Business and Transfer Taxation

Review Notes
Compiled by: Karl Guinucud
A transfer may be gratuitous or onerous.
CONCEPT OF TRANSFER TAXATION
Gratuitous Onerous
1. Donacion inter vivos (death) 1. Value-added Tax
2. Donacion mortis causa (during 2. Other Percentage Taxes
lifetime) 3. Excise Taxes

with applicable Documentary Stamp Tax

I. Gratuitous Transfer: ESTATE TAX

 An estate tax is a tax on the right to transfer certain property at death and on certain transfers
which are made by law equivalent to testamentary disposition (in contemplation of death).
 It is an excise tax (a tax impose upon the right or privilege), the object of which is the shifting of
economic benefits and the enjoyment of the property from the deceased to the living.
 It accrues as of the time of death of the deceased.
 The taxpayer in estate taxation is the estate of the decedent represented by the administrator,
executor or legal heirs.

1. Concept of Succession – a mode of acquisition by virtue of which the property,

rights and obligations to the extent of the value of the inheritance, of a
person are transmitted through his death to another or others by will or
by operation of law.
 Will – is an act whereby a person is permitted with the formalities prescribed by law, to
control to a certain degree the disposition of his estate, to take effect after his death. From
the moment of death of the decedent, the rights to the succession are transmitted, and the
possession of the hereditary property is deemed transmitted to the heir.
 Kinds of Will:
a. Notarial or Ordinary Will – one which is executed in accordance with the
formalities prescribed by Art. 804 to 808 of the New Civil Code. It is the will that
is created for the testator by a third party, usually his lawyer, follows proper
form, signed and dated in front of the required bumber of witnesses and acknowledged
by the presence of a notary public.
b. Holographic Will – is a written will which must be entirely written , dated
and signed by the hand of the testator himself, without the necessity of any
witnesses.
c. Codicil – A supplement or addition to a will, made after the execution of a
will and annexed to be taken as part thereof, by which any disposition made in the
original will is explained, added or altered.

2. Elements of Succession
 Decedent – the person whose property is transmitted through succession, whether
testamentary, intestate, or mixed.
 Heir – the person called to the succession either by the provision of a will or by
operation of law.
  Estate – refers to all property, rights and obligations of a person which are not
extinguished upon his death.

3. Kinds of Succession
a. Testamentary – results from the designation of an heir, made in a will executed in
the form prescribed by the law.
 The descedent may dispose his properties in his last will and testament in the
manner he wants, however, he must reserve some for certain persons who are
called by the law as compulsory heirs.

 Compulsory heirs are:

i. Legitimate children and descendants, which include legally adopted children
ii. In the absence of legitimate descendants, the legitimate parents or ascendants*
iii. Surviving spouse
iv. Illegitimate child, both natural and spurious
*Note: Legitimate parents or ascendants can only inherit in the absence of
legitimate children or descendants. Brothers and sisters of the decedent are not
considered as compulsory heirs, thus they cannot inherit from the legitime of the
decedent

 In the absence of compulsory heirs, the successors would be:

i. Relatives up to 5th degree of consanguinity
ii. If there were no relatives, the government shall inherit the whole estate.
iii. If there is a will, the decedent may name other persons to inherit the free
portion of the net distributable estate

 Kinds of Successors
i. Legatee – an heir of personal property given by virtue of a will
ii. Devisee – an heir of real property given by virtue of a will

 Under testamentary succession, properties left by the decedent are classified into:
i. Legitime – portion of the testator’s property which could not be disposed
freely because the law has reserved it for the compulsory heirs.
ii. Free portion – part of the whole estate which the testator could dispose of
freely through a written will irrespective of his relationship to the recepient.

 Executor (executrix) is the person nominated by the testator to carry out the
directions and requests in the decedent’s will and to dispose his property according to
the decedent’s testamentary provisions after his death.

b. Legal Intestate Succession – transmission of properties where there is no will, or

if there is a will, such is void or lost its validity, or nobody succeeds the will.
 In the intestate succession, the entire estate of the decedent is distributed to the
heirs. The compulsory heirs in testamentary succession are also the heirs in intestate
succession. However, intestate heirs include brothers and sisters, collateral relatives
within the fifth degree of consanguinity and the state.
 Administrator (administratrix) is the person appointed by the court, in
accordance with the governing statute, to administer and settle intestate estate and
such testate estate as no competent executor designated by the testator.
 c. Mixed Succession – a transmission of properties, which is effected partly by will
and partly by operation of law

II. Formula in Computing Estate Tax

1.
For married decedents (residents and citizens)
Exclusive Conjugal/Community Total
Properties Properties
Gross Estate xx xx xx
Less: Allowable Deductions
1. Ordinary (ELITE) (xx) (xx) (xx)
Net Estate before Special xx xx xx
Deductions
2. Special Deductions
 Family Home (xx)
 Medical Expenses (xx)
 Standard deduction (xx)
 Benefits received under (xx)
RA 4917
 Share of the Surviving (xx)
Spouse (1/2 of the net
conjugal/community estate
before special deductions)
Net Taxable Estate xx
Estate Tax Due xx
Less: Estate Tax Credit (xx)
Estate Tax Payable xx

 As a general rule, obligations contracted during the marriage are presumed to have
benefited the marriage, and are charges againts the community/conjugal
property (e.g. funeral expenses, judicial expenses, claims against the estate).

 Vanishing deduction may be a dedcution against exclusive or community/conjugal

property, depending on the classification of the property to which it is related, if
exclusive or community/conjugal.

 A deduction, whether against exclusive or community/conjugal estate follows the

classification of the property in the gross estate. If the property to which the
deductioon is related is exclusive property in the gross estate, the deduction is against the
exclusive gross estate. If the property to which the deductioon is related is
community/conjugal property in the gross estate, the deduction is against the
community/conjugal gross estate.

2. For single decedents

Gross estate xx
Less: Ordinary Deductions (xx)
 Special Deductions (xx)
Net Taxable Estate xx

Estate Tax Due xx

Less: Estate Tax Credit (xx)
Estate Tax Payable xx

III. Gross Estate

Residents and Citizens Non-Resident Aliens

What are included? How to value? What are How to

included? value?
1. ALL real properties The higher between the Fair 1. Real The higher
wherever situated. Value or the Zonal Value. properties between the
located ONLY in Fair Value or
the Philippines the Zonal
Value.
2. ALL personal properties Fair Value at the time of 2. Personal Fair Value at
wherever situated: death properties the time of
a. Tangible In case of shares of stocks: located ONLY in death
b. Intangible a. If traded in the local the Philippines: In case of
stock exchange, a. Tangible shares of
the MEAN between the b. Intangibl stocks, same
highest and lowest e properties as residents
quotations. situated only and citizens.
b. If not traded in the in the
local stock exchange: Philippines
i. Ordinary shares – unless
book value exempted
ii. Preferred shares – on the
par value basis of
reciprocity
.
3. Whether real or personal a. If the transfer is The same as Same
property: a bona fide sale, no residents and valuation as
a. In contemplation of amount shall be citizens, in the case of
death included in the gross however, only residents and
b. Transfer with estate. for properties citizens.
retention or reservation b. If the transfer is a situated
of certain right sale but for no or within the
c. Transfer under insufficient Philippines.
general power of consideration,
appointment the difference
d. Revocable transfer between the FAIR
VALUE at the time of
death and the
 consideration
received.
c. If the transfer is
a sale for no or
insufficient
consideration and
the fair value at the
time of death is LESS
than the
consideration
received, no amount
shall be included in the
gross estate.
4. Proceeds of life Amount of proceeds. Same treatment
insurance, included only as in the case of
if: residents and
a. Whether REVOCAB citizens, only if
LE or IRREVOCABLE, applicable.
when the beneficiary is
i. The estate of the
deceased
ii. His executor or
iii. His
administrator
b. The beneficiary is
a third person, and the
transfer
is REVOCABLE

 What intangible properties are considered as situated within the Philippines?

1. Franchise which must be exercisable in the Philippines;
2. Shares, obligations or bonds issued by domestic corporations;
3. Shares, obligations or bonds issued by any foreign corporation, 85% of business of
which is in the Philippines;
4. Shares, obligations or bonds issued by any foreign corporation, if such shares,
obligations or bonds have acquired business in the Philippines;
5. Shares or rights in any partnership, business or industry established in the Philippines.

IV. Exemptions and Exclusions from Gross Estate

 Under Section 85 and 86 of NIRC
1. Capital or exclusive property of the surviving spouse
2. Properties outside the Philippines of a non-resident alien decedent
3. Intangible personal property of a non-resident alien in the Philippines when the rule
of reciprocity applies.

 Under Section 87 of NIRC

1. Merger of usufruct in the owner of the naked title
 2. Transmission or delivery of the inheritance or legacy of the fiduciary heir or legatee
to the fideicommissary
3. Transmission from the first heir, legatee or donee in favor of another beneficiary, in
accordance with the will of the predecessor
4. All bequests, devices, legacies or transfers to social welfare , cultural and charitable
institutions, provided:
i. No part of the net income of said institution inure to the benefit of any
individual;
ii. Not more than 30% of such transfers shall be used for administration
purposes.

 Under Special Laws

1. Proceeds of life insurance and benefits received by members of the GSIS (RA 728)
2. Benefits received by members from SSS by reason of death (RA 1792)
3. Amounts received from Philippine and United States governments for war damages
4. Amounts received from United States Veterans Administration
5. Retirement benefits of officials/employees of a private firm (RA 4917), provided
they are included in the gross estate.
6. Payments from the Philippines and US governments to the legal heirs of deceased of
World War II Veterans and deceased civilian for supplies/services furnished to the US
and Philippine Army (RA 136)

V. Property Relationship Between Spouses

Conjugal Absolute
Partnership Community
I. Property acquired BEFORE Marriage
a. Gratuitous Exclusive Communal
b. Onerous Exclusive Communal
c. Where the spouse has a Exclusive Exclusive
legitimate descendant from a
previous marriage
II. Property
acquired DURING marriage
a. Gratuitous title Exclusive Exclusive
b. Onerous Title Conjugal Communal
c. In exchange of EXCLUSIVE Exclusive Exclusive
property
d. In exchange of conjugal/ Conjugal Communal
community property
e. Fruits or income from Conjugal Exclusive
EXCLUSIVE property
 f. Fruits or income from Conjugal Communal
conjugal/ community property
 The highlighted rows are the differences between the two systems.
 Jewelries shall form part of the communal property (in case of absolute community).
 Rules in determining the property of relationship
1. Agreement on marriage settlement
2. If there was no prenuptial agreement and:
i. The date of marriage took place before August 3, 1988, conjugal partnership of
gains.
ii. The date of marriage took place on or after August 3, 1988, absolute community
of property.

VI. Deductions
Deductions from gross estate
 Residents and Citizens: ELITE + PP + VD + FH + STD + R + M + Share of the
Surviving Spouse
 Nonresident Aliens: ELITE + PP + VD + Share of the Surviving Spouse

1. Expenses, losses, indebtedness and taxes (please see discussions below).

a. If decedent was a citizen or resident alien, deduct all ELIT.
b. If decedent was a non-resident alien, prorate ELITE as follows:

Phil. Gross Estate x Total ELITE

World Estate

2. Transfers for PUBLIC PURPOSE. These are bequests, legacies, devises or transfers for
the use of the government of the Phil. or any political subdivision thereof, exclusively for
public purpose.
3. Deduction for property previously taxed (VANISHING DEDUCTION).
4. The family home not exceeding P1,000,000.
5. Standard deduction for citizen or resident alien decedent only of P1,000,000.
6. Retirement benefits received by employees of private firms from private pension plan
approved by the BIR under R.A. 4917.
7. Medical expenses paid or incurred within 1 year prior to decedent’s death duly
substantiated with receipts but not to exceed P500,000 for citizen or resident decedent.
8. Net share of the surviving spouse in the conjugal partnership property or community
property as diminished by the expenses properly chargeable to such property shall be
deducted from the estate.

Expenses, losses, indebtedness, and taxes deductible from gross estate (ELIT)
1. Funeral expenses. Limit is 5% of the gross estate but not exceeding P200,000
(statutory maximum).
2. Judicial expenses for the testamentary or intestate proceedings.
3. Losses due to fire, storm, shipwreck, or other casualty.
4. Losses due to theft, robbery or embezzlement.
5. Claims of the decedent against insolvent persons, where the value of the decedent’s
interest therein is included in the gross estate.
 6. Claims against the estate, provided that the debt instrument was notarized at the time
the indebtedness was incurred; and, if the loan was contracted within three years before the
death of the decedent, a statement showing the disposition of the proceeds of the loan (or
how the proceeds of the loan was used) must accompany the estate tax return.
7. Unpaid mortgage, where the value of the decedent’s interest, undiminished by the
mortgage, is included in the gross estate.
8. Income tax on income prior to death of the decedent.
9. Property taxes which have accrued prior to death of decedent.

REQUISITES for deduction of losses in Nos. 3 and 4 above

a. The loss is not compensated by insurance or otherwise.
b. The loss is not claimed as a deduction in the estate income tax return.
c. The loss must occur not later than the last day for payment of the estate tax. (The last
day for payment of the estate tax is 6 months from the decedent’s death).

PROPERTY PREVIOUSLY TAXED (VANISHING DEDUCTION)

1. Purpose - to minimize the effects of a double tax on the same property within a short period of
time.
2. Conditions for allowance:
a. There is a property forming a part of the gross estate of the present decedent situated in
the Philippines;
b. The present decedent acquired the property by inheritance or donation within 5
years prior to his death;
c. The property subject to vanishing deduction can be identified as the one received from the
prior decedent, or from the donor, or can be identified as having been acquired in exchange for
the property so received;
d. The property acquired formed part of the gross estate of the prior decedent, or of the taxable
gift of the donor;
e. The estate tax on the prior transfer or the gift tax on the gift must have been paid; and
f. The estate of the prior decedent has not previously availed of the vanishing deduction.

3. Percentage of vanishing deduction - the rate depends on the interval between the death of
present decedent and death of prior decedent (if the property was acquired by inheritance) or
death of present decedent and date of gift (if the property was acquired by donation), as follows:
More than Not more than Percentage
xxx 1 years 100%
1 years 2 years 80%
2 years 3 years 60%
3 years 4 years 40%
4 years 5 years 20%
5 years Xxx Xxx
4. Procedures in computing vanishing deduction
a. Determine the initial value by comparing the FMV of the property used in computing the
first transfer tax paid with the FMV of the property in the present decedent. The lower of the
two is the initial value.

b. From the initial value taken, deduct any mortgage or lien on the property previously taxed
which was paid by the present decedent prior to his death, where such mortgage or lien was a
 deduction from the gross estate of the prior decedent or gross gift of the donor. This is the initial
basis.

c. The initial value taken, as reduced by Step (b), shall be further reduced by prorated
deductions for expenses, losses, indebtedness, taxes (ELIT) and transfers for public purpose
(PP) only, allocable to the property previously taxed as follows:

Lower Value xxxx

Less:Mortgage Paid xxxx

Initial basis xxxx

Pro Rated Deduction:

Initial Value / Gross Estate x Deductions xxxx
This is the final basis. xxxx
Multiply the VD Rate xx%
Vanishing Deductions xxxx
d. Determine the time interval between the death of present decedent and death of prior
decedent (if the property was acquired by inheritance) or death of present decedent and date
of gift (if the property was acquired by donation) to find the applicable percentage of vanishing
deduction.
e. Multiply the final basis by the percentage of vanishing deduction to arrive at the
VANISHING DEDUCTION.

The FAMILY HOME

1. Defined - The family home is the dwelling house where a person and his family reside, and the
land on which it is situated.
2. Value included in the gross estate. The current fair market value or zonal value of the family
home, whichever is higher, shall be included in the gross estate of decedent.
3. Valuation date. The family home shall be valued as of the date of death.
4. Conditions for allowance of deduction:

a. Decedent must have died on or after July 28, 1992.

b. The total value of the family home must be included in the gross estate of the decedent.
c. The family home must be the actual residence of decedent and his family at the time of death,
as certified by the Barangay Captain of the locality where the family home is situated.
d. Deduction cannot exceed the fair market value or zonal value of the family home as included
in the gross estate but not exceeding P1,000,000.
e. It is a deduction from common properties or separate properties of the decedent, as the case
maybe.

Tax credit for estate tax paid to a foreign country

1. Who can claim? Only citizen or resident alien decedent.
2. Amount Deductible, whichever is lower:
a. Actual estate tax paid abroad
 b. Limit
2. Limitations on tax credit:
a. Only one country is involved

Net estate (per Foreign Country) x Philippine estate tax

Total net estate

b. Two or more foreign countries are involved

Limit 1: per country

Net estate (per Foreign Country) x Philippine estate tax

Total net estate

Limit 2: Total Foreign Country

Net estate (all Foreign Countries) x Philippine estate tax

Total net estate

VII. Compliance Requirements

a. Notice of death shall be given when the value of the gross estate exceeds P 20,000
b. The executor, administrator or any of the legal heirs shall file the notice of death within
2 months after the decedent’s death or within 2 months after the executor or administrator
has qualified.
c. The estate tax return shall be filed within 6 months after the decedent’s death,
but may be extended to not exceeding 30 days if authorized by the BIR Commissioner.
d. When the estate tax return shows a gross value exceeding P 2,000,000, it shall be
supported with a statement duly certified by a CPA.
e. The payment of estate tax shall be made at the time the return is filed. However,
the CIR may allow an extension of until 5 years if settled judicially or 2 years if settled
extra-judicially.

I. Nature of Donor’s Tax – a tax on the privilege of the donor to give; it is not a property tax
but is a tax imposed on the transfer of property by way of gift during the life time of the donor. The
donor’s tax shall not apply unless and until there is a completed gift. It is an excise tax imposed
upon the right of a person to transfer property gratuitously during his lifetime.

II. Essentials of a Taxable Donation

Donation takes place only when there is a concurrence of the following:
1. Capacity of the donor
2. Donative intent
3. Delivery of the gift - Completed
4. Acceptance by the donee - Perfected
Note:
a. The transfer of property is completed by delivery, either actually or
constructively, of the donated property to the donee.
 b. The transfer of property by gift is perfected from the moment the donor
knows of the acceptance of the donee.
c. The composition and valuation of gross gift is the same as the composition and
valuation of gross estate.

III. Classification of Donors

1. Residents and Citizen – taxable globally
2. Non-resident Alien:
a. With reciprocity
b. Without reciprocity

IV. Computation of Donor’s Tax

On first donation:
Gross Gift xx
Less: Deductions from gross gift (xx)
Net gift xx
Times the Applicable rate* %
Donor’s tax due and payable xx
Less: Tax Credit (xx)
Donor’s Tax Payable xx

On subsequent donation:
Gross gift made this month xx
Less: Deductions from gross gift (xx)
Net gifts, current xx
Add: ALL prior net gift w/in the year xx
Aggregate net gifts xx
Times applicable Tax rate %
Donor’s Tax Due xx
Less: Donor’s Tax paid on prior gifts (xx)
Tax Credits (xx)
Donor’s Tax Due and Payable xx

1. Who are Relatives?

a. Brothers, sisters (whether by whole or half-blood), spouse, ancestors and lineal
descendants.
b. Legally adopted children are considered as relatives, hence they are entitled to the
same rights, privileges and obligations of legitimate children, as provided by law.
c. Relative by consanguinity (by blood) in the collateral within fourth degree of
relationship.
2. Remember 
a. ONLY gifts to relatives are computed using the cumulative basis.
b. Donation to strangers (beyond 4th degree) is computed using individual basis
since the rate will be the same regardless of the amount.
c. The classification of taxpayers are still the same in estate tax.
d. The reciprocity rule shall also be considered for intangible personal property of
Non-Resident Aliens in computing gross gift.
V. Gross Gift
1. Direct Gift (donor to donee)
2. Gift through creation of trust
3. Condonation of debt
4. Repudiation of inheritance if:
a. Specifically and categorically done in favor of identified heirs; and
b. To the exclusion or disadvantage of other co-heirs.
5. Renunciation by the surviving spouse of his/her share in the conjugal partnership or
absolute community after the dissolution of the marriage in favor of the heirs of the
deceased spouse or any other person/s
6. Transfer for insufficient consideration, provided that it is not in contemplation of
death, revocable transfer or transfer under general power of appointment. Otherwise, it
will be subject to estate tax.

7. Rules to observe:
a. As a rule, the value of the property/right donated shall be the fair market value
existing when the gift was made (as of the time of donation).
b. The time to value is the moment when the donation has been completed and
perfected (delivered and accepted).
c. When the donation is subject to a suspensive condition, the value of the gift is to
be determined only at the time when the stipulated condition is fulfilled, subject to the
time of delivery and acceptance of the gift.

8. Valuation Methods:
a. Real properties are valued at the assessed value or zonal value, whichever is higher.
b. Personal properties are valued at current market price or fair market value.
c. Right to use or usufructuary is valued based on the Basic Standard Mortality Rate
Table (BSMT) with the consideration of the present value using the prevailing market
interest rate at the time of donation.
d. Shares of stocks are valued at:
i. If traded – Closing price
ii. If not traded – using the adjusted net asset method

VI. Donation Between husband and wife

 Gift from common property – the gift is taxable one-half to each donor spouse.
 General Rule: Donation between husband and wife is not taxable as it is declared void
by law.
 Exception: Moderate gifts between the spouse are valid.
 Husband and wife are considered as separate and distinct taxpayers for purposes of the
donor’s tax. However, if what was donated is a conjugal or community property and only the
husband signed the deed of donation, there is only one donor for donor’s tax purposes, without
prejudice to the right of the wife to question the validity of the donation without her consent
pursuant to the pertinent provision of the Civil Code of the Philippines and the Family Code of
the Philippines.
VII. Political Contributions (Omnibus Election Code (OEC) and Repulic Act No.
7166)
1. As a rule, any contributions given to candidates, political parties or coalition of parties are
not subject to donor’s tax as long as the following conditions are met:
2. The contribution is for campaign purposes; and
3. The donation is duly reported to the Commission on Election (COMELEC)
4. The campaign contribution is subject to donor’s tax on the part of the donor, if such
contributions are not reported to the COMELEC.

VIII. Exemptions and Deductions

DEDUCTION RESIDENTS OR NON-RESIDENT

CITIZENS ALIENS
1. Dowries or gift made on account YES NO
marriage of a son or daughter,
legitimate, illegitimate or legally
adopted, to the extent of P10,000 per
child per marriage. The gift must be
made before marriage or within one
year thereafter.
2. Gifts to the National YES YES
Government, its political
subdivisions or any entity created by
any of its agencies which is not
conducted for profit
3. Gifts in favor of educational, YES YES
charitable, religious, cultural and
social welfare institutions, etc. (subject
to 30% rule)
4. Encumbrance on property YES YES
donated assumed by the done
(mortgages, if any)
5. Diminution in the value of property YES YES

 Exemptions under Special Laws

1. International Rice Research Institute
2. Ramon Magsaysay Foundation
3. Integrated Bar of the Philippines
4. Development Academy of the Philippines
5. National Museum
6. National Library
7. Archives of the National Historical Institute
8. Musuem of Philippine Costumes
9. Intramuros Administration
IX. Destroyed Donations
1. Donor’s tax accrues upon the completion of the donation, meaning upon delivery.
2. Gifts destroyed after they have been delivered are considered as valid donations. Thus,
even if it had been destroyed already, the donation shall be subject to donor’s tax still.
3. Total destruction has nothing to do with the donor’s tax liability when the thing donated is
already delivered.

X. Tax Rates Applicable

1. If given to relatives, 2% - 15% tabular tax
2. If given to stranger, 30%.
Note: A stranger is a person who is NOT:
a. A brother or sister (whether whole or half-blood)
b. Spouse
c. Ancestor
d. Lineal descendant
e. Relative by consaguinity in the collateral line within 4th civil degree of relationship

XI. Tax credit for donor’s tax paid to a foreign country

1. Who can claim? Only citizen or resident alien decedent.
2. Amount Deductible, whichever is lower:
a. Actual estate tax paid abroad
b. Limit
3. Limitations on tax credit:
a. Only one country is involved

Net gift (per Foreign Country) x Philippine donor’s tax

Total net gift

b. Two or more foreign countries are involved

Limit 1: per country

Net gift (per Foreign Country) x Philippine donor’s tax

Total net gift

Limit 2: Total Foreign Country

Net gift (all Foreign Countries) x Philippine donor’s tax

Total net gift

XII. Deadline for Filing of return

1. The deadline for the filing of donor’s tax return (BIR Form 1800) will be 30 days after
the donation was made.
2. The payment for donor’s tax shall be the same day as of that the day the return was filed
(Pay-as-You-File System)
3. When the Commissioner gives an extension, the payment of the tax due may be made on
such day as extended by the CIR, but not to exceed six (6) months.
 4. The filing of returns for donor’s tax is with the Revenue District Office or duly authorized
collection (e.g. City Treasurer) in which the donor resided at the time of transfer.
5. If there is no legal residence in the Philippines, filing should be made with the Office of
the Commissioner on Internal Revenue.

XIII. Attachments
1. Based on the BIR Form 1800, the following documents shall be attached:
2. Sworn statement of the relationship of the donor to the donee;
3. Proof of tax claimed tax credit, if applicable;
4. Certified true copy of the Original/Transfer/Condominium Certificate of Title (OCT, TCT,
CCT) of the donated property (for real properties);
5. Certified true copy of the latest Tax Declaration of lot and/or improvement, if applicable
(for market value purposes);
6. Certificate of No Improvement issued by the Assessor’s Office where the donated real
property/ies have not declared improvements, if applicable;
7. Proof of valuation of shares of stock at the time of donation, if applicable;
8. For listed stocks – newspaper clippings/certification issued by the Stock Exchange as to
the value of per share
9. For unlisted stocks – latest audited Financial Statements of the issuing corporation with
the computation of the book value per share.
10. Proof of valuation of other types of personal properties, if applicable;
11. Proof of claimed deductions, if applicable; and
12. Proof of the Tax Debit Memo used as payment.

I. Pro-Forma Computation

Output VAT from regular Domestic Sales and Receipts (limit P 1,919,500) xx
Output VAT from Importation (paid prior to release from Customs) xx
Output VAT from Deemed Sale Transactions xx
Output VAT from Zero-Rated Sales xx
xx
Less:
Input VAT from Purchases of Goods (xx)
Input VAT from Importation (xx)
Input VAT from Purchases of Services (xx)
Input VAT from Deemed Sale Transactions (if not previously claimed) (xx)
Input VAT from Depreciable Capital Goods (xx)
Input VAT from TIV/ Presumptive (xx)
VAT Payable xx

II. Concept of VAT

1. A VAT is a tax levied on the value of the products of an enterprise in the course of its
production and distribution. It is otherwise known as the tax on Mark-ups.
2. It is a percentage tax imposed at every stage of the transfer of goods on sale, exchange, barter, and
the importation of goods, including transaction deemed by law as a sale or leasing of goods or property
and the performance of services in the course of trade or business.
3. It is based on the gross selling price or gross value in money or net sales when there
are sales discounts or sales returns, whichever is applicable, of the goods or property sold,
bartered, or exchanged or the gross receipts dervied from the sale or exchange of services, including
the lease of goods or property, or in the case of imported goods, on the total value of importation
or its landed cost plus excise and ad valorem tax and other charges on importation.

III. Sources of Output VAT

1. Importation
a. All importations are subject to VAT of 12%, except those exempt under Sec. 4 of RR No.
6-97.
b. Importations made by a tax-exempt taxpayer shall, likewise, be exempt from VAT.
However, the subsequent purchaser, transferee or recepient who are not tax-exempt shall
pay the VAT on the imported goods as if he was the importer.
c. The tax base of imported good for VAT purposes include total value of importation or its
landed cost plus excise and ad valorem tax and other charges on importation.

2. Sale of goods
Tax base of VAT on sale of goods or properties
Gross sales xxx (a)
Less:
Sales discounts xxx (b)
Sales returns and allowances xxx (c) Xxx
Net sales Xxx
Add Excise tax, if any xxx (d)
Tax base Xxx
Notes:
a. Gross sales include:
i. Cash sales
ii. Sales on account (open account)
iii. Installment sales
iv. Deemed sales (Consumption, Consignment, Distribution, Dacion en Pago,
and Retirment)
v. Other amounts due from buyer such as for packaging, delivery and insurance.
b. Sales discount granted and indicated in the invoice at the time of sale and the
grant of which does not depend upon the happening of future event may be excluded
from gross sales within the same month or quarter it was given.
c. Sales returns and allowances may be deducted from the gross sales for the month
or quarter in which a refund is made or a credit memo is issued.
d. Excise tax (a business tax), if any, is included in the gross sales, while VAT is
excluded.

3. Sale of Properties
1. Sale of real property classified as capital asset is not subject to VAT. Such
transaction is subject to capital gains tax of 6% based on sales price or FMV, whichever is
higher.
2. In general, sale of real property primarily held in the normal course of business
(inventory/ordinary asset) is subject to VAT, except:
a. Residential lot with selling price of P 1,919,500 and below; and
 b. Sale of house and lot and other residential dwellings with selling price at P
3,199,200 and below.

3. Sale of real properties in the course of trade or business

c. On installment plan (initial payments do not exceed 25% of the gross selling price)
Installments received Xxx
Add:
Interest xxx
Other charges xxx Xxx
Tax base Xxx
Note: Upon full payment, if the zonal or market value is higher than the total receipts
or collections, the additional VAT shall be paid accordingly.
d. On cash basis or deferred payment plan (initial payments exceed 25% of the gross
selling price)
The tax base shall be the higher between SELLING PRICE stated in the sales document
and ZONAL OR MARKET VALUE.
Notes:
a. If the gross selling price is the zonal or market value of the real property, the zonal or
market value shall be deemed inclusive of the VAT.
b. If the VAT is not billed separately, the selling price stated in the sales document shall
be deemed inclusive of the VAT.

4. Sale of Scrap Materials

1. Sale of scrap such as empty drums, plastic bags, cartons, and wood crates; obsolete
inventories and fully depreciated fixed assets at a minimal prices or lower than the purchase
price are subject to VAT.
2. Ordinary assets, other than inventories held for sale, which are originally subject to
depreciation are likewise subject to VAT, when sold.

5. Sale of Service
a. In general, all kinds of sale, exchange or supply of services rendered in the Philippines are
subject to 12% VAT, except those which are classified and qualified as zero-rated or VAT-
exempt.
b. Under the situs of service criteria services performed outside the Philippines, even if
undertaken in the course of business, are BEYOND the scope of VAT.
c. Tax Base:
i. Total amount of money or its equivalent representing the contract price, compensation
service fee, rental or royalty.
ii. Amount charged for materials supplied, with the services and deposits and advance
payments actually or constructively received during the taxable quarter, excluding VAT.

d. VAT in Professional Fees

As a rule, earnings from a practice of profession will be subject to VAT if:
i. The professional is a VAT-registered person; or
ii. A non-VAT registered but his total gross receipts exceed P 1,919,500.
Also, aside from VAT is subject to 10% creditable withholding tax if the aggregate
amount per year is P720,000 and below, and 15% creditable withholding tax if
exceeding P720,000.
e. VAT on Service Contractors
 i. Subject to 12% VAT
ii. If the contract is with the government, the government shall withhold final
withholding VAT of 5%.
iii. Also subject to 2% creditable withholding tax for sale of services and 1%
creditable withholding tax for sale of goods.

f. VAT on Security Agency

i. Agency fees are subject to 12% VAT, excluding the salary of the guards.
ii. Subject to a 2% creditable withholding tax for sale of service based on the agency fee.
iii. If the contract does not separate the agency fees from the salary of the guards, the
whole amount will be subjected to VAT and 2% creditable withholding tax.

g. VAT on Real Estate Brokers

i. The commission income of real estate brokers are subject to VAT of 12% if he is VAT-
registered or his total commission exceeds P1,919,500 per year.

h. VAT on Dealers in Securities

i. Dealers in securities are subject to VAT based on their gross receipts (gross selling
price less cost of securities sold).

j. VAT on Lending Investors

i. Lending investors includes all persons not include banks (depository and
savings), non-bank financial intermediaries, finance companies, and
other financial intermediaries not performing quasi-banking.
ii. Subject to VAT of 12% on their interest incomes.
iii. Does not include banks, other financial intermediaries performing quasi-banking
functions and pawnshops.

k. VAT on Transportation Services

i. Subject to VAT of 12% on:
 Transport of goods and cargoes whether by land, air and sea.
 Transport of passengers by air and sea.
ii. Transport of passengers by land are subject to 3% OPT.

l. VAT on Lessor of Commercial and Residential Units

i. If the monthly rent per unit does not exceed P12,800, regardless of the aggregate
amount, the lessor is exempted from VAT and OPT.
ii. If the monthly rent per unit exceeds P 12,800, but the aggregate amount does not
exceed P1,919,500, the lessor is only subject to OPT, not to VAT.
iii. If the monthly rent per unit exceeds P 12,800 and the aggregate amount does exceed
P1,919,500, the lessor is only subject to VAT.

6. Deemed Sale Transactions (CCDDR)

a. Transfer, use or consumption not in the course of trade or business of goods or
properties originally intended for sale or for use in the course of trade or
business;
b. Consignment of goods if not sold within 60 days following the date of consignment;
 c. Distribution or transfer to creditors in payment of debt or dacion en pago;
d. Distribution or transfer to shareholders or investors as share in the profit; and
e. Retirement from or cessation of business or incorporation of single proprietorship with
respect to all goods on hand, whether capital goods, stock in trade, supplies or materials, as
of the date of such retirement, cessation or incorporation,

Notes: The tax base for deemed sale transactions would be the lower of (a) acquisition
cost or (b) the current market price. Where the gross selling price is unreasonably lower
than the actual market value, the appropriate tax base shall be determined by the
Commissioner. The gross selling price is unreasonably lower than the actual
market value if it is lower by more than 30% of the actual market value of the same goods
of the same quantity or quantity sold in the immediate locality on the the nearest date of sale.

f. Transfer of assets as a result of merger or consolidation are not considered as

deemed sale transaction. However, the unused input tax of the dissolved corporation, as of
the date of merger or consolidation, shall be absorbed by the surviving corporation.

7. Zero-Rated Sales
a. Export Sales
i. The sale and actual shipment of goods from the Philippines to a
foreign country.
ii. Sale of raw materials or packaging materials to a nonresident buyer
for delivery to a resident local export-oriented enterprise.
iii. Sale of raw materials or packaging materials to export-oriented
enterprises whose export sales exceed 70% of total annual production.
iv. Sale of gold to the Bangko Sentral ng Pilipinas.
v. Those considered export sales under the Omnibus Investment
Code of 1987 (E. O. No. 226) and other special laws, e.g., sales to diplomatic missions
and other agencies and/or instrumentalities granted tax immunities.
vi. Sale of goods, supplies, equipment and fuel to persons engaged in
international shipping or international air transport operations.

b. Foreign currency denominated sale

i. It means sale to a nonresident of goods (except automobiles and nonessential
goods) assembled or manufactured in the Philippines for delivery to a resident in the
Philippines.

c. Effectively zero-rated sales

- Effectively zero-rated sales of goods and properties shall refer to the local sale (constructive
export) by a VAT-registered person to a person or entity who was granted indirect tax
exemptions under special laws or international agreement, such as:
i. Sale to Asian Development Bank (ADB);
ii. Sale to International Rice Research Institute (IRRI);
iii. Sale to duly registered and accredited enterprises with Subic Bay Metropolitan
Authority (SBMA); and
iv. Sale to duly registered and accredited enterprises with Philippine Economic Zone
Authority (PEZA).

IV.Sources of Input VAT

1. Importation and Domestic Purchase of Goods
a. Goods for sale
b. Goods for conversion into finished product (including packaging materials)
c. Goods for use as supplies
d. Goods for use as materials supplied in the sale of services
e. Goods for use in trade or business for which depreciation or amortization is allowed
f. Transactions deemed sale (CCDDR)
g. In case of importation, an input tax may be claimed for the importation of goods for
business use by a VAT-registered taxpayer. Input tax paid by a non-VAT person,
whether for personal or business use, are not creditable. Also, input VAT paid by a VAT
registered on goods imported for personal use are not creditable.

2. Purchase of Services
3. Purchase of Capital Goods
Claim for input tax on depreciable goods
a. Applies only to domestic purchase or importation of capital goods subject
to depreciation for income tax purposes.

b. Where the aggregate acquisition cost (exclusive of VAT) of depreciable capital

goods during any calendar month does not exceed P1,000,000, the total input tax
is creditable against output tax in the month acquired (Outright Credit)

c. Where the aggregate acquisition cost (exclusive of VAT) of depreciable capital

goods during any calendar month exceeds P1,000,000, the total input tax is creditable
against output tax, as follows:
i. Spread evenly over 60 months (starting in the calendar
month acquired) the input tax, if the estimated useful life of the depreciable
capital good is 5 years or more.
ii. Spread evenly over the actual number of months of
estimated useful life (starting in the calendar month acquired) the input tax, if the
estimated useful life of the depreciable capital good is less than 5 years.

d. If the depreciable capital good is sold or transferred within a period of 5 years

or prior to the exhaustion of the amortizable input tax thereon, the entire
unamortized input tax on the capital good sold or transferred can be claimed
as input tax credit in the month/quarter when the sale or transfer was made.

4. Zero-Rated Sales
a. The input VAT may at the option of the taxpayer, be claimed for (a) tax refund, the
claim of which shall be filed and made within 2 years from the close of the quarter when
such sales are made, or (b) tax credit against internal revenue taxes.

5. Presumptive Input VAT

a. Persons or firms who can avail:
i. Processor of sardines, mackerel and milk (SaMaMi)
ii. Manufacturer of refined sugar, cooking oil and packed
noodle-based instant meal (ReCoPa)
 b. Basis of presumptive input tax - Gross value in money of purchases of primary
agricultural and marine food products used as inputs in the processing or
manufacturing of SaMaMi and ReCoPa.
c. Rate of presumptive input tax – 4%

6. Transitional Input VAT

a. Persons who can avail:
a. Persons who become liable to VAT for the first time
b. Persons who elect to be VAT-registered
b. Basis of transitional input tax - Beginning inventory of VAT-
subject goods, materials and supplies.
c. Transitional input tax allowed - The HIGHER between:
a. 2% of the VAT-subject beginning inventory value for income tax purposes;
and
b. Actual VAT paid on such beginning inventory.

7. Standard Input VAT (Sale to Government)

a. The sale to Government or its political subdivision by VAT-registered person shall be
subject to 12% VAT, provided that:
i. The government shall withhold 5% final withholding VAT
upon payment to the VAT registered person;
ii. The VAT-registered person may claim a Standard Input
VAT of 7% against its output VAT from the sale to government. The Actual Input
VAT attributable to sales of goods and services to the government shall not be
credited against the Output vat arising from sales to non-government entities.

V. Excess output or input taxes

a. If at the end of any taxable month or quarter the output tax exceeds the input tax, the
difference is VAT payable(current liability).

b. If the input tax at the end of any taxable quarter (inclusive of input tax carried over
from the previous quarter) exceeds the output tax, the excess input tax (current asset)
shall be carried over to the succeeding taxable month or quarter, provided that
any input tax attributable to 0-rated sales by a VAT-registered person may at his option
be refunded or applied for a tax credit certificate.

c. Input taxes on zero-rated sales of goods, properties or services

The input taxes on zero-rated sales of goods, properties or services may at the option of
the VAT-registered person be:
i. Refunded (within 2 years after the close of the quarter
when such sales were made); or
ii. Converted into tax credit certificates which may be used in
paying other NIRC taxes (the two-year peremptory period applies); or
iii. Applied against the output tax of domestic sales.

d. Unused input tax of persons who retired

Unused input taxes of persons whose registration has been cancelled due to retirement
from or cessation of business may be converted into tax credit certificate which may be
 used in payment of other NIRC taxes within 2 years from the date of cancellation or claim
for refund if there be no internal revenue tax liabilities against which the tax credit
certificate may be utilized.

e. Period within which to refund

Refund or tax credit certificate shall be granted within 120 days from the date of
submission of complete documents.
If the Commissioner fully or partially denies the application for VAT refund or issuance
of tax credit certification (TCC) on the expiration of 120-day period, the taxpayer may
appeal to the Court of Tax Appeals within 30 days from the receipt of the denial;
otherwise, the decision will become final.

f. Manner of giving refunds

Refunds shall be made upon warrants drawn by the Commissioner of Internal Revenue
or by his authorized representative without the necessity of being countersigned by the
COA Chairman.

VI. Administrative Requirements

1. Return and payment of VAT
a. In general - VAT return shall be filed and the tax due thereon be paid within 25 days
following the close of each taxable quarter.
b. VAT-registered persons shall declare and pay VAT on a monthly basis, not later than
the 20th day following the close of each of the first two months of a taxable quarter;
taxpayers under the EFPS, on or before a prescribed due date based on the business
industries classification.

2. Persons whose registration has been cancelled

a. Any person whose registration has been cancelled shall file a return and pay the tax
due thereon within 25 days from the end of the month the business ceases to operate or
when VAT registration has been officially cancelled.
b. Only one consolidated return shall be filed for the principal place of business or head
office and all branches.

3. Where to file the return and pay the tax - In any one of the following located within the
revenue district where the taxpayer is registered or required to register:
a. Authorized agent bank
b. Revenue collection officer
c. Duly authorized city or municipal treasurer
 I. Percentage Taxes

Summary rules on Other Percentage Taxes (OPT) under R.A. 8424, as last amended by
R.A. 9337

Section Tax Base Tax Rate

116 Tax on persons exempt from VAT Monthly gross sales or receipts 3%
(except
Cooperatives) and not liable to pay
the other
percentage taxes below.

119 Tax on franchises:

1. On gas and water utilities Monthly gross receipts 2%

2. On radio and/or television Monthly gross receipts or pay 3%

broadcasting companies with VAT at their option. Once
annual GR of not more than exercised, it becomes
P10,000,000 irrevocable.

125 Amusement taxes from operators of:

1. Boxing exhibitions Quarterly gross receipts 10%
(Exempt, if a World or Oriental championship in any division is at stake, promoted
by a Filipino citizen or Corporation, at least 60% Filipino owned, and one of the
contenders is a Filipino citizen)
2. Professional basketball Quarterly gross receipts 15%
games
3. Cockpits Quarterly gross receipts 18%
4. Cabarets, night or day clubs Quarterly gross receipts 18%
5. Jai-alai and race tracks Quarterly gross receipts 30%

For the purpose of the amusement tax, the term “gross receipts” embraces all the receipts
of the proprietor, lessee or operator of the amusement place. Said gross receipts also
include income from television, radio, and motion picture rights, if any.

126 Tax on winnings  Winner of the 4% of the net prize

prizes in double
forecast/quinella
& trifecta bets
 Person winning not 10% of the net prize
in double
forecast/quinella &
trifecta bets
 Owners of winning 10% of the prize
race horses

123 Tax on life insurance premium, Insurance premiums collected 5%

except purely
 cooperative companies or
associations

124  Owners of property who obtain On premiums paid 5%

insurance
directly with foreign companies
 Agents of foreign insurance Insurance premiums collected 10%
companies
(fire, marine or miscellaneous
insurance agents)

127-A Tax on sale, barter or exchange of shares of stock listed and traded through the local
stock exchange (LSE), other than sale by a dealer in securities – ½ of 1% of gross selling
price or gross value in money of the shares of stock sold, bartered, exchanged or
otherwise disposed of.

127-B Tax on shares of stock sold or exchanged through the LSE in an initial public offering of
shares of stock of a closely held corporation in accordance with the proportion of shares
of stock sold, bartered or exchanged or disposed of to the total outstanding shares of
stock after the listing in the LSE:
Up to 25% 4% of GSP
Over 25% to 33 1/3% 2% of GSP
Over 33 1/3% 1% of GSP

117 Percentage tax on domestic Monthly gross receipts 3%

common carriers
by land for the transport
of passengers and
keepers of garages, except owners of
bancas
and animal-drawn two-wheeled
vehicles.

The following shall be considered per unit minimum quarterly gross receipts (for Sec.
117 only):

Manila and
other Cities Provincial
 Jeepney for hire P2,400 P1,200
 Public utility bus:

Not exceeding 30 passengers 3,600 3,600

Exceeding 30 but not exceeding 6,000 6,000
50
Exceeding 50 7,200 7,200
 Taxis 3,600 2,400
 Car for hire (with chauffeur) 3,000 3,000
 Car for hire (w/o chauffeur) 1,800 1,800
118 OPT on international carriers (air & Monthly gross receipts 3%
shipping)
for the transport of both passengers & cargoes

120 Tax on overseas dispatch, message Quarterly gross receipts from

or
conversation originating from the such services 10%
Philippines

Exempted from Sec. 120 are: (DING)

 Diplomatic services
 International organizations
 News services
 Government

121 Tax on banks and non-bank Monthly gross receipts

financial
intermediaries performing quasi-
banking
functions:
a. On interests, commissions and discounts from lending activities
as well as income from financial leasing, based on remaining
maturities of the instruments, as follows:

Maturity period of more than 5 years 1%

Maturity period of 5 years or less 5%

Note: In case of pretermination, the maturity period shall be

reckoned to end as of the date of pretermination for purposes of
classifying the transaction and applying the correct rate of tax.
b. On royalties, rental of property (real or personal), profit from
exchange and all other items treated as gross income under Section 7%
32 of the tax code.
c. On trading gains within a taxable month on foreign currency, debt
securities, derivations and other similar financial instruments. 7%
d. On dividends and equity shares in the net income of subsidiaries. 0%

122 Tax on other non-bank financial Monthly gross receipts

intermediaries,
including finance companies,
money changers
and pawnshops:
a. On interests, commissions and discounts from lending activities
as well as income from financial leasing, based on remaining
maturities of the instruments, as follows:
Maturity period of more than 5 years 1%
Maturity period of 5 years or less 5%
 Note: In case of pretermination, the maturity period shall be
reckoned to end as of the date of pretermination for purposes of
classifying the transaction and applying the correct rate of tax.
b. On royalties, rental of property (real or personal), profit from
exchange and all other items treated as gross income under Section 7%
32 of the tax code.
c. On dividends and equity shares in the net income of subsidiaries. 0%

Return and payment of other percentage taxes

a. General rule: Every person liable to pay percentage taxes shall file a monthly return of the
amount of his gross sales, receipts or earnings and pay the tax thereon within twenty (20) days
after the end of each taxable month. The taxpayer may file a separate return for each branch or
place of business, or a consolidated return for all branches or places of business with the
authorized agent bank, Revenue District Officer, Collection Agent or duly authorized Treasurer
of the City or Municipality where said business or principal place of business is located, as the
case maybe.

b. Exceptions:
 The tax on overseas dispatch, message or conversation originating from the Philippines shall
be paid by the person rendering the service within twenty (20) days after the end of each quarter.
 Amusement taxes shall be paid by the proprietor, lessee, operator or any party liable within
twenty (20) days after the end of each quarter.
 The tax on winnings shall be deducted and withheld by the operator, manager or person in
charge of the horse races and remitted to the Bureau of Internal Revenue within twenty (20) days
from the date the tax was deducted and withheld.
 The stock transaction tax of 1/2 of 1%, shall be collected by the stock broker and remitted to the
Bureau of Internal Revenue within five (5) banking days from the date of collection.
 The stock transaction tax of 4%, 2% and 1%, in case of primary offering, shall be paid by the
corporation within thirty (30) days from the date of listing of the shares of stock in the local stock
exchange. In case of secondary offering, the tax shall be collected by the stockbroker and remitted
to the Bureau of Internal Revenue within five (5) banking days from the date of collection.
 Any person retiring from a business subject to percentage tax shall notify the nearest internal
revenue officer, file his return and pay the tax due thereon within twenty (20) days after closing
his business.

PART 1 – TAX REMEDIES

I. Overview
1. The basic purpose of remedies is to maintain equilibrium between the interest of
the state and the taxpayer.
2. Remedies can be either administrative or judicial.
3. Administrative remedies involves assessment and collection, protest and refund.
4. Judicial remedies may either be a civil suit or criminal suit, appeal to CTA,
injunction/ temporary restraining order, or criminal suit against erring BIR officials.

5. Summary of Remedies
 REMEDIES TO THE COMMON REMEDIES TO THE
STATE REMEDIES TAXPAYER
1. ADMINISTRATIVE LEVEL (BIR)
Assessment Compromise Protest
Collection Abatement Refund
2. JUDICIAL LEVEL (Courts)
Civil Suit/Action Appeal to CTA
Criminal Suit/ Action TRO/ Injunction
Criminal Suit against
erring BIR officials

II. Remedies Available to the Government

1. Administrative Remedies
a. Assessment
- Similar to audit
- It is a finding by the taxing authority that the taxpayer has not paid the correct
taxes.
- An assessment contains not only a computation of tax liabilities but also
a demand for payment within a prescribed period. It also signals the time
when penalties and interests begin to accrue against the taxpayer.
- Time of assessment (statute of limitation or prescriptive period) – national
internal revenue taxes shall be assessed within 3 years:
 After the due date for the filing of the return (a return filed before the due
date shall be considered as filed on such due date);
 From the day the return was filed, where the return is filed beyond the due
date; and
 From the filing of the amended return, if the return was amended
substantially.

- EXCEPTIONS - The 3-year prescriptive period of assessment is extended if:

 False or fraudulent return with intent to evade the tax was filed - the
assessment may be made within 10 years from the discovery of the
falsity or fraud;
 No return is filed - assessment may be made within 10 years after the
discovery of the failure or omission to file the return; and
 Before the expiration of the 3-year prescriptive period for assessment of the
tax, both the taxpayer and the CIR have agreed in writing (waiver) to its
assessment after such time, the tax may be assessed within the period agreed
upon. The period so agreed upon may be extended by subsequent written
agreement made before the expiration of the period previously agreed upon.

- If the government tries to assess a tax beyond the prescriptive periods, the
taxpayer may claim defense of prescription of the right of the government
 to assess. The defense of prescription, however, is not jurisdictional and must be
raised seasonably, otherwise it is deemed waived.

- How are tax audits/investigations initiated?

 Issuance of Electronic Letter of Authority (eLA), Tax Verfication Notice
(TVN) and/or Letter of Notice (LN) is considered as a “notice of audit or
investigation” that prohibits amendment to any return covering period referred
to in the eLA, TVN and/or LN
 RMO No. 62 – 2010 discontinued the manual issuance of Letter of Authority
(LA) andTVNs
 There must be a grant of authority before any revenue officer can conduct
an examination or issue an assessment. Thus, the BIR cannot extend its
examination or assessment beyond the period covered by the Letter of
Authority (LA).
 LA should cover a taxable period not exceeding one taxable year. The
practice of issuing an LA covering audit of “unverified prior year’s” is
prohibited.

- Place of Examination
 The primary place of examination is the taxpayer’s place of business.
 The secondary place of examination is at the Office of the BIR
 Only duly authorized Revenue Office can audit
- Submission of documents
 Use of best evidence available when:
i. The reports or records of the taxpayer are not available (i.e. lost or
destroyed; unreasonably refuses to submit records); or
ii. The reports and records submitted by the taxpayer are determined to be
false, incomplete or erroneous or cannot be understood. [Sec. 6(B), Tax
Code]
- End of Audit/Investigation
 Preparation of report of investigation showing preliminary findings
 Notice of Informal Conference – RR No. 18 -2013 removed the requirement
for the issuance of a letter of informal conference before a Preliminary
Assessment Notice (PAN) is issued.

b. Collection
- Collection means enforcing the payment of tax. The following are the
administrative collection remedies of the government:
i. Summary proceedings
 Distraint (actual or constructive)
 Levy
 Tax lien
 Forfeiture
 Suspension of business operations in violation of VAT
 Enforcement of an administrative fine
ii. Judicial proceedings
 - Time of collection (statute of limitation or prescriptive period):
i. Return filed was not false or fraudulent
 Collection with prior assessment - within 5 years from the date of
assessment, either by summary proceedings of distraint and levy or by
judicial proceedings.
 Collection without prior assessment - within 3 years from the date
of filing the return or from the last day required by law for filing, if the
return was filed on or before such last day, by judicial proceedings only.
ii. Return filed was false or fraudulent with intent to evade the tax or no return
is filed.
 Collection with prior assessment - within 5 years from the date of
assessment, either by summary proceedings of distraint and levy or
judicial proceedings.
 Collection without prior assessment - within 10 years after the
discovery of the falsity, fraud or omission to file the return, by judicial
proceedings only.

- Any internal revenue tax, which has been assessed within the period agreed
upon by the taxpayer and the CIR, may be collected by distraint or levy or by a
proceeding in court within the period agreed upon in writing before the
expiration of the 5 years prescriptive period to collect. The period so agreed upon
may e extended by subsequent written agreement made before the expiration of
the period previously agreed upon.
- If the government tries to collect by any of the above remedies beyond the
prescriptive periods, the taxpayer may claim defense of prescription of the right of
the government to collect. The defense of prescription, however, is not
jurisdictional and must be raised seasonably, otherwise it is deemed waived

c. Distraint
- It is the seizure (taking) by the government of personal property (tangible of
intangible) to enforce payment of taxes.

ACTUAL DISTRAINT CONSTRUCTIVE

DISTRAINT
Made only on the property of Made on the property of any
a delinquent taxpayer taxpayer, whether
delinquent or not.
There is taking of possession. The taxpayer is merely
prohibited from disposing of his
property.

- It can either be actual distraint or constructive distraint.

d. Levy:
- It is the seizure (taking) by the government of real property to enforce
payment of taxes.
 DISTRAINT
1. Personal Property
2. Forfeiture by the government
is not provided.
3. The taxpayer is not given the
right of redemption with respect to
the distrained personal property.
LEVY
1. Real Property
2. Forfeiture is authorized
3. The right of redemption is
granted in case of real property
levied upon and sold or forfeited
to the government.

Levy Garnishment
1. As to subject Real property owned by Personal property
matter and in possession of the owned by the taxpayer
taxpayer. but in the possession
of a third party.
2. As to Forfeited in favor of the Purchased by the
disposition government then sold to government then
for want of meet the deficiency. resold to meet the
bidders or bids deficiency.
inadequate to
satisfy tax
deficiency
3. As to Advertisement once a No advertisement is
advertisement week for three weeks. required.
for sale

e. Tax Lien:
- It is a legal claim or charge on property, either real or personal, established by
law as security in default of the payment of taxes. The extent of lien shall be the tax
together with the interests, penalties, and costs that may accrue. The lien attaches
not only from the service of warrant of distraint but from the time the tax become
due and payable.

f. Forfeiture
- If there is no bidder in the public sale or if the amount of the highest bid is
insufficient to pay taxes, penalties and costs, the real property shall be forfeited
to the Government. The effect is to transfer the title of the specific thing
from the owner to the Government.

g. Run After Tax Evaders (RATE)

i. It is a program initiated by the DOF and BIR to
investigate and prosecute individuals and entities engaged in tax evasion and
other criminal violations of the National Internal Revenue Code of 1997
ii. The objectives of the RATE program are:
 generate the maximum deterrent effect on the taxpaying public by
impressing the fact that tax evasion is a crime and violators will be caught
and punished
  enhance voluntary compliance among taxpayers
 promote confidence of the public in the tax system.
iii. Fraudulent activities or criminal tax violations
covered by the RATE Program
 Offenses relating to income:
a. Failure to file tax returns
b. Failure to pay taxes
c. Deliberate underdeclaration of income by more than 30% of that
declared per return (substantial underdeclaration)
d. Hiding or transferring assets or income
e. Non-remittance of withholding taxes
 Offenses relating to deductions:
a. Deliberate overstatement of amountof deductions by more than 30%
of actual deductions (substantial overstatement of deductions)
b. Claiming personal expenses as business expenses
c. Claiming false deductions
 Other violations:
a. Use of fake Certificate Authorizing Registration (CAR), Tax
Clearance Certificate (TCC) or other accountable forms.
b. Failure to register with the BIR
c. Keeping more than one (1) set of books of accounts
d. Making false entries in books and records

iv. Background
 In March 2005, the BIR and the DOF launched the Run After Tax
Evaders (RATE) Program.
 Since March 2005, 87 complaints of tax evasion have been submitted to
the Department of Justice (DOJ) for preliminary investigation under the
RATE Program, including those filed against actors, businessmen, public
officials and other high profile personalities.
 The BIR registered a record income tax collection in 15 April 2005 of
P21.4 Billion or a 43.6% increase from the P14.8 Billion collected compared
to the previous year.
 But almost 5 years after the program’s launch, only 6 out of the 87
complaints for tax evasion submitted to the DOJ progressed to the filing of
criminal cases in court.

h. Run After The Smugglers (RATS)

i. In 2005, the Bureau of Customs launched an aggressive
battle against smugglers who pose serious and direct threat to the national
economy by depriving the government of its much- needed revenues.
ii. To boost its collection, the BOC introduced the Run
After the Smugglers (RATS) Program which aimed to file customs cases against
high profile smugglers.
iii. It is designed not onluto collect taxes but also to ensure
that importers comply with existing laws and regulations on tariff and customs
which complements the post-audit power of the BOC under RA 9135, which took
effect on June 2, 2001.
 i. Oplan Kandado
i. On January 23, 2009, the BIR issued Revenue
Memorandum Order No. 3 – 2009 to implement a nationwide “Oplan Kandado”
Program
ii. Under the program, business operations of non-
compliant taxpayers will be suspended and their establishments will be
temporarily closed if they will be found to have violated certain tax laws.
iii. The programs aims to intensify the Bureau’s enforcement
operations through strict imposition of prescribed administrative sanctions for
non-compliance with the basic tax requirements.
iv. Grounds for suspension:
 Failure to issue receipts or invoices by a VAT-registered or registrable
taxpayer;
 Failure to file a VAT return;
 Understatement of taxable sales or receipts by 30% or more of the correct
amount thereof in the case of a VAT-registered or registrable taxpayer;
 Failure to register
v. The closure of the business establishment shall last for
a period of not less than five (5) days, and shall be in force until the violation is
rectified by the concerned taxpayer.
vi. The suspension and temporary closure of business shall
not preclude the BIR from filing the appropriate charges under the RATE
Program of the Bureau, if evidence so warrants the taxpayer concerned or
responsible office of the corporations.
vii. The closure order shall only be lifted by the BIR when
there has been:
 A subsequent filing or amendment of returns with the payment of the tax
inclusive of statutory penalties;
 Subsequent registration with the payment of the corresponding
compromise penalties
 Payment of deficiency taxes inclusive of penalties corresponding to the
sales where no invoices/receipts have been issued; and
 Payment of deficiency taxes inclusive of penalties corresponding to the
understatement of taxable sales or receipts.

III. Remedies to the State: Judicial Remedies – Civil and Criminal Action
a. Civil action is resorted to when a tax liability becomes collectible, that is, the
assessment becomes final and unappealable, or the decision of the CIR has become final,
executory, and demandable.
b. Criminal action, like civil action, cannot be instituted without the approval of the CIR.
It is resorted to not only for collection of taxes but also for enforcement of statutory
penalties of all sorts. The judgment in the criminal case shall not only impose the penalty
but shall also order the payment of the taxes.
c. The extinction of a taxpayer’s criminal liability does not necessarily result in the
extinguishment of his civil liability. Conversely, the subsequent satisfaction of a tax
liability will not operate to extinguish the criminal liability.
IV. Remedies Available to the Taxpayer
1. Administrative Remedies
a. Protest
 Protest is a challenge against assessment.
 The filing of a petition for reconsideration or reinvestigation shall be made
within 30 days from the receipt of the assessment with the CIR. Within 60
therefrom, all relevant supporting documents should have been submitted,
otherwise the assessment shall become final.

b. Refund or Tax Credit

 A taxpayer may file for tax refund in case of excessive or erroneous payment of
a tax with the BIR:
i. Tax is collected erroneously or illegally.
ii. Penalty is collected without authority.
iii. Sum collected is excessive

V. Remedies to the Taxpayer: Judicial Remedies – Civil Action

a. General Rule: No action shall suspend the collection, payment, levy or distraint,
and/or sale of any property of the taxpayer.
b. Exception: The CTA is empowered to suspend the collection of internal revenue taxes
and custom duties only when there was a:
c. Showing that collection of the tax liability may jeopardize the interest of the
government and/or the taxpayer;
d. Deposit of the amount claimed or file a surety bond for not more than twice the
amount of tax with the Court when required; and
e. Showing by the taxpayer that appeal is not frivolous nor dilatory
f.
g. Appeal to the CTA within 30 days from the receipt of decision on the protest or
from the lapse of 180 days due to inaction of the Commissioner, whichever comes earlier.
h. Action for damages against a revenue officer by reason of any act done in the
performance of official duty
i. Filing of criminal complaint against erring BIR officials and employees.
j. Injunction, when the CTA in its opinion the collection by the CIR may jeopardize
the taxpayer.

VI. Remedies to Both Government and Taxpayer

1. Compromise
a. Mutual concession between the taxpayer and the government in setting a
tax deficiency amicably.
b. What cases may be compromised?
i. Delinquent accounts
ii. Cases under administrative protests
iii. Civil tax cases being disputed before the
courts
iv. Collection cases filed in courts
v. Criminal violation, other than those already
filed in court or those involving criminal tax refunds.
c. What cannot be compromised?
 i. Criminal violation of NIRC already filed in
court.
ii. Cases involving fraud.
d. What are the grounds for compromise?
i. A reasonable doubt as to the validity of
the claim against the taxpayer exists; or
ii. The financial position of the taxpayer
demonstrate a clear inability to pay the assessed tax
e. Prescribed minimum compromise rates:
i. Financial incapacity - 10% of the basic
assessed tax
ii. Other cases - 40% of the basic assessed tax
f. Compromised settlement subject to approval of the Evaluation Board,
composed of the CIR and the 4 Deputy Commissioners:
i. Where the basic tax exceeds P1,000,000, or
ii. Where the settlement offered is less than the
prescribed minimum rates above.

2. Abatement
a. A tax may be cancelled or obliterated upon the authority of the BIR under
certain circumstances.
b. What are the grounds for abatement?
i. The tax or any portion thereof appears to be
unjustly or excessively assessed;
ii. The administration and collection costs
involved do not justify the collection of the amount due; and
iii. The Commissioner may also, even without
claim therefore, refund or credit any tax where on the face of the return
upon which payment was made such payment appears clearly to have been
erroneously paid.
PART 2 – ADDITIONS TO TAX
I. Overview
II. Civil Penalties and Criminal Penalties

III. Civil penalties

a. Interest
In general, there shall be assessed and collected on any unpaid amount of tax, interest at
the rate of 20% per annum, or such higher rate as may be prescribed by rules and
regulations, from the date prescribed for payment until the amount is fully paid.

1. Deficiency Interest
Any deficiency in the tax due, as the term is defined in the Tax Code, shall be
subject to the interest at the rate of 20% per annum, which interest shall be assessed
and collected from the date prescribed for its payment until the full payment thereof.

Formula:
Deficiency Interest = Deficient tax x 20% x no. of days or months
Total No. of days or months in a year
 2. Delinquency Interest
Delinquency interest in case of failure to pay:
i. The amount of the tax due on any return required to be filed, or
ii. The amount of the tax due for which no return is required, or
iii. A deficiency tax, or any surcharge or interest thereon on the due date
appearing in the notice and demand of the CIR, there shall be assessed and
collected on the unpaid amount interest at the rate of 20% per annum until
the amount is fully paid, which interest shall form part of the tax.
Formula:
Delinquency Interest = Deficient tax plus any deficiency interest or surcharges
times 20% times no. of days or months
Total No. of days or months in a year

3. Interest on extended payment

If any person required to pay the tax is qualified and elects to pay the tax on
installment under the provisions of the Tax Code, but fails to pay the tax or any
installment thereof, or any part of such amount of installment on or before the date
prescribed for its payment, or where the CIR has authorized an extension of time
within which to pay a tax or a deficiency tax or any part thereof, there shall be
assessed and collected interest at the rate of 20% per annum on the tax or deficiency
tax or any part thereof unpaid from the date of notice and demand until it is paid.
b. Surcharges
1. Simple Neglect (25%)
i. Failure to file any return and pay the tax due thereon.
ii. If the return is not filed with the proper internal revenue officer.
iii. Failure to pay on time the deficiency tax shown in the notice of assessment.
iv. Failure to pay the full or part of the amount of tax shown on any return
required to be filed, or the full amount of tax due for which no return is required
to be filed, on or before the date prescribed for its payment.

2. Willful Neglect (50%)

i. Willful neglect to file the return on time.
ii. False or fraudulent return is willfully filed (failure to report sales, receipts
or income in an amount exceeding 30% of that declared per return, and a claim
of deductions in an amount exceeding 30% of actual deductions, shall render
the taxpayer liable for substantial under-declaration of sales, receipts or
income or for substantial overstatement of deductions, thus making the return
filed false or fraudulent).
Problems:
1. Anita filed her annual income tax return on April 3, 2015 for her income last 2014. Until what
day can the Bureau of Internal Revenue make its assessment?
2. Anita filed her annual income tax return on May 3, 2015 for her income last 2014. Until what
day can the Bureau of Internal Revenue make a collection if there should be an assessment?
3. XYZ Corporation filed its annual income tax return on April 10, 2015. On October 3, 2016, it was
found out that the return filed was fraudulent. Until what day can the Bureau of Internal Revenue
make a collection?
4. XYZ Corporation filed its annual income tax return on April 10, 2015. On October 3, 2016, it was
found out that the return filed was fraudulent. Until what day can the Bureau of Internal Revenue
make a collection if there should be an assessment?
 5. Date assessment was received - February 8, 2009. Petition for reconsideration was filed with
the Bureau of Internal Revenue of February 18, 2009. Documents supporting the petition were filed
with the Bureau of Internal Revenue on February 28, 2009. Decision of denial of the petition was
received on March 11, 2009. Second request for reconsideration was filed with the Bureau of
Internal Revenue on March 21, 2009. Date revised assessment was received was April 2, 2009. Last
day to appeal to the Court of Tax Appeals:
6. Assessment received - January 5, 2015. Petition for reconsideration filed with the Bureau of
Internal Revenue - February 1, 2015. Documents supporting the petition filed by the taxpayer -
February 7, 2015. Decision of the Bureau of Internal Revenue denying the petition was received -
March 22, 2015. Second request for reconsideration filed with the Bureau of Internal Revenue -
March 30, 2015. Decision of denial of second request for reconsideration was received - April 12,
2009. Last day to appeal to the Court of Tax Appeals:
7. Date assessment was received - January 2, 2009. Petition for reconsideration was filed with the
Bureau of Internal Revenue - January 12, 2009. Documents supporting the petition for
reconsideration was filed with the Bureau of Internal Revenue - January 22, 2009. No decision on
the protest by July 12, 2009. Last day to appeal to the Court of Tax Appeals:
8. On January 20, 2008, a taxpayer filed a protest on/request for reconsideration of an assessment
of a tax. He received a final decision of the Bureau of Internal Revenue on the protest on April 30,
2008. He failed to appeal to the decision to the Court of Tax Appeals. The Bureau of Internal
Revenue was collecting the tax by summary proceedings on June 20, 2013. The taxpayer was
opposing the collection of the tax on the ground of prescription of the government to collect. When
shall be the last day to collect?

9. Date of tax erroneously paid June 10, 2013

Date of claim for refund was filed with BIR March 3, 2015
Date of BIR decision of denial was received April 5, 2015
Last day to appeal to the Court of Tax Appeals is on:

10. Date the national internal revenue tax was erroneously paid - April 10, 2007. Claim for refund
was filed with the Bureau of Internal Revenue - March 10, 2008. Date decision of denial of refund
was received – March 21, 2009. Last day to appeal to the Court of Tax Appeals: