TAX 2 MIDTERMS REVIEWER Sources: National Internal Revenue Code De Leon- Class Notes Prepared by: B2015 Academics Committee Tax 2 Reviewer Ops

MODULE 1 TRANSFER TAXES those imposed upon the gratuitous disposition of private property taxes levied on the transmission of property from a decedent or deceased to his heirs or from a donor to a donee 1. Estate taxation 2. Donors tax I. ESTATE TAXATION A.) BASIC PRINCIPLES OF ESTATE TAX Estate tax is the tax on the right to transmit property at death and on certain transfers which are made by the statute the equivalent of testamentary dispositions. Estate Tax is a tax imposed in the privilege that a person is given in controlling to a certain extent, the disposition of his property to take effect upon death. It is an excise tax imposed on the act of passing the ownership of property at the time of death and not on the value of the property or right. Estate tax should not be construed as a direct tax on the property of the decedent although the tax is based thereon. Purpose and Justification 1) Benefit-received theory-considers the services rendered by the government in the distribution of the estate of decedent, collected as tax 2) Privilege theory/State partnership theory- inheritance is not a right but a privilege granted by the State (passive and silent partner in the accumulation of property) 3)Ability to pay theory- receipt of inheritance places assets in the hands of the heirs and beneficiaries, creating an ability to pay tax 4) Redistribution of wealth theory- the receipt of income contributes to inequalities in wealth and incomes, the tax bringing more equality to distribution of wealth B.) DETERMINATION OF GROSS ESTATE GROSS ESTATE - is the total value of all property, whether real or personal, tangible or intangible, belonging to the decedent at the time of his death, situated within or outside the Philippines, where such decedent was a resident or citizen of the Philippines. in case of a non-resident alien

decedent, it shall include only property situated in the Philippines. Classification of decedent SEC. 85. Gross Estate. - the value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated: Provided, however, that in the case of a nonresident decedent who at the time of his death was not a citizen of the Philippines, only that part of the entire gross estate which is situated in the Philippines shall be included in his taxable estate. (A) Decedent's Interest. - To the extent of the interest therein of the decedent at the time of his death; (B) Transfer in Contemplation of Death. - To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, in contemplation of or intended to take effect in possession or enjoyment at or after death, or of which he has at any time made a transfer, by trust or otherwise, under which he has retained for his life or for any period which does not in fact end before his death (1) the possession or enjoyment of, or the right to the income from the property, or (2) the right, either alone or in conjunction with any person, to designate the person who shall possess or enjoy the property or the income therefrom; except in case of a bonafide sale for an adequate and full consideration in money or money's worth. (C) Revocable Transfer. - (1) To the extent of any interest therein, of which the decedent has at any time made a transfer (except in case of a bona fide sale for an adequate and full consideration in money or money's worth) by trust or otherwise, where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power (in whatever capacity exerciseable) by the decedent alone or by the decedent in conjunction with any other person (without regard to when or from what source the decedent acquired such power), t o alter, amend, revoke, or terminate, or where any such power is relinquished in contemplation of the decedent's death. (2) For the purpose of this Subsection, the power to alter, amend or revoke shall be considered to exist on the date of the decedent's death even though the exercise of the power is subject to a precedent giving of notice or even though the alteration, amendment or revocation takes effect only on the expiration of a stated period after the exercise of the power, whether or not on or before the date of the decedent's death notice has been given or the power has been exercised. In such cases, proper adjustment shall be made representing the interests which would have been excluded from the power if the decedent had lived, and for such purpose if the notice has not been

given or the power has not been exercised on or before the date of his death, such notice shall be considered to have been given, or the power exercised, on the date of his death. (D) Property Passing Under General Power of Appointment. - To the extent of any property passing under a general power of appointment exercised by the decedent: (1) by will, or (2) by deed executed in contemplation of, or intended to take effect in possession or enjoyment at, or after his death, or (3) by deed under which he has retained for his life or any period not ascertainable without reference to his death or for any period which does not in fact end before his death (a) the possession or enjoyment of, or the right to the income from, the property, or (b) the right, either alone or in conjunction with any person, to designate the persons who shall possess or enjoy the property or the income therefrom; except in case of a bona fide sale for an adequate and full consideration in money or money's worth. (E) Proceeds of Life Insurance. - To the extent of the amount receivable by the estate of the deceased, his executor, or administrator, as insurance under policies taken out by the decedent upon his own life, irrespective of whether or not the insured retained the power of revocation, or to the extent of the amount receivable by any beneficiary designated in the policy of insurance, except when it is expressly stipulated that the designation of the beneficiary is irrevocable. (F) Prior Interests. - Except as otherwise specifically provided therein, Subsections (B), (C) and (E) of this Section shall apply to the transfers, trusts, estates, interests, rights, powers and relinquishment of powers, as severally enumerated and described therein, whether made, created, arising, existing, exercised or relinquished before or after the effectivity of this Code. (G) Transfers of Insufficient Consideration. - If any one of the transfers, trusts, interests, rights or powers enumerated and described in Subsections (B), (C) and (D) of this Section is made, created, exercised or relinquished for a consideration in money or money's worth, but is not a bona fide sale for an adequate and full consideration in money or money's worth, there shall be included in the gross estate only the excess of the fair market value, at the time of death, of the property otherwise to be included on account of such transaction, over the value of the consideration received therefor by the decedent. Maams notes>>> has to be in contemplation of death (H) Capital of the Surviving Spouse. - The capital of the surviving spouse of a decedent shall not, for the purpose of this Chapter, be deemed a part of his or her gross estate.

Classification of Taxpayers and Composition of Gross Estate Gross Estate Composition (Sec. 85, NIRC) Decedent Gross Estate Resident citizen Nonresident citizen Resident alien 1. ) Real property wherever situated 2.)Tangible personal property wherever situated 3.) Intangible personal property wherever situated Nonresident alien 1) Real property situated in the Philippines 2) Tangible personal property situated in the Philippines 3) Intangible personal property with situs in the Philippines, unless excluded in the basis of reciprocity

Velilla v Posadas SUMMARY: Arthur Graydon Moody was an American resident who lived and maintained business in the Philippines. He became inflicted with leprosy and for fear of being confined in the Cullion Leper Colony, he surreptitiously left the Philippines. He stayed in Paris for three months for treatment, and then moved in Calcutta, India. From Calcutta, he wrote a letter to Harry Wendt in Manila offering to sell his shares in a domestic company. He stated in the letter that certainly Ill never return there to live or enter business again. He died of his disease in Calcutta. His estate consisted principally of bonds and shares of stock of domestic corporations, bank deposits and other intangible personal property. During the probate of his will, the CIR assessed inheritance and income taxes. The defense of his estate was that Moody was a non-resident alien so his personal property is not taxable in the Philippines. The Supreme Court ruled that the CIR properly assessed his taxes because the situs of his properties was the Philippines and he was domiciled in the Philippines until his death. DOCTRINE: To effect the abandonment of ones domicile, there must be a deliberate and provable choice of a new domicile, coupled with actual residence in the place chosen, with

a declared and provable intent that it should be ones fixed and permanent place of abode, ones home. Coll v Lara SUMMARY: Miller was an american citizen who had to stay in the Phiilppines due to his work. During his stay in the Phil,he acquired shares of stock in domestic corporations. When Miller's will was admitted to probate, both in the US and in the Phil., the ancillary administrator filed for taxes. The CIR assessed the estate of esteate and inheritance tax on the premise that Miller was a resident of the Philippines at the time of his death. The SC ruled that Miller was a resident of the US at the time of his death. DOCTRINE: at the time that The National Internal Revenue Code was promulgated in 1939, the prevailing construction given by the courts to the "residence" was synonymous with domicile. and that the two were used intercnangeably Rule of Reciprocity

SEC. 104. Definitions. - For purposes of this Title, the terms 'gross estate' and 'gifts' include real and personal property, whether tangible or intangible, or mixed, wherever situated: Provided, however, That where the decedent or donor was a nonresident alien at the time of his death or donation, as the case may be, his real and personal property so transferred but which are situated outside the Philippines shall not be included as part of his 'gross estate' or 'gross gift': Provided, further, That franchise which must be exercised in the Philippines; shares, obligations or bonds issued by any corporation or sociedad anonima organized or constituted in the Philippines in accordance with its laws; shares, obligations or bonds by any foreign corporation eighty-five percent (85%) of the business of which is located in the Philippines; shares, obligations or bonds issued by any foreign corporation if such shares, obligations or bonds have acquired a business situs in the Philippines; shares or rights in any partnership, business or industry established in the Philippines, shall be considered as situated in the Philippines: Provided, still further, that no tax shall be collected under this Title in respect of intangible personal property: (a) if the decedent at the time of his death or the donor at the time of the donation was a citizen and resident of a foreign country which at the time of his death or donation did not impose a transfer tax of any character, in respect of intangible personal property of citizens of the Philippines not residing in that foreign country, or (b) if the laws of the foreign country of which the decedent or donor was a citizen and resident at the time of his death or donation allows a similar exemption from

transfer or death taxes of every character or description in respect of intangible personal property owned by citizens of the Philippines not residing in that foreign country. The term 'deficiency' means: (a) the amount by which tax imposed by this Chapter exceeds the amount shown as the tax by the donor upon his return; but the amount so shown on the return shall first be increased by the amount previously assessed (or Collected without assessment) as a deficiency, and decreased by the amounts previously abated, refunded or otherwise repaid in respect of such tax, or (b) if no amount is shown as the tax by the donor, then the amount by which the tax exceeds the amounts previously assessed, (or collected without assessment) as a deficiency, but such amounts previously assessed, or collected without assessment, shall first be decreased by the amount previously abated, refunded or otherwise repaid in respect of such tax. Reciprocity clause The NIRC excludes intangible personal property with situs in the Philippines from the gross estate of a non-resident alien decedent if there is reciprocity. There is reciprocity if: a) The decedent at the time of his death was a resident citizen of a foreign country which at the time of his death did not impose an estate tax of any character in respect of intangible personal property of citizens of the Philippines not residing in that foreign country; OR b) the laws of the foreign country of which the decedent was a resident citizen at the time of his death allow a similar exemption from estate taxes of every character, in respect of intangible personal property owned by citizens of the Philippines not residing in that foreign country. Situs or location of property, Sec 104: *Real and personal property, whether tangible or intangible, or mixed, wherever situated, provided that where the decedent (or donor) was a non- resident alien at the time of his death (or donation), his real and personal property so transferred but which are situated outside the Philippines shall not be included as part of his gross estate. (DeLeon) Intangible Assets with Situs Within the Philippines (Sec. 104, NIRC) 1. Franchise which must be exercised in the Philippines. 2. Shares, obligations or bonds issued by any corporation or sociedad anonima organized or constituted in the Philippines in accordance with its laws.

3. Shares, obligations or bonds issued by any foreign corporation 85% of the business of which is located in the Philippines. 4. Shares, obligations, or bonds issued by any foreign corporation if such shares, obligations or bonds have acquired a business situs in the Philippines. 5. Shares or rights in any partnership, business or industry established in the Philippines. SPECIFIC ITEMS INCLUDED in the GROSS ESTATE Property owned by the decedent actually and physically present in his estate at the time of his death such as land, buildings, shares of stock, vehicles, bank deposit, and the like. 1. Decedent's Interest refers to the extent of equity or ownership participation of the decedent on any property physically existing and present in the gross estate, whether or not in his possession, control or dominion. It also refers to the value of any interest in property owned or possessed by the decedent at the time of his death (interest having value or capable of being valued or transferred). Property not physically in the estate (these have already been transferred during the lifetime of the decedent but are still subject to payment of estate tax) such as: 2. Transfer in Contemplation of Death. -includes donation mortis cause -include in the gross estate the value of property transferred y the decedent during his lifetime in anticipation of his death such as: a. Transfer of property in favor of another person, but the transfer was intended to take effect only upon the transferors death b. Transfer by gift intended to take effect at death, or after death, or under which the donor reserved the income or the right to designate the persons who should enjoy the income. (Note: There is no transfer in contemplation of death when the transfer of property is a bona fide sale for an adequate and full consideration in money or moneys worth.)

US vs. Wells SUMMARY: John W. Wells, a resident of Menominee, Michigan, died on August 17, 1921. The Commissioner of Internal Revenue assessed additional estate taxes, upon the ground that certain transfers by the decedent within two years prior to his death, were made in contemplation of death and should be included in

the taxable estate under the provisions of 402(c) of the Revenue Act of 1918, 40 Stat. 1057, 1097. The amount of the additional tax was paid by the executors and claim for refund was filed. The claim having been rejected, the executors brought this suit in the Court of Claims to recover the amount paid. The Court of Claims decided in favor of the executors DOCTRINE: Whether a gift inter vivos was made "in contemplation of death" within the meaning of the Revenue Act of 1918 depends upon the donor's motive, to be determined in each case from the circumstances, including his bodily and mental condition. A gift is made "in contemplation of death" when the motive inducing it is of the sort that leads to testamentary disposition, but not when the motive is merely to attain an object desirable to the donor in his life, as where the immediate and moving cause of transfers was the carrying out of a policy, long followed by the decedent in dealing with his children, of making liberal girts to them during his lifetime. A transfer may be "in contemplation of death" though not induced by a fear that death is near at hand. Dizon vs. Posadas SUMMARY: After the death of his father, Luis Dison was charged Php 2,808 as inheritance tax by the CIR, w/c he paid under protest. Alleging that the property he received from his deceased father was donated to him by virtue of a gift intervivos, and not an inheritance, he sought to recover what he paid. LC ruled in favor of the CIR, so he appealed to the SC Held: The gift to Dison, who was a forced heir, was considered an advancement. Under Sec. 1540 such gifts is subject to tax. DOCTRINE: The law presumes that such gifts (made to those who shall prove to be the heirs, devisees, legatees or donees mortis causa of the donor) have been made in anticipation of inheritance to EVADE tax. Thus, to prevent this, they are added to the resulting amount of the inheritance tax.

3. Revocable Transfer. - -It 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.

(These transfers do not actually convey full ownership over the property transferred. Hence, they are still part of the gross estate of the transferor). 4. Property Passing Under General Power of Appointment -The power of appointment is general when the power of appointment authorizes the donee of the power to appoint any person he pleases. The donee of a general power of appointment holds the appointed property with all the attributes of ownership thus, the appointed property shall form part of the gross estate of the donee (beneficiary) upon his death. 5. Proceeds of Life Insurance. -Proceeds of life insurance taken out by the decedent on his own life should be included in the gross estate if the following requisites are present: a. It must be an insurance on the life of the decedent. b. The beneficiary must be either of the following: His estate His executor His administrator Any third person provided that the designation is not irrevocable (If silent, the designation of the beneficiary is assumed to be revocable. Irrevocable designation of the beneficiary is never assumed.)

Proceeds of Life

Insurance Beneficiary Estate Executor Administrator 3rd Party (i.e. wife) 3rd Party

Designation Revocable or irrevocable Revocable or irrevocable Revocable or irrevocable Revocable Irrevocable

Gross Estate Included Included Included Included Excluded

Art. 116, Family Code. All property acquired during the marriage, whether the acquisition appears to have been made, contracted or registered in the name of one or both spouses, is presumed to be conjugal unless the contrary is proved.

Del Val vs. Del Val SUMMARY: Decedent Gregorio took out a life insurance policy on his life and designated Andres as beneficiary. Gregorio died intestate. His other heirs claim that the proceeds of the insurance policy should be included in Gregorios estate. The Court held that the proceeds belong to the beneficiary as his separate property and should excluded from the estate of the insured-decedent. DOCTRINE: Proceeds of an insurance policy belong exclusively to the beneficiary and not to the estate of the person whose life was insured. The civil code does not apply because the contract of life insurance is a special contract and the destination of the proceeds is determined by special laws which deal exclusively with the subject. **When taxable a) Beneficiary is estate of deceased- amount receivable by the estat, 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 b) Beneficiary other than decedent- amount receivable by any beneficiary except when it is expressly stipulated that the designation of beneficiary is irrevocable

6. Prior Interests. Except as otherwise specifically provided therein, Subsections (B), (C) and (E) of Section 86 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. 7. Transfers of Insufficient Consideration. -When a sale or transfer (other than a bona fide or valid sale) was made for a price less than it FMV at the time of sale or transfer, the excess of the FMV of the transferred property at the time of death over the value of the consideration received should be included in the gross estate. For this purpose, the following FMVs shall be used: a. FMV of the property at the time of transfer if the consideration received is substantially the same with the FMV at the time of transfer, such sale or transfer is considered a bona fide sale, hence, not subject to estate tax.

b. FMV of the property at the time of death If the consideration received is substantially lower or for less than full and adequate consideration compared to the FMV at the time of the sale or transfer, such sale or transfer was made for insufficient consideration. In such case, the excess of the FMV at the time of death over the FMV at the time of sale or transfer should be included in the gross estate of the decedent. - If there was no consideration received at the date of transfer and such transfer was made in contemplation of death, the FMV of the property at the date of death, not at the date of transfer, should be included in the gross estate of the decedent. - If there was no consideration received at the date of transfer and such transfer was not made in contemplation of death, such transfer shall be considered donation inter-vivos subject to donors tax base on the FMV of the property at the date the donation was made. 8. Capital of the Surviving Spouse. The capital of the surviving spouse of a decedent shall not, for the purpose of this Chapter, be deemed a part of his or her gross estate. Claims against insolvent persons A judicial declaration of insolvency is not required but the incapacity of the debtor to pay his obligation should be proven. -As a rule regardless of the amount the debtor is unable to pay, the full amount of the claim, against the insolvent person should be included in the gross estate of the decedent. The portion of the claim which is not collectible should be allowed as a deduction from the gross estate. Properties of spouses Sec 85 (H) , NIRC. Capital of the Surviving Spouse. - The capital of the surviving spouse of a decedent shall not, for the purpose of this Chapter, be deemed a part of his or her gross estate. Art. 75. Family Code. The future spouses may, in the marriage settlements, agree upon the regime of absolute community, conjugal partnership of gains, complete separation of property, or any other regime. In the absence of a marriage settlement, or when the regime agreed upon is void, the system of absolute community of property as established in this Code shall govern. Art. 117 FC. The following are conjugal partnership properties:

(1) Those acquired by onerous title during the marriage at the expense of the common fund, whether the acquisition be for the partnership, or for only one of the spouses; (2) Those obtained from the labor, industry, work or profession of either or both of the spouses; (3) The fruits, natural, industrial, or civil, due or received during the marriage from the common property, as well as the net fruits from the exclusive property of each spouse; (4) The share of either spouse in the hidden treasure which the law awards to the finder or owner of the property where the treasure is found; (5) Those acquired through occupation such as fishing or hunting; (6) Livestock existing upon the dissolution of the partnership in excess of the number of each kind brought to the marriage by either spouse; and (7) Those which are acquired by chance, such as winnings from gambling or betting. However, losses therefrom shall be borne exclusively by the loser-spouse. Art. 109 FC. The following shall be the exclusive property of each spouse: (1) That which is brought to the marriage as his or her own; (2) That which each acquires during the marriage by gratuitous title; (3) That which is acquired by right of redemption, by barter or by exchange with property belonging to only one of the spouses; and (4) That which is purchased with exclusive money of the wife or of the husband. Art. 88 FC. The absolute community of property between spouses shall commence at the precise moment that the marriage is celebrated. Any stipulation, express or implied, for the commencement of the community regime at any other time shall be void. Art. 92 FC. The following shall be excluded from the community property: (1) Property acquired during the marriage by gratuitous title by either spouse, and the fruits as well as the income thereof, if any, unless it is expressly provided by the donor, testator or grantor that they shall form part of the community property; (2) Property for personal and exclusive use of either spouse. However, jewelry shall form part of the community property; (3) Property acquired before the marriage by either spouse who has legitimate descendants by a former marriage, and the fruits as well as the income, if any, of such property.

C. VALUATION OF THE GROSS ESTATE In General- Fair market Value at the time of death Real Property The higher value between: FMV determined by the Commissioner; and FMV as shown in the schedule of values fixed by the provincial and city assessors. If there is no zonal value, the taxable base is the FMV that appears in the latest tax declaration. If there is an improvement, the value of improvement is the construction cost per building permit or the FMV per latest tax declaration Personal Property FMV at the time of death Shares of stock Unlisted common share: Book value per share of the issuing corporation. (Appraisal surplus shall not be considered, as well as the assigned amount to preference share, if any). Unlisted preference share: Par value per share Listed share: 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 Right to usufruct, use or habitation, In accordance with the latest Basic Standard Mortality Table and annuity taking into account the probable life of the beneficiary, to be approved by the Secretary of Finance upon recommendation of the Insurance Commissioner

Manila Railroad Co. vs. Velasquez SUMMARY: Manila Railroad Company wanted adjoining pieces of land to be expropriated to the government for their use in line with the constriction of a railroad station at the site of Lucena, Province of Tayabas. The company in question is contesting the P81k just compensation amount arrived at by the commissioners. [The court here discusses the modes of arriving at such amount]. The lower court relied upon the finding of the commissioners, which MRC feels to be greatly in excess of its value because the construction of

schools in the area increased the land value, made it a choice for setting up residences, and showed increase in population upon the news spreading that the train station is going to be built there whereas the values of the lots in question were originally very cheap because they were mere agricultural lots, some not even tilled because they owners did not have farm animals. The issue at hand is whether the court can substitute its own judgment for the findings of the commissioners, or subject their report to review. DOCTRINE: "Compensation" means an equivalent for the value of the land (property) taken. Anything beyond that is more and anything short of that is less than compensation. To compensate is to render something which is equal in value to that taken or received. The word "just" is used to intensify the meaning of the word "compensation;" to convey the idea that the equivalent to be rendered for the property taken shall be real, substantial, full, ample. "Just compensation." therefore, as used in section 246 of the Code of Civil Procedure, means a fair and full equivalent for the loss sustained. There is ample authority in the statute to authorize the courts to change or modify the report of the commissioners by increasing or decreasing the amount of the award, if the facts of the case will justify such change or modification. Evidence of other sales made in good faith is competent if the character of such parcels as sites for business purposes, dwellings, or for whatever other use which enhances the pecuniary value of the condemned land is sufficiently similar to the latter that it may be reasonably assumed that the price of the condemned land would be approximately near the price brought by the parcels sold. The market value of the condemned land is all that the owner is entitled to. Evidence that the locality may become a business or a choice residential district when its history over a period of years shows that there are large tracts of agricultural land in the vicinity which have never been appropriated for any of those purposes, does not justify appraising such land at figures which would be worth it if such development were an actual fact

EXCLUSIONS AND EXEMPTIONS FROM THE GROSS ESTATE A. Exclusions under Secs. 85 and 86, NIRC 1. Exclusive property of the surviving spouse In case of married decedents, the composition of the gross estate shall be: Particulars Gross Estate Exclusive properties of the decedent Included Exclusive properties of the surviving spouse Excluded Common properties of the decedent and the surviving spouse Included 2. Property outside the Philippines of a non-resident alien decedent Sec. 85, NIRC Provided, however, that in the case of a nonresident decedent who at the time of his death was not a citizen of the Philippines, only that part of the entire gross estate which is situated in the Philippines shall be included in his taxable estate. 3. Intangible personal property in the Philippines of a non-resident alien under the Reciprocity Law. B. Exemption under Sec. 87, NIRC SEC. 87 Exemption of Certain Acquisitions and Transmissions. The following shall not be taxed: (A) The merger of usufruct in the owner of the naked title; (B) The transmission or delivery of the inheritance or legacy by the fiduciary heir or legatee to the fideicommissary; (C) The transmission from the first heir, legatee or donee in favor of another beneficiary, in accordance with the desire of the predecessor; and (D) All bequests, devises, legacies or transfers to social welfare, cultural and charitable institutions, no part of the net income of which insures to the benefit of any individual: Provided, however, That not more than thirty percent (30%) of the said bequests, devises, legacies or transfers shall be used by such institutions for administration purposes. C. Exclusions under special laws 1. Proceeds of life insurance and benefits received by members of GSIS (RA 728).

2. Benefits received by members from the SSS by reason of death (RA 1792). 3. Amounts received from Philippine and US governments for war damages. 4. Amounts received from the US Veterans Administration. 5. Benefits received from the Philippines and US government for damages suffered during WW II (RA 4917). 6. Retirement benefits of officials/ employees of a private firm (RA 4917). 7. Payments from the Philippines of US government to the legal heirs of the deceased of WW II Veterans and deceased civilian for supplies/ services furnished to the US and Philippine Army (RA 136). 8. Life insurance proceeds on life insurance policy taken out by the decedent himself, upon his own life, where the beneficiary is a third person and is irrevocably designated. 9. Life insurance proceeds on Insurance policy (group insurance) taken out by employer on the employees life, whoever the beneficiary maybe, whether the designation as beneficiary is revocable or irrevocable. TAX RATES of ESTATE TAX under Section 84 There shall be levied, assessed, collected and paid upon the transfer of the net estate as determined in accordance with Sections 85 and 86 of every decedent, whether residenr or nonresident of the Philippines, a tax based on the value of such net estate, as computed in accordance with the ff. Schedule: If net estate is: OVER BUT NOT OVER THE TAX SHALL BE PLUS - P 200,000 Exempt - P 200,000 500,000 P 0 5% of excess over P200,000 P 500,000 2,000,000 15,000 8% of excess over P500,000 P2,000,000 5,000,000 135,000 11% of excess over P2,000,000 P 5,000,000 10,000,000 465,000 15% excess over P 5,000,000

10,000,000 - 1,215,000 20% of excess over P P10,000,000 D. DEDUCTIONS FROM GROSS ESTATE

Summary Allowable Deductions from the Gross Estate

Citizen and Resident Decedents

Nonresident Alien Decedents

I. ORDINARY DEDUCTIONS: 1. Expenses, Losses, Indebtedness, Taxes, etc. a. Funeral Expenses b. Judicial expenses c. Claims against the estate d. Claims against the insolvent person e. Taxes f. Losses 2. Transfer for public use 3. Vanishing deduction 4. RA 4917

I. ORDINARY DEDUCTIONS: 1. Proportionate Deductions for Expenses, Losses, Indebtedness, Taxes, etc. (ELITe) computed as: Gross Estate (Phils.) x ELITe (world) Gross Estate (World) 2.Transfer for public use 3.Vanishing deduction 4.RA 4917 Not allowed

II. SPECIAL DEDUCTIONS 1. Standard Deduction 2. Family Home 3. Medical Expenses III. SPECIAL DEDUCTIONS: -Not allowed

ORDINARY DEDUCTIONS A. ELITE (Expenses, Losses, Indebtedness, Taxes, etc.) 1. Funeral expenses -Actual funeral expenses (paid or unpaid) up to the time of interment, or an amount equal to 5% of the gross estate, whichever is lower, but in no case to exceed p 200,000. -To be considered actual, the funeral expenses must be paid out of the estate, not by somebody or out of contributions from friends and relatives -Any amount in excess of P 200,000 shall not be allowed as a deduction as funeral expenses. Neither shall the unpaid portion in excess of the

P 200,000 threshold be allowed to be claimed as a deduction under claims against estate -Funeral expenses also include: -Mourning apparel of the surviving spouse and unmarried minor children of the deceased bought and used on the occasion of the burial -Expenses of the wake preceding the burial including food -Fees for religious rites and ceremonies prior to interment -Cost of burial plot, tombstone, mausoleum, but not their upkeep -Publication and telecommunication charges for death notices -Interment and/ or cremation charges -All other expenses incurred for the performance of the rites and ceremonies incident to the interment (Note: Medical expenses as of the last illness will not form part of funeral expenses but should be claimed as medical expenses) 2. Judicial expenses -administration expenses essential in the settlement of the estate or necessarily incurred for but not limited to: a) collection of the assets of the estate; b) payment of debts; and c) distribution of the remainder among those entitled thereto. These expenses should be supported by receipts, invoices or by a sworn statement of account issued and signed by the creditor. -other judicial expenses: -actual judicial or court expenses -attorneys fees -expenses of administration such as, but not limited to -inventory taking of assets comprising the gross estate -payment of debts of the estate -distribution of the estate among the heirs -accountants fee -clerks hire -cost of preserving and distributing the estate -cost of string or maintaining the property of the estate -brokerage fees 3. Indebtedness or claims against the estate -Requisites for deductibility: a. It must be valid in law and enforceable in court against him (decedent) when he was alive.

b. It must not have been condoned by the creditor or the action to collect from the decedent must not have been prescribed. c. If the indebtedness arises from a debt instrument, it must be notarized, except for loans granted by financial institutions where notarization is not part of the business practice/ policy of the financial institution-lender. d. If contracted within 3 years before the death of the decedent, a statement under oath (by executor/ administrator) must be executed and must be attached therewith a statement showing the disposition of the proceeds of the loan. (Note: Unpaid funeral and medical expenses shall not be deductible under this category.) Substantiation Requirements In case of simple loan (including advances): a) The debt instrument must be duly notarized at the time the indebtedness was incurred, such as promissory note or contract of loan, except for loans granted by financial institutions where notarization is not part of the business practice/ policy of the financial institution-lender b) Duly notarized Certification from the creditor as to the unpaid balance of the debt, uncludign interest as of the time of death. c.) In accordance with the requirements as prescribed in existing internal revenue issuances, proof of financial capacity of the creditor to lend the amount at the time the loan was granted, as well as its latest audited balance sheet with a detailed schedule of its receivable showing the unpaid balance of the decedent-debtor. d) A statement under oath executed by the administrator or executor of the estate reflecting the disposition of the proceeds of the loan if said loan was contracted within 3 years prior to the death of the decedent. If the unpaid obligation arose from purchase of good or services: a) Pertinent documents evidencing the purchase of goods or service, such as sales invoice/ delivery receipt (for sale of goods), or contract for the services agreed to be rendered (for sale of service), as duly acknowledged, executed and signed by decedent-debtor and creditor, and statement of account given by the creditor as duly received by the decedent-debtor. b) Duly notarized Certification from the creditor as to the unpaid balance of the debt, including interest as of the time of death. C c) 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. d) Where the settlement is made through the Court in a testate or intestate proceeding, pertinent documents filed with the Court evidencing the claims against the estate, and the Court Order approving the said claims, if already issued. 4. Claims against an insolvent person -Requisites for deductibility For purposes of estate taxation, a judicial declaration of insolvency is not required but a) The incapacity of the debtor to pay his obligation should be proven. b) The full amount owed by the insolvent must first be included in the decedents gross estate. c) If the insolvent could only pay partial amount, the full amount owed shall be included in the gross estate, and the amount uncollectible shall be allowed as a deduction. 5. Unpaid mortgages or indebtedness on property -To be allowed as a deduction, the decedents gross estate must include the FMV of the property encumbered. The amount allowed as a deduction would be the outstanding debt or mortgage. -In case unpaid mortgage payable is being claimed by the estate, verification must be made as to who was the beneficiary of the loan proceeds. If the loan is found to be merely an accommodation loan, the value of the unpaid loan must be included as receivable of the estate. -If there is legal impediment to recognize the same as receivable of the estate, said unpaid obligation/ mortgage payable shall not be allowed as a deduction from the gross estate. -In all instances, the mortgaged property, to the extent of the decedents interest therein, should always form part of the gross estate. 6. Taxes -unpaid taxes that accrued prior to the death of the decedent. However the following are not allowed as a deduction: -income tax on income received after death -property taxes accrued after death -estate tax

7. Losses -amount deductible is the value of the property lost Requisites for deductibility: a) Arising exclusively from: i. Acts of God such as fire, storm, shipwreck and other similar casualty ii. Acts of man such as robbery, theft, embezzlement b) Not compensated by insurance or otherwise c) Not claimed as a deduction in an income tax return of the estate subject to income tax d) Occurred during the settlement of the estate e) Occurred before the last day for the payment of estate tax (6 months after the death of decedent) B. Transfer for Public Use -dispositions in a last will and testament or transfers to take effect after the death in favor of the government of the Philippines or any political subdivision thereof. -Before it is allowed as a deduction from the gross estate, same amount shall be included first in the computation of the gross estate C. Vanishing Deductions -deduction for property previously taxed -Allowed as a deduction to minimize the effect of or as a remedy against double taxation Requisites for deductibility: 1. Death -the present decedent died within 5 years from the date of death of the prior decedent or date of gift 2. Identity of property -the property with respect to which deduction is sought can be identified as the one received from the prior decedent, or from the donor, or as the property acquired in exchange for the original property so received 3. Located in the Philippines -the property on which vanishing deduction is being claimed must be located in the Philippines 4. Inclusion of property -the property must have formed part of the gross estate situated in the Philippines of the prior decedent or have been included in the total amount of the gifts of the donor made within 5 years prior to the present decedents death 5. Previous taxation of the property -the estate tax on the prior succession, or the donors tax on the gift must have been finally

determined and paid by the prior decedent or by the donor as the case may be 6. No previous vanishing deduction on the property -no such deduction on the property, or the property given in exchange therefore, was allowed in determining the value of the net estate of the prior decedent Vanishing Deduction Rates Period from receipt to

decedents death Rate %

Within one year 100 Beyond one year to 2 years 80 Beyond 2 years to 3 years 60 Beyond 3 years to 4 years 40 Beyond 4 years to 5 years 20 D. Amounts received by heirs under RA 4917 -Any amount received by the heir(s) from the decedents employer as a consequence of the death of the decedent-employee in accordance with RA 4917, provided that the amount of separation benefit is included as part of the gross estate of the decedent. SPECIAL DEDUCTIONS A. Standard Deduction -The law allows a standard deduction of P 1,000,000. No qualification, condition nor requisite whatsoever. B. Family Home -The amount of family home allowable as deduction would be whichever is lower of P 1,000,000 or FMV at the time of the decedents death, of the family home and the land on which it stands. -For purposes of regulations, actual occupancy of the house or house and lot as the family residence shall not be considered interrupted or abandoned in such cases as temporary absence from the constituted family home due to travel studies or work abroad. Unmarried Head of a Family -An unmarried man or woman with one or both parents, or with one or more brothers or sisters, or with one or more legitimate, recognized

natural or legally adopted children living with and dependent upon him or her for the chief support -where such brothers or sisters or children are not more than 21 years old, unmarried and not gainfully employed or where such children, brothers or sisters, regardless of age are incapable of self-support because of mental or physical defect, OR -any of the beneficiaries mentioned in Art. 154 of the Family Code who is living in the family home and dependent upon the head of the family for legal support Beneficiaries of family home: -Husband and wife, or the head of a family; and -Their parents, ascendants, descendants including legally adopted children, brothers and sisters, whether the relationship be legitimate or illegitimate, who are living in the family home and who depend upon the head of the family for legal support Limitation -For purposes of availing of family home deduction to the extent allowable, a person may constitute only one family home. Requisites for deductibility 1. The decedent was married or if dingle, was head of the family 2. Along with the decedent, any of the beneficiaries must be dwelling in the family home 3. The family home as well as the land on which it stands must be owned by the decedent. Therefore, the FMV of the family home should have been included in the computation of the decedents gross estate. 4. The family home must be the actual residential home of the decedent and his family at the time of his death, as certified by the Barangay Captain of the locality where the family home is situated. 5. The total value of the family home must be included as part of the gross estate of the decedent; and 6. Allowable deduction must be in an amount equivalent to the current FMV of the family home as declared or included in the gross estate, or the extent of the decedents interest (whether conjugal/ community or exclusive property), whichever is lower, but not exceeding P 1,000,000.

C. Medical Expenses -All medical expenses (cost of medicines, hospital bills, doctors fees, etc.) incurred (whether paid or unpaid) within 1 year before the death of the decedent shall be allowed as a deduction, provided: -that the same are duly substantiated with official receipts for services rendered by the decedents attending physicians, invoices, statement of account duly certified by the hospital, and such other documents in support thereof -and provided further, that the total amount thereof, whether paid or unpaid, does not exceed P 500,000 Requisites for deductibility: 1. Incurred by the decedent within 1 year prior to his death 2. Substantiated by receipts NET SHARE OF THE SURVIVING SPOUSE -The amount deductible is the net share of the surviving spouse in the conjugal partnership property. Net share of the surviving spouse is neither an ordinary or special deduction. -The net share is equivalent to 50% of the conjugal property after deducting the obligations chargeable to such property. -The share of the surviving spouse must be removed to ensure that only the decedents interest in the estate is taxed. ALLOWABLE DEDUCTIONS FOR NONRESIDENT ALIEN DECEDENT -The value of the net estate of a decedent who is a non-resident alien in the Philippines shall be determined by deducting from the value of that part of his gross estate which at the time of his death is situated in the Philippines the following items of deduction: F.) TAX CREDIT FOR FOREIGN ESTATE TAXATION Section 86 E) Tax Credit for Estate Taxes paid to a Foreign Country. (1) In General. - The tax imposed by this Title shall be credited with the amounts of any estate tax imposed by the authority of a foreign country. (2) Limitations on Credit. - The amount of the credit taken under this Section shall be subject to each of the following limitations: (a) The amount of the credit in respect to the tax paid to any country shall not exceed the same proportion of the tax against which such credit is taken, which the decedent's net estate situated within such country taxable under this Title bears

to his entire net estate; and (b) The total amount of the credit shall not exceed the same proportion of the tax against which such credit is taken, which the decedent's net estate situated outside the Philippines taxable under this Title bears to his entire net estate. G. NOTICE OF DEATH, RETURN, PAYMENT of TAX, SANCTIONS SEC. 89. Notice of Death to be Filed. - In all cases of transfers subject to tax, or where, though exempt from tax, the gross value of the estate exceeds Twenty thousand pesos (P20,000), the executor, administrator or any of the legal heirs, as the case may be, within two (2) months after the decedent's death, or within a like period after qualifying as such executor or administrator, shall give a written notice thereof to the Commissioner. SEC. 90. Estate Tax Returns. - (A) Requirements. - In all cases of transfers subject to the tax imposed herein, or where, though exempt from tax, the gross value of the estate exceeds Two hundred thousand pesos (P200,000), or regardless of the gross value of the estate, where the said estate consists of registered or registrable property such as real property, motor vehicle, shares of stock or other similar property for which a clearance from the Bureau of Internal Revenue is required as a condition precedent for the transfer of ownership thereof in the name of the transferee, the executor, or the administrator, or any of the legal heirs, as the case may be, shall file a return under oath in duplicate, setting forth: (1) The value of the gross estate of the decedent at the time of his death, or in case of a nonresident, not a citizen of the Philippines, of that part of his gross estate situated in the Philippines; (2) The deductions allowed from gross estate in determining the estate as defined in Section 86; and (3) Such part of such information as may at the time be ascertainable and such supplemental data as may be necessary to establish the correct taxes. Provided, however, That estate tax returns showing a gross value exceeding Two million pesos (P2,000,000) shall be supported with a statement duly certified to by a Certified Public Accountant containing the following: (a) Itemized assets of the decedent with their corresponding gross value at the time of his death, or in the case of a nonresident, not a citizen of the Philippines, of that part of his gross estate situated in the Philippines; (b) Itemized deductions from gross estate allowed in Section 86; and (c) The amount of tax due whether paid or still due and outstanding. (B) Time for filing. - For the purpose of determining the estate tax provided for in Section 84 of this Code, the estate tax return required under the preceding Subsection (A) shall be filed within

six (6) months from the decedent's death. A certified copy of the schedule of partition and the order of the court approving the same shall be furnished the Commissioner within thirty (30) after the promulgation of such order. (C) Extension of Time. - The Commissioner shall have authority to grant, in meritorious cases, a reasonable extension not exceeding thirty (30) days for filing the return. (D) Place of Filing. - Except in cases where the Commissioner otherwise permits, the return required under Subsection (A) shall be filed with an authorized agent bank, or Revenue District Officer, Collection Officer, or duly authorized Treasurer of the city or municipality in which the decedent was domiciled at the time of his death or if there be no legal residence in the Philippines, with the Office of the Commissioner. SEC. 91. Payment of Tax. - (A) Time of Payment. - The estate tax imposed by Section 84 shall be paid at the time the return is filed by the executor, administrator or the heirs. (B) Extension of Time. - When the Com missioner finds that the payment on the due date of the estate tax or of any part thereof would impose undue hardship upon the estate or any of the heirs, he may extend the time for payment of such tax or any part thereof not to exceed five (5) years, in case the estate is settled through the courts, or two (2) years in case the estate is settled extrajudicially. In such case, the amount in respect of which the extension is granted shall be paid on or before the date of the expiration of the period of the extension, and the running of the Statute of Limitations for assessment as provided in Section 203 of this Code shall be suspended for the period of any such extension. Where the taxes are assessed by reason of negligence, intentional disregard of rules and regulations, or fraud on the part of the taxpayer, no extension will be granted by the Commissioner. If an extension is granted, the Commissioner may require the executor, or administrator, or beneficiary, as the case may be, to furnish a bond in such amount, not exceeding double the amount of the tax and with such sureties as the Commissioner deems necessary, conditioned upon the payment of the said tax in accordance with the terms of the extension. (C) Liability for Payment - The estate tax imposed by Section 84 shall be paid by the executor or administrator before delivery to any beneficiary of his distributive share of the estate. Such beneficiary shall to the extent of his distributive share of the estate, be subsidiarily liable for the payment of such portion of the estate tax as his distributive share

bears to the value of the total net estate. For the purpose of this Chapter, the term 'executor' or 'administrator' means the executor or administrator of the decedent, or if there is no executor or administrator appointed, qualified, and acting within the Philippines, then any person in actual or constructive possession of any property of the decedent. SEC. 92. Discharge of Executor or Administrator from Personal Liability. - If the executor or administrator makes a written application to the Commissioner for determination of the amount of the estate tax and discharge from personal liability therefore, the Commissioner (as soon as possible, and in any event within one (1) year after the making of such application, or if the application is made before the return is filed, then within one (1) year after the return is filed, but not after the expiration of the period prescribed for the assessment of the tax in Section 203 shall not notify the executor or administrator of the amount of the tax. The executor or administrator, upon payment of the amount of which he is notified, shall be discharged from personal liability for any deficiency in the tax thereafter found to be due and shall be entitled to a receipt or writing showing such discharge. SEC. 93. Definition of Deficiency. - As used in this Chapter, the term 'deficiency' means: (a) The amount by which the tax imposed by this Chapter exceeds the amount shown as the tax by the executor, administrator or any of the heirs upon his return; but the amounts so shown on the return shall first be increased by the amounts previously assessed (or collected without assessment) as a deficiency and decreased by the amount previously abated, refunded or otherwise repaid in respect of such tax; or (b) If no amount is shown as the tax by the executor, administrator or any of the heirs upon his return, or if no return is made by the executor, administrator, or any heir, then the amount by which the tax exceeds the amounts previously assessed (or collected without assessment) as a deficiency; but such amounts previously assessed or collected without assessment shall first be decreased by the amounts previously abated, refunded or otherwise repaid in respect of such tax. SEC. 94. Payment before Delivery by Executor or Administrator. - No judge shall authorize the executor or judicial administrator to deliver a distributive share to any party interested in the estate unless a certification from the Commissioner that the estate tax has been paid is shown. SEC. 95. Duties of Certain Officers and Debtors. - Registers of Deeds shall not register in the Registry of Property any document transferring real property or real rights therein or any chattel

mortgage, by way of gifts inter vivos or mortis causa, legacy or inheritance, unless a certification from the Commissioner that the tax fixed in this Title and actually due thereon had been paid is show, and they shall immediately notify the Commissioner, Regional Director, Revenue District Officer, or Revenue Collection Officer or Treasurer of the city or municipality where their offices are located, of the non-payment of the tax discovered by them. Any lawyer, notary public, or any government officer who, by reason of his official duties, intervenes in the preparation or acknowledgment of documents regarding partition or disposal of donation inter vivos or mortis causa, legacy or inheritance, shall have the duty of furnishing the Commissioner, Regional Director, Revenue District Officer or Revenue Collection Officer of the place where he may have his principal office, with copies of such documents and any information whatsoever which may facilitate the collection of the aforementioned tax. Neither shall a debtor of the deceased pay his debts to the heirs, legatee, executor or administrator of his creditor, unless the certification of the Commissioner that the tax fixed in this Chapter had been paid is shown; but he may pay the executor or judicial administrator without said certification if the credit is included in the inventory of the estate of the deceased. SEC. 96. Restitution of Tax Upon Satisfaction of Outstanding Obligations. - If after the payment of the estate tax, new obligations of the decedent shall appear, and the persons interested shall have satisfied them by order of the court, they shall have a right to the restitution of the proportional part of the tax paid. SEC. 97. Payment of Tax Antecedent to the Transfer of Shares, Bonds or Rights. - There shall not be transferred to any new owner in the books of any corporation, sociedad anonima, partnership, business, or industry organized or established in the Philippines any share, obligation, bond or right by way of gift inter vivos or mortis causa, legacy or inheritance, unless a certification from the Commissioner that the taxes fixed in this Title and due thereon have been paid is shown. If a bank has knowledge of the death of a person, who maintained a bank deposit account alone, or jointly with another, it shall not allow any withdrawal from the said deposit account, unless the Commissioner has certified that the taxes imposed thereon by this Title have been paid: Provided, however, That the administrator of the estate or any one (1) of the heirs of the decedent may, upon authorization by the Commissioner, withdraw an amount not exceeding Twenty thousand pesos (P20,000) without the said certification. For this purpose, all withdrawal slips shall contain a statement to the effect that all of the joint depositors are still living at the time of

withdrawal by any one of the joint depositors and such statement shall be under oath by the said depositors. Notice of Death: WHEN: in all cases of transfers subject to tax or where, though exempt from tax, the gross value of the estate exceeds P20,000 WHO: the executor, administrator or any of the legal heirs WHEN: within 2 months after the decedents death or within a like period after qualifying as such executor or administrator WHAT: give a written notice to the Commissioner De Leon notes Estate Tax Returns BY WHOM - an estate tax return under oath is required by law to be filed by the executor, administrator or any of the legal heirs - Where the gross value of the estate exceeds P200,000 though exempt from the estate tax or - Regardless of the gross value of the estate, where the said estate consists of registered or registerable real property, such as real property, motor vehicle, shares of stock or other similar property for which a clearance from the Bureau of Internal Revenue is required as a condition precedent for the transfer of ownership hereof in the name of the transferee WHEN - the return shall be filed within 6 months from the decendents death. the tax shall be paid at the time the return is filed by the executor, administrator or the heirs, or within such extension as may be granted by the Commissioner, but not to exceed 5 years in case the estate is settled through the courts, or 2 years in case the estate is settled extra-judicially. The executor, administrator or any of the legal heirs, as the case may be, is required to give a written notice of death to the Commissioner within 2 months after the decedents death or after qualifying as such executor or administrator WHERE - Except in cases where the Commissioner of Internal Revenue otherwise permits, the return shall be filed with an authorized or Accredited Agent Bank or Revenue District Officer, Revenue Collection Officer, or duly authorized treasurer of the city or municipality where the decedent was domiciled at the time of his death, or if there be no legal residence in the Philippines, with the Office of the Commissioner of Internal Revenue CONTENTS - the return shall set forth:

- the value of the gross estate of the decedent at the time of his death, or in case of a non-resident foreigner, of that part of his gross estate situated in the Philippines -the deductions allowed therefrom; and -such other information as may be necessary to establish the correct taxes CERTIFICATION BY A CERTIFIED PUBLIC ACCOUNTANT - where the value of the gross estate exceeds P2 Million, the estate tax return shall be supported with a statement duly certified by certified public accountant containing the following: -itemized assets of the decedent with their corresponding gross valu at the time of his death, or in the case of a non-resident foreigner, of the part of his gross estate situated in the Philippines; -itemized deductions allowed therefrom; and -the amount of tax due whether paid or still due and outstanding COPIES - the return shall be filed in triplicate, 2 copies for the BIR and 1 copy for the taxpayer.

MODULE 2- VALUE ADDED TAX A. Concept of VAT Sec 4.105-2, RR 16-2005 Nature and Characteristics of VAT. VAT is a tax on consumption levied on the sale, barter, exchange or lease of goods or properties and services in the Philippines and on importation of goods into the Philippines. The seller is the one statutorily liable for the payment of the tax but the amount of the tax may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or services. This rule shall likewise apply to existing contracts of sale or lease of goods, properties or services at the time of the effectivity of RA No. 9337. However, in the case of importation, the importer is the one liable for the VAT.

Contex Corp v CIR SUMMARY: Contex Corp, a Non-VAT taxpayer under RA 7227, filed an application for refund or tax credit of the input VAT it paid when it purchased supplies and materials necessary for its business. DOCTRINE: VAT is an indirect tax. As such, the amount of tax paid on the goods, properties or services bought, transferred, or leased may be shifted or passed on by the seller, transferor, or lessor to the buyer, transferee or lessee. An indirect tax, such as the VAT, is a tax on consumption of goods, services, or certain transactions involving the same. Petitioners claim for exemption from VAT for its purchases of supplies and raw materials is incongruous with its claim that it is VAT-Exempt, for only VAT-Registered entities can claim Input VAT Credit/Refund. While it is true that the petitioner should not have been liable for the VAT inadvertently passed on to it by its supplier since such is a zero-rated sale on the part of the supplier, the petitioner is not the proper party to claim such VAT refund. Rather, it is the petitioners suppliers who are the proper parties to claim the tax credit and accordingly refund the petitioner of the VAT erroneously passed on to the latter. Definition Value-added tax is a consumption tax imposed at every stage of the distribution process on the sale, barter, exchange, or lease of goods or properties and rendition of services in the course of trade or business, or the importation of goods,

whether such imported goods are for use in business or not. Essential Features of VAT Nature 1) It is a privilege tax imposed directly not on the thing or service but on the act of the seller, transferor, importer, or lessor who is exclusively made liable for its payment, although the burden of the tax is borne ultimately by the consumer 2) It is an ad valorem tax, the amount or sale being based on the gross selling price or gross value in money of goods or properties, or gross receipts from performance of services 3) It is an indirect tax. It may be shifted to the consumer in the absence of any showing that the latter is exempt from indirect tax a) Party statutorily liable is the seller, and hence he cannot claim exemption because the consumer is tax exempt b)Seller may choose to absorb the VAT and not pass it on to his buyers to make his prices competitive Advantages of VAT 1) Eliminates cascading problem under the old sales tax 2)It is a neutral between different goods, properties, and services or businesses, therefore more equitable; applies to all persons 3) Establishes wider tax base; taxation is more fair and equitable 4) Simple and easy to administer (only 2 tax rates) 5) Expected to generate larger revenues Important features 1) All persons liable to VAT shall register with the appropriate RDO 2) Provides for 2 rates: 0% for export sales and sales and services that are 0 rated or effectively zero-rated 3) VAT registered person is entitled to credit input taxes (VAT invoice or OR) 4) Consumption type VAT 5) All goods, properties, and services are subject to tax at all levels of distribution 6) Total value of the goods is subject to tax only once 7) CIR may determine the appropriate tax base in certain cases 8) CIR may suspend or temporarily close businesses for violations of VAT law/regulations 9) Returns shall be filed with and the tax paid to duly authorized agent banks

Constitutionality of VAT

Juan David v Exec Sec and CIR (missing digest)

B. TAXABLE TRANSACTIONS Sale of goods- SECTION 106 NIRC SEC. 106, NIRC. . 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, 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. (1) The term 'goods' or 'properties' shall mean all tangible and intangible objects which are capable of pecuniary estimation and shall include: (a) Real properties held primarily for sale to customers or held for lease in the ordinary course of trade or business; (b) The right or the privilege to use patent, copyright, design or model, plan, secret formula or process, goodwill, trademark, trade brand or other like property or right; (c) The right or the privilege to use in the Philippines of any industrial, commercial or scientific equipment; (d) The right or the privilege to use motion picture films, tapes and discs; and (e) Radio, television, satellite transmission and cable television time. The term 'gross selling price' means the total amount of money or its equivalent which the purchaser pays or is obligated to pay to the seller in consideration of the sale, barter or exchange of the goods or properties, excluding the value-added tax. The excise tax, if any, on such goods or properties shall form part of the gross selling price. (2) Zero-rated Sales of Goods or Properties. The following sales by VAT-registered persons shall be subject to zero percent (0%) rate: (a) Export Sales. - The term 'export sales' means: (1) The sale and actual shipment of goods from the Philippines to a foreign country, irrespective of any shipping arrangement that may be agreed upon which may influence or determine the transfer of ownership of the goods so exported and paid for in acceptable foreign currency or its equivalent in goods or services, and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP); (2) Sale of raw materials or packaging materials to a nonresident buyer for delivery to a resident local export-oriented enterprise to be used in manufacturing, processing, packing or repacking in the Philippines of the said buyer's goods and paid for

in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP); (3) Sale of raw materials or packaging materials to export-oriented enterprise whose export sales exceed seventy percent (70%) of total annual production; (4) Sale of gold to the Bangko Sentral ng Pilipinas (BSP); and (5) Those considered export sales under Executive Order NO. 226, otherwise known as the Omnibus Investment Code of 1987, and other special laws; and (6) The sale of goods, supplies, equipment and fuel to persons engaged in international shipping or international air transportation (b) Foreign Currency Denominated Sale. - The phrase 'foreign currency denominated sale' means sale to a nonresident of goods, except those mentioned in Sections 149 and 150, assembled or manufactured in the Philippines for delivery to a resident in the Philippines, paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP). (c) Sales to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects such sales to zero rate. (B) Transactions Deemed Sale. - The following transactions shall be deemed sale: (1) Transfer, use or consumption not in the course of business of goods or properties originally intended for sale or for use in the course of business; (2) Distribution or transfer to: (a) Shareholders or investors as share in the profits of the VAT-registered persons; or (b) Creditors in payment of debt; (3) Consignment of goods if actual sale is not made within sixty (60) days following the date such goods were consigned; and (4) Retirement from or cessation of business, with respect to inventories of taxable goods existing as of such retirement or cessation. (C) Changes in or Cessation of Status of a VAT-registered Person. - The tax imposed in Subsection (A) of this Section shall also apply to goods disposed of or existing as of a certain date if under circumstances to be prescribed in rules and regulations to be promulgated by the Secretary of Finance, upon recommendation of the Commissioner, the status of a person as a VAT-registered person changes or is terminated. (D) Sales Returns, Allowances and Sales Discounts. - The value of goods or properties sold and subsequently returned or for which allowances were granted by a VAT-registered person may be deducted from the gross sales or receipts for the quarter in which a refund is made or a credit memorandum or refund is issued. Sales discount granted and indicated

in the invoice at the time of sale and the grant of which does not depend upon the happening of a future event may be excluded from the gross sales within the same quarter it was given. (E) Authority of the Commissioner to Determine the Appropriate Tax Base. - The Commissioner shall, by rules and regulations prescribed by the Secretary of Finance, determine the appropriate tax base in cases where a transaction is deemed a sale, barter or exchange of goods or properties under Subsection (B) hereof, or where the gross selling price is unreasonably lower than the actual market value. Importation SEC. 107. Value-Added Tax on Importation of Goods, NIRC. (A) In General. - There shall be levied, assessed and collected on every importation of goods a value-added tax equivalent to ten percent (10%) based on the total value used by the Bureau of Customs in determining tariff and customs duties plus customs duties, excise taxes, if any, and other charges, such tax to be paid by the importer prior to the release of such goods from customs custody: Provided, That where the customs duties are determined on the basis of the quantity or volume of the goods, the value-added tax shall be based on the landed cost plus excise taxes, If any. (B) Transfer of Goods by Tax-exempt Persons. - In the case of tax-free importation of goods into the Philippines by persons, entities or agencies exempt from tax where such goods are subsequently sold, transferred or exchanged in the Philippines to non-exempt persons or entities, the purchasers, transferees or recipients shall be considered the importers thereof, who shall be liable for any internal revenue tax on such importation. The tax due on such importation shall constitute a lien on the goods superior to all charges or liens on the goods, irrespective of the possessor thereof. Sale of Services SEC. 108, NIRC. Value-added Tax on Sale of Services and Use or Lease of Properties. (A) Rate and Base of Tax. - There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of services, including the use or lease of properties: Provided, That the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%), after any of the following conditions has been satisfied: (i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds two and four-fifth percent (2 4/5%); or (ii) National government deficit as a percentage of GDP of the previous year exceeds one and one-half percent (1 1/2%).

"The phrase 'sale or exchange of services' means the performance of all kinds of services in the Philippines for others for a fee, remuneration or consideration, including those performed or rendered by construction and service contractors; stock, real estate, commercial, customs and immigration brokers; lessors of property, whether personal or real; warehousing services; lessors or distributors of cinematographic films; persons engaged in milling, processing, manufacturing or repacking goods for others; proprietors, operators or keepers of hotels, motels, rest-houses, pension houses, inns, resorts; proprietors or operators of restaurants, refreshment parlors, cafes and other eating places, including clubs and caterers; dealers in securities; lending investors; transportation contractors on their transport of goods or cargoes, including persons who transport goods or cargoes for hire and other domestic common carriers by land relative to their transport of goods or cargoes; common carriers by air and sea relative to their transport of passengers, goods or cargoes from one place in the Philippines to another place in the Philippines; sales of electricity by generation companies, transmission, and distribution companies; services of franchise grantees of electric utilities, telephone and telegraph, radio and television broadcasting and all other franchise grantees except those under Section 119 of this Code and non-life insurance companies (except their crop insurances), including surety, fidelity, indemnity and bonding companies; and similar services regardless of whether or not the performance thereof calls for the exercise or use of the physical or mental faculties. The phrase 'sale or exchange of services' shall likewise include: (1) The lease or the use of or the right or privilege to use any copyright, patent, design or model plan, secret formula or process, goodwill, trademark, trade brand or other like property or right; (2) The lease or the use of, or the right to use of any industrial, commercial or, scientific equipment; (3) The supply of scientific, technical, industrial or commercial knowledge or information; (4) The supply of any assistance that is ancillary and subsidiary to and is furnished as a means of enabling the application or enjoyment of any such property, or right as is mentioned in subparagraph (2) or any such knowledge or information as is mentioned in subparagraph (3); (5) The supply of services by a nonresident person or his employee in connection with the use of property or rights belonging to, or the installation or operation of any brand, machinery or other apparatus purchased from such nonresident person; (6) The supply of technicai advice, assistance or services rendered in connection with technical management or administration of any scientific, industrial or commercial undertaking, venture, project or scheme; (7) The lease of motion picture films, films, tapes and discs; and

(8) The lease or the use of or the right to use radio, television, satellite transmission and cable television time. "Lease of properties shall be subject to the tax herein imposed irrespective of the place where the contract of lease or licensing agreement was executed if the property is leased or used in the Philippines. "The term 'gross receipts' means the total amount of money or its equivalent representing the contract price, compensation, service fee, rental or royalty, including the amount charged for materials supplied with the services and deposits and advanced payments actually or constructively received during the taxable quarter for the services performed or to be performed for another person, excluding value-added tax. (B) Transactions Subject to Zero Percent (0%) Rate. - The following services performed in the Philippines by VAT-registered persons shall be subject to zero percent (0%) rate: (1) Processing, manufacturing or repacking goods for other persons doing business outside the Philippines which goods are subsequently exported, where the services are paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP); (2) Services other than those mentioned in the preceding paragraph rendered to a person engaged in business conducted outside the Philippines or to a nonresident person not engaged in business who is outside the Philippines when the services are performed, the consideration for which is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP); (3) Services rendered to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects the supply of such services to zero percent (0%) rate; (4) Services rendered to persons engaged in international shipping or international air transport operations, including leases of property for use thereof; (5) Services performed by subcontractors and/or contractors in processing, converting, or manufacturing goods for an enterprise whose export sales exceed seventy percent (70%) of total annual production; (6) Transport of passengers and cargo by air or sea vessels from the Philippines to a foreign country; and (7) Sale of power or fuel generated through renewable sources of energy such as, but not limited to, biomass, solar, wind, hydropower, geothermal, ocean energy, and other emerging energy sources using technologies such as fuel cells and hydrogen fuels. Concept of in the course of trade or business Sec 4.105-3, RR 16-2005

Meaning of In the Course of Trade or Business. The term in the course of trade or business means the regular conduct or pursuit of a commercial or economic activity, including transactions incidental thereto, by any person regardless of whether or not the person engaged therein is a non-stock, non-profit private organization (irrespective of the disposition of its net income and whether or not it sells exclusively to members or their guests), or government entity. Non-resident persons who perform services in the Philippines are deemed to be making sales in the course of trade or business, even if the performance of services is not regular. CIR v CA 242 scra 289

Summary: CIR was trying to tax Atlas Mining manufacturers and contractors tax for lending its steel balls and leasing dumptrucks respectively Doctrine: To be liable for both taxes, one must be doing busines. The intent just has to be for profit and/or that it may be considered the first of many transactions. Steel balls were just to accommodate so it was not considered for profit. Dumptrucks continuously gave profit as shown in the books.

CIR v CA 329 scra 237 SUMMARY: Commonwealth Management and Services Corporation was organized by Philamlife to perform collection, consultative and other technical services, including functioning as its internal auditor, and that of its other affiliates. BIR assessed COMASERCO for deficiency VAT for the year 1988. COMASERCO protested claiming that it is not engage in business as it was not rendering service for profit but instead on reimbursement-of-cost basis only. CTA agreed with the CIR. However, on appeal, CA sided with COMASERCO and ruled that it was not liable to pay VAT for it was not engaged in the business of selling services. SC reversed the CA ruling and reinstate the CTA ruling because profit is not a factor in determining whether one is engaged in business or not. DOCTRINE: The term "in the course of