Taxation 2 Reviewer Module 1
Lesson 1: Basic Concepts of Succession Nature of Succession
Estate tax is a form of transfer tax; a tax imposed upon a gratuitous or without adequate and full valuable consideration transfer of property ownership. It is likewise an excise tax imposed upon the right to transfer property at the time of death.
The transfer of ownership may either be during lifetime or upon the death of a person. The transfer of ownership during lifetime is donation inter vivos which is subject to donor’s tax, while the transfer of ownership upon death of a person is donation mortis causa which is subject to estate tax.
Succession takes effect from the moment of death of the decedent. Difference from Estate Tax and Donor’s Tax
Estate Tax Donor’s Tax
Tax imposed on the privilege to transfer property upon one’s death
Tax imposed upon one’s privilege to transfer property during lifetime Known as inheritance tax Known as gift tax
Secure funds for the use of government in order to pay its actvities
Arrest inequities in the distribution of wealth among citizens
Rates of this tax is higher than the rate in donor’s tax
Terminologies
Succession is a mode of transferring ownership of property, rights and obligations by a person upon his death to another or others either by a will or by operation of law.
Will refers to the control of a person to a certain degree of the disposition of his estate, with the formalities prescribed by law, which takes effect upon his death.
Testator is the person who executed the will.
Gross estate is the total amount of properties owned by the decedent at the time of death.
Net estate is gross estate diminished by the allowable deductions. Insolvent person is one who has no ability to pay his liabilities.
Testate refers to the death of a testator with the will having been executed. Deductions are amounts or items allowable by the law to be deducted from the gross estate to arrive at the net estate. The burden of proof for the deductions being claimed shall be on the taxpayer.
Elements of Succession
1) Decedent. The person who died and whose property is transmitted through succession, either by will or by operation of law.
2) Heir. The person who will receive the property which is the subject of succession, either by provision of the will or by operation of law. 3) Estate. The property, rights and obligations of a person which are not extinguished by his death and which are to be transferred to the heir. Kinds of Succession
1) Testamentary. Succession resulting from a will which designates an heir and his entitlement to the estate, executed in the form prescribed by law. a) Legatee is a successor or heir to a particular personal property by virtue of a will.
b) Devisee is a successor or heir to a particular real property by virtue of a will.
2) Legal or intestate. Succession resulting from the operation of law since there is no will, or if there is a will, the same is considered void.
3) Mixed. Succession which is partly by will and partly by operation of law.
Meaning of Repudiation of Interest
The refusal of an heir to accept an inheritance is called repudiation of inheritance. The refusal to accept an inheritance may be effected through a notarized document or by means of petition to the court having jurisdiction over the testamentary proceedings.
For instance, Atty. Albert Fenzy left a last will and testament providing for the equal disposition of his cash of ₧3,000,000 to Vina, Ivy, and Nathalie. If Nathalie, because she is already financially well off, repudiated her inheritance in favor of Vina, then Vina and Ivy would each receive
₧1,000,000 but Vina would receive ₧1,000,000 more which is considered a donation from Nathalie.
Persons Authorized to Manage the Estate
1) Executor. The person indicated by a testator to carry out the provisions in his will upon his death.
2) Administrator. The person designated by the court to administer and settle the properties of the decedent in accordance with the governing statute since no competent executor was designated by the testator.
Lesson 2: Gross Estate- Inclusions Classifications of Decedent 1) resident or citizen:
a) citizen of the Philippines residing in the Philippines b) citizen of the Philippines residing abroad
c) citizen of a foreign country residing in the Philippines, i.e., a resident alien who is not a Filipino citizen but whose residence is in the Philippines 2) non-resident, non- citizen
a) citizen of a foreign country residing abroad, or an individual who is a resident in the Philippines but is not a Filipino citizen. He may be engaged in business in the Philippines or he may not be engaged in business in the Philippines but comes to the Philippines for a definite purpose which can be accomplished promptly. An example of the latter may be someone who comes to the Philippines for a 3-day concert, after which, he returns to his domicile abroad.
The gross estate of the above decedent may include: 1) properties physically in the estate; and
2) properties not physically in the estate, depending on some conditions Properties Physically in the Estate
The properties physically in the estate are properties still owned by the decedent at the time of his death, to the extent of his equity or interest in such property, whether he is the exclusive owner, or it is by conjugal, community, or common ownership.
Properties Not Physically in the Estate
The properties not physically in the estate refer to assets or properties owned by the decedent during his lifetime but were no longer owned by him at the time of his death because these properties were transferred by him while he was still alive. These are the:
1) transfer in contemplation of death; 2) revocable transfers;
3) property transfer under the general power of appointment 4) transfer for an insufficient consideration.
The transfer in contemplation of death is motivated by the thought of death which prompted the disposition of the property so that estate tax may be avoided. If the transfer was made where the time interval from the moment of making the said transfer was relatively close, then this is construed as a transfer in contemplation of death. However, if the transfer was made for a sufficient consideration or payment, this does not fall under the transfer in contemplation of death because there was a valid sale.
In revocable transfers, the decedent before his death transfers the enjoyment of his property to another person but subject to his right to revoke or cancel the transfer at his will, with or without notice to the transferee.
A power of appointment is a right to designate the person or persons who are to receive certain property from the estate of a prior decedent. A power of
appointment may either be a general power of appointment or a limited (specific or special) power of appointment. A general power of appointment is one which may be exercised in favor of any beneficiary, while a limited power of appointment designates a specific beneficiary. Under the general power of appointment, the decedent is deemed the owner of the property and therefore it shall form part of his gross estate. On the other hand, under the special power of appointment, the decedent is only a trustee to the property and therefore it should not be part of his gross estate.
If ownership to the property was transferred in contemplation of death, through revocable transfer, and by general power of appointment for an adequate consideration in money’s worth, the difference between the fair market value over the consideration received shall be included in the gross estate of the decedent. Also, if by clear indications, the inter vivos transfer (during life time) was fictitiously made, the entire fair market value at the time of death shall be included in the gross estate.
Proceeds of Life Insurance
The proceeds of life insurance taken out by the decedent shall be part of the gross estate if the beneficiary is:
a) the estate of the decedent, his executor or administrator; or b) a person other than the estate, executor or administrator, and the designation of the beneficiary is revocable.
The Insurance Code of the Philippines takes the designation of the beneficiary as revocable unless expressly stated by the insured and indicated in the policy that it is irrevocable. The proceeds of life insurance where the beneficiary is irrevocable is not part of the gross estate.
Illustrations in the book
Claim Against Insolvent Person
The claim of a decedent against an insolvent person shall be part of the gross estate at the full amount of the claim. A deduction from the gross estate for the uncollectible portion shall be made.
For instance, Mr. Egay died with a ₧100,000 receivable from Mr. Bong. Mr. Bong has assets of ₧30,000 and liabilities of ₧50,000. The gross estate shall include the ₧100,000 receivable and there shall be a deduction from the said gross estate of ₧40,000 (₧20,000/₧50,000 X ₧100,000)
Valuation of the Gross Estate
The gross estate shall be valued at the fair market value at the time of the decedent’s death.
In the case of personal property acquired by the decent just recently, the acquisition or purchase price shall be taken as the fair market value. However, where the personal property was not acquired recently, the evidence of its fair market value shall be considered.
In the case of real property, the values shall be the current and fair market values as fixed by the Provincial and City Assessors, or the fair market value as determined by the Commissioner of Internal Revenue, whichever is higher. Illustrations in book
Lesson 3: Gross Estates- Exclusions
Transfers Exempt from Estate Tax under the Code a) merger of usufruct in the owner of the naked title;
b) Transmission or delivery of the inheritance or legacy by the fiduciary heir or legatee to the fidei commissary;
c) The transmission from the first heir, legatee or donee in favor of another beneficiary, in accordance with the will of the predecessor;
d) all bequests, devises, legacies or transfers to social welfare, cultural and charitable institutions no part of the net income of which insures to the benefit of any individual; provided, that not more than thirty percent (30%) of the said bequests, legacies or transfers shall be used by such institutions for administrative purposes.
Usufruct refers to the right of temporary nature which authorizes its holder to enjoy the use and benefits resulting from the enjoyment of somebody else’s property with the obligation to return on some designated time, either the same property or its equivalent. In usufruct, the two (2) claimants are the usufructuary and the owner of the naked title. The usufructuary enjoys the use and fruits of the property, while the owner exercises all the rights of ownership to the property. The merger of the usufruct in the owner of the
naked title takes effect when the naked ownership and the usufruct come to be held by the same person. The exemption is premised on the fact that there is only one transfer, i.e., from the testator to the owner of the naked title. The transfer shall only be taxed once, hence, the exemption.
Fidei-commissary substitution arises when the testator designates a first heir and makes him responsible to preserve and transmit, in whole or in part, the inheritance to a second heir. Likewise, there shall be a first heir and a second heir where the relationship shall be one degree, for example, parent and child, and vice versa.
There may be transfer of property from the first heir, legatee or donor in favor of another beneficiary according to the desire or will of the predecessor. This exemption again is premised on the fact that there is only one transfer or single transfer, i.e., from the testator to the second beneficiary.
To be exempt from estate tax, the statute requires that bequests, legacy or devise be made to qualified recipient organizations. It shall be given to an institution which is duly accredited by an accrediting entity known as the Philippine Council for NGO Certification (PCNC). Note further that donations are exempt from estate tax only if not more than thirty percent (30%) of the said bequests, legacies or devises shall be used by such institutions for administration purposes.
Transfers Exempt Under Special Laws
The following are exempt from estate tax under special laws:
a) Benefits received from the Government Service Insurance System (GSIS); b) Benefits received from the Social Security Services (SSS);
c) Amounts received from the Philippine and the United States of America governments as war damages;
d) Amounts received from the United States Veterans Administration. Lesson 4
Deductions Allowable for Residents or Citizens a) expenses, losses, indebtedness and taxes; b) transfers for public use;
c) vanishing deductions; d) medical expenses;
e) amount received by heirs under RA 4917 f) family home;
g) standard deduction of ₧1,000,000. Expenses, Losses, Indebtedness and Taxes
The amount deductible as funeral expenses shall conform with the following rule: the actual amount of funeral expenses or in an amount equal to five percent (5%) of the gross estate, whichever is lower, but in no case to exceed two hundred thousand pesos (₧200,000). For instance, if the actual funeral expenses is ₧210,000 and the gross estate is ₧5,000,000, its 5% is ₧250,000 versus actual expenses of ₧210,000 and the limit of ₧200,000, the allowable deductible funeral expenses is ₧200,000 which is the lower amount. Any of the said costs incurred by the relatives and friends is not allowed for the reason that they do not diminish the estate of the decedent. Further, expenses although related to the death of the decedent but incurred after the burial such as expenses related to the 1st death anniversary are not allowed as deductions.
The judicial expenses include costs incurred in the settlement of the estate as follows: fees of the executor or administrator of the estate; accountant’s and appraiser’s fees; costs to preserve, store, maintain and distribute the property or the estate; and the costs incurred in testamentary and intestate proceedings. In other words, they are deductible items incurred in the settlement of the estate. The claims against the estate are debts which are properly deductible from the estate. To be deductible, the following requisites shall be met: that the claims are incurred in good faith and for an adequate consideration of money or money’s worth received by the decedent; the debt instrument was duly notarized and if the loan was contracted within three (3) years before the death of the decedent, the administrator or executor shall submit a statement showing the disposition of the proceeds of the loan.
The claims against insolvent persons, otherwise known as bad debts, are equal to the indebtedness which cannot be collected anymore because of the insolvency of the debtor. The claims against insolvent persons shall be part of the gross estate to be deductible from it.
Unpaid mortgage indebtedness are deductible if the following requisites are complied with, to wit:
a) the value of the mortgage indebtedness is included in the value of the gross estate;
b) the unpaid mortgage indebtedness was for an adequate and full consideration in money or money’s worth.
The following are unpaid taxes which are allowed as deductible items from the gross estate of the decedent:
a) income taxes on income received before the death;
b) gift taxes on donations inter vivos that are unpaid until death; c) property taxes that accrued prior to the death of the decedent.
The taxes that already accrued after death are not deductible from the gross estate but they are proper charges against the income of the estate. Losses are deductible if the following requisites were complied with: a) the value of the lost property are included in the gross estate;
b) such losses occurred within six (6) months after the death of the decedent; c) such losses must be due to fires, storms, shipwreck or other casualties, including loss from robbery, theft or embezzlement;
d) such losses are not compensated by insurance, in part or in whole; e) such losses are not claimed as deduction in an income tax return. Transfers for Public Use
The entire value of personal or real property transferred to or for the use of the Government of the Republic of the Philippines, or any political subdivision thereof, and for exclusive public use is allowed as deduction from the gross estate of the decedent.
Vanishing Deductions
Vanishing deduction is intended to provide relief to such heavy transfer taxes. The vanishing deduction is allowed to reduce the gross estate upon
compliance with the following requisites:
a) the property on which the vanishing deduction is being claimed shall be located in the Philippines;
b) the donor’s or estate tax imposed on the first transfer was finally determined and paid;
c) the present decedent died within five (5) years from receipt of the property from a prior decedent or donor;
d) the property must be part of the taxable estate of the prior decedent, or of the taxable gift of the donor;
e) no vanishing deduction on the property was allowed in the estate of the prior decedent;
f) the property can be identified as the one received from prior decedent, or from the donor.
The procedures in computing the vanishing deduction are as follows: 1) determine the basis of the vanishing deduction:
a) find the initial value that will be the basis of the vanishing deduction as the value of the property in the prior estate (or value used in filing and paying the donor’s tax) or the value of the same property in the present estate, whichever is lower;
b) deduct from the value in item a) above the mortgage or lien paid by the present decedent on the property. The resulting figure is called the initial basis.
c) from the initial basis, deduct the amount equal to the result of the following formula:
Initial Basis / Gross Estate X Deductions
d) multiply the actual basis computed in item c) above by the appropriate rate, based on the length of time the property has been acquired by the present decedent, as follows:
100% within one year prior to the death of the decedent
80% more than one year but not more than two years prior to the death of the decedent;
60% more than two years but nor more than three years prior to the death of the decedent;
40% more than three years but not more than four years prior to the death of the decedent;
20% more than four years but not more than five years prior to the death of the decedent.
Don Zobel, single, inherited a house and lot from his mother with a fair market value of ₧5,000,000. The said land at the time of inheritance was subject to a mortgage of ₧1,000,000. During his lifetime, he paid ₧500,000 on the mortgage indebtedness. Three (3) years after, Don Zobel died with the same property valued with a fair market value of ₧6,500,000. The gross estate on which the previously mentioned property was part of totalled ₧10,000,000 while the deductions therefrom amounted to ₧3,000,000. The vanishing deduction is computed as follows:
Medical Expenses
The actual amount of medical expenses, supported with official receipts, or ₧500,000, whichever is lower, incurred by the decedent within one year prior to his death can be claimed as deduction from the gross estate. The medical expenses include doctor’s professional fees, medicines, laboratory tests charges, hospital room and equipment.
Republic Act No. 4917
- relates to benefits granted and received by the heirs of the decedent from his employer as a result of separation from service due to death of the decedent-employee which can be deducted from the gross estate.
Family Home
- refers to the land and the dwelling house on it where the spouses and their family, and even an unmarried head of a family, reside. The basis shall include the current fair market value or zonal value of the family home, whichever is higher. Further, the following conditions for allowance of family home as deduction shall be complied with:
a) the decedent died on or after July 28, 1992;
b) the gross estate shall include the value of the family home;
c) the property must be the actual residential home of the decedent and his family at the time of death, certified by the Barangay Captain who has jurisdiction over the locality where the family home is situated; and d) the deductible amount shall be the actual value as declared and included in the gross estate, but not exceeding ₧1,000,000.
Standard Deduction
The code provides an amount equivalent to one million (₧1,000,000) pesos as automatic deduction and not subject to any proofs of substantiation of receipts, independent of all other deductions. For example, Mr. Filar died leaving a gross estate of ₧7,000,000. Deductions for expenses and losses, supported by receipts amounted to ₧2,000,000. Other allowable deductions totalled ₧1,500,000. The total allowable deductions shall be ₧4,500,000 accounted as follows:
Deductions Allowable for Non Resident Aliens
The allowable deductions for non resident aliens are the same items of allowable deductions from the gross estate of residents or citizens, except medical expenses, RA 4917, family home, and standard deduction. Specifically, the expenses, losses, indebtedness, taxes, vanishing deduction, and transfer for public purpose are allowed as deductions from the gross estate of non resident aliens.
formula:
For example, Mr. Jason Armstrong, an American residing in California, USA died leaving the following properties and other information related thereto:
The allowable deduction from the gross estate of Mr. Armstrong is ₧141,147.50 , computed as follows:
Take note of the following:
a) medical expenses are not allowed as deduction;
b) funeral expenses are limited by the actual expenses versus 5% of the gross estate located in the Philippines, whichever is lower;
c) claims against insolvent person shall be included in the gross estate to be allowed as deduction; and
d) ordinary expenses are allowed only to the extent of the amount applied with the above stated formula.
Net Taxable Estate
The net taxable estate is computed as gross estate less allowable deductions. Example on page 50
Take note of the following:
a) funeral expenses are limited to 5% of the gross estate or actual, whichever is lower, but not to exceed ₧200,000;
b) claims against insolvent person was deducted and likewise included in the gross estate;
c) family home was limited to zonal value versus fair market value, whichever is lower, but not to exceed ₧1,000,000.
Module 2
Lesson 1: The Fundamental Concept of Donor’s Tax Definition of Donation
- An act of a person (the donor) who gives a gift gratuitously to another person (the donee) who accepts such gift from the donor. Thus, the elements of a donation or gift are:
1. Donor – the person who gives the gift 2. Donee – the person who receives the gift
3. Gift – the property gratuitously transferred from donor to donee
Our definition is very specific about the acceptance of the gift from the donor because without the acceptance of the donee, there can be no gift or donation. Therefore, donor’s tax arises upon acceptance of the gift by the donee. these will give rise to the following taxes:
1. Donor’s tax for that portion wherein the donee has not paid nor render services, and
2. Income tax for that portion wherein the donee has paid or rendered services in consideration of the gifts accepted.
Purposes of Donor’s Tax
1. To compliment the estate tax, in order to prevent abuses from the taxpayers by transferring his properties during his lifetime, and
2. To raise revenue to support the government’s projects. For example:
Mr. Malla has three children. He owns a parcel of land in the province. Mr. Malla would like to evade estate tax so, while still alive, he transfers his property to his children.
Question:
Can Mr. Malla evade taxes? Answer:
No, because although Mr. Malla will not pay estate tax as he still alive, he will pay instead a donor’s tax.
If the transfer was done while Mr. Malla is still alive but suffering from a terminal disease, this is a transfer in contemplation of death and is subject to estate tax and not donor’s tax.
Kinds of Donations
1. Inter-vivos. This means that the gifts are made and intended to take effect during the lifetime of the donor. Subject to donor’s tax
2. Mortis-causa. This means that the gifts are made and intended to take effect upon the donor’s death. Subject to estate tax.
3. Contemplation of death. This means that the gifts are made during the donor’s lifetime. This is in contemplation of his death, regardless of whether his death is impending, forth coming or not. This is subject to estate tax.
Various Classifications Relating to Donation A) Classification of donor:
1. Resident citizen donor – the donor is a resident citizen of the Philippines at the time of donation.
2. Non-resident citizen donor – the donor is a citizen of the Philippines but qualified to be classified as non-resident citizen during the taxable year. This is in accordance with the rules governing the classification of such citizen as a non-resident citizen status.
3. Resident alien donor – the donor is a resident alien of the Philippines at the time of donation.
4. Non-resident alien donor – the donor is considered as a non-resident alien of the Philippines at the time of donation.
Civil status of the donor: 1. Married
2. Single
3. Married legally separated 4. Married but not legally separated 5. Widow/widower
6. Divorcee
B) Classification of donee:
1. Relative – this means that the donee is related by blood or by affinity to the donor.
For example: Related by blood: a) brother or sister
b) parents and other ascendants c) children and descendants d) aunts and uncles e) nephews and nieces f) grandnephew/nieces g) first cousins
h) lineal descendant up to the fourth degree of relationship
Other relatives by blood not mentioned above are treated as not relatives as far as donor’s tax is concerned.
For example:
a) Second degree cousin Related by affinity a) husband and wife b) legally adopted children c) legally adopted parents
Other relatives by affinity other than those mentioned above are treated as not related.
For example: a) parents-in-law b) brother-in-law
2. Not-relative – this means that the donee is not related to the donor by blood or by affinity as defined above.
For example: a) friend b) teacher c) neighbour d) supervisor
e) any others not related by blood Rules on gifts between spouses
1. Each spouse is considered as a taxing unit and therefore must file a separate donor’s tax return.
2. The gifts which were given by a married couple before and after their marriage, are subject to donor’s tax.
3. Ordinarily, gifts by and between spouses after marriage are prohibited and invalid except:
a) when the gifts are of moderate value and
b) when they are given on an occasion of rejoicing like birthday, anniversary, etc.
C) Classification of property to be donated:
1. Real property. This refers to a property that is immovable. The donation of an immovable property is valid, if this is supported by a public document which will specify the location and the value of the property.
a) land b) building c) improvement d) trees e) machinery
f) construction of all kinds adhered to the soil, and g) real rights to or equity in immovable property
2. Personal property. This refers to a property that is movable or can be transferred from one place to another. Donation of ₧5,000 or less can be made orally. However, if the donation exceeds ₧5,000 – donation and the acceptance must be in writing in order to be valid.
For example: a) money b) credits c) shares of stocks d) bonds e) securities f) jewelry g) animals h) merchandise i) furniture
3. Tangible properties. This refers to real or personal properties, which can be physically seen or touched.
4. Intangible property. This refers to any personal property, which cannot be physically seen or touched.
For example:
a) franchise, which must be exercised in the Philippines
b) shares, obligations, bonds issued by any corporation, Sociedad Anonima organized, or constituted in the Philippines in accordance with its laws c) shares, obligations or bonds issued by any foreign corporation, eighty five percent (85%) of the business of which is located in the Philippines d) shares, obligations or bonds issued by any foreign corporation, if such shares, obligation, or bonds have acquired a business situs in the Philippines e) share or rights in any partnership, business or industry established in the Philippines
Classification of property donated by spouses
1. Exclusive donation. This means that the husband or the wife made a donation from out of his/her exclusive property.
2. Conjugal donation. This means that the couple made a donation from out of their conjugal properties.
D) Classification of donation according to its place of origin 1) Those properties that are located from within the Philippines 2) Those properties that are located from outside the Philippines The nature of donation
1. First donation during the calendar year
2. Subsequent donations during the same calendar year Valuation of property donated
1. Properties donated should be valued at their fair market value at the time of donation.
2. If there is no known fair market value of the properties, then the fair market value of the properties nearest to the date of donation will be considered. 3. Shares of stocks listed in the stock exchange. The fair market value refers to the quotation price of the stock exchange. This is the average of the highest and the lowest quoted price at the time of the donation).
4. Shares of stocks not listed in the stock exchange. Fair market value refers to the book value at the time of donation.
5. Usufruct. This refers to the right to enjoy or use the fruits of the property or benefits of the property. The fair market value of the usufruct shall be determined by taking into account the probable life of the beneficiary in accordance with the latest American tropical experience table.
6. Real property. Fair market value means the common value of the property as agreed upon by a willing buyer and the willing seller.
Lesson 2: Gross Gifts
Factors affecting the computation of gross gifts: 1. Classes of donors
2. Location of properties 3. Classification of properties 4. Relationship of donor and the donee 5. The nature of donation
Gross gifts of various classifications of donors
A. For resident citizen, resident alien, and non-resident donor
The gross gifts of these types of donors will be the total fair market value of all donated properties whether.
1. Situated within and without the Philippines 2. Real or personal properties
3. Tangible or intangible
4. Transferred directly or indirectly 5. In trust or otherwise
6. Subject or not subject to gift tax B. For non-resident alien donor
The gross gifts of this type of donor will be the total value of all donated properties situated within the Philippines only, whether:
1. Real or personal properties
2. Tangible or intangible (subject to reciprocity clause) 3. Transferred directly or indirectly
4. In trust or otherwise
5. Subject or not subject to gift tax Reciprocity Clause:
There will be no gift tax that will be collected from a non-resident donor in respect to an intangible personal property that is located within the Philippines under the following circumstances:
1. If the country of that non-resident donor did not impose gift tax at the time of donation to Filipino citizens residing in that country.
2. If the laws of the country of that non-resident donor granted similar exemption on gift tax to Filipino citizens who are living in that country. Exclusion from gross gifts
1. Donation of property situated outside the Philippines in the case of non-resident alien donor.
2. Donation of intangible personal property in the Philippines if provided for under a reciprocity clause. law in the case of non-resident alien donor. 3. Donation or transfer of property subject to estate tax:
a. Donation mortis-causa
b. Transfer in contemplation of death c. Transfer subject to revocation
d. Transfer under a general power of appointment
4. Sale or exchange of real property in the Philippines held as capital asset, subject to the final capital gains tax.
5. Transfer of property by way of: bona-fide sale, arms-length transaction, and those made in the ordinary course of business
6. Gratuitous rendition of service by a person to another (it is not a taxable gift since the law specifies that the donors tax is imposed only on the transfer of property or right)
Exemption of certain gifts
The following gifts are exempted in the computation of donor tax but should be a part of the computation of the gross gifts.
1. Dowries or gifts made on account of marriage and before its celebration or within one year thereafter by parents to each of their legitimate recognized natural or legally adopted children, This is applicable for the first ten thousand pesos only.
Example on page 68
2. Gifts made to or for the use of the National Government or any entity created by any of its agencies which is not conducted for profit or to any political subdivisions of the said government;
Example in page 68
3. Gifts in favour of an educational, charitable, religious, cultural or social welfare corporations, institutions, foundations, trust or philanthropic organization, or research institutions or organizations. Provided, that not more than thirty percent (30%) of said gifts shall be used by such donee for administration purposes.
Prizes and awards given to athletes
Donations in the form of prizes and awards given to athletes in international sports tournaments and competitions, held in the Philippines or in other countries, which are sanctioned by national sports bodies, are exempted from the payment of donor’s tax. Example on page 69
Exempted gifts under special laws:
The donations to the following are exempted from taxes under special laws through presidential decrees or republic acts.
1. Social welfare, cultural or charitable institutions, no part of the net income of which inures to the benefit of any individual, if not more than 30% of said gift shall be used for administrative purposes (PD507 – R.A. 1916) 2. Donation of equipment, materials, services to the task force on human settlement (PD297)
3. Government of the Philippines, for the purpose of scientific, engineering and technological research, inventions, and development (RA 1606) 4. Any international civic organization for religious or charitable purposes, for its use or free distribution (RA 1616)
5. International Rice Research Institute (RA2707 – PD1620) 6. Philippine American Cultural Foundation (RA3076) 7. Integrated Bar of the Philippines (PD181) 8. Philippine Inventors Commission (RA3480) 9. Ramon Magsaysay Award Foundation (PR3076) 10. Development Academy of the Philippines (PD205)
11. Aquaculture Department of the Southeast Asian Fisheries Development Center of the Philippines (PD202)
12. National Action Center (PD294)
13. National Museums, National Library, and the Archives of the National Historical Institute (RA373)
14. Southern Philippine Development Administration (PD690) 15. Museum of Philippine Costumes (PD1349 amended by PD1388) 16. Intramuros Administration (PD1616 amended by PD1388)
Please take note that gifts to the above-mentioned recipients are exempted from gift tax or donor’s tax, but these are not exempted from inclusion as part of the gross gifts computation. Since these should be included in the gross gifts computation, it will also be presented as part of the allowable deduction, thus making a zero effect on the net taxable donor’s tax.
The following are included in the gross gifts. I. Donation subject to donors tax
A. Actual gifts made during the year. Ordinary gifts, donations inter-vivos or gratuitous transfer of property.
For resident citizen or resident alien, the gross gifts will consist of the following:
1. Real property, within and outside the Philippines 2. Tangible property, within and outside the Philippines 3. Intangible property – within and outside the Philippines
For non-resident alien, the gross gifts consist of the following (without reciprocity):
1. Real property – within the Philippines
2. Tangible personal property – within the Philippines
3. Intangible personal property – within the Philippines subject to the following:
a. Franchise, which must be exercised in the Philippines
b. Shares, obligations or bonds issued by any corporation, organized and constituted under Philippine laws
c. Shares, obligations or bonds issued by any foreign corporation, 85% of which is located in the Philippines
d. Shares, obligations or bonds issued by any foreign corporation which have acquired a business situs in the Philippines
e. Shares or rights in any partnership, business, or industry established in the Philippines
For non-resident alien, the gross gifts consist of the following (with reciprocity)
1. Real property – within the Philippines
2. Tangible personal property – within the Philippines
B. Transactions or transfers of property deemed gifts during the year. 1. The condonation or forgiveness of receivables without or with inadequate consideration is considered as a donation.
Example on page 71
2. Any property transfer for inadequate consideration, except the following: a. Taxable transfer subject to estate tax such as: donation mortis-causa, transfer in contemplation of death, revocable transfer, transfer under a general power of appointment.
b. Sale or exchange of real property situated in the Philippines held as capital asset subject to final capital gains tax.
c. Transfer of property representing bona-fide sale, arms-length transactions under ordinary course of business.
Please take note that the computation for gifts that are given with inadequate consideration will be the difference between the adequate consideration and the actual inadequate consideration.
II. Donation exempted from donors tax a. Exempted gifts under section 101 of the NIRC b. Exempted gifts under special decrees and laws Lesson 3: Allowable Deductions from Gross Gifts Allowable deductions:
I. Resident citizen, non-resident citizen, and resident alien donor A. Deduction as per BIR rules/regulation
1. Encumbrances and liabilities on the donated property if assumed by the donee
Example on page 73
2. The diminution on the donated property as directed/instructed by the donor is also deductible from the gross gift.
Example on page 74 II. Non-resident alien donor
A. Deductions as per BIR rules/regulation
1. Encumbrances, liabilities on the donated property if assumed by the donee (same rules for resident donor above)
2. The diminution on the gifted property as directed/instructed by the donor is also deducted from gross gift. (Same rules for resident donor above). B. Those gifts that are exempted under NIRC (section 101) as enumerated in lesson of this module
C. Those gifts that are exempted under special laws Example on page 74
Rules on gifts on account of marriage:
1. The total fair market value of the dowry or gift on account of marriage must be first included/presented in the gross gifts.
This means that gift given on account of marriage must be included first in the listings of gross gift and then a deduction from said gross gift as provided can be claimed.
2. The amount allowed as a deduction shall be the lower between the two amounts as follows:
a. Fair market value of the property given or. b. Maximum amount of ₧10,000
3. The donor is entitled to claim said exemption on account of marriage for each of his qualified children – donees.
4. The donee must be a qualified child of the parent – donor.
a. A legitimate child. A legitimate child is a child born within wedlock. This means that the child was born of parents who were married to each other at the time the child was conceived.
b. Natural child. A natural child is a child born outside of wedlock. This means that at the time the child was conceived, the parents were not qualified to marry.
Perhaps one or both of the parents were underage when the child was conceived.
c. Legally adopted child. This means that parents under a judicial decree adopted the child or the adoption has a legal adoption paper.
5. The dowry or gifts on the account of marriage must have been given before the date of marriage, during the marriage or even after the date of marriage if within a year from the date of marriage.
6. For married couple giving dowries or gifts to their qualified children on account of marriage, each spouse shall get therein 50% equity in such conjugal gifts, which amount shall be presented in their separate computation of gross gift. However, each
spouse can claim a maximum deduction amounting to ₧10,000 for each qualified child. Example on page 76
Lesson 4: Taxable Gifts
The above-illustrated table is used if the donee is a relative. If the donee is not a relative of the donor: a flat rate of 30% of the net taxable gift is imposed. Example on page 78
Procedures for computing donors tax 1. Determine the net taxable gift.
2. Trace net taxable gift to the bracket in the table of donor’s taxes. 3. Just follow the bracket
4. If for example there was a subsequent gift, and therefore another filing is required.
Example on page 79
How about if the Mr. Ogawa made subsequent gifts, say on August 4, 2004 example on page 79
Lesson 5: Administrative Provisions of Donor’s Tax Who are required to file donors tax returns?
Any individual who makes gratuitous transfer of rights or property to another person (except those that are exempted under NIRC) shall file a donor’s tax return under oath in duplicate.
When shall this return be filed?
The return shall be filed within 30 days after the gift is given to the donee. Where shall this return be filed?
1. With an authorized agent bank (AAB)
2. With the revenue district officer, revenue collection officers or duly authorized treasurer of the city or municipality where the donor was domiciled at the time of the gift or transfer of rights or property to the donee.
3. If the donor has no legal residence in the Philippines, the return shall be filed with the BIR Commissioner.
4. If the gift is given by a non-resident alien donor, the return shall be filed with the Philippine Embassy or Consulate in the country where he is domiciled at the time of the transfer or directly with the office of the BIR Commissioner.
5. In other places as permitted by the BIR Commissioner. What documents are to be attached to the return?
1. A photocopy of the deed of donation covered by said tax return. 2. In case of prior gifts (but made during the taxable year), the previous donors tax return filed and the receipt of payment.
3. If the donor’s tax was paid abroad, a certified copy of the receipt evidencing tax payment.
4. Photocopy of Owner’s certificate of title and or tax declaration in case of real property.
5. Certificate of registration of motor vehicle, stock certificate, certificate of investment/deposits, etc.
MODULE 3 Lesson 1 Business defined
Business pertains to trade or commercial activity regularly engaged in as a means of livelihood or with an end to earn profit or income by any person or government entity.
The requisites for one to be considered engaged in business are: 1. The activity should be a commercial or economic activity.
2. The commercial or economic activity should be done with regularity. By regularity, it means that the transaction is not just one isolated transaction. 3. Business must be lawful.
4. Business must be within the commerce of man. 5. The purpose is to earn profit or livelihood is the motive. Types of Business organizations according to nature
There are three types of businesses according to nature. Trading or merchandising refers to a business that is engaged in buying of goods or merchandise and selling them at a higher price. Manufacturing or production refers to a business that is engaged in buying of raw materials, processing and then transforming these raw materials into a finished product by adding on labor, and selling the produced product to dealers or retailers.
Service concern refers to the rendering of professional or non-professional services for a fee. For example, an accountant does auditing or public accounting practice to clients for a specified fee agreed upon Types of Business organizations according to form
Sole proprietorship or single proprietorship refers to a form of business organization that is owned by one person only.
Partnership is a form of business organization wherein two or more persons enter into a contract and bind themselves to contribute money, property or industry to a common fund with the intention of dividing the profits among themselves.
Corporation is an artificial being created by operation of law having the right of succession and the powers, attributes and properties expressly authorized by law or incident to its existence.
The distinctions between sole proprietorship, partnership and corporation are: 1. As to ownership:
Sole P. Partnership Corp.
As to ownership Owned by one person called proprietor Owned by 2 or more called partners Owned by incorporators who are either stockholders or members. Incorp. Should not be less than 5 but not more than 15 As to
distribution of profit
All the profits go to the owner Profit is divided among the partners Share on the profits of the stockholders are distributed in the form of dividend as approved by Board Business Taxes are internal revenue taxes imposed by the national government on the onerous transfer of property, services or rights in the normal course of business. They are likewise privilege taxes paid upon the privilege of engaging in business or pursuing an occupation, calling or profession.
Major Classifications of Business Taxes (RA 8424)
a. Value-Added tax (VAT) is a tax levied on the sale of goods or properties, sale of services or the importation of goods or merchandise.
b. Percentage tax is a tax levied on the sale or receipt of any person not subject to VAT and who is not a VAT-registered person and other persons falling under sections 117-127 of the National Internal Revenue Code.
c. Excise tax is a tax levied on goods manufactured or produced in the Philippines for domestic sale or consumption or for any other disposition or to things imported.
- Specific tax and the Ad valorem tax. The excise tax imposed and based on weight or volume capacity or any other physical unit of measurement is referred to as Specific tax while the excise tax based on selling price or other specified value of the good is referred to as Ad valorem tax.
Lesson 2 Value-Added Tax
- refers to the business tax imposed by the national government on any person, who in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services, and on any person who imports goods as per section 106 to 108 of the National Internal Revenue Code.
- It is an indirect tax and the amount tax may be shifted on to the buyer (R.A. 7716. (Section 105)).
Persons Liable to Value-Added tax
1. Any person who in the course of trade or business, sells, barters, or exchanges goods.
2. Any person who renders services unless exempted.
3. Any person who imports goods whether for business or non-business purpose.
The phrase “in the course of trade or business” means the regular conduct or pursuit of a commercial or an economic activity, including transactions incidental thereto, by any person regardless of whether or not the person herein is a non-stock, non-profit private organization (irrespective of the disposition of its net income and whether or not it sells exclusively to members or guests), or government entity.
Transactions subject to Value-Added Tax
1. Every sale, barter or exchange transaction in the course of trade or business. 2. Every transaction deemed sale for vat purposes.
3. Every importation whether it is for business or non-business purposes. 4. Every sale of services made in the course of trade or business other than services rendered by persons subject to other percentage taxes, including the use or lease of properties.
Requisites for Transactions to be subject to VAT
1. There must be an actual or deemed sale of goods or properties or services for a consideration.
2. The transaction is undertaken in the ordinary course of trade or business 3. Such transaction is not exempt under the NIRC code, special laws or international agreements.
Characteristics of VAT
1. It is an indirect tax. Vat is considered an indirect tax because the seller of the goods or services may shift the burden of tax to the buyer.
2. It employs tax credit. The vat charged by the seller becomes the vat credit of the buyer against the vat he charged on his sales. This is output tax minus input tax equals vat payable where the input tax is the vat credit.
3. It is cumulative. The vat is cumulative in effect as the tax is borne by the last consumer. Unless and until the goods reach the final consumer, such goods continue to cumulate tax passed on to the buyer.
VAT Transactions and Rates
1. VAT Taxable Transactions at 10%. These are sales transactions on goods or properties, services and/or importation subject to the rate of ten percent (10%).
2. Zero-rate transactions at 0%. These are the export sales, and sales that are effectively zero-rated, and the zero-rated sales on services.
3. VAT-Exempt transactions. These are the transactions that are exempt under the provision of section 109 of the National Internal Revenue Code and those exempted under special laws and international agreements.
Elements of Value-Added Tax System 1. Output tax or Output VAT
2. Input tax or Input VAT
Refers to the 10% VAT on purchases charged by the VAT seller. Sources of Input Tax:
a. Vat paid on local purchases and importation of goods for sale, used as supplies, form part of the products for sale, or used in business subject to depreciation except automobiles, aircraft and yachts.
b. Vat paid on the purchase of real properties. c. Vat paid on the purchase of services. d. Transitional input tax.
e. Presumptive input tax. Transitional Input tax
Any person who becomes liable to value-added tax or any person who elects to be a VAT-registered person shall, subject to the filing of an inventory according to the rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner, be allowed input tax on his beginning inventory of goods, materials and supplies equivalent to eight percent (8%) of the value of the goods, materials and supplies, whichever is higher, which shall be creditable against output tax (section 111,(A)). Presumptive Input Tax shall be for the following:
1. Persons or firms engaged in the processing of sardines, mackerel and milk, and in manufacturing refined sugar and cooking oil, shall be allowed a presumptive input tax, creditable against the output tax, equivalent to the one and one-half percent (1 1/2%) of the gross value in money of their purchases of primary agricultural products which are used as inputs to their production. 2. Public work contractors shall be allowed a presumptive input tax equivalent to one and one-half percent (1 ½%) of the contract price with respect to government contracts only in lieu of actual input taxes, therefrom (Section 111, (B)).
3. VAT Payable
Refers to the excess of the output tax over the creditable input tax Computation of Value-Added Tax Due example on page 96 Accounting Entries for Vat transactions (January) on page 97
Creditable VAT withheld refers to vat withheld by the government or any of its political subdivisions, instrumentalities or agencies including government owned or controlled corporations, before making payment on account of its purchase of goods from sellers who are subject to vat, equivalent to 3% of the gross payment for the purchase of goods, which is creditable against the vat liability of such seller.
Example on page 98-99 VAT exempt Persons
1. Persons not engaged in undertaking VAT taxable transactions. a. Persons whose annual gross receipts or sales do not exceed ₧550,000; b. Non-stock/non-profit organizations.
In the foregoing, if said persons exceeded their annual gross receipts of ₧550,000, they now become liable to VAT and therefore register as VAT-person.
2. Persons considered in subsistence livelihood activities.
Exempt from vat and percentage tax and the payment of registration fee of ₧500. These persons shall be considered to be principally for subsistence livelihood activities only and not in the course of trade or business when their aggregate gross sales or receipts do not exceed ₧ 100,000 during the 12-month period (Revenue Circular 4-98)
3. Persons exempt from VAT under special laws. a. Cooperative Development Authority (RAs 6938, 8424)
b. Those registered with the Special Economic Zone or Free Ports in the Philippines. (Destination principle)
c. Regional or Area headquarters of multinational companies in the Philippines. (BIR ruling 176-88)
4. Inventors. (RR 19-93) Lesson 3:
Exempt Transactions from Value-Added Tax
section 109 of the National Internal Revenue Code:
a) Sale of nonfood agricultural products; marine and forest products in their original state by the primary producer or the owner of the land where the sales are produced;
b) Sale of cotton and cotton seeds in their original state, and copra; c) 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 therefore;
Products classified under this paragraph and paragraph a) shall be considered in their original state even if they have undergone the simple processes of preparation or preservation for the market such as freezing, drying, salting, broiling, roasting, smoking or stripping. Polished and/or husked rice, corn grits, raw cane sugar and molasses, and ordinary salt shall be considered in their original state;
d) 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);
e) Sale or importation of coal and natural gas, in whatever form or state, and petroleum products (except lubricating oil, processed gas, grease, wax and petrolatum) subject to excise tax imposed under Title VI;
f) Sale or importation of raw materials to be used by the buyer or importer himself in the manufacture of petroleum products subject to excise tax, except lubricating oil, processed gas, grease, wax and petrolatum;
g) Importation of passenger and/or cargo vessels of more than five thousand (5,000) tons, whether coastwise or ocean-going, including engine and spare parts of said vessel to be used by the importer himself as operator thereof; h) 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;
i) Importation of professional instruments and implements, wearing apparel, domestic animals, and personal household effects (except any vehicle, vessel, aircraft, machinery, other goods for use in the manufacture and merchandise of any kind in commercial quantity) belonging to persons coming to settle in the Philippines, for their own use and not for sale, barter or exchange, accompanying such persons, or arriving within ninety (90) days before or after their arrival, upon the production of evidence satisfactory to the
Commissioner, that such person are actually coming to settle in the Philippines and that the change of residence is bona fide; j) Services subject to percentage tax under Title V;
k) Services by agricultural contract growers and milling for others of palay into rice, corn into grits and sugar cane into raw sugar;
l) Medical, dental, hospital and veterinary services subject to the provisions of Section 17 of Republic Act NO. 7716, as amended;
m) Educational services rendered by private educational institutions, duly accredited by the Department of Education, Culture and Sports (DECS) and the Commission on Higher Education (CHED), and those rendered by government educational institutions;
n) Sale of an artist himself of his works of art, literary works, musical compositions and similar creations, or his services performed for the production of such works;
o) Services rendered by individuals pursuant to an employer-employee relationship;
p) 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 income from the Philippines;
q) Transactions which are exempt under international agreements to which the Philippines is a signatory or under special laws, except those under PD Nos. 66, 529 and 1590;
r) 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;
s) Sale of electric cooperatives duly registered with the Cooperative Development Authority or National Electrification Administration, relative to the generation and distribution of electricity as well as their importation of machineries and equipment, including spare parts, which shall be directly used in the generation and distribution of electricity;
t) Gross receipts from lending activities by credit or multi-purpose cooperatives duly registered with the Cooperative Development Authority whose lending operation is limited to their members;
u) Sales by non-agricultural, non-electric cooperatives duly registered with the Cooperative Development Authority; Provided, that the share capital contribution of each member does not exceed fifteen thousand pesos (₧15,000) and regardless of the aggregate capital and net surplus ratably distributed among the members;
v) Export sales by persons who are not VAT-registered;
w) Sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or business or real property utilized for low-cost and socialized housing as defined by Republic Act No. 7279, otherwise known as the Urban Development and Housing Act of 1992, and other related laws, house and lot and other residential dwellings valued at One million pesos (₧1,000,000) and below; Provided that not later than January 31st of the calendar year subsequent to the effectivity of this Act and each calendar year thereafter, the amount of one million pesos (₧1,000,000) shall be adjusted to its present value using the Consumer Price Index as published by the National Statistics Office (NSO);
x) Lease of a residential unit with a monthly rental not exceeding eight thousand pesos (₧8,000); Provided, that not later than January 31st of the calendar year subsequent to the effectivity of Republic Act 8241 and each calendar year thereafter, the amount of eight thousand (P8,000) shall be adjusted to its present value using the Consumer Price Index as published by the National Statistics Office (NSO);
y) Sale, importation, printing or publication of books and any newspaper, magazine, review or bulletin which appears at regular intervals with fixed prices for subscription and sale and which is not devoted principally to the publication of paid advertisements; and
z) 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 Five hundred fifty thousand pesos (₧550,000); Provided, that not later than January 31st of the calendar year subsequent to the effectivity of Republic Act No. 8241 and each calendar year thereafter, the amount of Five hundred fifty thousand (₧550,000) shall be adjusted to its present value using the Consumer Price Index, as published by the National Statistics Office (NSO).
Example on page 107- 110 Lesson 4
Rate and Base of Tax
There shall be levied, assessed and collected on every sale, barter or exchange of goods or properties, a value-added tax equivalent to ten percent (10%) of the gross selling price or gross value in money of the goods or properties sold, bartered or exchanged, such tax to be paid by the seller or transferor. The tax base for value-added tax is gross selling price or gross value in money of goods sold, bartered or exchanged. The tax rate applicable is 10%. Goods or Properties defined
Goods or properties shall mean all tangible and intangible objects which are capable of pecuniary estimation and shall include:
1. Real properties held primarily for sale to customers or held for lease in the ordinary course of trade or business;
2. The right or the privilege to use patent, copyright, design or model, plan, secret formula or process, goodwill, trademark, trade brand or other like property or right;
3. The right or privilege to use any industrial, commercial or scientific equipment in the Philippines;
4. The right or the privilege to use motion picture films, films, tapes and discs; and
5. Radio, television satellite transmission and cable television time. Transactions subject to Value-Added Tax
1. Every sale, barter or exchange transaction in the course of trade or business. 2. Every transaction deemed sale for vat purposes.
3. Every importation whether it is for business or non-business purpose. 4. Every sale of services made in the course of trade or business other than services rendered by persons subject to other percentage taxes including the use or lease of properties.
Requisites for Transactions to be subject to VAT
1. There must be an actual or deemed sale of goods or properties or services for a consideration.
2. The transaction is undertaken in the ordinary course of trade or business. 3. Such transaction is not exempt under the NIRC code, special laws or international agreement.
Transactions deemed sale
The following transactions shall be deemed as sale:
1. Transfer, use or consumption not in the course of business of goods or properties originally intended for sale or for use in the course of business.
2. Distribution or transfer to shareholders or investors as share in the profits of the VAT-registered person.
3. Consignments of goods if actual sale is not made within sixty (60) days following the date such goods were consigned.
4. Retirement from or cessation of business, with respect to inventories of taxable goods existing as of such retirement or cessation
Gross selling price, defined
- means the total amount of money or its equivalent which the purchase pays or is obligated to pay to the seller in consideration of the sale, barter or exchange of the goods or properties, excluding value-added tax. The excise tax, if any, on such goods or properties shall form part of the gross selling price. For example, an item is sold for ₧500 per unit. The gross selling price is ₧500 and the vat is ₧50 (₧500x10%), so the total price of the item sold is ₧550.
Zero percent (0%) rate
The following sale of VAT-registered persons shall be subject to zero percent (0%) rates:
1. Export sales;
2. Foreign Currency denominated sales; and
3. Sales to persons or entities whose exemption under special laws or international agreement to which the Philippines is a signatory effectively subjects such sales to zero rates.
Export sales, defined Export sales means:
1. The sale and actual shipment of goods from the Philippines to a foreign country, irrespective of any shipping arrangement that may be agreed upon which may influence or determine the transfer of ownership in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas; 2. Sale of raw materials or packaging materials to a non-resident buyer for delivery to a resident local export-oriented enterprise to be used in
manufacturing, processing, packing or repacking in the Philippines of the said buyer’s goods and paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas;
3. Sale of raw materials or packaging materials to export-oriented enterprise whose export sales exceed seventy percent (70%) of the total annual production;
4. Sale of gold to the Bangko Sentral ng Pilipinas;
5. Those considered export sales under Executive order no. 226, otherwise known as the Omnibus Investment Code of 1987, and other Special Laws. Foreign Currency denominated sale, defined
- means sale to a non-resident of goods, except those mentioned in sections 149 and 150 of NIRC, assembled or manufactured in the Philippines for delivery to a resident in the Philippines, paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas. Example on page 117
Changes in or cessation of status of a VAT-registered Person
In other words, the vat rate of 10% shall likewise apply to the goods disposed of or existing at the time there is a change in the status of VAT-registered person or the business is terminated. For example: Wise Partnership is a vat-registered person that is into the sale of goods or merchandise. After two years of operation, the owners incorporated Wise Partnership into Wise Corporation. The inventories at the time of change in status of the business transferred to the new corporation should be applied with 10% vat for tax purposes. Determination of the Tax
The tax shall be computed by multiplying the total amount indicated in the invoice by one-eleventh (1/11).
For example: A vat-registered person sold ₧55,000.00 worth of merchandise. The vat shall be computed as ₧55,000 x 1/11 = ₧5,000.
Sales returns, allowances and sales discounts
The value of the goods or properties sold and subsequently returned or for which allowances were granted by a VAT-registered person may be deducted from the gross sales or receipts for the quarter in which a refund is made or a credit memorandum or refund is issued. Example on page 119
Authority of the Commissioner to determine the Appropriate Tax Base The Commissioner of Internal Revenue shall, by rules and regulations prescribed by the Secretary of Finance, determine the appropriate tax base in cases where a transaction is deemed a sale, barter or exchange of goods or properties under subsection (B) hereof, or where the gross selling price is unreasonably lower than the actual market value.
Example on page 119 Lesson 5
Sale or Exchange of services defined
- Means the performance of all kinds of services for others for a fee, remuneration or consideration in the Philippines. It includes the following: 1. Professional/technical services performed or rendered by:
o Construction and service contractors;
o Stock, real estate, commercial customs and immigration brokers; o Persons engaged in milling, processing, manufacturing or repacking; o Dealers in securities;
o Lending investors;
o Transportation contractors on their transport of goods or cargoes; o Banks, non-bank financial intermediaries and finance companies; o Non-life insurance companies (except crop insurance) including surety, fidelity, indemnity and bonding companies
o A nonresident person or his employee in connection with the use of property rights belonging to, or the installation of any brand, machinery or other apparatus purchased from nonresident person.
2. Transfer of technology such as:
o The lease or use of any industrial, commercial knowledge or information; o The supply of scientific, technical, industrial or commercial knowledge or information;
o The supply of any assistance that is ancillary and subsidiary to and is furnished as a means of enabling the application or employment of any such property, or right or any such knowledge or information.
3. Lease or use of intangible property.
This includes copyrights, patents, designs, models, plans, secret formula or process, goodwill, trademark, trade brand or other like property or right, right to use radio, television, satellite transmission and cable television time. 4. Lease or use of tangible property such as:
o Lessors of property, whether real or personal;(except lease of residential unit where the monthly rental does not exceed ₧8,000; and the aggregate rentals received by the lessor does not exceed ₧550,000
o Warehousing services;
o Lessors/distributors of cinematographic films;
o Proprietors, operators or keepers of hotels, motels, rest houses; o Proprietors, operators of restaurants, refreshment parlors, cafes and other eating places including night club and caterers;
o Services of franchise grantees of telephone and telegraph, radio and television broadcasting and all other franchise grantees except those under section 119 of the NIRC;
o The lease or use of the right or privilege to use any copyright, goodwill, trademark brand or other like property or right;
o The lease of motion pictures, films, tapes and discs;
o The lease or right to use radio, television, satellite transmission and cable television time.
Tax base
The VAT on supply of services is based on gross receipts. Gross receipts refer to cash or its equivalent, whether actually or constructively received. Tax Rates
The tax is:
1. 10% of the gross receipts.
2. 0% of the gross receipts from the services performed in the Philippines if: a. From processing, manufacturing or repacking of goods for other persons doing business in the Philippines, the goods are subsequently exported, or the services are paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas; b. Services other than letter a, if the consideration is paid in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas;
c. Services rendered to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory; d. Services rendered to vessels engaged exclusively in international shipping;
