TAXATION LAW Volume II RAEGAN L. CAPUNO Professor and Pre-Bar Reviewer in Taxation Law 2020 EDITION Published & Distributed by REX Book Store rel Memos ees, GS 18796-0567/5799-0746 Tel Nos 2161-65 FreedomBldg. CM Rests Avenue “Tol, Nos.: B522-4521/0522-4107 Manila, Pitippines wawrex.comphCONTENTS CHAPTER | ESTATE TAX Preliminary .. Estate Tax ... Theories of Estate Taxation Governing Law on Imposition of Estate Tax .... ‘Taxpayer of Estate Tax and Liability for Payment Determination of Estate Tax Liability, Estate Tax Rate.......... Classification of Decedent. Gross Estate .... Inclusions to Gross Estate Reciprocity Rule .. Exclusions to Gross Estate. Exempt Properties Excluded Properties . Taxable Transfers .. Transfer in Contemplation of Death Revocable Transfer Property Passing under General Power of Appointment Transfers for Insufficient Consideration Other Inclusions .... Decedent’s Interest Proceeds of Life Insurance: Prior Interest... Determination of Value of the Gross Estate . Deductions General Principles of Estate Deductions ........0 ix Seremnnaanutd a aR oNNen we e 1 12 14 14 14 15, 16 16 17Deductions Allowed to Estate of Citizen and Resident Decedent..... Funeral Expense Judicial Expense ... Claims Against the Estate. Requisites for Deductibility of Claims Against the Estate .:... Claims Against Insolvent Perso ‘Unpaid Mortgage . Unpaid Taxes Losses Property Previously Taxed or Vanishing Deduction, Requisites to Claim Vanishing Deduction .... Amount Received by Heirs Under Republic Act No. 4917. Deductions to Estate of Non-Resident Alien Decedent Net Share of the Surviving Spouse in the Conjugal Partnership or Community Property... ‘Tax Credit for Estate Taxes Paid in a Foreign Country Limitations on Tax Credit Estate Tax Administration... Notice of Death...... Estate Tax Returns Contents of the Estate Tax Return.. Certification by a Certified Public Accountant... Time for Filing of Estate Tax Return and Its Extension... ‘Time of Payment of Estate Tax Extension of Payment of Estate Tax. Effect of Extension of Payment... Payment of the Estate Tax by Installment Place of Filing of Estate Tax Return and Place of Payment.. Withdrawal of Bank DeposiSummary of Changes Under the TRAIN Law... Estate Tax Rate .. Deductions Allowed to Citizen and Resident Decedents - ” Deductions Allowed to Non-Resident Decedents .. Estate Tax Administration CHAPTER Il DONOR’S'TAX Donation .. Essential Requisites of Donation Formal Requisites of Donation.. Donor's Tax... Nature of Donor’s Tax and the Law That Governs the Imposition of Donor’s Tax... Purpose or Object of Donor's Tax. ‘Transfers and Transactions Constituting Donation ‘Campaign Contributions... Cancellation of Indebtedness Renunciation of Inheritance .. Renunciation of the Surviving Spouse of the Share in the Conjugal Partnership or Absolute Community..... ‘Transfer for Less Than Adequate and Full Consideration '.. Donor’s Tax Liability Determination and Composition of Gross Gift. Classification of Donor.. Reciprocity Rule ... Valuation of Gross Gift Exclusions in Gross Gift and Exempt Donations: Deductions Allowed... Computation of Donor's Tax. Donations Between Husband and Wife.... Tax Credit for Donor’s Taxes Paid in a Foreign Country... Limitations on Tax Credit .... Donor’s Tax Administration ... Filing of Returns and Payment of Taxes. xi 35 35 386 87 38 39 39 40 41 41 41 43 44‘Time and Place of Filing of Donor’s Tax Return and Payment of Donor's Tax... Notice of Donation by a Donor Engaged in Business .....: CHAPTER Ill VALUE-ADDED TAX Preliminary .... Concept and Framework of Value-Added Tax (VAT) Cross-Border Doctrine or Destination Principle Person Paying the Consumption Tax VAT as an Indirect Tax Nature and Characteristics of VAT... Persons Liable... In the Course of Trade or Business... Non-Stock and Non-Profit Organization and ' Government Entity. Exceptions to the Rule of Regularity Importation ... ‘Transactions Incidental to the Course of Trade or Busines: Services Performed in the Philippines by Non-Resident Person ‘Transactions Deemed Sale .. VAT on Sale of Goods or Propertie: Requisites of Taxability of Sale of Goods or Properties ‘Types of Sales of Goods or Properties Vatable Sales .. Rate and Tax Base of Vatable Sales .. Deemed Sales. Zero-Rated Sales. Export Sales Implementation of Enhanced VAT Refund System and the Change of Zero-Related Sales to 12% Vatable Sales ... Automatic Zero-Rated Sale and Effective Zero-Rated Sale .. Exempt Sales. 58 58 ‘69 70 70 72 73 74 4 1% 76 wr) 9 80 81Special Rules on Sale of Real Properties. a Change or Ceasation of Status as VAT-Registered Person . VAT on Importation .. Person Liable to VAT on Importation Transfer of Goods by Tax-Exempt Persons... VAT on Sale of Services and Use or Lease of Properties Vatable Sales of Services...... ‘Tax Base of VAT on Sale of Service Requisites for Taxability. Zero-Rates Sale of Service: Implementation of Enhanced VAT Refund System and the Change of Zero-Related Sale of Service to 12% Vatable Sales of Service Exempt Sale of Servic Exempt Transactions. ' Tax on Persons Exempt from VAT Exempt Transactions May Be Registered for VAT Purpose: VAT Liability... Creditable Input Tax Sourees of Creditable Input Tax. Persons Who Can Avail of the Input Tax Credit Claims for Input Tax on Depreciable Goods... Transitional Input Tax, Presumptive Input Tax Excess Unutilized Input Ta Refund of Input Tax ..,, Requisites for Claim of Refund of Input Tax Prescriptive Period to File Administrative Claim for Refund of Input Tax Place of Filing Administrative and Judicial Procedures in Claim for Refund of Input Tax Changes Under the TRAIN Law £0-Day Period of the Commissioner to Decide Expiration of the 90-Day Period Without Decision or the Inaction of the Commissioner. The 120-Day + 30-Day Rule under the NIRC.... 106 106 109 109 110 110 112 113 114 114 116 118 119 119 120 122BIR Ruling No. DA-489-03 Constitutes an Exception to the Mandatory and Jurisdictional Nature” * of the 120+30-Day Perio: 124 Nature of BIR Ruling No:'DA-489-03.. 126 ‘Manner of Giving Refun 126 VAT Registration .. 126 General Registration Requirement 126 Mandatory VAT Registration 127 Liability for Failure to Register to VAT. 128 Optional VAT Registration. 128 Registration of Non-VAT ot Exempt Taxpayer. 128 Required to Register as Non-VAT Persor 129 Summary of VAT Registration 129 Invoicing Requirement .sassim 130 Information Contained in VAT Invoice/Official Receipt... - 181 Consequences of Issuing VAT Invoice/Receipt ! by a Non-VAT Person....... “132 Consequences of Issuing a VAT Invoice/Receipt on Exempt Transaction, , 182 Returns and Payment of VAT 192 Filing of Return 132 Withholding of VAT on Government Money Payments and Payments to Non-Residents... 188 Power of the Commissioner to Suspend Business : Operations of Taxpayer... CHAPTER IV ‘ REMEDIES Remedies of the Government 186 Assessment..... 136 Powers of the Commissioner Determine the Correct Tax 186 Assessment and Its Commencement 187 Prescriptive Period of Assessment esi 1p 188 Period of Assessment in Case of an Amended Return. 140 xivExceptions to the Prescriptive Period of Assessment. Extraordinary Circumstance, Waiver of Statute of Limitation. Execution of Waiver under (RMO) No. 20-90 Effect of a Defective Waiver. Estoppel in Period of Prescription. Effect If the Government and Taxpayer are In Pari Delicto in the Execution of Waiver of the Statute of Limitation... RMO No. 14-2016 repealed RMO No. 20-90 Revenue Memorandum Circular.No. 141-2019 . Suspension of Running of Statute of Limitations .. Jeopardy Assessment.....ise.cee General BIR Tax Audit Process Issuance of Letter of Authority Letter of Authority (LOA). Issuance and Approval of LOA..w.. Requisites of a Valid LOA Period Covered by LOA Service and Revalidation of LOA... LOA Distinguished from a Letter Notice (LN), Conversion of LN to LOA. Conduct of Audit Examinatio1 Frequency of Taxpayer's Examinatio Preservation of Books and Accounts and Other Accounting Records Reporting of Results of Examination * Notice of Informal Conference (NIC) Preliminary Assessment Notice (PAN). Requisites of a Valid PAN... Exceptions to the Issuance of PAN Reply to PAN... Formal Letter of Demand and Final Assessment Notice (FLD/FAN) Requisites of a Valid FLD/FAN. xv 141 141 142 144 146 146 154 155 156 156 161 166 167 167 169 170 171 171 173 173FLD/EAN Must Contain a Demand for Payment and with Definite Due Dates Assessment Containing an Indefinite Amount of Tax Liability Is Void . Quasi-Judicial Power of the Commissioner of His Authorized Representative .... ‘When is an Assessment Made or Deemed Mad: FAN/ELD Must Be Issued Within the Sees Period of Assessment .. Issuance of Final Decision on Disputed Assessment (FDDA).... Requisites of a Valid FDDA A Void FDDA Does Not Ipso Facto Render the Assessment Void ... Authorized Signatories of NIC, PAN, FLD/FAN, and FDDA...... Mode of Service of PAN, FLD/FAN, and FDDA Personal Service Substituted Service Prescriptive Period of Collection..... Suspension of Running of Period to Collect Government Remedies to Enforce Tax Collection Distraint of Personal Properties. Procedure for Distraint and Garnishment. Sale of Personal Property Distrained Levy of Real Properties .. Procedure of Levying a Real Property... Advertisement and Sale of Levied Real Property. Redemption of Property Sold Further Distraint and Levy Tax Lien Judicial Action.. Civil Action.. Criminal Action. Tax Evasion xvi 175 176 17 179 181 181 182 183 185 185 185 185 186 187 187 188 190 191 191 192 193 194 195 195 197 198 198 198 199 199 199Assessment Not Necessary Before Filing of Criminal Complaint .. a The Civil Action Filed to Question the FDDA’ Is Not Deemed Instituted with the Criminal Case for Tax Evasion a ‘Taxpayer's Remedies 202 Administrative Remedies to Challenge the Assessment: 202 Challenging the Validity of the Lo, a Responding to the NIC. at Reply to PAN.... ame, Protesting the FLD/FAN, a8 ‘Types of Protest... 208 Requisites of a Valid Protest. aoe Submission of Additional Documents, am Action of the Commissioner or His Duly Authorized Representative... 308 Final Decision on a Disputed Assessment (FDDA) 508 Remedies of the Taxpayer on the Action or Inaction of the Commissioner or His Duly Authorized Representativ: 207 A Motion for Reconsideration of the Denial of Administrative Protest: Does Not Toll the oe 30-Day Period to‘Appeal to the CTA Filing of Appeal to Court of Tax Appeals (CTA) Without First Contesting the FLD/FAN; i Exception to the Rule... i “210 Implied, Indirect, or Deemed Denial of Protest: 211 When Does an Assessment Become Final, i Exectitory, and Demandable? “ fa’ 212 Judicial Remedy of Challenging the Assessment - 213 Appeal to the CTA Division. 213 Non-Injunction of Tax Collection 214 CTA Has Jurisdiction to Dispense with Deposit. or Bond. 216 Appeal to the CTA En Banc and to the Supreme Court... is 216 217 Recovery of Tax Erroneously or Illegally Collected xviiAppeal to the CTA En Banc and to the Supreme Court. 218 Compromise of Tax Liability 218 Cases Which May Be Compromised 219 Cases Which May Not Be Compromised.. 219 Basis for Acceptance of Compromise Settlement Prescribed Minimum Percentages of Compromise. : Settlement.. Approval of Offer of Compromise Abatement or Cancellation of Tax Liability Abatement or Cancellation Due to Unjust and Excessive Imposition Abatement or Cancellation Due to Administration Cost More Than the Amount Sought to Be Collected... 227 223 CHAPTER V BUREAU OF INTERNAL REVENUE AND COURT OF TAX APPEALS The Bureau of Internal Revenue (BIR) and Its Powers and Duties... 228 Chief Officials of the BIR 228 Powers of the Commissioner 229 Power to Interpret Tax Laws and to Decide Tax Cases.. 229 Power of the Commissioner to Obtain Information and to Summon, Examine, and Take Testimony of Persons... 232 Power of the Commissioner to Make Assessments and Prescribe Additional Requirements for Tax Administration and Enforcement. 233 Power to Delegate Authority ... : 239 Duty of the Commissioner to Ensure the Provision and, Distribution of Forms, Receipts, Certificates, and Appliances, and the Acknowledgment of Payment of Taxes. 240 xviiiOther Powers and Authorities of the Commissioner 241 Revenue Regions and Revenue District Offices 242 Court of Tax Appeals... 243 Exercise of CTA’s Power and Function: 244 Cases Within the jurisdiction of the CTA in Divisions. 244 Cases Within the Jurisdiction of the CTA En Banc .. 247 Decisions of the Commissioner of Internal Revenue ... 248 Decisions, Resolutions, or Orders of the Regional s 250 251 » 251 ~ 252 CTA’s Jurisdiction on Cases Involving Constitutionality or Validity of a Tax Law, Regulation, or Administrative Issuance... 253 CTA’s Jurisdiction Over a Special Civil Action for Certiorari Assailing an Interlocutory Order. 258 Annulment of Judgment of the CTA in Division. 260 Who May Appeal; Period to File Petition 264 ‘Where to Appeal; Mode of Appeal . 264 Appeal to the Supreme Court.. 265 CHAPTER VI LOCAL TAXATION Preliminary..... 2668 Implementing Statutes of Local Taxation. 267 Fundamental Principles of Local Taxatio 268 269 Local Taxing Authority.... Rationale for the Bnactment of an Ordinance Approval, Effoctivity, and Challenge of Tax Ordinance Approval and Effectivity of Tax Ordinance... Questions on Constitutionality and Legality of 271 Tax Ordinance or Revenue Measure... Nature of the Authority of the Secretary of Justice 272 Effect of Filing an Appeal to the Secretary of Justice... 273 xix|. Doctrine of Exhaustion of Administrative Remedies Exception to the Doctrine of Exhaustion of Administrative Remedies... Secretary of Justice Can Only Review Appeals Pertaining to Local Taxes... 276 Appeal to Court of Competent Jurisdiction ... 276 Common Limitations on the Taxing Power of LGU. 278 axing Powers of Provinces .. 287 ‘Tax on Transfer of Real Property Ownership 287 Tax on Business of Printing and Publication .. 288 Franchise Tax Tax on Sand, Gravel, and Other Quarry Services. 292 Professional Tax 294 Amusement Tax 204 Tax on Delivery Truck/Van bua Taxing Powers of Municipalities 296 Tax on Business .. Rates of Business Tax Tax on Retirement of Business Rules on Payment of Busines: Fees and Charges . Foes for Sealing and Licensing of Weights and ‘Measure: 298 Fishery Rentals, Fees, and Charges 3” Situs of the Tax .. : 300 Rules on Sales Allocation 802 Taxing Powers of Cities... a” ‘Taxing Powers of Barangays o Taxes... os Service Fees or Charges oa Barangay Clearance = 308 Other Fees and Charges. Common Revenue Raising Powers and Residual Taxing ta Power of LGU. Community Tax Individuals Liable to Community Tax Juridical Persons Liable to Community TaxExemptions to Community Tax.. Place and Time of Payment Community Tax Certificate. Collection of Taxes .. Assessment of Local Taxes and Taxpayer's Remedies. ‘Tax Period of Examination .. Periods of Assessment and Collection Suspension of the Running of Period to Assess and Collect rr. Protest of Assessment Mandatory Issuance of Notice of Assessment by the Local Treasurer... Payment of Assessed Tax Not a Requirement to Appeal to Court of Competent Jurisdictio: Claim of Refund or Tax Credit ..... ‘Taxpayer's Options When an Assessment Is Issued Section 195 Compared with Section 196 Civil Remedies for Collection of Revenues .. Tax Lien Administrative Remedies. Distraint of Personal Property. Right of Pre-Emption Procedure of Sale. Disposition of Procees Levy on Real Property. Advertisement and Sale Right of Pre-Emption Right of Redemption......, Purchase of Property by the Local Government Units for Want of Bidder. Further Distraint or Levy. Personal Property Exempt from Distraint or Levy... Judicial Action 206 306 307 307 808 309 309 210 310 311 312 312 312 316 316 319 321 322 322 322 323 323 324 324 325 326 326 327 327 327 . 828CHAPTER VII REAL PROPERTY TAXATION Real Property Taxation.. Fundamental Principles... Appraisal and Assessment of Real Property Classes of Ren] Property Actual Use of Real Property as Basis for Assessmen Assessment Levels... Issuance of Notice of Assessment. Contesting an Assessment of Value of Real Property Local Board of Assessment Appeals and the Central Board of Assessment Appeal ... Effect of Appeal on the Payment of Real Property Ta: Imposition of Taxes .. Real Property Taxes. Exemptions from Real Property Tax. Real Property Owned by the Republic of the Philippines or Any of Its Political Subdivisions Real Properties by Government-Owned and Controlled Corporation Are Subject to Real Property Tax Beneficial Use Doctrin Real Properties Actually, Directly, and Exclusively Used for Religious, Charitable, and Educational Purposes Special Levy on Education Fund Special Levy on Idle Lands Idle Lands Exempt from Tax. Special Levy by Local Government Units Requirements in the Imposition of the Special Assessment... Fixing the Amount of Special Levy .« Accrual of Special Levy Summary of Imposition... wail 329 330 3a1 332 333 333 334 334 335Collection of Real Property Tax Accrual of Real Property Tax Duty to Collect Taxes ........ Payment of Real Property Tax. Periods to Collect Real Property Tax Taxpayer's Remedies Claim for Refund... Remedies of LGUs for Collection of Real Property Tax Notice of Delinquency in the Payment of the Real Property Tax.... aaa Remedies for the Collection of Real Property Tax Local Governments Lien a4 Levy on Real Property 364 Advertisement and Sale, 365 Redemption of Property Sold Final Deed to Purchaser Purchase of Property by the Local Government Units for Want of Bidder... Further Distraint or Levy Collection of Real Property Tax Through the Courts... Appendix A - Tax Reform for Acceleration nnd Inclusion (TRAIN) - R.A. No. 10963 ... wiiCHAPTER I ESTATE TAX Preliminary Article 712 of the New Civil Code provides for the different modes of acquiring ownership, namely: (1) occupation, (2) intellectual creation, (3) law, (4) donation, (5) succession, whether testate or intestate, (6) tradition, as consequence of certain contracts, and (7) prescription. Of these modes of acquiring ownership, succession and donation are generally regarded as gratuitous transfers of property from one person to another which means there is no consideration involved in the transfer or acquisition of property. These transfers are, however, subject to corresponding transfer taxes. The tax on the gratuitous transfer of property is called transfer tax. Under the National Internal Revenue Code (NIRC or ‘Tax Code), as amended, there are two (2) transfer taxes namely, estate tax under Section 84 and donor's tax under Section 98. In addition, there is another transfer tax under Section 135 of the Local Government Code, which is the Tax on Transfer of Real Property Ownership imposed by the province and city. However, this transfer tax is not solely imposed on gratuitous transfer of property but also on sale, barter, or any other mode of transferring ownership or title of real property, which generally involve a consideration. Moreover, it is apparent that the transfer tax in Section 135 of the Local Government Code applies only to real property, while estate and donor's tax apply to both personal and real properties. ESTATE TAX Estate tax is a tax on the exercise of the right to transfer property at death and is measured by the value of the property. It accrues as of the date of death of the decedent, notwithstanding the postponement of the actual possession er enjoyment of the estate by the beneficiary. (Pablo Lorenzo v. Juan Posadas, Jr., G.R. No. L-43082, June 18, 1937) By nature, estate tax is not a property tax but the value of the property serves as the basis of the tax. Estate tax is an excise tax or a privilege tax. Estate tax is in the nature of2 TAXATION LAW Volume IT administration expenses payable out of any available funds of the estate; and if there be none, by converting any property into money for such purpose. (BIR Ruling No, 093-85 dated June 13, 1985) ‘Theorles of Estate Taxation ‘The imposition of estate tax is based on the following theories: a. Benefit-Received Theory - the government’ performed servicesinthe distribution of the properties of the decedent tothe heirs, In view of these services and benefits derived both by the estate and the heirs, the state collects the tax. b. Redistribution of Wealth Theory - the imposition of estate tax reduces the property received by the successor bringing about a more equitable distribution of wealth in society, The portion of the property taken by the state in the form of tax is then used to fund social programs and projects of the state. ce. Ability-to-Pay Theory - the bigger the estate means the higher taxes to be paid, If the decedent dies without any property or if the properties are sufficient to cover some of the deductions allowed, then there is no liability to pay the tax; and d, State Partnership Theory - the state is viewed as a passive and silent partner in the accumulation of wealth and property of the decedent. The state even grants protection to the large estate of the decedent. The state collects its just share in such effort in the right time. Governing Law on Imposition of Estate Tax ‘Well-settled is the rule that estate taxation is governed by the statute in force at the time of death of the decedent. The estate tax accrues as of the date of death of the decedent and the accrual of the tax is distinct from the obligation to pay the same. Upon the death of the decedent, succession takes place and the right of the State to tax the privilege to transmit the estate vests instantly upon death. (Pablo Lorenzo v. Juan Posadas, G.R, No, L-43082, June 18, 1937; Section 3, Revenue Regulations No. 2-2003) Tee For purposes of estate tax, the following are the relevant tax Jaws and their respective dates of effectiCHAYTERI a ESTATETAX a. Revised Administrative - March 1, 1917- October Code 28, 1936 b. Commonwealth Act No. - October 29, 1936 - dune 106 80, 1938 c. Commonwealth ActNo. - July 1, 1939- September 466 14, 1950 d, Republic Act No.679 , - September 16, 1950 - December 31, 1972 e. Presidential Decree No. 69- January 1, 1973 - December 31, 1985 {Presidential Decree No. - January 1, 1986- July 27, 1994 1992 g. Republic Act No, 7499 = duly 28, 1992 - December 31, 1997 h, Republic Act No. 8424 = danuary 1, 1998 - (QNIRC of 1997) December 31, 2017 i. Republic Act No. 10963 - January 1, 2018 (Tax Reform for up to present Acceleration and Inclusion . (TRAIN) Law) In fine, even if the estate of the decedent is being settled at present time, one must lock at the date of death of the decedent to determine the applicable law in the settlement of estate and the computation of estate tax liability. Again, itis not the law effective at the time the estate is settled, but the law enforced at the date or time of doath of the decedent that will govern the settlement of his estate. ‘Taxpayer of Estate Tax arid Liability for Payment ‘The “estate” is the statutory texpayor of estate tax. The “estate” is treated as a person for purposes of paying the taxes. (Section 22(a), \NIRC) In fact, there is a separate taxpayer identification number (TIN) that the BIR issues to the estate for the purpose of filing the estate tax return and the payment of estate tax. The estate tax imposed is, however, paid by the executor or administrator before the delivery of the distributive share in the inheritance to any heir or beneficiary. Where there are two or more’ executors or administrators, all of them are severally liable4. ‘TAKATION LAW ‘Volume It for the payment of the tax. The estate tax clearance issued by the Commissioner of Internal Revenue (CIR or Commissioner) or the Revenue District Officer (RDO) having jurisdiction over the estato, serves as the authority to distribute the remaining/distributable propertiesishare i in the inheritance to the heir or beneficiary. The executor or administrator of an estate has the primaxy obligation to pay the estate tax, but the heir or beneficiary has subsidiary liability for the payment of that portion of the estate which his distributive share bears to the value of the total net estate. The extent of his liability, however, shall inno case exceed the value of his share in the inheritance. (Section 9(G), Revenue Regulations No. 2-2003) Determination of Estate Tax Liability The estate tax is determined by multiplying the appropriate estate tax rate with the not taxable estate, its tax base. In general, the estate tax is computed as follows: Gross Estate XX Less: Deductions xX Net Taxable Estate xX Multiply: Estate Tax Rate xX. Estate Tax Due XX ‘Less: Tax Credits XX Estate Tax Still Due’ xx The shore fhemula, may very depeteling. wn crhiacher Eis decedent is single or mazried at the time of death, ; Estate Tax Rate Under the NIRG, the estate tax is computed using the follow schedular and progressive tax rates: Over _ | But Not Over | The Tax Shall Be P 200,000 Exempt OA P.200,000 500,000 o| 5% | © "P2000 500,000 | _ 2,000,000 P15,000| 8% 500,000 2,000,000| 5,000,000 185,000 5,000,000 | 10,000,000 456,000 10,000,000 | _ And Over 1,216,000CHAPTERI 5 ESTATE TAX Based on the table of rates above, a net taxable estate of ‘P200,000.00 or less is exempt from estate tax. The estate tax rate is modified upon the enactment of TRAIN Law. Effective January 1, 2018, estate taxis computed at six percent (6%) of the not taxable estate. This means a flat rate of six percent (6%) applies regardless of the amount of net taxable estate. This also means that the first P200,000.00 net taxable estate is no longer exempt. Classification of Decedent The classification of a decedent is important because it determines the properties included in the gross estate, the deductions that may be claimed, and the place of filing of the return. Decedent may be classified based on citizenship and last residence at the time of death. A decedent may either be: a. Resident Citizen Decsdent; * b. » Non-Resident Citizen Decedent; c. , Resident Alien Decedent; and 4d. Non-Resident Alien Decedent (with crwithoutresprosiy) GROSS ESTATE Gross ‘estate pertains to the value of all properties, real or personal, of the decedent subject to estate tax. The gross estate is determined by taking into consideration the citizenship, residénce, and status of the decedent, as well as the location of the properties of the decedent. - The gross estate of a decedent who is a resident citizen, non- resident citizen, and resident alien. comprises of all properties, real or personel, tangible or intangible, wherever situated, and interest therein at the time of his death, including transfer in contemplation of death, revocable transfers, property passing under the general power of appointment, and transfors for insufficient consideration. On the other hand, the gross,estate of a decedent who is a non-resident alien comprises only of ‘properties situated in the Philippines. With respect to intangible personal property located in the Philippines, its inclusion in the gross estate is subject to the rule of reciprocity provided for under. Section 104 of the Tax ‘Code. (Section 4, Revenue Regulations No. 2-2003)6 ‘TAXATION LAW ‘Volume IT In summary, the gross estate is comprised of the following: Properties Owned and Existing at the Time of Death of the Decedent x Less:Exempt Transmissions/Acquisitions (xx) Excluded Properties (xx) Add: Taxable Transfers x Other inclusions xx Gross Estate xx Inclusions to Gross Estate As a rule, all properties owned by the decedent and existing at the time of his death are included in the gross estate. These inclusions in the gross estate may be summarized as follows: Properties within the Philippines | Properties ——| Located Decedent Real -Eerennel Propertios | Outside Properties a the P Tangible | Intangible |p sippines Resident Citizen v v voor ¥ Non-Resident z ¥ ¥arhon ¥, Citizen Resident Alien v ¥ v v ‘Non-Resident Alien 7 v : < w/ reciprocity Non-Resident Alien z ¢ ze 5 lo reciprocity Reciprocity Rule As presented in the table above, a non-resident alien decedent is taxable only on properties, real and personal, situated in the Philippines. Personal properties may eitherbe tangible or intangible. ‘The inclusion of intangible personal properties in the gross estate of the non-resident alien decedent depends on whether the reciprocity rule applies or not, ati The reciprocity rule applies only to a non-resident alien decedent and only on his intangible personal properties located inCHAPTERI 7 ESTATE TAX the Philippines. The reciprocity rule provides that no estate tax will be collected in respect of intangible personal property in the following instances: a. ifthe decedent at the time of his death was a citizen and resident of a foreign country which at the time of his death did not impose estate tax, in respect of intangible personal property of citizens of the Philippines not residing in that foreign country, or b._. if the laws of the foreign country of which the decedent was a citizen and resident at the time of his death allows a similar exemption from transfer or death taxes of every character or description in respect of intangible personal property owned by citizens of the Philippines not residing imthat foreign country. ‘The reciprocity rule is hy nature a form of exemption from estate tax because if the non-resident alien can avail this rule, the intangible personal properties located in the Philippines are not jnicluded in the gross estate and therefore not subject to estate tax. Gein the Tax Code provides the intangible personal properties deemed located in the Philippines, to wil: @ Franchise exeréised in the Philippines; Shares, obligations, or bonds issued by any corporation or sociedad anonima organized or constituted in the Philippines in accordance with its laws; Shares, obligations or bonds by any foreign corporation eighty-five percent (85%) of the business of which is located in the Philippines; a Shares, obligations or bonds issued by any foreign corporation if such shares, obligations, or bonds have acquired a business situs in the Philippines; and ~~ @. Shares or rights in any partnership, business, or industry established in the Philippines. ign country but a resident of another foreign country at the time of his death, e.g., a Singaporean residing in Japan at the time of death, the reciprocity rule cannot be applied.8 ‘TAXATION LAW Volume II In Collector of Internal Revenue v. Antonio Campus Rueda (G.R, No. L-13250, October 29, 1971), the decedent was a Spanish national but a resident of Tangier, Morocco, At the time of her death, she owned intangible personal properties located in the Philippines, The Jaws of Moroeco allow exemption from tranefer taxes with respect to intangible personal properties by citizens of the Philippines in Moroceo. The Supreme Court in this case allowed the application of the reciprocity rule and granted exemption from estate tax on the intangible personal properties located in the Philippines, It must be emphasized that the Collector of Internal Revenue v, Antonio Campus Rueda arose and was decided under Nationa) Internal Revenue Code of 1939 where then Section 122 (now Section 104) only requires that the decedent at the time of his'death was a resident of a foreign country which does not impose estate tax or grants exemption thereto. As it is now under Section 104 of the Tax Code, the requirement is that the decedent must be a citizen and resident ofa foreign country for the reciprocity rule to apply. ' Another issue resolved in Collector of Internal Revenue vu. Antonio Campus Rueda is the argument of the BIR that the reciprocity rule eannot be applied because Morocco, at that time, was not a country, hence the exemption cannot be applied. The Supreme Court ruled that being « country for purposes of the applicability of rule on reciprocity is immaterial, If the laws of Morocco grant exemption from transfer taxes with respect to intangible personal properties owned by citizens’ of the Philippines in Morocco, the requirement to be exempt is satisfied. Exclusions to Gross Estate ‘The gross estate of the decedent does not include @ exempt transmiscions/acquisitions and (2) excluded properties even if they are existing and with the decedent at the time of death. a. The following acquisitions and transmissions are exempt from estate tax, and thus, shall not be taxed: * The merger of usufruct in the owner of the naked title; The transmission or delivery of the inheritance of legacy by the fiduciary heir or legatee to the fideicommissary;CHAPTER I 9 ' ESTATE TAX ‘The transmission from the first heir, legatee, or donee in 8 favor of another beneficiary, in accordance with the desire of the predecessor; and e ‘All bequests, devises, legacies, or transfers to social welfare, cultural and charitable institutions. ‘As conditions for exemption of transfers to social welfare, ral, and charitable institutions, no part of the net income of cult? fare, cultural, and charitable institutions must inure to social Topic of any individual, and not more than thirty percent (80%) the ber id bequests, devises, legacies or transfers are used by such of rations for administration purposes. (Section 87, NIRC) re pucluded Properties rhe gross estate does not include the capital of the surviving «use of a decedent. (Section 85(H), NIRC) In addition, the net ne .e of the surviving spouse in the conjugal partnership property as ep inished by the obligations properly chargeable to such property js also not jncluded in the estate of the decedent. (Section 86(C), IRC)” Taxable Transfers sc . E Taxable ‘transfers are transfers of properties during the time of the decedent or transfers inter-vivos. Considering that the transfer happened during the lifetime of the decedent, the properties jnvolved are no longer with the decedent at the time of his death and supposedly not included in his gross estate anymore. However, the nature and circumstances attending the transfers indicate that the transfers are actually transfers mortis causa or suggest that the decedent still owns and controls properties up to the date of his death. Hence, these transfers of properties must be included in the gross estate and are subject to estate tax. The taxable transfers are: life' a. Transfer in contemplation of death; ' b. Revocable transfer; c. . Property passing under general power of appointment; and d.. Transfers for insufficient consideration.10 TAXATION LAW ‘Volume tt a. Transfer in Contemplation of Death A transfer made in contemplation of death is one prompted by the thought that the transferor hag not long to live and made in place of a testamentary disposition. (Thelma Aranas v, Teresita Mercado, etal., G.R, No, 156407, January 14, 2014 citing 1959 Prentice Hall, p. $909) Contemplation of death is a state of mind and it cannot be casily asccrtained, unless he says so, that the person is transferring the property because he knows he would die anytime goon. In this caso, tho acts and circumstances present before, during, or after the transfer are considered to ascertain whother the transfer is in contemplation of death, The health condition and age of the decedent, the execution of last will and testament, and the time gap between the transfer and the death of the transferor are factors suggesting the transfer is in contemplation of death. b. Revocable Transfer Revocable transfer is a transfer of property where such property continues to be owned by the transferor-trustor during his lifetime notwithstanding the tranefer, ac he still retains benoficial ownership. (BIR Ruling No. [DA-276-08] dated Aprit 2, 2008) Simply, revocable transfer involves transfer of possession over the property during the lifetime of the decedent but not transfer of ownership over the said property. Section 85(C) of the Tax Code, as amended, provides that interest. in the property of which the decedent has at any time made a transfer by trust or otherwise is included in decedent's gross estate. ‘The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all properties, real or personal, tangible or intangible, wherever situated to the extent of any interest therein, of which the decedent has at any time made a transfer by trust, where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power by the decedent to alter, amend, revoke, or terminate, or where any such power is relinquished in contemplation of the decedent’s death. The rationale for taxing such transfer in trust at the time of death of the trustor is to reach transfers which are really substitutes for testamentary dispositions and thus prevent evasion of estate tax. To he exempt from estate tax, the transfer inter vivos must be absolute and outright with no strings attached whatsoever by theCHATTERI PSTATE TAX transferor, which is not the ease here, (BIR Ruling No. [DA-216.08) dapat April 2, 2008) c. Property Passing under General Power of Appointment “Power of appointment” refers to a right to designate the person or persons who shall enjoy or possess certain property from the estate of a prior transferor. There are two (2) parties involved in the property passingundor the power of appointment namely, the donor of power and the donee of power. The “donor of power” is a person having property subject to disposition who created, reserved, or granted the power to designate the tranaferees or recipients of the property. The “donee of power” is @ person to whom the power to designate the transferees or recipient of the property is given or conferred. For estate tax purposes, the “donee of power” is the decedent. “Power of appointment” may either be: @. Genera! Power of Appointment - it authorizes the donee the power to appoint any person he pleases, including himself, hie spouse, his estate, executor or administrator, and his creditor, thus having as full dominion over the property as though he owned it, or b. Special Power of Appointment - when the donee can appoint only among a restricted or designated class of persons other than himself. (Elizabeth Morgan, v. Commissioner of Internal Revenue, 309 U.S. 78) A property passing under a general power of appointment is included in the gross estate of the donee-decedent while a property Passing under a special power of appointment is not included in the gross ostate of the donee-decedent. ‘Thus, under Section 85(D) of the NIRC, the property is included in the gross estate if the following are present: a, Theproperty passedundera general power of appointment; b, The exercise of the decedent of such power is i, by will, or ii, by deed executed in contemplation of, or intended to take effect in possession or enjoyment at or after his death, or2 ‘TAXATION LAW Volume It iii, by deed under which he has retained for his life or any period not ascertainable without reference to his death or for any period which does not, in fact end before his death a. the possession or enjoyment of, or the right to the income from, the property, or |‘ b. the right, either alone or in conjunction with any person, to designate the persons who shall possess or enjoy the property or ‘the’ income therefrom. ‘The above rule, however, does not apply in case.of a bona fide sale for an adequate and full consideration in money or money's worth. d. Transfers for Insufficient Consideration Under Section 85(G) of the Tax Code, ifany one of the transfers, trusts, interests, rights, or powers enumerated and described in Subsections (B), (C), and (D) of Section 85 of Tax Code is made, created, exercised, or relinquished for 2 consideration in money or money's worth, but 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 only the excess of the fair market value, at the time of death, of the property otherwise to be included on account of such transaction, over the value of the consideration received therefor by the decedent. When the circumstances of the transfers of property are those described in Section 85(B), (C), and (D) of the Tax Code and the transfers are without consideration, the transfers aré called as transfers in contemplation of death, revocable transfers, or property passing under a general power of appointment, This means the transfers are gratuitous. / However, when the circumstances of the transfer of property are those described in Section 85(B), (O), and (D) of the Tax ‘Code and the transfer is for inadequate or less than full consideration in money or money's worth, the transfer is a transfer for insufficient consideration and is subject to estate tax. When the circumstances of the transfers of property are those described in Section 85(B),.(C), and (D) of the Tax Code and the transfers are for adequate or full consideration in money or money'sCHAPTERT 13 ESTATE TAX worth, the transfers are bona fide sales and therefore not subject to -estate tax. It must be noted that when the circumstances of the transfer of'property are not those described in Section 85(B), (C), and (D) -of the Tax Code and the transfer is for inadequate or less than full consideration in money or money's worth, the transfer is a transfer for less than adequate and full consideration described in Section 100 of the Tax Code, which transfer is subject to donor’s tax, ‘The transfer is for insufficient consideration if the fair market value of the property at the time of transfer is substantially higher than the consideration received at the time of said transfer. In this case, the value inchided in the gross estate or the value subject of estate tax is the difference between the consideration received and the. fair market value of the property at the time of death of the transferor. Illustration: i Scenario 1 Scenario 2 Scenario 3 a, FMVatthetime | Pi,500,000.00 | P1,500,000.00 | P1,500,000.00 of transfer of Property b. Consideration | ‘P1,500,000.00 | P. 500,000.00 | . P 0 «teceived at the time of transfer of property ee i : ¢. FMVatthe time | P3,000,000.00 | P3,000,000.00 | P3,000,000.00 of death of the ‘ transferor « [* ‘Vahie to be P 0 | P2,500,000.00 | P3,000,000.00 "included in the gross estate Scehario 1: The fair market value at the time of transfer of property is equal to the consideration received at the time of transfor, The transfor is a/bona fide solo and therefore not subject to estate tex, Scenario 2: The fair market value at the time of transfer of property is higher than the consideration: received at the time of transfer of property. The transfer is for insufficient consideration. The value to be included in the grosstg ‘TTARATION LAW ‘Volume I’ estate is the difference between the consideration received and the fair market value of the property at the time of death of the transferor.. Scenario 3: This is a case of donation mortis causa because the transfer is without any consideration. ‘The full fair market value of the property at the time of death of the transferor is included in the gross estate. Again, to be subject to estate tax, the transfer for insufficient consideration must be coupled with circumstances of the transfer of property in Section 85(B), (C), and (D) of the ‘Tax Code. Other Inclusions Other inclusions in the gross estate’ aré- decedent's interest, proceeds of life insurance, and prior interest. a. Decedent's Interest Decedent’s interest pertains to any interest having value or capable of being valued and transferred by the decedent at the time of his death. a % - b. Proceeds of Life Insurance The press oi nesace ake by he cde won bi -e included in the gross estate if the er the eneficiary i the decedent upon his own life is , executor, or administrator, the inclusion or exclusion of proceeds. of life insurance in the gross estate is determined by ‘hecdeeizeonD eben the designation is revocable, the proceeds of fe insurance are included in the gross estate. Otherwise, if ee ati iran GSENEED from tho proms ete (Stn 65, NEO). eds of the following insurance are not included tlhe pret asteinet the decedent, and not subject to estate tax: b. Policy is an accident or property insurance; ©. Policy is taken by the employer for his employees or the so-called group life insurance;CHAPTER I 16 ESTATETAK Proceeds of insurance issued by the Government Service Insurance System (GSIS) and Social Security System sss) for government and private employees, respectively; an¢ Proceeds of life insurance payable to the heirs of the deceased members of the US and Philippine Army. Life insurance is a tax-efficient method of transfer of property, specifically money, from one person to another. Ifa person took a life insurance upon his own life, the proceeds are exempt from estate tax as discussed above. Similarly, the heirs who received the proceeds of life insurance are not subject to income tax because the proceeds of life insurance received by the heirs or beneficiaries are excluded from the gross income and therefore not subject to income tax under Section 82(B)(1) of the Tax Code. Except as otherwise specifically provided therein, transfer in contemplation of death, revocable transfer, and proceeds of life insurance shall apply to the transfers, trusts, estates, interests, rights, powers, and relinquishment of powers, as severally enumerated and described therein, whether made, created, arising, existing, exercised, or relinquished before or after the effectivity of the Tax Code. (Section 85(F), NIRC) . As estate tax accrues ‘at the time of death, the properties comprising the gross estate are valued based on their fair market value as of the time of death. (Section 5, Revenue Regulations No. 2.2003) eee aee @. Usufruct- to determine the v: e right to usufruct, use or habitation, shall be taken into account in accordance with the to be approved by the of Finance, upon recommendation of the Insurance Commissioner. (Section 88(A), NIRC) b. Real Property - the fair market value is whichever between: i, The fair market value as determined by the Commissioner of Internal Revenue, usually called as tl and16 TAXATION LAW Jame TE ii. The as shown in the schedule of values fixed by the (Section 88(B), NIRC) For purposes of prescribing real property values, the Commissioner of Internal Revenue is authorized to divide the Philippines into different zones or areas and shall, upon consultation ‘with competent appraisers both from the private and public sectors, determine the fair market value of real properties located in each zone or area. (Section 6(E), NIRC) «Shares of Stacks the valuation ofthe hares of stock wll be: ii If the share is unlisted in the stock exchange: 1. Unlisted common shares are valued based on their and 2. Unlisted preferred shares are valued at par value, In determining the book value of common shares, appraisal surplus i. is not considered as well as the value assigned to preferred ‘In computing the net taxable estate, there are deductions allowed by law depending on who the decedent is. These deductions under the Tax Code are classified into: z "Ordinary Deductions 1. Expenses, Losses, Indebtedness, Taxes, etc. (ELITE); i. Funeral Expense; ii. Judicial Expense; iii, Claims Against the Estate; iv. Claims Against Insolvent Person; v. Unpaid Mortgage;CHAPTER. | 17 PSTATETAX vi. Unpaid Taxes; and vii, Losses. p Property Previously Taxed or Vanishing Deduction; and 3, Transfer for Public Use. b, Special Deductions 1. Family Home; 2. Medical Expenses, 3. Benefits Received under Republic Act No. 4917; and 4, Standard Deduction. Share ofthe Surviving Spouse ‘The classification of the decedent is important because the estates of a resident citizen, non-resident citizen, and resident alien decedent may claim both ordinary and special deductions. With respect to a non-resident alien decedent, his estate may only claim ordinary deductions but not special deduction. In addition, the non- resident alien decedent can only claim pro-rated expenses, losses, jndebtedness, and taxes. If the decedent is married, the share of the surviving spouse in the net conjugal properties is deducted from the gross estate of the decedent. General Principles of Estate Deductions 3 In claiming the deduction, the following principles apply: Substantiation Rule. All items of deductions must be supported with documentary evidence such as receipts, invoices, contracts, financial statements, and other proofs that they actually existed or occurred to establish their validity. The only exception to this rule is the Standard Deduction. Matching Principle - An item of deduction must be part of the gross estate to be deductible therefrom. No deduction is allowed for those which are not part of the gross estate, No Double Classification Rule - An item of deduction cannot be claimed under several deduction classifications. Only one classification is allowable.18 ‘TAXATION LAW Volume I. 4. Default Presumption on- Ordinary Deduction - In the case of married decedents, ordinary deductions are presumed to be against the common properties unless proven to be exclusive property of either spouse. This is in line with the rule that properties are common properties unless proven exclusive. (Transfer and Business Taxation, Rex Banggawan, 2016 Edition, pp. 462-463) DEDUCTIONS ALLOWED TO ESTATE OF CITIZEN’ AND RESIDENT DECEDENT Funeral Expense . Funeral expenses are expenses ineurred from the date of death until the date of interment. Funeral expenses are not confined to its ordinary or usual meaning. They include: a. The..mourning apparel of the surviving spouse and unmarried minor children of the deceased. ‘bought and ‘used on the occasion of the burial; if 'b., Expenses for the deceased's wake, including food and drinks; Publication charges for death notices; 4. Telecommunication expenses incurred in informing relatives of the deceased; €. Cost of burial plot, tombstones, monument or mausoleum but not their upkeep. In case the deceased owns a family estate or several burial lots, only the value corresponding to the plot where he is buried is deductible; f, _ Interment and/or cremation fees and charges; and g... All other expenses incurred for the performance of the rites and ceremonies incident to interment, Expenses incurred after the interment, such as for prayers, masses, entertainment, or the like are not deductible. Any portion of the funeral and burial expenses borne or defrayed by relatives and friends of the deceased are not deductible. 7 Medical expenses as of the last illness will not form'part of funeral expenses but should be claimed as a Medical Expense, a special deduction, feyCHAPTERI 18 ESTATE TAX, Actual funeral expenses shall mean those which are actually incurred in connection with the interment or burial of the deceased. ‘The expenses must be duly supported by receipts or invoices or other evidence to show that they were actually incurred following the substantiation rule. The amount that may be claimed as funeral expense is whichever is lower between (1) actual funeral expenses (whether paid or unpaid) up to tho timo of interment, or (2) five poreont (5%) of the value of gross estate. The claimable funeral expense shall in no case exceed P200,000.00. Any amount of funeral expenses in excess of the P200,000.00 threshold, whether the same had actually been paid or still payable, is‘not be allowed as a deduction. Neither is the unpaid portion of . the funeral expenses incurred, which is in excess of the P200,000.00 threshold allowed tobe claimed as a deduction under “claims against the estate” following the No Double Classification Rule. (Section 6(A) (1), Revenue Regulations No, 2-2008) TRAIN Law ‘TRAIN Law repealed the provision allowing funeral expense as an ordinary deduction; Thus, estates of decedents who died on January 1, 2018 onwards Judicial expenses are expenses for testamentary or intestate proceedings which include expenses incurred in the inventory- taking of assets comprising the gross estate, their administration, the payment of debts of the estate, as well as the distribution of the estate among the heirs. In short, these deductible items are expenses incurred during the settlement of the estate but not beyond the last day prescribed by law, or the extension thereof, for the Mog of the estate tax return. Judicial expenses may include: a. Fees of executor or administrator; b. Attorney's fees; c. Court fees; d.. Accountant's fees;‘TAXATION LAW ‘Velume Ir Appraiser’s fees; Clerk hire; ; Costs of preserving and distributing the estate; Pam e Costs of storing or maintaining property of the estate; ang . Brokerage fees for selling property of the estate. . Any unpaid amount for the aforementioned cost and expenses claimed under “Judicial Expenses” should be supported bya sworn Statement of account issued and signed by the creditor following the Substantiation Rule. (Section. 6(4)(2), Revenue Regulations No, 2.2008) ‘ ey . Judicial expenses are ‘expenses of administration, Administration expenses, as an allowable deduction from the Bross estate of the decedent for purposes 'of arriving at the value of the Net estate, have been construed to include all expenses essential to the collection of the assets, payment of debts or the distribution of the property to the persons entitled to it. (24A Am eJur 2d, Federal Taxation (1995), sec. 144, 288) Judicial expenses include expenses incurred in the judicial Proceeding or extrajudicial settlement of the estate. (Commissioner of Internal Revenue v. Josefina Pajonar, G.R. No. 123206, March 22, 2000) Og 1 However, expenditures incurred for the individual benefit of the heirs, devisees, or legates are not deductible. Judicial expense does not also include fees incident to litigation incurred by the heirs in asserting their respective rights, (B. E. Johannes v. Carlos Imperial, G.R. No. L-19153, June 30, 1922) Expenditures incurred for the individual benefit of the heirs, devisees, or legatees are not deductible. (344 Am Jur 2d, Federal Taxation, 1995) ~ TRAIN Law’ TRAIN Law repealed the provision allowing judiciel’ expense as an ordinary deduction, Thu: nm January 1, 2018 onwards may In claims against the estate, the decedent is the debtor. The word “claims” is generally construed to mean debts or demandsCHAPTER I a ESTATE TAX ‘of a pecuniary nature which could have been enforced against the deceased in his lifetime and could have been reduced to simple money judgments. Claims against the estate or indebtedness in respect of property may arise, out of contract, tort, or operation of law. “Tn order to avail claims against thé estate as a deduction to determine the net taxable estate, the following essential requisites “must be present: a. The liability represents a personal obligation of the deceased existing at the time ofhis death except (1) unpaid obligations incurred incident to his death such as unpaid funeral expenses (i.e., expenses incurred up to the time of interment) and (2) unpaid medical expenses, which are classified under a different category of deductions; b. ~The liability was contracted in good faith and for adequate * and full consideration in money or money’s worth; c. The claim must be a debt or claim, which is valid in low and enforceable in court; d.,. The indebtedness must not have been condoned by the creditor or the action to collect from the decedent must not have been prescribed. * "1 It is also required of.claims against the estate as s allowable Senate i and, ‘hope Gases etna cath of the decedent, the administrator or executor is required to submit a statement showing the disposition of the proceeds of the loan. (Section 86(A)(1)(c), NIRC) Inclaime against insolvent person, the decedent is the creditor. ‘The claim is incurred during the lifetime of the decedent but remains unpaid at the time of his death, Thus, it is the estate which is now collecting from the debtors of the decadent. The debtor must be insolvent. “Insolvent” ics to the finaricial ‘condition of a debtor that is generally unable to pay its or22 ‘TAXATION LAW ‘Volume It his liabilities as they fall due in the ordinary course of business or has liabilities that are greater than its or his assets. (Section’ 4(p), Financial Rehabilitation and Insolvency Act of 2010) To be allowed as a deduction, the value of the claim of the deceased against insolvent persons must be included in the gross estate because the claim against insolvent persons is a decedent's interest or decedent's property at the time ofhis death: _., Moreover, the incapacity of the debtor to pay his obligation must be proven. Mere allegation is not sufficient. (Monserrat vu. Collector of Internal Revenue, CTA Case No. 11, December 28, 1955) During the lifetime of the decedent, he may incur indebtedness and use his property as a security for its payment, such as mortgage, which remains unpaid at the time of his death. The amount of unpaid mortgage is allowed as a deduction provided the fair market value of the property mortgaged or the decedent's interest therein, undiminished by such mortgage or indebtedness, is ineluded in the gross estate. The deduction allowed in the case of claims against the estate, unpaid mortgages or any indebtedness is, when founded upon a promise or agreement, limitad to the extent that they were contracted bona fide and for an adequate and full consideration in money or money's worth. (Section 86(A)(1)(c), NIRC) In case an unpaid mortgage payable is being claimed by the estate, verification must be made as to who was the beneficiary of the loan proceeds. If the loan is found to’be merely an accommodation loan where the loan proceeds went to another person, the value ‘of the unpaid loan must be included as a receivable of the estate. If. there is a legal impediment to recognize the same as receivable'of the estate, said unpaid obligation/mortgage payable shall not. be allowed as a deduction from the gross estate. In alll instances, the mortgaged property, to the extent of the decedent’s interest therein, should always form part of the gross taxable estate. (Section 6(A)(5), Revenue Regulations No. 2-2008; Revenue Regulations No. 12-2018) Toclaim taxes as an allowable deduction, the taxes must have accrued as of date of death of the decedent and remain unpaid as ofCHAPTERI 2 ESTATE TAX the time of death. However, the following taxes cannot be claimed as deductions: a. ‘Income tax upon income received after death; b. . Property taxes not accrued before his death; or c.. Estate tax due from the transmission of his estate. (Section 86(A)(1)(¢), NIRC) . From the date of death of the decedent and during the settlement of the estate, there are losses that may occur on the properties owned by the decedent. Example is when the decedent left residential house that was consumed by fire or jewelries stolen. ‘These losses may be claimed as a deduction for estate tax purposes subject'to the following requisites: +a. ‘The losses.are due to fires, storms, shipwreck, or other casualties, or from robbery, theft, or embezzlement} ib. The losses are not compensated for by insurance or otherwise; ¢. The losses are not claimed as a deduction for income tax purposes in an income tax return, and a. The losses are incurred not later than the last day for the Suu payment of the estate tax. (Section 86(A)(1Xe), NIRC) Under the TRAIN Law, the filing of estate tax return is extended from six (6) months to one (1) year from the date of death of the decedent. This also means the deadline for payment of estate taxis extended to one (1) year. Hence, the period within which losses may be incurred is also modified from six (6) months to one (1) year. "Al vanishing deduction operates to éase the harshness of successive taxation of the same property within a relatively short period to time occasioned by the untimely death of the transferee after the death of the prior decedent or after the donation. (Reviewer in Taxation, Victorino Mamalateo, 2014 Edition, p. 374) A vanishing deduction is a deduction allowed from the gross estate of citizens, resident aliens and non-resident estates foroy ‘TAXATION LAW Volaine It properties which were previously subject to donor's or estate taxes, The deduction allowed diminishes for a period of five (6) years. (Estate of Reyes v. Commissioner of Internal Revenue, C.T.A. Case No. 6747, January 16, 2006) Simply, there are two (2) occasions where vanishing deduction may’ arise. First, a decedent transferred his property to his heir/ transferee. The transfer is subject to estate tax. Subsequently and within a period of five (5) years, the heir/transferee who still owns the property received from the first decedent also died. The second transfer is also subject to estate tax, The estate in the second transfer may claim vanishing deduetion as allowable deduction. In this scenario, there is succession followed by another succession. Second, a person donsited a property to the donee. The transfer is subject to donor's tax. Subsequently and within a period of five (6) years, the donee who still owns the property donated died. ‘The second transfer is subject to estate tax, The estate may claim vanishing deduction as allowable deduction, In this scenario, there is donation followed by succession. Thercis novanishing deduction if the first transfer is a donation and the second transfer is also donation or if the first transfer is a succession and the second transfer is a donation. The following are the requisites before vanishing deduction maybeclaimed: a. The present decedent died within five (6) years from the date of death of the prior decedent or the present decadent died within five (6) years from the date of donation; -. b. The property must be located in the Philippines and can be specifically identified as the one received from the prior decedent or from the donor, or which can be identified as having been acquired in exchange for property soreceived; ¢. The value of the property must be included in the’ gross estate of the present decedent; d. The donor's tax or estate tax on the prior transfer must be finally determined and paid by or on behalf of such donor, or the estate of such prior decedent; andCHAPTERI 25 ESTATE TAX +e, , The estate of the prior decedent did not claim or was ‘> yc" » not allowed to claim vanishing deduction in the case of multiple succession, ‘The decreasing percentages of deduction (hence the word * “vanishing”) are: i. One hundred percent (100%) of the value, if the prior decedent died within one (1) year prior to the death of the decedent, or if the property was transferred ie bn by gift within the same period prior to his leath; » +. di, Eighty percent (80%), if the period is more than one Hus dea (2) year but not more than two (2) years; sii, Sixty percent (60%), if the period is more than two . @)years but not more than three (3) years; iv. Forty percent (40%), if the period is more than three (8) years but not more than four (4) years; and v. ‘Twenty percent (20%), if the period is more than four (4) years but not more than five (5) years. ‘The amount of all the bequests, legacies, devises or transfers to or for the use of the Government of the Republic of the Philippines, or any political subdivision thereof, for exclusively public purposes is allowed as deduction as transfer for public use. (Section 86/A)(3), NIRO) - Family home refers to the dwelling house, including the land on which it is situated, where the husband and wife, or the head of the family, and members of their family reside, The Barangay Captain of the locality where the family home is located must issue a certification that it is actually the family home of the decedent. ‘The family home is deemed constituted on the house and lot from the time it is actually occupied as a family residence and is considered as such for as long as any of its beneficiaries actually resides therein, (Arts. 152 and 153, Family Code)26 TAXATION LAW Volume It For estate tax purposes, actual occupancy of the house or house and lot as the family residence shall not be considered interrupted or abandoned in such cases as the temporary absence from the constituted family home due to travel or studies or work abroad, ete. In other words, the family home is generally characterized by permanency, that is, the place to which, whenever absent for business or pleasure, one still intends to return: ‘Tho family home must be part of the properties of the absolute community or of the conjugal partnership, or of the exclusive properties of either spouse depending upon the classification of the property (family home) and the property relations prevailing on the properties of the husband and wife. It may also be constituted by an unmarried head of a family on his or her own property, (Art. 156, Ibid.) For purposes of availing of a family home deduction, to the extent allowable, a person may constitute only one family home. (Art. 161, Ibid.) ‘To claim family home-as a deduction, the following conditions must be met: a, The family home must be the actual residential home of the decedent and his family at the time of his death, as certified by the Barangay Captain of the locality where the family home is situated; b. The total value of the family home must be included as part of the gross estate of the decedent; and c. Allowable deduction must be in an amount equivalent to the current fair market value of the family home as declared or included in the gross estate, or.the extent of the decedent's interest (whether conjugal/community or exclusive property), whichever is lower, but not exceeding P1,000,000. (Section 6(D), Revenue Regulations’ ae 2-2003; Revenue Regulations No. 12-2018) TRAIN Law TRAIN Law increased ee of family home eee more thai not more, than the settlement of estate of decedents who diced January 1, 2018 onwards.CHAPTER I 27 ESTATE TAX » A standard deduction is a deduction w! fF substantiation in the amount of One Million Pool EI. ‘The full amount of P1,000,000.00 is allowed as deduction for the benefit of the decedent. (Section 6(E), Revenue Regulations ‘No. 2.2003) The only requirement is that the decedent is either a resident citizen, non-resident citizen, or resident alien. TRAIN Law .. Effective January 1, 20: er the TRAIN Taw ines fn 080860 15000000 © All medical expenses (cost of medicines, hospital bills, doctors’ fees, ete.) incurred (whether paid or unpaid) are allowed as deduction provided the following are present: a. The expenses aro incurred within one (1) year before the death of the decedent; b, The expenses are duly substantiated with official receipts for services rendered by the decedent's attending physicians, invoices, statements of account duly certified by the hospital, and such other documents in support * thereof; and c. The total amount, whether paid or unpaid, does not exceed Five Hundred Thousand Pesos (P500,000). Any amount of medical expenses incurred within one year from death in excess of Five Hundred Thousand Pesos (P500,000.00) is not allowed as a deduction. Neither can any unpaid amount thereof in excess of the P500,000.00 threshold nor any unpaid amount for medical expenses incurred prior to the one-year period from date of death be allowed to be deducted from the gross estate as @ claim. against the estate, (Section 6(F), Revenue Regulations No. 2. 2003) TRAIN Law «TRAIN Law repealed the provision allowing medical expense as special deductic ‘hus, estates of decadents who died on January 1 2s cwerdnmay toler elim mete ext28 ‘TAXATION LAW ‘Volume II SE eee ‘Any amount received by the heirs from the decedent's employer as a consequence of the death of the decedent-employee in accordance with Republic Act No. 4917 is allowed as a-deduction, provided that the amount of the separation benefit is included as‘part of the gross estate of the decedent. (Section 6(G), Revere Regulations No. 2.2003) Yponel DEDUCTIONS TO ESTATE OF NON-RESIDENT ALIEN DECEDENT Under the Tax Code, the estate of a non-resident alien decedent is allowed the following deductions: ; L The proportion of the total expenses, losses, indebtedness, and taxes which the value of such part bears to the value of his entire gross estate wherever situated is allowed as deduction. The allowable deduction shall be computed using the following formula: ; Gross Estate-Philippines + Exp , Losses, f ~ GrosasinNera * Wobees, and ~,Almable Deducson Taxes 8. Transfer for Public Ue. “The estate of a non-resident alien decedent is not allowed to claim special deductions such as family home, medical expenses, standard deduction, and benefits received under Republic Act No. 4917, - + Upon the effectivity of the TRAIN Law, funeral and judicial expenses. are removed from the list of ordinary deductions. - This means the proportion of tho. total expenses now excludes these expenses, However, the estate of a non-resident alien decedent can still claim the proportion of losses, indebtedness, and taxes. .: _, Significantly, TRAIN Law now allows the estate of a non lecedent to claim standard deduction ih the amotint Net Share of the Surviving Spouse in the Conjugal Partnership or Community Property " ean _ After deducting the allowable deductions appertaining to the conjugal or community properties included in the gross estate, theCHAPTERI 29 ESTATETAX share of the surviving spouse must be removed to ensure that only the decedent’s interest in the estate is taxed. , » The estate of citizen and resident decedents are taxable in all their properties located within or without the Philippines. Through , this, it is possible that their properties outside the Philippines are also taxable in the foreign country where these properties are Jocated. In order to avoid or at least minimize the effect of double taxation, an estate tax credit on the estate taxes paid in a foreign country is allowed in the Philippines. The estate tax credit that may be allowed in the Philippines is ject to the following limitations: ‘The amount of the credit in respect to the tax paid to any country shall not exceed the saie proportion of the tax against which such credit is taken, which the decedent's net estate situated within such country taxable under this Title bears to his entire net estate; and ~The total amount of the credit shall not exceed the same proportion of the tax against which such credit is taken, which the decedent's net estate situated outside the -“\ ’ Philippines taxable under the Tax Code to his entire net +. estate. (Section 86(B), NIRC) In fine, the tax credit allowed shall depend on whether one _ foreign country or multiple foreign countries are involved. | The tax credit is whichever is lower of the actual estate tax’paid in foreign country and the limit as determined below: Net Taxable Estate-Foreign Net Taxable Bstate-World 5, » Multiple Foreign Countries 1, Determine whichever lower ofthe actual estate tax paid + in each of the foreign country end the'limit per country using the formula above. x Estate Tex Dupin Philippines = Limitation30 ‘TAXATION LAW ‘Volume IT 2, Determine the total world estate tax credit limit using the formula below: 4 ea ‘Total Net Taxeble Estate-Foreien Estate TaxDuein Se eee, , Matai T orien Net Texalle Estate Word "Philippines Limitation 8. The allowable estate tax credit is whichever is lower between the computed limitations in items 1 and 2 above, ESTATE TAX ADMINISTRATION Under the Tax Code, the executor, administrator, or any of the legal heirs of the decedent must inform the BIR, through the Commissioner, of the fact of death of the decedent. This is accomplished by filing a notice of death to the BIR. The notice of deatia is required in all cases where the transferis subj though exempt, the gross value of the ‘The notice of death must be filed within two (2) months after tha decedent's death, or within a like Period after qualifying as such executor or administrator, (Section &9, NIRC) Failure to file a notice of death’ within the period prescribed makes the estate liable to corresponding penalty. seg Be TRAN het mnt ais The estate tax return (BIR Form No, 1801) must be filed in the following instances: In all cases of transfers subject to estate tax; a. b. Incas , where the gross value of or ©. In cases where th property such as real property, motor vehicle, shares of stock or other similar property for which a clearance from the BIR is required as a condition precedent for the transfer of ownership. (Section $0(A), NIRC)CHAPTER aL ESTATE TAX Under the TRAIN Law, Contents of the Estate Tax Return The estate taxretum, whichis filed under oath andin duplicate, shall contain the following information: a. Thevalueoftthe gross estaté of the decedent at the time of his death, or in case of a non-resident, not a citizen of the Philippines, of that part of his gross estate situated in the Philippines; b. The deductions allone fom gros estat in aerminng the estate; and Such part of such information as may at the time be ascertainable and such supplemental data as may be a ‘necessary ‘to establish the correct taxes, (Section 90(A), NIRC) Certification by a Certified Public Accountant - A. certification by-a Certified Public Accountant (ory is required,as a supporting document to the estate tax return when tho gross value of the estate exceeds P2,000,000,00, The certification shall also contain: a Itemized assets of the decedent with their corresponding gross value at the time of his death, or in the case of a i non-resident, not a’citizen of the Philippines, of that part "=. of his gross estate situated in the Philippines; 1b. _ Ttemizad deductions from gross estate allowed in Section 86 of the NIRG; and : . The amount of tax due whether paid or still due and outstanding. (Section 96(A), NIRC) "Under the TRAIN Lam, the amount of gross value of extate provided in the estate tax return that must: be; supported by-a statement duly certified hy a CPA is increased from P2,000,000.00 to P5,000,000.0032 ‘TAXATION LAW Volume It Time for Filing of Estate Tax Return and Its Extension ‘Under the Tax Code, the estate tax return must be filed within six (6) months from the decedent's death. The Commissioner has the authority to grant, in meritorious cases, a reasonable extension not exceeding thirty (30) days for filing the return. (Section 90(B), NIRC) The court approving the project of partition shall furnish the Commissioner with 2 certified copy thereof and its order within thirty (80) days after promulgation of such order. (Section 9(4), Revenue Regulations No. 2-2002) ; Under the TRAIN Law, the ‘deadlin i “Tatham Time of Payment of Estate Tax In the Philippines, the BIR adopts the pay-as-you-file system which means the deadline for payment of tax is on the deadline of the filing of the corresponding tax return. Thus, the estate tax is paid at the time the estate tax return is filed by the executor, administrator or the heirs, i.e., which is within six (6) months from the date of death of the decedent. (Section:91(4), NIRC) ‘Under the TRAIN Law, considering the deadline for filing of the return is extended, payment of estate tax is also extended from six (6) months to one (1) year from the date of death, The payment of estate tax may be extended when the Commissioner finds that the payment on the due date of the estate tax or of any part thereof would impose undue hardship upon the estate or any of the heirs. “ ‘The extension for payment of estate tax depends on whether the estate is settled judicially or extra-judicially. In case of judicial settlement, the payment of estate tax may be extended for a Period not exceeding five (5) years, while in case of extrajudicial settlement, the payment may be extended toa period not exceeding two (2) years. TeCHAPTER 33 ESTATE TAX 2 Any amount paid after the statutory due date of the tax, put within the extension period, is subject to interest but not to surcharge. If an extension is granted, 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 and with such sureties as the Commissioner deems necessary, conditioned upon the payment of the said tax in accordance with the terms of the extension. ‘There is no extension for payment of taxes which may be granted by the Commissioner where the taxes are assessed by yeason of negligence, intentional disregard of rules and regulations, or fraud on the part of the taxpayer. (Section 91(B), NIRC) In the event that the payment of estate tax is extended, the @atate tax must be paid on or before the date of the expiration of the ‘period of the extension, In addition, the running of the Statute of Limitations for assessment as provided in Section 203 of the NIRC or the period of the government to assess is suspended for the period of any such extension. (Section 91(B), NIRC) + Incase the available cash of the estate is not sufficient to pay its total estate tax liability, the estate may be allowed to pay the tax by installment: and a clearance shell be released only with respect to the property the corresponding/computed tax on which has been paid. There shall, therefore, be as many clearances (Certificates ‘Authorizing Registration) as there are as many properties released because they have been paid for by the installment payments of | the estate tax. * * ‘The computation of the estate tax, however, shall always be on the cumulative amount of the net taxable estate. Any amount paid after the statutory due date of the tax shall be imposed the corresponding applicable penalty thereto. However, if the payment of the tax after the due date is approved by the Commissioner or his duly authorized representative, the imposable penalty thereon shall34 TAXATION LAW Volume I only be the interest. Nothing in this paragraph, however, prevents the Commissioner from executing enforcement action against the estate after the due date of the estate tax provided that all the applicable laws and required procedures are followed/observed. (Section 9(F), Revenue Regulations No. 2-2002) The TRAIN Law inserted an additional provision which provides for payment by installment in ease the available cash of the estate is insufficient to pay the total estate tax due.’ Payment shalll be allowed within two (2) years from the statutory date for its payment without civil penalty and interest. aa eee In case of a resident decedent, whether citizen or alien, the administrator or executor shall register the estate of the decedent and secure a new TIN from the Revenue District Office where the decedent was domiciled at the time of his death and shall file the estate tax return and pay the corresponding estate tax with the Accredited Agent Bank (AAR), Revenue District Officer, Collection Officer or duly authorized Treasurer of the city or municipality where the decedent was domiciled at the time of his death, whichever is applicable: In case of a non-resident decedent, whether non- Seaakdent citizen or non-resident alien, with executor or administrator in the Philippines, the estate tax return shall be filed with and the TIN for the estate shall be secured from the Revenue District Office where such executor or administrator is registered. In case the executor or administrator is not ragistered, the estate tax return shall be filed with and the TIN of the estate shall be secured from the Revenue District Office having jurisdiction over the executor or administrator's legal residence. Nonetheless, in case the non- resident decedent does not have an executor or administrator in the Philippines, the estate tax return shall be filed with and the TIN for the estate shall be secured from the Office of the Commissioner through RDO No. 39 —South Quezon City. The Commissioner of Internal Revenue is authorized to exercise his power to allow a different venue/place in the flingof tax returns, (Section 9(C), Revenue Regulations No. 2-: 3003)