ST.

ANTHONY’S COLLEGE
San Jose, Antique

BUSINES EDUCATION DEPARTMENT

AEC 215 Business Taxation

GROSS ESTATE
Estate Tax: Definition and Nature

Estate Tax is a tax imposed on the privilege that a person is given in controlling to a certain extent, the
disposition of his property to take effect upon death. 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.

Justification for the Imposition of Estate Tax

1. Benefit-Received Theory. The law considers the service rendered by the government in the distribution
of the estate of the decedent, either by law or in accordance with his wishes. For the performance of these
services and other benefits that accrue to the estate and the heirs, the State collects the tax.

2. Privilege or State Partnership Theory. Under this theory, inheritance is not a right, but a privilege
granted by the State and legatees have been acquired only with the protection of the State. Consequently,
the State as a passive silent partner in the accumulation of property has the right to collect the share
which is properly due to it.

3. Ability to Pay Theory. Receipt of inheritance which is in the nature of an unearned wealth or windfall,
are place assets into the hands of the heirs and beneficiaries. This creates an ability to pay the tax and
thus contributes to government income.

4. Redistribution of Wealth Theory. The receipt of inheritance is a contributing factor to the inequalities
in wealth and incomes. The imposition of estate tax reduces the property received by the successor, thus
helping to promote equitable distribution of wealth in society. The tax base is the value of the property,
and the progressive scheme of taxation is precisely motivated by the desire to mitigate the evils of
inheritance in the present form.

Classification of Taxpayers and Composition of Gross Estate

Tangible Personal Intangible Personal

Real Property
Decedent Property Property
Within Without Within Without Within Without
Citizen / / / / / /
Resident Alien / / / / / /
Nonresident /
/ X / X X X
Alien
(With reciprocity)

Reciprocity Clause

The tax code excludes “intangible” personal property with situs in the Philippines from the gross estate of a
non-resident alien decedent if there is reciprocity. There is reciprocity if:

a. 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
b. 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.

Intangible Asset

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.

Intangible asset Situs

1. Receivable (Promissory Note) Residence of the Debtor
2. Bank Deposit Location of the Bank
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 ST. ANTHONY’S COLLEGE
San Jose, Antique

BUSINES EDUCATION DEPARTMENT

AEC 215 Business Taxation

Intangible asset Situs
3. Other Intangible Properties:
a. Franchises, Patents, Copyrights, Trademarks Where Property is Used or Exercised
b. Investment in Partnership Where Partnership Is Established
c. Shares of Stock (Include Corporate Bonds)
i. Domestic Corporation Within the Philippines
ii. Foreign Corporation Without the Philippines
Except:
1. If ≥ 85% of Business is in the Philippines Within the Philippines
2. If Shares have acquired a Business Situs in the Philippines Within the Philippines

Valuation of Gross Estate

- In general, properties are valued at fair market value at the time of death of the decedent.

Property
Real Property
Personal Property
Stocks NOT listed in any
local exchange
Stocks listed in the stock
exchange
Units of participation in any
association recreation, or
amusement club
Usufruct, use, habitation,
annuity
Notes; accounts receivable
Valuation
FMV which is the higher of the zonal value or the assessor's Value
Generally, FMV at the time of death of the decedent.
For common shares: Book value on the valuation date (date of death), or on
the date nearest the valuation date.
For preferred shares, par value.
Average of the lowest and highest quotes on the valuation date (date of
death) or day nearest to the valuation date.
FMV is the bid price nearest the date of death published in any newspaper
or publication of general circulation.
Value shall be based on the probable life of the beneficiary in accordance
with the latest Basic Standard Mortality Table approved by the Department
of Finance.
FMV is the discounted amount of the unpaid principal plus interest.

Exemptions and Exclusions from the Gross Estate

a. Exclusions under Sections 85 and 86 of the Tax Code

1. Exclusive property of the surviving spouse.

The gross estate in case of married decedents, is composed of:

i. Exclusive properties of the decedent; and
ii. Common properties of the decedent and the surviving spouse

Exclusive properties of the surviving spouse should be excluded in the gross estate because these
properties are not owned by the decedent upon his death.

2. Property outside the Philippines of a non-resident alien decedent.

Section 85 of the Tax Code provides that for nonresident alien decedents, only his properties situated
or with situs within the Philippines shall be included in his gross estate. Consequently, properties
outside of the Philippines are excluded in determining gross estate.

3. Intangible personal property in the Philippines of a non-resident alien under the Reciprocity Law.

The tax code excludes “intangible” personal property with situs in the Philippines from the gross
estate of a non-resident alien decedent if there is reciprocity.

b. Exclusions under Section 87 of the Tax Code

1. The merger of usufruct in the owner of the naked title.

2. The transmission or delivery of the inheritance or legacy by the fiduciary heir (also known as the 1 st
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 ST. ANTHONY’S COLLEGE
San Jose, Antique

BUSINES EDUCATION DEPARTMENT

AEC 215 Business Taxation

heir) or legatee to the fideicommisary (also known as the 2nd heir).
3. The transmission from the first heir, legatee or donee in favor of another beneficiary, in accordance
with the desire of the predecessor (also known as “special” power of appointment).
4. All bequest devises, legacies or transfers to social welfare, cultural and charitable institutions, no part
of the net income of which inures to the benefit of any individual; Provided, however, that not more
than thirty percent (30%) of the said bequest, devises, institutions for legacies or transfers shall be
used by such institution administration purposes.

The government agency which is empowered to determine me exemption is the BIR. To enable it to
exercise such power the value of transfer to social welfare, cultural and charitable institutions should be
included in the gross estate. An equal amount, however, may be taken up as a deduction.

c. Exclusions under Special Laws

1. Proceeds of life insurance and benefits received by members of the Government Service Insurance
System (GSIS) (R.A. 728)
2. Accruals and benefits received by members from the Social Security System by reason of death (R.A.
1792).
3. Proceeds of life insurance taken out by the decedent himself, upon his own life, where the beneficiary
is a third person and is irrevocably designated.
4. Proceeds of life insurance (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 the Philippine and United States governments for war damages (R.A. 227).
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 Army (R.A.
136).
7. Amounts received from the United State Veterans Administration (R.A. No. 360).
8. Transfer by way of bona fide sales.
9. Properties held in trust by the decedent.
10. Acquisition and/or transfer expressly declared as not taxable.
11. Personal Equity and Retirement Account (PERA) assets shall not be considered assets of the
Contributors for purposes of estate taxes (R.A. No, 9505).

Inclusions in the Gross Estate

- Includes all properties, rights and interests which the decedent owns at the time of his death;

1. Properties owned by the decedent actually and physically present in his estate at the time of death.
2. Decedent’s Interest (whether legal or beneficial) in property owned or possessed by the decedent and at
the time of death (ex. Usufructuary writes, leasehold rights).
3. Taxable transfers - meet during lifetime but are in the nature of testamentary dispositions (mortis causa
in substance), Though he has transferred the property during his lifetime, he remains in control of the
property, and the transfer is intended to take effect only at or after his death.

a. Transfers in Contemplation of Death

- Transfer is impelled by the thought of death.

Ex. Donation Mortis Causa — donation which takes effect upon the death of the donor, and therefore
partakes of the nature of a testamentary disposition.

1. No transfer of title or ownership to the donee;

2. The donor retains ownership (cither legal or beneficial) and remains in full control of the property
during his lifetime;
3. The transfer is revocable by doner at will during his lifetime; and
4. The transfer is void if the donee dies first.

b. Transfer with retention or reservation of certain rights over the income or enjoyment of the
property transferred.
- Transferor reserves his right to the income of the property until his death.
- Transferor reserves his right to the possession or enjoyment of the property until his death.

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 ST. ANTHONY’S COLLEGE
San Jose, Antique

BUSINES EDUCATION DEPARTMENT

AEC 215 Business Taxation

c. Revocable Transfers
The transferor reserves the power to alter, amend, revoke, or terminate the enjoyment of the property
by the transferee, or where such power is relinquished in contemplation of the decedent’s death.
- Whether or not such power is exercised during lifetime. If not exercised during lifetime, it is
considered exercised at the time of death.

d. Property passing under a General Power of Appointment (GPA)

- The decedent is the donee.
- The (appointed) property comes from a donor (of the power) with a GPA for the donee (of the
power). The donee is authorized to dispose of the property by exercising his power of appointment
in designating any person who shall possess or enjoy the property and/or its income.
- A GPA makes the appointed property, for all purposes, the property of the donee of the power of
appointment.

e. Transfer for Insufficient Consideration

In all the taxable transfers above, if the transfer is a bona fide sale for adequate and full consideration
in money or money's worth, no value (or the property transferred) shall be included in the gross estate.

However:
1. If the transfer is not a bona fide sale for an adequate and full consideration in money or money's
worth, there shall be included in the gross estate the excess of the FMV of the property at the time
of death over the value of the consideration received by the decedent.

Included in gross estate = FMV of property at time of death — Consideration received

2. If transfer is fictitious, the total value of the property at time of death shall be included in the gross
estate of the decedent.

The above rules on sufficient consideration are summarized in Table 2-3 below:

f. Claims Against Insolvent Persons

- Receivables due from persons who are insolvent.
- Shall be included in the gross estate at its full amount.
- Bad debt deduction is taken for the uncollectible portion.

g. Proceeds of Life Insurance

Proceeds of life insurance taken out by the decedent upon his own life shall be included in his gross
estate when:
1. His estate, his executor or administrator is the beneficiary; whether nor not the designation of the
beneficiary is revocable; or
2. The beneficiary is any other person, but the decedent retains the power to revoke the designation.

Note: When designation of the beneficiary is not clear, it is presumed to be revocable.

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 ST. ANTHONY’S COLLEGE
San Jose, Antique

BUSINES EDUCATION DEPARTMENT

AEC 215 Business Taxation

Proceeds of life insurance are NOT included in gross estate when:
1. Beneficiary is other than the estate, his executor or administrator, and the designation is
irrevocable.
2. Proceeds of a group insurance policy.
3. Benefits from the GSIS, SSS, accruing by reason of death.

Estate Tax Rate – The net estate of every decedent, whether resident or nonresident of the Philippines,
shall be subject to an estate tax rate of six percent (6%).

Estate Tax Return

The estate tax return is required to be filed in the following cases:

a. When the transfer is subject to estate tax.
b. When the gross estate includes properties for which clearance from the BIR (Certificate Authorizing
Registration (CAR)) is needed before transfer of ownership to. The transferees/heirs can be effected
(regardless of the value of the gross estate)

Who files?
- The executor or administrator, or any of the legal heirs.

Time of filing?
- Within 1 year from death of decedent.
Time of filing can be extended for another 30 days or less in meritorious cases. The application for
the extension of time to file the estate tax return must be filed with the Revenue District Office
(“RDO”) where the estate is required to secure its TIN and file its tax returns. This request shall be
approved by the Commissioner or his duly authorized representative,

Where filed?
a. If decedent was a resident — the administrator or executor shall register the estate and secure e new
TIN therefor from the RDO where the decedent was domiciled at the time of his death.
The administrator/executor shall file the estate tax return with:
i. an Authorized Agent Bank (“AAB”), or
ii. Revenue District Officer or Collection Officer having jurisdiction over the place where the
decedent was domiciled at the time of death, or
iii. duly authorized ‘Treasurer of the city or municipality in which the decedent was domiciled at
the time of his death,
whichever is applicable following prevailing rules and procedures on collection.

b. If decedent was a non-resident (whether citizen er alien) — the TIN for the estate shall be secured
from, and the estate tax return shall be filed with:
i. With the RDO where the executor/administrator is registered.
ii. If the executor/administrator is pot registered the BIR, with the RDO having jurisdiction over
the legal residence of the executor administrator.
iii. If there is no executor/administrator, with the Office of the Commissioner (RDO No. 39, South
Quezon City).

Contents of the Estate Tax Return

1. Value of the gross estate;
2. Gross estate outside the Philippines for non-resident alien decedents:
3. Deductions allowed and taken;
4. Other supplemental data;
5. For estate tax returns showing a gross value exceeding P5 Million, a statement certified by a CPA as
to the assets, deductions, and tax due.

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 ST. ANTHONY’S COLLEGE
San Jose, Antique

BUSINES EDUCATION DEPARTMENT

AEC 215 Business Taxation

Payment of the Estate Tax

When paid?
- Estate tax is paid at the time the return is filed (pay as you file).

Extension of time to pay:

When the Commissioner finds that the payment on the due date of the estate tax or 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.

The application for extension of time to pay the estate tax shall be filed with the RDO where the estate is
required to secure its ‘TIN and file its estate tax return. This request shall be approved by the Commissioner
or his duly authorized representative.

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, conditioned upon the payment of the
said tax in accordance with the terms of the extension.

Any amount paid after the statutory due date of the tax, but within the extension period, shall be subject to
interest but not to surcharges.

Payment by Installment

In case of insufficiency of cash for the immediate payment of the total estate tax due, the estate may be
allowed to pay the estate tax due through the following options:

a. Cash Installment
i. The estate tax return shall be filed within one (1) year from the date of decedent’s death;
ii. The cash installments shall be made within two (2) years from the date of filing of the estate tax
return;
iii. The frequency (i.e., monthly, quarterly, semi-annually, or annually), deadline, and amount of
each installment shall be indicated in the estate tax return, subject to the prior approval of the
BIR;
iv. No civil penalties or interest may be imposed on estates permitted to pay the estate tax due by
installment. However, the Commissioner is not prevented from executing enforcement actions
against the estate after the due date of the estate tax, provided that all the applicable laws and
required procedures are followed/observed; and
v. In case of the lapse of 2 years without the entire estate tax due being paid, the remaining
balance thereof shall be due and demandable subject to the applicable penalties and interest
reckoned from the prescribed deadline for filing the return, and payment of the estate tax.

b. Partial Disposition of Estate and Application of its Proceeds to the Estate Tax Due
i. The estate (ax return shall be filed within one (1) year from the date of decedent's death.
ii. The written request for the partial disposition of the estate shall be approved by the BIR. The
said request shall be filed, together with a notarized undertaking that the proceeds thereof shall
be exclusively used for the payment of the total estate tax due.
iii. The computed estate tax due shall be allocated in proportion to the value of each property.
iv. The estate shall pay to the BIR the proportionate estate tax due of the property intended to be
disposed of.
v. An electronic Certificate Authorizing Registration (“eCAR") shall be issued upon presentation
of proof of payment of the proportionate estate tax due of the property intended to be disposed.
Accordingly, there may be as many eCARs issued as there are properties intended to be
disposed to cover the total estate tax due, net of the proportionate estate taxes previously paid
under this option; and
vi. In case of failure to pay the total estate tax due out of the proceeds of the said disposition, the
estate tax due shall be immediately due and demandable subject to the applicable penalties and
interest reckoned from the prescribed deadline for filing the return and payment of the estate
tax. This is without prejudice to the withholding of the issuance of the eCARs on the remaining
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San Jose, Antique

BUSINES EDUCATION DEPARTMENT

AEC 215 Business Taxation

properties until the payment of the remaining balance of the estate tax due, including the
penalties and interest.

Who pays the estate tax?

1. The executor or administrator. Where there are 2 or more executors or administrators, all of them
shall be severally liable for the payment of the tax.
2. An heir shall be subsidiarily liable but only to the extent oi his share in the net estate.

Payment of Estate as a Prerequisite to Distribution

The estate tax clearance (CAR) issued by the Commissioner or the RDO having jurisdiction over the estate
will serve as the authority to distribute the remaining or distributable properties or shares in the inheritance
to the heirs or beneficiaries.

No judge shall authorize the executor or a judicial administrator to deliver a distributive share to any party
interested in the estate unless a certification from the Commissioner that the estate tax has been paid is
shown.

Payment of Estate Tax as a Prerequisite to Transfer of Shares, Bonds, Rights

There shall not be transferred to any new owner in the books of any corporation, sociedad anonima,
partnership, business, or industry organized or established in the Philippines any share, obligation, bond, or
right by way of gift inter vivos or mortis causa, legacy, or inheritance, unless an eCAR is issued by the
Commissioner or his duly authorized representative.

Payment of Tax as a Requirement for Withdrawal from Bank Account

The executor, administrator, or any of the legal heirs may be allowed to withdraw from a bank deposit of the
decedent within 1 year from the date of death. The amount withdrawn shall be subject to a 6% final
withholding tax.

For joint accounts, the 6% final withholding tax shall be based on the share of the decedent in the joint bank
deposit.

The bank is required to file the prescribed quarterly return on the final tax withheld on or before the last day
of the month following the close of the quarter during which the withholding was made.’ In all cases, the
final tax withheld shall not be refunded nor credited against the tax due on the net taxable estate of the
decedent.

In instances where the bank deposit accounts have been duly included in the gross estate of the decedent,
and the estate tax due thereon paid, the executor, administrator, or any of the legal heirs shall present the
eCAR issued for the said estate prior to withdrawal. Such withdrawal shall no longer be subject to the
withholding imposed under Section 97 of the Tax Code.

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