CHP7: BUSINESS TAXES

TRANSFER TAX 2nd Sem | Sir Lazo PRELIM

BUSINESS TAXES NOTE: If the asset sold is an ordinary asset,

it is generally subject to vat unless exempt
under the law,
Those imposed upon onerous transfers such
as sale, barter, exchange and importation.

Without a business pursued in the Philippines TYPES OF BUSINESS TAXES

(except importation) by the taxpayer, business
taxes cannot be applied.
1. Value added tax (VAT)
Generally based on gross sales/gross
receipts. Hence, irrespective of the results of 2. Other percentage taxes (OPT) or simply
business operations (income or loss), taxpayers Percentage Tax
engaged in trade are still liable to pay for
business taxes (either vat or percentage tax, 3. Excise taxes
plus excise tax, if applicable).

If the sale is exempt from vat, it may be

NOTE: Vat provisions pertain to those
subject to Other Percentage Tax (OPT)
persons whose undertakings are intended to
be pursued on a going concern basis
SO! transactions already subjected to vat
should no longer be subject to Percentage Tax.
ISOLATED TRANSACTIONS
BUT! transaction subj to either vat/ percentage
tax may still be subject to excise tax
Generally, not considered in the ordinary
course of trade or business, hence, not subject
to business tax.

BUT! services rendered in the Philippines by

non-resident persons shall be considered as
being rendered during trade or business even if
the performance is not regular.

A VATable transaction is not subject to

percentage tax, but a taxpayer may have
mixed transactions, making them liable for
VAT, percentage tax, and excise tax if
applicable.
TYPES OF TRANSFER

1. Gratuitous Transfer

Transfer without consideration is not subject to

business tax but subject to transfer taxes
(donor's tax or estate tax).
VALUE-ADDED TAX
1. Onerous Transfer
A tax on the value added by sellers to the sale
Transfer with Consideration is subject to or lease of goods, property, or services in
business tax & income tax unless exempt IF in business, including imported goods for
the ordinary course of trade or business personal or business use in the Philippines.
including incidental transactions.
A consumption tax imposed on the sale,
Not in the course of trade/business = NOT barter, exchange, or lease of goods and
subj to business tax but may be subj to income services in the Philippines (cross-border
tax.
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doctrine) and on imported goods, applied at

each stage of production and distribution. formula or process, goodwill, trademark,
trade brand or other like property or right
Cross border doctrine means that VAT is
not included in the cost of goods intended 3. The right or privilege to use any industrial
for consumption outside the Philippines' commercial or scientific equipment
taxing jurisdiction.
4. The right or the privilege to use motion
KINDS OF VAT picture’ films, films, tapes and discs; and

5. Radio, television, satellite transmission

1. VAT on sale of goods or properties and cable television time.

2. VAT on importation of goods

SALES OF SERVICES
3. VAT on sale of services and use of lease
of properties  It refers to performing services in PH for a
fee, in cash or kind.
 VAT on services is a tax on payments
PERSONS LIABLE for professional or business services.
 It is an indirect tax that can be passed
on to clients.
1. Sale on the Ordinary Course  The tax accrues when the service fee
is collected, regardless of timing.
Anyone engaged in trade or business who  Payments may be collected in advance
sells, barters, exchanges, leases goods or or after the service is rendered.
properties, provides services, or imports goods
is liable for VAT.
SALES OF REAL PROPERTIES
2. Importation
 It refers to properties held for sale or
lease in the seller’s ordinary course of
An importer, whether an individual or a business.
corporation, and regardless of whether the
importation is for business or personal use, is  Installment sales (real estate dealer)
liable for VAT. are subject to VAT on payments, including
interest and penalties.
 VAT applies to payments actually or
TRANSFER BY A TAX-EXEMPT ENTITY
constructively received by the seller.
TO NONE-TAX EXEMPT ENTITY

If tax-free imported goods are later sold, CHARACTERISTICS OF VAT

transferred, or exchanged to non-exempt
persons or entities in the PH, the buyers or
recipients are considered the importers It is an indirect tax where tax
1.
and are liable for any applicable internal shifting is always presumed
revenue tax.
VAT is an indirect tax that sellers can pass on
to buyers, lessees, or transferees, tho they
GOODS OR PROPERTIES remain legally responsible for paying it.
(statutorily liable).
Refer to all tangible and intangible items that
can be valued monetarily This rule applies even to existing sales or lease
of goods, properties, or services contracts
1. Real properties held primarily for sale to when RA 9337 (VAT Reform Act) took effect.
customers or held for lease in the ordinary For imports, the importer is directly liable
course of trade or business for VAT.

2. The right or the privilege to use patent, While businesses file VAT returns with the BIR,
copyright, design or model, plan, secret the tax burden ultimately falls on consumers,
not the legal responsibility to pay it.
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goods or local purchase of goods,

properties or services, including
lease or use of property in the
course of his trade or business.
2. It is consumption-based.
NOTE: If the total input tax, including any
carried over from the previous quarter,
VAT is a consumption tax on the sale, barter, exceeds the output tax, the excess input tax
exchange, or lease of goods and services in the is carried forward to the next
Philippines, as well as on imported goods. quarter(s).
The final consumers ultimately bear the tax, as However, for input tax related to zero-rated
businesses pass it on to them. As a result, VAT sales, a VAT-registered person may choose
makes up a significant part of consumer to request a refund or apply for a tax credit
spending. certificate to offset other internal revenue
taxes, subject to legal and regulatory
It is imposed on value-added in limitations.
3. each single of production &
distribution process.
BASIS OF VALUE ADDED TAX
The VAT system ensures fiscal adequacy by
taxing every stage of consumption. Businesses
in the supply chain play a role in collecting and
managing the tax.

It is a credit-invoice method value-

4.
added tax

VAT payable is calculated by subtracting input

VAT from output VAT, with taxpayers remitting
the difference to the BIR.

Sellers pass the tax liability to end users, who

may offset their own VAT liability with
payments received from consumers.

Since VAT is a consumption tax, sellers act only

as tax collectors, while the final burden falls on
consumers.

In the Philippines, the Credit-Invoice Method

or Tax Credit Approach is used to compute VAT 1. To prevent the avoidance of estate
payable. VAT is first imposed on sales as tax. The donor's tax supplements the estate
Output VAT, while a tax credit is claimed on tax by preventing the avoidance of the latter
VAT paid for purchases, known as Input VAT. through the device of donating the property
during the lifetime of the deceased.

INPUT VAT VS OUTPUT VAT 2. To prevent or compensate for the loss

of the progressive rates of income tax
when large estates are split up by gifts to
Output vat due on the sale, lease or numerous donees.
exchange of taxable goods or
properties or services by any
ELEMENTS OF DONATION
person registered or required to
register

Input vat due on or paid by an VAT- Capacity of the donor to make a

1.
registered on importation of donation
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It refers to the condition and legal competence

of the donor to enter into a contract donor.

All persons who may contract and dispose of

their property may make a donation. 4. Acceptance

So! it is not enough that a person be Donation is perfected not from the time of
capacitated to contract, he must also have the acceptance but from the time of knowledge of
capacity to dispose (determined at the the donor that the donee has accepted the
perfection of the donation) same.

Donative intent or intent to make WHY: The tax law considers donation not
2. merely as an act of gratuitously transferring
a gift on the part of the donor
property or right but as a contract.
It refers to the proper declaration of the legal
Hence, must have meeting of the minds
owner of a property or right to transfer
between the donor and the donee perfected.
ownership to another without consideration.
Acceptance must be made during the
Such an intent followed by a donative act is
lifetime of the donor and of the donee.
essential to constitute a gift, and no strained
and artificial construction of a supplementary
Donations made to conceived and unborn
statute should be included to tax as gift a
children may be accepted by those persons
transfer actually lacking od donative intent
who would legally represent them if they
were already born
Donative intent is required only in direct
gifts
Completion and Perfection of Donation

If gift is indirect, taking place by way of sale,

The donor's tax shall not apply until there is a
exchange, or other transfer of property (for
completed gift.
inadequate consideration) donative intent is
not necessary. The intention to donate is
known by observing the forms required by law Law governing imposition of Donor’s
to make it valid, Tax

3. Delivery The law in force at the time of the perfection

/completion of the donation shall govern the
Donor’s tax applies to a completed gift. imposition of donor's tax

Completed by the delivery, either actual or

constructively, of the donated property or the FORMALITIES
instrument, to the donee.

The law in force at the time of perfection or 1. Donation of Movable Property

completion of the donation shall govern the
imposition of donor’s tax, based on the fair This may be made orally or in writing,
market value (FMV) of the property. This may be made orally or in writing. An oral
donation requires simultaneous delivery of the
Value Donation & Acceptance must thing or of the document representing the right
exceeds 5K be in writing or else void donated.

A gift that is incomplete because of reserved

powers becomes complete when either:
2. Donation of Immovable Property
1. Donor renounces the power;
it must be made in a public document,
2.. The donor's right to exercise the power specifying therein the property donated and
ceases because of the happening of some the value of the charges which the donee must
event or contingency or the fulfillment of satisfy or else void.
some condition, other than the death of the
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Acceptance of Immovable Property As to time of taking effect (Perfection):

1. In the same deéd of donation; takes effect during the

Inter-Vivos lifetime of the donor and
2. In a separate public document. The donor the donee.
shall be notified thereof in an authentic
form, and this — shall be noted in both Mortis-Causa takes effect upon death of
instruments. the donor.

VOID DONATIONS

1. Those made between persons who were

guilty of adultery or concubinage at the
time of the donation.

2. Those made between persons found

CHARACTERISTICS OF DONOR’S TAX guilty of same criminal offense, in
consideration thereof.

3. Those made to a public officer or his

1. An excise tax, not a property tax. It is a
wife, descendants and ascendants, by
tax imposed on the “right” or “privilege” to
reason of his office.
transfer property by way of gift intervivos.

2. being a “contract”, does not apply unless

NOTE: action for declaration of nullity may
and until there is a completed gift.
be brought by the spouse of the donor or
donee and the guilt of the donor and donee
3. transfer is perfected from the moment may be proved by preponderance of
the donor knows of the acceptance of the evidence in the same action.
done..

4. A direct tax because the tax is imposed VALUATION OF GROSS GIFTS

on the donor and determined with reference
to all the donor's gifts.
GEN RULE: Fair Market Value at the time of
donation

CLASSIFICATION OF DONATION EXCEPTION:

REAL PROPERTY (Higher of)
➢ FMV determined by Commissioner
As to motive or purpose ➢ FMV shown in schedule of values fixed
by provincial & city assessors
SHARES OF STOCK
Simple The cause is pure ➢ Unlisted common share: Book
liberality. value per share of issuing corporation
➢ Unlisted preference share: Par
Donations made due to value per share
past services rendered or ➢ Listed shares: Average of the
Renumerator future services or charges highest and lowest quotes on the
y and burdens not really nearest date if none are available on
donation bc not gratuitous the date of death.

Modal consideration is less than

the value of the thing
donated.
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4. Shares, obligations, or bonds issued

by-any foreign corporation if it has
acquired a business situs in PH.

5. Shares or rights in any partnership,

business or . industry established in
the Philippines.

CLASSIFICATION OF DONORS

1. Citizen and resident

2. Nonresident alien with reciprocity

3. Nonresident alien without reciprocity

DONOR’S TAX RATE

The tax rate payable by a donor for each

calendar year shall be 6% based on the total
gifts in excess of P250,000 exempt gift
made during the calendar year.
THERE IS RECIPROCITY IF:
The tax shall apply whether the transfer is in
A. If the donor was a resident citizen of trust or otherwise, whether the gift is direct or
a foreign country that did not indirect, and whether the property is real or
impose estate taxes on intangible personal, tangible or intangible
personal property of non-resident
Filipinos, the same exemption
applies in the Philippines. NOTE: Any contribution in cash or in kind to
any candidate, political party or coalition of
B. If a foreign country grants estate parties for campaign purposes, shall be
tax exemptions to non-resident governed by the Election Code, hence, not
Filipino citizens for intangible subject to donor's tax
personal property, the same
exemption applies to its citizens in
the Philippines. DONOR’S TAX RATE

Gifts include real and personal property,

INTANGIBLE ASSETS WITH SITUS whether tangible or intangible, or mixed,
“WITHIN” PH wherever situated

BUT! If donor was a nonresident alien at the

1. Franchise which must be exercised time of donation, his real and personal
in PH property so transferred situated outside the
Philippines shall not be included as part of
2. Shares, obligations or bonds issued gross gift
by any corporation or sociedad
anonima org or constituted in PH in
accordance w/ its laws.

3. Shares, obligations or bonds issued

by any foreign corporation, 85% of
the business of which is located in
the Philippines.
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INCLUSIONS IN THE GROSS GIFTS

1. Direct Gifts

2. Gifts through creation of a Trust

3. Transfer for insufficient consideration

4. Condonation of debt Sale of Shares of Stock of a Domestic

Corporation (Not through the-local
5. Repudiation of inheritance stock exchange) lower than its FMV

6. Renunciation by the surviving spouse of

his/her share in the common property KEY NOTES:

The provision aims to prevent

manipulation of selling prices to reduce
Transfer for Insufficient Consideration income taxes.

Applies to property other than real property Under the Tax Code, gain from property
subject to final capital gains tax. sales is based on the declared selling price
minus cost basis.
If transferred for less than full and adequate
consideration in money or money’s worth, the If a lower price is declared than the actual
difference is considered a "deemed gift." amount exchanged, it results in lost tax
revenue.
The fair market value is determined at the time
of the Contract to Sell or Deed of Sale (if no The Supreme Court confirmed that the
prior Contract to Sell exists). absence of donative intent does not exempt
transactions from donor’s tax.
The deemed gift amount is included in the total
gifts made during the calendar year for tax The TRAIN Law introduced an exception:
purposes. transactions made in the ordinary course of
business (bona fide, arm’s length, and
NOTE: Bonafide transfers made in the without donative intent) are not subject to
ordinary course of business and free from donor’s tax.
any donative intent, even if the
consideration is inadequate on account of When unlisted shares are sold below FMV,
bad bargain shall not be Subject to donor's the difference is a taxable gift unless the
tax sale is at arm’s length and for legitimate
business purposes.

RMC 30-2019 states that determining

whether a transaction is at arm’s length is a
factual matter, requiring proof of business
purpose.

However, RMC 30-2019 does not specify

acceptable proof of a bona fide business
transaction.

Condonation/cancellation of
Indebtedness

An act of liberality, by virtue of which the

creditor, without receiving any equivalent,
renounces the enforcement of the obligation
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which is extinguished in its entirety or in that

part or aspect of the same to which the co-heir(s).
remission refers

By a generous act of a person who, for To be subject to dover tax, the two (2)
instance, lends money to another with an conditions enumerated must be present.
obligation to repay, the borrower is released
from such obligation, hence, subject to donor’s
tax.

There is NO condonation of debt or donation in

the following cases: Renunciation of share in common
property by the surviving spouse and
Condonation is due to the repudiation of inheritance
1.
rendition of service.
Renunciation by the surviving spouse of his or
The transaction has the effect of payment of her share in the conjugal partnership or
compensation. The debtor is therefore subject absolute community after the dissolution of the
to income tax. marriage in favor of the heirs of the deceased
spouse or any other persons is SUBJECT to
donor's tax.
The condonation was made by a
2.
corporation for its shareholders.
EXEMPT GIFTS and/or DEDUCTIONS
The transaction has the effect of payment of FROM THE GROSS GIFTS
dividends by the issuing corporation (creditor).
The debtor is assumed to have earned a Exemptions (exclusions) are not to be treated
dividend income. as exclusions from the gross gifts of the donor.

Payment of Loan by the Guarantor They partake the nature of deductions and are
therefore deductible from the gross gifts to
arrive at taxable net gifts. Hence, the same
A guarantee is gratuitous unless stated item/amount shall likewise be presented in the
otherwise. gross gifts of the donor.

BUT! if the obligation is “jointly” entered into

by the guarantor and the borrower with a 1. Donations Gt exceeding P250,000 during
creditor-bank, the security given by the the year, regardless of the relationship of
guarantor to fulfill the obligation of the the donor and the donee
borrower is not gratuitous because the
guarantor must be indemnified by the principal 2. Gifts made to or for the use of the
debtor in case the guarantor pays for the debt. National Government or any entity created
by any of its agencies which is not
In such cases, payment by the guarantor is not conducted for profit, or to any political
subject to donor's tax subdivision of the said Government

Repudiation of Inheritance 3. Gifts in favor of non-profit educational

and/or charitable, religious, cultural or social
welfare corporation, institution, accredited
General renunciation by an heir, including the
nongovernment organization, trust or
surviving spouse, of his or her share in the
philanthropic organization or research
hereditary estate left by the decedent is NOT
institution or organization.
subject to donor’s tax, UNLESS:
BUT! not more than 30% of said gifts shall
1. The renunciation was categorically done be used by such donee for administration
in favor of identified heir(s); and purposes.

2. To the exclusion or disadvantage of other

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NOTE: Donations to the national 5. Encumbrances on the property donated if

government or its profit-oriented entities are assumed by the donee.
subject to donor’s tax and must be included
in the gross gift but cannot be deducted.
NOTE: Net Gift is the net economic benefit
The same rule applies to gifts made to received by the donee. If a mortgaged
nonprofit educational, charitable, religious, property is gifted with condition that donee
cultural, social welfare, or accredited assumes the mortgage liability, net gift is
organizations. If more than 30% of the calculated by deducting mortgage amount
donation is used for administrative purposes, from the property's fair market value.
it is subject to donor’s tax.
6. Diminutions
Notice of donation by a donor engaged
in business
Reduction in the value of the donated property
as provided by the donor. It refers to the
To be exempt from donor’s tax and claim a full decrease in the value of the donated property
deduction, a business donor must submit a as a result of a condition made by a donor to
Notice of Donation for any donation of at least the donee.
₱50,000 to the Revenue District Office (RDO)
within 30 days of receiving the donee
institution’s Certificate of Donation.

This certificate must confirm that no more than

30% of the donation will be used for
administrative purposes, as required under
Section 101(A)(3) and (B)(2) of the Tax Code.

4. Donations made to entities as exempted

under special laws
COMPUTATION OF DONOR’S TAX DUE
a. Prizes and awards given to athletes.
b. Donation to the International Rice
Research Institute.
c. Donation to the Ramon Magsaysay
Award Foundation.
d. Donation Inventor’s Commission.
e. Donation to the Integrated Bar of the
Philippines.
f. Donation to Development Academy
of the Philippines.
g. Donation to Philippine-American
Cultural Foundation.
h. Donation to PH Health Insurance
Corporation.
i. Donations of equipment, materials, The computation of donor’s tax shall be on a
services to the Task Force on human cumulative basis (on gifts made within the
settlement same calendar year), regardless of the
j. Donations to Intramuros Admin relationship of the donor and the donee
k. Donations to Southern Philippines (relative or stranger, natural or juridical
Development Administration person).
l. Donations to National Social Action
Council
m.Donations to the Museum of PH Donations made by Spouses
Costumes
n. Donations to the Aqua culture Depart
Husband and wife are considered separate
of Southeast Asia Fisheries Dev
taxpayers for donor’s tax purposes.
Center of the Philippines
o. Exempt donations under Bayanihan
However, if a conjugal or community property
Act
is donated and only the husband signs the
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deed of donation, he is regarded as the sole

donor for tax purposes. 4. The name of the donee; and

This does not affect the wife's right to 5. Such further information as may be
challenge the donation’s validity if given required by rules and regulations made
without her consent, as provided under the pursuant to law.
Civil Code and the Family Code of the
Philippines.

Donations made by a Foreign

Corporation
PLACE OF FILLING
Foreign corporations are only subject to
donor’s tax in the Philippines if the donated
property is located in the country. Except in cases where the Commissioner
otherwise permits, the return shall be filed and
A foreign corporation's donation of its own the tax paid to
shares of stock is generally not subject to 1. An authorized agent bank,
donor’s tax. 2. Revenue District Officer, or
3. Revenue Collection Officer
BUT! if 85% of the corporation’s business is in
the Philippines or if the shares have acquired a having jurisdiction over the place where the
business situs in the country, the donation may donor is domiciled at the time of the transfer,
be taxed, subject to reciprocity rules. or if there is no legal residence in the
Philippines, with the Office of the
Additionally, if a foreign corporation donates Commissioner.
shares of stock to a resident employee, it is not
subject to donor’s tax, as it is presumed to be In the case of gifts made by a
given in consideration of the employee’s nonresident, the return may be filed
services. with:

BUT! the donation is treated as taxable

compensation income for the employee and is
1. Philippine Embassy or Consulate in the
subject to income tax. The value of the
country where he is domiciled at the time of
donated shares is considered a deductible
the transfer, or.
expense for the corporation, provided it
complies with applicable withholding tax on
compensation. 2. Directly with Office of the Commissioner

FILING OF TAX RETURN AND PAYMENT

Civil Penalties and Interest
OF TAX DUE

Any individual who makes any transfer by gift 1. Penalty of 25% if there is no false or
shall, for the purpose of the said tax make a fraudulent intent on the taxpayer.
return in duplicate. The return shall set forth:
2. Penalty of 50% if there is false, malice or
1. Each gift made during the calendar year fraudulent intent on the taxpayer.
which is to be included in’ computing net
3. Interest on the unpaid amount of tax
2. The deduction claimed and allowable from the date computed until fully paid.

3. Any previous net gifts made during the INTEREST RATE:

same calendar year  Under TRAIN Law - 12%
 Prior to 2018 - 20%
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