MODULE 1

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 know the nature of transfer taxes.
2. To be able to understand the basic concepts of succession.
3. To be able to know the bases of succession concerning decedents property.
4. To be able to know who are legitimate successors in the property of a deceased person.
5. To be able to understand and explain the kinds of succession

KEY POINTS
Transfers Transfer Taxation Testate Intestate
Mixed Decedent Heirs Estate

CORE CONTENT
Introduction: This module contains the following
1. Nature of Transfer Tax : Onerous transfer and Gratuitous transfer
2. Basic Concept of Succession : Definition & Elements of Succession
3. Basis of Successions: Family relation, Implicit ownership, Socio-economic
4. Successors: Primary compulsory heirs, Secondary compulsory heirs
5. Kinds of Succession: Testamentary, Intestate, Mixed

IN-TEXT ACTIVITY

Transfer - refers to any transmission of property from one person to another.

Types of transfers
1. Bilateral transfers
Involve transmission of property for a consideration. They referred to as onerous transactions
or exchange. These are subject to income tax.
a. Sale – exchange of goods and/or services for money or its equivalent.
b. Barter – exchange of goods for goods, goods for services or services for services.
2. Unilateral transfers
Involve the transmission of property by a person without consideration. They are commonly
referred to as gratuitous transactions or simply, transfers. These are subject to transfer tax.
a. Donation – gratuitous transfer inter vivos (during the life)
b. Succession – gratuitous transfer mortis causa (after death)
3. Complex transfers

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 Are transfers for less than full and adequate consideration. These are sales made at prices
which are significantly lower than the fair market value of the property sold. These transactions
should be divided to its onerous element (subject to income tax) and gratuitous element
(subject to transfer tax).
The onerous element refers to the difference between the selling price and the cost, while the
gratuitous element refers to the difference between the fair market value and the selling price.

Transfer Tax
A tax imposed on the gratuitous transfer of property ownership. It is a privilege tax which is
imposed on the act of passing ownership of property and not a tax on the property itself.
The transfer of ownership may take effect during the lifetime in the case of the donor’s tax or upon
the death of a person as in the case of estate tax.
.

Nature of Transfer Taxes

1. Privilege tax – it is a tax imposed on the privilege to transfer properties.
2. Ad valorem tax – the amount is dependent on the value of the properties transferred.
3. Progressive tax (NIRC)/Proportional (TRAIN) – under the NIRC, transfer taxes are generally
progressive since they are determined using a schedule of tax rates manifesting increasing
taxes with increasing values of the property transferred. However, TRAIN Law amended this,
making transfer taxes proportional in nature with a flat rate of 6%.
4. National tax – these are levied by the national government.
5. Direct tax – transfer taxes cannot be shifted. The transferor should be the one paying the tax.
6. Fiscal tax – levied to raise money for the support of the government.

Types of Transfer Taxes

1. Estate Tax, which is a tax imposed upon the right of transmitting property, at the time of
death, and the privilege of controlling the disposition of one’s property to take effect upon
death.
2. Donor’s (Gift) Tax is a tax on the privilege of transmitting one’s property to another during the
lifetime without adequate and full valuable consideration.

Succession – is aa mode of acquisition by virtue of which the property, rights and obligations to the
extent of the value of the inheritance, of a person is transmitted through his death to another or
others either by his will or by operation of law. (Art 774, Civil Code)

Types of Succession
1. Testate of Testamentary Succession – is that which results from the designation of an heir,
made in a will executed in the form prescribed by law.
2. Legal or Intestate Succession – when a decedent dies without a will or with an invalid one,
the distribution of the estate shall be in accordance with the default provision of the Civil Code
on succession.

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 3. Mixed Succession – transmission of the decedent properties shall be partly by virtue of aa
written will and partly by operation of law.

Elements of Succession
1. Decedent – the general term applied to the person whose property is transmitted through
succession, whether or not he left a will. If he left a will, he is also called the testator.
2. Estate – the property, rights and obligations of the decedent not extinguished by his death.
This is also referred to as the “inheritance” of the decedent.
3. Heirs – a person called to the succession either by provisions of a will or by operation of law.

Heirs Under Testamentary Disposition

1. Compulsary Heirs
2. Other persons specified by the decedent in his will.

Heirs Under Intestate Succession

1. Compulsary Heirs
2. Relatives up to fifth degree of consanguinity
3. Republic of the Philippines.

Types of Compulsary Heirs

1. Primary heirs – legitimate children and their direct descendants
2. Secondary Heirs – Legitimate/Illegitimate parents and ascendants
3. Concurring Heirs – The surviving spouse and illegitimate descendants.

Definition of terms
1. Legitimate children are those born out of legal marriage
2. Direct descendants refer to the children or, in their absence, grandchildren.
3. Legitimate parents refer to biological parents
4. Illegitimate parents are adopting parents to an adopted child.
5. The surviving spouse is the widow or widower of the decedent
6. Illegitimate descendants are illegitimate children.

SESSION SUMMARY
Transfer taxes are levied on gratuitous transfers such as donation and succession. Donor’s tax is
imposed on donations while estate tax is imposed on succession.

SELF-ASSESSMENT
1. What are transfers?
2. Differentiate onerous transfers from gratuitous transfers.
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 3. Enumerate the different rationale of transfer taxation. Briefly discuss each.
4. Differentiate donation inter vivos and donation mortis causa.

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

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