2020

Transfer and Business Taxation

Ebenezer Gener
Module Writers:
DR. JOSEPHINE DIANA S. CAMPOS
Sarmiento Campus
Module 1-10

Ms. CINDI D. ESPIRITU

Bustos Campus
Module 11-17
 MODULE 1. INTRODUCTION TO BUSINESS TAXES
Duration: 3 hours

Introduction
This module provides a detailed discussion about the basics of business tax, what it
comprises, and to whom the former is imposed.
Objectives
In this module, you will be able to:
❖ Define business with regard to its requisites
❖ Identify business taxes as specified in the NIRC
❖ Determine as to whom taxes are imposed
Pre-Assessment Activity 1: Answer the question based on tour own understanding
using your own words.
➢ Why do we pay taxes?
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➢ Who benefits when taxes are collected?

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Lesson 1- Theories on Business Tax, Percentage Tax and Excise Tax

What is business?
“Business” or “in the course of trade or business” means the regular conduct or pursuit of
a commercial or economic activity, including transactions incidental thereto, by any
person or government entity. The requisites are:
a. The activity must be a commercial or economic activity; and
b. There must be regularity in the activity.
A commercial or economic activity is an activity where the purpose is profit or income.
The term “regular” involves more than one isolated transaction. It indeed requires
repetition and a continuity of action (Reyes, 2019).
Example 1.
Mr. W sold his car at a loss. There is no business tax. There is no business tax. There is
no income or profit element in the transaction-hence not an economic activity. The
transaction is isolated—there is no regularity (Even if sold at a gain).
The Business Taxes
There are three major business taxes in the National Internal Revenue Code (NIRC),
namely:
 a. Excise tax;
b. Percentage tax; and
c. Value-added tax
The excise tax
On whom is the excise tax imposed?
(a) On manufacturers and importers of:
(1) Distilled spirits (e.g., liquors)
(2) Wines (e.g., grape wine);
(3) Fermented liquors (e.g., beer);
(4) Tobacco products (e.g., chewing tobacco);
(5) Cigars;
(6) Cigarettes;
(7) Automobiles;
(8) Yachts and other vessels intended for pleasure;
(9) Manufactured fuel oils (e.g., gasoline, diesel fuel oil, bunker fuel oil, etc.);
(10) Mineral products (e.g., gold, silver);
(11) Non-essential goods (e.g., jewelry, perfumes — (There is an enumeration in
the law.); and
(12) Sweetened beverages.

(b) On sellers of services of:

Domestic procedures, surgeries, and body enhancements undertaken for
aesthetic reasons entirely focused on altering and enhancing a patient's appearance,
improving aesthetic appeal, symmetry and proportion (but not reconstructive surgery or
repair, reconstruction and restoration of bodily functions due to congenital disorders,
trauma, burns, infectious, disease, and those intended to correct dysfunctional areas of
the body).

The percentage taxes

The percentage taxes are on sales of services (enumerated in the National Internal
Revenue Code). The taxes are the following:
(a) 3% percentage tax on sale of goods, properties or services;
(b) Common carrier's tax on domestic carriers;
(c) Common carrier's tax on international carriers:
(d) Franchise tax;
(e) Overseas communications tax;
(f) Tax on banks and non-bank financial intermediaries performing quasi-banking
functions;
(g) Tax on other non-bank financial intermediaries;
(h) Tax on insurance companies;
(i) Tax on agents of foreign insurance companies;
(j) Amusement tax;
(g) Tax on winnings; and
(h) Stock transaction tax.

Lesson 2 – Theories on Value-added Tax

The value-added tax

The value-added is on:

 (a) Sale of goods or properties;
(b) Sale of services;
(b) Importation of goods.

Can there be, on one business:

Excise tax with value-added tax? Yes
Excise tax with the 3% percentage tax? Yes
Excise tax with some other percentage tax? No
Value-added tax with percentage tax? No

Registration of business

Every taxpayer subject to.the value-added tax must register with the Bureau of Internal
Revenue as a VAT taxpayer and pay an annual registration fee of for every separate
and distinct establishment, including facility types (sales outlets, places of production,
warehouses and storage places) where the business is conducted.

Every taxpayer not subject to the value-added tax but subject to the excise tax or
percentage tax must register with the Bureau of Internal Revenue and pay an annual
registration fee for every separate and distinct establishment where the business is
conducted.

Example 2. Mr. F is a merchant. He has his main store in the City of Manila, a branch
store in Quezon City, and another branch store in Pasay City. There will be three separate
registrations and three separate payments of the registration fees.

Registration for value-added tax -Mandatory registration.

Any person who, in the course of trade or business, 'sells, barters or exchanges goods or
properties, or engages in the sale or exchange of services will be 'liable to register for
value-added tax if:
(a) Gross sales or receipts within the year exceeded three million pesos (P3,000,000);
(b) There are reasonable grounds to believe that his gross sales or receipts for the next
twelve (12) months will exceed three million pesos (₱3,000,000).

Example 3. With gross sales in any year not exceeding P3,000,000, Mr. N was paying
the percentage tax of 3% on his sales. For 2019, on August 25, 2019 his sales was
already a total of ₱3,200,000. What were the business taxes business taxes in 2019?

January 1 to August 31, 2019 — Percentage tax;

September 1, 2019 and thereafter — Value-added tax.

Optional registration

Any person who is not required to register as a VAT taxpayer because the sales, barters
or exchanges of goods or properties, or the sales or exchanges of services, do not, or will
not, exceed three million pesos (₱3,000,000), may opt to register under the value-added
tax system.

The threshold of ₱3,000,000

For purposes of determining the threshold of three million pesos (₱3,000,000), the
husband and wife will be considered as separate taxpayers. If a taxpayer has two or more
lines of businesses that would otherwise be subject to the value-added tax, the gross
sales/receipts will be combined for purposes of determining if the threshold was
exceeded. Any VAT exempt sales will not be included in determining the threshold
(Reyes, 2019).

Example 4. Mr. Adukit has three lines of business,with gross receipts as follows:

Business A, VAT exempt business ₱3,000,000

Business B, sale of goods 1,800,000
Business C, sale of services 1,800,000

Should there be a value-added tax?

The gross receipts of Business A will not be included in determining if the taxpayer is
subject to the value-added tax. The gross, receipts from Business B and Business C will
be aggregated. The aggregate exceeds ₱3,000,000, so that the two businesses are
subject to value-added tax.

Cancellation of VAT registration

The registration of any person as a value-added taxpayer may be cancelled if

(a) The person makes written application and can demonstrate to the Commissioner's
satisfaction that his gross sales or receipts for the following twelve (12) months will
not exceed three million pesos (P3,000,000); or
(b) The person has ceased to carry on his trade or business and does not expect to
recommence any trade or business within the next twelve (12) months.

When will the cancellation take effect? Answer: The first day of the following month.

Registration of invoices and receipts

A taxpayer who is in business will have his invoices and receipts registered with the
Bureau of Internal Revenue. If a VAT taxpayer, such invoices and receipts will clearly
indicate that he is a VAT taxpayer.

Electronic receipts or sales or commercial invoices

Under the TRAIN LAW, within five (5) years from the effectivity of that law, and upon the
establishment of a system capable of storing and processing the required data, the
Bureau of Internal Revenue will require:
a. Taxpayers engaged in e-commerce, and
b. Taxpayers under the Large Taxpayers Service to issue electronic receipts
or sales or commercial invoices in lieu of manual receipts or sales or
commercial invoices.

Taxpayers not covered by this mandate may issue electronic receipts or sales or
commercial invoices in lieu of manual receipts and sales and commercial invoices.
Post-Lesson Reflection

1. What concept did you learn today?

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2. What aspects of the lesson do you believe are most useful in your understanding
of the subject matter?
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Post-Assessment Activity 1:
Read each statement below carefully. Place a T on the line if you think a statement
it TRUE. Place an F on the line if you think the statement is FALSE.

______1. The percentage tax on sale of goods, properties or services is .03 %.

______2. A taxpayer who is in business will have his invoices and receipts registered
with the Bureau of Internal Revenue.
______3. The registration of any person as a value-added taxpayer may be cancelled
if the person merely demonstrate to the Commissioner's satisfaction that his gross
sales or receipts for the following twelve (12) months will not exceed three
million pesos (P3,000,000).
______4. If a taxpayer has two or more lines of businesses that would otherwise be
subject to the value-added tax, the gross sales/receipts will be combined for
purposes of determining if the threshold was exceeded.
______5. A commercial or economic activity is an activity where the purpose is profit
or income. The term “regular” involves not more than one isolated transaction.

Reference:
o Reyes, V. (2019). A Study on Business Taxes and Transfer Taxes Under the
TRAIN Law. GIC Enterprises & Co. Inc.
 MODULE 2. VALUE-ADDED TAX ON SALE OF GOODS OR PROPERTIES
Duration: 3 hours

Introduction
This module will provide you a comprehensive discussion of what value-added tax is and
how to determine the amount of VAT payable as well as the input and output tax.

Objectives
In this module, you will be able to:
❖ Identify the taxpayer as to defined in the Tax Code;
❖ Determine transactions deemed as sales
❖ Distinguish transactions subject to value-added-tax (VAT)
❖ Calculate the value-added-tax to be paid by the buyer

Pre-Assessment Activity 2:
Read each statement below carefully. Place a T on the line if you think a statement it
TRUE. Place an F on the line if you think the statement is FALSE.
______1. A barter or exchange is the transfer of ownership of property in
consideration of property received or to be received.
______2. "Goods or properties" are all tangible objects which are capable of
pecuniary (money) estimation.
______3. Gross selling price" is defined as the total amount of money or its equivalent
which the purchaser pays or is obligated to pay to the seller in consideration of the
sale, barter, or exchange, including the value-added tax.
______4. The tax base (the amount on which the rate of value-added tax is applied)
is gross selling price.
______5. In an "actual sale", the selling price of the seller is: (a) Recovery of cost and
expenses; and (b) Desired profit.

Lesson 1- Transactions deemed “sales”

Quick Facts on Value-added Tax

1. The value-added tax is a consumption tax. It is imposed on a seller, but the seller
passes it on to the buyer;
2. The value-added tax should be shown on the official invoice or receipt issued to
the buyer, as a separate item;
3. The value-added tax is 12%, 5% or 0% of the selling price;
4. Whereas each sale has a value-added tax, and separate recording in the books
of accounts is on a per transaction basis, reporting and payment of the value-
added tax to the government is made monthly, on the transactions of the month.

The Taxpayer

The taxpayer is defined as any person who sells, barters or exchanges goods or
properties in the course of trade or business will be subject to the value-added tax. (The
law exempts certain transactions from the value-added tax.)

In addition, the taxable transactions are sale, barter and exchange. Whenever in a rule
the word "sale" is used, it must be understood to include barter and exchange.
Definition of sale, barter or exchange

A sale is the transfer of ownership of property in consideration of money received or to

be received. For a more comprehensive meaning of "sale", see Figure 2 on transactions
"deemed sales".

A barter or exchange is the transfer of ownership of property in consideration of property

received or to be received. An isolated transaction of sale or exchange of private property
is not in the course of trade or business, and is not subject to the value-added tax.

Example 2-1. Mr. Adukit made a cash sale of his merchandise inventory. The sale is
subject to the value-added tax.
Example 2-2. Mr. Balbonn sold his three-year old family car. This is not subject to the
value-added tax.

Figure 2-1. Transactions deemed sales

The following are considered "sales" in the course of trade or business subject to the
value-added tax (Statutory enumeration):

a. Transfer, use or consumption, not in the ordinary course of business, of goods

or properties ordinarily intended for sate or in the course of business;
b. Distribution or transfer of inventory to shareholders or investors for their shares
in the profits of a VAT-registered person;
c. Distribution or transfer of inventory to creditors in payment of debt;
d. Consignment of goods if actual sale is not made within sixty days following the
date such goods were consigned;
e. Retirement from or cessation of business, with respect to inventories of taxable
goods as of the date of such retirement or cessation.

Example 2-3. Mr. Cocoteh sells household furniture. He removed from his store a living
rootm set for use in his residential house. This is deemed a sale.

Example 2-4. Titik Dee Co. declared and paid a dividend out of merchandise inventory.
This is deemed a sale.

Example 2-5. Ephal Co. is indebted to Ferlaloo Co. for raw materials. When Eco Co. could
not pay in money, Ferlaloo Co. agreed to receive the finished goods of Eco Co. in
payment. This is deemed a sale by Eco Co.

Example 2-6. GnaG Co., a manufacturer, made sales, as follows: To Mr. HaRimm, on
credit, with title to the goods passing to Mr. HaRimm, and to Mr. Inahya, on consignment,
with title to the goods to pass only upon actual sale of the consigned goods to a buyer.
The goods consigned to Mr. Inahya are still in the shelves of Mr. Inahya. The sale to Mr.
HaRimm is subject to the value-added tax because title to the goods has passed to Mr.
HaRimm. The consignment to Mr. Inahya, although title to the goods has not yet passed,
will be subject to the value-added tax when actually sold by Mr. Inahya, or after sixty days
from the date of consignment (Provision of law).

Example 2-7. Jay & Kaye was a partnership in trade. Jaye & Kaye was dissolved and Led
& Med was formed to continue the business of Jay & Kaye. At the time Jay & Kaye was
dissolved, the books of accounts showed a merchandise inventory of ₱100,000, which
was also the physical inventory. The inventory will be deemed sold by Jay &Kaye Co. to
Led & Med Co., and will be subject to the value-added tax.

What are Goods or Properties?

Before we proceed to defining goods and properties, remember that sales of movable
and immovable properties are taxable.

"Goods or properties" are all tangible and intangible objects which are capable of
pecuniary (money) estimation. (The law has a provision that states what are within the
definition of "goods or properties".)

Goods are movable properties. Thus, sales by a car dealer are sales of goods in the
conduct of trade or business, subject to the value-added tax.

What is within the definition of "properties"? Included in the term "properties" are real
properties. Thus, sales by a real estate dealer are sales of properties in the conduct of
trade or business, subject to the value-added tax.

The Tax Base

The tax base (the amount on which the rate of value-added tax is applied) is gross selling
price.

Meaning of gross selling price. By statutory definition: "Gross selling price" is defined as
the total amount of money or its equivalent which the purchaser pays or is obligated to
pay to the seller in consideration of the sale, barter, or exchange, excluding the value-
added tax. The excise tax, if any, on such goods, will form part of the gross selling price.
Stated concisely, gross selling price includes everything that the buyer pays the seller,
except the value-added tax shifted to the buyer. "Gross selling price" does not mean gross
sales. The law and regulations allow downward adjustments for:

(a) Sales returns and allowances;

(b) Sales discounts agreed upon, at the time of sale, (the granting of which does not
depend on the happening of a future event) ,indicated on the sales invoice, and
availed of by the buyer.

Example 2-8. Mr. Aye sold an article to Mr. Beeh. The quoted selling price was ₱10,000,
not including freight and value-added tax. Mr. Beeh has to pay ₱10,500 (additional P500
for the freight) and the value-added tax before title to the goods passes to him upon
delivery at his place. The gross selling price was ₱10,500.

Remember:
In an "actual sale", the selling price of the seller is:
(a) Recovery of cost and expenses; and
(b) Desired profit.

Example 2-9. Mr. C produced articles at a production cost of P50,000. The articles are
subject to an excise tax of ₱5,000. The articles became subject to the excise tax the
moment they came into existence, although payment of the tax will be made only upon
removal of the goods from the place of production. The share of the articles in the
operating expenses is calculated at ₱8,000. The desired profit is ₱37,000. The selling
price was ₱100,000, which was:

Recovery of:

Production cost ₱50,000

Operating expenses 8,000

Excise tax 5,000

Desired profit 37,000

Selling price ₱100,000

Value-added tax @ 12% 12,000

Total, to be paid by the buyer ₱112,000

The gross selling price does not include VAT.

The VAT billed to the buyer, and received by the seller, is not part of the selling price.

Example 2-10. In a taxable period, Mr. D had grosss sales, value-added tax not included,
of ₱425,000. Sale returns and allowances for the same period discounts, stated on the
invoice, tomers, were P20,000 and P5,000, gross selling price tax base was:

Gross sales ₱425,000

Less:

Sales returns and allowances 20,000

Sales discounts 5,000__

25,000

Gross selling price tax base ₱400,000

The Commissioner of Internal Revenue will determine the appropriate tax base in cases
where the transactions are deemed sales, or where the gross selling price is unusually
lower than the actual market value.
Example 2-11. Mr. Dee sold an article for ₱50,000, when the prevailing market value was
₱100,000. The Commissioner of Internal Revenue will determine the amount on which to
compute the output value-added tax.

Example 2-12. Ecolum Co. is a lumber sawmill. It used lumber from its production to
construct the residential house of its Vice-President. This transaction is deemed a sale.
The Commissioner of Internal Revenue will determine the amount on which to compute
the output value-added tax.

THE TAX RATES

The tax rates are:

a. Twelve percent (12%), if domestic sale;
b. Five percent (5%), if sales to the Government (and certain entities);
c. Zero percent (0%), if export sale.

The law states zero-rated tax on exports (and certain other transactions). Goods exported
are taxed at 0%, whether title to the goods passed to the buyer in the Philippines or
abroad, but paid in acceptable foreign currency

"Export sales" is defined as the sales and actual shipments or exportations of goods from
the Philippines to a foreign country, irrespective of any shipping arrangement that may be
agreed upon which may influence or determine the transfer of ownership of the
goods so exported, and paid for in acceptable foreign currency or its equivalent in goods
or services, and accounted for in accordance with the rules and regulations of the Banko
Sentral Ng Pilipinas (BSP).

Example 2-13. Mr. Eww exported his manufactured goods to Fe Co. in the United States,
under terms of shipment F.O.B. California, United States. Payment was in dollars remitted
thru the Philippine National Bank, Cali. fomia, U.S.A., branch. Since title to the goods was
transferred, and hence, the sale was consummated, in the United States, the sale was
an export sale.

Example 2-14. Gee Co. exported its manufactured goods to Etch-H Co.in the United
States, under terms of shipment F.O.B. Manila, Philippines. Payment was in dollars
remitted thru the Philippine National Bank, California, U.S.A., branch. Even as title to the
goods was transferred, and hence, the sale was consummated, in the Philippines, the
sale was still an export sale.

Lesson 2- Determination of Value-Added Tax Payable

The Value-Added Tax Payable of Seller (Formula)

Output taxes (seller's value-added tax on sales)

Less: Input taxes (seller's value-added taxes paid on purchases, etc.)
Equals: Value-added tax payable of seller (See Figure 2-2)

Figure 2-2. TAX FORMULA

 Reference: Reyes, V. (2019) A Study on Business & Transfer Tax

Output tax is the value-added tax on a sale.

Input tax is the value-added taxes paid:

On local purchases from VAT-registered persons, and on importations, of goods:

a. For sale;
b. For conversion into or intended to form part of a finished product for sale,
including packaging materials;
c. For use as supplies;
d. For use in trade or business, for which depreciation (or amortization) is
allowed for income tax purposes (capital goods), except automobiles,
aircraft and yachts;
e. Value-added taxes paid on purchases of real property;
f. Value-added taxes paid on purchases of services;
g. Transitional input tax; and
h. Presumptive input tax

Example. Mr. Wee, a VAT taxpayer, made domestic sales of ₱600,000 and export sales
of ₱1,400,000. The output taxes on domestic sales would have been ₱600,000 x 12%,
or ₱72,000, and the output taxes on exports would have been ₱1,400,000 x 0%, or
₱0.

Example. Mr. Oh imported goods to be sold, with a landed cost of ₱40,000 (Module 7).
He sold the goods to Mr. Peeh for ₱90,000. Mr. Peeh sold the goods to Mr. Qyu for
₱170,000, for use by Mr. Qyu as raw materials. Mr. Qyu secured the services of Mr. R, a
service contractor and paid Mr. R ₱50,000. Mr. Qyu sold his products for ₱400,000. All
taxpayers involved are VAT-registered persons and all selling prices mentioned do not
include the value-added tax. The computations for the value-added taxes in the series of
transactions involving VAT taxpayers would have been as shown in Figure 2-4.
Figure 2-3. The tax formula on a purchase-sale transaction:

Reference: Reyes, V. (2019) A Study on Business & Transfer Tax

Figure 2-4. VAT in a series of transactions involving VAT taxpayers.

Reference: Reyes, V. (2019) A Study on Business & Transfer Tax

Example 2-15. Mr. R, a VAT taxpayer, made a sale at ₱100,000, value-added tax not
included, of goods that he bought at ₱3,000 from a non-VAT taxpayer. The value- added
tax payable was ₱12,000, computed as follows:

Output tax (₱100,000 x 12%) ₱12,000

 Less: Input tax 0
Value-added tax payable ₱12,000

Example 2-16. Mr. Selly, a VAT taxpayer, made a sale at ₱100,000, value-added tax not
included, of goods that he bought at ₱3,000 from a VAT taxpayer, value-added tax not
included. The value-added tax payable was ₱11,640, computed as follows:

Output tax (₱100,000 x 12%) ₱12,000

Less: Input tax (₱3,000 x 12%) 360
Value-added tax payable ₱11,640
Reference: Reyes, V. (2019) A Study on Business & Transfer Tax
Example 2-17. On assumed data:

Gross sales ₱200,000

Less:
Sales returns and allowances ₱20,000
Sales discounts 1,200 21,200
Net sales ₱178,800
₱ 21,456

On assumed data:
Gross purchases ₱100,000
Less:
Purchase returns and
allowances ₱10,000
Purchase discounts 500 10,500
Net purchases ₱89,500
Input tax (P89,500 x 12%) ₱10,740

From the preceding computations:

Output tax ₱21,456
Less: Input tax 10,740
Value-added tax payable 10,716

Reminder:

While the examples in the pages in this module, and succeeding modular lessons, may
be on a concurring set of circumstances, such circumstances must be understood as all
occurring within a month. It must be stated now that the value-added tax is paid after the
end of, and on all VAT-related transactions of, a month.

Answer Exercises at the Post-Assessment section of this module.

The Real Estate Dealer

A sale of real property by a real estate dealer will be subject to the value-added tax at
12% of the gross selling price.

A real estate dealer is any person engaged in the business of buying, developing, selling,
or exchanging real property as principal and holding himself out as a full or part-time
dealer of real estate.
What is gross selling price? Gross selling price is whichever is higher between the
consideration stated in the contract of sale and the fair market value.

How to determine the fair market value? It is whichever is higher between the market
value as determined by the Comissioner of Internal Revenue (zonal value), and the fair
market value as shown in the schedule of values of the Provincial or City Assessor (real
property tax declaration). In the absence of zonal value/fair market value as market value
refers to the market value shown in the latest real property tax declaration. The tax base
is the consideration stated in the deed of sale, or the zonal value, or the fair market value
in the assessment rolls, whichever is the highest (Reyes, 2019).

Example 2-21. Case 1 Case 2 Case 3

In pesos consideration stated in
the deed of sale 2,500,000 4,000,000 3,000,000
Zonal value 3,500,000 4,300,000 2,400,000
FMV in the assessment rolls 1,950,000 4,700,000 2,450,000
Gross selling price 3,500,000 4,700,000 3,000,000
Value-added tax at 12% 420,000 564,000 360,000

In a nutshell, gross selling price is whichever is highest of the:

a. Consideration stated in the deed of sale;
b. Zonal value, per Commissioner of Internal Revenue; and
c. Fair market value per Real Property Declaration the Provincial or City Assessor

Installment sale by the real estate dealer

In case of a sale by a real estate dealer in installments, can the value-added tax be
computed in installments (as output value-added tax for the real estate dealer and input
value-added tax for the buyer)? Yes, if the initial payments do not exceed twenty-five
percent (25%) of the selling price stated in the deed of sale (not whichever is highest of
the three values looked into). Initial payments will include all payments scheduled in the
year of sale.

Note: Installment payments of the value-added tax is allowed if the initial payments do
not exceed 25% of selling price in the deed of sale.

Steps to Follow on Installment Value-Added Tax of a Real Estate Dealer.

When the initial payments do not exceed twenty-five percent (25%) of the selling price:
Step 1. Compute the value-added tax at twelve percent (12%) on the tax base (whichever
is highest of three values);
Step 2. Determine the value-added tax on the installment payment, as follows:

Collection on the selling price VAT not included x Computed VAT

Agreed selling price, VAT not included in Step 1

The official receipt issued must state the basis of the VAT component.

Example 2-22. Sale of real property in installments by a real estate dealer.

 Consideration in the deed of sale ₱1,800,000
Zonal value 2,000,000
Fair market value in the assessment rolls of the city 1,700,000
Payments on the consideration:
July 1, 2018 (date of sale) 225,000
December 1, 2018 225,000
July 1, 2019 1,350,000
Value-added tax on highest of three values
(₱2,000,000 x 12%) ₱240,000
Down payment, July 1, 2018 ₱225,000
Payment, December 1, 2018 225,000
Installment payments, year of sale ₱450,000

Initial payments of ₱450,000 do notexceed 25% of the consideration of

₱1,800,000.

Reference: Reyes, V. (2019) A Study on Business & Transfer Tax

Installment value-added tax:

July 1, 2018:
₱225,000/₱1,800,000 x ₱240,000 ₱ 30,000
December 1, 2018:
₱225,000/₱1,800,000 x ₱240,000 ₱ 30,000
July 1, 2019:
₱1,350,000/₱1,800,000 x ₱240,000 ₱ 180,000

The deed of sale and each official receipt showing payment on the installment price must
state that the value-added tax is based on the zonal value.

Example 2-23. Mr. Bolly is a real estate dealer. He sold a piece of land in installments.
Data were as follows:

Installment selling price, VAT not included ₱4,000,000

Zonal value 2,000,000
Fair market value 5,000,000
Installment selling price 4,000,000
Terms of payment:
May 2, 2018 (date, of sale) 1,000,000
May 2, 2019 3,000,000
Total ₱4,000,000

He had expenses of operations paid to VAT taxpayers, value-added tax not included, as
follows:
May 2, 2018 20,000
May 2, 2019 60,000

Required: Calculate the output tax, input tax and value-added tax payable.
 Value-added tax on the sale- on highest three values
(P5,000,000 x 12%) ₱600,000
May 2, 2018
Output tax (1,000,000/4,000,000 x 600,000) ₱150,000
Less: Input tax on expenses (20,000 x 12%) 2,400
Value-added tax payable ₱147,600
May 2, 2019
Output tax (3,000,000/4,000;000 x 600,000) 450,000
Less: Input tax (60,000 x 12%) 7,200
Value-added tax payable ₱442,800

Presumptive Input Tax

Persons or firms engaged in processing sardines, mackerel, and milk, and in

manufacturing refined sugar and cooking oil, and packed noodle-based instant meals
will be allowed a presumptive input tax, equivalent to four percent (4%) of the gross value
in money of their purchases of primary agricultural products.

Primary agricultural products being referred in the early statement are those which are
used as inputs to their production. Primary agricultural products are agricultural products
in their original state.

Note: Agricultural products, previously VAT exempt, give input tax to the preferred
taxpayer.

(Are original marine products within the meaning of original agricultural products? Reyes
(2019) thinks no. The law at times mentions “agricultural" and "marine" products
separately.)

On the other hand, the term "processing" means pasteurization, canning and activities
which through physical or chemical process alters the exterior texture or form or inner
substance of a product in such a manner as to prepare it for special use to which it could
not have been put in its original form and condition (this present definition of
"processing" was the old definition of "manufacturing" in the law).

Example 2-24. Mr. Fis-shy purchases sardines from fishermen and processes them into
canned sardines. Going to processing in a certain taxable period were the following
purchases, value-added tax not included:

Fish (from fishermen) ₱100,000

Tin cans 20,000
Tomato paste (in cans) 5,000
Olive oil (in plastic bottles) 2,500
Pepper (from farmers) 1,800
Paper labels (from printers) 500
Sales during the period, value-added tax not included, amounted to
₱400,000. The value-added tax payable would have been:
Output taxes (400,000 x 12%) ₱48,000
 Less: Input taxes —
Actual value-added taxes on purchases —
On tin cans (20,000 x 12%) 2,400
On tomato paste (5,000 x 12%) 600
On olive oil (2,500 x 12%) 300
On paper label (500 x 12%) 60
Presumptive input tax —
On pepper (1,800 x 4%) 72 3,432
Value-added tax payable ₱44,568
Reference: Reyes, V. (2019) A Study on Business & Transfer Tax

Post-Lesson Reflection

1. What concept did you learn today?

________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
____________________________.

2. What aspects of the lesson do you believe are most useful in your understanding
of the subject matter?
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
____________________________.

Post-Assessment Activity 2: Choose the best possible answer and provide solutions
for what is asked.

A. A VAT subject real estate dealer sells a residential lot on January 15, 2019. The
following information are made available on the terms of the sale:

Gross selling price ₱3,000,000

Initial payments on January 15, 2019
(consisting of down payment and installments in the
year of sale) 900,000

Balance to be paid in equal installment,

installments starting February 15, 2019 2,100,000

The zonal value of the residential lot was ₱2,800,000.

Question 1 - Does the sale qualify under installment plan?

a. Yes, because the sale has initial payments and, therefore, qualify
under installment plan.
b. No, because the initial payments exceed 25% of the selling price.
c. Yes, because the initial payments include installments in the year of
sale.
 d. No, because the initial payments exceed 25% of the zonal value.

Question 2 - What is the tax base for VAT purposes?

a. ₱3,000,000 b. ₱2,100,000
c. ₱2,800,000' d. None of the choices

Question 3 - How much was the output tax on January 15, 2019 using 12%
VAT rate?
a. 360,000 b. 108,000
c. 300,000 d. None

Question 4 - How much was the output tax on February 15, 2019 using 12% VAT rate?
a. 360,000 b. 108,000
c. 300,000 d. None

B. The following information are taken from the books of accounts of a VAT-registered
taxpayer:

Third quarter:
Sales ₱1,000,000
Purchases 800,000
Excess input VAT as of end of second 25,000
quarter
Fourth quarter:
Sales 1,500,000
Purchases 1,100,000

Question 1- How much is the VAT payable (excess input tax) for the third quarter using
12% VAT rate?
a. 36,000
b. 24,000
c. (5,000)
d. (1,000)
Question 2- Based on the same information in Problem B, how much is the VAT payable
for the fourth quarter using 12% VAT rate?
a. 48,000
b. 47,000
c. 11,000
d. None of the choices

Reference: Section 4.110-7, Revenue Regulations No. 16- 2005 as amended by RR No.
2-2007 and RR No. 4-2007; Tamayo, A. (2018). Reviewer in Taxation 2.

Note: R.A. No. 9361 (approved on November 24, 2006) removes the provision under
R.A. No. 9337 that subjects the allowable input tax credit to the 70% limit (based on
output tax) in case the input tax exceeds output tax. The repeal covers VAT returns for
taxable quarters ending not earlier than December 2006.
 MODULE 3. VALUE-ADDED TAX ON SALE OF SERVICES
Duration: 3 hours

Introduction

This module provides a comprehensive discussion of services subject to value-added tax,

be it in the course of trade or business; service is rendered in the Philippines; and service
that is not subject to any of the percentage taxes. Examples on relevant tax cases will
also be provided.

Objectives
In this module, you will be able to:
❖ Identify businesses subject to VAT
❖ Obtain familiarization with statutory definition and items classified as sale of
services
❖ Compute the value-added tax payable

Pre-test Assessment Activity 3: Answer T for true and F for false.

______1. The term "gross receipts” means cash or its equivalent actually received
or constructively received (not including the value-added tax) as payments on the
contract price, compensation, service fee, rental or royalty.
______2. Constructive receipt occurs when the money consideration or its equivalent
is placed in the control of the person who rendered the service with restriction by
the payor.
______3. The tax base of the value-added tax on sale of services is gross receipts.
______4. Advances on the contract, although not yet earned, are already taxable
gross receipts.
______5. Receivables are not taxable

Lesson 1 – Delineation of Service

Service is subject to the value-added tax if: (a) Service is in the course of trade or
business; (b) Service is rendered in the Philippines; (c) Service is not subject to any of
the percentage taxes (Reyes, 2019).

"Sale or exchange of services” is defined as the performance of all kinds of services in

the Philippines for others for a fee, remuneration or consideration provided that there is
no existing employer-employee relationship. A taxpayer with regard to his registered
business, may have two lines of taxable activities, one subject to the value-added tax and
another subject to a percentage tax (Refer to Figure 3-2).

Example 3-1. A lease contract entered into in the Philippines by a citizen of the Philippines
who happens to be a dealer in real estate. It is meant for use of an apartment in New
Jersey, U.S.A. by a citizen of the Philippines, is not subject to the value-added tax. Lease
is a sale of services (as stated in the law). All the same, the services were not rendered
in the Philippines.

Examples of businesses subject to VAT:

a. Hotels, motels, inns, pension houses and resorts;
b. Restaurants, cafes and other eating places;
c. Security agencies;
d. Warehouses;
 e. Forwarders (on forwarding of cargoes);
f. Lessors of properties, real or personal.
(Refer to Figure 3-1 for statutory definition and enumeration)

Figure 3-1. Statutory definition and enumeration of sale of services

Sale of services (in the course of trade or business) includes performed or rendered by
(statutory provision):
a. Construction and service contractors;
b. Stock, real estate, commercial, customs and immigration brokers,
c. Lessors of property, whether personal or real;
d. Warehousing services;
e. Lessors or distributors of cinematographic films;
f. Persons engaged in milling, processing, manufacturing or repacking of goods for
others,
g. Proprietors, operators, or keepers of hotels, motels, resthouses, pension houses,
inns, resorts;
h. Proprietors or operators of restaurants, refreshment parlors, cafes and other eating
places, including clubs and caterers;
i. Dealers in securities;
j. Lending investors;
k. 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;
l. 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,
m. Sales of electricity by generation companies, transmission, and distribution
companies;
n. 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 the National Internal Revenue Code who are subject to percentage
tax;
o. Non-life insurance companies (except their crop insurances), including surety,
fidelity and bonding companies;
p. Similar services regardless of whether or not the performance thereof calls for the
exercise or use of the physical or mental faculties;
q. The lease or the use of or the right or privilege to use any copyright, patent, design
or model, plan, secret formula or process, goodwill, trademark, trade brand and
other like property or right;
r. The lease or the use of, or the right to use of any industrial, commercial or scientific
equipment;
s. The supply of scientific, technical, industrial or commercial knowledge or
information;
t. The supply of any assistance that is ancillary and subsidiary to, and is furnished
as a means of enabling the application or enjoyment of any such property, or right
as is enumerated in letter (r) hereof or any such knowledge or information as is
mentioned in subparagraph (s);
u. The supply of services by a non-resident person or his employee in connection
with the use of property or rights belonging to, or the installation or operation of
any brand, machinery or other apparatus purchased from such non-resident
person;
 v. The supply of technical advice, assistance or services rendered in connection with
technical management or administration of any scientific, industrial or commercial
undertaking, venture, project or scheme;
w. The lease of motion picture films, tapes and discs;
x. The lease or use of or the right to use radio, television, satellite transmission and
cable television time.

"Similar services regardless of whether or not the performance thereof calls for the
exercise or use of the physical or mental faculties" (paragraph p) is very broad in its import
and application, to include all kinds of services, by whatever name they may be called or
described, for a fee, in the Philippines, provided there is no percentage tax on the services
(Reyes, 2019).

Lesson 2- Percentage Tax on Common Carriers

Figure 3-2. Value-added tax or percentage tax of domestic carriers.

Common carrier by land:

Transporting goods or cargoes 12% Value-added tax
Transporting passengers 3% Common carrier's tax

Common carriers by air or sea:

From one point in the Philippines to another point
in the Philippines
Transporting goods or cargoes 12% Value-added tax
Transporting passengers 12% Value-added tax
From one point in the Philippines to a point outside the
Philippines
Transporting goods or cargoes 0% Value-added tax
Transporting passengers 0% Value-added tax

Example 3-2. Bitutuh Transport Co. is a domestic corporation in overland transportation

business in Luzon, Philippines, transporting people and cargo from Southern Philippines
to Northern Philippines, and vice versa. In a day, it had the following gross receipts:
For transporting passengers ₱200,000
For transporting cargoes 50,000
Total ₱250,000
What were the business taxes involved?
Common carrier's tax (P200,000 x 3%) ₱ 6,000
Value-added tax-Output VAT (P50,000 x 12%) ₱ 6,000

Example 3-3. C-sea Shipping Co., a domestic corporation, has inter-island vessels in the
Philippines transporting passengers and cargoes (from one point in the Philippines to
another point in the Philippines). In one trip, it had obtained the following gross receipts:
For transporting passengers ₱500,000
For transporting cargoes 100,000
Total ₱600,000
What were the business taxes involved?
Common carrier's tax (500,000 x 12%) ₱ 60,000
Value-added tax - Output VAT (100,000 x 12%) ₱ 12,000
Example 3-4. DeeAyWay Overseas Shipping is a domestic corporation, transporting
passengers and cargoes from one point in the Philippines to a point abroad, and vice
versa. In one voyage, it had the following gross receipts:

For transporting passengers ₱2,000,000

For transporting cargoes: 1,000,000
Total ₱3,000,000
How much was the business tax?
Value-added tax - Output VAT (3,000,000 x0%) ₱ 0____

Lesson 3 - The Tax Base

The tax base of the value-added tax on sale of services is gross receipts (Refer to Figure
3-3).

Figure 3-3. Definition of gross receipts.

The term "gross receipts” means cash or its equivalent actually received or
constructively received (not including the value-added tax) as:
a. Payments on the contract price, compensation, service fee, rental or royalty;
b. Payments for materials supplied with the services; and
c. Deposits or advanced payments on the contract for services.

Constructive receipt occurs when the money consideration or its equivalent is placed in
the control of the person who rendered the service without restriction by the payor.

Examples are as follows: (a) Deposits in banks which are available to the seller of
services, without restriction; (b) Issuance by the debtor of a notice to offset any debt or
obligation and acceptance thereof, by the seller as payment for the services rendered; (c)
Transfer of amount retained by the owner to the account of the contractor (Reyes, 2019).

Example 3-5. Mr. Asim-mo is a building contractor. In constructing a building, he furnished

labor and was paid a contract price of ₱2,100,000, VAT not included. The taxable gross
receipts is ₱2,100,000. The output value-added tax is ₱252,000 (2,100,000 x 12%).

Quick Facts to Remember:

❖ The tax is on the cash received.
❖ Receivables are not taxable
❖ Taxable gross receipts include gross receipts for materials furnished with the
services
❖ Advances on the contract, although not yet earned, are already taxable gross
receipts.

Example 3-6. Mr. Balbonn, a building contractor. In constructing a building, the contract
price collected, VAT not included, were for the following:

Materials ₱3,300,000
Labor 1,100,000
Total ₱4,400,000
The taxable gross receipts is ₱4,400,000. The output value services added tax is
₱4,400,000 x 12%, or ₱528,000.

Example 3-7. A building contractor received a payment on a construction in progress of

₱2,200,000 (based on the percentage of completion of the building). Also, he received
₱220,000 advance on the balance of the contract price, on work still to be done. All the
amounts mentioned are VAT not included. The taxable gross receipts is ₱2,420,000. The
output value-added tax is ₱290,400 (₱2,420,000 x12%).

Example 3-8. Mr. DeeKwatro, a building contractor, had a contract receivable of

₱5,000,000, value-added tax not included, on a building contract with Mr. Eminemm. Mr.
Eminemm paid ₱4,800,000 as he retained the balance of ₱200,000 as guaranty against
defects (should there be any) of the building that may be discovered within one year from
the date of completion of the construction. The taxable gross receipts of Mr. DeeKwatro
is ₱4,800,000, and the output value added tax at 12% is ₱576,000.

Will there be sales discounts and sales returns and allowances that will reduce the gross
receipts? Yes.

Example 3-9. (Sales Returns) In services provided, with materials provided, payments on
it were received already by the VAT tax payer, but the buyer of the services returned
some of the materials, the gross receipts of the VAT taxpayer will be reduced by the peso
value of the sales returns.

Example 3-10. (Sales Allowance) In services provided, payments on which were received
already by the VAT taxpayer, but the buyer of the services complained on the quality of
the work done, and there was a downward adjustment on the price for the services
(allowance), the gross receipts will be reduced by the sales allowance.

The Tax Rates

❖ Twelve percent (12%) of the gross receipts;
❖ Zero percent (0%) of the gross receipts from services performed to certain entities
under certain conditions (provided in the law)

THE TAX FORMULA

Output taxes (seller's value-added tax on sales)
Less: Input taxes (seller's value-added taxes on purchases)
Value-added tax payable by the seller (Refer to Figure 3-3)

What are the input taxes? They are value-added taxes paid:
On local purchases from VAT registered taxpayers, and on importation of goods:
a. For materials, supplied with the sale of services;
b. For use as supplies;
c. For use in trade or business for which depreciation (or amortization) is allowed for
income tax purposes (capital goods), except automobiles, aircraft and yachts;
Value-added taxes paid on purchase of real property;
Value-added taxes paid on purchase of services;
Transitional input tax (to be discussed in the succeding module)
 Figure 3-4. tax Formula
Reference: Reyes, V. (2019). A Study on Business Taxes and Transfer Taxes.

Example 3-11. Mr. Kaye is a building contractor. He constructed a building for Mr. LaLav,
for which he made a final billing on October 20, 2019 of ₱6,000,000, VAT not included,
for materials used, and labor applied. On that billing, he received ₱5,000,000 cash on the
date of billing, with the balance received on October 29. Payments in October 2019
related to construction were:
Materials purchased on October 12, 2019, value-added tax
not included ₱1,000,000
Labor furnished by a sub-contractor, paid on October 30,
VAT not included 800

Question: How much was the value-added tax payable for October 2019?
Answer: ₱504,000
Output tax (₱6,000,000 x 12%) ₱720,000
Less: Input taxes -
On materials purchased (1,000,000 x 12%) ₱120,000
On labor purchased (800,000 x 12%) 96,000 216,000
Value-added tax payable, October ₱ 504,000

Example 3-12. Mr. Lilo is in the business of repairing motor vehicles, furnishing labor only,
or both labor and parts. For one month, he had obtained the following data. Value-added
tax is not included:
Amounts received as advances on cars to be repaired and
repainted ₱11,000
Amounts received for cars repaired, repainted, finished and
delivered to owners:
For labor 110,000
For parts (purchased from automobile parts VAT
registered dealers) 33,000

The parts were billed to the customers at the invoice prices of the parts dealers. Amounts
paid to machine shops for re-grinding, reboring and other machine shop jobs on car
engines amounted to ₱44,000, value-added tax not included. Amounts paid to suppliers
of paints amounted to ₱22,000, value-added tax not included. The value-added tax
payable for the month would have been computed, as follows:

Cash received as advances ₱ 11,000

Cash received for work completed:
For labor 110,000
For parts 33,000
Total amount received ₱ 154,000

Output taxes (₱154,000 x 12%) ₱ 18,480

Less: Input taxes -
On parts purchased (33,000 x 12%) ₱ 3,960
On services of machine shops (44,000 x 12%) 5,280
On paints purchased (22,000 x 12%) 2,640 11,880
Value-added tax payable ₱ 6,600

Example 3-13. Mr. AyeBee is a Certified Public Accountant in practice of public

accounting. He is a VAT-registered taxpayer. Data for a taxable month, value-added tax
not included are as follows:

Professional fees:
Received, net of a 10% withholding income tax on the gross
professional fees 180,000
Receivables 300,000
Reimbursements received on advances for clients:
Expenses chargeable to client, billed to clients 20,000
Expenses chargeable to client, billed to Mr. AyeBee 6,000
Purchase of computer from VAT taxpayer 70,000
Purchase of office supplies from VAT taxpayer 1,000
Payments for water from VAT supplier 10,000
Payments for electricity from VAT taxpayer 20,000
Payments to the PLDT 5,000
Salaries of office personnel 25,000
Other expenses of operations:
Paid to VAT taxpayers 3,000
Paid to non-VAT taxpayers 8,000

Note: When the gross receipt was subject to withholding income tax determine the gross
receipts before withholding tax by dividing the amount received by the rate of withholding
tax

The computation for the value-added tax payable would be:

Output taxes:
On professional fees received:
(180,000/90%) ₱200,000
(200,000 x 12%) ₱ 24,000
On reimbursements received from
clients for expenses chargeable to clients, billed to
Mr. AyeBee (6,000 x 12%) 720
Total ₱ 24,720
Less: Input taxes
 On expenses chargeable to client, billed to Mr.
AyeBee (6,000 x 12%) 720
Purchase of computer (70,000 x 12%) 8,400
Purchase of office supplies (1,000 x 12%) 120
Purchase of water (10,000 x 12%) 1,200
Purchase of electricity (20,000 x 12%) 2,400
Payments to PLDT (5,000 x 12%) 600
Payments for other expenses of operations, paid
to VAT taxpayers (3,000 X 12%) 360 13,800
Value-added tax payable ₱ 10,920

Withholding of Value-Added Tax

According to Reyes (2019), the Government or any of its political subdivisions,

instrumentalities or agencies, including government-owned or controlled corporations will,
before making payment on account of services rendered by contractors which are subject
to value-added tax, deduct and withhold a final withholding value-added tax at the rate of
five percent (5%) of the gross payment. When a sale is subject to a final value-added tax
under the above rule, such sale is not included anymore in the month-end and quarter-
end computations for the value added tax payable. The tax withheld will be considered a
cost or an expense by the seller.

Post-Lesson Reflection

1. What concept did you learn today?

________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
____________________________.

2. What aspects of the lesson do you believe are most useful in your understanding
of the subject matter?
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
____________________________.

Post-Assessment Activity 3: Choose the best possible answer and provide solutions
for what is asked.

A- A VAT-registered taxpayer engaged the services of a non-resident service provider.

The contract price was ₱500,000 which was paid by the VAT-registered taxpayer in
full. How much was the amount of withholding VAT to be withheld by the VAT-
registered taxpayer using 12% VAT rate?
 a. 60,000
b. 50,000
c. 35,000
d. 26,000

B- Using the same data in the preceding number, how much input tax could be claimed
as credit by the VAT-registered taxpayer using 12% VAT rate?
a. 60,000
b. 50,000
c. 35,000
d. 26,000
 MODULE 4. COMMON VAT RULES ON SALE OF GOODS, PROPERTIES
AND SERVICES-THE SALES INVOICE
Duration: 3 hours

Introduction

This module provides an explication of the basic concepts underpinning rules on value-
added tax with regard to sale of goods, properties and services. This module provides a
strong base on which students can then build to develop their understanding of VAT on
sales invoice and receipts, through tax formulas, illustrative problems and solutions for
practice.

Objectives
In this module, you will be able to:
❖ Determine the VAT on sales invoices by mere application of tax formula
❖ Apply VAT exemptions, discounts on sales to senior citizens
❖ Compute for VAT-exempt sale

Pre-test Assessment Activity 4: Encircle the best answer

1. Which of the following sales to senior citizens shall not be exempt from VAT?
Reference: Revenue Memorandum Circular No. 36-2012
a. Sale of food, drinks, dessert and other consumable items served by the
establishments, including value-meals and promotional meals, offered for
consumption of the general public
b. Sale of single serving seat meals with beverage for an individual senior citizen
c. Bulk orders which are within the context of pre-contracted or pre-arranged group
meals or packages
d. Sale of medicines from drug stores, hospital pharmacies, medical and optical
clinics and similar establishments including non-traditional outlets dispensing
medicines
2. The following sales are made by a VAT-registered seller of goods:
I - Sale of prescription medicines to a Person With DisabilitY (PWD)
II - Sale of rice, corn and other basic necessities to a Senior Citiien
a. Both I and II are VAT-exempt
b. Both I and II are not VAT-exempt
c. Only I is VAT-exempt
d. Only II is VAT-exempt
Reference: Section 4.109 - 1 (w), Revenue Regulations No. 13-2018

Lesson 1- Billing of the Tax in the Sales Invoice

Quick Facts:
• The value-added tax must be shown in the sales invoice or official receipt as a
separate item and at the correct amount.

• What materializes if the value-added tax is not displayed in the invoice or receipt
as a separate item, or there is a display of the value-added tax but at the wrong
amount? The total in the invoice or receipt will be considered as inclusive of the
value-added tax, and the value-added tax component of the total will be computed
by multiplying such total by the fraction of 12/112
Example 4-1. A selling price of ₱1,000, VAT not included, was billed in a sales invoice or
official receipt which showed a total only of ₱1,120. How much was the output value
added tax on the sale?
Value-added tax:
₱ 1,120 x 12/112 P 120.00

Example 4-2. Based on the following data, determine the correct value-added tax on the
sale.
Selling price ₱1,000.00

Value-added tax 140.00

Total ₱1,140.00

How much was the correct value-added tax on the sale?

Answer: The correct value-added tax was ₱1,140 x 12/112 = ₱122.14
Example 4-3. A selling price of ₱1,000 was reflected in a sales invoice as follows:
Selling price ₱1,000.00

Value-added tax 110.00

Total ₱1,110.00

How much was the correct value-added tax on the sale?

Answer: The correct value-added tax was ₱1,110 x 12/112 = ₱118.93

Lesson 2- The Sales Invoice

There are two kinds of sales invoices currently in use, specifically:

a) BIR-approved pre-printed sales invoice; and
b) BIR-approved computer generated sales invoice
c) Within five (5) years from the implementation of the TRAIN LAW in 2018, and upon
the establishment of a system capable of storing and processing the required data,
the Bureau of Internal Revenue will require:
✓ Taxpayers engaged in e-commerce, and
✓ Taxpayers under the Large Taxpayers Service
✓ to issue electronic receipts or sales or commercial invoices in lieu of manual
receipts or sales or commercial invoices.

Taxpayers not covered by this mandate may issue electronic receipts or sales or
commercial invoices in lieu of manual receipts and sales and commercial invoices.

VAT-exemption on sales to senior citizens

Senior citizens are exempt from the value-added tax on the purchases of the following
goods and services:
✓ Medicines and essential medical supplies, accessories and equipment;
✓ fees of attending physicians; medical, dental and diagnostic and laboratory fees;
 ✓ fares for transportation; charges in utilization of services of hotels, restaurants and
similar establishments;
✓ admission fees in cinemas, theaters and other places of culture, leisure and
amusement; and funeral and burial services (RA 9994, Expanded Senior Citizens'
Act) , (which would, if not given to senior citizens, be vatable sales of goods or
services).

How is this reflected? (Refer to Examples 4-4 to 4-6)

A Sample Image of Pre-printed BIR-approved Sales Invoice

 A Sample Image of Computer-generated Sales Invoice

Example 4-4. A senior citizen purchased from the Merqyury Drug Store a certain medicine
for his high blood pressure. The drug store sells this drug to the general public at ₱1,120,
value-added tax included. What must be shown on the sales invoice?
Selling price, VAT included ₱1,120

Less: Value-added tax (1,120 x 12/112) 120

Balance 1,000

Less: 20% discount to senior citizen 20

Selling price ₱ 980

Example 4-5. A family, consisting of two senior citizens and four other members, ate at
Maxxie restaurant. VAT not included, the food of senior citizen No. 1 was worth P300.
Senior citizen No. 2 ordered food amounting to P200 also VAT not included. The billing
for food of the other four members was for P500. What must be shown in the sales
invoices?
On the sales invoice for senior citizen No.1:
Food ₱300
Less: 20% discount (60)
VAT 0
 Amount ₱240

On the Sales Invoice for Senior Citizen No. 2:

Food ₱200

Less: 20% discount (40)

VAT __0__

Amount ₱160

On the sales invoice for the other three members of the family:

Food ₱500

VAT at 12% 60

Total ₱560

A Sample Image of Pre-printed Sales Invoice Issued to a Senior Citizen

Steps in determining the correct amount to be reflected on the sales invoice of a senior
citizen:

Step 1- Compute the VAT component on the stated selling price*;

Step 2- Remove the VAT component of the stated price*;
Step 3- On the balance after Step 2, deduct/remove the 20% discount;
Step 4- After Step 3 is the price the senior citizen will pay;
Step 5- Ask for the senior citizen ID;
Step 6- Get the senior citizen ID number;
Step 7- Have the senior citizen sign the sales invoice.
*12/112 x ₱2,400 = VAT of ₱257.14

Example 4-6. It is not uncommon that, assuming a sale to two senior citizens, there is
one sales invoice only, each citizen with a twenty percent (20%) discount, and each
senior citizen asked to sign the sales invoice on a blank above his or her printed name
(Reyes, 2019).

Example 4-7. Mr. Akorn is subject to the value-added tax. He has an output tax on one
sale' made by him at ₱1,200 and an input tax at ₱360 on the purchase of the article sold.
On assumed cash transactions, on a per transaction basis:

Output taxes ₱1,200

Less: Input taxes 360
Value-added tax payable ₱ 840

Post-Lesson Reflection

1. What concept did you learn today?

________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
____________________________.

2. What aspects of the lesson do you believe are most useful in your understanding
of the subject matter?
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
____________________________.

Post-Assessment Activity 4: Choose the best possible answer and provide solutions
for what is asked.

The Mang Kannor Pizza, VAT-registered issued the following official receipt to a customer
who was with a senior citizen:

Ordered by a senior citizen

Parma pizza ₱880.00
 Mango basil 180.00 ₱1,060.00
Ordered by the non-senior citizen
House salad 420.00
Beef rendang 590.00
Avocado smoothie 190.00 1,200.00
Total sales (VAT inclusive) ₱2,260.00

Question 1 - How much is the VAT-exempt sale?

a. ₱2,017.85
b. ₱1,060.00
c. ₱946.43
d. None of the choices

Question 2 - How much is the sales discount for senior citizen?

a. ₱403.57
b. ₱212.00
c. ₱189.29
d. None of the choices

Question 3 - How is the service charge assuming the bill is net of the 10%
service charge?
a. ₱201.77
b. ₱182.85
c. ₱164.67
d. None of the choices
Question 4 - How much is the total amount due?
a. 2260.00
b. 2,140.00
c. 2,017.85
d. None of the choice
 MODULE 5. COMMON VAT RULES ON SALE OF GOODS, PROPERTIES AND
SERVICES — MONTHLY DECLARATIONS AND QUARTERLY
RETURNS
Duration: 3 hours

Introduction

This module provides a detailed discussion of the common VAT rules on sale of goods,
properties and services — monthly declarations and quarterly returns. This module
provides a strong theoretical foundation on which students can then build to develop their
understanding of VAT rules through illustrative problems and solutions for eventual
application.

Objectives
In this module, you will be able to:
❖ Apply VAT rules on sale of goods, properties, and services with regard to monthly
declarations and quarterly return
❖ Calculate the value-added tax payable at the end of the quarter shown in the
quarterly return

Pre-test Assessment Activity 5: What compliance activities should a VAT taxpayer,

after registration as such, do promptly or periodically? Place a check mark (√) on the
box that corresponds to the statement that complies with BIR rules on Filing of the Monthly
Value-added Tax Declaration.
1. Filing of the Monthly Value-added Tax Declaration on or before the 20th day
following the end of the taxable month (for manual filers)/on or before the
prescribed due dates enunciated in RR No. 16-2005 (for e-filers) using BIR
Form No. 2550M and of the Quarterly VAT Return on or before the 25th day
following the end of the taxable quarter using BIR Form No. 2550Q.
2. Monthly Value-added Tax Declaration should reflect gross receipts (for
seller of service)/ gross sales (for seller of goods) and output tax (VAT on
sales)
3. Monthly Value-added Tax Declaration should reflect purchases of goods
and services made in the course of trade or business/exercise of profession
and input tax (VAT on purchases),
4. Monthly Value-added Tax Declaration should reflect other allowable tax
credits as in the case of advance VAT payment and VAT withheld by
government payors, and VAT payable or excess input VAT, whichever is
applicable, with the accredited agent banks (AABs) of the BIR or Revenue
Collection Officers (RCOs) of the BIR (in areas without AAB), for returns with
payment, or with the RDO/LTDO having jurisdiction over the taxpayer (home
RDO/LTDO), for returns with payment.
5. The monthly VAT Declaration and the Quarterly VAT Return shall reflect the
consolidated total for all the taxable lines of activity and all the establishments
- head office and branches.

Lesson 1- VAT and Tax Periods

The value-added tax year must coincide with the income tax year. Thus, the quarterly
VAT periods are, assuming the quarterly income tax periods are:
 The income tax year ends: December 31 April 30
VAT first quarter ends March 31 July 31
VAT second quarter ends June 30 October 31
VAT third quarter ends September 30 January 31
VAT fourth quarter ends December 31 April 30

All persons liable to the value-added tax will pay the tax for each of the first and second
months of a quarter, based on the transactions of the month, as reflected in the Monthly
VAT Declaration, within twenty (20) days after the end of the month. If the output taxes
exceed the input taxes, there will be a value-added tax payable. If the input taxes exceed
the output taxes, there will be no value-added tax payable. The excess of input taxes
over the output taxes of the first month will be carried over to the second month to the
third month (end of quarter).

Quick Facts:
❖ The monthly declarations are on transactions of the month.
❖ The quarterly return is on the transactions of the quarter.
❖ VAT paid for the first and the second months are deducted from the VAT of the
quarter.
❖ A VAT taxpayer has two Monthly VAT Declarations and a Quarterly VAT return.

Within twenty-five (25) days after the end of the quarter, there will be a Quarterly VAT
return, reflecting the cumulative transactions of the quarter. (Hence, the transactions of
the first and second months are again reported and the output and input taxes on them
again reported.

Total output taxes for the quarter [less] total input taxes for the quarter [equals] value-
added tax payable for the quarter). Value-added tax payable for the quarter (less) the
value-added tax paid under the monthly declarations for the first and second months of
the quarter (equals) value-added tax payable at the end of the quarter. Consequently, on
assumed figures:

Output taxes of the quarter ₱90,000

Less: Input taxes of the quarter 65,000
Value-added tax for the quarter ₱25,000
Less: Value-added tax paid under the monthly declarations for
the 1st and 2nd months of the quarter 18,000
Value-added tax payable at the end of
the quarter shown in the quarterly return ₱ 7,000

If the aggregate of value-added tax paid under the first and second monthly declarations
exceeds the value-added tax payable for the quarter, the excess will be carried over to
the next month to offset the output taxes that month (Refer to Figure 5-1-1, for a more
specific illustration).

Example 5-1.
Output taxes of the quarter ₱80,000
Less: Input taxes of the quarter 65,000
Value-added tax payable for the quarter as shown in the quarterly 15,000
return
 Less: Value-added tax paid under the monthly declarations for the
first and second months of the quarter 20,000
Excess value-added tax paid within the quarter (for use in the next
month/quarter) ₱ 5,000

Figure 5-1-1. Monthly VAT Declarations and Quarterly VAT Returns

Reference: Reyes, V. (2019). A Study on Buiness Taxes and Transfer Taxes.

Post-Lesson Reflection

1. What concept did you learn today?

________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
____________________________.

2. What aspects of the lesson do you believe are most useful in your understanding
of the subject matter?
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
____________________________.
Post-Assessment Activity 5: Read each statement below carefully. Place a T on the
line if you think a statement it TRUE. Place an F on the line if you think the statement is
FALSE.
______1. All persons liable to the value-added tax will pay the tax for each of the first
and second months of a quarter, based on the transactions of the month, as
reflected in the Monthly VAT Declaration, within twenty (20) days after the end of
the month.
______2. Within forty-five (45) days after the end of the quarter, there will be a
Quarterly VAT return, reflecting the cumulative transactions of the quarter.
______3. If the aggregate of value-added tax paid under the first and second monthly
declarations exceeds the value-added tax payable for the quarter, the excess will
be carried over to the next month to offset the output taxes that month.
______4. A VAT taxpayer has two Monthly VAT Declarations and a Quarterly VAT
return.
______5. The quarterly return is on the transactions of the quarter.
 MODULE 6. COMMON VAT RULES ON SALE OF GOODS, PROPERTIES AND
SERVICES - INPUT TAX ON CAPITAL GOODS AND INPUT TAX ALLOCATION
Duration: 6 hours

Introduction

What comes to mind when we begin to talk about excess, unutilized input value-added
tax (VAT) that can be allowed as deduction to gross income for tax purposes? You may
infer that these may include the following: input VAT from VAT exempt transactions, input
VAT of non-VAT registered persons, and the excess of the actual input VAT from
government sales. All these will transpire, as you carefully analyze cases and examples
provided in this module. In addition, a comprehensive discussion of input tax on capital
goods and progress billings, input tax allocation, transitional input tax and 12% rated
sales with 0% rated sales will help you understand the principle behind accounting for
VAT in the Philippines.

Objectives
In this module, you will be able to:
❖ Define input tax on capital goods and aggregate costs of assets in terms of useful
life;
❖ Amortize input taxes in accordance with tax rules;
❖ Compute the value-added taxes payable

Pre-Assessment Activity 6: Write the letter of the correct answer in the space provided.
______1. Any input tax on the purchases or importation of goods in the course
of trade or business shall be creditable against the output tax if:
I- evidenced by a VAT invoice or official receipt.
II- issued by a VAT-registered person.
a. I and II are correct
b. Neither I nor II is correct
c. Only I is correct
d. Only II is correct
______2. Where a VAT-registered person purchases or imports capital goods, which
are depreciable assets for income tax purposes, the aggregate acquisition cost of
which (exclusive of VAT) exceeds ₱1,000,000 in a calendar month regardless of
the acquisition cost of each capital good, the input tax on purchases or imports of
capital goods shall be claimed as credit:
a. over a period of 60 months regardless of the estimated life.
b. over a period of 60. months unless the estimated life is less than 5 years in
which case over the actual number of months comprising the estimated life.
c. in full in the month acquired, if the estimated life is less than 5 years.
d. in full in the quarter acquired unless the estimated life is less than 5 years,
in which case over the actual number of months comprising the estimated
life.
______3. The aggregate acquisition cost of a depreciable asset in any calendar
month refers to the:
a. total price agreed upon for one or more assets acquired during the
calendar month.
b. payments actually made during the calendar month.
c. total price agreed upon. for one asset only acquired during the calendar
month.
 d. initial payments made if purchased on installment plan.
______4. It is the cost of construction work which is not yet completed.
a. Construction in progress
b. Capital good
c. Work in process
d. None of the choices
______5. A VAT-registered domestic carrier operating air, land and sea transport
equipment acquired vehicles for use in its operation to transport goods and
cargoes. The domestic carrier:
a. can claim input taxes on the said acquisitions.
b. cannot claim input taxes on the said acquisitions.
c. can claim input taxes only on the acquisitions of air and sea transport
vehicles.
d. can claim input taxes only on the acquisition of land transport vehicles.
Lesson 1 – Input Tax on Capital Goods

Capital goods refer to goods with estimated useful life of more than one year and which
are subject to depreciation (or amortization) under the income tax law, used directly or
indirectly, in the production and sale of taxable goods or services.

Figure 6-1. Input tax on capital goods.

If the aggregate cost of the capital goods purchased or imported in a calendar

month does not exceed one million pesos (₱1,000,000), the input tax of each asset
will be allowed in the month of purchase.
If the aggregate cost of the capital goods purchased or imported in a calendar month
exceeds one million pesos (₱1,000.000), the input tax on each asset will be amortized
monthly, over its life in months, but not to exceed 60 months specifically, over the life
of the asset in number of months, or 60 months, whichever is shorter.

Quick Facts:
❖ Consider the aggregate of costs of ALL capital goods purchased or imported
WITHIN THE MONTH:
✓ If not exceeding ₱1,000,000, input tax on each, upon purchase.
✓ If exceeding 1,000,000, amortize the input taxes.

Example 6-1. A VAT taxpayer made a purchase on June 2, 2019 of machinery for use in
his business:
a. If the acquisition cost, VAT not included, was ₱500,000 and its useful life is ten
years, how much was the input tax for June 2019?
Answer: ₱500,000 x 12%, or ₱60,000.
b. If the acquisition cost, VAT not included, was ₱3,000,000 and the useful life is 10
years, how much was the input tax for June 2019?
Answer: ₱3,000,000 x 12% is 360,000; 360,000 divided by 60 months is ₱6,000.
c. If the acquisition cost, VAT not included, was ₱3,600,000 and the useful life was 3
years, how much was the available input tax for June 2019?
Answer: ₱3,600,000 x 12% is ₱432,000; ₱432,000/36 months is ₱12,000.

Example 6-2. Alpah Co. made acquisitions of fixed assets, on the dates, and at the costs,
VAT not included, mentioned below, with journal entries below:
 Asset 1: June 5, 2019 (asset life of 6 years) ₱300,000
Asset 2: June 15, 2019 (asset life of 2 years) 600,000
Asset 3: June 25, 2019 (asset life of 4 years) 480,000

June 5 Fixed asset 300,000

Input taxes 36,000
Cash/Payable 336,000
Acquisition of Asset No. 1

June 15 Fixed asset 600,000

Input taxes 72,000
Cash/Payable 672,000
Acquisition of Asset No. 2

June 25 Fixed asset 480,000

Input taxes 57.600
Cash/Payable 537,600
Acquisition of Asset No.3

The aggregate costs of all acquisitions during the month exceeded ₱1,000,000. The input
taxes will be amortized.

Amortization of input taxes 06/05/19 to 06/05/21 to 06/05/23 to

06/05/21 06/05/23 06/05/25
Asset No. 1 — life of 6 years
(₱300,000 x 12% is VAT of ₱36,000)
Per month (₱36,000/60 months) ₱ 600 ₱ 600 ₱ 600
Asset No. 2 — life of 2 years
(₱600,000 x 12% is VAT of 72,000)
Per month (₱72,000/24 months) 3,000 Expired Expired
Asset No. 3 — life of 4 years
(₱480,000 x 12% is VAT of ₱57,600)
Per month (₱57,600/48 months) 1,200 1,200 Expired
Amortization per month of use ₱4,800 ₱1,800 ₱ 600

Input taxes in June 2019 for aquisitions

(₱36,000+₱72,000+₱57,600) ₱165,000
Less: Amortization, June 2019 4,800
For Amortization after June 2019 ₱160,800

Journal entry:
June 30, 2019 Debit Credit
Deferred input tax ₱160,800
Input taxes ₱160,800

When an asset with an unamortized input tax is retired from business, the unamortized
input tax must be closed against the output taxes.
Journal entry if amortized in July 2019: Debit Credit
Output taxes (on sales of the month) xxx
Input taxes (on purchases of the month) xxx
 Deferred input taxes ₱160,800

Figure 6-2.

Construction In progress (CIP) — of fixed asset. CIP is the cost of

construction which is not yet completed. CIP is considered a purchase
of services, the value of which will be determined based on the
progress billings. Input taxes on such transaction will be recognized in
the month that payment was made on the progress billing. In case of a
contract for the sale of service where only labor will be supplied by the
contractor and the materials will be purchased by the contractee from
other suppliers, input tax on the labor will be recognized in the month
that payment was made based on progress billings, while input tax on
the purchase of materials will be recognized at the time that the
materials were purchased.

Example 6-3.

a. If there was a CIP (construction in progress) for a depreciable asset for use in
business with the following data: The taxpayer will purchase materials as needed,
and the VAT contractor will furnish labor for a contract price of ₱2,000,000, on
which there would be progress billings. If in a month, the taxpayer purchased
materials (VAT not included) of ₱500,000, and paid the contractor P400,000 (VAT
not included) on the progress billing, how much will be the input taxes? Answer:
₱108,000.

On the materials (₱500,000 x 12%) ₱ 60,000

On the progress billings (400,000 x 12%) 48,000

Total input taxes ₱108,000

b. Mr. Aopa entered into a contract with a building contractor. The contractor will
furnish materials and labor, and Mr. Aopa will pay according to the progress billings
of the contractor. The total contract price was ₱10,000,000. For the month of June
2019, Mr. Aopa paid the contractor on a progress billing of ₱2,000,000. How much
is the value- added tax? Answer: ₱2,000,000 x 12%, or ₱240,000.

Quick Fact:
❖ The rule on construction in progress will apply even if the total payments for the
month on the progress billings and materials exceeded ₱1,000,000.

Lesson 2 - Input Tax Allocation

An Important Rule to Remember: Allocation will be on the basis of sales.
a. When a taxpayer with a VAT business and a non-VAT business makes a purchase
during a month from a VAT registered person, for use in both his VAT and non-
VAT business, the input tax on the purchase will be allocated between the VAT
and non-VAT business.
b. When a taxpayer with domestic and export sales makes a purchase during a
month from a VAT-registered person for his domestic and export sales, the input
tax on the purchase will be allocated between the 12% rated sales and the 0%
rated sales. The input tax, allocable to export sales is refundable or creditable
against other internal revenue taxes due from the taxpayer.
c. When a VAT-registered person sells goods or properties or services to the
Government or any of its political subdivision, instrumentalities or agencies,
including government-owned or controlled corporations (GOCCs), (subject to 5%
final VAT) the input taxes on purchases will be allocated between the sales to the
public and the sales allocated to Government, etc. and the VAT input tax
allocated the latter will be cost or expense to the seller.

VAT business with non-VAT business

Example 6-4. Ceeh Co. has Business No. 1, which is subject to the value-added
tax, and Business No. 2, which is not subject to the value-added tax. Refer to the data for
the month of March 2019 below:
03/01 Purchases of goods from VAT suppliers for VAT business, VAT
not included 200,000
Purchase of goods from non-VAT suppliers, for non-VAT
03/03 business, VAT not included 180,000
Purchase of supplies from VAT suppliers, for use of VAT and
03/15 non-VAT business, VAT not included 20,000
03/16 Sales, VAT business, VAT not included
03/25 Sales, non-VAT business, invoice price

The value-added tax payable would have been computed as:

Lesson 3 - 12% rated sales with 0% rated sales

Example 6-5. Diego Lalu Co., a VAT taxpayer, had the following data on sales, and
purchases from VAT suppliers, VAT not included, in a month:
Sales, domestic ₱2,000,000
Sales, exports 8,000,000
Purchases of goods for domestic sales 600,000
Purchases of goods for export sales 2,400,000
Purchases of equipment, for use of both
domestic and export sales 900,000

The input tax allocation would have been computed thus:

Sales Domestic Export
Output taxes
(2,000,000 x 12%) ₱ 240,000
(8,000,000 x 0%) 0
Less: Input taxes —
On goods (600,000 x 12%) (72,000)
On goods (2,400,000 x 12%) (288,000)
On equipment (900,000 x 12% is) ₱ 108,000
Sales, domestic 2,000,000
Sales, exports 8,000,000
Total ₱10,000,000
(2,000,000/10,000,000x108,000) (21,600)
(8,000,000/10,000,000x108,000) ________ (86,400)
VAT payable ₱ 146,400
Input tax refundable, or creditable ₱ 374,400
against other internal revenue taxes

The input tax of ₱374,400 may be refunded separately of a VAT payment of ₱146,400,
OR credited against the VAT payable on domestic sales:
Value-added tax payable on domestic sales ₱146,400

Less: Value-added tax refundable on exports (374,400)

Net VAT refundable (₱228,000)

The VAT refundable of ₱374,400 may also offset not a VAT, but
against any other internal revenue tax (for instance, against income tax
due).

Sales to the public with sales to the Government

Example 6-6. In a month, E Co. a VAT taxpayer had:

Sales to the public ₱3,000,000

Sales to the Government 2,000,000

Total ₱ 5,000,000

Purchases 2,400,000
 Input tax on purchases of 2,400,000

(2,400,000x12%) ₱ 288,000

The value-added tax payable on the sales to the public:

Output taxes (3,000,000 x 12%) 360,000

Less: Input taxes on sales to public

(3,000,000/5,000,000 x 288,000) 172,800

Value-added tax payable ₱ 187,200

Lesson 4 - Transitional Input Tax.

Transitional input tax. When a taxpayer who is not subject to the value-added tax
becomes subject to the value-added tax because of the following:
a. The gross sale exceeded three million pesos (₱3,000,000), or
b. The taxpayer being exempt from the value-added tax system, and opted to be
registered under the value-added tax system; the taxpayer will be allowed an
input tax on his inventory on the transition date.

For a previously VAT-exempt person who transitioned into a VAT taxpayer, he will be
allowed transitional input taxes on his inventory on the transition date of:
a. goods,
b. materials, and
c. supplies,
equivalent to two percent (2%) of the inventory value, or the value-added tax actually
paid on it, whichever is higher.

However, there is no transitional input tax on:

a. services;
b. capital goods;
c. goods that are VAT exempt under Section 109 of the National Internal Revenue
Code.

Example 6-7. Mr. Asev began his business as as trader, but as a non-VAT taxpayer. In
his first calendar year of operations he was not subject to the value-added tax. He became
subject to the value-added tax on January 1, 2019. On December 31, 2018, he had an
inventory with valuation in the Statement of Financial Position from purchases from VAT
suppliers, VAT included, of ₱5,600. In January 2019 his gross sales amounted to
₱120,000, and purchases of P40,000 from VAT suppliers, value-added tax not included.
The value-added tax payable for the January 2019 would have been computed thus:
Output taxes (120,000 x 12%) ₱14,400

Less: Input tax on purchases of ₱4,800

January (40,000 x 12%)

Transitional input tax on

 December 31, 2018 inventory —

Statutory provision (5,000 x 2%) ₱100

Actually paid (5,600 x 12/112) ₱600

Whichever is higher ₱ 600 5,400

Value-added tax payable ₱ 9,000

Quarterly Summary List of Sales and Purchases

All persons liable for value-added tax, such as manufacturers, wholesalers, service
providers, among others, are required to submit Quarterly Summary List of Sales and
Quarterly Summary List of Purchases. The Summary Lists will be submitted through
Compact Disk-Recordable (CDR) medium. (Rev. Reg. No. Books of Accounts 1-1012).

Books of Accounts

The books of accounts of a VAT taxpayer must be registered with the Bureau of Internal
Revenue before they are used.

The Purchases Book and the Sales Book

The purpose of a Purchase Book is to have in one book of accounts, clearly classified, in
columns, all purchases on account with value-added tax, the value-added tax on them,
and purchases without a value-added tax. The total of input taxes on purchases on
account of any month is shown under the column Input Taxes.

The purpose of a Sales Book is to have in one book of accounts, unmistakably classified,
in columns, all account sales subject to the value-added tax, the output taxes on them,
and sales not subject to the tax. The total of the output taxes on the sales on account in
a month is shown under the column Output Taxes.

Other books of accounts of the taxpayer (example: cash receipts book, cash
disbursement book, and general journal) may also have entries involving the value-added
tax.

Example 6-8. Mr. M a VAT taxpayer had a Purchase Book and a Sales Book, with entries
shown in Figure 6-3 and Figure 6-4. The value-added tax payable from cash purchases
and cash sales will be recorded in the General Journal.

The Purchase Book shows a total input taxes of ₱30,000 and the Sales Book shows a
total of Output Taxes of ₱84,000. Assuming that cash purchases and cash sales in the
General Journal had Input Taxes of ₱40,000 and Output Taxes of ₱100,000, the month-
end computation will be:
Figure 6-3. An Example of a Purchase Book
Credit Debit Debit Other
Accounts Purchases Input Debits
Payable Taxes
April 2 Purchase, Mr. Q ₱112,000 ₱100,000 ₱12,000
April 9 Purchase, Mr. R 168,000 150,000 18,000
April 30 Expenses 30,000 _________ ____________ ₱ 30,000
Total ₱310,000 ₱250,000 ₱ 30,000 ₱ 30,000
Total for the month ₱310,000 ₱250,000 ₱ 30,000 ₱ 30,000

Figure 6-4. An Example of a Sales Book

Debit Credit Credit Other
Accounts Sales Output Credits
Receivable Taxes
April 10 Sale to Mr. A ₱336,000 ₱300,000 ₱36,000
April 20 Sale to R Co. 448,000 400,000 48,000
Total for the month ₱784,000 ₱700,000 ₱ 84,000

Output taxes (84,000 + 100,000) ₱184,000

Less: Input taxes (30,000 + 40,000) 70,000
Value-added tax payable ₱144,000

Post-Assessment Activity 6: Write the letter of the correct answer in the space
provided.
______1. Which of the following shall be entitled to transitional input tax credits on
beginning inventories?
I. Taxpayers who became VAT-registered persons upon exceeding the minimum
turnover of ₱3,000,000 in any 12-month period
II. Taxpayers who voluntarily register even if their turnover does not exceed
₱3,000,000 (except franchise grantees of radio and television, broadcasting
whose threshold is ₱10,000,000)
a. Both I and II
b. Neither I nor II
c. I only
d. II only
______2. The transitional input tax shall be:
a. four percent (4%) of the value of the beginning inventory on hand or
actual VAT paid on such goods, materials and supplies, whichever is lower.
b. actual VAT paid on goods, materials and supplies comprising the beginning
inventory.
c. two percent (2%) of the value of the beginning inventory on hand or actual
VAT paid on such goods, materials and supplies, whichever is higher.
d. none of the choices.
______3. Should actual input VAT exceed standard input tax (7% of gross
payments):
a. the excess may form part of the sellers' expense or cost.
b. the difference must be closed to expense or cost.
c. the excess shall be claimed as input tax credit from output tax on other
sales/receipts.
d. none of the choices.
______4. If actual input VAT is less than the standard input tax (7% of gross
payment):
a. the excess may form part of the sellers' expense or cost.
b. the difference must be closed to expense or cost.
c. the excess shall be claimed as input tax credit from output tax on other
sales/receipts.
d. none of the choices.
______5. The government or any of its political subdivisions, instrumentalities
or agencies including GOCCs, as well as private corporations
individuals, estates and trusts whether large or non-large taxpayers,
shall withhold 12% VAT with respect with which of the following
payments?
a. Lease or use of properties or property rights owned by non-residents
b. Services rendered to local insurance companies, with respect to
reinsurance premiums payable to non-residents
c. Other services rendered in the Philippines by non-residents
d. All of the choices
 MODULE 7. VALUE-ADDED TAX ON IMPORTATION
Duration: __ hours

Introduction

Two questions must be carefully answered when value-added tax on importation is taken
into account. First, when a shipment of goods from abroad arrived in the Philippines
and placed under the premises of the Bureau of Customs, is there already an importation?
Second, when a shipment of goods from abroad arrived in the Philippines and was
removed by the importer from customs custody for transfer to his place of business, is
there already an importation? All of these questions will be addressed in this module.
Theoretical discussions go with tax rules, illustrative cases, and procedural solutions to
aid application and stay on the path to mastery.

Objectives

In this module, you will be able to:

❖ Apply tax rules on landed cost, custom and tariff duties on importation;
❖ Identify legitimate expenses attributable to importation;
❖ Determine the tax on importation of merchandise

Pre-Assessment Activity 7: Read each statement below carefully. Place a T on the line
if you think a statement it TRUE. Place an F on the line if you think the statement
is FALSE.
______1. Customs and tariff duties are based on quantity or volume.
______2. Interest and bank charges are typical and legitimate expenses of
importation.
______3. Importation is not yet completed when the goods brought into the
Philippines are removed from customs custody.
______4. A shipment of goods from abroad arrived in the Philippines and in the
premises of the Bureau of Customs is an importation.
______5. When the customs and tariff duties are based on the value of the
importation, the tax base (counterpart of landed cost) is the dutiable value of the
importation, as determined by the Bureau of Customs, excluding all legitimate
expenses of importation prior to the removal of the goods from customs custody

Lesson 1 - The tax rate and tax formula

The value-added tax rate is twelve percent (12%). The tax is applied on:
a. Landed cost. The term "landed cost" (customs and tariff duties are based on
quantity or volume) of importation means the invoice cost of the goods imported,
plus all the legitimate. expenses of importation prior to the release of the goods
from customs custody.
b. When the customs and tariff duties are based on the value of the importation,
the tax base (counterpart of landed cost) is the dutiable value of the importation,
as determined by the Bureau of Customs, plus all legitimate expenses of
importation prior to the removal of the goods from customs custody.
The following are typical and legitimate expenses of importation: insurance, freight,
interest, stamps, bank charges, customs duties, customs brokerage fee, wharfage dues,
excise tax, if any, and processing fee. Prior to removal from customs custody, the value-
added tax, the excise tax, if any, and the customs duty must all be paid. The value-added
tax paid on an importation is an input tax of the importer which is creditable against his
output taxes.

Quick Facts:
❖ A shipment of goods from abroad arrived in the Philippines. It is in the premises
of the Bureau of Customs. Is there already an importation? None.

❖ A shipment of goods from abroad arrived in the Philippines. It was removed by the
importer from customs custody for transfer to his place of business. Is there
already an importation? Yes.

Remember: Importation is completed when the goods brought into the Philippines
are removed from customs custody (Reyes, 2019).

Example 7-1. Abakkaddaa Co. made an importation of merchandise to be sold. The

customs and tariff duties were based on the quantity of the imported goods. The invoice
cost was ₱4,500,000. Freight was ₱400,000 and marine insurance was ₱100,000.
Legitimate expenses on the importation prior to removal from customs custody amounted
to ₱500,000. The tax on the importation was ₱660,000, and computed as follows:

Invoice cost of the preparation ₱4,500,000

Freight 400,000
Marine Insurance 100,000
Other expenses on the importation 500,000
Landed cost ₱5,500,000
Value-added tax (5,500,000 x 12%) ₱ 660,000
Reference: Reyes, V. (2019). A Study on Business Taxes and Transfer Taxes Under the
TRAIN Law. GIC Enterprises & Co. Inc.

Example 7-2: Mr. Bibi made an importation of an article to be sold. The customs and tariff
duties were based on the value of the importation as determined by the Bureau of
Customs. The invoice cost of the importation was ₱4,900 and freight and insurance was
₱300. The, dutiable value of the importation was ₱5,000. All other legitimate expenses of
importation amounted to ₱500. The value-added tax on the importation at twelve percent
(12%) was ₱660, computed as follows:
Dutiable value of the importation ₱5,000
Legitimate expenses of importation 500
Tax base for value-added tax Value-added tax (5,500 X 12%) ₱ 660

Example 7-3. Mr. Yessy is a VAT importer-trader. He is a seasoned trader. He had the
following transactions in a month:
Sales ₱2,000,000
Local purchases from VAT suppliers 600,000
Importations, with a VAT payment of 50,000
The value-added tax payable was ₱118,000.
Output taxes (2,000,000 x 12%) ₱ 240,000
Less: Input taxes from Iocal purchases (600,000 x 12%) ₱72,000
 Input taxes from importations 50,000 122,000
Value-added tax payable ₱ 118,000

Post-Lesson Reflection

1. What concept did you learn today?

________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
____________________________.

2. What aspects of the lesson do you believe are most useful in your understanding
of the subject matter?
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
____________________________.

Post-Assessment Activity 7: Choose the best possible answer.

Question 1: The input tax credit on importation of goods or local purchases of

goods, properties or services by a VAT-registered person shall be creditable to
which of the following?
a. To the importer upon payment of VAT prior to the release of goods from
customs custody
b. To the purchaser of the domestic goods or properties upon consummation
of the sale
c. To the purchaser of services or the lessee or licensee upon payment of
the compensation, rental, royalty, or fee
d. All of the choices
Question 2: It means the VAT due or paid by a VAT-registered person on importation of
goods or local purchases of goods, properties, or services, including lease or use of
properties, in the course of trade or business.
a. Output tax
b. Input tax
c. Deferred input tax
d. VAT payable
Question 3: Which of the following transactions evidenced by a VAT invoice or official
receipt issued by a VAT-registered person in accordance with Secs. 113 and 237 of the
Tax Code shall be creditable against the output tax?
a. Purchase or importation of goods for sale
b. Purchase or importation goods for conversion into or intended to form part
of a finished product for sale, including packaging materials
c. Purchase or importation of goods for use as supplies in the course of
business
d. All of the choices
Reference: Section 4. 110-1 (a) (1), (2), (3) Revenue Regulations No. 16- 2005.
 MODULE 8. THE VALUE-ADDED TAX AND INCOME TAX OF AN INDIVIDUAL
Duration: __ hours

Introduction
The rules discoursed in this module apply only to individuals in business or practice of
profession. This module provides a detailed discussion about value added tax with
graduated income tax and value-added tax with the 8% or graduated income tax.
Formulas are provided to so that you may focus on application of tax rules, rather than
mere memorization.
Objectives
In this module, you will be able to:
❖ Understand the rules that apply to individuals in business or practice of
profession;
❖ Determine which tax rate to used and whom taxes are imposed;
❖ Acquire knowledge on the meaning and purpose of RMO No. 23-2018
Pre-Assessment Activity 8: Match column A with the correct answer on column B.

Column A Column B
1. Mixed income earners or individuals a. purely compensation
earning income both from compensation income earners
and self-employment (business or
practice of profession) will be subject to
this type of rate.

2. This tax rate can also be availed by self- b. graduated tax rate
employed individuals earning income
purely from self-employment, business,
and/or practice of profession whose gross
sales and/or receipts and other non-
operating income does not exceed the
new value-added tax (VAT) threshold of
₱3,000,000.

3. An individual who cannot opt for the right c. BIR Form 1905
percent income tax rate option. (application for
registration information
update)

4. This document must be filed by self- d. Partners of general

employed individuals who wish to avail the professional partnerships
eight percent 8% income tax rate. (GPPs)

5. An individual who also cannot opt for the e. 8% tax on gross sales or
right percent income tax rate option. receipts and other non-
operating income
exceeding ₱250,000.
Lesson 1 – Value-added tax with the graduated income tax

If the gross sales or gross receipts of the individual from business or practice of profession
exceed the VAT threshold of three million pesos (₱3,000,000), the income tax formula
would be:
Gross sales or receipts ₱ xxxx
Add: Non-operating gross receipts xxxx
Total xxxx
Less: Deductions for Itemized deductions for costs and expenses Or
Optional Standard Deduction at 40% of gross sales or receipts (xxxx)
Taxable Income ₱xxxx
Income tax is at the graduated income tax of 0% to 35% ₱xxxx

So that the individual is subject to:

a. Income tax at graduated rates; and
b. Value-added tax;

Example 8-1. Mr. Antmann is in business with gross sales of ₱4,000,000, and costs and
expenses of ₱2,100,000. Because the gross sales exceed the threshold of
₱3,000,000, his internal revenue taxes for the year will be:

o On the taxable income of ₱1,900,000 (₱4,000,000 less ₱2,100,000), the

graduated income tax will apply; (The income tax at 8%* on gross sales cannot
apply) and;
o on the gross sales of ₱4,000,000, there will be an output value-added tax of
₱48,000.

Quick Facts:
* In line with implementing Republic Act No. 10963 or the Tax Reform for Acceleration
and Inclusion (TRAIN) Act, the Bureau of Internal Revenue (BIR) issued Revenue
Memorandum Order (RMO) No. 23-2018 on May 21 prescribing the policies, guidelines
and procedures for availing of eight percent income tax rate option for individuals earning
from self-employment, business, and/or practice of profession. The RMO takes effect
immediately.

Under RMO No. 23-2018, the following policies and guidelines apply:

❖ The income of self-employed individuals—including single proprietors,

professionals, and mixed income earners—is generally subject to graduated
income tax rates, as provided in the Tax Code, as amended.

❖ Self-employed individuals earning income purely from self-employment, business,

and/or practice of profession whose gross sales and/or receipts and other non-
operating income does not exceed the new value-added tax (VAT) threshold of
₱3,000,000 can avail one of the following options: (a) Graduated income tax rates,
as provided in the Tax Code, as amended, or (b) Eight percent (8%) tax on gross
sales or receipts and other non-operating income exceeding ₱250,000.

❖ Mixed income earners or individuals earning income both from compensation and
self-employment (business or practice of profession) will be subject to the
 graduated tax rate, as provided in the Tax Code, as amended, on compensation
income under an employer-employee relationship.

The income from self-employment, on the other hand, is subject to the following rules:

If the gross sales or receipts and other non-operating income do not exceed the VAT
threshold, the individual has the option to be taxed as follows:

❖ Graduated income tax rates as provided under the Tax Code, as amended, or

❖ Eight percent (8%) income tax rate based on gross sales or receipts and other
non-operating income, in lieu of percentage tax, as provided in the Tax Code, as
amended.

❖ If the gross sales or receipts and other non-operating income exceed the VAT
threshold, the individual will be subject to graduated tax rates under the Tax Code,
as amended.

The following individuals cannot opt for the right percent income tax rate option. They will
be subject to graduated tax rates, as provided in the Tax Code, as amended.

❖ Purely compensation income earners;

❖ VAT-registered taxpayers, regardless of the amount of gross sales or receipts and

other non-operating income;

❖ Individuals exempt from VAT or other percentage taxes whose gross sales or
receipts and other non-operating income exceeded the VAT threshold during the
taxable year;

❖ Individuals subject to other percentage taxes under Title V of the Tax Code, as
amended, except for those subject under Section 116 of the same Code;

❖ Partners of general professional partnerships (GPPs); and

❖ Individuals enjoying income tax exemption

Self-employed individuals availing of the eight percent 8% income tax rate must signify
their intention by filing any of the following documents:

❖ New business registrant:

❖ BIR Form No. 1901 and/or 1701Q upon registration; or

❖ Initial quarter return (BIR Form No. 2551Q and/or 1701Q) of the taxable year after
the commencement of a new business or practice of profession.

❖ Existing individual business taxpayer:

❖ BIR Form 1905 (application for registration information update) at the beginning of
the taxable year, to end-date the form type of quarterly percentage tax, provided
 that the eight income tax rate is selected in filing the initial quarterly income tax
return for income tax purposes;

❖ First quarterly percentage tax return; and/or

❖ First quarterly income tax return.

Individuals availing of the eight percent income tax rate for the first time must also submit
their certificate of registration (COR) for updating together with the BIR Form 1905. The
application for registration information update (BIR Form 1905) signifying the intention to
avail of the eight percent income tax rate must be filed at the beginning of every taxable
year; otherwise, the graduated income tax rate applies. The availment is valid and
irrevocable for the taxable year when the said tax rate was chosen.

Lesson 2 - Value-added tax with the 8% or graduated income tax

If the gross sales or gross receipts of the individual from business or practice of profession
did not exceed the VAT threshold of three million pesos (₱3,000,000), and whereas the
taxpayer would have been subject to the 3% percentage tax, the taxpayer may opt to be
VAT registered, the income tax formula prescribed is*:

Gross sales or receipts ₱xxxx

Add: Non-operating, gross receipts xxxx
Total ₱xxxx
Less: Deduction of 250,000**
Taxable income ₱xxxx
Income tax at 8% ₱xxxx
With the value-added tax ₱xxxx
OR
Gross sales or receipts ₱xxxx
Add: Non-operating gross receipts xxxx
Total ₱xxxx
Less: Itemized deductions for costs and expenses Or
Optional Standard Deduction at 40% of gross
sales or receipts xxxx
Taxable income Income tax at graduated rates ₱xxxx
With the value-added tax ₱xxxx

Quick Facts:

* According to Reyes (2019), the 8% income tax can still apply because the VAT threshold
of ₱3,000,000 had not been reached.

**About the 8% Income Tax Rate -This filing option is available for self employed
individuals whose gross sales/receipts and other non-operating income for the year does
not exceed the three million peso (₱3,000,000) Value Added Tax (VAT) threshold, and
are not subject to Percentage tax. In this case, they have the option to avail any of the
following:

▪ Use graduated income tax rates (follow the regular rates for individuals)
 ▪ Avail for an 8% tax on gross sales/receipts in excess of ₱250,000

One the best advantages in availing this option is that once you availed the 8% tax rate,
you do not need to settle for a separate Percentage and Income Tax Return. Another
advantage is that with the 8% option, all you need is to do is add your gross sales/receipts
minus the non-taxable ₱250,000, then multiply the difference with the 8% tax rate.

Post-Lesson Reflection

1. What concept did you learn today?

________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
____________________________.

2. What aspects of the lesson do you believe are most useful in your understanding
of the subject matter?
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
____________________________.

Post-Assessment Activity 8: Read each statement or question below carefully and fill
in the blank(s) with the correct answer. Answers may be more than one word.
1. If the gross sales or receipts and other non-operating income exceed the VAT
threshold, the individual will be subject to _____________under the Tax Code,
as amended.
2. Individuals availing of the eight percent income tax rate for the first time must
also submit their ______________for updating together with the__________.
3. Self-employed individuals earning income purely from self-employment, business,
and/or practice of profession whose gross sales and/or receipts and other non-
operating income does not exceed the new value-added tax (VAT) threshold of
₱3,000,000 can avail one of the following options: (a)___________, as provided
in the Tax Code, as amended, or (b) Eight percent (8%) tax on gross sales or
receipts and other non-operating income exceeding __________.
4. Under RMO No. 23-2018, the income of self-employed individuals—including
single proprietors, professionals, and mixed income earners—is generally subject
to _______________ rates, as provided in the Tax Code, as amended.
5. The 8% Income Tax Rate filing option is available for self employed individuals
whose gross sales/receipts and other non-operating income for the year does not
exceed _________________.

References:
o Revenue Memorandum Order No. 23-2018.
https://www.bir.gov.ph/index.php/revenue-issuances/revenue-memorandum-
orders/2018-revenue-memorandum-orders.html
o https://www.grantthornton.com.ph/insights/articles-and-updates1/tax-
notes/availing-yourself-of-8-tax-rate-for-self-employed-individuals/
 MODULE 9. PERCENTAGE TAXES
Duration: __ hours

Introduction
This module entails a comprehensive discussion of the three percent (3%) percentage
tax on gross sales or gross receipts. Illustrative cases supported with solutions will help
you understand the step by step guide for computing percentage tax and VAT payable.
Objectives
In this module, you will be able to:
❖ Apply general rules on tax base;
❖ Compute percentage tax payable for both VAT-registered and NON-VAT
registered taxpayers; and
❖ Compute VAT payable
Pre-Assessment Activity 9: Read each statement or question below carefully and fill in
the blank(s) with the correct answer. Answers may be more than one word.
1. The taxpayer of the ____percentage tax is a taxpayer who is _____ from the,
value-added tax.
2. A taxpayer who initially presumed that the gross sales/receipts and other non-
operating income for the taxable year will not exceed the ______ pesos VAT
threshold but has actually exceeded the same during the taxable year, will be liable
to VAT presumptively beginning on the _____day of the month following the month
when the threshold is breached.
3. One who is subject to any of the percentage tax cannot be subject to the value-
added tax, however, a registered business may have two lines of activities, one of
which is subject to the _________ and the other subject to a __________.
4. Amusement tax is a ______ tax.
5. A non-VAT taxpayer who volunteers to be a VAT taxpayer knowing that their gross
receipts and other non-operating income will exceed the VAT threshold within the
taxable year, will automatically be subject to the _____________ rates if the 8%
income tax rate is initially selected.

Lesson 1 – Percentage Taxes

Under Sections 116 to 127 of the National Internal Revenue Code, the percentage taxes
are:
a. 3% percentage tax on persons exempt from the value-added tax because their
gross annual sales do not exceed three million pesos (₱3,000,000), and who are
not required to pay a percentage tax under any of (b) to (I), below; BUT in the
month within the year that the sales exceeded three million pesos, the value-added
tax shall begin to apply, so that for that month there will be the 3% percentage tax
with its tax return, and the value-added tax with its tax return. In the months
thereafter, there will be the value-added tax only.
b. Tax on domestic carriers;
c. Tax on international carriers;
d. Franchise tax;
e. Amusement tax;
f. Tax on winnings;
g. Tax on stock transactions
 h. Overseas communications tax;
i. Tax on banks and non-bank financial intermediaries performing quasi-banking
functions;
j. Tax on other non-bank financial intermediaries;
k. Tax on life insurance companies;
l. Tax on agents of foreign insurance companies;

Remember: One who is subject to any of the percentage tax cannot be subject to the
value-added tax, however, a registered business may have two lines of activities, one of
which is subject to the value-added tax and the other subject to a percentage tax.

General rules on tax base and taxpayer of percentage taxes

Commonly, percentage taxes are based on gross receipts. "Gross receipts" is defined as
cash actually or constructively received. Receivables, although income thereafter is
earned already, are not yet taxable. There are no deductions from gross receipts to arrive
at the taxable gross receipts, except, returns and allowances, and discounts. In addition,
the taxpayer is the seller of the goods or services (with exceptions). This will be discussed
in Module 10.

The taxpayer of the 3% percentage tax

A taxpayer:
a. who is exempt from the, value-added tax under paragraphs (s) of Section 109 of
the National Internal Revenue Code (gross sales or receipts in the preceding
year did not exceed ₱3,000,000), and not under any other paragraph of the
same section; and
b. did not avail of Optional VAT registration.

Example 9-1. Mr. Ajummeh, whose gross annual sales never exceeded ₱3,000,000 had,
in a taxable month, gross sales of ₱100,000, sales returns and allowances of ₱5,000,
and sales discounts of ₱2,000. The percentage tax is computed, as follows:
Gross sales ₱100,000
Less: Sales returns & allowances ₱5,000
Sales discounts 2,000 7,000
Sales subject to percentage tax ₱93,000
Percentage tax at 3% ₱ 2,790

Example 9-2. Mr. Besutoww is a trader. His gross sales in the preceding year amounted
to ₱3,000,000. His gross annual sales in the preceding year did not exceed ₱3,000,000.
He is subject to the three percent (3%) percentage tax.

Example 9-3. Mr. Ciattos sells agricultural food products. In 2018, his gross sales
amounted to ₱440,000. For the first month of 2019 his gross sales amounted to ₱100,000.
What business tax would he pay in 2019?
Answer: None. He is not subject to the value-added tax because he is exempt under
paragraph (a) of Section 109 of the National Internal Revenue Code. He is not subject to
the three percent (3%) percentage tax because his exemption is not under paragraph on
volume sales.

Example 9-4. Mr. Dranny Goose had gross sales of ₱3,000,000 in 2018. In the first month
of 2019, his gross sales amounted to ₱200,000, any tax not included, with purchases
from VAT-registered suppliers at fifty percent (50%) of the selling price, value-added tax
not included. For 2018, Mr. Dranny was subject to the 3% percentage tax, or ₱6,000. —
Gross receipts of ₱3,000,000 is exactly the threshold amount. It did not exceed the
threshold of ₱3,000,000.

Lesson 2 - Optional Vat Registration

When the gross sales or receipts of the preceding year did not exceed three million pesos
(₱3,000,000), to determine whether it is better to be VAT-registered or remain subject to
the 3% percentage tax, one must not look only at, and compare, the percentages - the
3% and the 12% (of net sales or receipts). One has to look into the net effect of all the
business taxes that converge on the operations of the business (Reyes, 2019).

Example 9-5.
Sales ₱200,000
Purchases from VAT registered persons 100,000
Expenses, paid to VAT registered persons 60,000
IF VAT REGISTERED.
Output taxes (₱200,000 x 12%) ₱ 24,000
Less: Input taxes —
On purchases (₱100,000 x 12%) ₱12,000
On expenses
(₱60,000 x 12%) 7,200 19,200
Value-added tax payable ₱ 4,800
Total of tax payments:
VAT paid on the purchases 12,000
VAT paid on the expenses 7,200
VAT payable ₱4,800
Total ₱24,000
IF NOT VAT-REGISTERED
Percentage tax (200,000 x 3%) ₱ 6,000
Total of tax payments:
VAT paid on the purchases ₱12,000
VAT paid on the expenses 7,200
Percentage tax payable 6,000
Total ₱25,200

Lesson 3 - Return and Payment of the 3% Percentage Tax.

A monthly percentage tax return must be filed and the tax paid within twenty (20) days
after the end of the month. The taxpayer, with several branches or place of business, but
all subject to the percentage tax, may file a separate return for each branch or place of
business, or a con-solidated return for all (Reyes, 2019).

Example 9-6. A taxpayer had on record, in his books of

accounts, the following transactions:
May 2 Purchase from a VAT supplier, of goods to be sold; ₱50,000, VAT of
₱6,000, not included.
May 12 Purchase from a non-VAT supplier, of goods to be sold, ₱90,000
May 15 Sale of ₱30,000.
May 20 Payment of the April percentage tax.
 May 26 Sale of ₱10,000

Question: How, much is the percentage tax of May?

Answer: ₱1,200

Sale-May 15 ₱30,000
Sale-May 26 10,000
Total sales of the month ₱40,000
Percentage tax at 3% of ₱40,000 ₱ 1,200

The Taxpayer’s Transition

A taxpayer who initially presumed that the gross sales/receipts and other non-operating
income for the taxable year will not exceed the three million pesos (P3,000,000) VAT
threshold but has actually exceeded the same during the taxable year, will be liable to
VAT presumptively beginning on the first day of the month following the month when the
threshold is breached. The taxpayer will pay the required percentage tax covering gross
sales/ receipts and other non-operating income from the beginning of the taxable year of
commencement of business/practice of profession until the time the taxpayer became
liable to the VAT, without imposition of penalty if timely paid on the immediately
succeeding month/quarter. Thus, there may be an instance when a taxpayer has two
business returns in a month/quarter — i.e., percentage and VAT returns.

Figure 9-1. **Optional VAT Registration: Gross Sales or Receipts Did Not Exceed
₱3,000,000
Reference: Reyes, V. (2019) A Study on Business & Transfer Tax
A non-VAT taxpayer who volunteers to be a VAT taxpayer knowing that their gross
receipts and other non-operating income will exceed the VAT threshold within the taxable
year, will automatically be subject to the graduated income tax rates if the 8% income tax
rate is initially selected. Any income tax under paid under the said flat 8% income tax rate
will be deducted from the income tax due under the graduated income tax.

**Note: IF VAT REGISTERED- cash proceeds on sales amounting to 224,000 is exclusive

of 12% VAT (200,000 sales + 24,000 output taxes )

Post-Lesson Reflection

1. What concept did you learn today?

________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
____________________________.

2. What aspects of the lesson do you believe are most useful in your understanding
of the subject matter?
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
____________________________.

Post-Assessment Activity 9: Choose the best possible answer.

Case 1: Mr. Jaime Topaz is the owner of a small variety store. His gross sales in any one
year do not exceed the VAT threshold amount. He is not VAT-registered. The following
data are taken from the books of the variety store for th month ending November 30,
2019.
Merchandise Inventory, October 31, 2018 ₱10,000
Gross Sales 45,000
Purchases from VAT-registered suppliers 35,000
How much is the percentage tax due and payable?
a. ₱1,650
b. ₱1,350
c. ₱300
d. None

Case 2: A taxpayer is engaged in VAT-subject transactions but his annual gross sales do
not exceed the VAT threshold. Hence, he did not register under VAT system. However,
during the current, year, his quarterly gross sales show:
First quarter ₱1,000,000
Second quarter 1,000,000
Third quarter 1,000,000
Fourth quarter 1,000,000
Question 1 - Which of the following statements is correct?
I - The taxpayer is required to update his registration from non-VAT to VAT taxpayer in
the fourth quarter.
II - The taxpayer is required to, update his registration from non-VAT to VAT taxpayer
until taxpayer is liable to VAT.
III - VAT shall be imposed prospectively.
IV - Percentage tax due on the non-VAT portion of the sales/receipts shall be collected
without penalty, if timely paid on the due date immediately following the month/
quarter when taxpayer ceases to be a non-VAT.
a. I, II, III and IV are correct
b. I, II and III are correct
c. Only I and II are correct
d. Only II I and IV are correct

Question 2 - How much is the percentage tax due?

a. ₱480,000
b. ₱120,000
c. ₱90,000
d. None of the choices

Question 3 — How much is the VAT due?

a. ₱480,000
b. ₱120,000
c. ₱90,000
d. None of the choices

Reference:
o Reyes, V. (2019). A Study on Business Taxes and Transfer Taxes Under the
TRAIN Law. GIC Enterprises & Co. Inc.
o https://taxacctgcenter.ph/accounting-for-value-added-tax-vat-in-the-philippines/
 MODULE 10. PERCENTAGE TAX RATES
Duration: __ hours

Introduction
This module discourses percentage tax rates: franchises, amusement tax, and stock
transaction tax. Illustrative cases supported with solutions will help you understand the
step by step guide for computing percentage tax.
Objectives
In this module, you will be able to:
❖ Apply general rules on the filing and payment of percentage tax;
❖ Identify amusement places subject to tax; and
❖ Compute percentage tax
Pre-Assessment Activity 10: Choose the correct answer.
1. Which of the following franchise grantees is subject to the 2% percentage tax on
franchise?
a. Franchise on radio and/or television broadcasting companies the gross
annual receipts in the preceding year do not exceed ₱10,000,000
b. Franchise on gas and water utilities
c. Franchise on toll road operations
d. PAGCOR and its licenses and franchisees
2. The tax on banks and non-bank financial intermediaries performing quasi-banking
functions on interest, commissions and discounts from lending activities as well as
income from financial leasing on instruments from which such receipts are derived
with a remaining maturity of 5 years or less is:
a. 5% on gross receipts
b. 7% on gross receipts
c. 12% on gross receipts
d. None of the choices
3. The tax on life insurance premium based upon the total premiums collected in the
Philippines whether such premiums are paid in money, notes, credits or any
substitute for money is:
a. 125
b. 10%
c. 7%
d. 2%
4. Who shall be liable to the amusement taxes under Section 135?
a. Patrons of amusement places
b. Lessors of amusement places
c. Proprietor, lessees, or operator of amusement places
d. None of the choices
5. The operator of one of the following places is not subject to:
a. Cockpits
b. Racetracks
c. Bowling alleys
d. KTV Karaoke joints
Lesson 1 – Percentage Taxes

Percentage tax is a business tax imposed on persons, entities, or transactions

specified under Sections 116 to 127 of the National Internal Revenue Code of 1997
(also known as Tax Code), as amended, and as required under special laws.

Quarterly Percentage Tax Rates Table

Coverage Taxable Base Tax Rate

Non-VAT registered persons Gross sales or receipts 3%
under Section 109 (BB)
Domestic carriers and keepers Gross receipts 3%
of garages

International air/shipping Gross receipts on transport 3%

carriers doing business in the of cargo from the Philippines
Philippines to a foreign country

Franchise grantees: 2%
Gross receipts
Gas and water utilities 3%
Gross receipts
Radio and television
broadcasting companies whose
annual gross receipts of the
preceding year do not exceed
Php10,000,000 and did not opt
to register as VAT taxpayer

Overseas dispatch, message or Amount paid for the service 10%

conversation originating from the
Philippines

Banks and non-bank financial Interest, commissions and discounts from

intermediaries performing lending activities as well as income from
quasi-banking functions financial leasing, on the basis of remaining
maturities of instruments from which
receipts are derived:
If maturity period is five 5%
years or less

If maturity period is more 1%

than five years

Dividends and equity shares 0%

and net income of
subsidiaries

Royalties, rentals of 7%
property, real or personal,
profits from exchange and
 all other items treated as
gross income under Sec. 32
of the Tax Code, as
amended

Net trading gains within the 7%

taxable year of foreign
currency, debt securities,
derivatives and other similar
financial instruments

Other non-bank financial Interest, commissions, 5%

intermediaries discounts and all other items
treated as gross income
under the Tax Code, as
amended

Interest, commissions, discounts from

lending activities, as well as income from
financial leasing on the basis of remaining
maturities of instruments from which such
receipts are derived:
If maturity period is five 5%
years or less

If maturity period is more 1%

than five years

Life Insurance Total premiums collected 2%

Company/Agent/Corporation

(except purely cooperative

companies or associations)

Agents of foreign insurance companies (except reinsurance premium):

Insurance agents authorized Total premiums collected 4%
under the Insurance Code to
procure policies of insurance for
companies not authorized to
transact business in the
Philippines

Owners of property obtaining Total premiums paid 5%

insurance directly with foreign
insurance companies

Proprietor, lessee or operator of the following:

Cockpits Gross receipts 18%

Cabarets, Night or Day Clubs, Gross receipts 18%

videoke bars, karaoke bars,
karaoke televisions, karaoke
boxes and music lounges

Boxing exhibitions (except when Gross receipts 10%

the World or Oriental
Championship is at stake in any
division, provided further that at
least one of the contenders for
World Championship is a citizen
of the Philippines and said
exhibitions are promoted by a
citizen/s of the Philippines or by
a corporation/ association at
least 60% of the capital of which
is owned by said citizen/s)

Professional basketball games Gross receipts 15%

(in lieu of all other percentage
taxes of whatever nature and
description)

Jai-alai and race track Gross receipts 30%

Winnings on horse races Winnings or 'dividends' 10%

Winnings from 4%
doubleforecast/quinella and
trifecta bets
Prizes of owners of winning 10%
race horses

Sale, barter, exchange or other Gross selling price or gross 6/10 of 1%

disposition of shares of stock value in money
listed and traded through the
Local Stock Exchange other
than the sale by a dealer of
securities

Sale, barter or exchange or Gross selling price or gross value in money

other disposition through:
Proportion of disposed shares to total
• Initial Public Offering outstanding shares after the listing in the
(IPO) – the issuing
local stock exchange:
corporation shall pay the
imposed tax
• Secondary Public
Offering – the seller shall
pay the imposed tax
• Up to 25% 4%

• Over 25% but not over 33 2%

1/3%
 • Over 33 1/3% 1%

Lesson 2- Tax of 2% and 3% on Franchises

A franchise is a law. It authorizes a certain person, natural or juridical (partnership or

corporation), to operate a public utility. Consequently, a corporation that will operate a
railway system, or generate and sell electricity will need a franchise. The following are
subject to a percentage tax generally called “franchise tax”.

Gas and water utilities 2%

Radio and/or television broadcasting companies
whose annual gross receipts of the preceding year did 3%
not exceed ₱10,000,000

Other franchise grantees are subject to the value-added tax on sale of services. The
franchise tax of 2% or 3% is on gross receipts from activities covered by the franchise.
Other gross receipts may be subject to the value-added tax.

Special rules on radio/television broadcasting:

a. If gross receipts in the preceding year exceeded Value-added tax
₱10,000,000;
b. If gross receipts in the preceding year did not
exceed ₱10,000,000 (but may opt to be registered Percentage tax
under the VAT system).

Example 10-1. HoleZim Co. is a holder of a franchise to sell and distribute water. In a
month, it had gross receipts from the sale of water of ₱5,000,000 and rent income
from heavy equipment (received from subdivision owners) of ₱50,000. The franchise
tax was 2% of ₱5,000,000, or ₱100,000.

Example 10-2. Icann Co. is a holder of a franchise to operate a radio/television

network. Its gross receipts in 2018 was ₱9,000,000. In the first month of 2019, it had
gross receipts of ₱700,000 and total payments to VAT-suppliers of goods and services
of 250,000, taxes not included It was not subject to the value-added tax since the gross
receipts did not exceed ₱10,000,000 in a year. The percentage tax for the month would
have been ₱700,000 x 3%, or ₱21,000.

Example 10-3. In the preceding illustration of Icann Co., if Icann Co. opted to be a
value-added taxpayer in 2019, the value-added tax payable for the first month would
have been:
Output taxes (700,000 x 12%) ₱84,000
Less: Input taxes (250,000 x 12%) 30,000
Value-added tax payable ₱54,000

Lesson 3 - Amusement tax

There are many kinds of amusement places, but not all are subject to the amusement
taxes. There are many activities for amusement, but not all are subject to the
amusement taxes. At this juncture, there is an amusement tax which is a local tax.
This is the amusement tax on admissions to theatres, cinematographs, concert halls,
circuses and other places of amusement.
Tax base

The tax is based on gross receipts.

"Gross receipts" covers all the receipts of the proprietor, lessee or operator of the
amusement place. It includes income from television', radio and motion picture rights,
if any.

Figure 10-1. Amusement Tax – Amusement Place

Amusement Place Tax
Place for boxing exhibition 10%
Place for professional basketball games (which is in lieu of all
percentage taxes of whatever name and description) 15%
Cockpits, cabarets, night or day clubs 18%
Jai-alai and race tracks 30%

Remember: Boxing exhibitions where World or Oriental Championships in any division

is at stake will be exempt from amusement tax, if one of the contenders is a citizen of
the Philippines and said exhibitions are promoted by citizens of the Philippines or by
a corporation or association at least sixty percent (60%) of the capital of which is
owned by such citizens.

Example 10-4. The PNBAA is a professional basketball organization. In a basketball

series within a month, it had gross receipts from the gates of ₱1,000,000. In addition,
tv coverage gave it additional gross receipts of ₱1,000,000. Advertisements inside the
coliseum where the games were conducted gave it additional gross receipts of
₱1,000,000. The amusement tax was 15% of ₱3,000,000, or ₱450,000.

Example 10-5. Sports, Unlimited, a domestic corporation wholly owned by citizens of

the Philippines, sponsored a world boxing event for World Championship in the
lightweight division between a Jaimaican boxer and a Filipino boxer. Gate receipts
amounted to ₱10,000,000. Satellite coverage gave the corporation an additional gross
receipts of ₱1,200,000. The gross receipts of Sports Unlimited Ltd. was ₱11,200,000.
There is no amusement tax. All the requirements for the exemption of the boxing
exhibition from the amusement tax were present.

Example 10-6. The Grand Entertainment, a domestic corporation had the following
gross receipts from championship events it conducted in the Philippines:
Ping-pong ₱ 500,000
Billard 1,000,000
Tennis 1,200,000
Volleyball 600,000
Baseball 800,000
Basketball (amateur) 900,000
Chess 400,000

There was no amusement tax because the activities were not among those mentioned
in the law which are subject to amusement tax.

Tax on winnings

Figure 10-2. Tax on winnings

Winnings in horse races or jai-alai 10%
but if from:
Double, forecast, quinella and trifecta bets 4%
 Owner of winning horse 10%

Daily double is an event wherein the bettor selects a number in each of two
consecutive races and the selection in each race must finish first. Extra double is an
event wherein the bettor selects a number in each of two selected races and the
selection in each race must finish first. Forecast is an event wherein the bettor selects
two numbers in a selected race, and the selection must finish first and second in the
correct order. Double quinella is an event wherein the bettor selects the numbers in
each of two selected races, and the selection in each race must finish first and second
in either order. Trifecta is an event wherein the bettor selects three numbers in a
selected race and the selections must finish first, second and third in the correct order.

Quick Facts:

Who is the taxpayer of the tax on winnings?

❖ The person who wins in horse races and jai-alai, based on his winnings or
"dividends" (the tax to be based on the actual amount paid to him for every
winning ticket, after deducting the cost of ticket); and
❖ The owner of winning race horses, based on the prize.

How is the tax paid?

The tax will be withheld from the "dividends" or "prize", by the operator, manager or
person in charge of the horse races or jai-alai.

Example 10-7. Mr. Lambo is an owner of a race horse who, on June 12, from a Special
Independence Day Race won a prize in the amount of ₱5,000,000.The tax on the
winnings would have been withheld at 10% of ₱5,000,000, or ₱500,000.

Lesson 4- Stock transactions

This percentage tax is called "stock transaction tax":

a. On a sale, barter, exchange or other disposition of shares listed and traded

thru a local stock exchange, other than by a dealer in securities;
o The tax base: Gross selling price or gross value in money of the shares
sold, bartered, exchanged or otherwise disposed of;
o The tax rate: Six tenth of one percent (6110 of 1%).
o The taxpayer: The seller.
b. On the sale, barter, exchange or other disposition thru initial public offering of
shares of stock in a closely held corporation:
o The tax base: Gross selling price.
o The tax rates: In accordance with the proportion of the shares sold,
bartered, exchanged or otherwise disposed of to the total outstanding
shares of stock after the listing in the local stock exchange, as follows:

Up to twenty-five percent (25%) 4%

Over twenty-five percent (25%), but not over

thirty-three and one-third percent (33-1/3%)
2%

Over thirty-three and one-third percent 1%

 o The taxpayer: The issuing corporation in primary offering the seller in
secondary offering.

"Closely-held corporation" means any corporation at least fifty percent (50%) in value
of the outstanding capital stock or at least fifty percent (50%) of the total combined
voting power of all classes of stock entitled to vote, is owned directly or indirectly by or
for not more than twenty individuals.

Example 10-8. Mr. MJay sold shares of stock of domestic corporations listed and
traded in the Philippine Stock Exchange, thru his stock broker, as follows:
a. Shares of Nol Co, with a cost of ₱2,000,000 and a selling price of ₱2,800,000.
b. Shares of Oley Co. with a cost of ₱2,500 ,000 and a selling price of ₱2,000,000.

How much is the aggregate of the separate stock transaction tax payments?

On the shares of Nol Co. (2,800,000 x 6/10 of 1%) ₱14,000

On the shares of Oley Co. (2,000,000 x 6/10 of 10,000

1%)

Total ₱24,000

Example 10-9. Ipo Co. was a closely held corporation. In opening itself to the public,
it made an initial public offering (IPO) of its shares of stock on a selling price of
₱5,000,000 for shares of stock which would give the, buying public an interest after
the listing of 30% in the corporation. How much was the stock transaction tax? The
tax was ₱5,000,000 x 2%, or ₱100,000.

Percentage taxes: Return and payment

The taxpayer may file a separate return for each branch or place of business, or a
consolidated return for all.

Remember:

General rule- Every person liable to pay a percentage tax will file a monthly return of
the amount of his gross receipts and pay the tax thereon, within twenty (20) days after
the end of each taxable month.

Overseas communications tax Within twenty (20) days after the end of the quarter

Amusement tax Within twenty (20) days after the end of the quarter

Tax on winnings Remitted to the Bureau of Internal Revenue within

twenty (20) days from the date withheld

Stock transaction tax Remitted to the Bureau of Internal Revenue within

6/10 of 1% five (5) banking days from the date withheld by the
broker.
Stock transaction tax On primary offering, within 30 days of from from
4%, 2% and 1% the date of listing in the local stock exchange

Post-Lesson Reflection

1. What concept did you learn today?

______________________________________________________________
______________________________________________________________
______________________________________________________________
______________________________________________________________
______________________________________________________________

2. What aspects of the lesson do you believe are most useful in your
understanding of the subject matter?
______________________________________________________________
______________________________________________________________
______________________________________________________________
______________________________________________________________
______________________________________________________________

Post-Assessment Activity 10: Identify the percentage tax rate of each item covered.

______1. Domestic carriers and keepers of garages.

______2. Jai-alai and race track
______3. Life Insurance Company/Agent/Corporation (except purely cooperative
companies or associations)
______4. Gas and water utilities
______5. Professional basketball games (in lieu of all other percentage taxes of
whatever
nature and description)

Reference:

o Reyes, V. (2019). A Study on Business Taxes and Transfer Taxes Under the
TRAIN Law. GIC Enterprises & Co. Inc.
o https://www.bir.gov.ph/index.php/tax-information/percentage-tax.html
 MODULE 11: EXCISE TAXES

Duration: 1.5 hours

Introduction

The manufacturer who produces excisable article, and obtain it from the place of
production for the purpose of domestic sale or consumption, will be subject to the
excise tax. The importer of excisable article, who obtain them from customs custody,
will be subject to the excise tax. The seller of excisable services is obligatory to pay
excise tax. This taxes are being imposed on goods or services used by people as
unnecessary or can cause harmful in our body or in our environment.

Objectives:

In this module, you will be able to:

❖ Define the excise tax;

❖ Determine the kinds and articles subject to excise tax;
❖ Identify the excise tax rate
❖ Determine to whom the taxes are imposed and when it must be paid.
Pre-test Assessment Activity # 11. Modified True or False. Write TRUE if the
statement is correct, if it is FALSE, underline the incorrect word/phrases and write its
corrected equivalent in the space before the number.

___________________1. Direct tax and specific tax are excise tax.

___________________2. An ad valorem tax is paid by the manufacturer or

producer of the articles.

___________________3. Unsweetened beverages are subject to excise tax.

___________________4. An imported article must be paid excise tax prior to the

release of the article from customs custody.

___________________5. Invasive Cosmetic procedures like facelift is subject to

excise tax.

___________________6. Ad valorem tax is an excised tax imposed and based

on weight or volume capacity or any other physical unit of measurement.

___________________7. Seller of a wine is required to pay excise tax.

___________________8. Excise Tax is a tax on the production, sale or

consumption of a commodity in a country.

___________________9. A locally manufactured article, must be paid excise tax

prior to the removal of the article from the place of production.

___________________10. The excise tax is imposed only on manufacturer and

importer of the articles stated above or by the seller of services in the case of
cosmetic procedures.
Lesson 1: DEFINITION, KINDS AND ARTICLES SUBJECT TO EXCISE TAX.

What is excise tax?

Excise Tax is a tax on the production, sale or consumption of a commodity in a

country.

Kinds of excise taxes:

a. Specific Tax – an excised tax imposed and based on weight or volume

capacity or any other physical unit of measurement. (Example: An excise tax
on gasoline is on every liter of gasoline)
b. Ad valorem Tax - an excised tax imposed and based on selling price or other
specified value of the article, or gross receipts. (Example: An excise tax on
automobiles is based on the selling price)
Articles subject to excise tax:

a. Alcohol Products
b. Tobacco Products
c. Petroleum Products
d. Minerals and Mineral Products
e. Automobiles and Other Motor Vehicles
f. Non-Essential Goods
g. Sweetened Beverages
h. Invasive Cosmetic Procedures
Lesson 2: EXCISE TAX COMPUTATION AND RATE

MANNER OF COMPUTATION:

• Specific Tax = No. of Units/other measurements x Specific Tax Rate

• Ad Valorem Tax = No. of Units/other measurements x Selling Price of any

specific value per unit x Ad Valorem Tax Rate

The following are the excise tax rates:

A. ALCOHOL PRODUCTS

NEW TAX RATES based on Republic Act No. Remarks

PARTICULARS 10351 2018
2013 2014 2015 2016 2017 onwards
A. DISTILLED SPIRITS, AD VALOREM & SPECIFIC TAX
1) AD VALOREM
TAX RATE - Based
on the Net Retail
Price (NRP) per
proof (excluding 15% 15% 20% 20% 20% 20%
the excise and
value-added
taxes);
and
 Effective
1/1/2016,
the specific
tax rate
2) SPECIFIC TAX -
Php20 Php20 Php20 Php20.80 Php21.63 shall be
Per proof liter
increased
by 4%
every year
thereafter
B. WINES, per liter of volume capacity
1) Sparkling wines/
champagnes,
where the NRP
(excluding the
excise and VAT)
per bottle of 750ml
volume capacity,
regardless of proof
is:
Php500.00 or less Php250 Php260 Php270.40 Php281.22 Php292.47
More than Effective
Php500.00 Php700 Php728 Php757.12 Php787.40 Php818.90 1/1/2014,
2) Still wines and the specific
carbonated wines tax rate
containing 14% of Php30.00 Php31.20 Php32.45 Php33.75 Php35.10 shall be
alcohol by volume increased
or less by 4%
3) Still wines and every year
carbonated wines thereafter
containing more
than 14% (of
Php60.00 Php62.40 Php64.90 Php67.50 Php70.20
alcohol by volume)
but not more 25%
of alcohol by
volume
4) Fortified wines
containing more
Taxed as distilled spirits
than 25% of
alcohol by volume
C. FERMENTED LIQUORS , per liter of volume capacity
1) If the NRP Effective
(excluding excise 1/1/2018,
and VAT) per liter the specific
of volume capacity tax rate
is: shall be
Php 50.60 and increased
Php15.00 Php17.00 Php19.00 Php21.00 Php23.50
below by 4%
More than Php every year
Php20.00 Php21.00 Php22.00 Php23.00 Php23.50 thereafter
50.60
2) If brewed and Effective
sold at 1/1/2014,
microbreweries or Php28.00 Php29.12 Php30.28 Php31.50 Php32.76 the specific
small tax rate
establishments shall be
such as pubs and increased
restaurants, by 4%
regardless of the every year
NRP thereafter
NOTE:
IN CASE OF FERMENTED LIQUORS AFFECTED BY THE "NO DOWNWARD
RECLASSIFICATION " PROVISION, THE 4% INCREASE SHALL APPLY TO THEIR
RESPECTIVE APPLICABLE TAX RATES

B. TOBACCO PRODUCTS

NEW TAX RATES based on Republic Act No. 10351 Remarks

PARTICULARS 2018
2013 2014 2015 2016 2017
onwards
A. TOBACCO PRODUCTS, per kilogram
1. Tobacco Products
(a) Tobacco
twisted by hand
or reduced into
a condition to be
consumed in
Php1.75 Php1.82 Php1.89 Php1.97 Php2.05
any manner
other than the
ordinary mode
of drying and
curing; Effective
1/1/2014,
(b) Tobacco
the
prepared or
specific
partially
tax rate
prepared with or
shall be
without the use
Php1.75 Php1.82 Php1.89 Php1.97 Php2.05 increased
of any machine
by 4%
or instrument or
every
without being
year
pressed or
thereafter
sweetened; and
(c) Fine-cut
shorts and
refuse, scraps,
clippings,
Php1.75 Php1.82 Php1.89 Php1.97 Php2.05
cuttings, stems,
midribs and
sweepings of
tobacco;
2. Chewing
tobacco
unsuitable for Php1.50 Php1.56 Php1.62 Php1.68 Php1.75
use in any other
manner
B. CIGARS, per cigar
3. Cigars
(a) Based on the Effective
NRP per cigar 1/1/2014,
(excluding the the
20% 20% 20% 20% 20%
excise and specific
value-added tax rate
taxes), and shall be
increased
by 4%
(b) Per cigar Php5.00 Php5.20 Php5.41 Php5.62 Php5.85 every
year
thereafter
C. CIGARETTES , per pack
NEW TAX RATES based on RA No. 10963 (TRAIN Law)
January January
January 1, July 1, 2018
1, 2020 1, 2022
PARTICULARS 2018 until until January 1, 2024
until until
June 30, December onwards
December December
2018 31, 2019
31, 2021 31,2023
1. Cigarettes
Php32.50 Php35.00 Php37.50 Php40.00
packed by hand

Effective
1/1/2024, the
2. Cigarettes specific tax rate
packed by Php32.50 Php35.00 Php37.50 Php40.00 shall be increased
machine by 4% every year
thereafter

INSPECTION FEE - There shall be collected inspection fees on leaf tobacco, scrap,
cigars, Cigarettes and other manufactured tobacco and tobacco products as follows:

PRODUCT TYPE INSPECTION FEE

(1) Cigars P 0.50 per thousand pieces or fraction
thereof
(2) Cigarettes P 0.10 per thousand sticks or fraction
thereof
(3) Leaf Tobacco P 0.02 per kilogram or fraction thereof
(4) Scrap and other manufactured P 0.03 per kilogram or fraction thereof
tobacco

C. PETROLEUM PRODUCTS

EFFECTIVITY (RA 10963-TRAIN

PRODUCT TYPE Law)
 January January 1, January 1,
1, 2018 2019 2020
(a) Lubricating oils and greases, including but Php9.00 Php10.00
not limited to base stock for lube oils and
greases, high vacuum distillates, aromatic
extracts and other similar preparations, and
additives for lubricating oils and greases,
whether such additives are petroleum based or
not,per liter and kilogram respectively, of
volume capacity or weight Php8.00
(a.1) Locally produced or imported oils
previously taxed but are subsequently
reprocessed, re-refined or recycled, per liter and
kilogram of volume capacity or weight.
(b)Processed gas, per liter of volume capacity
(c)Waxes and petrolatum, per kilogram
(d)Denatured alcohol to be used for motive
power , per liter of volume capacity
(e)Asphalt, per kilogram
(f)Naphtha, regular gasoline, pyrolysis gasoline Php9.00 Php10.00
and other similar products of distillation, per liter
of volume capacity Php7.00
(g)Unleaded premium gasoline, per liter of
volume capacity
(h)Kerosene, per liter of volume capacity Php3.00 Php4.00 Php5.00
(i)Aviation turbo jet fuel,aviation gas, per liter of Php4.00 Php4.00 Php4.00
volume capacity
(j)Kerosene when used as aviation fuel, per liter
of volume capacity
(k)Diesel fuel oil, and on similar fuel oils having Php4.50 Php6.00
more or less the same generating power, per
liter of volume capacity
(l)Liquified petroleum gas used for motive
Php2.50
power, per kilogram
(m)Bunker fuel oil, and on similar oils having
more or less the same generating power, per
liter of volume capacity
(n)Petroleum coke, per metric ton
(o)Liquified petroleum gas, per kilogram Php1.00 Php2.00 Php3.00
(p)Naphtha and pyrolysis gasoline, when used Php0.00 Php0.00
as raw material in the production of
petrochemical products or in the refining of
petroleum products, or as replacement fuel for
natural-gas-fired-combined cycle power plant, Php0.00
in lieu of lacally-extracted natural gas during the
non-availability thereof, per liter of volume
capacity
(q)Liquified petroleum gas, when used as raw
material in the production of petrochemical
products, per kilogram
(r)Petroleum coke when used as feedstock to
any power generating facility, per metric ton

D. MINERALS AND MINERAL PRODUCTS

PRODUCT TYPE TAX RATES (RA 10963-TRAIN Law)

Coal and coke January 1, 2018 - Php50.00

(Domestic and January 1, 2019 - Php100.00
Imported) January 1, 2020 - Php150.00
and onwards
Nonmetallic Minerals Four percent (4%) based on the actual market value of
and Quarry Resources the gross output thereof at the time of removal
(Locally extracted or
produced)
Nonmetallic Minerals Four percent (4%) based on the value used by the Bureau
and Quarry Resources of Customs (BOC) in determining tariff and customs
(Imported) duties, net of excise tax and value-added tax
Locally-extracted Exempt
natural gas and
liquefied natural gas
All Metallic Minerals Four percent (4%) based on the actual market value of
(locally extracted or the gross output thereof at the time of removal
produced copper, gold,
chromite and other
metallic minerals)
Imported copper, gold, Four percent (4%) based on the value used by BOC in
chromite and other determining tariff and customs duties, net of excise tax
metallic minerals and value added tax
On indigenous Six percent (6%) of the fair international market price
petroleum thereof, on the first taxable sale, barter, exchange or such
similar transaction, such tax to be paid by the buyer or
purchaser before removal from the place of production.
The phrase “first taxable sales, barter, exchange or similar
transaction’' means the transfer of indigenous petroleum in
its original, state to a first taxable transferee. The fair
international market price shall be determined in
consultation with appropriate government agency.

For the purpose of this Subsection, “indigenous

petroleum” shall include locally-extracted mineral oil,
hydrocarbon gas, bitumen, crude asphalt. Mineral gas
and all other similar or naturally associated substances
with the exception of coal, peat, bituminous shale and/or
stratified mineral deposits."
NOTE:
In the case of mineral concentrates not traded in commodity exchanges in the
Philippines or abroad, such as copper concentrate, the actual market value shall be
the world price quotations of the refined mineral products content thereof prevailing
in the said commodity exchanges, after deducting the smelting, refining and other
charges incurred in the process of converting the mineral concentrates into refined
metal traded in those commodity exchanges.

On minerals and mineral products sold or consigned abroad, the actual cost of
ocean freight and insurance shall be deducted from the tax base.

E. AUTOMOBILES AND OTHER MOTOR VEHICLES

NET MANUFACTURER'S PRICE/IMPORTER'S TAX RATES (RA 10963

SELLING PRICE (TRAIN Law)
OVER UP TO RATE
0 Php600,000 4%
Php600,000 Php1,000,000 10%
Php1,100,000 Php4,000,000 20%
Php4,000,000 over 50%

F. NON-ESSENTIAL GOODS

• Twenty percent (20%) based on the wholesale price or the value of

importation used by the Bureau of Customs in determining Tariff and
Customs Duties, net of Excise and Value-Added taxes

G. SWEETENED BEVERAGES (RA 10963-TRAIN Law)

PRODUCT TAX RATE

Per Liter of Volume
Capacity
Using purely caloric sweeteners, and purely non-caloric Php6.00
sweeteners, or a mix of caloric and non-caloric sweeteners
Using purely high fructose corn syrup or in combination with any Php12.00
caloric or non-caloric sweetener
Using purely coconut sap sugar and purely steviol glycosides Exempt

H. INVASIVE COSMETIC PROCEDURES - (RA 10963-TRAIN Law)

SERVICE Tax Rate

Performance of Services on Invasive Cosmetic Procedures 5%

Lesson 3: BURDEN AND PAYMENT OF EXCISE TAX

WHO ARE SUBJECT TO THE EXCISE TAX

The excise tax is imposed only on manufacturer and importer of the articles
stated above or by the seller of services in the case of cosmetic
procedures.

WHEN MUST THE EXCISE TAXES BE PAID

In the case of a locally manufactured article, the excise tax must be paid
prior to the removal of the article from the place of production.

In the case of an imported article, the excise tax must be paid prior to the
release of the article from customs custody.

Illustration:

An importer of sparkling wines is subject to excise tax.

Illustration:

A manufacturer of shoes is not subject to excise tax. Although the taxpayer is a

manufacturer, shoes are not included in the articles subject to excise tax.

Illustration:

A dealer of a car is not subject to excise tax. Because taxpayer is not a manufacturer
or importer.

Post Test Assessment Activity # 11. Fill in the blanks. Write your answer in the
space provided.

1. The ____________________ is imposed only on manufacturer and importer of

the articles stated above or by the seller of services in the case of cosmetic
procedures.
2. A ______________________ article, must be paid excise tax prior to the
removal of the article from the place of production.
3. ____________________ is a tax imposed based on weight or volume capacity
or any other physical unit of measurement.
4. Excise Tax is a tax on the________________, sale or consumption of a
commodity in a country.
5. ____________________ procedures like facelift is subject to excise tax.
6. _____________________ and specific tax are excise tax.
7. ___________________ beverages are subject to excise tax.
8. An _____________________ is paid by the manufacturer or producer of the
articles.
 9. An ________________ article must be paid excise tax prior to the release of
the article from customs custody.
10. ____________________________ of a wine is required to pay excise tax.

References:

Online

• https://www.bir.gov.ph/index.php/tax-information/excise-tax.html#concepts
Textbooks

• Reyes, V. (2019) A Study on Business & Transfer Tax

• Reyes, V. (2018) A Handbook on Taxation
 MODULE 12: DONOR’S TAX

Duration: 3 hours

Introduction
When the persons donate a property to someone as long as it is located in the
Philippines,these subject to donor’s tax. Regardless,if the person is a resident or non
resident and a citizen or not a citizen of the Philippines. This module will provide a
comprehensive information on how this process will be implemented. Also some
relevant cases will be presented.

Objectives:

In this module, you will be able to:

• Defined Donor’s Tax and determine as to whom taxes are imposed;

• Compute the Donor’s Tax owed by a taxpayers;
• Determined the value, exemptions and procedures of Donor’s Tax.
Pre-test Assessment Activity # 12. Answer the following questions.

1. What is Donor’s Tax?

______________________________________________________________
______________________________________________________________
______________________________________________________________
______________________________________________________________
2. Who is the donor that are taxable on their gifts whether located within or outside
the Philippines?
______________________________________________________________
______________________________________________________________
______________________________________________________________
______________________________________________________________
3. Who is the donor that are subject to rule of reciprocity with respect to his
intangible donations located in the Philippines?
______________________________________________________________
______________________________________________________________
______________________________________________________________
______________________________________________________________
4. What amount of gift is tax exempt?
______________________________________________________________
______________________________________________________________
______________________________________________________________
______________________________________________________________
5. What is the prescribed date of filling and payment of donor’s tax?
______________________________________________________________
______________________________________________________________
______________________________________________________________
______________________________________________________________
Lesson 1: Definition of Donor’s Tax and its concept.

What is Donor’s Tax?

Donor’s Tax is a tax on a donation or gift, and is imposed on the gratuitous transfer
of property between two or more persons who are living at the time of the transfer.

There are two kinds of donor’s namely:

(a) The resident, or citizen of the Philippines; and

(b) The non-resident, not citizen of the Philippines.
If the donor is:

A resident, or citizen of the A non-resident, not citizen of the

Philippines
Philippines

(a) Real estate, regardless of (a) Real estate located in the

location; Philippines;

(b) Tangible personal property, (b) Tangible personal property

regardless of location; located in the Philippines;

(c) Intangible personal property, (c) Intangible personal property

regardless of location. located in the Philippines

(qualified by the reciprocity

clause in the law)

Rules of Reciprocity

There is reciprocity, if the intangible personal property of a non-resident alien donor is

located in the Philippines at the time of his death:

(a) Did not impose a transfer tax; or

(b) Allowed similar exemption from transfer tax in respect of intangible personal
property owned by citizens of the Philippines not residing in that foreign country.

When there is reciprocity, the transposal of intangible personal property located in the
Philippines of a non-resident alien donor is NOT SUBJECT TO TAX. When there is
no reciprocity, the transposal of intangible personal property located in the Philippines
of a non-resident alien donor is SUBJECT TO TAX.
The “reciprocity clause”

Z FOREIGN COUNTRY PHILLIPINES

Intangible personal property here

X, citizen and resident of
this country, donated

Y, citizen and resident of

The Philippines
Intagible personal property here

There is no donor’s tax here on The intangible personal property

so donated here by X will not be
intangible personal property
taxable here

The laws here exempt from The intangible personal property

donor’s tax here the intangible so donated here of X will not be
personal property tax here of Y, taxable here
Filipino

Intangible personal properties located in the Philippines

By provision of law, the following examples are:

1. Franchise which must be exercised in the Philippines.

2. Shares, obligations, or bonds issued by any corporation or sociedad anonima
organized or constituted in the Philippines in accordance with its laws.
3. Shares, obligations, or bonds issued by any foreign corporation eighty-five
per centum(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 business situs in the Philippines; and
5. Shares or rights in any partnership, business or industry established in the
Philippines.

The enumeration in the law is not exclusive, however. Any other intangible
property (e.g. receivables) in the Philippines will be included as gift.

Lesson 2: Donor’s Tax Rate and Sample Computation

THE DONOR’S TAX ON TOTAL GIFTS

The tax for each calendar year shall be SIX PERCENT (6%) computed on
the basis of the total gifts in excess of TWO HUNDRED FIFTY THOUSAND
PESOS (P250, 000) exempt gift made during the calendar year.
Illustration 1.
Mr. Uno made a donation of P50, 000 in 2019. How much was the donor’s tax?
Answer: None or 0. Exempt from the donor’s tax.
Illustration 2.
Mr. Dos made a donation of P250,000 in 2019. How much was the donor’s tax?
Answer: None or 0. Exempt from the donor’s tax.
Illustration 3.
Mr. Tres made a donation of P250,000 in 2019. How much was the donor’s
tax?
Answer: None or 0. Exempt from the donor’s tax.
Illustration 4.
Mr. Cuatro a donation of P500, 000 in 2019. How much was the donor’s tax?
Answer: Donation in 2019 P 500, 000
Less: Exempt amount 250,000
Taxable Gift 250,000
Donor’s Tax Rate X 0.06
Donor’s Tax Due P 15,000
Illustration 5.
Mr. Cinco donations in 2019 as follows:
January 25. A donation of P700, 000;
March 24. A donation of P100, 000.
How much were the donor’s taxes of Mr. E in 2019?
Answer: Donation of January 25 P 700, 000
Add: Donation of March 24 100, 000
Total P 800, 000
Less: Exempt amount 250,000
Taxable Gift 550,000
Donor’s Tax Rate X 0.06
Donor’s Tax Due P 33, 000
Illustration 6.
Mr. Seis made donations on:
February 25, 2019. A donation of P400, 000;
September 24, 2019. A donation of P200, 000.
How much is the donor’s tax on the donation of each date?
Answer: Donation of February 25, 2019 P 400, 000
Less: Exempt amount 250,000
Taxable Gift 150,000
 Donor’s Tax Rate X 0.06
Donor’s Tax P 9, 000

Donation of September 24, 2019 P 200, 000

Add: Donation of February 25, 2019 400,000
Total P 600,000
Less: Exempt amount 250,000
Total taxable gifts within the year 350,000
Donor’s Tax Rate X 0.06
Donor’s Tax at 6% P 21, 000
Less: Donor’s Tax on prior net gifts within the year 9, 000
Donor’s Tax Due P 12,000
JOINT DONATION BY HUSBAND AND WIFE

A joint donation by husband and wife will be considered a donation by each, of

one half of the donation. There will be separate donor’s tax returns.

Illustration:
A donation of P900, 000 was made by husband and wife to a legitimate child.
The donor’s tax was computed as follows:

Husband Wife
Gift made (for each, ½ of P900,000) P 450,000 P 450,000
Less: Exempt amount 250,000 250,000
Taxable Gift 200,000 200,000
Donor’s Tax Rate X 0.06 X 0.06
Donor’s Tax Due 12,000 12,000

Lesson 3: Valuation, Exemptions and Procedures of Donor’s Tax

Valuation of gift

Property given as gross gift will be valued at fair market value at the time of the
donation.

Exempt from Donor’s Tax

The following are the examples of exempt from the donor’s tax:

(a) Donation to the International Rice Research Institute.

(b) Donation to the Ramon Magsaysay Award Foundation
(c) Donation to the Philippine Inventor’s Commission
(d) Donation to the Integrated Bar of the Philippines
(e) Donation to the Development Academy of the Philippines
(f) Donation to social welfare, cultural or charitable institution, no part of the
net income of which inures to the benefit of any individual, if not more
than thirty percent (30%) of the donation will be used by the done for
administration purposes.
Who shall file donor’s tax

The Donor’s Tax Return (BIR Form No. 1800) shall be filed in triplicate by any
person, natural or juridical, resident or non-resident, who transfers or causes to
transfer property by gift, whether in trust or otherwise, whether the gift is direct or
indirect and whether the property is real or personal, tangible or intangible.

Taxpayers who are filing BIR Form no. 1800 are excluded in the mandatory
coverage from using the eBlRForms (Section 2 of RR No. 9-2016).

Donor’s tax return

The Donor’s Tax Return (BIR Form No. 1800) shall be filed within thirty (30)
days after the date the gift (donation) is made.

The return shall be filed with any Authorized Agent Bank (AAB) of the Revenue
District Office having jurisdiction over the place of domicile of the donor at the time of
the donation, or if there is no legal residence in the Philippines, with the Office of the
Commissioner of Internal Revenue, (Revenue District Office No. 39, South Quezon
City). In case of gifts made by a non-resident alien, the return may be filed with RDO
No. 39, or with the Philippine Embassy or Consulate in the country where he is
domiciled at the time of donation.

A separate return shall be filed by each donor for each gift (donation) made on
different dates during the year reflecting therein any previous net gifts made in the
same calendar year. Only one return shall be filed for several gifts (donations) by a
donor to the different donees on the same date.

If the gift (donation) involves conjugal/community property, each spouse shall

file separate return corresponding to his/her respective share in the
conjugal/community property donated. This rule shall likewise apply in the case of co-
ownership over the property being donated.

Payment of Donor’s Tax

The donor’s tax will be paid at the time the return is filed, and with the office
where the return is filed.

Post Test # 12. Multiple Choice. Write the letter that corresponds your answer
before the number.

1. This refers to a tax on a donation or gift, and is imposed on the gratuitous

transfer of property between two or more persons who are living at the time of
the transfer.
a. Gift Tax
b. Donor’s Tax
c. Donee’s Tax
d. Property Tax
2. Which of the following is not correct?
a. The first P150,000 of the donation is not subject to donor’s tax.
b. The first P200,000 of the donation is not subject to donor’s tax.
c. The first P250,000 of the donation is not subject to donor’s tax.
 d. The first P300,000 of the donation is not subject to donor’s tax.
3. Donor’s Tax rate is?
a. 2%
b. 4%
c. 6%
d. 8%
4. Grey gave her parents a gift of P300, 000 and made a donation of P50, 000 to
Philippine Inventor’s Commission. He also donated a parcel of land to his
parish church. Which of the gifts made may be subject to donor’s tax?
a. Donation to parents
b. Donation to Philippine Inventor’s Commission
c. Donation to parish church
d. All of the above
5. When the property is donated, the basis of the donor’s tax is?
a. The cost of acquisition of the donor
b. The agreed value by the donor and donee
c. The fair market value at the time of the donation
d. All of the above
6. Conjugal donations of husband and wife are considered as:
a. One half donation of respective husband and wife
b. One donation of respective husband and wife
c. Both a & b
d. None of the Above
7. When is the payment date of Donors Tax?
a. Before the donor’s tax return is filed.
b. At the time the donor’s tax return is filed.
c. After thirty days (30) the donor’s tax return is filed
d. All of the above
8. Who is the donor that are taxable on their gifts whether located within or
outside the Philippines
a. Resident Citizen
b. Non Resident Citizen
c. Resident Alien
d. Non Resident Alien
9. What is the prescribed date of filing of Donor’s Tax?
a. Within thirty (15) days after the date of donation is made.
b. Within thirty (30) days after the date of donation is made.
c. Within thirty (45) days after the date of donation is made.
d. Within thirty (60) days after the date of donation is made.
10. Who is the donor that are subject to rule of reciprocity with respect to his
intangible donations located in the Philippines?
a. Resident Citizen
b. Non Resident Citizen
c. Resident Alien
d. Non Resident Alien
Problem Solving: Answer the following problem and show your solution in the
space provided.

1. Mr. & Mrs Alarcon, citizens of the Philippines donated to their legitimate son the
following properties in year 2019:
Lot (conjugal property) P 300,000
Apartment (exclusive property of Mr. Alarcon ) 1 750,000
Jewelry (exclusive property of Mrs. Alarcon) 90,000
Compute the donor’s tax of each spouses.

2. Mrs. De Guzman made a donation to her daughter on March 18,2019, cash of

P380,000 and car of P900,000 on March 19, 2019. How much was the donor’s
tax?

3. Mr. Pharex made donations in 2019 as follows:

April 25. A donation of P1, 200, 000;
March 24. A donation of P 500, 000.
How much were the donor’s taxes of Mr. Pharex in 2019?
 4. Ms. Change made donations on January 16, 2019 an amount of P150, 000 and
on November 4, 2019 an amount of P700, 000. Compute the donor’s tax on the
donation of each date?

5. Mr. Ink made a donation on December 30, 2019 amounting to P100, 000 and
P50, 000. How much is the donor’s tax?

References:

Online

• https://www.bir.gov.ph/index.php/tax-information/excise-tax.html#concepts
Textbooks

• Reyes, V. (2019) A Study on Business & Transfer Tax

• Reyes, V. (2018) A Handbook on Taxation
 MODULE 13: GROSS ESTATE

Duration: 3 hours

Introduction

When people comes at the end of its rope, there will be a successor of it. In the
Philippines, this normally happens with wealthy people. There will be a process of
transmission on the property of deceased person to its heir. Before any distribution
made to heir the decedents assets will be subject to estate tax. This will be the end
of the story in life of decedent but new beginning to its heir.

Objectives:

In this module, you will be able to:

• Identify properties subject to estate tax.

• Determine as to whom taxes are imposed
• Determine the value, exempt acquisition and proceeds of estate.
Pre-test Assessment Activity # 13. True or False. Write T if the statement is correct
and write F if the statement is incorrect in the space provided.

____1. The citizenship and residency of the decedent determines properties subject
to gross estate.

____2. The acquisition value of the property at the time of death is considered in
determining the value of the gross estate.

____3. Live in relationship of a man and woman shall divide equally the properties
they acquired during their live-in period.

____4. Property that is subject to a limited power of appointment shall be included as

part of the gross estate.

____5. The gross estate of a non-resident citizen decedent includes all properties
located in the Philippines.

Lesson 1: The Gross Estate

Determination and valuation of Gross Estate is the starting point in computing Estate
tax liability.

The gross estate will include the value of:

(a) Properties in the estate ; and

(b) Properties not in the estate, under certain conditions.
Depending on whether the descendent, at the time of his death was:

Class A – Resident or Citizen

Class B – Non Resident, not citizen
Class
(a) Citizen of the Philippines residing in the Philippines A
(b) Citizen of the Philippines residing abroad A
(c) Citizen of a foreign country residing in the Philippines A
 (d) Citizen of a foreign country residing abroad B

Properties in the estate.

The gross estate, if the decedent is:

A resident, or citizen of the A non-resident, not citizen of the

Philippines
Philippines

(d) Real estate, regardless of (d) Real estate located in the

location; Philippines;
(e) Tangible personal property, (e) Tangible personal property
regardless of location; located in the Philippines;
(f) Intangible personal property, (f) Intangible personal property
regardless of location. located in the Philippines
(qualified by the reciprocity
clause in the law)

The rule of “reciprocity clause” including illustrations thereon, are parallel to those of
donors. (See Chapter 12).

Forms of Properties in the Gross Estate

Real Estate, or real property is called in law as immovable property means land,
building, or anything attached to the soil with permanence.

Personal Property is called in law as movable property.

This can be:

Tangible personal property is movable property that can be seen or touched.

Intangible personal property is movable property that cannot be seen or
touched.
Illustration 1. Mr. Uno, a citizen of the Philippines, residing in the Philippines, died
living a piece of land in the Philippines. The land in the Philippines is included in his
gross estate.

Illustration 2. Mr. Dos , an alien residing in the Philippines, died living a piece of land
in a foreign country. The land in the foreign country is included in his gross estate.

Properties Not in the Estate.

There may be properties which at the time of the decedent’s death are not in
the estate because they were transferred by him during his lifetime. A value from the
properties will be “borrowed” and included in the computation of the gross estate if
transferred under circumstances qualifying as:

1. Transfer in contemplation of death – donation made during the lifetime of the

transferor but intended to take effect at the time of death.
Illustration: Mr. Tres, read in the newspaper the obituary (notice of
death) of a friend with whom he was talking a day before. Immediately
 after reading the obituary, he made a transfer of all his properties to his
son, his only heir.
Illustration: Mr. Cuatro is in a very poor state of health. Suffering from
lung cancer. He transferred all his properties to his heirs under the law.

2. Revocable transfer – is a transfer where the terms of enjoyment of the

property may be altered, amended revoked or terminated by the decedent.
Illustration: Uno transferred property to Dos to be held in trust for Tres.
Without taking back the property, Uno can change Dos; or
Without taking back the property, Uno can change Tres; or
Uno can take back the property.

3. Transfer under general power of appointment – a power of appointment is

the right to designate the person or persons who will succeed to the property of
a prior decedent. It can be :
1) General power of appointment – is one which may be exercised in
favor of anybody.
Illustration: Uno transferred property to Dos, with a provision that
if Uno transfer the property, such transfer may be in favor of
anybody. Dos transferred the property to Tres. Dos died. The
value of the property will be included in the gross estate of Dos.
2) Limited power of appointment – is one which may be exercised only
in favor of a certain person or persons designated by the prior decedent.
Illustration: Uno transferred property to Dos, with a provision that
if Dos transfer the property, such transfer may be in favor of Tres.
Dos transferred the property to Tres. Dos died. The value of the
property will not be included in the gross estate of Dos.

Note: In order that the property passing under a power of appointment may be
included in the gross estate of the transferor, the power of appointment must be
a general power of appointment.

Location of property

For purposes of including in the gross estate the value of property subject of
transfer in contemplation of death, revocable transfer, or transfer under general power
of appointment, where must the property be?

(a) If the decedent was a resident or citizen of the Philippines, the location of the
property is immaterial, because all properties, regardless of location must be
included in the gross estate;
(b) If the decedent was a non-resident, not citizen of the Philippines, the property
must be located in the Philippines at the time of death.
Lesson 2. The value, exempt acquisition and proceeds of estate.

Distribution of “borrowed” value.

Since even as the value of property subject of transfer in contemplation of

death, revocable transfer, or transfer under general power of appointment is included
in the gross estate, the property remains physically with the transferee, in the
distribution of the estate, such value will be returned to the transferee from whom the
value was borrowed (as if due to him as an heir).

Illustration: The gross estate of Mr. Seis was P10, 000, 000, in which was
included a revocable transfer of P100, 000 to Siete. The net estate, after
payment of the estate tax was P5, 200,000(which included the P100, 000). The
last will and testament provided that his entire estate will go to his only son,
Ocho. How would the estate be actually distributed? After deducting the P100,
000, which all the while remained in the hands of Siete, P5, 100,000 will go to
the son, Ocho.

Proceeds of Life Insurance

Proceeds of life insurance are paid by the insurance company directly to the
beneficiary.

Proceeds of insurance under policies taken out by the decedent upon his life
will constitute part of the gross estate if the beneficiary is:

(a) The estate of the decedent, his executor or administrator; or

(b) A third person (i.e., a person other than the estate executor or administrator), and
the designation of the beneficiary is revocable.

Under the insurance Code of the Philippines, a designation of a beneficiary is

revocable, unless stated expressly in the policy that the designation is irrevocable.

Illustration: Mr. Nueve took an insurance on his life and designated his estate
as the revocable beneficiary. Upon his death, the insurance proceeds
receivable will be part of his gross estate.

Illustration: Miss Diez took an insurance on her life and designated her father
as irrevocable beneficiary. Upon her death the insurance proceeds to be
received by the father will not be included in her gross estate.

Claim against insolvent person

A decedent’s claim against an insolvent person (i.e.,a person whose assets are not
sufficient to pay his liabilities) will be included in the gross estate at the full amount of
the claim. The fact that it is uncollectible in whole or in part will be recognized by a
deduction from the gross estate from the uncollectible portion as deduction from gross
estate.
Illustration: Mr. Uno died with a receivable from Mr.Dos of P20,000. Mr. Uno
has assets of P100,000 and obligations of 400,000 pesos at the time of
Mr.Uno’s death. The gross estate of Mr.Uno must include a value from the
receivable of P20,000 and there will be a deduction of 3/4 x P20,000 pesos for
P15,000, computed as follows:
Claims of creditors P400,000
Assets available to creditors 100,000
Claims of creditors that will not be paid P300,000
Ratio of claims that will not be paid to the
Total claims of debtors (P300, 000/P400, 000 ¾
Deduction (3/4 of P20, 000) P15,000
Exempt acquisitions and transmissions

The following acquisitions and transmissions will not be taxed ( section 87

national internal revenue code):
(a) The merger of usufruct in the owner of the naked title;
(b) the transmission or delivery of the inheritance or legacy by the fiduciary heir or
legatee to the fideicomissary;
(c) the transmission from the first heir, legatee or done in favor of another
beneficiary in accordance with the will of the predecessor;
(d) All bequest,devices, legacies or transfers to social welfare, cultural and
charitable institution no part of the net income of which inures to the benefit of
any individual: provided that more than 30% of the said bequest, legacies or
transfer will be used by such institution for administrative purposes.

Illustration: Mr. Tres died leaving a piece of land to Mr.Cuatro, a friend, but with
the condition that if another friend Mr. Cinco gets married, Mr. Cuatro will give the
property to Mr.Cinco, Mr. Cinco got married. The transmission from Mr. Tres to Mr.
Cuatro paid the estate tax. The transmission from Mr. Cuatro to Mr. Cinco will not
be subject to estate tax.

Illustration: Mr. Seis died leaving a piece of land to Mr.Siete in usufruct (right to
enjoy the fruits) and to Mr.Otso in naked ownership (without the right to the
fruits).The land was subject to the estate tax in the estate of Mr. Seis. Upon the
death of Mr. Siete, the usufruct will be merged into the naked ownership of Mr.
Otso. and Mr. Otso will become the absolute owner of the property. The
transmission of the usufruct from Mr. Siete to Mr. Otso, if will be exempt from the
estate tax? It will not be included in the estate of Mr. Siete.

The value of property in exemption (a) (b) and (c) need not be included in the gross
estate anymore.

With regard to the property in (d), the value of the property will be included in the
gross estate, and the same value will be deducted from the gross estate, so that the
net taxable estate from it will be zero (P0). Why? Because to be exempt, two
conditions must be satisfied: (1) no part of the net income of the institution will inure
to the benefit of any individual; and (2) not more than 30% of the bequest, legacies
and transfers will be used for administrative purposes. The satisfaction of the
conditions is subject to verification of the bureau of internal revenue. If the conditions
are not satisfied,the transmission is taxable and the value of the property will in
taxable estate, and will pay the estate tax.

The following will not be taxed ( examples under special laws):

(a) Amount received for War Damages
(b) Amounts received from the United States Veterans Administration
(c) Benefits received from the Government Service Insurance System
(d) Benefits receive from the Social Security System

Valuation of the gross estate

The gross estate will be valued at its fair market value at the time of
the decedent’s death.
Realities

“Invincible properties” of the state.

Illustration.

A man dies, survived by a daughter, leaving a piece of land with a Torrens Title
in his name, a car registered in the Land Transport Office in his name, shares a stock
of a domestic corporation in his name in the Stock and Transfer Book of the
corporation, cash on hand, jewelry and other personal properties. In the case of the
land and car registered with government registry offices, and shares of stock of
Domestic Corporation, documents showing transfer of ownership will be required
before these properties can be registered in the name of the daughter. Among the
documentary requirements will be the estate tax return and the official receipt on
payment of the estate tax. But how about the cash on hand, jewelry, and personal
properties? There is a very great probability that the heir will not declare them, or
declare only a small portion of them.

Unliquidated property ownership

Illustration.

A died a widower, with property registered in his name. He had two legitimate
children by a former marriage, C and D. A died leaving ten hectares of farm land
acquired when already a widower. C got married to E and had a child F. E died ahead
of C. D got married to G and had two legitimate children, H and I . G died ahead of D.
The present generation is, F, H, and I. If all successions were intestate (there was no
last will and testament), what is the interest of each in the present generation in the
undivided property, that must have been reported as gross estate of their
predecessors, assuming such property had an exchange fair market value of P3, 000,
000? F, H and I must contribute to the estate tax that must be paid on the estate of A,
to the extent of one-half for F, and one-fourth for each H and I. F must pay estate tax
on the estate of C. H and I must share to the extent of one-half each on the estate tax
on the estate of D.

A – P3, 000,000

C- P1, 500,000 D - P1, 500,000

F- P1, 500,000 H – P750, 000 I – P750, 000

Live in Relationships

What property is brought about by two people who are living together without
being married? Common-law husband-wife relationship are many and there are
properties acquired by the parties to the relationship. The rules:

Property acquired by:

(a) Exclusive effort;

(b) Or exclusive money;
(c) Or exchanged with exclusive property,
Will be exclusive property of the party who exerted the effort or owned the
exclusive money or property.
 Property acquired by:

(a) Joint effort

(b) Or money owned by both; or
(c) Exchange with property owned by both,
Will be co-owned by the parties, one half to belong to each.

so that the gross estate will consist of:

(a) Exclusively – owned property; and

(b) One half of the joint co-owned property.

Post Test Assessment Activity # 13. Multiple Choice. Write the letter that
correspond your answer in the space provided. If the correct answer is not found in
the option write letter X.

____1. Which of the following whose estate from within only should be included I the
gross estate?

a. Resident Filipino Citizen

b. Resident Alien
c. Nonresident Filipino Citizen
d. Non Resident Alien
____2. This item is not included as part of his gross estate of the decedent.

a. Claims against insolvent person

b. His donation of property before he died.
c. Proceeds of life insurance with irrevocable beneficiary
d. Properties already given in contemplation of death.
____3. When a married person dies, the property between the husband and wife
acquired in joint effort, the gross estate of the decedent would include:

a. His exclusive properties and all conjugal properties

b. All properties of the husband and wife
c. His exclusive property and one-half of the conjugal property
d. All of the above
____4. The properties of the decedent subject to gross estate determine base on:

a. Citizenship
b. Residency
c. Both a & b
d. None of the above
____5. This power of appointment may be exercised in favor of anybody.

a. Transfer under general power of appointment

b. General power of appointment
c. Limited power of appointment
d. Unlimited power of appointment
____6. The gross estate will be valued at it’s __________________ at the time of
the decedent’s death.
 a.Fair Market Value
b.Acquisition Value
c.Depreciation Value
d.Accumulated Value
____7. The gross estate of a non-resident citizen decedent includes all properties
located:
a. In the Philippines
b. In the Foreign Country
c. Both a & b
d. None of the above
____8. This property is called in law as immovable property.

a. Cash
b. Land
c. Jewellery
d. Car
____9. It is a transfer where the terms of enjoyment of the property may be altered,
amended revoked or terminated by the decedent.

a. Revocable transfer
b. Transfer in contemplation of death
c. Transfer under general power of appointment
d. Terminated transfer
____10. This is the starting point in computing Estate Tax.

a. Citizenship
b. Residency
c. Properties
d. Gross Estate
References:

Online

e. https://www.bir.gov.ph/index.php/tax-information/excise-tax.html#concepts
Textbooks

f. Reyes, V. (2019) A Study on Business & Transfer Tax

g. Reyes, V. (2018) A Handbook on Taxation
 MODULE 14: DEDUCTIONS FROM THE GROS ESTATE

Duration: 3 hours

Introduction

In previous module, we able to identify and understand the properties subject

to estate tax. The next step will be determination of the composition of deductions from
the gross estate. This deductions must be subtracted to the gross estate to arrive in
the estate tax liability. This is important to categorize to lessen the burden of taxpayers.

Objectives:

In this module, you will be able to:

• Determine the composition of deductions from the gross estate

• Identify estate entitled for deductions in the gross estate
• Obtain familiarization with the amount deducted from the gross estate
Pre-test Assessment Activity # 14. Essay. Answer the following question based
on your own understanding and words in the space provided.

1. What is claims against the estate? When is it allowed as deduction from the
gross estate?
______________________________________________________________
______________________________________________________________
______________________________________________________________
______________________________________________________________
______________________________________________________________
______________________________________________________________
______________________________________________________________
______________________________________________________________
2. Explain family home. What are the requirement for a residential house and lot
to be allowed as deduction from gross estate?
______________________________________________________________
______________________________________________________________
______________________________________________________________
______________________________________________________________
______________________________________________________________
______________________________________________________________
______________________________________________________________
______________________________________________________________

3. State the rule when unpaid taxes are allowed as deductions from gross
estate. Give specific example.
______________________________________________________________
______________________________________________________________
______________________________________________________________
______________________________________________________________
______________________________________________________________
______________________________________________________________
______________________________________________________________
Lesson 1: Deductions from the Gross Estate

The following are the deductions from the gross estate:

Ordinary Deductions

Claims against the estate Yes

Claims against insolvent person Yes

Unpaid mortgage or indebtedness Yes

Casualty losses, or from robbery, theft or embezzlement Yes

Taxes Yes

Transfer for public use Yes

Amount received by heirs under Republic Act 4917 Yes

Vanishing Deduction Yes

Special Deductions

Standard deduction P5,000, 000

Family home (at fair market value of family home in the P10,000,000
gross estate) maximum

Lesson 1: Ordinary Deductions

Claims against the estate

Claims against the estate are contracted obligation of the decedent, enforceable if he
were alive. Thus, an obligation that had prescribed already during the lifetime of
decedent, or that was unenforceable against him when still alive (e.g. not in writing)
will not be a claim against his estate when he is dead.

If the claim is from debt instrument, the instrument must be notarized. If the loan was
within three years prior to death. The executor or administrator must submit a
statement showing the disposition of the proceeds of the loan.

Illustration:

Mr. Uno during his lifetime, executed a promissory note that was not notarized. He
died with the note still unpaid. Can there be a claim against his estate arising out of
the promissory note? None.
llustration:

Mr. Dos during his lifetime, executed a promissory note, payable within sixty dates
from the date of issues, and had it notarized. He died the day after he executed the
promissory note. The proceeds of the note were certified by the administrator of the
estate as used for family expenses. The obligation is a claim against the estate.

Illustration:

Mr. Tres during his lifetime, was sued for damages for an act committed by him, and
the court ordered him to pay damages. He died before he could comply with the order
of the court. The judgment for the sum of money is a claim against the estate. There
is no debt instrument involved.

Claims against insolvent person

A person is insolvent when his properties are not sufficient to pay his obligation. The
claims of the creditors shall be satisfied out of his available properties. There are two
kinds of creditors namely:

1. Preferred creditors- shall be paid first in full from the properties (e.g. the
government, for unpaid taxes)
2. Ordinary creditors- shall be paid after all preferred creditors compensated, the
balance of the properties.
Claims against insolvent persons are deductions from the gross estate, subject to the
condition that the full amounts of the receivables are first included in the gross estate.
The deduction from the gross estate shall be the uncollectible portion. It shall be wrong
to include in the computation for the taxable estate only the realizable portion of the
claims.

Illustration:

Mr. Cuatro died leaving an estate, in which receivables from debtors are included, as
follows: P10, 000 from a brother who died without any property whatsoever, and P15,
000 from a friend whose properties are not sufficient to pay preferred creditors. The
deduction for claims against insolvent persons shall be P25, 000.

Illustration:

Mr. Cinco died leaving a gross estate of P 10,000,000, in which there is a receivable
of P60, 000 from a debtor who has not enough properties to pay all his obligations.
The debtor properties can only pay ½ of the obligation. The deduction for claims
against insolvent persons shall be P30, 000.

Unpaid mortgage or indebtedness

When a person leaves property encumbered by mortgage or indebtedness, his gross

estate must include the market value of the property. The mortgage or indebtedness
is deduction from the gross estate. It will be wrong to include in the computation for
the gross estate only the equity of the decedent on the property.
Illustration:

Miss Seis died leaving real property with a fair market value of P1, 000, 000, but
subject to a mortgage in favor of Mr.Seven in the amount of P600, 000. While the
equity of Miss Seis is 400,000, the gross estate will include the fair market value of
P1, 000, 000 and the mortgage of 600,000 will be claimed as a deduction from the
gross estate.

Losses

Losses are deductible from the gross estate if:

(a) Incurred are during the settlement of the estate;

(b) Arising from fire, shipwreck of other casualty, robbery, theft or embezzlement;
(c) Not compensated by insurance of otherwise;
(d) At the time of filling of the estate tax return, such loss has not been claimed as
a deduction from gross income;
(e) Incurred before the last day of payment of the estate tax (within one year from
the decedent’s death, or an extension granted by the Bureau of Internal
Revenue not exceeding thirty (30) days of filing the estate.
Illustrations

Cost of Property P500,000

Fair market value of property at the time of casualty loss 350,000

Insurance recovery 200,000

Deduction is P150,000 computed as follow:

Fair market value of property at the time of loss 350,000

Less: Insurance recovery 200,000

Deductible loss 150,000

Taxes

Taxes are deductible from the gross estate if such taxes accrued prior to the decedent’
death. Taxes accrued after the decedent’s death are not deductible.

Illustration:

Mr. Otso died on March 10, 2019 living a gross estate amounting to P10, 000,000.
Before he died he was not able to file his income tax return for the calendar year 2018.
The income tax accrued before his death is P50, 000. The deduction for taxes of Mr.
Otso shall be P50, 000.

Transfer for Public use

By “transfer for public use” as deduction from the gross estate is meant disposition in
a last will and testament, or transfer to take effect after death, in political subdivision
thereof, for exclusively public purposes:

Political Subdivision of the National Government:

(a) Provinces
(b) Cities
(c) Municipalities
(d) Barangays
Illustration:

In his last will and testament, Mr Nueve. left a piece of land with a fair market value of
P10, 000, 000 to the city of San Rafael, Bulacan. In this land, city of San Rafael,
Bulacan will build a new State University. There will be a deduction of P10, 000, 000
from the gross estate of Mr. Nueve.

Illustration:

Mr. Diez made a donation of piece of land with a fair market value of P3, 000, 000 to
Barangay Poblacion, Bustos Bulacan on which to constructs its barangay hall. The
value of the property shall be included in the gross estate of Mr. Diez, and the same
amount will be a deduction from his gross estate.

Amount received by heirs under Republic Act 4917

“AN ACT PROVIDING THAT RETIREMENT BENEFITS OF EMPLOYEES OF

PRIVATE FIRMS SHALL NOT BE SUBJECT TO ATTACHMENT, LEVY,
EXECUTION, OR ANY TAX WHATSOEVER."

Any amount receivable by the heirs from the decedent’s employer as a consequence
of the death of the decedent employee in accordance with republic act 4917 will be
deductible from the gross estate of the decedent.

Illustration:

Mr. Once, employed in UB Company during his lifetime. Died and received the amount
of P50,000 as his death benefit. The amount of P50,000 will be included in his gross
estate, and the same amount will be deduction received by heirs under Republic Act
4917.

Vanishing Deduction

To lessen the burden on the same property within a short period of time on each
transfer, vanishing is allowed when:

(a) The present decedent died within five years from receipt of the property from
a prior decedent or donor;
(b) The property on which vanishing deduction is being claimed must be located
in the Philippines
(c) The property must have formed part of the taxable estate of the prior
decedent, or of the taxable gift of the donor;
(d) The estate tax on the prior succession for the donor's tax on the gift must have
been finally determined and paid;
 (e) The property on which vanishing deduction is being claimed must be identified
as the one received from the prior decedent, or from the donor or something
acquired in exchange for it;
(f) No vanishing deduction on the property was allowable to the estate of the prior
decedent.
There must be two deaths in order to have vanishing deduction. It will be deduction, if
the property was acquired by the present decedent through inheritance. If the property
was acquired by the present decedent through donation, the donor may be still alive
and vanishing deduction will not be allowed.

Illustration:

Mr. Doce died leaving a piece of land to Mr. Trece. Two years later, Mr. Trece died
leaving the same piece of land. There can be a vanishing deduction on the piece of
land from the gross estate of Mr. Trece can be identified as the same piece of land
inherited.

Illustration:

Mr. Dos inherited real property from Mr. Uno. Three years after the inheritance he
died, and the property was inherited by Mr. Tres. Four years after Mr.Tres, inherited
the property, he died, and the property was inherited by Mr. Cuatro. Two years after
inheriting the property, Mr. Cuatro died, and the property was inherited by Mr. Cinco.
Six years after, Mr. Cinco died. Vanishing deduction will or will not be available to
estates, as shown in the presentation below.

Vanishing Deduction

Property held for:

Uno+ 3 years Vanishing deduction in the estate of Dos.

Dos+

4 years No vanishing deduction in the estate of Tres

because there was vanishing deduction in the
Tres+ estate of Dos -even as 4 years only

2 years Vanishing deduction in the estate of Cuatro

because there was no vanishing in the estate
Cuatro+ of Tres.

6 years No vanishing deduction in the estate of Cinco

because inherited more than five years ago
Cinco+

Computation for the vanishing deductions

Step 1. Determine the basis of the vanishing deduction:

a. The initial value to take as the basis of the vanishing deduction is the value of
the property in the prior estate (or value used for donor’s tax purposes), or the
value of such property in the present estate, whichever is lower. Where the
 property referred of consists of two or more items, the aggregate of the item by
item lower of two values will be the initial basis.
b. The value in (a) will be reduced by any payment made by the present decedent
on any mortgage or lien on the property, where such mortgage or lien was a
deduction from the gross estate of the prior decedent, or gift of the donor;
c. The value in (b) will further reduced by:
Value as reduced in (b) x All deductions except the
Gross Estate vanishing deductions

Step 2. On the computed basis in Step (1), apply :

% If received by inheritance or gift

100% Within one year prior to the death of the decedent

80% More than one year but not more than two years year prior to the
death of the decedent

60% More than two years but not more than three years year prior to the
death of the decedent

40% More than three years but not more than four years year prior to the
death of the decedent

20% More than four years but not more than five years year prior to the
death of the decedent

Illustration:

Mr. Uno, single, inherited a piece of land from his father with a fair market value of P6,
000,000 when inherited. Two and half years later Mr. Dos died with still the same piece
of land, at this time with a fair market value of P7,000,000. The gross estate, on which
the land was part P20, 000,000.

“Selected ordinary deductions” from the gross estate for claims against the estate and
taxes, amounted to P8, 000,000.

The vanishing deduction would have been computed as follows:

Land, initial value to take P6,000,000

Less: P6,000,000/P20,000,000 x P8,000,000 2,400,000

Basis of vanishing deduction P3,600,000

Vanishing deduction (60% of P3,600,000) P 2,160,000

Lesson 2: Special Deductions

Standard Deduction

The gross estate of every decedent who was a citizen or resident of the Philippines
always has a standard deduction of five million pesos (P5, 000,000).
Family Home

A family home of a married person or unmarried head of the family, is the house where
the person and his family reside, and the land which it is situated. The meaning of the
family are the spouse, parents, descendants, ascendants, brothers and sisters, who
are living the family home and who depend upon the head of family for support.

The deduction for family home is “an amount equivalent to its fair market value and/or
the maximum amount is ten million pesos (P10, 000, 000)”.

The deduction from the gross estate for family home shall be allowed when the family
home is certified by the Barangay Captain of the locality where it is located.

For a person who was married at the time of death, and who was under the conjugal
partnership of gain in his property relationship with the spouse, the deduction of the
family home is one-half (1/2) of the fair market value of the family home, but not exceed
ten million(P10,000,000) , if such family home was conjugal property.

Note: There can be one family home only.

Illustration:

Mr. Tres, single, a head of a family, died leaving a gross estate a family home with a
fair market value of P12, 000,000, together with other properties with a fair market
value of P10, 500,000. Deductions sought to be against insolvent were P4, 000,000
but not including the family home and standard deduction. The net taxable would have
been computed as follows:

Gross Estate:

Family Home P12,000,000

Other properties 10,500,000

Total P22,500,000

Deductions:

Claims against the P 4,000,000

insolvent

Family Home 10,000,000

Standard Deduction 5,000,000 P19,000,000

Net taxable estate P3,500,000

If the decedent was a citizen of the Philippines residing abroad, and his home was
abroad, there will be no deduction of the family home. Because, the requirement of
certification by the barangay captain cannot be given.

In case the decedent used as family home a part of structured co-owned by him with
other, the value of the family home to be included in his gross estate, and the deduction
for family home, is only the value of that portion of the structure that belongs to him,
the aggregate of which is subject to the maximum of P10, 000,000 deduction of family
home.

If a family home is mortgage, there will be a deduction of a mortgage and a family

home. The two deductions are from the gross estate, not against the particular
property only.

Illustration

Mr. Cuatro died, a citizen and resident of the Philippines. Included in his gross estate
was a family home consisting of the land and a structure on it that he acquired thru a
bank loan of P12, 000,000. At the time of his death the property has a P5, 000,000
zonal value, and an unpaid bank P800, 000. The total deduction related to the property
that can be claimed is P10,800,000 computed as follows:

Unpaid Mortgage P800,000

Family Home 10,000,000

Total P10,800,000

Lesson 3: DEDUCTIONS FOR A NON-RESIDENT, NOT CITIZEN OF THE

PHILIPPINES

A decedent who was not a citizen or resident of the Philippines at the time of death,
with properties within and outside the Philippines, is subject to tax only on his estate
within the Philippines. Due to this, the estate in the Philippines is allowed limited
deductions.

Deductions from the gross estate of a non-resident, not citizen, of the Philippines

a. Expenses, losses, indebtedness, taxes etc.

Gross Estate, Philippines x World expenses, losses,

Gross Estate, World indebtedness, taxes, etc.

*claims against the estate, claims against insolvent persons, unpaid mortgage
of indebtedness on properties, losses, taxes and losses. It does not matter
where the expenses, losses, indetedness taxes, etc., were paid or incurred
(whether within or outside the Philippines). On the total of the items, the formula
provided by the law must be applied.
b. Transfer for public use of property in the Philippines
c. Vanishing deduction on property in the Philippines
Illustration:

Mr. Cinco, a citizen and resident of F foreign country, single died leaving a gross estate
of P15, 000,000 in the Philippines and P3,000,000 in F foreign country. Expenses,
losses, indebtedness, taxes etc. in the Philippines amounted to P6,000,000, while
expenses, losses, indebtedness etc. in F foreign country amounted to P1,000,000.
The deductions from the Philippine gross estate for expenses, losses, indebtedness,
taxes, etc. Computed as follows:

Gross estate within the Philippines P15,000,000

Gross estate within F Foreign country 3,000,000

World gross estate P18,000,000

Expenses, losses, indebtedness, taxes, P6,000,000

etc. within the Philippines

Expenses, losses, indebtedness, taxes, 1,000,000

etc. within F Foreign country

World expenses, losses, indebtedness, P7,000,000

taxes, etc.

Deduction : P5,833,333

P15,000,000/P18,000,000xP7,000,000

Post Test #14: Identification. Write your answer in the space provided.

_____________________1. This deduction from the gross estate shall be the

uncollectible portion.

_____________________2. This deduction shall be deductible from the gross estate

if accrued prior to the decedent’ death.

_____________________3. This are contracted obligation of the decedent,

enforceable if he were alive.

_____________________4. This creditor shall be paid first in full from the properties.

_____________________5. An act providing that retirement benefits of employees of

private firms shall not be subject to attachment, levy, execution, or any tax
whatsoever."

_____________________6. The deduction for family home is “an amount equivalent

to its fair market value and/or the maximum amount is ______________?

_____________________7. There must be two deaths in order to have this kind of

deduction.

_____________________8. This deduction maybe arise from fire, shipwreck of other

casualty, robbery, theft or embezzlement.
_____________________9. The deduction from the gross estate for family home shall
be allowed when the family home is certified by whom?

_____________________10. The gross estate of every decedent who was a citizen

or resident of the Philippines always has a standard deduction of ______________?

References:

Online

• https://www.bir.gov.ph/index.php/tax-information/excise-tax.html#concepts
Textbooks

• Reyes, V. (2019) A Study on Business & Transfer Tax

• Reyes, V. (2018) A Handbook on Taxation
 MODULE 15: ESTATE TAX

Duration: 3 hours

Introduction

Estate tax is a tax on properties, whether real or personal, tangible or intangible,

wherever situated for a resident, or citizen of the Philippines. However, for a non-
resident, non-citizen of the Philippines only the properties located in the Philippines.
This taxes shall be paid in transferring properties of the decedent to their heirs. The
estate tax diminished extremely wealthy households before it can be transfer to heirs.

Objectives:

In this module, you will be able to:

• Compute the estate tax of a decedent

• Apply the deductions discussed in the previous module.
Pre-test Assessment Activity # 15. True or False. Write T if the statement is correct
and write F if the statement is incorrect in the space provided.

_____1. The first P250, 000 of net taxable estate is tax exempt.

_____2. To arrive in the net taxable estate any claims and allowable deductions
against the estate shall be added.

_____3.The rate of estate tax is 6% of net estate.

_____4. If a property relation between the spouses is by contract, the contract must
be executed before the marriage.
_____5. Estate lax levied on the net value of the estate of a deceased person after
distribution to the heirs or beneficiaries.

Lesson 1: Estate Tax

Estate Tax

A tax levied on the net value of the estate of a deceased person before distribution to
the heirs or beneficiaries.

Rate of Estate Tax

The net estate of every decedent whether resident or non-resident of the Philippines,
as determined in accordance with the National Internal Revenue Code, shall be
subject to an estate tax at the rate of SIX PERCENT (6%).

FORMULA IN COMPUTING ESTATE TAX

Gross Estate P xxx

Less: Deductions xxx

Net Taxable Estate P xxx

Estate tax of 6% of the net estate P xxx

Illustration:

Mr. A resident citizen, died leaving an estate with the following data:

Gross Estate P15,000,000

All deductions 7,000,000

Net taxable estate P8,000,000

The estate tax is (P8, 000,000 x 6%) P480,000

Problem 1:

Mr. B died leaving a gross estate of P20, 000,000. He borrowed P1, 200,000 from Mr.
C, a friend, and executed a notarized promissory note stating that the note will be
payable in 1 year. After 6 months Mr. B died and there is a remaining balance of P600,
000. The estate tax computed as shown below.

Estate of Mr. B

Gross Estate P20,000,000

Less deductions:

Claims against the estate P 600,000

Standard deductions 5,000,000 5,600,000

Net taxable estate P14,400,000

Estate tax at 6% (P14, 400,000 x 6%) P 864,000

Problem 2.

Mr. D, single, a citizen and resident of the Philippines, a head of family leaving a family
home of P 20,000,000. There is a receivable of P600, 000 from a debtor who has not
enough properties to pay all his obligations. The debtor properties can only pay ½ of
the obligation. The estate tax computed as shown below.

Estate of Mr. D

Gross Estate

Family Home P20,000,000

Receivable from a debtor 600,000

 Total P20,600,000

Less deductions:

Family Home P10,000,000

Claims against insolvent person (1/2 of P600,000) 300,000

Standard deductions 5,000,000 15,300,000

Net taxable estate P5,300,000

Estate tax at 6% (P5,300,000 x 6%) P 318,000

Problem 3.

Mr. E, single, a citizen and resident of the Philippines, died on March 10, 2019, leaving
a family home of P9, 500,000 together with land and building in Bulacan with a fair
market value of P12,000,000. Before he died he was not able to file his income tax
return for the calendar year 2018. The income tax accrued before his death is P150,
000. The estate tax computed as shown below.

Estate of Mr. E

Gross Estate

Family Home P9,500,000

Land and Building 12,000,000

Total P21,500,000

Less deductions:

Family Home P9,500,000

Income Tax 150,000

Standard deductions 5,000,000 14,650,000

Net taxable estate P6,850,000

Estate tax at 6% (P6,850,000 x 6%) P 411,000

Problem 4.

Miss F, a widow, a citizen and resident of the Philippines, a head of the family, died
leaving a family home of P30, 000,000. Car worth of P5, 000,000. Real Property Tax
accrued prior to death P300,000. She also inherited a piece of land from his father
with a fair market value of P8, 000,000 when inherited. Three and half years later Miss
F. died with still the same piece of land, at this time with a fair market value of
P9,000,000. The estate tax computed as shown below.
 Estate of Miss F

Gross Estate

Family Home P30,000,000

Car 1,000,000

Land inherited from the father 9,000,000

Total P40,000,000

Less deductions:

Real Property Tax P 300,000

Vanishing Deduction 3,176,000

Family Home 10,000,000

Standard deductions 5,000,000 18,476,000

Net taxable estate P21,524,000

Estate tax at 6% (P21,524,000x 6%) P 1,291,440

The vanishing deduction would have been computed as follows:

Land, initial value to take P8,000,000

Less: P8,000,000/P40,000,000 x P300,000 60,000

Basis of vanishing deduction P7,940,000

Vanishing deduction (40% of P7,940,000) P 3,176,000

Lesson 2: Decedent was married.

Decedent was married

Under Philippine laws, the properties relationship between the spouses may be
governed by contract executed before the marriage, which may be:
(a) complete separation of property
(b) relative community or conjugal partnership of gains
(c) absolute community
(d) any other property relationship
If a property relation between the spouses is by contract, the contract must be
executed before the marriage.

In the absence of such contract, or if the contract is void: (a) on marriage contracted
before august 3, 1988, the system or partnership of gains will govern; and (b) on
marriage contracted on or after august 3, 1988 ( effectivity of the family code of the
philippines), the system of absolute community of property will govern.
Whether the property relationship is conjugal partnership of gains (relative community
of property) absolute community of property, the net properties of a decedent who was
married will fall in two categories:
(a) net property owned exclusively; and
(b) net property owned jointly( called “ community” or “ conjugal”)
The surviving spouse has a 1/2 share in the net community or conjugal property.

Illustration:

Exclusive Conjugal Total

Conjugal Properties:

Family Home P9,000,000 P9,000,000

Real and personal properties 14,000,000 14,000,000

Exclusive Properties: 5,000,000 5,000,000

Gross Estate 5,000,000 23,000,000 P28,000,000

Less:

Ordinary Deductions

Conjugal Ordinary Deductions (2,000,000) (2,000,000)

Net Conjugal Estate 21,000,000

Special Deductions

Family Home (4,500,000)

Standard Deduction (5,000,000)

Total Deductions (11,500,000)

Net Estate 16,500,000

Less: 1/2 Share of Surviving Spouse (10,500,000)

Spouse

Conjugal Property P23,000,000

Conjugal Deductions (2,000000)

Net Conjugal Estate P21,000,000

(P21M/2)

NET TAXABLE ESTATE P6,000,000

Estate Tax (P6,000,000 x 6%) P 360,000

Post Test Assessment Activity # 15. Multiple Choice. Write the letter that
corresponds your answer before the number.

1. To arrive in the net taxable estate any claims and allowable deductions against
the estate shall be_______?
a. Added c. Multiply
b. Subtracted d. Divide
2. What is the rate to compute the estate tax liability?
a. 2% c. 6%
b. 4% d. 8%
3. To compute the estate tax liability, the estate tax rate shall be multiply to :
a. Gross Estate c. Deductions
b. Net Taxable Estate d. Estate Tax
4. Which of the following statement is correct?
a. If a property relation between the spouses is by contract, the contract must
be executed before the marriage.
b. If a property relation between the spouses is by contract, the contract must
be executed after the marriage.
c. If a property relation between the spouses is by contract, the contract must
be executed during the marriage.
d. All of the above
5. A tax levied on the net value of the estate of a deceased person before
distribution to the heirs or beneficiaries.
a. Gross Estate c. Deductions
b. Net Taxable Estate d. Estate Tax
Problem Solving: Answer the following problem and show your solution in the space
provided.

1. Mr. Juan, single, a citizen and resident of the Philippines, a head of family,
leaving a family home of P 9,500,000, Cash in Bank P3, 000,000 and Car
P2,500,000. There is a receivable of P400, 000 from a debtor who has not
enough properties to pay all his obligations. The debtor properties can only pay
1/4 of the obligation. Compute the estate tax of Mr. Juan.
2. Mr. Tank died leaving a gross estate of P10, 000,000, He borrowed P150, 000
from a friend and executed a promissory note but unfortunately forget to notarized.
Before he died, he was not able to pay the real property tax amounting to P20,
000. Compute the estate tax of Mr. Tank.

3. Mr. Happy a citizen and resident of the Philippines, a head of the family, died
leaving a family home of P15, 000,000 together with agricultural land of P5,
000,000. Before he died, in the preceding year, he was not able to pay his income
tax worth of P130, 000. He borrowed P500, 000 from a friend and executed a
promissory note, payable within ninety days from the date of issue, and had it
notarized. He died the day after he executed the promissory note. The proceeds
of the note were certified by the administrator of the estate as used for family
expenses. He also inherited a piece of land from his mother with a fair market value
of P10, 000,000 when inherited. After, four and half years later Mr. Happy died with
still the same piece of land, at this time with a fair market value of P11,300,000.
Compute the estate tax of Mr. Happy.
 4. Mr. Asher, a resident and citizen of the Philippines died, leaving the following
estate to the surviving spouse Angela :
Family Home (conjugal property) P12,000,000
Car (exclusive property of Mr.Asher) 2,000,000
Land & Building (conjugal property) 8,000,000
Conjugal Ordinary Deductions 500,000

References:
Online

• https://www.bir.gov.ph/index.php/tax-information/excise-tax.html#concepts
• https://www.pinoymoneytalk.com/philippines-estate-tax-bir-revenue-regulation-
12-2018/?fbclid=IwAR3KC9ugyN-
aOIpzkYVKGVIkoYyDd_ATZjgKuRV3ZtN_1TSudl4_RAqI_Eg
Textbooks

• Reyes, V. (2019) A Study on Business & Transfer Tax

• Reyes, V. (2018) A Handbook on Taxation
 MODULE 16: ESTATE TAX COMPLIANCE REQUIREMENTS

Duration: 1.5 hours

Introduction

We already occurred computing the estate tax of a decedents in the previous module.
Now, we can able to learn how file and pay the estate tax. This is important to remember
to avoid penalty charges that maybe acquired in the future.

Objectives:

In this module, you will be able to:

• Determine how to file estate tax return

• Identify the mode of payment estate tax
• Understand the foreign estate tax credit.
Pre-test Assessment Activity # 16. . Write T if the statement is correct and write F if the
statement is incorrect in the space provided.

____1. The notice of death should be submitted to the BIR within two months from the
date of death of the decedents.

____2. The BIR Commissioner shall have authority to grant, in meritorious cases, a
reasonable extension not exceeding thirty (30) days for filing the return.

____3. The estate tax credit is not available to non-resident alien decedent.

____4. An estate tax returns showing a gross estate value exceeding Five million pesos
(P3, 000,000) shall be supported with a statement duly certified to by a CPA.

____5. Tax credit is allowed to all decedents who have properties within and outside the
Philippines

Lesson 1: Filling of Return

Estate Tax Return

(A) Requirements. - In all cases of transfers subject to the tax imposed herein, or
regardless of the gross value of the estate, where the said estate consists of registered
or registrable property such as real property, motor vehicle, shares of stock or other
similar property for which a clearance from the Bureau of Internal Revenue is required as
a condition precedent for the transfer of ownership thereof in the name of the transferee,
the executor, or the administrator, or any of the legal heirs, as the case may be, shall file
a return under oath in duplicate, setting forth:

(1) The value of the gross estate of the decedent at the time of his death, or in
case of a nonresident, not a citizen of the Philippines, of that part of his gross
estate situated in the Philippines;
 (2) The deductions allowed from gross estate in determining the estate as defined
in Section 86; and

(3) Such part of such information as may at the time be ascertainable and such
supplemental data as may be necessary to establish the correct taxes.

Provided, however, That estate tax returns showing a gross value exceeding Five million
pesos (P5,000,000) shall be supported with a statement duly certified to by a Certified
Public Accountant containing the following:

(a) Itemized assets of the decedent with their corresponding gross value at the
time of his death, or in the case of a nonresident, not a citizen of the Philippines,
of that part of his gross estate situated in the Philippines;

(b) Itemized deductions from gross estate allowed in Section 86; and

(c) The amount of tax due whether paid or still due and outstanding.

(B) Time for Filing. For the purpose of determining the estate tax provided for in Section
84 of this Code, the estate tax return required under the preceding Subsection (A) shall
be filed within one (1) year from the decedent's death.

A certified copy of the schedule of partition and the order of the court approving the same
shall be furnished the Commissioner within thirty (30) days after the promulgation of such
order.

(C) Extension of Time. - The Commissioner shall have authority to grant, in meritorious
cases, a reasonable extension not exceeding thirty (30) days for filing the return.

(D) Place of Filing. - Except in cases where the Commissioner otherwise permits, the
return required under Subsection (A) shall be filed with an authorized agent bank, or
Revenue District Officer, Collection Officer, or duly authorized Treasurer of the city or
municipality in which the decedent was domiciled at the time of his death or if there be no
legal residence in the Philippines, with the Office of the Commissioner.

Lesson 2: Payment of Estate Tax

(A) Time of Payment. - The estate tax imposed by Section 84 shall be paid at the time
the return is filed by the executor, administrator or the heirs.

(B) Extension of Time. - When the Commissioner finds that the payment on the due date
of the estate tax or of any part thereof would impose undue hardship upon the estate or
any of the heirs, he may extend the time for payment of such tax or any part thereof not
to exceed five (5) years, in case the estate is settled through the courts, or two (2) years
in case the estate is settled extrajudicially.

In such case, the amount in respect of which the extension is granted shall be paid on or
before the date of the expiration of the period of the extension, and the running of the
Statute of Limitations for assessment as provided in Section 203 of this Code shall be
suspended for the period of any such extension.
Where the taxes are assessed by reason of negligence, intentional disregard of rules and
regulations, or fraud on the part of the taxpayer, no extension will be granted by the
Commissioner.

If an extension is granted, the Commissioner may require the executor, or administrator,

or beneficiary, as the case may be, to furnish a bond in such amount, not exceeding
double the amount of the tax and with such sureties as the Commissioner deems
necessary, conditioned upon the payment of the said tax in accordance with the terms of
the extension.

(C) Payment by Installment. – In case the available cash of the estate is insufficient to
pay the total estate tax due, payment by installments shall be allowed within two (2) years
from the statutory date for its payment without civil penalty and interest.

(D) Liability for Payment - The estate tax imposed by Section 84 shall be paid by the
executor or administrator before delivery to any beneficiary of his distributive share of the
estate. Such beneficiary shall to the extent of his distributive share of the estate, be
subsidiarily liable for the payment of such portion of the estate tax as his distributive share
bears to the value of the total net estate.

For the purpose of this Chapter, the term 'executor' or 'administrator' means the executor
or administrator of the decedent, or if there is no executor or administrator appointed,
qualified, and acting within the Philippines, then any person in actual or constructive
possession of any property of the decedent.

Lesson 3. Tax credit for foreign estate tax paid

Only the estate of a resident or citizen of the Philippines can be claim a credit for
foreign estate tax paid.

Formulas on foreign estate tax credit.

a. If there was one foreign country only to which an estate tax was paid, the estate
tax credit will not exceed the amount arrived at with the use of the following
formula:

Net estate, foreign country x Philippine Estate Tax = Pxxx

Net estate, world

Compare with:
Foreign estate tax paid Pxxx
Tax credit allowed, whichever is lower
(This is called Limitation A) Pxxx

b. If there were two or more foreign countries to which foreign estate taxes were
paid, tax credit for foreign estate taxes will be computed as follows:
Step 1. Tentative tax credits, Limitation A:
Add the tax credits, Limitation A, by country Pxxx
Step 2. Tentative tax credit, Limitation B:
Net estate, foreign country x Philippine Estate Tax = Pxxx
Net estate, world
Compare with:
 Total foreign estate tax paid Pxxx
Tentative tax credit in limitation B, whichever is lower Pxxx
Step 3. Final tax credit to apply (limitation A, Pxxx
or Limitation B, whichever is lower)

Illustration:

Mr. A, a citizen of the Philippines, died residing in the Philippines, leaving a net taxable
estate of P900,000 in the Philippines and P600,000 in Foreign Country X. The net taxable
estate in Foreign Country X paid an estate tax of P40,000 to that foreign country. The
Philippine estate tax due, after credit for the estate tax paid in foreign Country X, would
have been computed as follows:

Net taxable estate, Philippines P900,000

Net taxable estate, Foreign Country X 600,000
Net taxable estate, World P1,500,000
Philippine estate tax on P1,500,000 at 6% P 90,000
Less: Estate tax credit
Estate tax paid to Foreign Country X P40,000
P600,000/P1,500,000xP90,000 P36,000
Allowed 36,000
Estate tax still due P 54,000

Post Test Assessment Activity # 16: Essay

1. What is the prescribed period for filling of estate tax?

________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________
2. What is the prescribed period for payment of estate tax?
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________

3. If allowed, what is the maximum extension for filling the estate tax?
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________

4. If allowed, what is the maximum extension for payment the estate tax?
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________
 5. What are the liabilities of the executor and the beneficiaries for the payment of
estate tax?
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________

References:

Online

• https://www.bir.gov.ph/index.php/tax-information/excise-tax.html#concepts
Textbooks

• Reyes, V. (2019) A Study on Business & Transfer Tax

• Reyes, V. (2018) A Handbook on Taxation
 MODULE 17: NET DISTRIBUTABLE ESTATE

Duration: 1.5 hours

Introduction

The Net Distributable Estate (NDE) signifies the value of the estate which shall be
inherited by the heirs. While the Net Taxable Estate (NTE) signifies the net amount of
estate subject to estate tax. It is computed to determine the actual deductions in the
estate.

Objectives:

In this module, you will be able to:

• Identify the difference between the NDE and NTE;

• Compute the taxable estate and net distributable estate.
Pre-test Assessment Activity # 17. Matching type. Match column A to column B,
write only the letter that corresponds your answer in the space provided.

Column A Column B

_____1. Funeral Expenses a. Net Distributable Estate

_____2. Medical Expenses b. Net Taxable Estate

_____3.Vanishing Deductions

_____4.Standard Deduction

_____5. Family Home

_____6. Judicial Expenses

_____7. Legitimate obligation but

no proper documentations

_____8.Estate Tax

_____9. Foreign Estate Tax

_____10. Loss beyond six months

from the date of death

Lesson 1: Net Distributable Estate

The taxable estate on which the estate tax rates are applied is not the same as the
net distributable estate. The taxable estate is the result of the formula under the National
Internal Revenue Code: Gross estate less deduction equals net taxable estate. The net
distributable estate, on the other hand is properties physically in the estate less
diminutions of the estate equals the net distributable estate.

Expense and non-expense deductions causing a difference between net taxable estate
(NTE) and net distributable estate (NDE).

1) Funeral expenses, not a deduction from the estate, but an actual diminution of the
NDE;
2) Medical Expenses, not a deduction form the gross estate, but an actual diminution
of the NDE;
3) Judicial expenses, cannot be deducted in the computation of the NTE, but an
actual diminution of the NDE;
4) Loss: if sustained beyond six months from the date of death, is not a deduction in
the computation of the NTE, but will be deductible in the computation of the NDE.
5) Claims against the estate:
a. If arising from debt instrument, can be deducted in the computation of the NTE
only if the debt instrument is notarized, but will be deducted in the computation
of the NDE if it is to be recognized and paid from the estate, even if not
recognized.
b. Loan incurred within three years before the death, can be deducted in the
computation of the NTE only if there is a certification by the executor or
administration on the disposition of the proceeds of the loan, but will be
deducted in the computation of the NDE if it is to be recognized and paid from
the estate, even without such certification.
6. Vanishing Deduction, while allowable as deductions in the computation of the NTE,
is not physical diminutions of the estate, and will not be deducted in the
computation of the NDE;
7. Standard deduction which is a deduction in the computation of the NTE, but which
is not physical diminution of the NDE;
8. Family home (maximum of P10,000,000) which is deduction in the computation of
the NTE, but which does not physically diminished the NDE;
9. Share of the spouse in the net community estate, while one-half of the net
community estate arrived at with the use if the tax formula for the computation of
the NTE, is one-half of the net physical community estate in the computation of the
NDE;
10. Foreign estate tax may be claimed as tax credit in the computation of the NTE, but
is a deduction in the computation of the NDE.
11. Philippine estate tax is not a deduction on the computation of the NTE, but must
be deducted in the computation of the NDE.
 Illustration:

Decedent was single at the time of death

Real and personal properties in the Philippines P6,000,000

Proceeds of life insurance:

Receivable by the estate, as revocable beneficiary 1,000,000

Receivable by the spouse, as irrevocable beneficiary

Medical Expenses within one year prior to death:

Paid by the time of death 300,000

Unpaid at the time of death 400,000

Funeral Expense :

Paid by the time of death 100,000

Unpaid at the time of death 150,000

Other obligation of the decedent 1,000,000

What is the net taxable estate and net distributable estate?

Taxable Distributable

Gross Estate P6,000,000 P6,000,000

Receivable under life insurance, with estate 1,000,000 1,000,000

as beneficiary

Total P7,000,000 P7,000,000

Medical expenses (400,000)

Funeral expenses (150,000)

Other obligations (1,000,000) (1,000,000)

Standard deduction (5,000,000)

Total deductions P6,000,000

Net taxable estate P1,000,000

Estate tax at 6% (60,000)

Net distributable estate P5,390,000

Post Test Assessment Activity # 17. Problem Solving: Answer the following problem
and show your solution in the space provided.

1. Mr. Lemonade, a resident and citizen of the Philippines leaving the following
properties and expenses:

Real Estate P7,000,000

Car 1,500,000

Medical Expenses 100,000

Funeral Expenses 300,000

Judicial Expenses 150,000

Compute the net taxable estate and net distributable estate?

 2. Mr. Orange, a Filipino citizen, died leaving the family home with a fair market
value of P7,000,000 together with Land and Building worth of P8,000,000. Seven
months prior to his death, he was able to obtain a bank loan of P800, 000. At
date of his death, the loan has an unpaid balance of P600, 000. His cash in bank
was P170,000 before payments of the following:
Funeral Expenses P 70,000

Judicial Expenses 50,000

Compute the net taxable estate and net distributable estate?

References:

Online

• https://www.bir.gov.ph/index.php/tax-information/excise-tax.html#concepts
• https://www.pinoymoneytalk.com/philippines-estate-tax-bir-revenue-regulation-
12-2018/?fbclid=IwAR3KC9ugyN-
aOIpzkYVKGVIkoYyDd_ATZjgKuRV3ZtN_1TSudl4_RAqI_Eg
Textbooks

• Reyes, V. (2019) A Study on Business & Transfer Tax

• Reyes, V. (2018) A Handbook on Taxation