Value Added Tax

VALUE ADDED TAX
Is a percentage tax, imposed at every stage of the distribution process on the sale, barter, exchange (including transactions deemed by law as a sale), or lease of goods or properties or rendition of services in the course of trade or business, or the importation of goods.
CONCEPT OF VAT
The value added tax is a tax levied on a wide range of goods and services. It is a tax on the value, added by every seller, with aggregate annual sales of articles and/or services, exceeding P550,000 to his purchase of goods reported and services unless exempt. The VAT is computed at the rate of 0% or 12% of the gross selling price of goods or gross receipts realized from the sale of services.

Tax Base of VAT
The tax is based on the gross selling price or gross value in money of the goods or properties sold, bartered, exchanged or the gross receipts derived from the sale or exchange or services, including the lease of goods or properties, or in the case of imported goods, on the total value or landed cost thereof plus taxes and other charges, if any.

NATURE OF THE VAT
1. It is a privilege tax imposed by law directly not on the thing or service but on the act (sale, barter, exchange, or lease of goods or properties, importation of goods, or sale or performance of services) of the seller, (manufacturer, producer, wholesaler or retailer, transferor, importer or lessor who is made liable for its timely payment although the burden of the tax is borne by the ultimate consumer.
2. It is an ad valorem tax, the amount or sale thereof being based on the gross selling price or gross value in money of the goods or properties, or gross receipts derived from the performance of services, including the use or lease of properties.
3. It is an indirect tax- as such, it may be shifted or passed on to the buyer, transferee, or lessee of the goods, properties or services as part of the purchase price.

Valuation of particular gifts

Valuation of particular gifts

1. Personal property- the fair market value thereof at the time of the gift is considered the amount of the gift.
2. Real property- the current fair market value of as shown in the schedule of values fixed by the assessor’s office, or the fair market value as determined by the Commissioner of the Internal Revenue, whichever is higher.
3. Cash- if the gift is in money, then the amount thereof is the valuation


Donor’s Tax imposed on net gifts

The donor’s tax is computed on the basis of the total net gifts made during the calendar year, meaning the total amount of gifts after deducting the exemptions and allowable deductions.



Under Section 99 of the tax code, the donor’s tax for each calendar year shall be computed on the basis of the total net gifts during the calendar year.

Computation of Donor’s Tax

1. First donation in a year

Gross Gift made……………………………… P xxx

Less Deductions……………………………... xxx

NET GIFT………………. P xxx

Multiply by tax rate ………………………. X %

DONOR’S TAX ON NET GIFT………….. P XXX

2. Next donation of a subsequent date during the same year

Gross gift made on this date ………….. P xxx

Less: Deductions …………………. xxx

NET GIFT……………….. P xxx

Add all prior net gifts within the year.. xxx

AGGREGATE NET GIFTS ……. P xxx

Donor’s Tax on aggregate net gifts… P xxx

Less Donor’s Tax on all prior net

Gifts within the year…………… xxx

Donor’s Tax on the net gifts on this date P XXX

ADMINISTRATIVE PROVISIONS

The donor’s tax return must be filed under oath and in duplicate by any individual which makes any transfer of property or rights by way of gift, donation or contribution, and should contain the following information:

1. Each gift made during the year

2. Deductions claimed and allowable

3. Any previous net gift made during the same year

4. Name of the donee;

5. Other pertinent information

The Return shall be filed within 30 days from the date of the donation, in the BIR. In meritorious cases, the Commissioner of Internal Revenue may grant a reasonable extension not exceeding 30 days within which to file the return.

The donor’s tax shall be paid at the time the return is filed. However the Commissioner may extend the time for payment not exceeding 6 months provided the donor furnish a bond in amount of the tax and such other sureties as the Commissioner may require.

TAX CREDIT FOR GIFT TAXES PAID TO FOREIGN COUNTRIES

Tax credit- is a right of a taxpayer to deduct from the donor’s tax payable the foreign donor’s tax he has paid to his foreign country subject to limitation.

The donor’s tax imposed by the Tax Code upon a donor who was a citizen or a resident at the time of donation shall be credited with the amount of any donor’s taxes of any character and description imposed by the authority of a foreign country.

Limitations on credit

(a) For donor’s tax paid to one foreign country- the amount of the credit in respect to the tax paid to any country shall not exceed the same proportion of the tax against which such credit is taken which the net gifts situated within such country taxable under the tax code bears to his entire gift.

In computing the allowable tax credit, the formula is

Net gifts situated in a foreign country X Philippines Donor’s Tax = Tax Credit Limit

Entire Net Gifts

(b) For Donor’s Taxes paid to two or more foreign countries- the total amount of the credit shall not exceed the same proportion of the tax against which such credit is taken which the donor’s net gifts situated outside the Philippines taxable under Tax Code bears to his gift.

In computing the allowable tax credit, the formula is:

Net gifts situated in a outside the Philippines X Philippines Donor’s Tax = Tax Credit Limit

Entire Net Gifts

DONOR’S TAX (SEC. 98-108, RA 82424)

Donor’s or Gift Tax- is tax imposed on the privilege of transmitting property by and from a living person to another by way of donation.

Donation- refers to the act of liberality whereby a person disposes gratuitously of a thing or right in favor of another who, accepts it.

PARTIES TO A DONATION

1. DONOR- the person who gratuitously disposes of his property or right
2. DONEE- the person who receives and accepts the property or right being donated.

KINDS OF DONATION
1. DONATION MORTIS CAUSA- one which takes effect upon the death of the donor. This is similar to a transfer in contemplation of death, and in the nature of a testamentary disposition which is subject to estate tax, not to gift tax.
2. DONATION INTER VIVOS- gifts made and intended by the donor to take effect during his lifetime and therefore subject to donor’s tax, not to estate tax.


1. DONATION OF PERSONAL PROPERTY may be made orally or in writing, except when the value of the donated property exceeds P5,000, in which case, the donation and the acceptance must be in writing.
2. DONATION OF REAL PROPERTY must be in a public document to be valid, specifying therein the property donated and the value of the charges which the done must satisfy. The acceptance by the done may be made in the same deed of donation or in a separate instrument, and done during the lifetime of the donor.

REQUISITES

1. Capacity of the Donor-
2. Donative intent or the donor’s intent to make a donation
3. Delivery, actual or constructive, of the subject matter of the donation
4. Acceptance of the gift by the donee.

The donor’s tax applies to both natural and juridical persons. Every donation between husband and wife during the marriage is declared void by law, except donation mortis causa and moderate gifts which the spouses, on the occasion of any family affair, may give to each other. Gifts coming from the conjugal property made by both spouses are taxable, on half to each donor spouse.

Where the property is transferred for less than adequate consideration in money or money’s worth, the amount by which the value of the property exceeds the amount of consideration shall be deemed a gift for purposes of the donor’s tax. The gift tax will apply regardless of whether the transfer is in trust or not, direct or indirect, real or personal property is involved, tangible or intangible.

Composition of Gross Gift

For a resident donor- real properties, tangible and intangible personal properties wherever located.

For a non resident donor- real properties, tangible or intangible properties located in the Philippines.

Under sec.104 of the tax code, gross gifts include the following:
1. Real, intangible and tangible personal properties or mixed, located in the Philippines and outside of the Philippines, depending on the kind of donor.
2. Franchise which must be exercised in the Philippines
3. Shares, obligations or bonds issued by any corporation or partnership, organized in the Philippines in accordance with our laws;
4. Shares, obligations or bonds issued by any foreign corporations, 85% of which is located in the Philippines
5. Shares, obligations or bonds issued by any foreign corporation if such shares, obligations or bonds have acquired a business situs in the Philippines
6. Shares or rights in any partnership, business or industry established in the Philippines.

Exemption/Allowable deductions from gross gift under sec. 101
1. Dowries or gifts of parents on account of marriage made before the marriage or within one year thereafter, in favor of the legitimate, recognized natural or legally adopted children to the extent of the first P10,000.
2. Gifts made to or for the use of the national government or any entity created by any of its agencies, which is not conducted for profit or to any political subdivision of the said government.
3. Gifts in favor of an educational and/or charitable religious, cultural or social welfare corporation, institution, accredited NGO’s xxx, provided that not more than 30% of said gifts shall be used for administration purposes by such donee.

Deductions allowable under the BIR regulations

1. Encumbrances on the donated property, if assumed by the donee;
2. Diminution of the donated property as specified by the donor.

Exemptions under special laws

1. Gifts, contributions, donations to social welfare, cultural, or charitable institutions, no part of the net income of which inures to the benefit of any individual, if not more than 30% of said donation shall be used for administrative purposes. (Presidential Decree 507)
2. Gifts, contributions, donations to the government for purposes of scientific, engineering and technological research, invention and development
3. Gifts, contribution, donations to any international civic organization for religious or charitable purposes, provided that said donations shall be for its use, or to be distributed for free and not for sale or barter;
4. GCD to the IRRI
5. GCD to the IBP, Phil-American Cultural Foundation, Phil. Investors Commission,


In the case of non-resident donors the allowable deductions from gross gifts are the same as those for resident donors, except that the must be connected with donated properties situated in the Philippines only; there is no deduction for dowries given by parents to their children on account of marriage.

When the donee or beneficiary is a stranger, the tax payable by the donor shall be 30% of the net gifts.

A stranger is one who is not a brother, sister (whole or half-blood), spouse, ancestor, and lineal descendant, or relative by consanguinity in the collateral line within the fourth degree of relationship.

Political contributions are considered taxable gifts. The donee in this case is deemed to have received a financial advantage gratuitously. In the absence of an express exempting provision of law, such political contributions are subject to donor’s tax.

Final Exams will be on October 9,2009

Final Exams for Tax 71 B and C will be on Friday October 9, 2009.

Notice: No class on August 14, 2009

Midterms schedule

Part I (computation) August 17, 2009
Part II August 19, 2009

Thanks.

Problem no.2

I. Mr.P, a Filipino citizen, died in Cebu City on March 2009, leaving the following properties:

1. Household furnitures and appliances P 150,000

2. Cash in BPI (Savings Account) 75,000

3. Proceeds of life insurance wherein Mrs.X

designated her brother as her revocable

beneficiary 250,000

4. Claims against insolvent persons 30,000

5. Benefits received from her heirs from

GSIS by reason of Mrs. X’s death 100,000

6. Van, being used by Mrs. X’s brother but

Registered under her name 200,000

7. Proceeds of GSIS life insurance 100,000

==========

TOTAL P 905,000

Deductions claimed

1. Funeral Expenses P 100,000

2. Medical expenses 150,000

3. Judicial expenses 20,000

4. Claims against insolvent persons 30,000

==========

TOTAL P 300,000

Compute the net estate and the estate tax due and payable.

ANSWER:

Item no. 5 and item no 7 is not included as they are exemptions under special laws.

Gross Estate:

1. Household furnitures and appliances P 150,000

2. Cash in BPI (Savings Account) 75,000

3. Proceeds of life insurance wherein Mrs.X

designated her brother as her revocable

beneficiary 250,000

4. Claims against insolvent persons 30,000

5. Van, being used by Mrs. X’s brother but

Registered under her name 200,000

==========

TOTAL P 705,000

Deductions

1. Funeral Expenses P 35,250

2. Medical expenses 150,000

3. Judicial expenses 20,000

4. Claims against insolvent persons 30,000

==========

TOTAL P 235,250

Funeral Expenses:

P 705,000 X 5%= P35,250

Gross Estate: 705,000

Less Deductions 235,250

======

Net Estate 469,750

ESTATE TAX COMPUTATION: (SEC. 84. NIRC)

TAXABLE ESTATE: 469,750

200,000 0

269,750 X 5% 13,487.50

=========

ESTATE TAX DUE: 13,487.50

PROBLEM NO.1

I. Mr. P, a Filipino citizen, a widower with 2 children, died while having a vacation on May 2008 in New York City, leaving the following properties:

1. Apartment in New York P 1,500,000

2. House and Lot in San Francisco 2,000,000

3. House and Lot in Dumaguete City 2,000,000

4. Cash in BDO (current account) 500,000

5. Claims against insolvent person 100,000

6. Retirement benefits received by his heirs

From Mr. P’s employer under RA. 4917 700,000

7. ABS-CBN Shares of stocks 500,000

8. Car in Dumaguete City 200,000

9. Proceeds of Life Insurance where Mr. P

Named his friend Mario, as an irrevocable

Beneficiary 300,000

10. Benefits received from SSS by reason of

Mr. P’s death 500,000

=======

TOTAL 8,300,000

Deductions claimed

1. Funeral expenses P 300,000

2. Medical Expenses 650,000

3. Judicial Expenses 100,000

4. Claims against Estate 300,000

5. Claims against insolvent persons 100,000

6. Family Home 1,000,000

7. Benefits received from Mr.P’s employer 700,000

8. Losses from fire that occurred in the house

In Dumaguete City 150,000

=======

TOTAL P 3,300,000

Compute the Net Estate and the estate tax due and payable.

ANSWER :

TAKE NOTE ITEM NO. 9 IS NOT INCLUDED AS IT IS AN EXCLUSION AND ITEM NO. 10, IS AN EXEMPTION THEREFORE NOT INCLUDIBLE IN THE GROSS ESTATE OF THE DECEDENT.

1. Apartment in New York P 1,500,000

2. House and Lot in San Francisco 2,000,000

3. House and Lot in Dumaguete City 2,000,000

4. Cash in BDO (current account) 500,000

5. Claims against insolvent person 100,000

6. Retirement benefits received by his heirs

From Mr. P’s employer under RA. 4917 700,000

7. ABS-CBN Shares of stocks 500,000

8. Car in Dumaguete City 200,000

=======

TOTAL 7,500,000

Deductions claimed

1. Funeral expenses P 200,000

2. Medical Expenses 500,000

3. Judicial Expenses 100,000

4. Claims against Estate 300,000

5. Claims against insolvent persons 100,000

6. Family Home 1,000,000

7. Benefits received from Mr.P’s employer 700,000

8. Losses from fire that occurred in the house

In Dumaguete City 150,000

=======

TOTAL P 3,050,000

GROSS ESTATE 7,500,000

LESS DEDUCTIONS 3,050,000

=============

NET ESTATE 4,450,000

ESTATE TAX COMPUTATION: (SEC. 84. NIRC)

TAXABLE ESTATE: 4,450,000

2,000,000 135,000

2,450,000 X 11% 269,500

=========

ESTATE TAX DUE 404,500