CHAPTER 1
INTRODUCTION
Property – embraces everything which is or may be the subject
of ownership.
Ownership – the exclusive right of possessing, enjoying and
disposing of property.
MODES OF ACQUIRING OWNERSHIP
*The effectiveness of the various modes of acquiring ownership
and other real rights over property is premised on the existence
of TITLE or JUDICIAL JUSTIFICATION.
1. Occupation – property seized is without a known owner
2. Intellectual Creation
3. Donation – an act of liberty whereby a person disposes
gratuitously of a thing or right in favor of another, who accepts
it.
4. Succession – mode of acquisition by virtue of which the
property, rights and obligations to the extent of the value of the
inheritance, of a person are transmitted through HIS DEATH to
another.
5. Prescription – one ACQUIRES ownership and other real
rights through the lapse of time in the manner and under the
conditions laid down by law. (ACQUISITIVE PRESCRIPTION)
 Rights and actions are LOST by prescription
(EXTINCTIVE PRESCRIPTION)
CONCEPT AND NATURE OF TRANSFER TAXES
TRANSFER TAXES – taxes imposed upon the GRATUITOUS
DISPOSITION of private property
- Gratuitous – no consideration is transferred
- Onerous – consideration is received
EXCISE TAXES – are imposed upon the RIGHT OF A PERSON
TO TRANSFER HIS PROPERTY that may take effect during his
lifetime or upon his death.
Estate – encompasses the totality of assets and liabilities a
decedent owns at the time of his DEATH.
 Estate Tax – (in succession) is levied on the
TRANSMISSION OF PROPERTY from a prior decedent
to his heirs.
 Donor’s Tax – (in donation) is imposed as ownership of
the property passes from the donor to the done.
 both are excise taxes
 both are imposed upon the right of a person to transfer
his property that may take effect during his lifetime or
upon his death.
CHAPTER 2
BASIC CONCEPTS OF SUCCESSION
SUCCESION
 is a mode of acquisition by virtue of which the property,
rights and obligations to the extent of the value of the
inheritance, of a person are transmitted through his death
to another or others either by his will or by operation of law
KINDS OF SUCCESSION
1. Testamentary or testate – results from the designation of an
heir, made in a will executed in the form prescribed by law.
2. Legal or intestate – effected by operation of law, since the
decedent did not execute a will.
3. Mixed – effected partly by will and partly by operation
ELEMENTS OF SUCCESSION
1. Death of decedent
Decedent – person whose property Is transmitted through
succession, whether or not he left a will.
– Testator or Testatix – if he left a will; Testacy (status)
2. Inheritance
- All the property, rights and obligations and all which
accrued thereto(upon succession) of a person
which are not extinguished by his death.
- Personal right cannot be inherited
- Devise – testamentary disposition of real estate
- Legacy – gift or bequest by will of personal
property
3. Successors
- aka. Heirs – a person called to the succession
either by provision of a will (VOLUNTARY HEIRS)
or by operation of law (LEGAL or INTESTATE)
- Devisees and Legatees – persons to whom gifts of
real property and personal property are given by
virtue of a will
4. Acceptance
 Express Acceptance – may be made in a public or
private document.
 Tacit Acceptance – resulting from acts by which
intention to accept is necessarily implied or which one
would have no right to do except in capacity of an heir.
EXECUTOR – a person appointed by a TESTATOR to carry out
the directions and requests in his will, and to dispose of the
property according to his testamentary provisions after his death.
ADMINISTRATOR – person appointed by THE COURT to
administer the assets and liabilities of a decedent.
I. TESTAMENTARY SUCCESIONS
WILLS
Will – act whereby a person is permitted with formalities
prescribed by law, to control to a certain degree the disposition of
his estate to take effect after his death.
Codicil – an instrument that amends the provisions of a will.
Probate of a Will – the court procedure by which a will is proved
to be valid or invalid.
CAPACITY TO MAKE A WILL
 All persons who are not expressly prohibited by law may
make a will.
 Testator be of sound mind at the time of its execution.
Knows the:
 nature of the estate
 proper objects his bounty
 character of testamentary act
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  If someone who signs the instrument did not know what Legitimate Legitimate Surviving Illegitimate Free
the instrument said at the time of signing, or signed it Children/ Parents/ Spouse Portion
Descendants Ascendants Children/
against his will, the instrument is not a will.
 A married woman may make a will without the consent Descendants
of her husband and without the authority of the court of
a. excluded Same as 1/2 the Varies
the following: ½ the legitime legitime of a
 All of her separate property of a legitimate
 Share of the conjugal partnership or legitimate child
absolute community property child

b. None None None

CAPACITY TO SUCCEED BY WILL OR INTESTACY ½ ½
 In order to be capacitated to inherit, the heir, devisee or surviving surviving surviving
legatee must be living at the moment the succession
c. None None
opens. ½ ¼ ¼
 A child already conceived at the time of death of the surviving surviving
decedent is capable of succeeding provided it be born
d. None None None
later. ½ ½
surviving surviving surviving
(1/3)
FORMS OF WILLS e. None None 1/3 1/3 1/3
1. Must be in writing and executed in a language or dialect surviving surviving
known to the testator.
2. Must be subscribed by the testator himself or by the testator’s INSTITUTION OF AN HEIR
name written by some other person in his presence - is an act by virtue of which a testator designates in his
3. By his express direction, attested and subscribed by three will the person or persons who are to succeed him in his
credible witnesses in the presence of testator and of one property and transmissible rights and obligations.
another.
4. Must be acknowledged before a notary public by the testator
and witnesses. LEGITIME
- is that part of the testator’s property which he cannot
dispose of because the law has reserved it for certain
 Holographic Will - is a will written, dated and signed heirs, called compulsory heirs.
entirely by the testator with his own hand and not witnessed 1. Legitimate children and descendants, with respect to their
or attested. legitimate parents and ascendants
 At least one witness who knows his 2. In default of the foregoing, legitimate parents and ascendants,
handwriting with respect to their legitimate children and descendants
 In case contested, at least three 3. The widow or widower
witnesses 4. Acknowledged natural children, and natural children by legal
 The will of an alien who is abroad produces effect in the fiction
Philippines if made with the formalities by 5. Other illegitimate children.
o the law of the place in which he resides, or
o according to the formalities observed in his  Surviving spouse is always entitled to his legitime
country, or depending on the existence of other compulsory heirs.
o in conformity with those which the Civil Code
prescribes.
 A will made in the Philippines by a citizen or subject to
another country, which is executed in accordance with the
law of the country of which he is a citizen or subject, and
which might be proved and allowed by the law of his own
country, shall have the same effect as if executed according
to the laws of the Philippines.

REVOCATION OF WILLS AND TESTAMENTARY

DISPOSITIONS
A will may be revoked by the testator at any time before his
death.
Revocation outside the country is valid when it is done
according to:
o Law of the place where the will was made
o Law of the testator’s domicile
Revocation inside this country is done according to the
PROVISIONS OF CIVIL CODE.
Revocation of a will based onb false cause or an illegal cause
is null and void.

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 The Following Shall Be Sufficient Causes For The Disinheritance Of:
CHILDREN AND DESCENDANTS, A SPOUSE
LEGITIMATE AS WELL AS ILLEGITIMATE
1 when a child or descendant has been found guilty of when the spouse has been convicted of an attempt against
an attempt the life of the testator, his or her spouse, the life of the testator, his or her descendants, or ascendants
descendants or ascendants
2 when a child or descendant has accused the testator when the spouse has accused the testator of crime for
of a crime for which the law prescribes which the law prescribes imprisonment for six years or more,
imprisonment for six years or more, if the accusation and the accusation has been found to be false
has been found groundless
3 when a child or descendant has been convicted of when the spouse has given cause for legal separation
adultery or concubinage with the spouse of the
testator
4 when a child or descendant by fraud, violence, when the spouse by fraud, violence, intimidation, or undue
intimidation or undue influence causes the testator influence cause the testator to make a will or t change
to make a will or to change one already made one already made
5 a refusal without justifiable cause to support the Unjustifiable refusal to support the children or other
parent or ascendant who disinherits such child or spouse.
descendant
6 maltreatment of the testator by word or deed by the when the spouse has given grounds or the loss of
child or descendant parental authority
7 when a child or descendant leads a dishonorable or
disgraceful life
8 Conviction of a crime which carries with it the
penalty of civil interdiction.

LEGAL OR INTESTATE SUCCESSION Affinity – the connection existing in consequence of marriage

Intestacy – if a person dies without leaving a will, the person is
said to be died intestate.
 In this case, the government provides a default estate plan
under which the decedent’s estate is disposed.
 Legal or intestate succession take place:
1. If a person dies without a ill, or with a void will, or one
which has subsequently lost its validity
2. When the will does not institute an heir to, or dispose of
all the property belonging to the testator. In such case,
legal succession shall take place only with respect to the
property of which the testator has not disposed.
3. If the suspensive condition attached to the institution of
heir does not happen or is not fulfilled, or if the heir dies
before the testator, or repudiates the inheritance, there
being no substitution, and no right of accretion takes pace
4. When the heir instituted is incapable of succeeding,
except in cases provided in the Civil Code.
Consanguinity
- is the relation of persons descending from the same stock or
common ancestor.
- these persons are known as blood relatives.
 Lineal consanguinity - which may be descending or
ascending, is that which subsists between persons of
whom one is descended in a direct like from the other,
as between son, father, grandfather, great-grandfather,
and so upwards in the direct ascending line or
descending line.
Example: father and son
 Collateral consanguinity – is that which subsists
between persons who have the same ancestors, but
who not descend (or ascend) one from the other.
Example: uncle and nephew
between each of the married between each of the married
spouse and kindred of the other.
Representation
– is a right created by fiction of law, by virtue of which the
representative is raised to the place and degree of the person
represented and acquires the rights which the latter would have if
he were living or if he could have inherited.
 It takes place in the direct descending line, but never in the
ascending.
 In the collateral line, it takes place only in favor of the
children of brothers or sisters, whether they be of full or half
blood.
o Full Blood Relationship – is that existing between
persons who have the same father and the same
mother
o Half Blood Relationship – is that existing between
persons who have the same father, but not the same
mother, or the same mother, but not the same father.
ORDER OF INTESTATE SUCCESSION
1. Descendants direct line (legitimate children/ descendants)
2. Ascending direct line (legitimate parents/ ascendants)
3. Illegitimate children/ descendants
4. Surviving spouse
5. Collateral relatives within the 5th degree
6. The State

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 Brothers,
Other
Legitimate Legitimate Illegitimate Surviving Sisters Collateral
Children/ Parents/ Children/ Relatives State
Descendants Ascendants Descendants Spouse /Nephews w/in 5th
degree
Nieces

none none
a entire excluded excluded excluded excluded
surviving surviving

1/2 if only none

b
child
excluded ½ excluded excluded excluded
surviving

1/3 each if 2 none

c excluded 1/3 excluded excluded excluded
children surviving

none none none

d entire excluded excluded excluded
surviving surviving surviving

none
e ½ 1/4 ¼ excluded excluded excluded
surviving

none none
f ½ ½ excluded excluded excluded
surviving surviving

none none none None

g entire excluded excluded
surviving surviving surviving surviving

none none none

h ½ ½ excluded excluded
surviving surviving surviving

none none none none

i entire excluded excluded
surviving surviving surviving surviving

none none none none none

j entire excluded
surviving surviving surviving surviving surviving

none none none none none none

k entire
surviving surviving surviving surviving surviving surviving

WHEN DISTRIBUTION OF HEREDITARY ESTATE TAKES PLACE

 The EXECUTOR or JUDICIAL ADMINISTRATOR has
the task of making sure that the estate tax has been paid
before he delivers a distributive share to any party
interested in the estate.

 In estate taxation, the gross estate of citizens and

residents include all their property wherever situated.

 This gross estate is allowed deductions under the tax

law; the difference called the next taxable estate is the
basis of the estate tax to be imposed.

 Once the estate is closed and a final distribution of

assets is made to the beneficiaries, the executor
transfers the assets to be held in trust to the trustee.

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CHAPTER 3
GROSS ESTATE
Estate Tax
- is the tax on the RIGHT TO TRANSMIT PROPERTY at
death and on certain transfers which are made by law
the equivalent of testamentary dispositions.
- its object is to tax the shifting of economic benefits and
enjoyment of property from the dead to the living.
LAW THAT GOVERNS THE IMPOSITION OF ESTATE TAX
1. Statute in force at the time of death of decedent
2. Accrual of tax is distinct from the obligation to pay
3. Right of state to tax the privilege to transmit the estate
vests instantly upon death.
4. Tax Reform Act of 1997
PURPOSES OF ESTATE TAX
Benefit-Received Theory
- it recognizes the role of the State in the distribution of
the estate of a decedent to the heirs whether it be in
accordance with the decedent’s will or by operation of
law. (collection for service)
Privilege Theory or State Partnership Theory
- since inheritance is a privilege granted by the State and
since estate acquired and accumulated is under the
State’s protection, it is but righteous that the State
collect its share. (collection of share)
Ability to Pay Theory
- it asserts that the heirs because of the inheritance they
received are able and capable to pay the taxes due the
State. (dahil may pambayad man daw)
Redistribution theory
- it reduces the property received by the heirs through
taxes hence there is a more equitable distribution of
wealth in the society (share your blessings)
GROSS ESTATE
Decedent’s Estate - all property, wherever located, in which the
decedent owned beneficial interest at the time of death.
- Deed of Absolute Sale (by purchase)
Deed of Extrajudicial Settlement (inherited)
Deed of Donation (by donation)
 Gross Estate includes any right to income that had accrued,
but had not yet been received as of the date of the
decedent’s death.
 It does not include mere expectancy such as an expected
inheritance.
 Amounts withdrawn from the deposit accounts of a
decedent subjected to the 6% final withholding tax, shall
be excluded from the gross estate for purposes of
computing the estate tax.
RESIDENT CITIZEN, NON-RESIDENT CITIZEN AND
RESIDENT ALIEN DECEDENTS
- shall include all his properties and interests therein
wherever situated.
The ff. shall comprise his gross estate:
1. a.) TANGIBLE PERSONAL PROPERTY –personal
property that can be seen and touched.
b.) INTANGIBLE PERSONAL PROPERTY – personal
property that cannot be seen and touched.
2. REAL or IMMOVABLE PROPERTY – anything
attached to the soil with permanence.
3. TAXABLE TRANSFERS – inter vivos in form but mortis
causa in substance
a.) Transfer in Contemplation of Death
Donation Mortis Causa
- is a transfer in contemplation of death.
- it takes effect upon or after the donor’s death.
Factors to consider are the ff.:
 Age and state of health of the decedent at the time of
the gift
 Length of time between the gift and the death.
 Execution of a will within a short time of the making of
the gift.
b.) Revocable Transfer
- is a transfer by trust or otherwise where the decedent may
revoke, alter, amend or terminate the terms of enjoyment of
the property.
Trust – is the legal relationship created when a grantor known
as the TRUSTOR, transfers property with the intention that it can
be managed by a TRUSTEE for the benefit of a BENEFICIARY
or beneficiaries.
Proceeds of Life Insurance – insurance contract often
described as an insurance policy, is a common will-related
document.
- Proceeds of insurance under policies taken out by the decedent
upon his life shall constitute part of the gross estate if the
beneficiary is:
a. The estate of the decedent, his executor or
administrator
b. a third person other than the estate, his executor, or
administrator and the designation of the beneficiary is
revocable.
 Under the Insurance Code, a designation of beneficiary
is revocable unless stated expressly as irrevocable.
c.)Transfer Under A General Power Of Appointment
Power of appointment –is the right to designate the person/s
who will succeed the property of a prior decedent.
 General Power of Appointment – is on which
authorizes the donee of the power to appoint any
person to possess or enjoy the property
 Limited or Special Power of Appointment – is one
which authorizes the donee of the power to appoint only
from among a designated class or group of persons
other than himself.
Donor of the power – the person who creates the power of
appointment.
Donee of the power – the person who is given the right to
exercise the power
Appointed property – the subject of the power of appointment
which is the property being transferred
The values to include in the gross estate shall be in
accordance with the ff. rule:
o If the transfer was in the nature if a bona fide sale for an adequate
and full consideration in money or money’s worth, no value shall be
included in the gross estate.
o If the consideration received on the transfer was less than adequate
and full, the value to include in the gross estate be the excess of the
fair market value of the property at the time of the decedent’s death
over the consideration received.
o If there was no consideration received on the transfer as in donation
mortis causa, the value to include in the gross estate shall be the fair
market value of the property at the time of the decedent’s death.
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Non-Resident Alien Decedent
- only his property located in the Philippines shall form
part of his gross estate.
Gross estate shall include the ff.:
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. Share, 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.
Fair Market Value – is the price which a property will bring when
it is offered for sale by one who desires, but not obliged to sell,
and is bought by one who is under no necessary of buying it.
5.Separate property of the surviving spouse ( capital for the
husband or paraphernal for the wife)
6. Proceeds of life insurance where the beneficiary is
irrevocably designated.
Other Exemptions:
1. Benefits received by members from the GSIS and SSS
because of death.
2. Amounts received from the Philippine and U.S governments
for damages during the last war.
3. Benefits received by Philippine residents under laws
administered by the U.S. Veterans administration
4. Bequests, legacies or donations mortis causa to social
welfare, cultural or charitable organizations.
5. Grants and donations to the Intramuros Administration
6. Proceeds of group insurance policy taken out by the
company for the benefit of its employees.
7. Proceeds of accident insurance
8. All grants, endowments, donations or contributions used
actually, directly and exclusively for education

Real property
FMV(zonal value) as determined by the Commissioner
FMV as shown in the schedule of values fixed by the
provincial and city assessors, whichever is higher.
Share of stock
Unlisted shares
 Common- Book value
 Preferred- Par value
Listed shares – between the highest and lowest
quotation at date nearest the date of death, if none is
available on the death itself

Right to Usufruct, Use or Habitation, Annuity – value shall be

determined taking into account the probable life of the beneficiary
in accordance with the latest basic standard mortality table, to be
approved by the Secretary of Finance, upon recommendation of
the Insurance Commissioner.

Situs of Property
 Real Property – the place where it is situated
 Tangible Personal Property – where such is actually
located at the time of the decedent’s death
 Intangible Personal Property – is the domicile or
residence of the owner
 Accounts Receivable –residence of the debtor
 Bank Deposit- Location of depository bank
 Copyright, Trademark, Patent & Franchise – place or
country where the intangible is used or exercised

EXEMPTIONS FROM ESTATE TAX

1. The merger of usufruct in the owner of the naked title.
2. The transmission or delivery of the inheritance or legacy
of the fiduciary heir or legatee to the fideicommissary.
3. The transmission from the first heir, legatee or done in
favor of another beneficiary, in accordance with the will of
the predecessor.
4. All bequests, devices, 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 30% of the said bequests,
legacies or transfers shall be used by such institutions for
administration purposes.

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CHAPTER 4
DEDUCTIONS FROM GROSS ESTATE
I. Resident Citizen, Non-Resident Citizen And
Resident Alien Decedents
The following are the deductions from the value of gross
estate: (PRE-TRAIN)
1. Expenses, losses, indebtedness, and taxes
a. Funeral Expenses
b. Judicial Expenses of the testamentary / intestate
proceedings
c. Claims against the estate
d. Claims of the deceased against insolvent persons
e. Unpaid mortgages/indebtedness
f. Unpaid Taxes
g. Casualty losses
2. Property previously taxed or vanishing deduction
3. Transfers for public use
4. Family Home (1,000,000 to 10,000,000)
5. Standard Deduction equivalent to P1,000,000 (to 5M)
6. Medical Expenses
7. Amount received by heirs under Republic Act 4917
8. Net Share of Surviving spouse in the conjugal
partnership or community property
II. Non-Resident Alien Decedents
The following are the deductions: (PRE-TRAIN)
1. Expenses, Losses, Indebtedness and Taxes
- subject to limitation as follows
(Gross Estate, PH ÷ Gross Estate, World) × World exp,losses,indebtedness&taxes
= Deduction Allowed
2. Property previously taxed. Vanishing deduction on
property situated in the Philippines
3. Transfers for Public Use of Property situated in the
Philippines
4. Net Share of Surviving Spouse in the Conjugal
Partnership or Community Property
5. (TRAIN) Standard Deduction – P500,000
*No deduction shall be allowed unless the executor, or anyone of
the heirs, includes in the return required to be filed the value of
the decedent’s death of that part of his gross estate not situated
in the Philippines.
PROVISIONS ON THE DEDUCTIBLE ITEMS FOR RESIDENT
CITIZEN, NON-RESIDENT CITIZEN AND RESIDENT ALIEN
DECEDENTS BEFORE TRAIN LAW:
I. Expenses, Losses, Indebtedness and Taxes
a. Funeral Expenses:
 Any unpaid portion in excess of P200,000 threshold cannot
be claimed as deduction under ―claims against the estate‖.
Actual Funeral Expenses – incurred in connection with the
internment or burial of the deceased, duly supported by invoices,
receipts or other evidences.
They include:
 Mourning apparel of the surviving spouse and
unmarried minor children of the deceased bought
and used on the occasion of the burial
 Expenses for the deceased’s wake, including food
and drinks
 Publication charges for death notices
 Telecommunication expenses in informing relatives
of the deceased
 Cost of burial plot, tombstones, monument or
mausoleum but not their upkeep. In case the deceased
owns a family estate or several burial lots, only the value
corresponding to the plot where he is buried is deductible.
 Interment and/or cremation fees and charges
 All other expenses incurred for the performance of
the rites and ceremonies incident to internment
Not deductible:
 Expenses incurred after internment
 Any portion of the funeral/burial expenses borne or
defrayed by relatives/friends
b. Judicial Expenses – expenses incurred DURING THE
SETTLEMENT OF THE ESTATE but not beyond the last day
prescribed by law, or the extension thereof, for the filing of the
estate tax return or THOSE INCURRED IN THE:
o Inventory of taking assets comprising the gross estate
o Their administration
o The payment of debts of the estate
o Distribution of the estate among the heirs
Expenses may include: (Any unpaid amount of the following
should be supported by the SWORN STATEMENT OF
ACCOUNT issued and signed by the creditor)
 Fees of executor or administrator
 Attorney’s fees
 Court fees
 Accountant’s fees
 Appraiser’s fees
 Clerk hire
 Costs of preserving and distributing the estate
 Costs of storing or maintaining property of the
estate
 Brokerage fees for selling property of the estate
c. Claims Against the Estate
 Obligation contracted by the decedent when he was
alive but failed to settle or pay during his lifetime
- Not terminated by his death
- In respect of property, may arise out of: contract, tort or
operation of law
Requisites for Deductibility of Liability/Claim/Indebtedness:
1. Represents a personal obligation of the deceased existing at
the time of death except unpaid obligations incurred incident
to his death (unpaid funeral and medical expenses)
2. Contracted in good faith and for adequate and full
consideration in money or money‟s worth
3. Must be a debt or claim which is valid in law and enforceable in
court
4. Must not have been condoned by the creditor or the action to
collect from the decedent must not have prescribed
 Substantiation requirements have to be complied with
d. Claims Against Insolvent Persons
- creditor dies unable to collect from the debtor because
of the debtor’s insolvency
- Full amount of the claim must be included in the gross
estate
Apuli, BS Accountancy | 7
 - The receivable which is uncollectible may be deducted
from the gross estate
- Incapacity of the debtors to pay debts due to insolvency
must be proven
(Full Claim/Total Accounts Receivable) – (Still Collectible)
=Amount Deductible from the Gross Estate
(Full Claim)x (Assets/Liability of the Debtor)
=Still Collectible
e. Unpaid Mortgages
- exist when the decedent leaves property encumbered
by mortgage
- Fair market value of the property mortgaged must be
included in the gross estate in full
- Deductible amount shall be to the extent that it was
contracted bona fide and for an adequate and full
consideration in money or money’s worth
If being claimed by the estate, verification must be made as to
who was the beneficiary of the loan proceeds:
1. Loan is merely an accommodation loan where the loan
proceeds went to another person - value of the unpaid
loan is included as a receivable of the estate
2. If there is legal impediment to recognize the same as
receivable of the estate – said obligation/payable shall not
be allowed as deduction from the gross estate
3. In all instances, the mortgaged property, to the extent of
the decedent’s interest therein, should always form part
of the gross taxable estate
c. The property must be identified as the same property
received from prior decedent or donor or the one
received in exchange therefor
d. The ESTATE TAXES on the transmission of the prior
estate or the DONOR’S TAX on the gift must have
been finally determined and paid
e. No vanishing deduction on the property or the
property given in exchange therefor was allowed to
the prior estate.
Limitations on Amount Deductible
1. Value of the property – lower between the property
previously taxed or present decedent’s gross estate
2. Deduction for mortgage or other lien – initial value in #1
above shall be reduced by total amount paid, if any, by present
decedent, on any mortgage or other lien on the property where a
deduction was allowed
3. Deduction for expenses, etc. – value in #2 shall be further
reduced by an amount which bears the same ratio to the
amounts allowed as deductions for expenses, losses,
indebtedness, taxes and transfers for public use as the amount
otherwise deductible for property bears to the value of the
decedent’s gross estate
4. Percentage of Deductions – the value in #3 is the FINAL
BASIS/VALUE of the vanishing deduction multiplied by the
following percentages:

f. Unpaid Taxes
- taxes which have accrued as of the death of the
decedent but which were unpaid as of the time of death
- This deduction will not include the following:
(meaning these are chargeable against the income of the estate)
 Income tax upon income received after death STEP-BY-STEP Computation of the Vanishing Deduction
 Property taxes not accrued before his death
 Estate tax due from the transmission of his estate

g. Casualty Losses
– arises from:
 Fires, storms, shipwreck or other casualties
 Robbery, theft or embezzlement
– Subject to the following conditions that such losses:
1. Has no insurance
2. At the time of the filing of the return, have not
been part of deduction in ITR
3. Were incurred not later than the last day for
payment of the estate tax
– If fire loss occurred DURING THE SETTLEMENT of the
estate but BEYOND THE 6-MONTH PERIOD during
which the estate tax is supposed to be paid, loss shall
not be deductible

II. Property Previously Taxed or Vanishing Deduction

III. Transfers for Public Use
– allowed to lessen the impact of SUCCESSIVE
- the amount of all bequests, legacies, devises or
TAXATION of the same property within a very short
transfers to or for the use of the Government of the
period due to the death of the decedent-transferee
Republic of the Philippines, or any political subdivision
thereof, for exclusive public purposes
Requisites for Deductibility
IV. Family Home
a. Present decedent must have died within 5 years from
- Deductible amount is the current FMV of the decedent’s
the date of death of prior decedent or date of gift
family home at the time of death not exceeding
b. The property with respect to which the deduction is
P1,000,000
claimed must have formed part of the GROSS
- In excess of the said amount shall be subject to estate
ESTATE situated in the Philippines of the prior
tax
decedent or TAXABLE GIFT of the donor

Apuli, BS Accountancy | 8
 - The dwelling house, including the land on which it is CHAPTER 5
situated, where the husband and wife/head of the family NET TAXABLE ESTATE AND ESTATE TAX
and members of their family reside as certified to by the
BARANGAY CAPTAIN of the locality
- Permanency; a place to which whenever absent for NET TAXABLE ESTATE (Pre-Train Law)
business/pleasure, ONE STILL INTENDS TO RETURN - The transfer of the net estate of every descedent,
WHETHER RESIDENT OR NON-RESIDENT of the
Beneficiaries of Family Home: Philippines, as determined in accordance with the Code,
1. The husband and wife, or the head of the family shall be subject to estate tax.
2. Their parents, ascendants, descendants, including legally - The basis of the estate tax is the NET ESTATE.
adopted children, brothers and sisters whenever 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

Requisites for Deductibility

1. 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
2. The total value of the family home must be included as
part of the gross estate of the decedent
3. Allowable deduction must be in an amount equivalent to
the current FMV of the decedent’s interest (whether
conjugal/community or exclusive property), whichever is
lower, but not exceeding P1,000,000
TRAIN LAW
V. Standard Deduction - A fixed rate of 6% based on net estate
- In the amount of P 1,000,000 without the need of
substantiation
- Does not apply to Non-Resident Alien Decedents

VI. Medical Expenses

- Incurred by the decedent, WHETHER PAID/UNPAID,
within 1 year prior to his death and duly substantiated
with receipts
- shall not exceed P500 000

VII. Amount Received by the Heirs under Republic Act 4917

- Any amount received by the heirs from the
DECEDENT’S EMPLOYER as a consequence of the
death of the DECEDENT-EMPLOYEE
- Such amount must be included in the gross estate and
deductible from gross estate

VIII. Net Share of the Surviving Spouse

- ½ share of the surviving spouse must be removed after
deducting the allowable deductions pertaining to the
conjugal or community properties included in the gross
estate

Apuli, BS Accountancy | 9
CHAPTER 6 CHAPTER 7
NET ESTATE AND ESTATE TAX: NET ESTATE AND ESTATE TAX:
UNMARRIED DECEDENT CONJUGAL PARTNERSHIP OF GAINS

NET TAXABLE ESTATE MARRIAGE SETTLEMENT- The determination of the gross

The NET ESTATE SUBJECT TO TAX or NET TAXABLE estate of the decedent who is married will depend upon the
ESTATE is the basis for the computation of estate tax. property relations between the spouses.

GROSS ESTATE Pxx The spouse may, in the marriage settlements, agree upon
LESS: DEDUCTIONS xx the regime of:
NET TAXABLE ESTATE Pxx 1. Absolute community
2. Conjugal partnership of gains
*All property comprising the gross estate and all deductions of an 3. Complete separation of property
unmarried decedent are exclusive 4. Any other regime

IF THE DECIDENT IS A RECIDENT CITIZEN,
NON – RESIDENT CITIZEN AND RESIDENT ALIEN
 Gross estate shall consist of all his property wherever
situated
 Don’t forget the deductions especially maximum
allowable deductions – FUNERAL EXPENSES, the
computation of VANISHING DEDUCTIONS
In the absence of a marriage settlement, or when the regime
agreed upon is void, the property relations of the spouses
shall be governed by the following regime or system:
1. Conjugal Partnership of Gains,
if married before August 3, 1988.
2. Absolute Community of Property,
If married on or after August 3,1988

IF THE DECIDENT IS A NON - RESIDENT ALIEN CONJUGAL PARTNERSHIP OF GAINS

 Only his property situated in the Philippines shall form
part of his gross estate
 The deduction his estate may claim is subject to
limitation
- Oftentimes referred to as the CPG,
- it is one of the property relations between the spouses,
under which the HUSBAND and WIFE place in a
common fund the proceeds, products, fruits and income
from their separate properties and those acquired by
either or both spouses through their EFFORTS or BY
CHANCE
- Upon dissolution of the marriage or of the partnership,
the NET GAINS OR BENEFITS obtained by either or
both spouses shall be divided equally between them,
unless otherwise agreed in the marriage settlements.

In other words, the following are placed in a common fund:

1. the proceeds, products, fruits and income from their
separate properties; and
2. those acquired by either or both spouses through their
efforts or by chance

Gross Estate under Conjugal Partnership of Gains

1. Exclusive property of the decedent
2. Conjugal Property

EXCLUSIVE PROPERTIES OF EACH SPOUSE

(1) That which is brought to the marriage as his or her own;
(2) That which each acquired during the marriage by
gratuitous title (through pure liberality, as in donation
and testate/intestate succession);
(3) That which is acquired by right of redemption, by barter
or by exchange with property belonging to only one of
the spouses
(4) That which is purchased with exclusive money of the wife
or of the husband.

CONJUGAL PARTNERSHIP PROPERTY

(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;

Apuli, BS Accountancy | 10
 (4) The share of either spouse in the hidden treasure which CHAPTER 8
the law awards to the finder or owner of the property NET ESTATE AND ESTATE TAX:
where the treasure is found;
(5) Those acquired through occupation such as fishing or ABSOLUTE COMMUNITY OF PROPERTY
hunting;
(6) Livestock existing upon the dissolution of the partnership In case the future spouses agree in the marriage settlements that
in excess of the number of each kind brought to the the system of absolute community shall govern their property
marriage by either spouse; and relations during marriage, there are provisions in the Family
(7) Those which are acquired by chance, such as winnings Code that shall apply.
from gambling or betting. However, losses there from
shall be borne exclusively by the loser-spouse. NET TAXABLE ESTATE
Net taxable estate is the basis for the computation of estate tax.
PROCEEDS OF LIFE INSURANCE Pro-Forma computation (Pre TRAIN) is shown below.
1. If policy was taken BEFORE marriage –
a. And premiums were FULLY PAID by the
decedent-spouse, proceeds are the exclusive
property of the decedent-spouse.
b. And premiums were FULLY PAID by the
surviving-spouse, proceeds are the exclusive
property of the surviving-spouse.
c. And premiums were PARTLY PAID with
exclusive and conjugal fund during the
marriage, proceeds are the partially exclusive
and conjugal property
2. If policy was taken AFTER marriage –
- proceeds are CONJUGAL because it is
presumed that property acquired during
message is conjugal.
- ½ share of the surviving spouse in the
proceeds is EXCLUDED in the taxable gross
estate.

CLAIMS AGAINST INSOLVENT PERSON

The inclusion of claims against insolvent person in the gross
estate of the decedent spouse as either exclusive or conjugal
property will depend on the nature of the claim whether it is for
an exclusive or for a conjugal property.

DEDUCTIONS FROM GROSS ESTATE

1. Expenses, Losses, Indebtedness, and Taxes (ELIT)
a. Funeral expenses
b. Judicial expenses
c. Claims against the estate
d. Claims of the deceased against insolvent persons
e. Unpaid mortgage
f. Unpaid Taxes
g. Casualty Losses
2. Property Previously Taxed (Vanishing deduction)
3. Transfers for Public Use GROSS ESTATE
4. Family Home The gross estate of a married decedent under the system of
(If exclusive – apply yung maximum of 1M *PRETRAIN absolute community during the marriage shall be composed of
or maximum of 10M *TRAIN the following:
If conjugal – must be ½ of the share only BUT 1. Exclusive Property of the Decedent
make sure it follows the allowable maximum limit) 2. Absolute Community (Communal) Property
5. Standard Deduction – P1 million (P5,000,000 – TRAIN)
6. Medical Expenses EXCLUSIVE PROPERTY OF THE DECEDENT
7. Amount received by heirs under RA 4917 • It includes the property acquired during the marriage by
8. One half net share of the surviving spouse in the conjugal gratuitous title by either spouse, and the fruits as well the
partnership property. income thereof, in any, unless it is expressly provided by the
donor, testator or grantor that they shall form part of the
communal property;
• Property for personal and exclusive use of either spouse;
however, jewelry shall form part of the communal property;
• 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.

Apuli, BS Accountancy | 11
ABSOLUTE COMMUNITY (COMMUNAL) PROPERTY
 Unless otherwise provided in the Family Code of in the
marriage settlements, the COMMUNAL PROPERTY
shall consist of all the property owned by the spouses at
the time of the celebration of the marriage or acquired
thereafter.
 Property acquired during the marriage is presumed to
belong to the community, unless it is proved that it is
one of those excluded therefrom.
Proceeds of Life Insurance
- Proceeds of life insurance policy payable to the
insured’s estate may be communal or exclusive in
character.
- The time when the policy was taken and the source of
the premium payment shall determine whether the
proceeds are to from part of the gross estate of the
decedent spouse.
1. If policy was taken before marriage
a. And premiums were FULLY PAID by the decedent-
spouse, proceeds are the exclusive property of the
decedent-spouse.
b. And premiums were FULLY PAID by the surviving-
spouse, proceeds are the exclusive property of the
surviving-spouse.
c. And premiums were PARTLY PAID with exclusive
and communal (conjugal) fund during the marriage,
proceeds are the partially exclusive and communal
(conjugal) property
2. If policy was taken during the marriage
- proceeds are communal ( or conjugal) because it is
presumed that property acquired during the
marriage is communal ( or conjugal).
- In this case, the one-half share of the surviving
spouse in the proceeds is EXCLUDED in the
taxable gross estate.
CLAIMS AGAINST INSOLVENT PERSON
The inclusion of claims against insolvent person in the gross
estate of the decedent spouse as either exclusive or communal
property will depend on the nature of the claim- whether it is for
an exclusive or for a communal property.
DEDUCTIONS FROM GROSS ESTATE
1. Expenses, Losses, Indebtedness, and Taxes (ELIT)
a. Funeral expenses
b. Judicial expenses
c. Claims against the estate
d. Claims of the deceased against insolvent persons
e. Unpaid mortgage
f. Unpaid Taxes
g. Casualty Losses
2. Property Previously Taxed (Vanishing deduction)
3. Transfers for Public Use
4. Family Home
(If exclusive – apply yung maximum of 1M *PRETRAIN
or maximum of 10M *TRAIN
If conjugal – must be ½ of the share only BUT
make sure it follows the allowable maximum limit)
5. Standard Deduction – P1 million (P5,000,000 – TRAIN)
6. Medical Expenses
7. Amount received by heirs under RA 4917
8. One half net share of the surviving spouse in the conjugal
partnership property.
CHAPTER 9
TAX CREDIT FOR FOREIGN ESTATE TAX
Tax Credit – refers to the taxpayer’s RIGHT TO DEDUCT FROM
THE TAX DUE amount of tax he/it has paid to a foreign country
subject to limitations.
TAX DEDUCTION VS. TAX CREDIT
Tax deduction – is deduction from GROSS ESTATE.
Tax Credit – is a deduction from Philippine ESTATE TAX itself.
While there are numerous taxes that may be deducted from
gross estate, there is ONLY this FOREIGN ESTATE TAX that
may be claimed against Philippine estate tax.
ESTATE ENTITLED TO TAX CREDIT
1. Resident citizens;
2. Non-resident citizens;
3. Resident alien.
The estate tax payable is computed based on the net taxable
estate before tax credit may be deducted.
Estate Tax Payable xxx
Tax Credit for Foreign Taxes Paid (xxx)
Phil. Estate Tax Due xxx
Foreign Estate Taxes
– shall mean taxes proper only.
– Interest, surcharge or penalty relative to
tax delinquency shall not be credited.
LIMITATIONS ON CREDIT OF FOREIGN ESTATE TAXES
The amount of tax credit shall be subject to the following
limitations:
1. For estate taxes paid to one foreign country.
- The amount of the credit shall NOT EXCEED the same
proportion of the tax against which such credit is taken,
which decedent’s net estate within such country
- Taxable under the Tax Code bears to the entire net
estate.
- Expressed as a formula:
Net estate (per foreign country) X Phil. = Tax Credit
Entire Net Estate Estate Tax
2. For estate taxes paid to two or more foreign countries.
- 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 the Tax Code bears to the
entire net estate.
- Expressed as formula:
Net estate (per foreign country) X Phil. = Tax Credit
Entire Net Estate Estate Tax
The ALLOWABLE TAX CREDIT shall be lower amount between
the tax credit limit computed under limitation no. ―1‖ and that
computed under limitation no. ―2‖.
LIMITATION 1 – solve allowed Tax Credit per country then add
LIMITATION 2 – Add together the entire state in other countries
then solve for the allowed Tax Credit
*then compare kung ano mas mababa limitation 1/2
Apuli, BS Accountancy | 12
CHAPTER 10
ADMINISTRATIVE PROVISIONS

DUTIES OF CERTAIN PERSONS

 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.
 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 estate tax has
been paid is shown.
 It shall immediately notify the Commissioner, Regional
Director, Revenue District Officer or Revenue
Collection Officer or Treasurer of the City/Municipality
where their offices are located, of the nonpayment of
tax discovered.
 Any lawyer, notary public or government officer, who, by
reason of his official duties, intervenes in the preparation or
acknowledgement of documents regarding partition or
disposal of donation inter vivos or mortis causa, legacy or
inheritance, shall furnish the Commissioner, Regional
Director, RDO or RCO of the place where he may have his
principal office, with copies of documents and any
information which may facilitate the collection of estate tax.
 A debtor of the deceased shall not pay his debts to the
heirs, legatee, executor or administrator of his creditor,
unless the certification of the Commissioner that the estate
tax had been paid is shown. But he may pay his debt without
said certification if the credit is included in the inventory of
the estate of the deceased.
 Any person concerned shall not transfer 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 and bond or right by
way of gift inter vivos or mortis causa, legacy or inheritance,
unless a certification from the Commissioner that the estate
tax had been paid is shown.

Apuli, BS Accountancy | 13
CHAPTER 11
BASIC CONCEPTS OF DONATION
GIFT – intentional transfer of property from the transferor out of
generosity.
 A person can arrange to make a gift DURING LIFE,
AT THE MOMENT OF DEATH or BY WILL AFTER
DEATH.
REASONS WHY A PERSON MAKES A GIFT DURING LIFE
RATHER THAN BY WILL AFTER DEATH:
 To avoid estate taxes
 To have absolute assurance that the intended done
receives the gift
DONATION
- act of liberality whereby a person dispose gratuitously of a thing
or right in favor or another, who accepts it
 Donor - person who disposes of the thing or right
 Donee - one who accepts the thing or right
there is donation when:
 a person gives to another a thing, or right on account of
the latter’s merits or on account of the services
rendered by him to the donor, provided they do not
constitute a demandable debt
 When the gift imposes upon the done a burden which is
less than the value of the thing given, there is also a
donation.
does not include a donation of PERSONAL SERVICE (e.g.,
facial) or a donation of a RIGHT TO USE PROPERTY (e.g,
parking space).
KINDS OF DONATION
1. DONATION INTER VIVOS
- one made between living persons and which is perfected from
the moment the donor knows of the acceptance of the donee.
- SUBJECT TO DONOR'S TAX
- shall take effect during the lifetime of the donor.
* the fruits of the property from the time of the acceptance of the
donation, shall pertain to the done, unless the donor provides
otherwise.
2. DONATION MORTIS CAUSA
- donations which are to take effect upon the death of the donor
and partake of the nature of the testamentary provisions
governed by the rules established in the Title of Succession
under the Civil Code.
ELEMENTS OF DONATION
1. CONSENT
- perfected only from the moment the donor knows of the
acceptance by the donee.
- Vitiated consent - VOIDABLE
- The donee must accept the donation personally, through an
authorized person with a special power for the purpose, or with a
general and sufficient power; otherwise, the donation shall be
VOID
- ACCEPTANCE must be made during the lifetime of the donor
and donee.
2. OBJECT
- An ordinary donation may comprehend all the present property
of the donor, or part thereof, provided he reserves, in full
ownership or in usufruct, sufficient means for the support of
himself, and of all relatives who, at the time of the donations, are
by law entitled to be supported by the donor.
- Donations cannot comprehend future property.
- Donations of future property shall be governed by the
provisions on the TESTAMENTARY SUCCESSION and the
FORMALITIES OF WILLS
3. CAUSE
- an act of liberality although it may also beon account of the
donee’s merits or servicesnot constituting a demandable debt or
of aburden which is less than the value of thething given
- Donative intent is not at all essential.
4. FORMALITIES
- May be made orally or in writing.
- An oral donation requires the simultaneous delivery, actual or
constructive of the thing or of the document representing the right
donated
- Personal property exceeds five thousand (5,000) pesos, the
donation and acceptance is made in writing. Otherwise, the
donation shall be VOID.
- In order for a donation of an immovable may be VALID, it must
be made in a public document.
PERSONS WHO MAY GIVE OR RECEIVE A DONATION
1. All persons who may contract and dispose of their property
may make a donation
2. All those who are not specifically disqualified by law
 GUARDIANS and TRUSTEES cannot donate the
property entrusted to them.
 MINORS and others who cannot enter in a contract may
become donees but acceptance shall be done through
their parents or legal representatives
 Donations made to CONCEIVED AND UNBORN
CHILDREN may be accepted by those persons who
would legally represent them if they were already born.
 Donations made to incapacitated persons shall be
VOID.
 No person may give or receive, by way of donation,
more than he may give or receive by will - the donation
shall be INOFFICIOUS in all that may exceed this
limitation.
 Husband and wife are considered SEPARATE AND
DISTINCT (for the purposes of donor’s tax) except:
 if what was donated is a conjugal or;
 community property and only the husband
signed the deed of donation.
 Husband and wife cannot donate any conjugal or
community property without the consent of the other.
 Each spouse may, without the consent of the other,
make moderate donations for charity or on occasions of
family rejoicing or family distress.
 Husband and wife may make a joint donation of
conjugal or community property.
EXEMPT OF DONATIONS UNDER SPECIAL LAWS
Donations made to the following are exempt from donor’s tax:
1. International Rice Research Institute
2. Philippine-American Cultural Foundation
3. Ramon Magsaysay Award Foundation
4. Philippine Inventor’s Commission
5. Integrated Bar of the Philippines
6. Development Academy of the Philippines
7. Aquaculture Department of the Southeast Asian
Fisheries Development Center of the Philippines
8. National Social Action Council
9. Intramuros Administration
10. Southern Philippines Development Foundation
11. National Museum
12. National Library
Apuli, BS Accountancy | 14
 13. National Historic Institute
14. Task Force on Human Settlement consisting of
equipment, materials and services
15. Public Schools in accordance with the ―Adopt-a-School
Act of 1998‖ (R.A. 8525)
16. Philippine Red Cross

VOID DONATIONS
1. Those made between persons who were guilty of ADULTERY
or CONCUBINAGE at the time of donation;
2. Those made between persons found guilty of the SAME
CRIMINAL OFFENSE, in consideration thereof;
3. Those made between the spouses DURING THE MARRIAGE,
except moderate gifts which the spouses may give each other on
the occasion of any family rejoicing.
4. Those made between persons living together as husband and
wife WITHOUT A VALID MARRIAGE.
5. Those made to a public officer or his wife, descendants and
ascendants by reason of his office.

DONOR‟S TAX
- is a tax imposed on the gratuitous transfer of property between
two or more persons who are living at the time of transfer.
- an EXCISE (PRIVILEGE) TAX
- It is a taxed imposed on the transfer of property way of gift
inter vivos.
- It is a tax imposed on the right or privilege of the donor to
make a gift.
- Shall apply whether the transfer is in trust and whether the
property is real or personal.
- Shall not apply unless and until there is a completed gift.
- The TRANSFER OF PROPERTY BY GIFT is perfected from
the moment the donor knows of the acceptance by the donee;
- it is completed by the delivery, either actually or constructively,
of the donated property to the donee.

Rev. Reg. 12-2018

 An immovable donation may be VALID if it is made in a
public Deed of Donation or in a separate public document
and shall be done during the lifetime of the donor.
 If the acceptance is made in a separate instrument, the
donor shall be notified thereof.

PURPOSE OF DONOR‟S TAX

1. AVOIDANCE OF ESTATE TAX.
- Donor’s tax supplements the estate tax.
- Avoidance of estate tax is prevented by taxing
donations inter vivos.
2. AVOIDANCE OF INCOME TAX
- Donor’s tax compensates for the loss of income tax.
- Avoidance of income tax is done by splitting income
among numerous donees to escape the effects of
progressive income tax rates.

Apuli, BS Accountancy | 15
CHAPTER 12
GROSS GIFT
Gross Gift - the property or right donated subject to donor’s tax
before any deductions.
Resident Citizen, Non-resident Citizen or Resident Alien
Donor:
1. Real or Immovable Property within and without the
Philippines.
2. Tangible Personal Property within and without the
Philippines.
3. Intangible Personal Property within and without the
Philippines. This includes:
a) Franchise which must be exercised in the
Philippines;
b) Shares, obligations, or bonds issued by any
corporation or sociedad anonima organized or
constituted in the Philippines in accordance with its
laws;
c) Shares, obligations or bonds issued by any foreign
corporation 85% of the business of which is located
in the Philippines;
d) Shares, obligations, or bonds issued by any foreign
corporation is such shares, obligations or bonds
have acquired a business situs in the Philippines;
and
e) e. Shares or rights in any partnership, business or
industry established in the Philippines.
4. Where a PERSONAL PROPERTY classified as
CAPITAL ASSET is transferred for less than
adequate and full consideration in money or
money's worth, then the amount by which the fair
market value of the property exceeded the value of
the consideration shall be deemed a gift, and shall be
included in computing the amount of gifts made
during the calendar year.
Non- Resident Alien Donor:
(Only the properties located in the Philippines)
1. Real Property within the Phil.
2. Intangible and Tangible Personal Property within Phil.
Reciprocity Rule: Intangible Personal Property of a non-
resident alien donor. It shall be exempt from Donor’s Tax if either
of one or two conditions are present:
1. The country where the said donor is a CITIZEN AND
RESIDENT does not impose a transfer tax on intangible
personal property of Filipinos not residing in that country.
2. The country where the said donor is a CITIZEN AND
RESIDENT allows a similar exemption from transfer tax on
intangible personal property of Filipinos residing in that
country.
Summary:
Non- Resident Alien Donor:
If the donor was s non-resident foreign corporation, its
REAL or PERSONAL PROPERTY so transferred which are
OUTSIDE THE PHILIPPINES shall not be included as part of
its gross gift.
VALUATION OF GROSS GIFT
1. Valuation Date – at the time the gift is made.
2. Basis of Valuation – FMV of property donated. In case of
Real Property valuation is the FMV or zonal value as
determined by the commissioner, or the FMV as shown in
the schedule of values fixed by the city or provincial
assessor whichever is higher.

The TRAIN Law amends Section 100 of the NIRC providing that
the sale, exchange or other transfer of property in the ordinary
course of business shall be considered as made for an adequate
and full consideration in money or money's worth:
Section 100. Transfer for Less Than Adequate and Full
Consideration. — Where property, other than real property
referred to in Section 24(D), is transferred for less than an
adequate and full consideration in money or money's worth, then
the amount by which the fair market value of the property
exceeded the value of the consideration shall, for the purpose of
the tax imposed by this Chapter, be deemed a gift, and shall be
included in computing the amount of gifts made during the
calendar year: Provided, however, That a sale, exchange, or
other transfer of property made in the ordinary course of
business (a transaction which is a bona fide, at arm's length, and
free from any donative intent), will be considered as made for an
adequate and full consideration in money or money's worth.

Apuli, BS Accountancy | 16
CHAPTER 16 CHAPTER 17
NATURE AND CONCEPT OF VAT ON SALE OF GOODS OR PROPERTY
BUSINESS TAXES
Value Added Tax – tax on the value added to purchase price or
cost in sale or lease of goods, property or services in the course
 To engage in business means to employ or involve
of trade or business.
oneself in employment, occupation, profession, or
 Imposed on the value added on each stage of
commercial activity for gain or livelihood.
distribution
 Under the Tax Code, the three major business internal
 An indirect tax; may be shifted to buyer, transferee or
revenue taxes are:
lessee
 Value-added taxes;
 Percentage taxes; and
RA 9337 – VALUE-ADDED TAX REFORM ACT
 Excise taxes
Every person who, in the course of TRADE OR BUSINESS,
SELLS, BARTERS, EXCHANGES, LEASES goods or property
Business Taxes – are imposed upon ONEROUS TRANSFERS
or renders services is subject to VAT if aggregate amount of his
such as sale, barter or exchange.
actual or expected gross sales/receipts exceeds P1,919,500.
 But a person may, although not engaged in business,
be subject to a business tax such as VAT on importation
”in the course of trade or business”- means the regular
of goods not for business use.
conduct or pursuit of a commercial or an economic activity ,
including incidental transactions thereto, by any person
Value-Added Tax – a tax on CONSUMPTION LEVIED on the
whether or not the person engage therein is non-stock, non-
sale, barter, exchange or lease of goods or properties and
profit private organization or gov’t. entity.
services in the Philippines and on importation of goods into the
No automatic exemption from VAT registration requirements of
Philippines.
LGUs. (registration for being VAT taxpayer)
 The SELLER is the one statutorily liable for the payment
Any business with gross sales or receipt not exceeding
of the tax but the amount of the tax may be shifted or
P100,000 during any 12-month period – considered principally
passed on the BUYER, TRANSFEREE OR LESSEE of
for livelihood and not in the course of business.
the goods, properties or services.
Non Resident Foreign Person’s Service rendered in the
 In the case of importation, the IMPORTER is the one
Philippines – considered rendered in the course of trade or
liable for the value-added tax.
business even if performance or service is not regular.
 The system of tax shifting is an effective tool in the
Services performed outside the Philippines – not subject to vat.
creation of an AUDIT TRAIL which is vital for tax
administration and enforcement.
ILLUSTRATION 1 – Nonprofit org is exempted to income tax but
not to VAT Tax.
 VALUE-ADDED TAX and EXCISE TAX may be imposed
ILLUSTRATION 2 – Sale of company ng PPE to employee is
simultaneously on the manufacturer and importation of
subject to VAT
products.
ILLUSTRATION 3 – si M Co. (domestic) nakipartner sa NFRC.
 VALUE-ADDED TAX and PERCENTAGE TAX cannot be
May service sila na irerender pero sa ibang bansa, kaya not
imposed at the same time. It is either that the sale is subject
subject to any tax here.
to VAT, or subject to percentage tax, or not subject to any of
ILLUSTRATION 4 – Tax exemption to non stock corp covers only
the two taxes at all.
income taxes for which said corporations are directly liable.
Kapag yung vat is indirectly passed from supplier or seller, kapag
tinanggap mo yun, it is not tax expense for it but additional cost
na.

VAT ON SALE OF GOODS OR PROPERTY

All tangible or intangible objects that are capable of pecuniary
estimation & shall include the following:
1. Real property held for sale or for lease in the ordinary course
of business;
2. The right or the privilege to use patent, design, copyright,
design, plan, secret formula, goodwill or other like property
or right;
3. The right or the privilege to use in the Philippines of any
industrial, commercial or scientific equipment;
4. The right to use motion picture films, tapes & discs; and
5. Radio, television, satellite transmission and cable television
time.

ILLUSTRATION 5 – May trustor ng pera sa bank. Yung bank

pinambili itong property. Si trustor gusto kunin yung pinawian kay
bank pero yung property nalang. Not subject to VAT ito kasi the
event is not primarily sale to customers and walang consideration
na binigay. Only acknowledgement and confirmation of the legal
title na ipapasa kay trustor.

Apuli, BS Accountancy | 17
ILLUSTRATION 6 – Sale of real property held primarily for sale
to customers or held lease in the ordinary course of business of
the seller shale be subject to 10% VAT based on selling price.

GROSS SELLING PRICE- total amount of money or its

equivalent which the purchaser pays or is obligated to pay the
seller in consideration of sale of goods excluding the VAT.
 Excise tax if any, on such goods or property shall form
part of the gross selling price. Sales Returns and
Allowances are deductions from gross selling price to
arrive at tax base.

TAX BASE & RATES

Pre-TRAIN: there shall be levied, assessed and collected on
every sale, barter or exchange or transactions “deemed sale” of
taxable goods or property, VAT equivalent to 12% of the gross
selling price or gross value in money of the goods or property
sold, bartered or exchanged, or deemed sold in the Philippines.
TRAIN Law: retains the 12% rate & deletes the phrases “or
transactions “deemed sale”’ and „or deemed sold in the
Philippines,‟ and adds the phrase „such tax to be paid by the
seller or transferor‟ towards the end.

Apuli, BS Accountancy | 18
VAT
TRANSACTIONS DEEMED SALE & are subject to VAT:
1. Transfer, use/ consumption not in the ordinary course of business of
goods/ property originally intended for sale/ use in the course of
business
2. Distribution/ transfer to:
 shareholders/ investors as share in the profits of VAT registered
persons.
 Creditors in payment of debt/ obligation.
3. Consignment of goods if actual sale is not made within 60days
following the date such goods where consigned; and
4. Retirement from/ cessation of business, with respect to inventories of
taxable goods existing as of such retirement/ cessation.
SALE OF REAL PROPERTIES subject to VAT (Based on New
Thresholds)
1. Sale of residential lot with gross selling price exceeding P1,919,500
2. Sale of residential house & lot or other residential dwellings with gross
selling price exceeding P3,199,200, where the instrument of sale is
executed on or after Jan. 1, 2012 shall be subject to 12% vat.
*Sale executed & notarized on or after Nov 5, 2005 but prior to Jan. 1,
2012- appropriate threshold amount is P1,500,000 & P 2,500,000;
excess thereof shall be subject to 10% vat starting Feb. 1, 2006, to 12
% vat, effective 2012.
*includes sale, transfer or disposal within 12-month period of 2 adjacent
residential lot in favour of 1 buyer from the same seller.
3. Instalment sale of residential house & lot or other residential dwellings
with gross selling price exceeding P1,000,000
4. Real estate investment trust (REIT) shall be subject to VAT on its gross
sales from any disposal of real property.
ZERO-RATE
SALES BY VAT-REGISTERED PERSON SUBJECT TO ZERO-RATE:
 Export Sales;
 Foreign Currency Denominated Sale – sale to non-resident of goods
except those mentioned in section 149(automobiles) and 150 (non-
essential goods)
TRAIN Law- deletes foreign currency denominated sale in sec. 106
(2) of the NIRC
 sale of good or property to persons or entities whose exemption under
special law or international agreements to which the Philippines is a
signatory – Asian Development Bank, International Rice Research
Institute – subject such sale to zero-rate
EXPORT SALE means:
1. Sale and actual shipments of goods from the Philippines to a
foreign country irrespective of any shipping arrangement and paid
for in acceptable foreign currency or its equivalent in goods or
services and accounted for in accordance with the rules & regulations
of BSP
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 or repacking in the Philippines
of the said buyer’s goods and paid for in acceptable foreign currency
or its equivalent in goods or services and accounted for in
accordance with the rules & regulations of BSP
3. Sale of raw materials or packaging materials to export-oriented
enterprise whose export sales exceeds 70% of the total annual
production.
4. Sale of gold to BSP if the seller is a VAT-registered taxpayer
TRAIN Law- item no. 4 was reclassified as among Exempt
Transactions under Sec. 109(1)(Z)
5.Those considered export sales under EO 226, (Omnibus
Investments Code of 1987 and other special laws; and
Apuli, BS Accountancy | 19
 TRAIN Law- subparagraphs 3, 4 & 5 above shall be subject to
12% vat and no longer be considered export sales subject to 0%
VAT rate upon satisfaction of conditions:
(1) The successful implementation of an enhanced VAT refund system-
grants refund of creditable input tax within 90 days from the filing of the
VAT refund application with the bureau. All applications filed in Jan. 1,
2018 shall be processed & must be decided within 90 days from filing of
vat refund application.
(2) All pending VAT refund claims as of Dec. 31, 2017 shall be fully paid
cash by Dec. 1, 2019.

Provided, DOF shall establish VAT refund center in BIR & BOC that
will handle the processing & granting of cash refunds & creditable input
tax
5% of total VAT collection of BIR & BOC from immediately preceding
year- automatically appropriated annually; shall be treated as special
account in the General Fund/ as a trust receipts for the purpose of
funding claims for VAT refund.
- Any unused fund shall revert to the General Fund

BIR & BOC shall be required to submit Congressional Oversight

Committee on the Comprehensive Tax Reform Program
(COCCTRP) – a quarterly report of all pending claims for refund & any
unused funds.

THE FF. ARE CONSIDERED CONSTRUCTIVELY EXPORTED EVEN

WITHOUT ACTUAL EXPORTATION:
a. sales to bonded manufacturing warehouses of export oriented
manufacturers
b. sales to export processing zones
c. sales to enterprises duly registered & accredited with the Subic Bay
Metropolitan Authority
d. sales to registered export traders operating bonded trading warehouses
supplying raw materials in the manufacture of export products
e. sales to diplomatic missions & other agencies & or instrumentalities
granted tax immunities, of locally manufactured assembled or repacked
products whether paid for in foreign currency or not

Apuli, BS Accountancy | 20
6. The sale of goods, supplies, equipment & fuel to persons engaged in
international shipping/ air transport operations. Provided, that the
same is limited pertaining to the transport of goods & passengers from a
port in the Philippines directly to a foreign port / vice versa, without
docking at any port in the Philippines unless to unload/ load passengers
or cargoes.
TRAIN Law wordings- The sale of goods, supplies equipment & fuel to
persons engaged in international shipping / air transport operations.
Provided, that the goods, supplies, equipment & fuel shall be used for
international shipping/ air transport operations.

Apuli, BS Accountancy | 21
GROSS SELLING PRICE unreasonably lower than the actual
market value- if it is lower by more than 30% of the actual
market value of the same goods of the same quality & quantity;
- Commissioner of BIR shall determine the appropriate tax
base in such case.
 If the gov’t is one of the parties, the output vat shall be
based on the actual selling price.
 For transaction deemed sale, output tax shall be based
on market value at the time of occurrence of the
transaction.
 In case of retirement or cessation of business, tax base
shall be the lower between acquisition cost or the
current market value.
GROSS SELLING PRICE
- basis of VAT; it is the amount higher between selling price
stated in the document or fair market value.
*if VAT is not billed separately, the selling price stated in the
sales document shall be deemed to be inclusive of VAT
* If gross selling price is based on fair market/ zonal value of
the property, the fmv is deemed exclusive of vat.
Formula for VAT in case of sale of real property on
installment plan where the zonal/fmv is higher than the
consideration
x zonal value
x12%
SALE ON INSTALLMENT PLAN
- sale of property by real estate dealer; initial payment of which in
the year of sale do not exceed 25% of gross selling price
-seller is subject to output vat on the installment payment
received actually/ constructively; buyer can claim the input tax in
the same period
SALE ON DEFERRED PAYMENT BASIS
- initial payment of which in the year of sale exceed 25% of
gross selling price.
-transaction price is treated as cash sale; entire amount is
thereby taxable on month of sale.
Initial Payments
- payment received by the seller before or upon execution of the
instrument of sale
-covers any down payments made & includes all payments
actually or constructively received during the year of sale, the
aggregate of which determines the limit set by law.
-mortgage is not included unless such mortgage exceeds the
cost/ other basis of the property to the seller, in which case the
excess is considered part of initial payment.
Liquidating Dividends
- liquidating dividend is not sale subject to income tax, CWT,
DST
- a ―deemed sale‖ transaction for vat purposes
 stockholder’s part- any liquidating gain shall be treated
as capital gain, subject to regular income tax rate
under the tax code, not CGT.
ADVANCE VAT- ON TRANSPORT OF NATURALLY GROWN
& PLANTED TIMBER PRODUCTS
Requirement to Pay Advance VAT- shall be paid by the
owner/seller to the BIR through the authorized agent banks/
revenue collection officers/ deputized city or municipal treasurers
before transporting them from one place of production.
Basis: payment shall be determined by applying vat rate of 12%
on corresponding value per cubic meter of the different species
of naturally grown & planted products in accordance with specific
schedule.
ADVANCE VAT- ON SALE OF FLOUR MILLED FROM
IMPORTED WHEAT
- Revenue Regulation 29-2003 aim to level the playing fields
among players in the flour-milling industry, to encourage proper
declaration and payment of taxes for efficiency in tax
administration.
Flour miller- a person engaged in the milling of imported wheat
(directly imported or purchased from importer) to produce flour as
finished product.
Wheat trader-a person who is engaged in importing/ buying and
selling of imported wheat.
Requirement to Pay Advance VAT- vat shall be paid by the
flour miller prior to the release from BOC custody.
- purchases by flour miller from traders shall also be subject to
advance tax & shall be paid by the flour miller prior to its delivery
- importation of wheat by any trader shall still be exempt from vat.
However for monitoring purposes, the importer shall be required
to secure ATRIG (Authority to Release Imported Goods) from
BIR.
BASIS for Determining the Amount of Advance Payment of
VAT
Amount of advance VAT payment shall be determined by
applying 12% rate on the tax base as follows:
For wheat imported by flour millers-75% of the sum of:
(a) Invoice value X currency exchange rate on payment date
(b) Estimated custom duties & other charges prior to the release of
imported wheat from customs custody, except for the advance VAT;
(c) 5% of the sum of (a) and (b).
Total (a + b + c )
X 75%
Tax Base
X 12%
Advance Vat
For wheat purchased from traders- 75% of the sum of:
(a.) Invoice value;
(b.) Estimated freight expenses; and
(c.) 5% mark-up on the sum of (a) and (b)
Advance VAT- Sale of Jewelry, Gold, & Other Metallic
Minerals to NRA-NETB or NRFC
Revenue Regulation 5-2013 prescribed the tax treatment of the
sale of jewelry, gold & other metallic minerals to non-resident
alien individual not engaged in trade or business within the
Philippines, or to non-resident foreign corporation.
Sellers of jewelry, gold & other metallic minerals- required to pay
business tax (VAT or percentage tax), income & excise tax if applicable
in advance through Revenue Collection Officer of RDO having
jurisdiction over the place where transaction occurs, regardless whether
the sellers are duly registered with the BIR:
a. Advance payment of 12% VAT on gross selling price, or
percentage tax of 3% of gross sales;
b. Advance payment of income tax at the rate of 5% on gross
payment:
c. Actual payment of 2% excise tax based on either the actual
market value of the gross output at the time of removal, in the case
of those locally extracted; or the value used by VOC in computing
tariff & duties, in the case of importations. Actual market value shall
refer to the actual consideration paid by the buyer to the seller.
Advance payment shall be credited against actual business tax
& income tax due from such persons for the taxable period for
which such advance payments were remitted to the BIR.
Apuli, BS Accountancy | 22
CHAPTER 18
VAT ON SALE OF SERVICES AND
USE OR LEASE OF PROPERTY
SALE or EXCHANGE of SERVICES – performance of all kinds
of services IN THE PHILIPPINES for others for a fee,
remuneration or consideration, including those performed or
rendered by:
1. CONSTRUCTION and SERVICE CONTRACTORS;
2. STOCK, REAL ESTATE, COMMERCIAL, CUSTOMS and
IMMIGRATION BROKER;
3. LESSORS OF PROPERTY, whether personal or real ;
 ALL FORMS OF PROPERTY FOR LEASE, whether real or
personal, are liable to VAT except those that are VAT-
exempt.
7. PROPRIETORS, OPERATORS OR KEEPERS OF
Real Estate Lessor- any person engaged in the business of
leasing or subleasing real property.
 Lease of property shall be subject to VAT regardless of the
place where the contract of lease or licensing agreement
was executed if the property leased or used is located in
the Philippines.
 VAT on rental and/or royalties payable to non-resident
foreign corporations or owners for the sale of services and
use or lease of properties in the Philippines shall be based
on the contract price agreed upon by the licensor and the
licensee.
 The licensee shall be responsible for the payment of VAT
on such rentals and/or royalties in behalf of the non-resident
foreign corporation or owner in the manner prescribed.
Non-Resident Lessor/Owner – any person, natural or juridical,
an alien, or a citizen who establishes to the satisfaction of the
COMMISSIONER OF INTERNAL REVENUE.
 In a lease contract, the advance payment by the lessee
may be:
a. A loan to the lessor from the lessee
b. An option money for the property
c. Security deposit
d. Prepaid rental
- If ADVANCE PAYMENT (a,b,c) is loan to lessor, NOT
8. PROPRIETORS OR OPERATORS OF RESTAURANTS,
SUBJECT TO VAT
- If security deposit is applied to rental – VAT
 REAL ESTATE INVESTMENT TRUST (REIT) shall be
subject to VAT on its gross receipts from the rental of its
real property.
9. DEALERS IN SECURITIES;
4. WAREHOUSING SERVICES;
Warehousing Service-rendering personal services of a
warehouseman such as:
a. Engaging in the business of receiving and storing goods
of others for compensation or profit;
b. Receiving goods and merchandise to be stored in his
warehouse for hire; or
c. Keeping and storing goods for others, as a business
and for use.
5. LESSORS OR DISTRIBUTORS OF CINEMATOGRAPHIC
FILMS;
6. PERSONS ENGAGED IN MILLING, PROCESSING,
MANUFACTURING OR REPACKING GOODS FOR
OTHERS;
Miller- a person engaged in milling for others (except palay
into rice, corn into corn grits, and sugarcane into raw sugar),
is subject to VAT on sale of services.
 If miller is paid in cash for his services, VAT shall be
based on his gross receipts for the month or quarter.
 If he receives a share of the milled products instead of
cash, VAT shall be based on the actual market value of
his share in the milled products.
 Sale by the owner or the miller of his share of the milled
product (except rice, corn grits and raw sugar) shall be
subject to VAT.
HOTELS, MOTELS, REST HOUSES, PENSION HOUSES,
INNS, RESORTS, THEATERS AND MOVIE HOUSES;
TRAIN LAW
Deletes ― theaters and movie houses‖
 Hotels, resorts and other establishments which do not
regularly allow SHORT-TIME (less than 24 hours) stay in
their establishments are not covered by this RMO 16-2010
 Motels and other similar establishments shall submit to the
RDO where they are registered a SWORN
DECLARATION. The information to be included in the
Sworn Declaration includes the room type, number of
rooms and rate per room.
 The RDO in preparing the monthly OCCUPANCY
TURNOVER ANALYSIS REPORT (OTAR) per motel will
consider the following:
a. For peak periods covering the months of January to
February, April to June and December, the minimum
turnover/day of a particular establishment shall be set
at a constant factor of 2.
b. For lean periods covering the other remaining months
of the year, the minimum turnover/day shall be 1.50.
REFRESHMENT PARLORS, CAFES AND OTHER
EATING PLACES, INCLUDING CLUBS AND CATERERS;
 The gross receipts of recreational clubs including but not
limited to MEMBERSHIP FEES, ASSESSMENT DUES,
RENTAL INCOME AND SERVICE FEES are subject to
VAT.
Dealer in securities-merchant of stock or securities,
whether an individual partnership or corporation, with an
established place of business, regularly engaged in the
purchase of securities and sells them to customers with a
view to the gains and profits that may be derived therefrom.
 Dealers in securities and lending investors shall be
subject to VAT on the basis of their gross receipts.
However, for dealer in securities, the term “gross
receipts” = gross selling price – cost of securities
sold.
Apuli, BS Accountancy | 23
  A REIT shall not be considered a dealer in securities and
shall not be subject to VAT on its sale, exchange or
transfer of securities forming part of its real estate related
assets.
10. LENDING INVESTORS;
Lending investor- includes all persons other than banks,
non-bank financial intermediaries, finance companies and
other financial intermediaries not performing quasi-banking
functions who make a practice of lending money for
themselves or others at interest.
11. 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 Carrier - persons, corporations, firms or associations
engaged in the business of carrying or transporting
passengers or goods or both, by land, water or air, for
compensation, offering their services to the public and shall
include transportation contractors.
 Common carriers by land shall be subject to the 3%
percentage tax, but shall not be liable for VAT.
12. DOMESTIC 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.
TRAIN LAW
Deletes the word ―domestic‖
 Domestic common carriers by air and sea are subject to
12% VAT on their gross receipts from their transport of
passengers, goods or cargoes from one place in the
Philippines to another place in the Philippines.
BY LAND:
Transporting goods or cargoes 12% VAT
Transporting passengers 3% Common
Carrier‟s tax
BY AIR OR SEA;
From/To Within the Philippines-
Transporting goods or cargoes 12% VAT
Transporting passengers 12% VAT
From one point in the Philippines to abroad- (export)
Transporting goods or cargoes 0% VAT
Transporting passengers 0% VAT
(Subject to 3% Percentage Tax)
 Gross receipts of international air and sea carriers doing
business in the Philippines are liable to a PERCENTAGE
OF 3% based on their gross receipts derived from the
transport of cargo from the Philippines to another country.
13. SALE OF ELECTRICITY BY GENERATION,
TRANSMISSION AND DISTRIBUTION COMPANIES;
Rev. Reg. 13-2018
Sale of electricity by generation, transmission by any entity
including the National Grid Corporation of the Philippines
(NCGP), and distribution companies including electric
cooperatives shall be subject to 12% VAT on their gross
receipts.
Generation Companies- persons or entities authorized by
the ENERGY REGULATION COMMISSION (ERC) to
operate facilities used in the generation of electricity.
Transmission Companies- any person or entity that owns
and conveys electricity through the high voltage backbone
system and/or sub-transmission assets, e.g. NPC or
TRANSCO.
 The NGCP, which provides transmission services, is
SUBJECT TO 3% FRANCHISE TAX; hence, the
withholding of government money payments shall be thru
percentage tax withholding.
Distribution Companies – persons or entities which
operate a distribution system in accordance with the
provisions of the EPIRA.
Gross receipts under this subsection shall refer to the
following:
a. Total amount charged by generation companies for
the sale of electricity and related ancillary services;
and/or
b. Total amount charged by transmission companies for
transmission of electricity and related ancillary services;
and/or
c. Total amount charged by distribution companies and
electric cooperatives for distribution and supply of
electricity, and related electric service.
 The UNIVERSAL CHARGE passed on and collected by
distribution companies and electric cooperatives shall be
excluded from the collection of gross receipts.
14. FRANCHISE GRANTEES OF ELECTRIC UTILITIES,
TELEPHONE AND TELEGRAPH, RADIO AND/OR
TELEVISION BROADCASTING AND ALL OTHER
FRANCHISE GRANTEES , EXCEPT FRANCHISE
GRANTEES OF RADIO AND/OR TELEVISION
BROADCASTING WHOSE ANNUAL GROSS RECEIPTS
OF THE PRECEDING YEAR DO NOT EXCEED PHP
10,000,000, AND FRANCHISE GRANTEES OF GAS AND
WATER UTILITIES;
TRAIN LAW
―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;‖
 FRANCHISE GRANTEES OF TELEPHONE AND
TELEGRAPH shall be subject to vat on their gross
receipts derived from their telephone, telegraph, telewriter
exchange, wireless and other communication equipment
services.
 Amounts received for OVERSEAS DISPATCH,
MESSAGE, OR CONVERSATION ORIGINATING FROM
THE PHILIPPINES are subject to the percentage tax
under Sec. 120 of the tax code and hence exempt from
VAT.
Apuli, BS Accountancy | 24
  FRANCHISE GRANTEES OF RADIO AND/OR
TELEVISION BROADCASTING whose annual gross
receipts of the preceding year do not exceed php
10,000,000 shall not be subject to VAT, but to the 3%
franchise tax.
 FRANCHISE GRANTEES OF GAS AND WATER
UTILITIES shall be subject to 2% franchise tax on their
gross receipts.
15. NON-LIFE INSURANCE COMPANIES INCLUDING
SURETY, FIDELITY, INDEMNITY AND BONDING
COMPANIES;
TRAIN LAW
Modifies this item - ―non-life insurance companies (except
their crop insurances), including surety, fidelity, indemnity and
bonding companies; and‖
Non-life insurance companies- including surety, fidelity,
indemnity and bonding companies, shall include all
individuals, partnerships, associations, or corporations,
including professional reinsurers defined in Sec. 280 of P.D.
612,(Insurance code of the Philippines), mutual benefit
associations and government-owned or controlled
corporations, engaging in the business of property
insurance, as distinguished from insurance on human lives,
health, accident and insurance appertaining thereto or
connected therewith which shall be subject to
PERCENTAGE TAX under Sec. 123 of the tax code.
 non-life insurance including surety, fidelity, indemnity and
bonding companies are subject to VAT.
 The gross receipts from non-life insurance shall mean
total premiums collected, whether paid in money, notes,
credits or any substitute for money.
 Non-life insurance premiums – subject to VAT
 Non-life reinsurance premium – not subject to VAT
16. PRE-NEED COMPANIES;
Pre-need companies are corporations registered with
the Securities and Exchange Commission and
authorized/licensed to sell or offer for sale pre-need
plans whether a single plan or multi-plan.
- Engaged in a business as seller of services
providing services to plan holders by managing the
funds provided by them and making payments at
the time of need or maturity of the contract.
17. HEALTH MAINTENANCE ORGANIZATIONS; AND
Health and Maintenance organizations (HMOs) are
entities, organized in accordance with the provisions of
the Corporation Code of the Philippines and licensed
by the appropriate government agency, which arranges
for coverage or designated managed care services
needed by plan holders/members for fixed prepaid
membership fees and for a specified period of time.
TRAIN LAW*
Deletes the foregoing items in 16 and 17 in Section
108(A) of the NIRC.
18. SIMILAR SERVICES REGARDLESS WHETHER OR
NOT THE PERFORMANCE THEREOF CALLS FOR
THE EXERCISE OR USE OF THE PHYSICAL OR
MENTAL FACULTIES.
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 applied as payments for services
rendered and advanced payments actually or constructively
received during the taxable period for the services performed or
to be performed for another person, excluding value-added tax.
Train Law*
-deletes in the definition of ―gross receipts‖ the phrase
―applied as payments for services rendered‖ in Section 108 (A) of
the NIRC.
CONSTRUCTIVE RECEIPT
-occurs when the money consideration or its equivalent is
placed AT THE CONTROL OF THE PERSON who rendered the
service without restrictions by the payor.
TAX BASE AND RATE
-There shall be levied, assessed and collected, a value-
added tax equivalent to TWELVE PERCENT (12%) of the gross
receipts excluding the value added tax, derived from the sale
or exchange of services, including the use or lease of
properties.
Train Law*
-retains the rate and base of value-added tax on sale of
services and use or lease of property and deletes the phrase
―excluding the value-added tax:”
There shall be levied, assessed and collected, a value-
added tax equivalent to twelve percent (12%) of the gross
receipts derived from the sale or exchange of services,
including the use or lease of properties.
ZERO-RATED SALE OF SERVICES
-is a taxable transaction for VAT purposes, but shall not
result in any output tax. However, the input tax on purchases of
goods, properties or services related to such zero-rated sale
shall be available as tax credit or refund in accordance wit
regulations.
THE FF. SERVICES PERFORMED IN THE PHILIPPINES BY A
VAT-REGISTERED PERSON SHALL BE SUBJECT TO ZERO
PERCENT (0%) VAT RATE:
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);
1. SERVICES OTHER THAN PROCESSING,
MANUFACTURING OR REPACKING rendered to a
person engaged in business conducted OUTSIDE THE
PHILIPPINES or to a NON-RESIDENT PERSON
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
Apuli, BS Accountancy | 25
 and regulations of the Bangko Sentral ng Pilipinas
(BSP);
2. 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;
3. Services rendered to PERSONS ENGAGED IN
INTERNATIONAL SHIPPING OR AIR TRANSPORT
OPERATIONS, including leases of property for use
thereof; Provided, that these services shall be
exclusively for international shipping or air transport
operations. (Thus, the services referred to herein shall
not pertain to those made to common carriers by air and
sea relative to their transport of passengers, goods or
cargoes from one place in the Philippines to another
place in the Philippines, the same being subject to
twelve percent (12%) VAT under Sec. 108 of the Tax
Code, as amended);
4. Services performed BY SUBCONTRACTORS AND/OR
CONTRACTORS in processing, converting, or
manufacturing goods for an enterprise whose export
sales exceeds seventy percent (70%) of total annual
production;
5. Transport of passengers and cargo by DOMESTIC AIR
or SEA CARRIERS from the Philippines to a foreign
country.

(Gross receipts of international air carriers and

international sea carriers doing business in the
Philippines derived from transport of passengers and
cargo from the Philippines to another country shall be
exempt from VAT; however they are still liable to a
percentage tax of three percent (3%) based on their
gross receipts derived from transport of cargo from the
Philippines to another country as provided for in Sec.
118 of the Tax Code, as amended); and

6. SALE OF POWER OR FUEL GENERATED THROUGH

RENEWABLE SOURCES OF ENERGY such as, but
not limited to, biomass, solar, wind, hydropower,
geothermal and steam, ocean energy, and other
shipping sources using technologies such as fuel cells
and hydrogen fuels;

Provided, however that zero-rating shall apply strictly to

the sale of power or fuel generated through renewable
sources of energy, and shall not extend to the sale of
services related to the maintenance or operation of
plants generating said power.

Effectively Zero-Rated Sale of Services

-shall refer to the local sale of services by a VAT-
registered person to a person or entity who has granted
indirect tax exemption under special laws or international
agreement.
-Under these regulations, effectively zero-rated
sale of services shall be limited to sales to persons or
entities that enjoy exemptions from indirect taxes under
nos. 3,4 and 5 of the immediately preceding discussion.

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