MODULE 2

Transfer and Business Taxation

SESSION TOPIC 1: Transfer Taxes

LEARNING OUTCOMES
The following specific learning objectives are expected to be realized at the end of the session:
1. To be able to understand the nature and concepts of gross estate, provisions of the tax
laws concerning valuation of gross estate, enumerate property transfers that are exempt
from estate tax and additions to gross estate
2. To be able to understand the nature and concepts of items allowed as deductions from
estate tax, explain the nature of each ordinary deductions and determine the extent to
which these are allowed

KEY POINTS
Gross Estate Estate Tax

CORE CONTENT
Introduction:
This module includes
1. Gross Estate
2. Deductions allowed to estate
3. Tax Credit

IN-TEXT ACTIVITY
Estate Taxation pertains to the taxation of the gratuitous transfer of properties of the decedent to the
heirs upon the decedent’s death.
Governing Law
Decedents who died Between January 1, 1998 to On or after January 1, 2018
December 31, 2017
Shall be governed by The NIRC The TRAIN Law

Classification of Decedents for Taxation Purposes

1. Resident or Citizen Decedents – taxable on properties located within or outside the
Philippines
2. Non-resident Alien Decedents – taxable only on properties located in the Philippines, except
intangible personal property when the reciprocity rule applies

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The Estate Tax Model
Gross Estate P xxx
Deductions from Gross Estate xxx
Net Taxable Estate xxx

GROSS ESTATE
Gross estate contains of all properties of the decedent, tangible or intangible, real or personal, and
wherever situated at the point of death.

Summary of rules on gross estate

Residents or Citizens NRA without NRA with reciprocity
reciprocity
Property location -> Within Abroad Within Abroad Within Abroad
Real Properties √ √ √ x √ x
Personal Properties
- Tangible √ √ √ x √ x
- Intangible √ √ √ x x x

The Gross Estate Formula

Inventory of properties at the point of death P xxx
Less: Exempt transfers xxx
Properties not owned P xxx
Properties owned by excluded by law xxx xxx
Inventory of taxable present properties P xxx
Add: Taxable transfers xxx
Gross Estate P xxx

Transfers of properties not owned by the decedent

1. Merger of the usufruct in the owner of the naked title
2. The transmission or delivery of the inheritance or legacy by the fiduciary heir or legatee to the
fideicommissary
3. The transmission from the first heir, legatee, or done in favor of another beneficiary, in
accordance with the desire of the predecessor
4. Proceeds of irrevocable life insurance policy payable to beneficiary other than the estate,
executor or administrator.
5. Properties held in trust by the decedent
6. Separate properties of the surviving spouse of the decedent
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 7. Transfer by way of bona fide sales

Legal Exclusions
1. Proceeds of group insurance taken out by the company for its employees
2. Proceed of GSIS policy or benefits from GSIS
3. Accruals from SSS
4. United States Veterans Administration (USVA) benefits-RA 136
5. War damage payments
6. All bequests, devises, legacies or transfers to social welfare, cultural and charitable
institutions, no part of net income of which insures to the benefit of any individual; provided,
however, that not more than 30% of the said bequest, devises, legacies or transfers shall be
used by such institutions for administration purposes.
7. Acquisitions and/or transfers expressly declared as non-taxable by law
8. Bank deposits withdrawn from the decedent account during the settlement of the estate

Valuation of The Gross Estate

Properties subject to estate tax shall be appraised at their fair value at the point of death.
Real Properties – appraisal value of real property shall be whichever is higher of:
a. The value ad determined by the Commissioner of Internal Revenue (zonal value), or
b. The value fixed by the Provincial or City Assessors

Shares of Stock – the fair market value shall depend on whether the stocks are listed or unlisted in
the stock exchanges
a. Preferred shared are valued at par value
b. Unlisted common shares shall be valued at their book value
c. For shares which are listed in the stock exchange, RR12-2018 also reinstated the use of
arithmetic mean of highest and lowest quotation at a date nearest the date of death.

DEDUCTIONS FROM GROSS ESTATE

Classification of Deductions
a. Ordinary Deduction – conceptually includes items which diminish the amount of the
inheritance. The only exception here is the deduction for “Property previously taxed” which is a
tax incentive but is classified as ordinary deduction in pursuant to the estate tax form
b. Special Deductions – are items which do not reduce the inheritance but are nevertheless
allowed by law as incentive deductions against gross estate in the determination of the net
taxable estate.
c. Share of the surviving Spouse – pertains to the interest of the surviving spouse in the net
conjugal or command properties of the spouses. This portion is not owned by the decedent,
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 and will not be transmitted by the decedent as part of the inheritance; hence it must be
removed from the taxable estate.

ORDINARY DEDUCTIONS
1. Losses, Indebtedness and Taxes (LIT)
2. Transfer for Public Use
3. Vanishing Deductions (property previously taxes)

SPECIAL DEDUCTIONS
1. Family home – the allowable deduction must not exceed the lowest of fair market value of the
family home as declared or included in gross estate, the extent of the decedent’s interest
therein, or P10,000,000
2. Standard deductions- a deduction in the amount of P5,000,000 without the needs of
substantiation.
3. Benefits under RA4917 -amounts received by the heirs from the decedent’s employer as a
consequence of the death of decedent-employee in accordance with RA4917 is allowed as a
deduction provided that the amount of the separation benefit is included as part of the gross
estate of the decedent.

SHARE OF THE SURVIVING SPOUSE

The share of the surviving spouse is one-half of the net conjugal or community properties of the
spouses.

Rules on Claimable Deductions per Decedent Classification

Resident or Citizen* Non-resident alien
Ordinary deduction √ √

Special deduction √ None, except standard

deductions
Share of surviving spouse √ √

Determination of Foreign Tax Credit

The estate tax due of decedents who are taxable on global estate such as resident citizens, resident
aliens and non-resident citizens shall be further reduced by foreign tax credit for estate taxes paid in
foreign countries.

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The foreign tax credit shall depend on whether the decedent has properties in a simple foreign
country or multiple countries

Single Foreign Country

The foreign tax credit shall be whichever is lower of the actual foreign estate tax paid and the
following limit:

Foreign net taxable estate

World net taxable estate x Philippine estate tax due

Multiple Foreign Country

The lower of actual estate tax and the foregoing limit for each country is determined first.

The final foreign tax credit shall be the lower of the total of the tax credit allowable per country and the
world estate tax credit limit computed as

Total Foreign net taxable estate

World net taxable estate x Philippine estate tax due

SESSION SUMMARY
Some people don’t pay estate tax because the property stays in the family anyway. A property that
remained titled to the original ancestor owner can have conflicting claims. The advent of TRAIN Law
imposes a uniform flat rate of 6% for estate tax, capital gains tax and donor’s tax. The
tax rate is the same – whether the real property is sold or donated during the lifetime of
the person, or transferred to heirs upon the death of the decedent. The Train Law
simplified and reduced the estate tax to 6% based on the net value of the estate, and
even increased the standard deduction to P5 million and family home exemption to P10
million. It now appears that in so far as taxes are concerned, subjecting the assets to
estate tax is more tax-efficient, than transferring them to heirs through sale or donation
during the lifetime of the person.

SELF-ASSESSMENT
Assignment. Computation of the gross estate.
Quiz. Problems on gross estate.

REFERENCES
Refer to the references listed in the syllabus of the subject.

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