TAXATION LAW 2 – Atty.

Acas Transcribed Lecture

Transcribers’ note: use at your own risk. Mistakes, if any, were made in good faith.

PART II – Estate Tax

NOTE: if asked about a question that the law does not provide ANSWER THIS: Subject
to the rules and regulations of secretary of finance. (yan gusto niya isagot sakanya)

I. BASIC PRINCIPLES OF ESTATE TAX

What is the tax base?
NET ESTATE
 Who is the tax payer?
For taxation purposes an estate is a taxpayer

 For example the decedent has a civil action for damages based on a contract, does
that survive the death of the decedent?
Yes, so long as these are transmissible rights.

 When will the right of the heirs arise?

Immediately upon death
Collation – determination of the estate and who the heirs are

 Can you claim taxes before you judicially settle the estate?

 Can you pay taxes before the extrajudicial settlement?

No. One of the requirements is to have all the heirs determined. Once you have real
property, it will be transferred to the heirs.

 Standard deduction is 5 million. Do you need substantiation?

No, because it is already standard. You only need substantiation if it is not standard. So
for the 5 million, you do not need to submit receipts.

A. Estate Tax Defined; What is the taxable event

Estate tax
- defined as a tax on the right of the deceased person to transmit his estate to his
lawful heirs and beneficiaries at the time of death and on certain transfers, which
are made by law as equivalent to testamentary disposition.
- a tax levied, assessed, collected and paid upon the transfer of the net estate of
every decedent, whether resident or nonresident of the Philippines based on the
value of the net estate, by including the value at the time of his death of all the
property, real or personal, tangible or intangible, wherever situated; provided,
however, That in case of nonresident decedent who at the time of death was not a
citizen of the Philippines, only the part of the estate which is situated in the
Philippines shall be included in his taxable estate computed in accordance with
Sec 84 of Tax Code as amended.

ADEA | SANTOS 1
 Taxable event:
Estate tax is not a tax on property but rather imposed on the privilege of transmitting
property upon the death of the owner.

B. Nature and Purpose of Estate Tax

NATURE OF ESTATE TAX:
1. a transfer tax imposed upon the gratuitious disposition of private property
2. A privilege or excise tax, not a property tax because its imposition does not rest
upon general ownership
- the nature of the process of estate tax collection strictly speaking,
PURPOSE OF ESTATE TAX:
1. To generate additional revenue for the government
2. To reduce concentration of wealth
3. To provide for equal distribution of wealth
4. It is the most appropriate method for taxing the privilege which the decednt enjoys
in controlling the disposition at death of property accumulated durin the lifteime of
the decedent
5. It is the only method of collecting the share which is properly due to the state as a
partner in the accumulation of property which was made possible on account of
the protection given by the state

-estate tax is a more effective agent of bringing about a more equitable distribution
of wealth so far as that is the purpose of the tax because it applies to the net estate,
includin property otherwise exempted. It is the most appopriate and effective methd
of taxing the “privilege” which the decedent enjoys of controlling the disposition at
the death of property accumulated during life. Moreover, some would add that it is
the only method of collecting theshare which is properlydue to the State as a
“partner” in the accumulation of the property which was made possible on account
of the protection given by the State.

C. Time of Transfer of Properties

The properties and rights are transferred to the successors at the time of death of the
decedent. But the Register of Deeds shall not transfer the title to the properties without
the Ceritificate Authorizing Registration (CAR) issued by Revenue District Office
(RDO) evidencing the payment of estate tax.

Upon the death of the decedent, succession takes place and the right of the state to
tax the privilege to transmit the estate vests instantly upon death.
1. The notice of death must be filed within 2 months after the death of the decdent or
wihtin 2 monthts after qualifying as such executor or administrator (NOTICE OF
DEATH NO LONGER REQUIRED)
2. The properties comprising the gross estate shall be valued based on their fair
market value as of. The time of death of the decedent
3. The return must be filed within 6 months from the decdent’s death (RETURN MUST
BE FILED WITHIN 1 YEAR)

2
TAXATION LAW 2 – Atty. Acas Transcribed Lecture

Despite the transfer of properties and rights at the time of death, the executor or judicial
administrator shall not deliver a distributive share to any party interested in the estate unless
there is a certification from the commissioner that the estate tax has been paid.

Case(s):
Lorenzo v. Posadas (64 Phil. 353); Beam vs Yatco, 28 Phil.30
Lorenzo vs. Posadas
64 Phil 353

DOCTRINE: the law that governs the imposition of estate tax; time of accrual of estate tax.
Estate taxation is governed by the statute in force at the time of the death of the decedent.
The estate tax accrues as of the death of the decedent and the accrual of the tax is distinct
from the obligation to pay the same. Upon the death of the death of the decedent, succession
takes place and the right of the state to tax the privilege to transmit the estate vests instantly
upon death. 1the law in force at the time of death of the decedent is controlling, notwithstanding
postponent of the actual possession or enjoyment of the property by the beneficiary.

Facts:
On 27 May 1922, Thomas Hanley died in Zamboanga, leaving a will and considerable amount
of real and personal properties. Hanley’s will provides the following: his money will be given
to his nephew, Matthew Hanley, as well as the real estate owned by him. It further provided
that the property will only be given ten years after Thomas Hanley’s death. Thus, in the
testamentary proceedings, the Court of First Instance of Zamboanga appointed P.J.M. Moore
as trustee of the estate. Moore took oath of office on March 10, 1924, and resigned on Feb.
29, 1932. Pablo Lorenzo was appointed in his stead. Juan Posadas, Collector of Internal
Revenue, assessed inheritance tax against the estate amounting to P2,057.74 which includes
penalty and surcharge. He filed a motion in the testamentary proceedings so that Lorenzo will
be ordered to pay the amount due. Lorenzo paid the amount in protest after CFI granted
Posadas’ motion. He claimed that the inheritance tax should have been assessed after 10
years. He asked for a refund but Posadas declined to do so. The latter counterclaimed for the
additional amount of P1,191.27 which represents interest due on the tax and which was not
included in the original assessment. However, CFI dismissed this counterclaim. It also denied
Lorenzo’s claim for refund against Posadas. Hence, both appealed.

Issue:
Whether the estate was delinquent in paying the inheritance tax and therefore liable for the
P1,191.27 that Posadas is asking for?

Held:
Yes. It was delinquent because according to Sec. 1544 (b) of the Revised Administrative
Code, payment of the inheritance tax shall be made before delivering to each beneficiary his
share. This payment should have been made before March 10, 1924, the date when P.J.M.
Moore formally assumed the function of trustee.

1 Art. 777, NCC.

ADEA | SANTOS 3
Although the property was only to be given after 10 years from the death of Hanley, the court
considered that delivery to the trustee is delivery to cestui que trust, the beneficiary within the
meaning of Sec. 1544 (b).
Even though there was no express mention of the word “trust” in the will, the court of first
instance was correct in appointing a trustee because no particular or technical words are
required to create a testamentary trust (69 C.J.,p. 711). The requisites of a valid testamentary
trust are: 1) sufficient words to raise a trust, 2) a definite subject, 3) a certain or ascertained
object. There is no doubt that Hanley intended to create a trust since he ordered in his will that
certain of his properties be kept together undisposed during a fixed period or for a stated
purpose

D. Governing Law
- Statute in force at the time of death of the decedent
E. Amendments to the NIRC by TRAINs
Major changes in our Estate Tax laws:

1. Changes in the graduated rates to flat 6%. Previously, the computation of the
Estate Tax is on the value of the net estate of the decedent. Computed based on tax
schedule from P200,000 onwards. ( Note: Net Estate of Php 200,000 is exempt from
estate tax.)
This was the previous tax rates:

Now it will be subject to a flat rate of 6%.

4
TAXATION LAW 2 – Atty. Acas Transcribed Lecture

2. Allowable deductions where increase as follows:

Even if the funeral,

judicial and medical
expenses
deductions were
repealed, for me its
ok since the
standard deduction
was raised from P1
Million to P5 Million.

If NRA, standard deduction is P 500,000.

If standard deduction, you need to file CPA report stating that estate is 5M.
Standard deduction = first P5million is exempt from estate tax.
3. Other administrative changes

II. DETERMINATION OF GROSS ESTATE (Sec. 85, NIRC)

A. Classification of Decedents (Sec. 85)
 What does the Philippines follow, nationality or domicile?
Nationality principle
The decedents who are covered by the Philippine Estate Tax are the ff.
1. Resident2 Citizen (RC), Non-resident Citizen (NRC), and Resident Alien3 (RA)
- the gross estate shall include all his property, real or personal, tangible or
intangible wherever situated at the time of his death.

2 Residence for the purposes of taxation – synonymous with “domicile”; permanent home where he intends to return
3 Resident alien- individual whose residence is within the Philippines and who is not a citizen thereof.

ADEA | SANTOS 5
 2. Non-resident Alien (NRA)
- it shall include only that part of the entire gross estate which is situated in the
Philippines, provided that in the case of intangbile property, its inclusion in the
gross estate is subject to the rule on reciprocity provided under sec. 104 of tax
code as amended.

Except: intangible property subject to the RULE ON RECIPROCITY.

Note: a corporation is not liable for estate tax because it is not capable of natural death.

Resident Non-Resident Non Resident Alien

Citizen/ Citizen
Resident
Alien

Composition (in general)

Real property ✓ only properties

Personal property situated in the Phil.

Tangible property

Intangible property ✗ except for intangible

properly which is subject to
the rule on reciprocity

Inclusions in Gross Estate

1. Decedent’s Interest
2. Prior Interests
3. Transfers in contemplation of death
4. Revocable transfers
5. Transfers with retained interest
6. Property passing under a general power of
appointment
7. Transfers for insufficient consideration
8. Proceeds of life insurance

Allowable Deductions

Standard Deduction Php 5 million P 500,000

Claims Against
Insolvent persons

6
TAXATION LAW 2 – Atty. Acas Transcribed Lecture

Claims against the

estate

Unpaid mortgages

Casualty losses
incurred during
settlement of the
estate

Property Previously
taxed (Vanishing
Deduction)

Family Home ( ceiling

amount P 10 Million)

Transfer for Public

Use

Amounts received by
heirs under Republic
Act No. 4917

Net Share of Surviving

Spouse in the
Conjugal Partnership
or Community
Property

B. Composition of Gross Estate, in General

- “gross estate” consists of the totality of the value of all the property of the decedent
at the time of his death,whether real or prsonal, tangible or intangible, wherever
sitauted; Provided, however, That in the case of nonresident citizen of the Philippines,
only the part of the entire gorss estate which is situated in the Philippines shall be
included in his taxable estate

 Does double taxation agreements apply in estate tax?

Double taxation agreements only apply in income tax.
 What is the basis for an estate tax for you not to be taxed double?
Section 86 (E)
Problem: joe black got hit by a cab and died. The cab company gave compensation
for his death. Is that part of the gross estate? NO. Estate consist of properties while
decedent is living. What was paid was given after death so, not included in the estate.

1. RC, NRC, RA – all properties, real or personal, tangible or intangible, wherever

situated

ADEA | SANTOS 7
 2. NRA – only properties situated in the Phil., except for intangible properly which is
subject to the rule on reciprocity
a. Rule on Reciprocity (Sec. 104, NIRC)
The intangible personal property of a non-resident alien individual if:
1. With reciprocity – shall not be included in the gross estate if:
B. The laws of the foreign country to which the decedent was a citizen and
a resident at the time of his death, did not impose a transfer tax of any
character, in respect of intagible personal prperty of the citizens of the
Philippines not residing in that foreign country
C. The laws of the foreign country allows a similar exemption from transfer
or death taxes of every character owned by citizens of the Philippines not
residing in that foreign country.
2. Without reciprocity- shall be included in the gross estate.

C. Determination of Residence for Estate Tax Purposes

1. If the decedent is a resident or non- resident citizen or a resident alien –
Net estate is equal to gross estate less ordinary and special deductions and
exclusions allowed by law
2. If the decedent is a non-resident alien – net estate is equal to gross estate
less ordinary deductions and exclusions allowed by law.
Example:
 I am a permanent resident of the United States, but I am still Filipino. I will be taxed
worldwide. What if they also tax me on worldwide estate wherever situated?
Sec. 86 (E)
You will not be taxed again. Unlike in Income Taxation, double taxation agreements only
refer to income taxation because the NIRC already recognizes tax credit.
 What if US and Philippines do not have the same taxation regime, what will be your
advice to your client? What if in the US there is no provision like this, and he is a resident
alien there? Which taxing jurisdiction will you follow?
The estate tax in the United States shall be paid first, because after that, you can claim a tax
credit in the Philippines.

D. Items to be included in determining Gross Estate (Sec. 85 (A) to 85 (G), NIRC)

Not exclusive. It includes all the property of the decedent at the time of his death
whether real or personal , tangible or intangible wherever situated.
 Should they be titled to the name of the decedent?
No.

What if there is still claims BY the estate, can that be included in the gross estate?

 Can there be claims that will survive by his death?

Yes. Should it be included in the gross estate? Yes.

 What are examples of claims that will survive even after his death?
1. right to bring or continue an action for forcible entry or unlawful detainer

8
TAXATION LAW 2 – Atty. Acas Transcribed Lecture

2. right to compel the execution of document necessary for conveyance provided that
the contract is valid and enforceable under statue of frauds
what are examples of rights extinguished by death? (not part of the estate)
1. intransmissible personal rights ( marital and parental authority, support, action for
legal separation, partnership, agency)
2. right to claim acknowledgement or recognition as natural child
3. right to hold public or private office.

9. Decedent’s Interest
-includes any interest having value or capable of being valued, transferred by the
decedent at the time of his death
- the decedent must have had an interest in the property at the time of his death in
order that such property interest must be taxable or includible in his gross estate.

10. Prior Interests

- except as otherwise specifically provided therein, transfers in contemplation of
death, revocable transfer and property passing under general power of
appointment shall apply to the transfers of trusts, estates, interests, rights, powers
and relinquishment of powers as severally enumerated and described, whether
made, created, arising, existing, exercised or relinquished before or after the
effectivity of the tax code.

11. Transfers in contemplation of death

Transfer in contemplation of death refers to the transfer, by trust or otherwise, of
properties on interest therein made by the decedent during his lifetime in
contemplation of or intended to take effect in possession or enjoyment at or of
which he has at any time made a transfer, by trust or otherwise, under which he
has retained for his life or for any period which does not in fact end before his death
the ff. (same enumeration)

General rule: the transfer shall be considered as transfer in contemplation of death

if, during the lifetime of the decedent, he still retained in the property any of the
following:
a. Possession or enjoyment thereof
b. Receipt of income or the fruits notwithstanding transfer
c. Right to designate person who shall possess or enjoy the said property or
income therefrom
Exception: bona fide sale for an adequate and full consideration in money or in
money’s worth.

If it takes effect after death, it’s already succession and not transfer. Usually occurs
1 year prior to the death.

12. Revocable transfers

- it refers to transfers where the transferor has reserved the right to alter, amend,
revoke such transfer, regardless of whether or not the power is actually exercised

ADEA | SANTOS 9
 during his lifetime and whether or not the power should be exercised by him alone
or conjunction with someone else.

- That right may be transmissible to the heirs. A revocable transfer is a conditional

transfer, there was no full transfer, so the ownership of the transferree is
conditional.

 What if heirs did not revoke? Will it still be included in the gross estate?
Yes. The law does not qualify.
 Why do you have to include it in gross estate?
Because its conditional. Won that power is exercised does not matter for
succession.
 Donation subject to a term, is that a revocable transfer?
If donation subject to a term, there no actual transfer of ownership. It can only be
used for a period of 50 years. It can be a usurfruct.
 How to determine if revocable or not?
Power of the donor.

 When does revocable transfer happen?

During the lifetime.
 Now that he died, why do we need to include it to his gross estate, when
it was already transferred?
Because:
1. You can use this as a tax evasion scheme
2. These are transmissible rights. It is not an agency, the contract between the persons
is not that of a principal and an agent. That right may be transmissible to the heirs, if
it is a transmissible rights. A revocable transfer is a conditional transfer, there was no
full transfer, so the ownership of the transferee is conditional. “sayo lang yan hanggat
sabihin kong hindi na yan sayo.”

 Why is irrevocable transfer not included in estate?

The transfer is not conditional, the ownership is not conditional
General Rule: a transfer is revocable transfer where:
1. There is a transfer by trust or otherwise
2. The enjoyment thereof was subject at the date of his death to any
change through the exercise of a power by:
a. The decedent alone
b. The decedent in conjunction with any other person without
regard to when or from what source the decedent acquired
such power, to alter, amend, revoke or terminate
c. Where such power is relinquished in contemplation of the
decedent’s death

13. Transfers with retained interest

Transfer with retention or reservation of certain rights involves cases where the
owner transfers his property during his lifetime but still retains the economic

10
TAXATION LAW 2 – Atty. Acas Transcribed Lecture

benefits (i.e., possession or enjoyment of the property or the power to designate

the person who may exercise such rights). By reason of the restriction, the
transferee is incapable of freely enjoying or disposing of the property until the
transferor’s death. This transfer may be regarded as having intended to take effect
in possession or enjoyment at the transferor’s death.

14. Property passing under a general4 power of appointment

- Power of Appointment is a right to designate by will or deed the person/s who are
to receive the property from the estate of the prior decedent. Usually, such power
is held by one who has enjoyed a life income from the property. However, it is
possible for one person to have a life income from certain property and another
persopn to have a right to designate who shall receive the property after death of
the life tenant.

- Requisites for taxability:

1. Existence of a general power of appointment
2. Exercise of such power by the decedent by will or by deed in certain cases
3. The passing of the property by virtue of such exercise.

15. Transfers for insufficient consideration

Transfers for insufficient consideration refers to the transfer that is not bona fide
sale of property for an adequate and full consideration in money or money’s worth.
Thus, if it is not a bona fide sale, the excess of the fair market value at the time of
death over the value of consideration received by the decedent shall form part of
the gross estate.
- if inter vivos transfer is proven fictitious or simulated, the total value of the property
at the time of death should be included in the gross estate.

- Transfers, trusts, interests, rights, or powers made, created, exercises or

relingquished for a consideration in money’s worth
Exception: a bona fide sale for an adequate and full consideration in money or
money’s worth.

16. Proceeds of life insurance

Requisites to be included in the Gross Estate:
1. The decedent takes an insurance policy on his own life
2. The amounts are receivable by:
a. The estate, his executor or administrator irrespective of whether or not
insured retained the power of revocation
b. Any beneficiary designated as revocable

4 Considered as general when it gives to the donee the power to appoint any person he pleases, including himself, his spouse, his estate,
executor or administrator and his creditor, thus having full dominion over the property as though he owned it.
It is considered special when the donee can appoint only among a restrcited or designated class of persons other than himself.

ADEA | SANTOS 11
 The proceeds of life insurance are not included in a decedent’s gross estate,
hence, not subject to estate tax when:
1. The beneficiary is other tha nthe estate, his executor or administrator
2. Designation is irrevocable

E. Specific Items to be included in Gross Estate (Sec. 104, NIRC)

include real and personal property, whether tangible or intangible, or mixed, wherever
situated:

Provided, however, That where the decedent or donor was a nonresident alien at the
time of his death or donation, as the case may be, his real and personal property so
transferred but which are situated outside the Philippines shall not be included as part
of his "gross estate" or "gross gift":

Provided, further, That franchise which must be exercised in the Philippines; shares,
obligations or bonds issued by any corporation or sociedad anonima organized or
constituted in the Philippines in accordance with its laws; shares, obligations or bonds
by any foreign corporation eighty-five percent (85%) of the business of which is located
in the Philippines; shares, obligations or bonds issued by any foreign corporation if
such shares, obligations or bonds have acquired a business situs in the Philippines;
shares or rights in any partnership, business or industry established in the Philippines,
shall be considered as situated in the Philippines:

Provided, still further, that no tax shall be collected under this Title in respect of
intangible personal property:

(a) if the decedent at the time of his death or the donor at the time of the donation was
a citizen and resident of a foreign country which at the time of his death or donation
did not impose a transfer tax of any character, in respect of intangible personal property
of citizens of the Philippines not residing in that foreign country, or

(b) if the laws of the foreign country of which the decedent or donor was a citizen and
resident at the time of his death or donation allows a similar exemption from transfer
or death taxes of every character or description in respect of intangible personal
property owned by citizens of the Philippines not residing in that foreign country.

F. Valuation of the Gross Estate (Sec. 88, NIRC)

SEC. 88. Determination of the Value of the Estate. -
(A) Usufruct. - To determine the value of the right of usufruct, use or habitation, as well
as that of annuity, there shall be taken into account the probable life of the beneficiary
in accordance with the latest Basic Standard Mortality Table, to be approved by the
Secretary of Finance, upon recommendation of the Insurance Commissioner.cralaw

(B) Properties. - The estate shall be appraised at its fair market value as of the time of
death. However, the appraised value of real property as of the time of death shall be,
whichever is higher of:
(1) The fair market value as determined by the Commissioner, or

12
TAXATION LAW 2 – Atty. Acas Transcribed Lecture

(2) The fair market value as shown in the schedule of values fixed by the Provincial
and City Assessors.

III. DETERMINATION OF NET ESTATE/ALLOWABLE DEDUCTIONS FROM GROSS

ESTATE (Sec. 86, NIRC)
A. Net Estate of Decedent who is either Citizen or Resident of the Philippines (RC, NRC,
RA) (Sec. 86(A), (C) NIRC) NOTE: Amended By TRAIN LAW.
1. Value of estate shall be determined by deducting from the value of gross estate:
a. Standard Deduction of Five Million Pesos if RC and RA (if NRA, p 500,000)
 Standard deduction is 5 million. Do you need substantiation?

No, because it is already standard. You only need substantiation if it is not

standard. So for the 5 million, you do not need to submit receipts.
Previously, you need to send a notice of death to the BIR, but now it is no
longer required. Before you also have to prove funeral expenses, medical
expenses, now you do not need.

b. Claims of deceased against insolvent persons

Does it require to undergo proceedings of insolvency? Law does not
provide. (subject to rules and regulations provided for by the secretary of
finance)
Requisites for Deductability:
1. The amount thereof has been initially included as part of his gross
estate
2. The incapacity of the debtors to pay their obligation is proven

c. Claims against the estate

Requisites for deductability:

1. Must be a personal obligation of the deceased existing at the time of
death, except unpaid obligations incurred incident to his death such as
unpaid funeral expenses
2. Must be valid in law and enforceable in court
3. Must be incurred in good faith and for an adequate consideration
4. Must not have been condoned by the creditor or action must not have
prescribed

d. Unpaid mortgages

Requisites for Deductability:

1. The value of the decedent’s interest therein, undiminished by such
mortgage or indebtedness is included in the value of the gross estate
2. The mortgages were contracted bona fide and for an adequate and full
consideration in money or money’s worth.
3. In case of unpaid mortgage payable is being claimed by the estate,
verification must be made as to who was the beneficiary of the loan

ADEA | SANTOS 13
 proceeds. If the loan is found to be merely an accomodation loan
where the proceeds went to another person, the value of the unpaid
loan must be included as a receivable of the estate. If there is a legal
impediment to recognize the same as receivable of the estate, said
unpaid obligation/ mortgage payable shall not be allowed as a
deduction from the gross estate.
4. In all instances, the mortgaged property, to the extent of the
decedent’s interest therein, should always form part of the gross
estate.

e. Casualty losses incurred during settlement of the estate

Requisites for Deductibility:

1. Arising from fire, storm, shipwreck or other casualties or from robbery,
theft, or embezzlement
2. Not compensated by insurance or otherwise
3. Incurred not later than the last day for the payment of the estate tax as
prescribed by law
4. At the filing of the estate tax return, such losses have not been claimed
as a deduction for income tax purposes in an income tax return
5. Incurred during the settlment of the estate

Note: casualty loss can be allowed as a deduction in one instance only,

either for income tax purposes or estate tax purposes.

f. Property Previously taxed (Vanishing Deduction) *take note. Might be

included in the final exam*

- Vanishing deductions refers to diminishing deductibility allowed from the

gross estate of the decedent on the property left behind by the decedent
which had acquired previously by inheritance or donation. Thus, vanishing
deductions is deducted only from the exclusive properties of the decedent
which forms part of his gross estate.

- Rationale: a property can only be allowed a “vanishing deduction” if it had

been subjected to the estate/ donor’s tax within 5 years prior to the death
of the present decedent. In other words, the said prpoerty had already been
subjected to transfer tax (either estate or donor’s tax) and now the recipient
of the said inheritance or donation has died, the same prpoerty will again
be subjected to another transfer tax, this time, estate tax. Thus, in order to
mitigate the harshness of successive taxation of the same property
occassioned by death occuring within a short period of time, the law
allows a vanishing deduction to be claimed on said property.

- The deduction allowed from the gross state of citizens, resident aliens
and non-resident aliens for proeprties which were previously subject to

14
TAXATION LAW 2 – Atty. Acas Transcribed Lecture

donor’s or estate tax. The deduction is called a vanishing deduction

because the deduction allowed diminishes over a period of 5 years.

In property previously taxed, there are two transfers involving the same
property. The first transfer is from the first decedent or donor to the heir or
donee, while the second transfer is from the heir or donee (now the second
decedent) to his heirs. Note that these two transfers must occur within 5
years and the first transfer has already been subjected to transfer tax.

WHAT ARE THE DEDUCTIONS? VALUE OF ESTATE OR TAX PAID?

- Value of the estate. Up to a certain extent only.

Requisites for deductibility:

1. property involved must have been transferred by prior
decedent either thru estate taxation or donation or which can
be identified thru estate taxation or donation or which can be
identified as having been acquired in exchange for property so
received;
2. The present decedent must have died within 5 years from the
receipt of the property from a prior decedent or donor;
3. The property can be identified as one received from the prior
decedent or donor or as the property acquired in exchange for
the original property so received;
4. The property must have formed part of the gross estate of the
prior decedent or total amount of gifts of the donor;
5. The donor’stac on the gift or the estate tac on the inheritance
must have been paid already;
6. Said property must be situated in the Phand now forms part of
the gross estate of the present decedent;
7. The amount of deduction is th full value of the property
previously taxed if the present decedent died within one year
from the death of the prior decedent and that the amount
deductible diminished yearly and is finally lost after the 5th year
from the death of the prior decedent.
8. The vanishing deduction on the property must not have been
claimed by the previous estate involving the same property.

g. Transfers for Public Use

Requisites for deductibility:
1. the disposition is in the last will and testament
2. disposition shoud take effect after death
3. in favor of the government of the Philippines or any of its
political subdivision includes charitable institutions.
4. exclusively for public use
5. the value of the property given is included in the gross estate.

ADEA | SANTOS 15
 Discussion: How do you determine the Fair Market Value? (basis for
determination of FMV)
Assessed (assessor’s) or zonal value (BIR value) of the property whichever is
higher .
What if the decedent is cash rich but lived in a simple house, if the house is
less than 10 million, will he be able to deduct 10 million?
No. The FMV of the lot will be the basis of the deduction.
When there is a substantiation requirement what do you look for?
Whenever there is a substantiation requirement, the law does not state the
requirements. There must be a signed Revenue regulations, revenue
memorandum circulars and revenue memorandum orders.
a. Family Home
 Is it a deduction or an exemption?
It is a deduction.
 How do you determine the Fair Market Value?
Assessed or zonal value of the property whichever is higher (this is also the
basis for Capital Gains Tax)
 What if the decedent is cash rich but he lived in a simple house, if
the house is less than 10 million, will he be able to claim the whole
10 million as a deduction?
No. The FMV of the lot will be the basis of the deduction. Even if you
purchased it for 10 million, but that is not the fair market value, then that is
what you have to do.

 When there is a substantiation requirement what do you look

for?
Whenever there is a substantiation requirement, the law does not state the
requirements. There must be a signed Revenue regulations, revenue
memorandum circulars and revenue memorandum orders.

6. Ceiling on Value of family Home (P10 Million)

7. Definition of Family home/When deemed constituted
- The dwelling house, including the land on which it is situated, where the
husband or the wife, or the head of the family, and members of their
family reside as certified by the barangay Captain of the locality.
- It is constituted on the house and lot from the time it is actually occupied
as a family residence and is considered as such for as long as any of
its beneficiaries actually reside therein.
- A person may only constitute one family home.

8. Beneficiaries of a Family Home

9. Conditions for deductibility
Requisites for deductibility:
1. The family home must be the actual residential home of the
decedent and his family at the time of his death as certified by
the Barangay Captain of the locality where the family home is
situated

16
TAXATION LAW 2 – Atty. Acas Transcribed Lecture

2. The total value of the family home must be included as part of

the gross estate of the decedent
3. Allowable deduction must be in an amount equivalent to:
a. The current fair market vlaue of the decedent’s family
home
b. The extent of the decedent’s interest Or 1 million pesos
whichever is lower.

h. Amounts received by heirs under Republic Act No. 4917 (Retirement

Benefits Of Employees Of Private Firms Shall Not Be Subject To
Attachment, Levy, Execution, Or Any Tax Whatsoever)

Any amount received by the heirs from the decedent’s employer as a

consequence of the death of the decedent-employee in accordance with
RA 4917 shall also be allowed as a deduction from the gross estate,
provided that such amount is included in the gross estate of the decedent.

i. Net Share of Surviving Spouse in the Conjugal Partnership or Community

Property

After deducting the allowable deductions appertaining to the conjugal or

community properties included in the gross estate, the share of the
surviving spouse must be removed to ensure that only decedent’s interest
in the estate is taxed.

Note: this is an exclusion rather than a deduction)

 If you have community property, everything is held in common. For

property and taxation purposes, everything is owned in common, but
the share of the wife in the net estate, will she still be able to get
something?
 Before husband died, who owns the properties?
The spouses. If one dies, the net share of the surviving spouse. Net
share means property less liabilities. For example, they own a house,
the house is 100 million, they had 50 million, mortgage, what is the
correct value of the house to determine the net share of the spouse?
100 million.
 What if I am a sole proprietor, and I died. I have a stay at home
husband. I have a claim against an insolvent person, should we
split the claim?
There is no creation of legal fiction in a sole proprietorship, so all that the
sole proprietorship owns, is also owned by the spouse.
 So in that case, how do you determine the liability, fully deducted
from the gross estate or should we divide the gross estate first?

ADEA | SANTOS 17
 We should divide it first.

B. Net Estates of Decedent who is a Non-resident Alien of the Philippines (NRA) (Sec.
86(B), NIRC) (amended by train law)
Deductions Allowed to Nonresident Estates. – In the case of a nonresident not a citizen
of the Philippines, by deducting from the value of that part of his gross estate which at
the time of his death is situated in the Philippines:

“(1). Standard Deductions– An amount equivalent to Five hundred thousand pesos

(P500,000);

“(2) That proportion of the deductions specified in paragraphs (2), (3), and (4) of
Subsection (A) of this Section which the value of such part bears to the value of his
entire gross estate wherever situated;

“(3) Property Previously Taxed. –

An amount equal to the value specified below of any property forming part of the gross
estate situated in the Philippines of any person who died within five (5) years prior to
the death of the decedent, or transferred to the decedent by gift within five (5) years
prior to his death, where such property can be identified as having been received by
the decedent from the donor by gift, or from such prior decedent by gift, bequest,
devise or inheritance, or which can be identified as having been acquired in exchange
for property so received:

One hundred percent (100%) of the value if the prior decedent died within one (1) year
prior to the death of the decedent, or if the property was transferred to him by gift,
within the same period prior to his death;

Eighty percent (80%) of the value, if the prior decedent died more than one (1) year
but not more than two (2) years prior to the death of the decedent, or if the property
was transferred to him by gift within the same period prior to his death;

Sixty percent (60%) of the value, if the prior decedent died more than two (2) years but
not more than three (3) years prior to the death of the decedent, or if the property was
transferred to him by gift within the same period prior to his death;

Forty percent (40%) of the value, if the prior decedent died more than three (3) years
but not more than four (4) years prior to the death of the decedent, or if the property
was transferred to him by gift within the same period prior to his death; and

Twenty percent (20%) of the value, if the prior decedent died more than four (4) years
but not more than five (5) years prior to the death of the decedent, or if the property
was transferred to him by gift within the same period prior to his death.

These deductions shall be allowed only where a donor's tax, or estate tax imposed
under this Title is finally determined and paid by or on behalf of such donor, or the
estate of such prior decedent, as the case may be, and only in the amount finally
determined as the value of such property in determining the value of the gift, or the

18
TAXATION LAW 2 – Atty. Acas Transcribed Lecture

gross estate of such prior decedent, and only to the extent that the value of such
property is included in that part of the decedent's gross estate which at the time of his
death is situated in the Philippines; and only if, in determining the value of the net
estate of the prior decedent, no deduction is allowable under paragraph (2) of
Subsection (B) of this Section, in respect of the property or properties given in
exchange therefore. Where a deduction was allowed of any mortgage or other lien in
determining the donor's tax, or the estate tax of the prior decedent, which was paid in
whole or in part prior to the decedent's death, then the deduction allowable under said
paragraph shall be reduced by the amount so paid. Such deduction allowable shall be
reduced by an amount which bears the same ratio to the amounts allowed as
deductions under paragraphs (1) and (3) of this Subsection as the amount otherwise
deductible under paragraph (2) bears to the value of that part of the decedent's gross
estate which at the time of his death is situated in the Philippines. Where the property
referred to consists of two (2) or more items, the aggregate value of such items shall
be used for the purpose of computing the deduction.

“(4) Transfers for Public Use. – The amount of all bequests, legacies, devises or
transfers to or for the use of the Government of the Republic of the Philippines or any
political subdivision thereof, for exclusively public purposes.

1. Value of estate shall be determined by deducting from the value of gross estate:
a. Standard Deduction of P 500,000 Pesos (NRA)
b. That proportion of the deductions below which the value of such part bears to the value of
his entire gross estate wherever situated

1. Claims against the estate

Requisites for deductability:
1. Must be a personal obligation of the deceased existing at the time of
death, except unpaid obligations incurred incident to his death such as
unpaid funeral expenses
2. Must be valid in law and enforceable in court
3. Must be incurred in good faith and for an adequate consideration
4. Must not have been condoned by the creditor or action must not have
prescribed

2. Claims of deceased against insolvent persons

Requisites for Deductability:
1. The amount thereof has bee initially included as part of his
gross estate
2. The incapacity of the debtors to pay their obligation is proven

3. Casualty losses incurred during settlement of the estate

Requisites for Deductability:
a. Arising from fire, storm, shipwreck or other casualties or
from robbery, theft, or embezzlement
b. Not compensated by insurance or otherwise
c. Incurred not later than the last day for the payment of the
estate tax as prescribed by law

ADEA | SANTOS 19
 d. At the filing of the estate tax return, such losses have not
been claimed as a deduction for income tax purposes in
an income tax return
e. Incurred during the settlment of the estate

Note: casualty loss can be allowed as a deduction in one instance only,

either for income tax purposes or estate tax purposes.

4. Unpaid mortgages
Requisites for Deductability:
a. The value of the decedent’s interest therein, undiminished by
such mortgage or indebtedness is included in the value of the
gross estate
b. The mortgages were contracted bona fide and for an adequate
and full consideration in money or money’s worth.
c. In case of unpaid mortgage payable is being claimed by the
estate, verification must be made as to who was the
beneficiary of the loan proceeds. If the loan is found to be
merely an accomodation loan where the proceeds went to
another person, the value of the unpaid loan must be included
as a receivable of the estate. If there is a legal impediment to
recognize the same as receivable of the estate, said unpaid
obligation/ mortgage payable shall not be allowed as a
deduction from the gross estate.
d. In all instances, the mortgaged property, to the extent of the
decedent’s interest therein, should always form part of the
gross estate.

c. Property Previously taxed (Vanishing Deduction)

- Vanishing deductions refers to diminishing deductability allowed from the
gross estate of the decedent on the property left behind by the decedent
which had acquired previously by inheritance or donation. Thus, vanishing
deductions is deducted only from the exclusive properties of the decedent
which forms part of his gross estate.

- Rationale: a property can only be allowed a “vanishing deduction” if it

had been subjected to the estate/ donor’s tax within 5 years prior to the
death of the present decedent. In other words, the said property had
already been subjected to transfer tax (either estate or donor’s tax) and
now the recipient of the said inheritance or donation has died, the same
prpoerty will again be subjected to another transfer tax, this time, estate
tax. Thus, in order to mitigate the harshness of successive taxation of
the same property occassioned by death occuring within a short
period of time, the law allows a vanishing deduction to be claimed on
said property.

20
TAXATION LAW 2 – Atty. Acas Transcribed Lecture

- The deduction allowed from the gross state of citizens, resident aliens
and non-resident aliens for properties which were previously subject to
donor’s or estate tax. The deduction is called a vanishing deduction
because the deduction allowed diminishes over a period of 5 years.

In property previously taxed, there are two transfers involving the same
property. The first transfer is from the first decedent or donor to the heir or
donee, while the second transfer is from the heir or donee (now the second
decedent) to his heirs. Note that these two transfers must occur within 5
years and the first transfer has already been subjected to transfer tax.

Requisites for deductibility:

1. property involved must have been transferred by prior
decedent either thru estate taxation or donation or which can
be identified thru estate taxation or donation or which can be
identified as having been acquired in exchange for property so
received;
2. The present decedent must have died within 5 years from the
receipt of the property from a prior decedent or donor;
3. The property can be identified as one received from the prior
decedent or donor or as the property acquired in exchange for
the original property so received;
4. The property must have formed part of the gross estate of the
prior decedent or total amount of gifts of the donor;
5. The donor’s tax on the gift or the estate tac on the inheritance
must have been paid already;
6. Said property must be situated in the Philippines and now
forms part of the gross estate of the present decedent;
7. The amount of deduction is the full value of the property
previously taxed if the present decedent died within one year
from the death of the prior decedent and that the amount
deductible diminished yearly and is finally lost after the 5th year
from the death of the prior decedent.
8. The vanishing deduction on the property must not have been
claimed by the previous estate involving the same property.

d. Transfers for Public Use

Requisites for deductibility:
1. the disposition is in the last will and testament
2. disposition should take effect after death
3. in favor of the government of the Philippines or any of its political subdivision
4. exclusively for public use
5. the value of the property given is included in the gross estate.

e. Net Share of Surviving Spouse in the Conjugal Partnership or Community Property

- After deducting the allowable deductions appertaining to the conjugal or
community properties included in the gross estate, the share of the

ADEA | SANTOS 21
 surviving spouse must be removed to ensure that only decedent’s interest
in the estate is taxed.
Note: this is an exclusion rather than a deduction.)

IV. EXCLUSIONS FROM GROSS ESTATE/EXEMPTIONS OF CERTAIN ACQUISITIONS

AND TRANSMISSIONS
A. Capital of Surviving Spouse
Sec. 85(H) of NIRC
Capital of Surviving Spouse refers to the exclusive property of the surviving spouse
and shall not, for estate tax purposes, be deemed as part of his gross estate, viz.:
a. that which is brought to the marriage as his or her own
b. that which each acquires during marriage by lucrative title;
c. that which is acquired by right of redemption or by exchange with other property
belonging to only one of the spouses;
d. that which is purchased with exclusive money of the surviving spouse
e. the sums collected by installments during the marriage credit payable in a certain
number of years are considered property of the spouse to whom credit belongs
f. the right of annuity, whether perpetual or form life and the right of usufruct ,
belonging to one of the spouses form part of his or her separate property but the
fruits , pensions and interests, due during the marriage belong to the partnership.

In ACP, is there Capital? Yes. Those acquired through a gratuitous title.

Arts. 148, 150, 201, Civil Code

Arts. 91, 92, 109, Family Code
B. Proceeds of life insurance where designation of beneficiary is irrevocable (Sec. 85(E),
NIRC)

C. Proceeds of life insurance where decedent was the insured but not the policy owner
D. Exemptions of Certain Acquisitions/Transmissions (Sec. 87, NIRC)
i. GE < P200,000.00;
ii. Merger of the usufruct in the owner of the naked title;
iii. Transmission of inherited property from the fiduciary heir/legatee to
fideicommissary;
iv. Transmission of inherited property from the first heir/legatee in favor of another
beneficiary; and
v. Bequests, devises, legacies or transfers to social welfare, cultural and charitable
institutions.
E. Exemptions under Special Laws –
Includes proceeds from SSS, GSIS

V. COMPUTATION OF ESTATE TAX

A. Tax Rate (Sec. 84, NIRC) amended by TRAIN
SEC. 84. Rate of Estate Tax. – There shall be levied, assessed, collected and paid
upon the Transfer of the net estate as determined in accordance with Sections 85
and 86 of every decedent, whether resident or nonresident of the Philippines, a tax at
the rate of six percent (6%) based on the value of such net estate.” ( TRAIN LAW)

22
TAXATION LAW 2 – Atty. Acas Transcribed Lecture

1. Tax Credit for Estate Taxes paid to a Foreign Country (Sec. 86(E), NIRC)
Tax credit is a remedy against international double taxation. It minimize te the
onerous effect of taxing the same property twice, tax credit against the
Philippine Estate tax is allowe for estate taxes paid to foreign countries.

Only estate of decedent who was a citizen or resident of the philippines at the
time of his death can claom tax credit for any estate tac paid to a foreign
country.

Filipino green card holder to pay estate taxes of land in US. Where will you pay
first? US because you don’t know the tax regime in the US. In the Philippines
you know that there is tax credit.

VI. PAYMENT OF ESTATE TAX

A. Estate Tax Returns
1. Requirements ( AMENDED BY TRAIN)
(A) Requirements. – In all cases of transfers subject to the tax imposed herein, or
regardless of the gross value of the estate, where the said estate consists of
registered or registrable property such as real property, motor vehicle, shares of
stock or other similar property for which a clearance from the Bureau of Internal
Revenue is required as a condition precedent for the transfer of ownership thereof
in the name of the transferee, the executor, or the administrator, or any of the legal
heirs, as the case may be, shall file a return under oath in duplicate, setting forth:

(1) The value of the gross estate of the decedent at the time of his death, or in
case of a nonresident, not a citizen of the Philippines, of that part of his gross
estate situated in the Philippines;

(2) The deductions allowed from gross estate in determining the estate as defined
in Section 86; and

(3) Such part of such information as may at the time be ascertainable and such
supplemental data as may be necessary to establish the correct taxes. “Provided,
however, That estate tax returns showing a gross value exceeding Five million
pesos (P5,000,000) shall be supported with a statement duly certified to by a
Certified Public Accountant containing the following: (AMENDED BY TRAIN)

(a) Itemized assets of the decedent with their corresponding gross value at
the time of his death, or in the case of a nonresident, not a citizen of the
Philippines, of that part of his gross estate situated in the Philippines;

(b) Itemized deductions from gross estate allowed in Section 86; and

(c) The amount of tax due whether paid or still due and outstanding.

2. Time for Filing ( AMENDED BY TRAIN)

ADEA | SANTOS 23
 For purposes of determining the estate tax, the estate tax return shall be filed within
1 year from the decedent’s death.

3. Extension of Time to File

The commissioner or any revenue officer authorized by him pursuant to the tax code
shall have the authority to grant, in meritorious cases a reasonable, not exceeding
30 days , for filing the return. The application for extension of time to file estate tax
return must be filed with the Revenue District Office where the estate is required to
secure its TIN and file the tax returns of the estate, which Revenue District Office
likewise, has the jurisdiction over the donor’s tax return required to be filed by any
party as a result of the distribution of the assets and liabilities of the decedent.

4. Place of Filing Return Sec. 90, NIRC

Except in cases where the Commissioner otherwise permits, the estate tax return
shall be filed with:
a. an authorized agent bank;
b. Revenue District Office
c. Collection Office
d. Duly authorized treasurer of the city or municipality in which the decedent
was domiciled at the time of his death
e. If there be no legal residence in the Philippines, Office of the Commissioner.
B. Payment of Estate Tax
1. Time for Payment
The estate tax imposed by Section 84 shall be paid at the time the return is filed
by the executor, administrator or the heirs. (Pay as you file principle)

a. Payment of Final Tax on Bank Deposits

2. Extensions of time to pay estate tax
When the Commissioner finds that the payment on the due date of the estate tax or
of any part thereof would impose undue hardship upon the estate or any of the heirs,
he may extend the time for payment of such tax or any part thereof not to exceed
five (5) years, in case the estate is settled through the courts, or two (2) years in
case the estate is settled extrajudicially. In such case, the amount in respect of
which the extension is granted shall be paid on or before the date of the expiration
of the period of the extension, and the running of the Statute of Limitations for
assessment as provided in Section 203 of this Code shall be suspended for the
period of any such extensi

Where the taxes are assessed by reason of negligence, intentional disregard of

rules and regulations, or fraud on the part of the taxpayer, no extension will be
granted by the Commissioner.

If an extension is granted, the Commissioner may require the executor, or

administrator, or beneficiary, as the case may be, to furnish a bond in such amount,
not exceeding double the amount of the tax and with such sureties as the
Commissioner deems necessary, conditioned upon the payment of the said tax in
accordance with the terms of the extension.

24
TAXATION LAW 2 – Atty. Acas Transcribed Lecture

3. Payment of estate tax by installment (AMENDED BY TRAIN)

Payment by Installment. – In case the available cash of the estate is insufficient to
pay the total estate tax due, payment by installment shall be allowed within two (2)
years from the statutory date for its payment without civil penalty and interest.

4. Liability for payment

Sec. 91, NIRC
The estate tax imposed by Section 84 shall be paid by the executor or administrator
before delivery to any beneficiary of his distributive share of the estate. Such
beneficiary shall to the extent of his distributive share of the estate, be subsidiarily
liable for the payment of such portion of the estate tax as his distributive share bears
to the value of the total net estate.

For the purpose of this Chapter, the term "executor" or "administrator" means the
executor or administrator of the decedent, or if there is no executor or administrator
appointed, qualified, and acting within the Philippines, then any person in actual or
constructive possession of any property of the decedent.

Take note:
tax Rate Taxable base

CGT 6% GROSS

ET 6% NET

DT 6% GROSS

ADEA | SANTOS 25
Part III: DONOR’S TAX -
when donor is still alive. It is not imposable unless accepted and completed- there is
actual transfer of ownership

I. BASIC PRINCIPLES OF DONOR’S TAX

Taxable base: gross
total net gifts made during the calendar year imposed under sec. 99 ( as amended by
TRAIN) depending on whether the donee is a relative or a stranger.
NET GIFT = net economic benefit from the transfer that accrues to the donee

Taxable event: the act of giving. It has to be accepted to be taxable.

Can you donate services? Yes. Is it subject to donor’s tax? No. Its not considered as an
intangible.
Coverage of donation: real, personal , intangible and tangible.
A. Concept of Donor’s Tax
Donor’s tax is a tax levied assessed, colleced and paid upon the transfer by any
person (whether individual or corporation), resident or nonresident of the property by
gift, computed as provided in sec. 99 of NIRC as amended.
- it is a tax on the privilege of trasmitting one’s property or property rights to another or
others without dequate and full valuable consideration.

Case: Lladoc vs. CIR (145 SCRA 292)

DOCTRINE: Donor’s Tax is imposed on the donations inter vivos or those made
between living persons to take effect during the lifetime of the donor. Donor’s tax is
not a property tax but a tax imposed on the transfer of property by way of gift inter
vivos.

B. Nature of Donor’s Tax

Donor’s tax is not a property tax but a tax imposed on the transfer of property by way
of gift inter vivos. It is an excise tax imposed on the exercise of donor’s right during life
to transfer property to others in a form of gift.

C. Purpose of Donor’s Tax

1. to forestall the eventuality of the property owners attempting to avoid payment
of estate tax by transferring their property to another during their lifetime so that
such estates may pass to the objects of their bounty unimpaired.
2.

D. Requisites of a Valid Donation5

1. Capacity of donor (Art. 735, New Civil Code)
2. Donative intent
3. Delivery

5 Donation is an act of liberality whereby a person called the donor disposes gratuitously of a thing or right in favor of another whois
called the donee , who accepts it.

26
TAXATION LAW 2 – Atty. Acas Transcribed Lecture

4. Acceptance (Art. 736, New Civil Code) if its not accepted within the lifetime of the
donor, can it be converted into legatee or devisee? NO.
I
E. Transfers which may be constituted as donation
1. Sale / exchange / transfer of property for less than adequate and full consideration
- Sec. 100, NIRC
- Donative intent required
2. Condonation / remission of debt
3. Renunciation of Inheritance
i. The general renunciation by an heir including the survuvung spouse of his
/ her share in the hereditary estate left by the decedent is NOT subject to
Donor’s tax unless specifically and categorically done in favor of identified
heir/s to the exclusion or disadvantage of the other co-heirs in the
hereditary estate.
- Exception
F. Amendments to the NIRC by TRAINs
OLD TAX CODE TRAIN LAW

Sec. 99 Rates of tax payable by donor

(A) In General. - The tax for each (A) In General. – The tax for each calendar
calendar year shall be computed on the year shall be six percent (6%)
basis of the total net gifts made during the computed on the basis of the total gifts
calendar year in accordance with the in excess of Two hundred fifty thousand
following schedule: pesos (P250,000) exempt gift made
during the calendar year.
A. If the net gift is:
B) 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.

(B) Tax Payable by Donor if Donee is a

Stranger. - When the donee or beneficiary
is stranger, the tax payable by the donor NOTE: single tax rate of 6% of net
shall be thirty percent (30%) of the net donations is imposed for gifts above
gifts. For the purpose of this tax, a P250,000 yearly regardless of relationship
'stranger', is a person who is not a: to the donor.

(1) Brother, sister (whether by whole or

half-blood), spouse, ancestor and lineal
descendant; or

(2) Relative by consanguinity in the

collateral line within the fourth degree of
relationship.

ADEA | SANTOS 27
 (C) 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.

Sec. 100. Transfer for Less Than Adequate and Full Consideration.

28
TAXATION LAW 2 – Atty. Acas Transcribed Lecture

Where property, other than real property Where property, other than real property
referred to in Section 24(D), is transferred referred to in Section 24(D), is transferred
for less than an adequate and full for less than an adequate and full
consideration in money or money's worth, consideration in money or money’s worth,
then the amount by which the fair market then the amount by which the fair market
value of the property exceeded the value value of the property exceeded the value
of the consideration shall, for the purpose of the consideration shall, for the purpose
of the tax imposed by this Chapter, be of the tax imposed by this Chapter, be
deemed a gift, and shall be included in deemed a gift, and shall be included in
computing the amount of gifts made during computing the amount of gifts made during
the calendar year. the calendar year: Provided, however,
That a sale, exchange, or other transfer of
property made in the ordinary course of
business (a transaction which is a bona
fide, at arm’s length, and free from any
donative intent), will be considered as
made for an adequate and full
consideration in money or money’s worth.”

Sec. 101. Exemption of Certain Gifts.

ADEA | SANTOS 29
 (A) In the Case of Gifts Made by a
Resident. - (A)In the Case of Gifts Made by a
(1) Dowries or gifts made on account of Resident.–
marriage and before its celebration or
within one year thereafter by parents to (1) Gifts made to or for the use of the
each of their legitimate, recognized National Government or any entity
natural, or adopted children to the created by any of its agencies which is
extent of the first Ten thousand pesos not conducted for profit, or to any
(P10,000): political subdivision of the said
(2) Gifts made to or for the use of the Government; and
National Government or any entity
created by any of its agencies which is (2) Gifts in favor of an educational and/or
not conducted for profit, or to any charitable, religious, cultural or social
political subdivision of the said welfare corporation, institution, accredited
Government; and nongovernment organization, trust or
(3) Gifts in favor of an educational and/or philanthropic organization or research
charitable, religious, cultural or social institution or organization: Provided,
welfare corporation, institution, however, That not more than
accredited nongovernment thirty percent (30%) of said gifts shall be
organization, trust or philanthropic used by such donee for administration
organization or research institution or purposes. For the purpose of this
organization: Provided, however, That exemption, a ‘non-profit educational and or
not more than thirty percent (30%) of charitable corporation, institution,
said gifts shall be used by such donee accredited nongovernment organization,
for administration purposes. For the trust or philanthropic organization and/or
purpose of this exemption, a non-profit research institution or organization’ is a
educational and/or charitable school, college or university and/or
corporation, institution, accredited charitable corporation, accredited
nongovernment organization, trust or nongovernment organization, trust or
philanthropic organization and/or philanthropic organization and/ or research
research institution or organization' is a institution or organization, incorporated as
school, college or university and/or a nonstock entity, paying no dividends,
charitable corporation, accredited governed by trustees who receive no
nongovernment organization, trust or compensation, and devoting all its income,
philanthropic organization and/or whether students’ fees or gifts, donation,
research institution or organization, subsidies or other forms of philanthropy, to
incorporated as a non-stock entity, the accomplishment and promotion of the
paying no dividends, governed by purposes enumerated in its Articles of
trustees who receive no compensation, Incorporation.
and devoting all its income, whether
students' fees or gifts, donation,
subsidies or other forms of
philanthropy, to the accomplishment
and promotion of the purposes
enumerated in its Articles of
Incorporation.

30
TAXATION LAW 2 – Atty. Acas Transcribed Lecture

II. DETERMINATION OF GROSS GIFT

A. Classification of Gross Gift
1. Citizens / Residents – Resident citizen (RC), Non-resident Citizen (NRC) and
resident Alien (RA)
2. Non-resident Alien (NRA)
Filipino green card holder= NRA POV OF PHIL. But POV of US, Resident Alien.

B. Composition of Gross Gift same as estate tax.

1. RC, NRC, RA - Real Property located within and without the Philippines
- Tangible personal property located within & without the
Philippines
- Intangible personal property located within & without the
Philippines (Sec. 104, NIRC)
2. NRA - Real Property located within Philippines
- Tangible personal property located within Philippines
unless there’s reciprocity (Sec. 104, NIRC)
- Rules of Reciprocity- intangible personal properties
C. Exemptions of Gift from Donor’s Tax
1. Gifts made by Residents (RC, RA) (Sec. 101(A), NIRC)
a. Gifts made to of for the use of national government ( includes local
government/ political subdivisions or any entities created by law (e.g.
PAGCOR)
b. Gifts in favor of educational / charitable institution ( must have a status of a
donee) it can be considered as an allowable deduction of income tax. But
to a certain extent only.
Condition: not more than 30% of the gift will be used by donee for admin
purposes
2. Gifts Made by a Non-resident Alien (NRA) (Sec. 101(B), NIRC)
a. Same as (ii) above
b. Same as (iii) above
3. Exemptions from donor’s tax under Special Laws
a. When provided in their Charters e.g PAGCOR , PCSO
D. Valuation of Gifts made in Property (Sec. 102 and 88(B), NIRC)
1. FMV at time of gift
2. Real Property – Higher of FMV determined by CIR or FMV fixed by provincial and
city assessors, whichever is higher.
3. Valuation of Particular Gifts
a. Personal Property
b. Real Property
c. Cash
E. Computation of Donor’s Tax
1. Person liable
- Donors (personal liability of the donor whether natural or juridical or
resident or non-resident who transfers or causes the transfer of property
by gift) as long as it satisfies art. 375 of NCC, you can donate.

2. Tax Basis (Sec. 99, NIRC)

ADEA | SANTOS 31
 The tax for each calendar year shall be six percent (6%) computed on the
basis of the total gifts in excess of Two hundred fifty thousand pesos
(P250,000) exempt gift made during the calendar year

3. Tax Rates (Sec. 99(A) and (B), NIRC)

a. No distinction between family members and strangers
4. Computation of Tax
a. Cumulative basis over a period of one (1) calendar year

5. Tax Credit for Donor’s Taxes Paid to a Foreign Country (Sec. 101(C))
a. Donations of a foreign country corporation of its own shares of
stock to a resident employee in the Philippines is not subject to
donor’s tax.
b. Limitation to credit (p. 742.) *might be included in exam*
F. Returns / Payment (Sec. 103, NIRC)
1. Requirements
- any person making donation (whether direct or indirect) unless the donation
is specifically exempted under the code or special laws is required, for
every donation, to accomplish under oath a donor’s tax return 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. Deductions claimed and allowable
c. Any previous net gifts made during th same calendar year
d. The name of the donee
e. Relationship of the donor to the donee
f. Such further information the Commissioner may require.
2. Time / Place of Filing & Payment
a. Time of Filing – 30 days after date of gift is made / completed
Payment coincides with the filing of return. ->the tax due thereon shall be
paid at the same time the return is filed.
b. Place of Filing / Payment ( Authorized Agent Bank/ Revenue District Officer/
Revenue Collection Officer or Duly authorised treasurer of the city or
municipality)
a. RC, NRC, RA – Residence / Domicile of donor
b. NRA – Philippine Embassy / Consulate where he is domiciled at the
time of transfer
Note: the valuation of the real property shall be based on the assessed or zonal value which
ever is higher.

VAT ( Value Added Tax)

Also know was sales tax
General rule: all sale transactions are vatable. Includes services
Exceptions
I. When they are vat exempt under sec. 109 (memorize)

32
TAXATION LAW 2 – Atty. Acas Transcribed Lecture

a. - if there is transformation of commodities mentioned under this section, they are

no longer VAT exempt. It must be raw materials in order to be considered VAT
exempt
II. Special laws
a. PWD
b. Senior citizen
c. Renewable energy
d. Importations

There must be receipt to be charged with VAT

If VAT inclusive, formula: vat inclusive amount /1.12 = ___x 12
Formula for VAT payable amount = input vat + output vat

VAT - tax on consumption

✓ Input Vat
✓ Output vat
✓ Zero rated - export and indirect export. Magbabayad ka padin ng VAT kahit ng import
and export ka. (E.g. imported materials and then assemble here in PH and then
exported again) . They are not vat exempt however they are entitled to VAT refund.
✓ Vat Exempt - not subject to VAT system. No VAT refund because it is already part of
the cost (?)

It is considered a VAT exempt entity. Therefore, the activities of person is considered as VAT
exempt. Meaning, the product sold is not subject to VAT. But it is still liable to pay VAT on
certain transactions.

ADEA | SANTOS 33