FROM QUIZ IN TAX

TRUE OR FALSE
1. If the child is born later, it can succeed if it was already conceived when
the decedent passed away. TRUE
2. If there is no institution of an heir in a will, the will is void. FALSE
3. Other than those imposed by law, the owner is not free to use and
dispose of the property as they see fit. FALSE
4. Donation is perfected from the moment the donor has known the
acceptance by the donee and completed by the delivery. TRUE
5. Children and descendants who verbally or physically abuse the testator
may not inherit any of the testator's possessions. TRUE
6. Onerous transfers are subject to transfer taxes. FALSE
7. Because it is levied on all Filipino inhabitants, whether they are
nationals of the Philippines or not, estate tax is a poll tax. FALSE
8. A resident alien is taxable for donations within and outside Philippines.
TRUE
9. The law presumes that every person is of a sound mind unless proven on
the contrary. TRUE
10. Estate tax is an example of property tax. FALSE
11. Legatee is another term for an inheritor who obtains real estate.
FALSE
12. In succession, even if they were not subject to estate tax, fruits and
credits that mature after the decedent's death are transferred to the
heirs. TRUE
13. The rights to succession are transmitted from the moment the heirs
received their share in the inheritance. FALSE
14. An illegitimate child is not one of the compulsory heirs. FALSE
15. Estate tax is an excise tax. TRUE
MULTIPLE CHOICE
The assets, liabilities, and obligations of a person that do not end with his
death and those that have accrued since the beginning of succession are
referred to as
a. real property
b. Capital
c. Estate
d. gross property
Which statement is false?
a. In succession, fruits and credits maturing after the death of the decedent
pass to the heirs even if they were not subjected to estate tax.
b. The successor inherits all the transmissible property of a decedent
including his liabilities
c. In succession, the successor can refuse the inheritance.
d. The successor can be made liable for the obligations of the decedent
beyond the value of the asset he received.
The estate tax accrues from the moment of
a. end of the month of death of the decedent
b. the notice of death of the decedent
c. the death of the decedent
d. valuation of the estate of the decedent
A donation inter-vivos but due to thought of death is:
a. Subject to donors tax.
b. Subject to inheritance tax.
c. Subject to estate tax if for inadequate consideration.
d. Subject to sales tax.
John died, leaving his wife Mary. The following properties were left upon
his death:
a. Durian plantation in Davao, brought into marriage by John - 3,000,000
b. Income of plantation in Davao earned during marriage - 250,000
c. Shares of stocks with Aga corp. earned by Mary during marriage -
420,000
d. Dividends from Aga Corp. earned during marriage - 52,000
e. Bus in Cebu, inherited by John during the marriage - 760,000
f. Income of passenger bus earned during the marriage - 23,000
g. Riceland in Legazpi, inherited by Mary before marriage - 460,000
h. Income of Riceland in Legazpi earned during the marriage - 50,000
i. Underwear(panties, brassiere) of Mary - 85,000
j. Cash, unidentified when and by whom acquired - 55,000
k. Jewelries inherited by Mary during marriage from her mother - 320,000
How much is the gross of John under the absolute community of
property?
a. 3,815,000
b. 4,610,000
c. 3,760,000
 d. 5,070,000
Which of the following proceeds of life insurance is to be included
in the taxable gross estate?
a. Amount receivable by any beneficiary designated in the insurance
policy.
b. Insurance proceeds from SSS and GSIS
c. Proceeds of group insurance taken out by a company for its employees.
d. Amount receivable by any beneficiary, irrevocable, designated in the
policy.
Statement 1: The estate tax accrues at the moment of death of the decedent.
Statement 2: In estate taxation, the taxpayer is the decedent.
Which of the above statement is correct?
a. Both statements are false.
b. Statement 2
c. Both statements are true.
d. Statement 1
The transfer of property by donation and succession is required by law.
The transferor must pay taxes under ________ theory.
a. ability to pay
b. benefit received
c. tax evasion
d. tax recoupment
The elements of succession are as follows, except
a. Executor
b. Heir
c. Decedent
d. estate
John died, leaving his wife Mary. The following properties were left upon
his death:
a. Durian plantation in Davao, brought into marriage by John - 3,000,000
b. Income of plantation in Davao earned during marriage - 250,000
c. Shares of stocks with Aga corp. earned by Mary during marriage -
420,000
d. Dividends from Aga Corp. earned during marriage - 52,000
e. Bus in Cebu, inherited by John during the marriage - 760,000
f. Income of passenger bus earned during the marriage - 23,000
g. Riceland in Legazpi, inherited by Mary before marriage - 460,000
h. Income of Riceland in Legazpi earned during the marriage - 50,000
i. Underwear(panties, brassiere) of Mary - 85,000
j. Cash, unidentified when and by whom acquired - 55,000
k. Jewelries inherited by Mary during marriage from her mother - 320,000
How much is the gross of John under conjugal partnership of gain?
a. 4,610,000
b. 3,760,000
c. 3,815,000
d. 5,070,000
Which of the following is not subject to estate tax?
a. A donation inter vivos
b. A donation mortis causa
c. A transfer during the lifetime for less than full and adequate
consideration
d. A succession to the property of a decedent who left no last will and
testament
Transfer that is somewhat influenced by will and partially by the
application of the law
a. intestate succession
b. testamentary succession
c. legal succession
d. mixed succession
Statement 1: If a person died single, his entire net exclusive properties
becomes subject to the estate tax.
Statement 2: If a person died married, his entire net exclusive properties and
entire net join properties with the spouse become subject to the estate tax.
a. Statement 1 is true; statement 2 is false.
b. Both statements are false.
c. Statement 1 is false; statement 2 is true.
d. Both statements are true.
A person who inherits real property thru a will is called
a. Heir
b. Legatee
c. Devisee
 d. sucessor
As a result of the legislation reserving a portion of the testator's property
for specific heirs known as compulsory heirs, the testator is unable to
dispose of this property called
a. Legitimate
b. Estate
c. free portion
d. legitime
John died, leaving his wife Mary. The following properties were left upon
his death:
a. Durian plantation in Davao, brought into marriage by John - 3,000,000
b. Income of plantation in Davao earned during marriage - 250,000
c. Shares of stocks with Aga corp. earned by Mary during marriage -
420,000
d. Dividends from Aga Corp. earned during marriage - 52,000
e. Bus in Cebu, inherited by John during the marriage - 760,000
f. Income of passenger bus earned during the marriage - 23,000
g. Riceland in Legazpi, inherited by Mary before marriage - 460,000
h. Income of Riceland in Legazpi earned during the marriage - 50,000
i. Underwear(panties, brassiere) of Mary - 85,000
j. Cash, unidentified when and by whom acquired - 55,000
k. Jewelries inherited by Mary during marriage from her mother - 320,000
How much is the exclusive properties of John under conjugal partnership
of gain?
a. 5,070,000
b. 3,815,000
c. 3,760,000
d. 4,610,000
In the Philippines, all of the following are regarded as intangibles, except
a. Shares, obligations or bonds issued by any corporation organized or
constituted outside Philippines in accordance with its laws.
b. Shares, obligations or bonds by any foreign corporation 85% of the
business of which is located in the Philippines.
c. Shares, obligations of bonds issued by any foreign corporation if such
shares, obligations or bonds have acquired a business situs in the
Philippines.
d. Franchise which must be exercises in the Philippines
 FROM REVIEW LAST SATURDAY
TRUE OR FALSE
1. Estate tax is imposed on transfers of property without consideration
between two or more living individuals during the time of transfer.
FALSE
2. In the absence of compulsory heir and collateral relatives, the
government has the right over the intestate property. TRUE
3. For married decedents, deductions are presumed common or conjugal
unless proven to be exclusive. TRUE
4. Standard deduction of 5 million only applies to married decedents who
are resident citizen. FALSE
Which of the following cases would estate tax won't apply?
a. A corporation which elects the board of directors as administrative of
its property.
b. A corporation which beneficiary is a retired employee.
c. A 25 year old financial analyst which parent is elected as his heir.
d. A 70 year old citizen assigned the free portion of his asset to a foreigner.
The object of estate tax is
a. right to transfer
b. the heir
c. the decedent
d. property of the decedent
A decedent died intestate with 2 million in estate. If he has 4 legitimate
children, 1 illegitimate child and 1 surviving spouse, how much shall the
illegitimate child inherit?
Solution:
2,000,000 x (0.5/5.5) = Php 181,818.1818
 Transfer
and
Business Tax
 MODULE 1
Introduction to Transfer Taxation

Introduction

In a narrow legal sense, the transfer tax is basically a transaction fee enforced
on the transfer of ownership of property from one entity to another. This module
presents the fundamentals of transfer taxation that will sets forth the very essence of
gratuitous and onerous transfers.

Learning Objectives

After studying this module, you should be able to:

1. Explain the concept of transfer.
2. Differentiate types of transfers.
3. Compare inter-vivos and mortis causa donation.
4. Describe the rationale and nature of transfer tax.
5. Interpolate the general rule in transfer taxation as affected by the
classification of tax payer and situs of transfer.
6. Identify the validity of a transfer.

Learning Content

What Is a Transfer Tax?

A transfer tax is a charge levied on the transfer of ownership or title to property
from one individual or entity to another. A transfer tax may be imposed by a state,
county, or municipality. It is usually not deductible from federal or state income taxes,
although it may be added to the cost basis when profit on the sale of securities and
investment property is calculated. Transfer tax is considered an excise tax in some
states (Kagan, 2020).
Transfer taxes are excise or privilege taxes.

Types of transfers:
1. Bilateral transfer
–transfer for consideration
–onerous transaction/exchange
–subject to income taxation for realized gain
Ex. Sale –exchange for money
Barter –exchange for another property
2. Unilateral transfer
–transfer without consideration
–gratuitous transactions or transfer

Types of Unilateral Transfer

1. Donation (donation inter-vivos) – gratuitous transfer from living donor
2. Succession (donation mortis causa) – gratuitous transfer from deceased person
upon death to his heirs
Comparison Inter-vivos vs Mortis causa
Inter-vivos Mortis causa

Transferor

Nature

Reason

Scope of the transfer of

properties

Property given

Transferee

Transfer tax

Timing of valuation of
donation

3. Complex transfer
–transfer for less than full and adequate consideration
–sales made lower FMV of property
Tax rules on transfer for adequate consideration
● Pure exchanges, subject to income tax only
Transfer for less than adequate & full consideration
● Transfer element (gratuity) – subject to transfer tax either mortis causa or
inter-vivos
● Exchange element (indirect donation) –subject to income tax
Example:
Assume a property with a fair market value of P50,000 and tax basis of P10,000
is sold for merely P30,000.

P20,000 will be subjected to transfer tax (transfer element)

P20,000 will be subjected to income tax (exchange element)

Rationale of transfer taxation

1. Tax evasion/minimization theory – a way to defeat income taxation with the
intention/ illegal
2. Tax recoupment theory –natural decreasing of income taxation
3. Benefit received theory –most dominant rationalization of transfer taxation
4. State partnership theory –gov’t is taking fair share by taxing the transfer of wealth
to another person
5. Wealth redistribution theory –transfer tax is redistributed to benefit society
6. Ability theory –transfer property is ability to pay tax

Nature of Transfer Taxes

1. Privilege tax
Transfer tax is as a form of privilege tax rather than a form of penalty it is
imposed because the transferor (donor or decedent) is exercising privilege in the form
of assistance rendered by the government in effecting the transfer of properties by way
of donation or succession.
2. Ad valorem tax
The amount of transfer tax is dependent on the value of the properties
transferred. Thus, valuation of the property transferred is needed in order to determine
the amount of the tax.
3. Proportional tax
Transfer taxes under the TRAIN law Imposed at flat 6% of the net estate or gift.
4. National Tax
Transfer taxes are levied by the national government. Local government units are
legally precluded from imposing the same.
5. Direct tax
Transfer taxes cannot be shifted. Transferor-donor or transferor-decedent is the
one subject to tax.
6. Fiscal tax
Transfer taxes are levied to raise money for the support of the government.

Classification of Transfer Taxpayers

1. Residents or Citizens such as:
Resident citizens
Resident aliens
Non-resident citizens
These are taxable on global transfers of property.
2. Non-resident Aliens
These are taxable on Philippine transfers of property.
The citizenship of juridical persons is determined by the incorporation tests. Juridical
persons that are organized in the Philippines are considered Philippine citizens. Those
organized abroad are considered aliens.

In donor's taxation, the term resident citizen or alien includes domestic or resident
foreign corporation. Obviously, corporations are not subject to estate taxation.
Situs of Transfer
Transfers occur in the location of the property. Properties are transferred mortis
cause in the place where they are located at the point of death. Likewise, properties are
transferred inter-vivos in the place where they are located at the date of donation.

General Rule in Transfer Taxation

1. Resident/Citizen – subject to tax on all transfer of properties, global transfer of
properties
2. Non-resident alien (NRA) –taxable only on properties located in the Philippines
at the date of transfer
Situs of Properties –location of the property
The ff. properties considered located in Philippines
1. Franchise exercisable in Philippines
2. Shares, obligations, or bonds issued by any corporation or sociedad anonima or
constituted in the Phil,
3. Shares, obligations or bonds by any foreign corporation 85% of the business is
located in Phil.
4. If such shares, obligations or bonds issued by any foreign corporation acquired
business situs in Philippines.
5. Shares or rights in any business or industry established in Philippines
6. Any personal property, tangible/intangible located in Philippines

Reciprocity rule on non-resident aliens

*intangible personal properties of NRA or Filipino non-resident are exempt from
Philippine transfer tax
Examples of intangible properties:
1. Financial assets 2. Accounting
a. Cash intangible assets
b. Receivables or a. Patent
credit b. Franchise
c. Investment in c. Leasehold right
bonds d. Copyright
d. Shares of stock e. Trademark
in a corp.
e. Interest in
partnership

Motive of donation is the determining factor

Example of motives (inter-vivos)
1. reward services rendered
2. relieve the donor of the burden of management of the property
3. save on income tax
4. see children financially dependent
5. see children enjoy property while still alive
6. settle family disputes
Example of motives (mostis causa)
1. take effect at the death of donor
2. last will and testament
3. retention of certain rights until death
4. revocable transfer
5. conditional transfer

Non-Taxable Transfers
1. Void Transfer –prohibited by law; invalid transfer
● property not owned
● donation between spouses
● refusal of done
● oral donation
2. Quasi-transfer –transfer that not involve transfer of ownership
● right to usufruct over the property to the owners naked title
● transfer of property to real owner
● transfer from first heir to second, predecessor
3. Incomplete transfer – transfer or deliver but ownership is not, it will transfer upon
happening future events/conditions
Types of Incomplete transfer
1. Conditional transfer
2. Revocable transfer
3. Transfer in contemplation of death
4. Transfer with reservation of title until death
How to incomplete transfer are completed?
1. Conditional transfer inter-vivos
a. Fulfillment of condition by transferee
b. Waiver of the same by the transferor
2. Revocable transfer to inter-vivos
a. Waiver by transferor exercising his right of revocation
b. Lapse of his reserved right to revoke
3. Reservation of title of property until death are completed

Learning Activity
 Identify inter-vivos and/or mortis causa donation in the following illustration.
Don Juan owns a hotel and a commercial building. He promised to donate the hotel to
son Juanito and the building to his other son Juanico. Don Juan was able to donate the
hotel Juanito when the property has a FMV of P40M. While finalizing the deed of
donation of the building to Juanico, Don Juan met an accident and died, during which
the FMV of the hotel and building is P45M and P50M respectively. A year after his
death, the properties have FMV of P48M and P52M.

Learning References

Banggawan, R. (2019). Business and transfer taxation. 2019 ed. Pasay, Philippines:
Real Excellence Publishing.

De Leon, H. & De Leon, H. Jr. (2013). The law on transfer and business taxation. 15th
ed. Manila, Philippines: Rex Book Store.

Kagan, J. (2020). What is a transfer tax? Retrieved January 26, 2021 from
https://www.investopedia.com/terms/t/transfertax.asp
 MODULE 2
The Concept of Succession and Estate Tax

Introduction

The Bureau of Internal Revenue defines estate tax is a tax on the right of the
deceased person to transmit his/her estate to his/her lawful heirs and beneficiaries at
the time of death and on certain transfers, which are made by law as equivalent to
testamentary disposition. It is not a tax on property. It is a tax imposed on the privilege
of transmitting property upon the death of the owner. The Estate Tax is based on the
laws in force at the time of death notwithstanding the postponement of the actual
possession or enjoyment of the estate by the beneficiary. This module discusses only
the basic rules of succession and introduces estate tax.

Learning Objectives

After studying this module, you should be able to:

1. Explain the concept of succession.
2. Present examples of types and elements of succession.
3. Interpolate the nature of estate tax.
4. Discuss taxation rules for different types of decedents
5. Discourse the model of estate taxation

Learning Content

Succession –mode of acquisition of property, rights, and obligation of a person to the

extent of the value of inheritance are transfer through his death
*Inheritance includes all property, rights and obligation of a person which are not
extinguished by death
Decedent –deceased or dead person

Types of SUCCESSION
1. Testamentary Succession –made in a will
o last and will and testament –written document
o testate – having left a valid will
2. Intestate Succession –without will or with invalid one
3. Mixed Succession –partly with written will and partly by operation of law
 Will –act whereby person is permitted to control to a certain degree of the
disposition of this estate, to take effect after his death
–expression of the decedent’s desire

Types of will
1. Holographic will –written, dated and signed by testator
2. Notarial will –notarized, signed by decedent and witnesses
3. Codicil –supplement or addition to a will, made after execution of a will; need to
be executed to be valid
Note: Every will must be acknowledged before notary public by testator and
witnesses

Nature of succession
Succession –is gratuitous transfer from deceased person in favor of his successor;
donation mortis causa
–involves net properties of decedent; heirs will inherit remaining of
decedent after satisfying decedent’s indebtedness and obligation incl. estate tax
Note: Heir shall not inherit the debt of decedent

Elements of Succession
1. Decedent –person who transfer properties through his succession, whether or
not with will
● testator - a person who has made a will or given a legacy
(universal)
● testatrix - a woman who has made a will or given a legacy
2. Estate –transfer of right, obligation and properties not extinguished by his death;
also called: inheritance of the decedent
3. Heirs –person called to the succession either by will or operation of law

Who are the heirs?

Compulsory heir –certain person who is identified by law
Types of Compulsory Heirs
1. Primary Heirs –legitimate children and direct descendants
2. Secondary Heirs –legitimate/illegitimate parents/ascendants
3. Concurring Heirs –surviving spouses and illegitimate descendants
Classification of Children
Under Civil Code of the Philippines, children are classified as follows:
1. Legitimate Children – those children conceived and born during marriage of
parents whose marriage is perfectly valid or voidable as long as the marriage has
not yet been annulled
2. Legitimated Children – those children conceived and born of unmarried parents
who have no legal impediments to marry each other and who subsequently
contracted marriage and recognized the children as their own. A child of a widow
who contracted marriage within six months from the death of her first husband
due to the question of the paternity of the child
3. Illegitimate Children
a. Natural Children – those born outside wedlock of parents, at the time of
the conception of the former, were not disqualified by any impediment to
marry each other (ex: natural children proper, natural children by legal
fiction)
b. Not Natural Children - those born outside wedlock of parents, at the time
of the conception of the former, were disqualified by any impediment to
marry each other (ex. adulterous, incestuous, spurious)
4. Adopted Children – children made by virtue of a judicial process or those
judicially ordered by the competent court and adjuring that the children to all legal
intents and purposes

Definition of terms
1. Direct descendants –children or grandchildren
2. Legitimate parents –biological parents
3. Illegitimate parents –adopting parents
4. Surviving spouse –widow/widower of descendants
5. Illegitimate descendants –illegitimate children
Note: under family revised code, adoptive parents can now qualify as secondary heirs
sharing 50:50 with biological parents

*in absence of compulsory heirs, ff. shall inherit in order of priority:

1. Collateral relatives up to 5th degree of consanguinity
2. Philippine gov’t
*priority is given to collateral relative in closest degree
Summary of Rules:
1. Concurring heirs
a. Descendants
b. Ascendants
2. Relatives in the collateral line up to 5th degree
3. Republic of the Philippines

Note: second cousins are on 6th degree, cannot inherit

ORDER OF INTESTATE SUCCESSION

Compulsory Heirs in Legitimes Intestate Heirs

1. Legitimate child/descendant 1. Legitimate child/descendant
2. Illegitimate child/descendant 2. Illegitimate child/descendant
3. Legitimate parent/ascendant 3. Legitimate parent/ascendant
4. Illegitimate parent 4. Illegitimate parent
5. Surviving Spouse 5. Surviving Spouse
6. Brother/sister
Nephew/niece
7. Other collaterals up to the 5th
degree
8. State

Notes:
- The first 5 intestate heirs exclude the last 3, except intestate heirs 5&6, who will
concur

Legitime –part of testator’s property which he cannot dispose of because the law has
reserve it for certain heirs, called compulsory heirs

Disinheritance and Repudiation

● Decedent can disinherit an heir on certain grounds
● Heirs may repudiate their share in inheritance of decedent

Other persons in succession

1. Legatee –person whom gifts of personal property is given by a will
2. Devisee –person whom gifts of real property is given by a will
3. Executors –person named by decedent who shall carry out the provision of will
4. Administrators –person appointed by court to manage distribution of estate of
decedent

Estate Taxation –pertain to the taxation of gratuitous transfer of properties of decedent

to the heir upon his death; governed by law

NATURE OF ESTATE TAX:

1. EXCISE TAX –estate tax is not tax on property but privilege tax to transfer
property through death
2. REVENUE/GENERAL TAX –estate tax is intended as revenue or fiscal measure
3. AD VALOREM TAX –estate tax is depending upon the value of estate
4. NATIONAL TAX –estate tax is imposed by gov’t
5. PROGRESSIVE TAX –estate tax is tax based on progressive rates
Classifications of Decedents for taxation Purposes
1. Resident or Citizen Decedents
2. Non-Resident Decedents

ESTATE TAX MODEL

Gross Estate Ᵽ XXX
Less: Deductions from gross estate XXX
Net Taxable estate Ᵽ XXX

GROSS ESTATE –pertains to the totality of the properties owned by decedent at point
of his death
Two concepts under gross estate:
a. Exclusion gross estate –not included from estate taxation
b. Inclusion gross estate –included as part of taxable gross estate

Deduction (expenses of death, obligation of decedent, losses of property which also

exemption from estate tax)

Net Taxable estate –net properties of the decedent after deductions allowable by law;
subject to estate tax

Learning Activity

Identify the validity of the will in the following illustrations.

1. Assume Maria named Jose in her will as her sole beneficiary. Jose died ahead of
Maria.

2. Juan Dela Cruz wrote his last will and testament as follows:
“I am devising my parcel of land in Camella Homes – Batangas to my closest and
favorite daughter.”

Sgd Juan Dela Cruz

Date: November 15, 2020

Juan died on January 5, 2021 leaving 5 legitimate daughters.

3. On the eve of December 24, 2020, Pedro Penduko accidentally obliterated his last
will and testament. On December 25, 2020, he died due to heart attack.
 Learning References

Banggawan, R. (2019). Business and transfer taxation. 2019 ed. Pasay, Philippines:
Real Excellence Publishing.

De Leon, H. & De Leon, H. Jr. (2013). The law on transfer and business taxation. 15th
ed. Manila, Philippines: Rex Book Store.

Tabag, E. & Garcia, E. (2020). Transfer and business taxation. 2020 ed. Quezon
City, Philippines: EDT Book Publishing.
 MODULE 3
Gross Estate – Inclusions and Common Rules

Introduction

Estate tax is governed by the statute in force at the time of death of the decedent.
Upon the decedent’s death, succession takes place, and the right of the State to tax the
privilege to transmit the estate automatically arises. As of January 1, 2018, the
Philippine Tax Code imposes an estate tax at the rate of six percent (6%) based on the
net value of the estate whether the decedent is a resident or a non-resident of the
Philippines. This module presents the inclusions and common rules alongside gross
estate.

Learning Objectives

After studying this module, you should be able to:

1. Define the composition of gross estate.
2. Explain the sharing of legitimes.
3. Identify the legitimes and free portion of the estate.
4. Compute for testate and intestate inheritance.

Learning Content

Composition of Gross Estate

The gross estate is divided into two main categories for succession purposes, the
legitime and free portion as shown below:

Decedent’s Estate To be inherited by:

Legitime Compulsory Heirs:
This portion of the estate is reserved by
law specially to compulsory heirs
Free portion Compulsory Heirs and/or Voluntary
Heirs
● As provided in the last will and
testament
● In the absence of a will, this portion
of the estate shall be distributed to
“intestate heirs” based in the order
of priority
 Legitime is part of a testator’s property which he cannot dispose of because the
law has reserved it for certain heirs who are, therefore called compulsory heirs. The
compulsory heirs cannot be deprived of their legitime by the testator except by
disinheritance. On the other hand, free portion is that portion of the estate which the
testator can freely dispose of. Hence, anyone may inherit from free portion (compulsory
or voluntary heirs). Voluntary heirs are those institute by the testator in his will to
succeed to the inheritance of the portion thereof of which the testator can freely
dispose.

Sharing of Legitimes by the Compulsory Heirs

Survivor Legitime Notes
LC ½ Divide by the number of LC, whether they survive
alone or with concurring CH
1 LC ½
SS ¼

2 or more LC ½
SS Equal to 1 LC

LC ½ All the concurring CH get from the half free

SS ¼ portion, the share of the SS having preference
IC ½ of 1 LC over that of the IC, whose share may suffer
reduction pro-rata because there is no preference
among themselves
LPA ½ Whether they survive alone or with concurring CH

LPA ½ IC succeed in the ¼ in equal shares

IC ¼

LPA ½
SS ¼

LPA ½
SS 1/8
IC ¼

IC ½ Divide equally among the IC

SS 1/3
IC 1/3
SS ½ 1/3 if marriage is in articulo mortis and deceased
spouse dies within 3 months after marriage
IP ½
 IP ¼ Only the parents of IC are included. Grand
SS ¼ parents and other ascendants are excluded

Illustrations:
Case A: Mr. Jo Ng died leaving an estate valued at 12,000,000. The surviving heirs
were his spouse, 2 legitimate children and 1 illegitimate child.
The distribution of his estate should be as follows:
Legitimate Children (1/2): P6,000,000
LC 1 P3,000,000
LC 2 3,000,000
Illegitimate child (1/2 of 1 LC) 1,500,000
Surviving Spouse (1/4) 3,000,000
Free Portion (remainder) 1,500,000
Total P12,000,000

Case B: Assume that the estate is P12,000,000 and the decedent is survived only by
his 2 illegitimate children.
The distribution of the estate should be as follows:
Illegitimate Child (1/2) P6,000,000
IC 1 P3,000,000
IC 2 3,000,000
Free Portion (remainder) 6,000,000
Total P12,000,000

Case C: Assume the same date in Case A except that Mr. Ng provided a last will and
testament giving P5,000,00 to his secretary.
The distribution of his estate should be as follows:
Legitimate Children (1/2): P6,000,000
LC 1 P3,000,000
LC 2 3,000,000
Illegitimate child (1/2 of 1 LC) 1,500,000
Surviving Spouse (1/4) 3,000,000
Free Portion (Secretary) 1,500,000
Total P12,000,000

A will is an act whereby a person is permitted, with the formalities prescribed by

law, to control to a certain degree the disposition of his estate to take effect after his
death (Art. 783 NCC). The making of a will is a strictly personal act. It cannot be left in
whole or in part of the discretion of a third person, or accomplished through the
instrumentality of an agent or attorney. All persons who are not expressly prohibited by
law may make a will. The persons prohibited by law to make a will are those below 18
years old and those who are not of sound mind at the time of its execution.
 The law presumes that every person is of sound mind, in the absence of proof to
the contrary. The burden of proof that the testator was not of sound mind at the time of
making his dispositions is on the person who opposes the probate of the will. If the
testator, one month, or less, before making his will was publicly known to be insane, the
person who maintains the validity of the will must prove that the testator made it during
a lucid interval. Supervening incapacity does not invalidate an effective will, nor is the
will of an incapable validated by the supervening of capacity. A married woman may
make a will without the consent of her husband, and without the authority of the court. A
married woman may dispose by will of all her separate property as well as her share of
the conjugal partnership or absolute community property.

Requisites for a valid Notarial Will

a. it must be in writing and executed in a language or dialect known to the testator
b. it must be subscribed at the end thereof by the testator himself or by the testator’s
name written by some other person in his presence and by his express direction
c. it must be attested and subscribed by three or more credible witnesses in the
presence of the testator and of one another

The following are disqualified from being witnesses to a will:

● Any person not domiciled in the Philippines
● Those who have been convinced of falsification of a document, perjury, or false
testimony

Foreign Wills
The will of an alien who is abroad produces effect in the Philippines if made with
the formalities prescribed by the law of the place in which he resides, or according to
the formalities observed in his country, or in conformity with those which the Philippine
civil code prescribes. A will made in the Philippines by a citizen or subject of another
country, which is executed in accordance with the law of the country of which he is a
citizen or subject, and which might be proved and allowed by the law of his own country,
shall have the same effect as If executed according to the laws of the Philippines.
When a Filipino is in a foreign country, he is authorized to make a will in any of
the forms established by the law of the country in which he may be. Such will may be
probated in the Philippines (Art. 815 NCC).

Important Things to know

1. Wills must still follow the laws on compulsory heirs. The so called “free-portion”
is the only part of the estate that the owner can give to whomever they wish.
2. Wills cannot remove an heir from the estate unless there is a court proceeding
called disinheritance that has been undertaken.
3. When a child has passed away before a parent or grandparent, his children are
entitled to inherit through the right of representation. However, the share the children
inherit is the share of their parent and not more than that.
 4. If the parent has passed away, nephews and nieces may inherit from their uncle
or aunt who have no children or will through the right of representation. However, the
share the children inherit is the share of their parent and not more than that.
5. Legitimate, illegitimate and adopted children inherit in all situations. Ampons do
not inherit unless formally adopted or unless they are specified in the will.

Illustrations:
Case D: Suppose there is 1 Legitimate child or Legitimate children. If the estate is worth
P1M, then the legitimate child must inherit _________.

With a will:
Legitimate children (or their children) – 1/2 of the estate divided amongst them
Free portion – 1/2 of the estate

LC (1/2) P500,000
Free portion (1/2) 500,000
If there are 4 legitimate children, then each inherits P125,000. The remaining P500,000 can be left to
whomever the estate owner wants as stated in the will.

Without a will:
LC P1,000,000
If there are 4 legitimate children, then each inherits P250,000.

Case E: Mr. Ritz Rich died leaving P45,000,000 (intestate) estate for his two legitimate
children, Harold and Alex, and two illegitimate children, Elon and Etan.
The estate shall be partitioned as follows:
Heir Share Partition Inheritance
Harold 1.0 1/3 P15,000,000
Alex 1.0 1/3 15,000,000
Elon 0.5 0.5/3 7,500,000
Etan 0.5 0.5/3 7,500,000
Total 3.0 P45,000,000

Revocation of wills and testamentary dispositions

A will may be revoked by the testator at any time before his death any waiver or
restriction of this right is void (Art. 828). A revocation done outside the Philippines, by a
person who does not have his domicile in the Philippines, is valid when it is done
according to the law of the place where the will was made, or according to the law of the
place in which the testator had his domicile at the time and if the revocation takes place
in the Philippines when it is in accordance with the provisions of the new civil code.

Requisites of Disinheritance
1. effected only through a valid will
2. for a cause expressly stated by law
3. cause must be stated in the will itself
4. cause must be certain and true
5. unconditional
6. total
7. the heir disinherited must be designated in such a manner that there can be no doubt
as to his identity

Common Causes for Disinheritance of children or descendants, parents or

ascendants, and spouse:
1. When the heir has been found guilty of an attempt against the life of the testator,
his/her descendants ascendants, and spouse in case of children and parents
2. When the heir has accused the testator of a crime for which the law prescribes
imprisonment for 6 years or more, if the accusation has been found groundless
3. When the heir by fraud, violence, intimidation or undue influence causes the testator
to make a will or to change one already made
4. Refusal without justifiable cause to support the testator who disinherits such heir

Peculiar Causes for Disinheritance

Children/Descendants:
a. When the child or descendant has been convicted of adultery or concubinage
with the spouse of the testator
b. Maltreatment of the testator by word or deed by the child/descendant
c. When the child or descendant leads a dishonorable or disgraceful life
d. When the child or descendant is convicted of a crime which carries with it a
penalty of civil interdiction.

Parents/Ascendants:
a. When the parents have abandoned their children or induced their daughters to
live a corrupt or immoral life, or attempted against their virtue
b. When the parent or ascendant has been convicted of adultery or concubinage
with the spouse of the testator
c. Loss of parental authority for causes specified in the Civil Code
d. Attempt by one of the parents against the life of the other, unless
there has been reconciliation between them

Spouse:
a. When the spouse has given cause for legal separation
b. When the spouse has given grounds for loss of parental authority

The decedent’s gross estate is comprised of all the properties, whether real
or personal, tangible or intangible, wherever situated. This includes any interest
in the properties at the time of death including transfers in contemplation of
death, transfers for insufficient consideration, revocable transfers, properties
passing under a general power of appointment, and proceeds of life insurance.
However, if the decedent was neither a resident nor a citizen of the Philippines at the
time of his or her death i.e. a non-resident alien, only the portion of the estate situated in
the Philippines is included in the taxable estate, except intangible personal property,
whose exclusion from the gross estate is subject to the rule on reciprocity.

Real property includes land and whatever is built on the land or attached to it. It
includes buildings (like houses and grain silos), fences, tile lines, and mineral rights, for
example.
Tangible personal property has physical substance and can be touched, held, and
felt. Examples of tangible personal property are numerous, just a few examples are
furniture, vehicles, baseball cards, cars, comic books, jewelry, and art.

Intangible personal property includes assets such as bank accounts, stocks, bonds,
insurance policies, and retirement benefit accounts. Intangible personal property
includes:

● franchise which must be exercised in the Philippines;

● shares of stock, obligations or bonds issued by corporations organized or
constituted in the Philippines;
● shares, obligations or bonds issued by a foreign corporation 85 percent of the
business of which is located in the Philippines;
● shares of stock, obligations or bonds issued by a foreign corporation if such
shares, obligations or bonds have acquired a business situs in the Philippines,
that is, they are used in the furtherance of its business in the Philippines; and
● shares, rights in any partnership, business or industry established in the
Philippines.

Excluded from the gross estate:

● proceeds/benefits coming from the Government Service Insurance System if the

decedent is a government employee;
● accruals from the Social Security System when the deceased person worked in
the private sector;
● proceeds of life insurance where the beneficiary is irrevocably appointed;
● proceeds of life insurance under a group insurance taken by the employer (not
taken out upon his life);
● transfer by way of bona fide sales;
● transfer of property to the national government or to any of its political
subdivisions;
● exclusive property of the surviving spouse;
● merger of usufruct in the owner of the naked title;
 ● properties held in trust by the decedent; and
● acquisition and/or transfer expressly declared as not taxable.
Valuation of Gross Estate
Properties subject to estate must be appraised at FV @ point of death
Fair value –refers to the amount at which 2 willing buyers and sellers could transact an
exchange
Valuation rules:
1. FV of property at time of death, included in gross estate
2. FV rules set by law or revenue regulation
3. In default of such FV rules, reference under GAAP is applied
4. Encumbrances on the property or decrease in value after death shall be ignored

Fair Value Rules on the ff. assets:

1. Real properties (whichever is higher)
a. Value at CIR (zonal value), if no zonal value it shall be based on FMV appears at
latest tax declaration
b. Value fixed by Provincial/City Assessor (Assessed value)

2. Shares of stock
a. Preferred share at par value
b. Unlisted common or ordinary share at Book Value
c. Listed in the stock exchanges or PSE, FMV closest at date of death or trading
price at date nearest to the date of death, if none is available on the date of death.

3. Usufruct and annuities

*included in gross estate
*Annuity at present value
*Usufruct right to income over property

4. Other properties
a. Used properties: brand new (purchase price), FV at second hand
b. Pawned jewelry properties (loan-to-value ratio)
c. Loan receivables –fair value at fixed amount in the contract

5. Taxable Transfer –transfer without consideration are included in gross estate at

fair value at date of death less consideration paid at the date of transfer.

Summary of rules on gross estate

Illustration:
Case F: A non-resident alien decedent left the following estate:
House & Lot in Hongkong, inherited before marriage P15,000,000
Car, acquired during marriage in Cebu 1,500,000
Shares of stock issued by a foreign corporation 250,000
Bank deposit with PNB branch in New York 500,000
Shares of stock issued by PLDT group of companies 500,000
5-year, 12% promissory note, received 2 years ago during
Marriage from a resident in the Philippines 500,000

If with no reciprocity
Solution:
Car, acquired during marriage in Cebu P 1,500,000
Shares of stock issued by PLDT group of companies 500,000
5-year, 12% promissory note, received 2 years ago during
Marriage from a resident in the Philippines 500,000
Interest Income (P500,000 x 12% x 2years) 120,000
P 2,620,000
If with reciprocity
Solution:
Car, acquired during marriage in Cebu P 1,500,000

Learning Activity

1. Thomas bought a new car with cash price of P3,000,000. He bought the car on
installment with the following terms: down payment of P500,000 and annual installment
of P700,000 for four years. On his way, he run over an approaching truck and died.
Determine the gross estate.

2. The decedent devised to his son a 1,000 sq.m. lot in Global City, Taguig with the
following valuation:
Fair value as determined by city assessors P20,000/sq.m.
Zonal value as determined by the CIR 17,000/sq.m.
FB determined by independent assessors 18,500/sq.m.
Determine the gross estate.

3. Don Valentin died leaving his wife Tina, is legitimate children, Val and Valen, and
illegitimate children Tine, Alen, and Valerie. The spouse has the following properties:
 Exclusive property of Don Valentin P18,000,000
Exclusive property of Donya Tina 16,000,000
Net common properties 36,000,000
Determine the distributable estate and compute for the inheritance of each heir.

Learning References

Banggawan, R. (2019). Business and transfer taxation. 2019 ed. Pasay, Philippines:
Real Excellence Publishing.

De Leon, H. & De Leon, H. Jr. (2013). The law on transfer and business taxation. 15th
ed. Manila, Philippines: Rex Book Store.

Tabag, E. & Garcia, E. (2020). Transfer and business taxation. 2020 ed. Quezon City,
Philippines: EDT Book Publishing.
Villaraza & Angangco. (2020). The Unspoken Cost of Dying: A Summary of Philippine
Taxes After Life. Retrieved February 10, 2021 from
https://www.lexology.com/library/detail.aspx?g=7105bd6f-051b-4eb7-bf92-7cfd715
710fd
Who are compulsory heirs under Philippine law? Retrieved February 10, 2021 from
https://lawyerphilippines.org/2019/02/08/compulsory-heirs-under-philippine-law/
 MODULE 4
Deductions from Gross Estate and TRAIN Law Updates

Introduction

There are charges which naturally diminish the amount of the inheritance of the
heirs. Hence, the law allows deductions from gross estate. In addition to these charges,
the law also allows certain deductions in the nature of incentives from gross estate. This
module will attempt to lay down the basic information regarding gross estate deductions
in accordance with the TRAIN Law. Some general provisions will also be discussed.

Learning Objectives

After studying this module, you should be able to:

1. Discuss the classification of deductions.
2. Identify the limit of each deduction.
3. Determine the net estate of the decedent.
4. Explain the changes in estate tax computation as affected by the TRAIN
Law.

Learning Content
NET TAXABLE ESTATE x % of Estate Tax = Estate Tax Payable

The Tax Reform for Acceleration and Inclusion (TRAIN) Act, otherwise known as
Republic Act (RA) 10963, is basically a blend of increases as well as reductions in tax
rates. While it increased the tax on certain passive incomes, documentary stamp as well
as excise on petroleum products, minerals, automobiles and cigarettes, it also reduced
the tax on personal income, estate and donation. The overall effect is seen to generate
approximately P130 billion in revenues which shall be used to fund the government’s
“Build, Build, Build infrastructure program” and “socio-economic programs”.

Prior to RA 10963, the Net Taxable Estate (Estate Tax Base) of a citizen or resident
decedent can generally be computed as follows:

Estate

Real Property xxx

Personal Property xxx

Gross Estate Xxx

Less: Allowable Deductions

– Funeral expenses (5% x gross estate, not to exceed P200,000) Xxx

– Judicial Expenses of testate or intestate proceedings xxx
– Claims against the estate – debt instrument was notarized, statement xxx
showing disposition of proceeds of loan, if contacted within 3 years from
date of death
– Unpaid taxes and mortgages xxx
– Medical expenses (incurred within 1 year prior to his death, xxx
substantiated with receipts, and not exceeding P500,000
 – Family Home (not to exceed 1,000,000) supported by a Barangay xxx
Clearance
– Standard Deduction of P1,000,000
xxx
– Properties previously taxed (vanishing deduction)
xxx
– Transfer for public use
xxx
– Amount received by heirs under RA 4917 (Retirement Benefits law),
xxx
provided such amount is included in the gross estate of the decedent
xxx Xxx
– Share of the surviving spouse (50% of the net conjugal estate)

Net Taxable Estate Xxx

Some of the amendments introduced under RA 10963 on estate tax include the
adoption of a fixed flat tax rate, the allowable deductions in computing a decedent’s net
taxable estate, and procedural matters intended to streamline processes.

In particular, the following are the amendments primarily aimed to simplify its
computation, procedures and payment:

o The estate tax rate was reduced from graduated rates of 5% to 20% of the net estate to
a fixed flat rate of 6% on the amount in excess of P5 million.
o Estates with a net value of P5 million and below will be exempted from paying the
estate tax.
o Judicial, funeral (threshold is up to P200,000) and medical expenses (threshold is up to
P500,000) are no longer allowed.
o Standard deduction (wherein no substantiation is required) is however increased from
P1,000,000 to P5,000,000
o Family home threshold for exemption has been increased from P1,000,000 to
P10,000,000. Barangay Certification is no longer a requirement
o Deduction for Expenses, Losses, Indebtedness and Taxes for non-residents are no
longer allowed. In lieu thereof, non-residents are now allowed to have a standard
deduction of 500,000
o Proportionate deduction allowed to non-residents is now limited to claims against the
estate, claims of the deceased against insolvent persons, and unpaid mortgages
o Notice of death is no longer a requirement
o CPA certification is required only if the gross estate is above P5,000,000. Previous
threshold is up from P2,000,000.
o The deadline for filing of estate tax return has been extended from 6 months from death
to one (1) year from death
o Payment of estate tax can be made in installment up to two years if cash of the estate is
insufficient to pay tax due
o In lieu of a required certification from the BIR that the estate tax has been paid, the new
law permits withdrawal of funds in bank deposit accounts (left by the decedent) by the
heirs, subject only to 6% withholding tax. Prior to RA 10963, only withdrawals up to
P20,000 is allowed
Penalty
For late filing of Tax Returns with Tax Due to be paid, the following penalties will be
imposed upon filing, in addition to the tax due:

1. Surcharge
There shall be imposed, in addition to the tax required to be paid, a penalty equivalent
to twenty-five percent (25%) of the amount due, in the following cases:
(1) Failure to file any return and pay the tax due thereon as required under the
provisions of this Code or rules and regulations on the date prescribed; or
(2) Unless otherwise authorized by the Commissioner, filing a return with an internal
revenue officer other than those with whom the return is required to be filed; or
(3) Failure to pay the deficiency tax within the time prescribed for its payment in the
notice of assessment; or
(4) Failure to pay the full or part of the amount of tax shown on any return required to be
filed under the provisions of this Code or rules and regulations, or the full amount of tax
due for which no return is required to be filed, on or before the date prescribed for its
payment.

2. Interest
In General. - There shall be assessed and collected on any unpaid amount of tax,
interest at the rate of twenty percent (20%) per annum, or such higher rate as may be
prescribed by rules and regulations, from the date prescribed for payment until the
amount is fully paid.

Additional reading:
https://www.bir.gov.ph/index.php/tax-information/estate-tax.html
https://assets.kpmg/content/dam/kpmg/ph/pdf/InTAX/2019/Guidelines%20and%20Instru
ctions%20for%20BIR%20Form%20No.%201801.pdf

Learning References

Banggawan, R. (2019). Business and transfer taxation. 2019 ed. Pasay, Philippines:
Real Excellence Publishing.

De Leon, H. & De Leon, H. Jr. (2013). The law on transfer and business taxation. 15th
ed. Manila, Philippines: Rex Book Store.
Tabag, E. & Garcia, E. (2020). Transfer and business taxation. 2020 ed. Quezon City,
Philippines: EDT Book Publishing.
 MODULE 5
Donor’s Tax

Introduction

The government's aim is to raise more money in order to improve services to the
people. The new administration has sought a big compromise in amending the
20-year-old tax code. The aim of this new law's amendment is to make taxation more
convenient, equitable, and effective. The transfer taxes on donations are one of the
clauses in the old tax law that changed. This discusses the general provisions of
Donor’s Tax in the Philippines under the TRAIN Law.

Learning Objectives

After studying this module, you should be able to:

1. Elaborate the definition of donor’s tax
2. Discuss the nature and purpose of donor’s taxation
3. Determine the elements of donation and identify its validity
4. Apply the valuation principles in the determination of donor’s tax

Learning Content

Donation is an act of liberality whereby a person disposes gratuitously of a thing

or right in favor of another, who accepts it (Art. 725 of the New Civil Code). Although the
law used the term “act”, the law considers donation as a “contract”, as shown by the fact
that it requires acceptance, and the rules on obligations and contracts apply to it as
suppletory law (Art. 737 NCC).

Nature of Donor’s Tax

Donor’s Tax is a tax on a donation or gift, and is imposed on the gratuitous
transfer of property between two or more persons who are living at the time of the
transfer. It shall apply whether the transfer is in trust or otherwise, whether the gift is
direct or indirect and whether the property is real or personal, tangible or intangible. It is
levied, assessed, collected and paid upon the transfer by any person, resident or
nonresident, of the property by gift. It is imposed on the exercise of the donor’s right
during lifetime to transfer property to others in the form of gift. Hence, donor’s tax is not
a property tax, but it is an excise tax imposed on the transfer of property by way of gift
inter-vivos.
Object of Imposition
a. To raise revenues.
b. To tax the wealthy and to reduce certain other excise taxes.
c. To discourage inter vivos transfers of property which could reduce mortis causa
transfers on which a higher tax (estate tax) can be collected.
d. To prevent avoidance of income tax through the device of splitting income among
numerous donees who are usually members of a family or into many trusts, with the
donor thereby escaping the effect of the progressive rates of income taxation.

Requisites (Elements) of a Valid Donation

a. Capacity of donor to donate: The donor’s capacity shall be determined as of the
time of the making of the donation.
b. Donative intent: Donative intent is necessary only in cases of direct gift. If the gift is
indirectly taking place by way of sale, exchange or other transfer of property as
contemplated in cases of transfers for less than adequate and full consideration
(Sec. 100, NIRC), not always essential to constitute a gift.
c. Actual or constructive delivery of gift
d. Acceptance by the donee

Application of Donor’s Tax

a. When donor’s tax will apply: The donor’s tax shall not apply unless and until there
is
a completed gift.
b. When a transfer becomes complete: A transfer becomes complete and taxable
only
when, the donor has divested himself of all beneficial interests in the property
transferred and has no power to recover any such interest in himself or his estate.
c. When an incomplete gift become a complete one and subject to donor’s tax. A
gift that is incomplete because of reserved powers becomes complete when either:
i. The donor renounces the power to recover; or
ii. His right to exercise the reserved power ceases because of the happening of
some event or contingency or the fulfillment of some condition, other than because of
the donor’s death.

Are onerous donations subject to donor’s tax?

No, since there is no gratuitous disposal. Exemption:
i. Where the transfer is for less than an adequate and full consideration in money
or money’s worth; or
ii. The gift imposes upon the donee a burden which is less than the value of the
thing given;
Note: The excess of the fair market value of the property over the actual value of
the consideration shall be subject to donor’s tax.

Elements of a Remuneratory Donation

i. A person gives to another a thing or right;
 ii. On account of the latter’s merit or services rendered by him to the donor; and
iii. The giving does not constitute a demandable debt.
Note: Donations made by a corporation to its deceased officer out of gratitude for
past services are subject to donor’s tax. Past services rendered without relying on a
promise express or implied that such services would be paid for in the future do not
constitute a demandable debt. Thus, the amount given by the corporation to the heirs of
the deceased officer of the corporation as gratitude for past services rendered by the
officer is subject to donor’s tax.

Transfers Subject to Donor’s Tax

a. Transfer in trust or otherwise, whether the gift is direct or indirect and whether the
property is real or personal, tangible or intangible;
b. Include not only the transfer of ownership in the fullest sense but also the transfer
of any right or interest in property, but less than title;
c. Where property, other than real property subject to capital gains tax, is transferred for
less than an adequate and full consideration in money or money’s worth, then the
amount by which the FMV of the property exceeded the value of the consideration shall,
for the purpose of the donor’s tax, be deemed a gift, and shall be included in computing
the amount of gifts made during the calendar year. Donative intent therefore, is not
always essential to constitute a gift.
d. Renunciation by the surviving spouse of his/her share in the conjugal partnership or
absolute community after the dissolution of the marriage in favor of the heirs of the
deceased spouse or any other person/s is subject to donor’s tax;
e. However, general renunciation by an heir, including the surviving 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.
Note: All donations made in one year are taxed at the same rate as if they had been
made at one time. A new computation of donor’s tax is made for gifts given at each
succeeding year.

Transfer which may be constituted as donation

a. Condonation/ Remission of Debt.
i. RULE: If the creditor condones the indebtedness of the debtor the following
rules apply:
1. On account of debtor’s services to the creditor the same is in taxable
income to the debtor.
2. If no services were rendered but the creditor simply condones the debt,
it is taxable gift and not a taxable income.
b. Transfer for Less Than Adequate and Full Consideration.
i GR: The property is transferred for less than adequate and full consideration in
money or money’s worth, the amount by which the FMV exceeds the consideration shall
be deemed a gift and be included in computing the amount of gifts made during the
year. It is as if the property was donated but in order to avoid paying donor’s tax, the
donor opted to transfer the property for inadequate consideration.
 ii XPN: Where property transferred is real property located in the Philippines
considered as capital asset, the donor’s tax is not applicable but the final income tax of
6% of the fair market value or gross selling price, whichever is higher.

Kinds of Donors
A. Individual Persons
1. Resident citizen
2. Non-resident citizen
3. Resident alien
4. Non-resident alien

B. Juridical Persons
1. Corporation
2. Partnership

Kinds of donees, as to relationship to donor

A. Stranger

STRANGER DEFINED
Stranger is not a brother, sister (whether by whole or half-blood), spouse, ancestor and
lineal descendants; or a relative by consanguinity in the collateral line within the 4th
degree of relationship

ILLUSTRATION
If your great-great-grandfather (GGF) makes a donation to you, can you consider your
relationship to your GGF as a stranger or non-stranger relationship?
NON-STRANGER relationship because GGF is an ancestor regardless of the number
of degrees.

B. Non-stranger

NON STRANGER DEFINED

Brother, sister (whether by whole or half-blood), spouse, ancestor and lineal
descendants; or a relative by consanguinity (not affinity) in the collateral line within the
4th degree of relationship

DEGREE OF RELATIONSHIP IS IMMATERIAL

For ancestors or descendants it does not matter how many degrees they are connected
to you. Lineal descendants, number of degrees does not matter. Legally Adopted child
and illegitimate child also covered by lineal descendants.

EXTENT OF RELATIVE BY CONSANGUINITY

Relative by consanguinity in the collateral line within the 4th degree of relationship – up
to the extent of your 1st degree cousin.

NON STRANGERS THAT ARE NOT BLOOD RELATED

1. Spouse
2. Legally Adopted child covered under lineal descendants

Tax Rates
Effective January 1, 2018 and onwards (Republic Act (RA) No. 10963/TRAIN)
Rate - The donor’s 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.

Notes:
1. When the gifts are made during the same calendar year but on different dates, the
donor's tax shall be computed based on the total net gifts during the year.
2. The relationship between the donor and the donee(s) shall not be considered.
Republic Act No. 10963 (TRAIN Law) does not distinguish donations made to relatives,
or donations made to strangers.

Valuation
The properties comprising the gift/donation shall be valued based on their fair
market value as of the time of donation.

If the property is a real property, the fair market value thereof as of the time of
donation shall be, whichever is the higher of –
1. The fair market value as determined by the Commissioner, or
2. The fair market value as shown in the schedule of values fixed by the provincial and
city assessors.

In the case of shares of stocks, the fair market value shall depend on whether the
shares are listed or unlisted in the stock exchanges. Unlisted common shares are
valued based on their book value while unlisted preferred shares are valued at par
value. In determining the book value of common shares, appraisal surplus shall not be
considered as well as the value assigned to preferred shares, if there are any. On this
note, the valuation of unlisted shares shall be exempt from the provisions of RR No.
6-2013, as amended.

For shares which are listed in the stock exchanges, the fair market value shall be
the arithmetic mean between the highest and lowest quotation at a date nearest the
date of donation, if none is available on the date of donation.

The fair market value of units of participation in any association, recreation or

amusement club (such as golf, polo, or similar clubs), shall be the bid price nearest the
date of donation published in any newspaper or publication of general circulation.

To determine the value of the right to 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. (Sec. 2,
RR No. 17-2018 and Sec. 5 of RR No. 12-2018)

Determination of Gross Gift

a. GROSS GIFTS defined: All property, real or personal, tangible or intangible, that was
given by the donor to the donee by way of gift, without the benefit of any deduction.
b. NET GIFTS, defined: Net gift is the net economic benefit from the transfer that
accrues to the donee.
Note: If a mortgaged property is transferred as a gift, but imposing upon the done the
obligation to pay the mortgage liability, then the net gift is measured by deducting from
the fair market value of the property the amount of mortgage assumed.
c. CUMULATIVE AND SPLITTING METHOD:
i. Distinguished:
1. Cumulative: When the donor makes two or more donations within the same calendar
year, it is required that the said donations be included in the return for the last donation.
It will not amount to double taxation because the tax paid for the previous methods will
be considered as tax credit for succeeding donations.
2. Splitting: The donor makes two or more donations during different calendar years.

Composition of Gross Gift

The following are included in the gross gifts:

a. For resident citizen, non-resident citizen, and resident alien (wherever situated)
i. Real property wherever situated (within & without the Philippines);
ii. Personal property wherever situated, tangible or intangible.

b. For non-resident alien (only within)

i. Real property situated within the Philippines;
ii. Personal property:
1. Tangible property situated within the Philippines
2. Intangible personal property with situs in the Philippines unless
exempted on the basis of reciprocity

Who Shall File?

The Donor’s Tax Return (BIR Form No. 1800) shall be filed in triplicate by any
person, natural or juridical, resident or non-resident, who transfers or causes to transfer
property by gift, whether in trust or otherwise, whether the gift is direct or indirect and
whether the property is real or personal, tangible or intangible. Taxpayers who are filing
BIR Form no. 1800 are excluded in the mandatory coverage from using the eBlRForms
(Section 2 of RR No. 9-2016).

When and Where to File and Pay?

The Donor’s Tax Return (BIR Form No. 1800) shall be filed within thirty (30) days
after the date the gift (donation) is made.
 The return shall be filed with any Authorized Agent Bank (AAB) of the Revenue
District Office having jurisdiction over the place of domicile of the donor at the time of
the donation, or if there is no legal residence in the Philippines, with the Office of the
Commissioner of Internal Revenue, (Revenue District Office No. 39, South Quezon
City). In case of gifts made by a non-resident alien, the return may be filed with RDO
No. 39, or with the Philippine Embassy or Consulate in the country where he is
domiciled at the time of donation.
A separate return shall be filed by each donor for each gift (donation) made on
different dates during the year reflecting therein any previous net gifts made in the same
calendar year. Only one return shall be filed for several gifts (donations) by a donor to
the different donees on the same date.
If the gift (donation) involves conjugal/community property, each spouse shall file
separate return corresponding to his/her respective share in the conjugal/community
property donated. This rule shall likewise apply in the case of co-ownership over the
property being donated.
When the return is filed with an AAB, taxpayer must accomplish and submit
BIR-prescribed deposit slip, which the bank teller shall machine validate as evidence
that payment was received by the AAB. The AAB receiving the tax return shall stamp
mark the word “Received” on the return and also machine validate the return as proof of
filing the return and payment of the tax by the taxpayer, respectively. The machine
validation shall reflect the date of payment, amount paid and transactions code, the
name of the bank, branch code, teller’s code and teller’s initial. Bank debit memo
number and date should be indicated in the return for taxpayers paying under the bank
debit system.
Payments may also be made thru the epayment channels of AABs thru either
their online facility, credit/debit/prepaid cards, and mobile payments.
For transactions covered by one (1) Deed of Sale/Exchange/Donation involving
one (1) to three (3) properties, the taxpayer can avail of the fast lane pursuant to
Revenue Memorandum Circular (RMC) No. 43-2018, as amended by RMC No.
107-2018. Payments amounting to twenty thousand pesos (P 20,000.00) and below
shall be paid in cash while payments above twenty thousand pesos (P 20,000.00) shall
be made through Manager’s Check or Cashier’s Check to the Revenue Collection
Officer of the RDO concerned.
The time of filing and payment vary depending on the law applicable at the time
of donation.

What donations are tax exempt?

A. “In the Case of Gifts made by a Resident
Gifts made to or for the use of the National Government or any entity created by
any of its agencies which is not conducted for profit, or to any political subdivision of the
said Government; and
Gifts in favor of an educational and/or charitable, religious, cultural or social
welfare corporation, institution, accredited non-government organization, trust or
philanthropic organization or research institution or organization: Provided, however, not
more than 30% of said gifts will be used by such donee for administration purposes. For
the purpose of this exemption, a ‘non-profit educational and/or charitable corporation,
institution, accredited nongovernment organization, trust or philanthropic organization
and/or research institution or organization’ is a school, college or university and/or
charitable corporation, accredited nongovernment organization, trust or philanthropic
organization and/ or research institution or organization, incorporated as a nonstock
entity, paying no dividends, governed by trustees who receive no compensation, 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.” (Sec. 17 of RR No. 12-2018)

B. In the Case of Gifts Made by a Nonresident not a Citizen of the Philippines

Gifts made to or for the use of the National Government or any entity created by
any of its agencies which is not conducted for profit, or to any political subdivision of the
said Government.
Gifts in favor of an educational and/or charitable, religious, cultural or social
welfare corporation, institution, foundation, trust or philanthropic organization or
research institution or organization: Provided, however, that not more than thirty percent
(30%) of said gifts shall be used by such donee for administration purposes. (Sec. 101
(B) of NIRC, as amended)

Net Gift
For purposes of the donor’s tax, “net gift” shall mean the net economic benefit
from the transfer that accrues to the donee. Accordingly, if a mortgaged property is
transferred as a gift, but imposing upon the donee the obligation to pay the mortgage
liability, then the net gift is measured by deducting from the fair market value of the
property the amount of mortgage assumed. (Sec. 12 of RR No. 12-2018)

Additional reading:
https://www.bir.gov.ph/index.php/tax-information/donor-s-tax.html

Learning References

Banggawan, R. (2019). Business and transfer taxation. 2019 ed. Pasay, Philippines:
Real Excellence Publishing.

De Leon, H. & De Leon, H. Jr. (2013). The law on transfer and business taxation. 15th
ed. Manila, Philippines: Rex Book Store.

Tabag, E. & Garcia, E. (2020). Transfer and business taxation. 2020 ed. Quezon City,
Philippines: EDT Book Publishing.