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2010 San Sebastian College Bar Review

Taxation 2
By: Atty. Francis Jay Sababan
He knows the intricacies of law and jurisprudence like the lines on the palm of
his hand.
A pre-week and pre-bar lecturer in Taxation law and jurisprudence at the
following schools in geographical order:
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.

University of Cordillera in Baguio City;


Legal Advantage Baguio
Univ Pangasinan, Dagupan City
UBelt Bar Consortium
Recolestos Law Center
San Sebastian College
San Beda Bar Review
Cosmopolitan Review Center, Ermita Manila
Aquila Legis lecturer, Rockwell Makati
Legal Advantage, Makati City
Arellano University Bar Review
University of Nueva Caseres in Naga City
Aquinas University in Legaspi
University of San Carlos in Cebu City
San Jose Recoletos, Cebu City
University Negros Occidental Recoletos, Bacolod
Silliman University in Dumaguete
Leyte Colleges in Tacloban City

Finished Tertiary school in Aquinas University and Law degree at University of


Santo Tomas. Currently a professor of Taxation law at:
1.
2.
3.
4.

University of the East;


Polytechnic University
Jose Rizal University
San Sebastian College

Last Bar majority of topics came from Tax 2. Your course is LLB,
meaning Libo-libong Bagsak o Liwat-liwat Bar sa Ilonggo. Do
not frustrate because the general rule in the bar is flanking and
exception is passing. So why frustrate yourself if you belong to
general rule?

Estate Tax
You have to know the term Estate Tax because in the
Philippine law we have 3 laws that use the word estate.
First, we have Income tax in sections 60-66 in tax code. We
also have real property tax under the local government code.
And the last is this estate tax, so do not confuse these terms.
So both donors and estate taxes are called transfer taxes. In
one of the bar exams it was asked, what are transfer taxes
under the Philippine Laws?

Estate tax under section 84;


Donors tax under section 98; and
Transfer tax for Real Property under section
135 in the Local Government Code

Tax credit always at the end or the bottom. It is not


deducted from gross income.
Tax credits are:
1.
2.
3.

Section 86 par. e: that will constitute tax credit;


Excess input tax under VAT, sec 110, par.b ; and
Tax credit certificate, sec. 204

Section 104
You have to determine who are the taxpayers under
estate and donors tax are. Section 104 covers both kinds of
taxpayers.
Estate tax:
1.
2.
3.
4.

Resident citizen
Non-resident citizen
Resident alien
Non-resident alien

Donors tax:
1.
2.
3.
4.
5.
6.

Resident citizen
Non-resident citizen
Resident alien
Non-resident alien
Domestic corporations
Foreign corporations

Corporations are not found in estate taxpayers because they


are not capable of a natural death. Why is it that we have to
determine?
Among the four taxpayers in estate tax, it is only the
NRA whose liability shall only be when the property is located
in the Philippines. That is with regard to the NRA, to the first
three their liability shall be on property located within and
without the Philippines. Id like to repeat that NRAs, their
only liability is when the property is located within the
Philippines.
In Donors tax, the NRA and foreign corporations, they will be
liable if the property is located in the Philippines. So the rest,
their liability is when the property is either within or without
the Philippines.
What is this property deemed located in the Philippines? Sec.
104
1.

Franchise to be exercised in Philippines;

What is an estate tax?

Franchise: legislative enactment authorizing


a person to engage in trade or business.

Is a transfer tax imposed on the transfer of the net


estate of decedent to his heirs or beneficiaries.

2.

Before we go further please take note of this formula:

3.

Gross
estate
(sec.85)
MINUS
deductions
(sec.86,par.a-c) EQUALS net estate or taxable estate TIMES
the rate under sec.84 EQUALS taxable net estate.: So,

4.

1.
2.

(Gross estate)- (Deductions) = Net estate x (Rates


under sec84) = Taxable Net Estate
(Taxable net estate) (Tax credit) = Estate tax

5.

Shares, obligations and bonds issued by


Domestic corporations;
Shares, obligations or bonds issued by foreign
corporations; provided that 85% of the business
is located in Phil.;
Shares, obligations and Bonds issued by foreign
corporations provided SOB have acquired
business situs in the Philippines;
Shares or rights in any partnership, business or
industry located in the Philippines.

Remember:

2010 San Sebastian College Bar Review


Taxation 2
By: Atty. Francis Jay Sababan
BAR Q: Could there be an exception, meaning even if the
property is located, the NRA and foreign corporation are still
EXEMPTED? YES
If the law of the foreigner does not impose transfer
tax at the time of donation or death of decedent, or it
exempts transfer tax; provided that exemption was granted
on intangible personal properties owned by Filipinos who are
not residing in that foreign country; provided further that
NRA must be a national or citizen of that foreign country and
at the same time they must be resident.
Asked in 2005 Bar about American who is resident of
Germany, on whether exemption could be applied. No.
foreigners must be a national or citizen and must be a
resident of his own country.
Segue (political law): Election in May 2010, by
unanimous vote in Negros the winner is the current governor,
but he failed to vote because of kidney failure. He
proclaimed as winner. After a month, he died. Immediately
the vice-governor who lost in gubernatorial race took over.
The winner in vice-gubernatorial race wants to succeed also
because he claims to be vice. Between the two who is the
successor?
The losing governors argument he is the governor by
virtue of the hold-over principle.
Here: The winning candidate died between the time
of proclamation and taking of oath
We shall proceed.
What shall be included in the Gross Estate?
Remember the elements by which NRA may be
exempted though the property is located in Philippines.
because generally, they are liable if located in the
Philippines. Take note of the elements I have told you in
section 104(middle section).
CASE:
42 SCRA 23 Campos Rueda vs CIR
The decedent is an NRA from Morocco, a former
Spanish but became Moroccan by virtue of marriage. At the
time of death she was a resident and national of Morocco. But
at the time of death she has plenty of shares of stocks
located in Philippines in a domestic corporation. Her
administrator Rueda went to BIR and claimed for exemptions
since Morocco exempts transfer taxes whether estate or
donor, intangible personal properties owned by Filipinos
where these Filipinos are not residing in Morocco. Rueda
proved all elemetns, but BIR did not allow because at the
time Morocco was not yet a full-pledged country but a colony
of Spain. SC said what matter here is that all elements are
present, the law do not require that the foreign country is a
full-pledged state, therefore it allowed the exemption.
SECTION 85
Take note of the rate of estate tax in section 84,
which is up to the maximum of 20%.
What could be the proper transfer to my children or
friends so that we can pay less tax? What is advantageous to
us?

Should it be Deed of Sale, Donation or just wait for


our death? You cannot say categorically which one of these
three. Depending upon the surrounding circumstances.
You have to know the rates of each tax, income tax.
The applicable one there net income tax- 5 to 32% or 6%
capital gains tax.
Donors Tax according to Section 99-B, if done is
stranger that rate is 30%, if Donee is relative a progressive
rate from 2-15%, in estate tax a progressive rate up to
maximum of 20%.
If rate of 32% apply, you do not choose Deed of Sale.
If the property consists of real or personal property and the
real property is an ordinary asset. The applicable is 32%,
when can we apply 6% if property is capital.
So distinguish capital from ordinary properties.
( Revenue Regulation 7-2003, section 39).
Apply deed of sale if rate of 6% applies, when can
you apply 6? When real property is considered capital. See RR
7-2003.
Donors tax, is it advisable?- if the done is a stranger,
no because the rate is 30%. If donee is relative, no you cant
because rate is 15%. But the final income tax of 6% is very
much lower than 15%.
You cannot say that the deed of donation is not
lower than estate tax, because if the donee is not a relative,
the rate is 30%.
Section 85: Gross Estate
Section 98(B)- Donors Tax
Why is the enumeration very long in section 85?
Under the estate tax if proprety is transferred after death of
decedent, estate tax shall always apply irrespective of his
motive. Is this true with regard to donors? No, because the
transfer is during the lifetime, so apply the donors tax. But
that is not always the same, because estate tax may be
imposed on transfer during the lifetime of transferor.
Property which is not own by decedent is also subject to
estate tax. Like (A) Decedents interest, property under
general power of attorney.
Section 85 (A)
This covers property which he does not only own but
he has interest on it. In cases of usufructuary or if he is a
lessee.
Usufructuary dies, is it subject to estate tax?
2 governing laws: sec 87(a); 88(a)
Section 87(a). When the property is transferred from
usufructuary to naked owner because of death of usufruct, it
is exempt from estate tax. But where a usufructuary is for
fixed period and he dies before the period ends, the property
will not be returned to the naked owner. It is implied that it
is subject to estate tax under section 88. In the same in the

2010 San Sebastian College Bar Review


Taxation 2
By: Atty. Francis Jay Sababan
contract of lease, you are only a lessee. But suppose the
lessee

Remove the condition You must pass the bar

died in a contract of 5 years, he died after 2 years, it will not


be returned to owner but will be inherited by the heirs,
which is why it is subject to estate tax.

At the time of the death, he is no longer the owner


and yet the law sanctions him by tax. If it is
irrevocable he loses the control so it is not subject
to estate tax.

Paragraph b, transfer in contemplation of death. Anyway, in


the Philippines we have 2 transfers:
1.

2.

Paragraph d on property passing under the general


power of appointment-

In contemplation of death:
a. During the lifetime of transferor he transfer
property but continues to possess the
property;
b. During lifetime he transfers but continues
to receives the fruits of the property;
c. He alone himself or together with other
persons and shall appoint a person who will
continue to receive the income of the
property.
By jurisprudence Vidal roses vs Posadas 58 Phil 108,
Dizon vs Posadas 57 Phil 465

This is identical to paragraph b. compare it


with fideicommissary substitution under article 863
of Civil Code; Testator, first heir and 2 nd heir. In
fideicommissary the one who chooses the 2nd heir is
the testator. But here in paragraph d the one who
chooses 2nd heir is the 1st heir. That is why when he
died his estate will be liable because he exercises
tremendous control, power and influence over the
choice of the 2nd heir. Take note, if transfer is under
fideicommissary where the 1st heir died it will be
transferred to the 2nd heir, the law says in section
87(b), it is exempt because he does not have any
control over the change or modification of the 2 nd
heir because it was chosen by testator.

2002 Bar: Vidal de Roses vs Posadas 58 Phil 108


Taxpayer executed a deed of donation and
last will and testament. When she died, the donees
tried to pay donors tax. BIR said, no you dont pay
us. Because the rate here of donors tax is smaller
than estate tax. So government said you pay us
estate tax and inheritance tax. The latter was
abolished by PD 69. If cause of action arose now, we
do not have inheritance tax. SC agreed with the BIR,
though there was execution deed of donation, the
donees in deed were the same persons instituted as
heirs in the last will of testament and these were
executed simultaneously. So the transfer was made
in contemplation of death. The applicable tax is
estate tax and inheritance tax.

The bar question last year was: Will the estate of 1 st


heir liable?
Yes because this is a property passing under the
general power of appointment where the choice
belongs to 1st heir, under section 87(b) in
fideicommissary the choice belongs to testator.
Paragraph e

28: 46 TAX CREDIT UNDER ESTATE TAX

Dizon vs Posadas
Father donated land to one and only son, father
died. Son tried to pay donors and donees tax. The
same officer argued again, it is a transfer in
contemplation of death because your father died
few days after execution of deed. SC agreed with
Posadas.
So you see, the transfer in contemplation death will
be under jurisprudence and under Tax code. So if
asked by way of enumeration what are transfers in
contemplation of death:
Dont quote the provision or case title
because that is marking.
Paragraph c on Revocable transfer- please memorize this.
What is revocable?
For instance your father said, this land will
be transferred in your name but it will be revoked if
you fail to pass bar in 2010 to be determine in March
2011. Whether you pass or not, that is a revocable
transfer.

1.
2.
3.

sec.86(e);
excess Input under VAT sec.110(B) credit
against any tax;
sec.204

Sec. 104
Who are the TPs under estate and donors tax?
Estate:
1.
2.
3.
4.

RC
NRC
RA
NRA- liability is only with respect to
property within the Philippines

Donors Tax:
1.
2.
3.
4.
5.
6.

RC
NRC
RA
NRA-sources within
DC
FC- sources within

Properties deemed located in the Philippines

So pano mo alisin ang estate tax? Make it


IRREVOCABLE.

2010 San Sebastian College Bar Review


Taxation 2
By: Atty. Francis Jay Sababan