Tax 2 Reviewer Lecture

ASSOCIATION OF TAXATION AND LAW STUDENTS

ACADEMICS DEPARTMENT http://www.facebook.com/atlas.ue 0915-1049090 & 0905-2101285

Note: No Copyright Intented Sources: Income Taxation, Omar Erasmo G. Ampongan; Transfer and Business Taxation, Edwin Valencia; CPAR and ReSA Review Materials Topic: CONCEPT OF DONATION AND DONOR’S TAX  NATURE OF DONOR’S TAX: DONATION – is an act of liberality whereby a person disposes gratuitously of a thing or right in favour of another who accepts it. The tax shall apply whether the transfer is in trust or otherwise, whether the gift is direct or indirect, whether the property is real or personal, tangible or intangible. Donation is a voluntary transfer of property from one person to another without any consideration or compensation therefore. The transfer of property by gift is perfected from the moment the donor knows of the acceptance by the donee; it completed by the delivery either actually or constructively, of the donated property to the done. The gift is completed when either: the donor renounces the power, his right to exercise the reserved power ceases because of the happening of some event or contingency of the fulfilment of some condition, other than because of donor’s death. There are two parties to a donation: a. DONOR – the person who disposes of the property or right b. DONEE – the person who receives the property or right. The donation can be perfected only upon the acceptance by the donee. The donation of a movable or personal property may be made orally or in writing. An oral donation requires the simultaneous delivery of the thing or of the document representing the right donated. However, if the property donated exceeds five thousand pesos (5,000), the donation and acceptance should be made in writing. The donation of an immovable property should be made in a public document. The computation for succeeding donations during the calendar year which includes previous net gifts to arrive at aggregate net gifts, is thus made because of the requirements that donor’s tax return should be filed within 30 days from the donation date and that donor’s tax shall be computed by the calendar year basis.

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PRIMARY REQUISITES OF DONATION: a. Acceptance by the donee. b. Delivery of the gift. c. Intent to donate d. Capacity to donate.  PURPOSE OF DONOR’S TAX: To supplement the estate tax by preventing the avoidance of the latter through the device of donating the property during the lifetime of the deceased (donor) To prevent the avoidance of income taxes. Without donor’s tax, the donor may escape the progressive rates of income taxation through the simple expedient of splitting his income among numerous donees.  KINDS OF DONATION: DONATION MORTIS CAUSA – takes effect upon the death of the donor. It partakes of the nature of a testamentary disposition and shall be governed by the law on succession DONATION INTER VIVOS – intended by the donor to take effect during his lifetime. The delivery of the property may be postponed, however, until the donor’s death. The donor’s tax is imposed on donation inter vivos.  OTHER FORMS OF DONATIONS: CANCELLATION OF INDEBTEDNESS – If a creditor desires to benefit a debtor, and without any consideration therefore, cancels the debt, the amount of the debt is a donation by the creditor to the debtor. TRANSFER FOR LESS THAN ADEQUATE AND FULL CONSIDERATION – where property, other than real property referred to in Section 24(D), is transferred for less than adequate and full consideration in money or in money’s worth, then the amount by which the fair market value of the property exceeded the value of the consideration shall, be deemed a gift, and shall be included in computing the amount of gifts made during the calendar year. a. Under Section 100, the transfer constitutes a gift and is subject to donor’s tax, although there is no donative intent.  Gratitude for services rendered is not a consideration, the value of which can be deducted from the property transferred. Like “love” and “affection”, it has no economic value.  Where the consideration is fictitious, the entire value of the property transferred shall be subject to donor’s tax. b. The only transfers excluded are those made bona fide in the ordinary course of business, at arm’s length, and free from any donative intent, even if the consideration is inadequate on account.

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 COMPOSITION OF GROSS GIFTS: Resident or Citizen Donor Tangible Personal Properties Intangible Personal Properties Real Properties

Regardless of location Regardless of location Regardless of location

Non-Resident Alien Donor Situated only in the Philippines Subject to the rule of reciprocity Situated only in the Philippines

RULE OF RECIPROCITY: a. When there is reciprocity – The intangible personal properties situated in the Philippines given as gifts by a non-resident alien donor are not subject to donor’s tax. b. When there is no reciprocity – The intangible personal properties situated in the Philippines given as gifts by a non-resident alien donor are subject to donor’s tax.  VALUATION OF GIFTS MADE IN PROPERTY: If the gift is made in property, the fair market value of the property at the time of the gift shall be considered the amount of gift. In case of real property, the provisions in estate tax shall apply to the valuation of said real property.  EXEMPT DONATIONS UNDER SPECIAL LAWS: These exemptions of certain gifts should be taken to mean the deductions allowed by law to arrive at the taxable net gifts. To the International Rice Research Institute To the Ramon Magsaysay Award Foundation Southern Philippines Development Administration Philippine American Cultural Foundation To the Philippine Inventor’s Commission To the Integrated Bar of the Philippines To the Development Academy of the Philippines National Social Action Council Museum of Philippine Costumes Aqua-Culture Department of Southeast Asia Fisheries Development Center of the Philippines Intramuros Administration To social welfare, cultural or charitable institution, no part of the net income of which inures to the benefit of any individual, if not more than 30% of the donation shall be used by the donee for administration purposes.  DEDUCTIONS FROM GROSS GIFT: For a resident or citizen donor: a. Dowries or gifts made on account of marriage and before its celebration, or within one year thereafter, by parents to each of their legitimate, recognized natural or adopted children, to the extent of the first ten thousand pesos (10,000).

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b. Gifts made to or the use of the National Government or any entity created by any of its agencies which is not conducted for profit. c. Gifts in favor of an educational and/or charitable, religious, cultural or social welfare corporation, institution, accredited non-government organization, trust or philanthropic organization, research institution or organization: Provided however, that not more than 30% of said gifts shall be used by such donee for administration purposes. For a non-resident alien: a. Gifts made to or the use of the National Government or any entity created by any of its agencies which is not conducted for profit. b. Gifts in favor of an educational and/or charitable, religious, cultural or social welfare corporation, institution, accredited non-government organization, trust or philanthropic organization, research institution or organization: Provided however, that not more than 30% of said gifts shall be used by such donee for administration purposes. Other deductions from gross gifts: a. Encumbrance on the property donated, if assumed by the donee. b. Those specifically provided by the donor as a diminution of the property donated. Deduction from gross gifts between husband and wife For deductions from gross gifts made by husband and wife jointly, out of conjugal or community funds of property, each donor has his or her own deductions. Each of the spouses is entitled to a maximum deduction of ten thousand pesos (10,000) for donation on account of marriage.  DONOR’S TAX RATES: OVER

100,000 200,000 500,000 1,000,000 3,000,000 5,000,000 10,000,000

BUT NOT OVER 100,000 200,000 500,000 1,000,000 3,000,000 5,000,000 10,000,000

THE TAX SHALL BE Exempt 0 2,000 14,000 44,000 204,000 404,000 1,004,000

PLUS

OF EXCESS OVER

2% 4% 6% 8% 10% 12% 15%

100,000 200,000 500,000 1,000,000 3,000,000 5,000,000 10,000,000

When the donee or beneficiary is stranger, the tax payable shall be thirty percent (30%) of the net gifts. A STRANGER is a person who is: a. Not a brother or sister (whether of the whole or half blood), spouse, ancestor or lineal descendant. b. Not a relative by consanguinity in the collateral line within the fourth degree of relationship. Any contribution in cash or in kind to any candidate, political party or coalition of parties for campaign purposes shall be governed by the Election Code, as amended.

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 FORMAT OF COMPUTATION:

Total (gross) gifts Less: Deductions (Exemptions) Total net gifts Add: Prior net gifts Total net gifts subject to tax Tax Due Total tax due Less: Tax credits/payments Payments for prior gifts Foreign donor’s tax paid Tax Payable (overpayment)

STRANGER RELATIVE xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx xxx (xxx) (xxx) xxx

Net gift shall mean the net economic benefit from the transfer that accrues to the donee The computation of the donor’s tax is on a cumulative basis over a period of one calendar year. Husband and wife are considered as separate and distinct taxpayers for purposes of donor’s tax. With the exception of moderate donations for charity or on occasions of family rejoicing, neither spouse may donate any community or conjugal property without the consent of the other. Every donation between the spouses during the marriage shall be void except for moderate gifts, which the spouse may give each other on the occasion of any family rejoicing, and donation mortis causa. 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 provisions of the Civil Code of the Philippines and the Family Code of the Philippines. The donor’s tax shall not apply unless and until there is a completed gift.  DONOR’S TAX CREDIT: Only resident or citizen donors are allowed donors tax credit. Because property in foreign country, when donated by a resident or citizen donor, pays a foreign donor’s tax and the Philippine donor’s tax, foreign donor’s tax credit offers a relief against the heavy burden of two taxes to pay. The tax credit allowed shall be lower amount between the actual donor’s tax in the foreign country and the limit. Limit is computed using the formula: LIMIT = (Net gifts, foreign country/ Net gifts, world) x Philippine donor’s tax Where donor taxes were paid in two or more foreign countries, the tax credit is computed as follows: a. Determine the limitation A, which is the total amount allowed for each foreign country. The amount allowed is the lower amount between actual donor’s tax paid to a foreign country and limit;

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b. Determine the limitation B, which is the lower amount between the total actual donor’s taxes paid to all the foreign countries and the limit for all the foreign countries; c. Determine the final tax credit allowed, which is the lower amount between Limitation A, and Limitation B. For a foreign donor’s tax paid to a foreign country, a credit is allowed to reduce the Philippine donor’s tax to pay, under the following formula: One foreign country Two or more foreign countries

Limit xxx Actual foreign donor’s tax xxx Allowed (lower between actual and limit) xxx Limit A – by country xxx Limit B – by total xxx Limit [lower between Limit A and B] xxx Actual total foreign donor’s taxes xxx Allowed tax credit (lower between allowed limit and actual total foreign donor’s taxes) xxx

 ADMINISTRATIVE PROVISIONS: Filing of Return and Payment of tax Requirements – any individual who makes any transfer by gift (except those which, under Section 101, are exempt from the tax) shall, for the purpose of the said tax, make a return under oath in duplicate. The return shall set forth: a. Each gift made during the calendar year which is to be included in computing net gifts b. The deductions claimed are allowable c. Any previous net gains made during the same calendar year d. The name of the donee e. Such further information as may be required by rules and regulations made pursuant to law. Time of Filing and Payment of Tax – the return of the donor required in this Section shall be filed within thirty (30) days after the date the gifts is made and the tax due thereon shall be paid at the time of filing. Place of Filing of Return a. In case of resident donors:  Authorized agent bank  Revenue District Officer  Revenue Collection Officer  Duly authorized Treasurer of the city or municipality where the donor was domiciled at the time of the transfer b. In case of non-resident donors:  Philippine Embassy or Consulate where he is domiciled at the time of the transfer  Office of the Commissioner

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Topic: INTRODUCTION TO VALUE-ADDED TAX (VAT) Value-Added Tax is a form of sales tax. It is a tax on consumption levied on the sale, barter, exchange or lease of goods or properties and services in the Philippines and on importation of goods into the Philippines. It is an indirect tax, which may be shifted or passed on to the buyer, transferee or lessee of goods, properties or services.

 Who are required to file VAT returns and/or pay VAT? -Any person or entity who, in the course of his trade or business, sells, barters, exchanges, leases goods or properties and renders services subject to VAT, if the aggregate amount of actual gross sales or receipts exceed One Million Five Hundred Thousand Pesos (P1,500,000.00). -A person required to register as VAT taxpayer but failed to register -Any person, whether or not made in the course of his trade or business, who imports goods  Where are VAT returns filed? The Monthly VAT Declaration (BIR Form 2550M) and Quarterly VAT Return (BIR Form 2550Q) shall be filed with any Authorized Agent Bank (AAB) in the place where the taxpayer is registered or required to be registered. In cases of no-payment, the return shall be filed with the Revenue District Office (RDO)/LTDO and LTAD where the taxpayer is registered or required to be registered. In places where there are no AABs, it shall be filed with and the tax paid to the Revenue Collection Officer or duly Authorized City or Municipal Treasurer of the place where the RDO is located.  What is "output tax"? Output tax means the VAT due on the sale, lease or exchange of taxable goods or properties or services by any person registered or required to register under section 236 of the Tax Code.  What is "input tax"? Input tax means the VAT paid by a VAT-registered person in the course of his trade or business on importation of goods or local purchase of goods or services, including lease or use of property, from a VAT-registered person. It shall also include the transitional input tax determined in accordance with Section 111 of the Tax Code.

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 What comprises "goods or properties"? The term "goods or properties" shall mean all tangible and intangible objects, which are capable of pecuniary estimation and shall include: a) Real properties held primarily for sale to customers or held for lease in the ordinary course of trade or business b) The right or the privilege to use patent, copyright, design or model, plan, secret formula or process, goodwill, trademark, trade brand or other like property or right c) The right or the privilege to use in the Philippines any industrial, commercial or scientific equipment d) The right or the privilege to use motion picture film, films, tapes and discs e) Radio, television, satellite transmission and cable television time  What comprises "sale or exchange of services"? The term "sale or exchange of services" means the performance of all kinds of services in the Philippines for others for a fee, remuneration or consideration, including those performed or rendered by the following: a) Construction and service contractors b) Stock, real estate, commercial, customs and immigration brokers c) Lessors of property, whether personal or real d) Warehousing services e) Lessors or distributors of cinematographic films f) Persons engaged in milling, processing, manufacturing or repacking goods for others g) Proprietors, operators or keepers of hotels, motels, resthouses, pension houses, inns, resorts h) Proprietors or operators of restaurants, refreshment parlors, cafes and other eating places, including clubs and caterers i) Dealers in securities j) Lending investors k) Transportation contractors on their transport of goods or cargoes, including persons who transport goods or cargoes for hire and other domestic common carriers by land, air and water relative to their transport of goods or cargoes l) Services of franchise grantees of telephone and telegraph, radio and television broadcasting and all other franchise grantees except those under Section 119 of the Tax Code m) Services of banks, non-bank financial intermediaries and finance companies n) Services of non-life insurance companies (except their crop insurances), including surety, fidelity, indemnity and bonding companies o) Similar services regardless of whether or not the performance thereof calls for the exercise or use of the physical or mental faculties The phrase "sale or exchange of services" shall include: a) The lease or the use of or the right or privilege to use any copyright, patent, design or model, plan, secret formula or process, goodwill, trademark, trade brand or other like property or right b) The lease or the use of, or the right to use of any industrial, commercial or scientific equipment c) The supply of scientific, technical, industrial or commercial knowledge or information

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d) The supply of any assistance that is ancillary and subsidiary to and is furnished as a means of enabling the application or enjoyment of any such property, or right or any such knowledge or information e) The supply of services by a nonresident person or his employee in connection with the use of property or rights belonging to, or the installation or operation of any brand, machinery or other apparatus purchased from such non-resident person f) The supply of technical advice, assistance or services rendered in connection with technical management or administration of any scientific, industrial or commercial undertaking, venture, project or scheme g) The lease of motion picture films, films, tapes and discs h) The lease or the use of or the right to use radio, television, satellite transmission and cable television time  What is a zero-rated sale? It is a sale, barter or exchange of goods, properties and/or services subject to 0% VAT pursuant to Sections 106 (A) (2) and 108 (B) of the Tax Code.  What transactions are considered as zero-rated sales? The following services performed in the Philippines by VAT-registered persons shall be subject to zero percent (0%) rate: a) Processing, manufacturing or repacking goods for other persons doing business outside the Philippines which goods are subsequently exported where the services are paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP) b) Services other than those mentioned in the preceding paragraph, the consideration for which is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP) c) Services rendered to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects the supply of such services to zero percent (0%) rate d) Services rendered to vessels engaged exclusively in international shipping e) Services performed by subcontractors and/or contractors in processing, converting, or manufacturing goods for an enterprise whose export sales exceeds seventy percent (70%) of total annual production ·

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The following sales shall be subject to zero percent (0%) rate: a) Sale of goods which are directly shipped by a VAT-registered resident to a place outside the Philippines b) Sale of goods which are considered as "deemed" export sales by a VAT-registered person to certain entities who are also residents of the Philippines: · Sales to export-oriented enterprises which the Code considers as export sales at the level of the supplier of raw materials · Sales to entities, the exemption of which, under a special law or an international agreement with the Government of the Philippines, effectively zero rates such sales · Sales of gold to the Bangko Sentral ng Pilipinas · Foreign currency denominated sales of goods c) Sales considered as exportation of goods under a special law such as Executive Order No. 226 (Omnibus Investments Code of 1987) and Republic Act No. 7916 (PEZA Law)  Where will taxpayers file their applications for VAT zero-rating? Taxpayers may file their application with the Audit Information, Tax Exemption and Incentives Division (AITEID) at the BIR National Office.  What is a Contractor's Final Payment Release Certificate and where should taxpayers file their application for this? The Contractor's Final Payment Release Certificate is issued by the BIR before a government contractor is fully paid for his contract with the government. Taxpayers may file their application at the BIR National Office at the Audit Information, Tax Exemption and Incentives Division (AITEID)  What transactions are considered as deemed sales? a) Transfer, use or consumption, not in the course of business, of goods or properties originally intended for sale or for use in the course of business b) Distribution or transfer to: · Shareholders or investors as share in the profits of the VAT-registered person; or · Creditors in payment of debt c) Consignment of goods if actual sale is not made within sixty (60) days following the date such goods were consigned d) Retirement from or cessation of business, with respect to inventories of taxable goods existing as of such retirement or cessation  What is VAT-exempt sale? It is a sale of goods, properties or service and the use or lease of properties which is not subject to output tax and whereby the buyer is not allowed any tax credit or input tax related to such exempt sale.

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 What are the VAT-exempt transactions? a) Sale of non-food agricultural products, marine and forest products in their original state by the primary producer or owner of the land where the same were produced b) Sale of cotton and cotton seeds in their original state and copra c) Sale or importation of agricultural and marine food products in their original state, livestock and poultry of a kind generally used as, or yielding or producing foods for human consumption and breeding stock and generic materials thereof d) Sale or importation of fertilizers; seeds, seedlings and fingerlings; fish, prawn, livestock and poultry feeds, including ingredients, whether locally produced or imported, used in the manufacture of finished feeds (except specialty feeds for race horses, fighting cocks, aquarium fish, zoo animals and other animals generally considered as pets) e) Sale or importation of coal and natural gas, in whatever form or estate, and petroleum products (except lubricating oil, processed gas, grease, wax and petrolatum) subject to the Excise Taxes imposed under Title VI of the Tax Code f) Sale or importation of raw materials to be used by the buyer or importer himself in the manufacture of petroleum products subject to excise tax, except lubricating oil, processed gas, grease, wax and petrolatum g) Importation of passenger and/or cargo vessels of more than five thousand tons, whether coastwise or ocean-going, including engine and spare parts of said vessel to be used by the importer himself as operator thereof h) Importation of personal and household effects belonging to residents of the Philippines returning from abroad and nonresident citizens coming to resettle in the Philippines; Provided, that such goods are exempt from customs duties under the Tariff and Customs Code of the Philippines i) Importation of professional instruments and implements, wearing apparel, domestic animals, and personal household effects (except any vehicle, vessel, aircraft, machinery, other goods for use in the manufacture and merchandise of any kind in commercial quantity) belonging to persons coming to settle in the Philippines, for their own use and not for sale, barter or exchange, accompanying such persons, or arriving within ninety (90) days before or after their arrival, upon the production of evidence satisfactory to the Commissioner of Internal Revenue, that such persons are actually coming to settle in the Philippines and that the change of residence is bona fide j) Services subject to percentage tax under Title V of the Code k) Services by the agricultural contract growers and milling for others of palay into rice, corn into grits, and sugar cane into raw cane sugar l) Medical, dental, hospital and veterinary services subject to the provisions of Sec. 17 of RA 7716, as amended m) Educational services rendered by private educational institutions, duly accredited by the Dept. of Education Culture and Sports (DECS), and Commission on Higher Education (CHED), and those rendered by the government educational institutions n) Sale by the artist himself of his works of art, literary works, musical compositions and similar creations, or his services performed for the production of such works o) Services rendered by individuals pursuant to an employer-employee relationship p) Services rendered by regional or area headquarters established in the Philippines by multinational corporations which act as supervisory communications and coordinating centers for their affiliates, subsidiaries or branches in the Asia-Pacific Region and do not earn or derive income from the Philippines

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q) Transactions which are exempt under international agreements to which the Philippines is a signatory, or under special laws, except those under the following laws: · P.D. No. 66 - Export Processing Zone Authority (EPZA) registered firms · P.D. No. 529 - Petroleum Exploration Concessionaires under the Petroleum Act of 1949 · P.D. No. 1590 - Philippine Airlines (PAL) relative to domestic transport of goods or cargoes r) Sales by agricultural cooperatives duly registered with the Cooperative Development Authority (CDA) to their members as well as sale of their produce, whether in its original state or processed form, to non-members; their importation of direct farm inputs, machineries and equipment, including spare parts thereof, to be used directly and exclusively in the production and/or processing of their produce s) Sales by electric cooperatives duly registered with the Cooperative Development Authority (CDA) or National Electrification Administration (NEA), relative to the generation and distribution of electricity, as well as their importation of machineries and equipment, including spare parts, which shall be directly used in the generation and distribution of electricity t) Gross receipts from lending activities by credit or multi-purpose cooperatives duly registered with the Cooperative Development Authority (CDA) whose lending operation is limited to their members u) Sales by non-agricultural, non-electric and non-credit cooperatives duly registered with the Cooperative Development Authority: Provided, that the share capital contribution of each member does not exceed Fifteen Thousand Pesos (P 15,000) and regardless of the aggregate capital and net surplus ratably distributed among the members v) Export sales by persons who are not VAT-registered w) Lease of a residential unit with a monthly rental not exceeding Eight Thousand Pesos (P 8,000.00), regardless of the amount of aggregate rentals received by the lessor during the year, provided that the exemptions likewise applies to lease of residential units where the monthly rental per unit exceeds P 8,000.00 but the aggregate rentals of the lessor during the year do not exceed P 550,000.00. x) Sale, importation, printing or publication of books and any newspaper, magazine, review or bulletin which appears at regular intervals with fixed prices for subscription and sale and which is not devoted principally to the publication of paid advertisements y) Sale or lease of goods or properties or the performance of services other than the transactions mentioned in the preceding paragraphs, the gross annual sales and/or receipts does not exceed the amount of P 550,000.00 z) Sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or business or real property utilized for low-cost and socialized housing as defined by Republic Act No. 7279, otherwise known as the Urban Development and Housing Act of 1992 and other related laws, house and lot and other residential dwelling valued at P 1,000,000 and below.

“If any of you lacks wisdom let him ask God, who gives generously to all without reproach, and it will be given him.” -James 1:5 “God is able to do immeasurably more than what we can think or imagine.” –Ephesians 3:20 “I can do all things through Christ who strengthens me.” –Philippians 4:13

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