has basis. If none, it will be dismissed favorable to
the taxpayer. But if there is basis, then the next thing is the issuance of the PAN. Upon such
issuance, the taxpayer ‘may’ respond. IOW, voluntary. The response of the taxpayer may be
submitted to the BIR within a period of 15 days. But if the taxpayer will not respond, the
assessment cannot be considered final. If there is response and such is meritorious, then it will
be dismissed. But mind you, at this stage, the BIR very seldom dismisses since it has already
issued a PAN. Panindigan na jud nah niya. Most likely, the finding is that it is not meritorious. If
it is not meritorious or if there is no response filed by the taxpayer within 15 days from the date
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of receipt of the PAN, the next thing that will happen is the issuance of FAN. The SC laid down
a rule that to ascertain if what has been issued was already a FAN, even it was not worded as
such in the heading, as long as there is a demand to pay for a particular date, that is already
considered a FAN. That’s why during the time of Henares, she made it more specific that it must
be a formal letter of demand and FAN. So, once you receive the FLD FAN, this is now the point
in time where the taxpayer is mandatorily required to protest such that if he will not protest,
the FLD FAN becomes final, executory and unappealable. The taxpayer must protest within 30
days from the date of the receipt of the FLD FAN. If this will lapse, he cannot even raise the
defense of prescription to the CTA because once he has received the FLD FAN, the rule there is
he can no longer go to the CTA via judicial action unless he has exhausted first the
administrative action, following the principle on exhaustion of administrative remedies.
The protest can be filed in 2 ways: (1) request for reinvestigation or (2) request for
reconsideration. When we say request for reinvestigation, it means to say that you are trying
to point out to the BIR a new or additional evidence which is why if you file a request for
reinvestigation, you are given 60 days within which to submit supporting documents. But if it is
reconsideration, more like of an MR lang. You’re just asking the BIR to take a second look of its
computation. No additional document will be issued.
PAN and FLD FAN are usually issued by the national office through the CIR or the Deputy
Commissioner. Pwede sad si regional office. Remember, the LOA can be issued by the RD. If the
LOA is issued by the RD, everything happens on a regional level. If the LOA is issued by the RD,
it follows that the PAN and the FLD FAN will be issued by the RD as well. If regional ang start sa
assessment, the protest or the appeal is also at a regional level. So you have to file the request
for reinvestigation or reconsideration sa RD or regional office. If si CIR ang ni-issue sa PAN and
FLD FAN, the protest will be filed at the national office.
As a rule, the CIR is given 180 days from the date of the submission of documents or filing of
the protest to decide on your protest. If a request for reinvestigation is involved, the counting
of the 180-day period will only start after you have filed the supporting documents. But if it is
request for reconsideration, the start of the 180-day period will commence the moment you
file your request for reconsideration.
Is the 180-day period really a mandate on the part of BIR?
No. If you look at it, it is only directory na decidean niya in a span of 180 days.
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What if the request for reinvestigation or reconsideration was filed with the RD? Is the RD
mandated to follow the 180 days?
No, it is also just directory. But the point is, if there is a decision, it must be delivered within the
180-day period. OW, if ni-lapse na ang 180-day, wa gihapon ang deicision, the taxpayer can
immediately appeal to the CTA within 30 days after the lapse of the 180-day period. That’s why
we can say that it’s more like directory lang on the part of the CIR kay even if mu-lapse na ang
180 days, the taxpayer can wait gihapon for the receipt of the adverse decision. And only upon
the actual receipt of such adverse decision will the 30-day period to appeal be counted.
Options if no decision or an adverse decision was rendered within the 180-day period
o from the CIR (national level) – filing of an MR (with the CIR) will not toll the running of the
30-day period to appeal to the CTA because filing of an MR to the CIR is not really sanctioned
under the NIRC.
o from the RD (regional level) – 2 options:
ü file an MR to the CIR (not to RD since subordinate man sya) – the 30-day period to appeal
to the CTA will not yet begin to run unless and until the CIR issues its final decision on
your MR
ü file an appeal to the CTA – the 30-day period to appeal to the CTA will start to run.
For purposes of discussion, mag-national level lang ta, so CIR level. From the CIR, you file an
MR. If you file an MR and favorable ang decision, which is seldom na mahitabu, then no
problem. But if adverse decision gihapon or if you did not file an MR to the CIR, then within 30
days, appeal to the CTA. However, if you file an MR to the CIR, since this does not toll the
running of the 30-day period, you really have to count on a daily basis. Di nimu huwaton na
makadawat ka sa resolution ni CIR on your MR. Basta before the lapse of the 30 days, appeal to
the CTA. if the decision of the CTA is favorable, no problem. However, if it is still unfavorable,
you can file an MR to the CTA. If favorable, no problem. If unfavorable, that is the time that you
file a petition for review to the SC. Take note, CTA to SC. Mu-matter ba if 300k/400k kadtong
rule sa jurisdiction sa MTC and RTC? No, because if it is something to do with tax, automatic it
goes to the CTA. Way labot si regular courts.
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Q&A: With respect to the prescriptive period, what if the LOA covers the period of 1 yr and then the
assessment pertained to a transaction in the first quarter. Asa ang reckoning point of counting? Is it the last
day of filing in the first quarter or April 15?
If it is income tax, we base it on the April 15 on the following year, dili sa quarter, because that is the deadline of filing set
under the Tax Code. But if it is withholding tax, that should be on the deadline when you’re supposed to file the
withholding payments. If you base it on the quarter man gud, the examination of the income tax cannot be done on a
quarterly basis. It has to be done on an annual basis. Mao nah usually April 15 of the following year. For VAT, it is on a
per quarter and even monthly basis. Same thing with OPT as well as withholding taxes. Lahi sa income tax kay iadjust pa
man nah nimu annually. I mean if i-assess ka on a per quarter basis, you can very well say na this was adjusted pa towards
the end of the year.

Which is better if regional level, file an MR to CIR or go directly to CTA?

It depends on your objective. If your objective is to prolong the process and really exhaust the administrative remedies,
then might as well file an MR to the CIR especially if you have contacts at the national level (wink). But,if the regional
office is very active in the collection, remember, basta napildi na ka regional level, pwede na baya mustart ug collection
process si BIR. Ma-stop lang nang collection if a TRO is issued by the CTA. If di ka ganahan ma-encumber imung mga
real properties, ang uban labi na if daku ang figure then active kaayo ang region in collecting kay lage nakontrahan ka, they
go directly to the CTA and file a TRO. Mao nang gibuhat ni Pacquiao.

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