n for the Imposition of Estate Tax Mead rendered by the government in “guna eee ein eco, ater yay lance oath ble wishes. For the performance of these se, "and other benefits that accrue to the estate and the heirs, the g i rinership Theory iy : Bebeis neon, Inberitance is not a right but a privileg y the State and legates have been acquired only with the protec the State. Consequently, the State as a passive silent partner ‘accumulation of property has the right to collect the share which q rly due to it. ee PP ps / y to Pay Theory ' of inheritance which is in the nature of an uneafeg or windfall, are place assets into the hands of the heirs and eficiaries. This creates an ability to pay the tax and thy “contributes to government income. te Redistribution of Wealth Theory The receipt of inheritance is a contributing factor to the inequa wealth and incomes. The imposition of estate tax reduces r arty received by the successor, thus helping to promote equit - distribution of wealth in society. The tax base is the value of property and the progressive scheme of. taxation is pre Motivated by the desire to mitigate the evils of inheritance in _ present form. , ‘Section 85 of the Tax Code States. that the value of the of the decedent should be determined by including the value of his death of all property, real or Personal, tangible or intal wherever situated: Provided, however, that in the case of a no : pei on vi ye ne lime of his death was not a citizen of the Philip only that pai le entire gross estat. ich is sit in il shall be included in his Dane estate, sone a a 34 Scanned by TapScannerChapter 2 Gross Estate The first estate tax law inthe Philippines is embod in Act 2601 which took effect on July 1, 1916. Itimposes graduated estate tax rates computed on ‘net inventoried propery let by.a decedent. It was subsequently revised by the Revised Administrative Code of the Philippines imposing upon “every transmission by virtue of inheritance, devise, bequest, git mors’ causa, oF advance in anticipation of inheritance, devise or bequest.” Since then, several laws were introduced to amending Act 2601 RA 8424 also known as “Tax Reform Act’ or the National Internal Revenue Code (NIRC) Effective Jan.1, 1998 further restructured the tax base and rates of both estate and donor's taxes in addition to allowing the deduction of ‘medical expenses from the gross estate. Bulk of the estate tax law (aside from determining the tax base and rates which are found in NIRC are embodied in the ‘New Civil Code of the Philippines. Estate Tax - Definition and Nature In the Philippines, Estate Tax is a tax imposed on the privilege that a person is given in controlling fo a certain extent, the disposition of his property to take effect upon death. As discussed in Chapter 1, it is an excise tax imposed on the act of passing the ownership of property at the time of death and not on the value of the property or right. On this basis, estate tax should not be construed as a direct tax on the property of the decedent although the tax is based thereon. Since estate tax accrues as of the time death, the right of the State to tax the privilege fo transmit the estate vests instantly upon death. The accrual of the tax is distinct from the obligation to pay the same. : 33 a ‘Scanned by TapScannerGross Estate The composit po2® Of the estate tax may be summarized 2s follows TABLE 2. Ps ‘Decedent On Citizen Gross Estate = Resident 1) Property (Real or Personal) property wherever situated Intangible personal property wherever situated > SNe Pe St red iopsry sce ithe Phtppines 2). Tangible personal property situated inthe Philippines Intangible personal property with stu in the Philippines, [a Unless excluded on the basis of reciprocity as described [i Se RECIPROCITY Clause The tax code excl Philippines from the 'steciprocity. There is reciprocity i: * The decedent at the time of his death was a resident citizen of a foreign country which at the time of his death did not impose an estate tax of any character in respect of intangible personal Property of citizens of the Philippines not residing in that foreign country; or The laws of the foreign country of which the decedent was a resident citizen at the time of his death allow a similar exemption from estate taxes of every character, in respect of intangible Personal property owned by citizens of the Philippines not residing in that foreign country. ludes “intangible” personal property with situs in the 1© goss estate of a non-resident alien decedent if there Intangible Asset 5 The term ‘intangible asset” was not defined in the Tax Code, nonetheless, Accounting Standards defines intangible asset as an “identifiable nonmonetary asset without physical substance’. They derive their value from intellectual or legal rights, and from the value they add to the other assets. As a tule, the situs of intangible personal property is the domicile of the owner, also known as “mobilia sequntur personam’. However, such rule is not applicable if the intangible property has situs elsewhere or Where the intangible property has acquired a business situs in another jurisdiction because the principle of “mobilia sequntur personam” is only used for convenience. It must yield to the actual situs of such property The situs of Franchise, for instance, should not be based on the domicile of the owner but the place where such franchise is exercised. 35 ‘Scanned by TapScannerapiTHIN" THE PHILIPPINES any foreign corpora ern fe ee i .d by any foreign Corporation j¢_ sued MY soquired 9 business situs ‘Location ofthe property Where the intangible is exercised reg cof where the corresponding certificate is stored Residence ofthe debtor & Lot- Hongkong, inherited beore mariage ‘acquired during mariage in Cebu ‘Shares of stocks ised by a foreign corporation, 20% of its nisin the Pilppines nk deposit wth PNB branch in New York, New York ‘representing income earned during marriage of stoks issued by PLOT group of companies, a Hon rare nde Pipe ans 12% promissory noe, received 2 years ago, ThedsteraresienietQc, Scanned by TapScanner2 Case A: Assume there is no reci Whatis the correct value of the gross estate? Answer: 2,620,000 Solution: Car, acquired during marriage in Cebu oe ‘Shares of stocks — PLDT min Sear, 10% Promissory Note 420,000 income (P500,000 x 12% x 2) —¥2,620,000_ “e otarations is in the «The shares of stock issued by a fore ion (20% of its operations is in @ shares ign corporation (20% o Philippines) is considered situated outside of the Philippines. Under the tax ee . Nonresident alien decedent is taxable only for properties situated in the Philippines. Sa rule applies to the House and Lot as well as the bank deposit in New York, USA. * Interest income eared before or at the time of death shall likewise form part of the decedent's gross estate. - ‘ Case B: Assume there is reciprocity, what is the correct value of the gross estate? “Answer: P1,500,000 Only the car in Cebu acquired during marriage shall be included in the decedent's gross estate. Intangible properties with situs within the Philippines are excluded in the determination of gross estate if there is reciprocity. ‘Scanned by TapScannerGROSSESTATE | eee cc fa NRAS OS Item, en a wise Wine No. | PARTICULARS P. SITUS | Resident | Reciprocity | Reciprocity arc | Par : iti Include | __Include Parc | Within | Include include nd Lot (Far Include | Exclude | Exclude _ “Rest Hane gaily Home) — Taguig Sn aaa nade nelle, Rese aes ‘ Include | Include | Include _ tReet iS | Include | Include | Include ee al Include | Exclude | Exclude Include | Include | Include Include | Exclude Exclude Within | Include | Exclude | Include _ Wio | Include | Exclude | Exclude | Within | Include | Exclude Include ABN Amro Bank (Foreign bank)—London | Wio | Include | Exclude Exclude | Branch | Receivables-debtors from Philippines | Within | include | Exclude | Include Receivables-debtors from Canada _ Wio | Include | Exclude | Exclude Shares of stock of domestic corporations, | Within | Include Exclude | Include The certificates are stored in the | Philippines | Shares of stock of domestic corporations. | Within Include | Exclude The certificates are stored abroad _ Car Shares of stock of foreign corporations. Wio Include | Exclude The certificates are stored in the | Philippines —_ i po Shares of stock of foreign corporations. Wio Include Exclude The certificates are stored abroad Ww Shares of stock of foreign corporations, Within | Include Exclude Include ines Include "| Exclude Exclude | Shares of stock of foreign corpor 80% of its operations is in the Philippines _ itt i us Shares of stocks of foreign corporations Within | Include Exclude Include which acquired business situs in the Philippines Me nee Patents and copyrights exercised in the Within | Include Exclude Include Philippines rae | i Patents and copyrights exercised abroad Wo _|_ Include Exclude Exclude | Wo | Include | Exclude | Exclude ‘Scanned by TapScannerbetween: the Commissioner; an / as shown in the schedule of values fy. Beyonce! and city assessors. — Listed shares: FMV shall be the mean between the highest and lowest qu at a date nearest the date of death, if available on the date of death itself. (RR 2-2003/ RR 12-2018) The bid price nearest the date published in any newspaper or p general circulation. j In accordance with the latest Mortality Table taking into accot “life of the beneficiary, Secretary of Finance the Insurance n Scanned by TapScannerILLUSTRATIONS; — le the correct al ‘ 7 he decedent in the following independent cases, |” 0 euded in the gross estate oft Case A: 4 foam brand new car witha cash rie of P3,000,000. H of P700,000 e i following terms: down payment of P500,000 an a j F four years. On his way home, he run over an approa' & fe bought the car on d annual installment ching truck and Answer: P3,000,000 Case B: The decedent granted a P2,000,000 loan to his best fiend two years before his death oe ster et tet er annum evi incipal and interest are due after three years, evidenced by a note. Both the princip: Answer: 2,400,000. Principal amount plus interest of 10% for 2 years Case C; Te decedent devised to his son a 1,000 square meter lot in Global City, Taguig with the following valuation: i Fair value as determined by city assessors P20,000/sq.m. Zonal value as determined by the CIR 17,000,000 FV determined by independent assessors 18,500,000 ey Answer: 20,000,000 (1,000 sq.m x P20,000) ‘The higher between the fair value as determined by city assessors and the zonal value as determined by the Commissioner of Internal Revenue (CIR) Case D: Decedent owns 100,000 ordinary shares of Alpha Company at the time of his death. At that time, Alpha’s outstanding shares were 1,000,000 with P10 par value and Retained Earnings amounting to P5,000,000. The shares are not traded in the stock exchange. + Answer: P1,500,000 Book value per share of Alpha Company multiplied by the number of shares held by the decedent at the time of death P10M + 5M. 1,000,000 shares X 100,000 shares Case E: A decedent left 10,000 Pinoy Telecom shares. The shares were traded in the local stock exchange. At the time of death, the following were available: Highest quotation “P800 per share Lowest quotation P200 per share Book value P350 per share “e_ Answer: P5,000,000 _[10,000sh. x ((800+200)/2)] ‘Scanned by TapScannerEstate’ 5 FROM THE GROSS ESTATE and 86 of the Tax Code ving spouse- Sen sen ies of the surviving spouse should Se ee estate because these properties are ne Mecadent upon his death ; ernal”_ properties. Whether jive or common will depend on the type ‘ ‘of the husband and wife. Property relations a pter 4. de the Philippines of a non-resident alien dece usi the PPax Code provides that for o dents, only his properties situated or with situs withir ‘lippines. shall be included in his gross estate ily, properties outside of the Philippines are exclude 1g gross estate. gible personal property in the Philippines of a no ‘under the Reciprocity Law. De - The tax code excludes “intangible” personal property nh n the Philippines from the gross estate of a 0 " decedent if there is reciprocity. Bs ns under Section 87 of the Tax Code “4. The merger of usufruct in the owner of the naked title. 2 transmission or delivery of the inheritance or heir (also known as the 1° heir) or y (also known as the 2 heir), sion from the first heir, legatee or do ‘Scanned by TapScannerEstate Tae Tegaeien n thity Percent (30%) of the said bequest, devises, legacies or transfers shat) Cet pe uch institutions fF administra ASS shall be used by suc Nn purposes, The governmen exemption is the value of transfer It agency which is empowered to determine the BIR. To enable it to exercise such power, the ain ¥ 10 social welfare, cultural and charitable stiutions should be included in the. gross estate. An equal amount, however, may be taken up as a deduction. While the Tax Code includes ‘this item in the exempt acquisitions and ansmissions, itis actually considered a deduction from the gf0ss rates, calf 10 include the property transferred to social Welfare, cultural or charitable institutions will impair the power of the BIR to assess taxes properly ILLUSTRATION | Case A - Merger of usufruct in the owner ofthe naked ttle lee 'n the last will and testament Parcel of land to his son (J ‘owner of the naked tit. f Mr. Yumao, he assigned the usufruct of his | luan) while his grandson (Pedro) was named the Upon the death of Mr. Yuma, the parcel of land should be included in his gross estate. However, upon the death of Juan, the parcel of land should be “excluded in his gross estate because he is not the owner ofthe land but his on, Pedro. There will be merger of usufruct in the owner of the naked tile (Pedro) upon Juan's death. Meaning, Pedro willbe entiled to both the usufruct ‘and ownership ofthe naked title upon Juan’s death. Case B ~ The transmission or delivery ofthe inheritance or legacy by the fiduciary | heir or legatee to the fideicommisary. In the last wil and testament of Mr. Yumao, he devised his parcel of land to his son (Juan) but with a condition that such property should be given to his grandson (Pedro) when the former dies. Thus, the parcel of land is intended to be inherited by Pedro, not Juan (For purposes of convenience, disregard rules on legitimes discussed in Chapter 1). Juan is acting only as a trustee or fiduciary until such time thatthe propery is transferred to Pedro, Since Juan is the father of Pedro and both were alive atthe time of the testator’ death (Mr. ‘Yumao), the substitution or transfer from Juan to Pedro is known as fideicommissary substitution. Upon the death of Mr. Yumao, the parcel of land should be included in his gross estate. However, upon the death of Juan, the parcel of land should be “excluded” in his gross estate because Juan is acting only as a trustee of Pedro. 42 Scanned by TapScannerEstile Ue i tion Elements ofa fdeicommissary substiuton: . The san ‘must not go beyond one degree from the het cay instituted (i. father to son) = The fiduciary(first heir) and the fideicommissary(second heir) must by toy living atthe time ofthe testator's death. Case C- The transmission from.the first heir, legatee or donee in favor OF anoth beneficiary, in accordance with the desire of the predecessor in accordance wit he reseed in Case B” except thatthe rl between Juan and Pedro is beyond one degree. For instance, Juan 1s the Uncle of Pedro. In this case, there is no fideicomissary subg E Nonetheless, the parcel of land is stil intended to be inherited by Pedy, R Juan. Juan is stil acting as a trustee Bt dicate re that ropery is transferred to Pedro. Likewise, Juan is al MS the 18 hg Wil Peds tne 2 ei The onl dfrence between exemption in cont and Case C is the degree of relationship between the 1* heir and the 2 hep The effect as to whether or not the property is included in the gross estat shy same. Hence, upon the death of Mr. Yumao, the parcel of land shouid be included in his gross estate. However, upon the death of Juan, the should be “excluded” in his gross estate because he is not the owner of he upon his death C. Exclusions under Special Laws 4. Proceeds of life insurance and benefits received by members of the GSIS (RA728). 2. Accruals and benefits received by members from the SSS by reason of death (RA1792). 3. Life Insurance proceeds on life insurance policy taken out by the decedent himself, upon his own life, where the beneficiary is a third person and is irrevocably designated. 4. Life Insurance proceeds on Insurance policy (group insurance) taken out by his employer on the employee's life, whoever the beneficiary maybe, whether the designation as: beneficiary is revocable or irrevocable. 5. Amounts received from Philippines and United States governments for war damages (RA227). 6. Payments from the Philippines of US government to the legal heirs of deceased of World War II Veterans and deceased civilian for supplies/services furnished to the US and Philippine Amy (RA136). Amounts received from United States Veterans Administration. . Transfer by way of bona fide sales. Properties held in trust by the decedent eon 43 ‘Scanned by TapScanner