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Business and Transfer Taxes Notes

Estate Tax
Basic Terms in Taxation
Right – The basics of human existence.Those things that
Taxation – power of the Government to impose burden upon are Necessary to live. You cannot live without these.
Eg. Right to breathe, right to live, right to vote, Freedom of speech. Etc.
the people to earn Revenue.

3 Inherent Powers of the State ( definition: Acaylar, PJ) PRivilege– Are Rights that you can live without.
1. Police Power – power to monitor people for These are things that are allowed and granted by the state.
the general welfare. These privileges can be Taxed.
Eg. Driver’s license, Professional Licenses, etc. You can live without having to drive
2. Eminent Domain – power to expropriate or be a lawyer, etc.

private property for public use.


3. Taxation – power of the government to
impose burden upon the people to earn
U Note:
Government requires us to pay taxes so that
revenue.
we can exercise the privileges that they have
U Note: granted upon us and these taxes also work for
the protection of our rights and privileges.
Taxation is the foundation wherein government
is founded on. Taxes and the government have
To understand taxation, one must understand the
a symbiotic relationship.
concept of rights and privileges. Rights are
usually not taxable while Privileges are usually
“Without taxation there is no government” taxable.
- Judge
Cooley Double Taxation - illegal in the Philippines. You
cannot tax the same thing twice for the same
KINDS OF TAXES
period and for the same purpose.
1. Income Taxes – taxes levied on the financial
income of persons, corporations, or other legal Capital Gains tax – A capital gains tax
entities. (abbreviated: CGT) is a tax charged on capital
2. Business Taxes- taxes levied on the privilege gains, the profit realized on the sale of a non-
to enter into business inventory asset that was purchased at a lower
a. Value Added Taxes price.
b. Other Percentage Taxes
c. Excise Tax – tax imposed on SIN 2 Basic Questions in Taxation
products ( products that are harmful 1. Are you a Citizen?
and wasteful) 2. Are you a Resident

If the answer is YES to anyone of these this is


3. Transfer Taxes – taxes on the privilege to
transfer of property from one person to
TAXABLE.
another.
a. Estate Taxes – takes effect after death
b. Donor’s Taxes – takes effect during
lifetime
a. Donation Inter Vivos - during
life
b. Donation Mortis Causa – takes
effect after death. ( Last will
and Testament)

4. Documentary Taxes – taxes levied on the


privilege to enter into contract.

RIGHT VS. PRIVILEGE


Notes from: The New Philippine Business and Transfer Taxes (Principles, Law and Problems) by Virgilio D. Reyes (Nov 2007)
Business and Transfer Taxes Notes from G. Mendoza
And Lectures by: ATTY. PRACKIE JAY ACAYLAR, CPA (EAC- Manila)
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Business and Transfer Taxes Notes
Estate Tax
W Legitimate Children &Legitimate
Descendants
W Legitimate Surviving Spouse
W Legitimated Children

Legitimate Children- all children born & conceived


Principles of Succession NOT out of wedlock.
♪ Legitimate Child
EleMENTS OF SUCCESSION
♪ Legally Adopted Child
1. Deceased/ Decedent –Person who died. ♪ Legitimated Child
Testator/ Testatrix (F) – person who wrote the last
will and testament. Also called the decedent. Illegitimate Children – all children born & conceived
2. Estate- a bulk of property left behind by the out of wedlock.
decedent.
3. Successors/ Heir- the persons to whom the “All Children conceived and born outside a valid
estate is given to. marriage are considered illegitimate.”
4. Executor/Administrator – person who will take ~(Art 165, Family Code of the
charge of the estate before the distribution. Philippines)
** Executor- person named in the will by the
testator ~ Secondary Compulsory Heir – only can get
** Administrator- person appointed by the part of the estate in the absence of the
courts in the absence of an assigned executor. primary compulsory heirs.
succession – mode of acquisition by virtue of which the property
W Legitimate Ascendants
rights and obligations, to the extent of the value of the Estate of a W Illigitimate Ascendants
person are transmitted through his death to others by will or operation
of Law. ( Reyes)
~ Voluntary Heirs – Heirs determined through
the last will
and testament.
Things Transmissible in Succession
1. Property – things that the decedent owned
before the time of his death.
LAST WILL AND TESTAMENT– a will or testament is a document
a. Real Estate/ Property- land, building or by which a person (the testator) regulates the rights of others over his
anything that is attached to the soil or her property or family after death. For the devolution of property not
with permanence. disposed of by will, see inheritance and intestacy. In the strictest
sense, "will" is a general term, while "testament" applies only to
b. Tangible Property- property that can be dispositions of personal property (this distinction is seldom observed).
seen or touched. A will is also used as the instrument in a trust.
Eg. Cars, Jewelry, Electronic Gadgets, etc.
c. Intangible Property- property that - A written instrument wherein the testator would administer his
cannot be seen or touched. properties rights and obligation after his death. (acaylar)
Eg. Rights, Franchises, Shares, bonds, etc.
Codicil- addenums or attachments to the will.
2. Rights – legal claims, franchises, (could be the
same as intangible property)
3. Obligations – unpaid debt Kinds of Last Will and Testaments
~ Holographic Will - a will entirely written
Kinds of Succession or created by the testator himself, signed
1. Testamentary Succession- succession which and dated and NOT subject to legal
results from a designation of heirs made in the formalities on form, witnesses, or
last will and testament executed by the acknowledgement before a notary public.
testator.
2. Intestate/Legal Succession- succession which >>> This kind of will does not need
results from the operation of law where there is formalities because many people can
no last will and testament or the LW&T is void recognize his handwriting and it can be
for any reason given by law. verified by a penmanship expert.
3. Mixed Succession – succession which results
partly from the LW&T and Partly from the ~ Notarial Will- a will that is created FOR the
operation of law. testator by a 3rd party, usually his lawyer,
follows proper form, signed and dated in
Kinds of Heirs front of the required number of witnesses
~ Primary Compulsory Heirs – heirs in a and acknowledged by the presence of a
succession whether there is or there is no last notary public.
will and testament. These include:

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Business and Transfer Taxes Notes
Estate Tax
2 PARTS OF THE ESTATE 2. Tangible personal property located within the
Philippines
~ Legitime– This is a secured portion of the estate that the law 3. Intangible personal property located within the
reserves for compulsory heirs.
Philippines unless there is reciprocity in which
~ Free Portion – Portion of the will that the testator can freely
dispose of. case it is not taxable in the Philippines.

Situs or PLACe OF TAxATION


PROBATE OF THE LAST WILL AND TESTAMENT– This is a Special
Proceeding validating the last will and testament.
Property has a situs or location or a jurisdiction for tax
“No property of a testator shall pass to an heir unless proven that all purposes. Situs is decisive in determining the estate of a
terms in the Last will and testament is legal and valid in court.” deceased person taxable in the Philippines.
Revocation of Will– the testator may revoke his last will and
testament at any time before he dies. If he executed more than one
Last will and testament the last one before he dies will be the
prevalent one

DiSINHERITANCE– A compulsory heir may be deprived of his


legitime for a cause provided by law and effected by will where the SUBJECT TO TAX
legal cause of which is stated. If there is any discrepancy, there must WITHIN WITHOUT
be proof or evidence.
Citizen / Resident y y
EXECUTOR/ ADMINISTRATOR– Carries out the provisions of the last Resident Alien y y
will and testament that is appointed by the testator. If he does not
accept, the court shall appoint. Non Resident y N
Alien/
Articulo MORTIS– testator dies within 3 months of the time of
Non Resident
marriage Citizen
Non Resident y Y
ESTATE TAXES Citizen
A tax on the right of transmitting property at the time of death
and on the privilege that a person is given control to a certain Real Property- country where they are situated
extent to the disposition of his property to take effect upon Tangible Personal Property- country where they
death. are actually located at the time of death of the
decedent
Applies to: Intangible Personal Property- considered as
a) Citizens of the Philippines intangible personal properties situated in the
b) Residents of the Philippines Philippines:
Non-resident aliens with properties in the ~ franchise which must be exercised in the
Philippines Philippines
~ shares, obligations or bonds issued by any
Where to file- municipality in which the corporation organized in the Philippines
decedent was domiciled at the time of his ~ shares, obligations or bonds issued by any
death or if there be no legal residence in the foreign corporation 85% of the business of
Philippines, with the Office of the which is located in the Phils
Commissioner. ~ shares, obligations or bonds issued by a
foreign corporation if such shares have
GROSS ESTATE acquired a business situs in the Phils.
~ Shares or rights in any partnership,
A. Gross Estate of Citizen and Resident Decedent business or industry established in the
Phils.
1. Real Property located within and without the
Philippines PROPERTIES INCLUDIBLE IN THE GROSS ESTATE
2 Tangible personal property located within and
DECEDENT’S INTEREST - shall include all properties, rights and
without the Philippines interest which the decedent owns at the time of death. It shall include:
3. Intangible personal property located within
and without the Philippines Properties owned by the decedent actually and
physically present in his estate at the time of his
B. Gross Estate of a Non-Resident Alien Decedent death such as land, buildings, shares of stock,
vehicles, bank deposit, etc
1. Real Property located within the Philippines

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Business and Transfer Taxes Notes
Estate Tax
The value of any interest in property owned or been exercised on of before the date of his death,
possessed by the decedent at the time of his such notice shall be considered to have been
death such as dividends declared before his given, or the power exercised on the date of his
death but received after his death, partnership death.
profits which have accrued before his death,
usufructuary rights, etc. PROPERTY PASSING UNDER A GENERAL POWER
OF APPOINTMENT
The value of property, right or interest in the
property, transferred by the decedent during his The rule is the gross estate shall include any
lifetime which, under the law, are in the nature of property passing or transferred under a general
testamentary dispositions such as life insurance power of appointment exercised by the decedent
proceeds in favor of a revocable beneficiary.
♪ By will
TAXABLE TRANSFERS ♪ By deed to take effect in possession or
enjoyment at or after his death
Value of the property or interest in property ♪ By deed under which he has retained for
transferred by the decedent during his lifetime his life or any period not ascertainable
which is in the nature of testamentary without reference to his death or for any
disposition: period which does not in fact end before
his death
♪ Transfers in contemplation of death ♪ The possession or enjoyment of, or the
♪ Revocable transfers right to the income from the property
♪ Property passing under a general power of ♪ The right, either alone, or in conjunction
appointment with any person to designate the persons
♪ Transfer with retention or reservation of who shall possess or enjoy the property or
certain rights over the income or the income therefrom
enjoyment of the property transferred
♪ Transfer for insufficient consideration The donee of a general power of appointment
holds the appointed property with all the
Transfers in Contemplation of Death attributes of ownership thus, the appointed
property shall form part of the gross estate of the
Impelled by the thought of death, or the donee of the power upon his death.
motivating factor or controlling motive for the
transfer of the property is the thought of death Transfers with Retention and Reservation of
without regard to the state of health of the Certain Rights Over the Income or Enjoyment of
transferor. the Property Transferred

Transfers where the donor reserves the right to


Donation Mortis Causa the income of the property until death; or
Takes effect upon the death of the donor. Its
characteristics are: Transfers where the donor reserves the right to
the possession or enjoyment of the property until
♪ there is no conveyance of title or death
ownership to the donee or transferee
♪ the transfer is revocable by the donor at These transfers do not actually convey full
will during his lifetime ownership over the property transferred hence
♪ the transfer shall be void id the donor the property still remains part of the gross estate
survives the donee of the transferor.

REVOCABLE TRANSFERS TRANFERS FOR INSUFFICIENT CONSIDERATION

Where the enjoyment of the property transferred → If the transfer is a bona fide sale for
may be altered, amended, revoked or terminated adequate and full consideration in money
by the decedent. The revocability is not affected or money’s worth, no value shall be
by the failure of the decedent to exercise the included in the gross estate.
power to revoke during his lifetime. If the notice → If the transfer is not a bona fide sale for an
has not been given, the power to revoke has not adequate and full consideration in money
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Business and Transfer Taxes Notes
Estate Tax
or money’s worth, there shall be included EXEMPT ACQUISITIONS AND TRANSACTIONS
in the gross estate only the excess of the FROM PAYMENT OF ESTATE TAXES
fair market value of the property at the ♪ the merger of the usufruct in the owner of
time of death over the value of the the naked title
consideration received by the decedent. ♪ the transmission or delivery of the
→ If an inter vivos transfer of the decedent is inheritance or legacy by the fiduciary heir
proven to be fictitious, the total value of or legatee to the fideicommissary
the property at the time of death shall be ♪ the transmission from the first heir,
included in the gross estate. legatee or donee in favor of another
beneficiary in accordance with the desire
Reasons for Taxability of the Transfers of the predecessor
♪ all bequests, devises, legacies or transfers
It will be seen that in most of these transfers, the to social welfare, cultural and charitable
property remains substantially that of the institutions, no part of the income of which
transferor during his lifetime notwithstanding the inures to the benefit of any individual;
transfer as he still retains either the “Beneficial Provided, however, that no more than 30%
Ownership” or “Naked Title” to the property. of the said bequests, devices, legacies or
Hence, the transfer is essentially similar in transfers shall be used by such institutions
respect to a transmission by testacy or intestacy for administration purposes.
upon the death of the owner. In order to be
exempted from the purview of the taxing
provisions, the transfer by inter vivos must be
absolute and outright with no strings attached VALUATION OF THE ESTATE
whatsoever by the decedent. ♪ Valuation Date- time of death
♪ Basis of Valuation- fair market value,
PROCEEDS OF LIFE INSURANCE which is the price which a property will
bring when it is offered for sale by one
Proceeds of life insurance under policies taken who desires, but is not obligated to sell
out by the decedent upon his own life shall be and is bought by one who is under not
included in his gross estate in the following cases: necessity of buying it
♪ Valuation of Usufruct- probable life of the
♪ when the beneficiary is the estate of the beneficiary in accordance with the latest
deceased, his executor or administrator Basic Standard Mortality Table
whether or not the deceased retained the ♪ Valuation of Real Property -
power of revocation
♪ when the beneficiary is other than the 1) FMV as determined by the Commissioner; or
estate of the deceased, his executor or 2) FMV as shown in the schedule of values fixed
administrator and the decedent retained by the Provincial or City Assessors
the power of revocation
♪ Valuation of Personal Properties- FMV at
CLAIMS AGAINST INSOLVENT PERSONS the time of the decedent’s death
Are receivables due or owing from persons who
are not financially capable of meeting their DEDUCTIONS FROM THE GROSS ESTATE
obligations. The receivables shall be included in
the gross estate at their full amount. The estate tax is computed based on the net
estate. The net estate is determined by
CAPITAL OF THE SURVIVING SPOUSE subtracting from the gross estate the deductions
The gross estate of a married decedent shall authorized by law.
consist of the following:
A)Funeral Expenses
♪ conjugal or community properties
♪ exclusive properties The limit is the actual funeral expenses or the
amount equal to 5% of the gross estate,
The capital of the surviving spouse shall not be whichever is lower, but in no case to exceed
deemed part of the gross estate. P200,000.

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Business and Transfer Taxes Notes
Estate Tax

Funeral expenses include the expenses for the a) Decedent died within five (5) years from
mourning clothing of the spouse and unmarried receipt of the property from a prior decedent or
minor children, fees and charges for masses, donor;
rites, ceremonies incident to the interment, b) Property on which vanishing deduction is
expenses of interment, and the cost of the coffin, being claimed must be located in the Philippines;
burial plot, tombstone, mausoleum or niche. The c) Property must have formed part of the taxable
cost of obituary notices, flowers and expenses of estate of the prior decedent, or of the taxable gift
the wake preceding the burial are also part of of the donor;
funeral expenses. Expenses incurred after burial d) Estate tax on the prior succession or the
can no longer be deducted. donor’s tax on the gift must have been finally
determined and paid;
B) Judicial Expenses e) Property on which vanishing deduction is
being taken must be identified as the one
Refers primarily to court expenses and expenses received from the prior decedent or from the
of administration. The expenses of donor, or something acquired in exchange
administration include those actually and therefore.
necessarily incurred in the administration of the f) No vanishing deduction on the property was
estate. allowable to the estate of the prior decedent

G) Family Home

A deduction from the gross estate is an amount


equivalent to the current fair market value of the
decedent’s family home. The maximum is P1M.
C) Claims Against Insolvent Persons
As a condition for the deduction for the family
The gross estate shall include receivables of the home, it must be certified to as family home by
decedent at their full amount due from debtors the barangay captain of the locality where it is
who are insolvent. The deduction is the amount located.
of the receivable which cannot be collected due H) Standard Deduction
to insolvency.
The law provides an amount equivalent to P1M.
D) Unpaid Mortgage
I) Medical Expenses
Unpaid mortgage in respect to property is a
deduction from the gross estate subject to the There is a deduction for medical expenses
condition that the decedent’s interest in the incurred by the decedent within 1 year prior to
property, undiminished by the mortgage, is his death, substantiated with receipts. In no case
included in the gross estate. shall the deductible medical expenses exceed
P500,000.
E) Losses
Requisites: J) Amount Received under RA 4917
1. loss is not compensated by insurance or
otherwise Any amount received by the heirs from the
2. loss was not claimed as a deduction in the decedent’s employer as a consequence of the
income tax return death of the decedent-employee in accordance
3. loss must occur not later than the last day with RA 4917 shall be deductible if such amount
for payment of the estate tax is included in the gross estate of the decedent.

F) Vanishing Deduction K) Procedural Requirements

The purpose is to minimize the effect of a double Notice of death (Sec. 89) in all cases of transfers
taxation on the same property within a short subject to tax, or if exempt from tax, the gross
period of time value of the estate exceeds P20,000.00 must be
filed two (2) months after the decedent’s death or
Conditions: after qualifying as executor or administrator.
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Business and Transfer Taxes Notes
Estate Tax

Estate Tax Returns X. Rates of Estate Tax – Section 84

1. Requirements: in all cases of transfers though XI. Duties of government agencies


exempt, gross value exceeds P200,000.00
regardless of value, the estate consists of a. Sec. 94 – No judge shall authorize the
registered or registrable property such as real executor or administrator to deliver the
property. Motor vehicle x x x . in which case the distributive share to any party interested in the
legal heirs, admin, exec files a return under oath estate unless a Certification from the
in duplicate setting forth: value of estate at the Commissioner shows that the estate taxes have
time of death, deductions allowed and other info. been paid.

If gross value exceeds P2,000,000.00 the return Sec. 95 – The Register of Deeds shall not register
shall be supported by a statement duly certified transfer of real property or real rights by way of
to by a CPA: gifts inter vivos or mortis causa unless tax is
shown to have been paid.
• itemized assets
• itemized deductions from gross estate Sec. 97 – No transfer of shares, obligations, bonds
• amount of tax due whether paid or in the books of a new corporation by way of gifts
outstanding inter vivos or mortis causa unless there is a
certification that the taxes have been paid.
Time for filing: 6 months from the decedent’s
death The lawyer preparing the document relating to
partition or disposition shall furnish the
Extension of time: Commissioner has authority to Commissioner, Regional Director, RDO with such
grant in meritorious cases a reasonable extension copies to facilitate collection
not exceeding 30 days.
The debtor of the deceased shall not pay his
Place of filing: Authorized agent bank, RDO, debts to the heirs unless there is a Certification
Collection officer, duly authorized treasurer of that the taxes have been paid.
city/municipality where decedent was domiciled
or if there be no legal residence in the Philippines, A bank where deposit is maintained by decedent
with the Office of the commissioner. shall not allow withdrawal unless there is a
Certification that the taxes have been paid.
IX. Payment of Estate Tax
Some BIR Rulings
Time of Payment: at the time the return is filed by
executor, admin, and heir BIR 423-87 (Life Insurance)

Extension: When Commissioner finds that The taxability of insurance proceeds will depend
payment would impose undue hardship on estate on whether the designation of the beneficiary is
or heirs, he may grant an extension revocable or irrevocable. If revocable, the
proceeds form part of the Gross Estate even if
the decedent- insured failed to revoke. But if the
• not exceeding 5 years, if estate is settled
designation is irrevocable, proceeds of the life
through the courts
insurance vest upon the beneficiary immediately
• not exceeding 2 years, if estate is settled and they no longer form part of the decedent’s
extrajudicially gross estate.
No extension in cases of assessment by reason of BIR 186-81
negligence, intentional disregard of rules and
regulations or fraud on part of taxpayer. Receivables as well as expected tax refunds at
the time of death of the decedent form part of
Who pays : Executor, administrator before the gross estate.
delivery to beneficiary.
• Beneficiary subsidiarily liable to the extent BIR 095-98
of distributive share.
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Business and Transfer Taxes Notes
Estate Tax
The estate tax shall be appraised at its FMV as of
the time of death or as of 6 months thereafter at
the election of the executor or administrator.
However the appraised value of real property as
of the time of death or at the election of the
executor or administrator as of 6 months after
death shall either be (a) the current and FMV as
shown in the schedule of values by the provincial
or city assessor or (b) the FMV as determined by
the CIR, whichever is higher.

BIR 011-86

Shares of stock which had been either


suspended, de listed or where no transactions
invoking them have been made, shall be valued
at their book value nearest the valuation date
which is the decedent’s death. The book value is
prima facie considered as FMV. However, if there
had been previous bona fide sales/exchanges of
such shares, the price at which such shares
exchanged hands should be taken or considered
as FMV.

BIR 066-98

The estate tax return is required to be filed within


6 months from the decedent’s death, and in
meritorious cases, a reasonable extension not
exceeding 30 days for filing the return may be
granted by the CIR. The payment of estate tax
shall be made upon the filing of the return or on
such date as fixed if an extension is granted by
the CIR as when payment of the same would
impose undue hardship on the estate or any of
the heirs, but in no case to exceed 5 years if the
estate is settled through the courts or 2 years in
case the state is settled extra judicially.

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