You are on page 1of 63

TRANSFER TAXES

CONCEPT:

Properties whether personal or real,


movable or immovable, personally used
or connected with business, are by
nature transferable from one person to
another.

Transfer of private properties may


either be onerous or gratuitous.
The onerous transfer of properties is
subject to business tax while gratuitous
transfer is subject to transfer tax.
Transfer tax – is the tax imposed on
one’s right to make casual and gratuitous
transfer of one’s property to the other
person.
There are two types of gratuitous
transfer, namely, by way of donation or
gift (donation inter vivos), and through
inheritance under the process of succession
(donation mortis causa).
The transfer of properties as a gift is
subject to donor’s tax while the transfer of
properties due to death is subject to estate
tax.

Donor’s tax (gift tax) - is tax imposed on


the privilege of transmitting property by and
from a living person to another by way of
donation.

Estate tax (death tax) - is tax imposed


on the privilege of the deceased person to
transmit his estate to his lawful heirs and
beneficiaries.
Mode of transfer Tax on transfer
1. In the conduct of business:
a. VAT-registered person VAT
b. Non-VAT registered person Percentage tax
2. Casual transfers
a. Onerous Capital gains tax
b. Through inheritance Estate tax
c. as a donation or gift Donor’s tax
DONOR’S TAX (Secs. 98-104)

- is an excise tax, not a tax on property


- levied and collectible upon the donor
- applicable whether the transfer is directly
or indirectly given (e.g. transfer in trust)
- includes real, personal, tangible or
intangible properties (Sec. 98B).
- imposed upon valid donations or transfers
thus, applies only when there is a COMPLETED
GIFT
- the law in force at the time of the
perfection/completion of the donation shall
govern the imposition of the donor’s tax.
Purposes:

1. To prevent avoidance of paying estate tax.


2. To prevent avoidance of paying income tax.

Requisites of a taxable donation:

1. Capacity of the donor – donor must be


capacitated to make a valid donation.

- donations (inter vivos) between husband &


wife are void therefore, not taxable
- donee need not be capacitated to receive
the gift
2. Donative intent –refers to the proper
declaration of the legal owner of a property
or right to transfer ownership to another
without consideration.
- intention is known by observing the
forms required by law
- not necessary in indirect gifts
e.g. Transfers for inadequate consideration
(Sec. 100)

3. Delivery – actual or constructive


4. Acceptance by the donee
Taxable Donations:

1. Cancellation of indebtedness – where debtor


did not render service in favor of the
creditor.
2. Renunciation of inheritance – only if
renunciation is specifically and categorically
done in favor of identified heir(s) to the
exclusion of the other co-heirs in the
hereditary estate (Sec. 11, Rev. Reg. No.
2-2003).
Compromises on will disputes – payment to a
dissatisfied heir who has no legally
enforceable rights may constitute donation.
CLASSIFICATIONS OF DONOR AND TAXABLE
DONATIONS
WITHIN WITHOUT
A. CITIZEN/RESIDENT
Real property TAXABLE TAXABLE
Tangible Personal property TAXABLE TAXABLE
Intangible Personal property TAXABLE TAXABLE
B. NONRESIDENT ALIEN
Real property TAXABLE NOT TAXABLE
Tangible Personal property TAXABLE NOT TAXABLE
Intangible Personal property TAXABLE* NOT TAXABLE

* Subject to the Rule of Reciprocity


Valuation of Donation:

1. Cash gifts – at face amount of the currency

2. Personal property other than cash - The


market value of the personal property at
the time of the gift shall be considered the
amount of the gift. (Sec. 102)

3. Real property - shall be appraised at its


fair market value as of the time of the
gift.
However, the appraised value of the real
property at the time of the gift shall be
whichever is the higher of:

a. the fair market value as determined by


the Commissioner of Internal Revenue (zonal
valuation) or

b.the fair market value as shown in the


schedule of values fixed by the Provincial
and City Assessors. [Sec. 102, in relation
to Sec. 88 (B)]
Under sec.104 of the tax code, gross gifts
include the following:

1. Real, intangible and tangible personal


properties or mixed, located in the
Philippines and outside of the Philippines,
depending on the kind of donor.

2. Franchise which must be exercised in the


Philippines.

3. Shares, obligations or bonds issued by


any corporation or partnership, organized in
the Philippines in accordance with our laws;
4. Shares, obligations or bonds issued by
any foreign corporations, 85% of which is
located in the Philippines

5. Shares, obligations or bonds issued by


any foreign corporation if such shares,
obligations or bonds have acquired a
business situs in the Philippines

6. Shares or rights in any partnership,


business or industry established in the
Philippines.
Deductions allowable under the BIR regulations

1. Dowries;

2. Encumbrances on the donated property,


if assumed by the donee; and

3. Diminution of the donated property as


specified by the donor.
Two kinds of donations for tax purposes:

1. Donation to Relatives

Relatives – refer to a brother, sister


(whether by whole or half-blood), spouse,
ancestor and lineal descendant; or relative by
consanguinity in the collateral line within the
fourth degree of relationship. [Sec. 99 (B)]

Tax base: The net gifts made during the


calendar year. [Sec. 99 (A)]
Tax Rate: Progressive tax rate (2%-15%)
Manner: Cumulative Method
Splitting of gift tax:
Let us suppose that the taxpayer wants to
donate the amount of Php 1,000,000 to his
children. If he were to donate the entire
amount to them, say on Christmas eve, then the
donors tax due on the gift will be Php 44,000
since the first Php 100,000 is exempt and the
next Php 900,000 is taxed at Php 44,000.

However, if he were to donate only one-


half on Christmas eve, and give the other half
after the New Year's noche buena, then the
total tax liability is reduced to only
Php 28, 000.
Exemptions:

• The first P100,000.00 net donation during a


calendar year made by a resident or non resident
[Sec. 99 (A)];

• Dowries or gifts made on account of marriage


and before its celebration or within one year
thereafter by residents who are parents to each
of their legitimate, recognized natural, or
adopted children to the extent of the first ten
thousand pesos (P10,000.00)

* “NET GIFT” shall mean the net economic benefit


from the transfer that accrues to the donee
2. Donation to Strangers

Strangers – are those who are NOT


considered as relatives.

Tax Base: Net gifts


Tax Rate: Fixed Rate (30%)

Exemptions:

a) donation by a resident or non-resident of a


prize to an athlete in an international sports
tournament held abroad and sanctioned by
the national sports association (R.A. 7549)
b) Political contributions made by a resident or
non-resident individual if registered with
the COMELEC irrespective of whether
donated to a political party or individual;

c) Gifts made by residents or non-residents 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 subdivisions of the said Government
[Sec. 101(A)(2)];

d) Gifts made by non-resident aliens outside of


the Philippines to Philippine residents;
e) Gifts made by residents or non residents 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 (A)(3)]

f) Donations given to the following


organizations:
• Ramon Magsaysay Award Foundation (RA 3086)
• Philippine Inventor’s Commission (RA 1606)
• Philippine-American Cultural Foundation (RA
3062)
• International Rice Research Institute (RA 2707)
• Integrated Bar of the Philippines
• Development Academy of the Philippines
• National Museum, National Library and the
archives of the National Historic Institute
• National Social Action Council (PD 373)
• Southern Philippines Development Administration
(PD 690)
• Task Force on Human Settlement
• Intramuros Administration (PD 1616)
• Museum of the Philippine Costumes (PD 1388)
• Gratuitous transfer by a religious corporation to
its local branch
TAX CREDITS:
In general, the tax imposed upon a donor who is
a citizen or a resident at the time of donation shall
be credited with the amount of any donor’s tax of
any character and description imposed by the
authority of a foreign country subject to tax credit
limitation. [Sec. 101 (c) (2)]
Limitation:

The rule applicable to tax credit paid to a foreign


country will be the lower of actual tax paid or the
amount derived computing the tax limit as follows:

Tax credit = Net donations outside the Phils. X donor’s


Net donations within and without tax
FILING OF RETURN (Sec. 103):

Any person making a donation (whether direct or


indirect), unless the donation is specifically exempt
under the Code or other special laws, is required,
for every donation, to accomplish under oath a
donor’s tax return in duplicate. The return shall set
forth:

(1) Each gift made during the calendar year which is to


be included in computing net gifts;

(2) The deductions claimed and allowable;

(3) Any previous net gifts made during the same


calendar year;
(4) The name of the donee;
(5) Relationship of the donor to the donee; and
(6) Such further information as the Commissioner may
require.

TIME AND PLACE OF FILING AND PAYMENT.

- The donor’s tax return shall be filed within


thirty (30) days after the date the gift is made or
completed and the tax due thereon shall be paid at
the same time that the return is filed.

- the return shall be filed and the tax paid to an


authorized agent bank, the Revenue District
Officer, Revenue Collection Officer or duly
authorized Treasurer of the city or municipality
where the donor was domiciled at the time of the
transfer, or if there be no legal residence in the
Philippines, with the Office of the Commissioner. In
the case of gifts made by a non-resident, the
return may be filed with the Philippine Embassy or
Consulate in the country where he is domiciled at
the time of the transfer, or directly with the
Office of the Commissioner.
Questions taken from Donor’s Tax (1997-2010):
No. of
times asked
Donations to non-stock, non-profit entities 3

Donation to Political candidates 2

Donation Propter Nuptias 2

When done is a stranger 1

Donation made to National Government 1

Inter vivos Donations made in contemplation of death 1

When is sale of property below market value considered as a 1


donation subject to donor’s tax
Donation tax bracket 1
Bar Exam Question:

1. The Congregation of the Mary Immaculate


donated a land a dormitory building located along
España St. in favor of the Sisters of the Holy
Cross, a group of nuns operating a free clinic and
high school teaching basic spiritual values. Is the
donation subject to donor’s tax? Reason Briefly
(maximum of 4 sentences).
ESTATE TAX (Secs. 84-97)

- is an excise tax, not a tax on property


- levied, assessed collected, and paid upon the
transfer of the net estate of a decedent (Sec.
84)
- the law in force at the time of death
notwithstanding the postponement of the actual
possession or enjoyment of the estate by the
beneficiary
- a tax imposed upon the basis of the Net
Estate (Gross Estate less Deductions) considered
as a unit
- paid by the estate represented by the
administrator/executor
- Estate tax accrues at the moment of
death of the decedent (Lorenzo v.
Posadas 64 Phil 353)

* The approval of the court, sitting in probate, or


as a settlement tribunal over the deceased is not a
mandatory requirement in the collection of taxes.
(Marcos II v. CA, G.R. No. 120880, 5 June 1997)
Basis:

1. Redistribution of wealth theory


2. Benefit-received theory
3. Privilege or state partnership theory
4. Ability to pay theory

Classification of Decedent:

1. Citizen or resident decedent


2. Nonresident aliens
Gross estate of the decedent shall be
determined by including the value at the time
of his death all property, real or personal,
tangible or intangible, wherever situated:
Provided, however, that in case of a
nonresident decedent who at the time of his
death was not a citizen of the Philippines; only
that part of the entire gross estate which is
situated in the Philippines shall be included in
his taxable estate. (Sec. 85)

Citizen and resident – within and without


Nonresident Alien - within
Gross Estate Subject to tax:

General Rule: It shall consists of the value of


ALL property of the decedent, to the extent
of the interest of the decedent at the time of
his death. Including:

1. Dividends declared by a corporation before death


of stockholder although paid after death, if the
decedent was living on the record date.
2. Partnership profits even if paid after death of
partner.
3. Proceeds of life insurance policy payable to a
revocable beneficiary.
4. Right of usufruct if transferable to the heirs.
Valuation of Gross Estate or Gift
1. Valuation date - Time of death or gift.
2. Basis of valuation:
a) Real properties (land)
1) Prior to August 31, 1969 - Comm. Act 466
2) September 1, 1969 to August 13, 1974 -R.A. 611
3) August 14, 1974 to November 24, 1976 - PD 539
4) November 25, 1976 to December 31, 1985 - PD
1054
5) January 1, 1986 - Present - PD 1994

b) Improvements
1) June 10, 1986 to February 4, 1988 - RAMO 3-86
2) February 5, 1988 to February 18, 1991 - RAMO
1-88
3) February 19, 1991 to 1994 - RAMO 2-91
4) 1994-FMV per TD (Latest TD)
c) Shares of stocks, obligations or bonds - RAMO
1-82

d) Usufruct, annuities, use or habitation - Formula


using American Tropical Experience Table.
Beginning January 1, 1998, the valuation shall
take into account the probable life of the
beneficiary in accordance with the latest Basic
Standard Mortality Table.

e) Foreign currency and cash in bank - Peso value


at exchange rate at the time of death.

f) Other personal properties - Fair market value at


the time of death.
Exceptions:

1. Transfers in contemplation of death

The transfer shall be considered as


transfer in contemplation of death if during
the lifetime of the decedent, he still
retained in the property the following:

a. The possession or enjoyment thereof; or


b. The receipt of the income or the fruits
notwithstanding the transfer; or
c. The right either alone or in conjunction with any
person, to designate person who shall possess or
enjoy the said property or income therefrom.
2. Revocable Transfers – is a transfer by
trust or otherwise, where the enjoyment
thereof was subject at the date of his
death to any change through the exercise
of a power by:

a. The decedent alone;


b. The decedent in conjunction with any person
without regard to when or from what source the
decedent acquired such power, to alter, amend,
revoke or terminate; or
c. Where any such power is relinquished in
contemplation of the decedent’s death.
3. Property passing under the general power of
appointment – the right to designate the
person or persons who shall enjoy and
possess certain property from the estate of
a prior decedent.

Property over which the decedent held a


power of appointment is not includible in his
gross estate unless such power is general.

Exception for 1-3: Bona fide sale for an


adequate and full consideration in money or
in money’s worth.
4. Proceeds of life insurance –

Requisites to be subject to estate tax:

1. The decedent takes an insurance policy on


his own life;
2. The amounts are receivable by:
a) The estate, his executor/administrator
b) Any beneficiary designated as
revocable

The rule applies even if the proceeds never


formed part of the estate because they were
paid by the insurer to the beneficiary of the
estate.
5. Transfers for insufficient consideration –

Transfers, trusts, interests, rights or


powers (1-3) made, created, exercised, or
relinquished for a 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.

Value= excess of the FMV of the property @


the time of death of decedent over the
consideration received.
Exclusions/Exemptions:

1. The merger of usufruct in the owner of the


naked title.

2. Transmission or delivery of the inheritance


or legacy by the fiduciary heir or legatee to
the fideicommissary.

3. Transmission from the first heir, legatee or


donee in favor of another beneficiary in
accordance with the desire of the
predecessor.
4. All bequests, devises, legacies or transfers
to social welfare, cultural and charitable
institutions, no part of the net income of
which inures to the benefit of any
individual, provided that not more than 30%
of which shall be used for administration
purposes (PD 507, 1974)

5. GSIS proceeds/benefit

6. Accruals from SSS

7. Proceeds of life insurance where the


beneficiary is irrevocably appointed.
8. Proceeds of life insurance under a group
insurance taken by the employer (Not taken
out by the decedent upon his own life)

9. WAR damage payments.


10. USVA -RA 136.
11. Properties held in trust by decedent.
12. Transfer by way of bonafide sales.
13. Capital of the surviving spouse of a
decedent [Sec. 85 (H)]
14. Transfer of property to the National
Government or to any of its political
subdivisions.
- The transfer should be through
testamentary succession. Oral transfers are
not deductible.
- Unless the surviving spouse expressly joins
in making the donation, it shall be deemed
to have been made by the deceased spouse
alone.
15. Property previously taxed (Vanishing
deduction) – an amount allowed as deduction
for property which was previously taxed
with transfer tax prior to the decedent’s
death.
- If the same property is included in the
gross estate of the present decedent, its value
may be deducted in computing the tax on his
estate, subject to the following conditions:

a. The present decedent died within 5 years


from receipt of the property through
gratuitous transfer;
b. The property from which a vanishing
deduction is being claimed must be located
in the Philippines;
c. An estate or donor’s tax must have been
actually paid on such property (mere filing is
not sufficient)
d. The property on which vanishing deduction is
being claimed must be identified as the one
received from the prior decedent/donor;
and
e. No similar deduction must have been allowed
for the same property in the estate of the
prior decedent.
Vanishing deduction
100% - if within 1 yr.
80% - if more than one year to 2 years
60% - if more than 2 years to 3 years
40% - if more than 3 years to 4 years
20% - if more than 4 years to 5 years
16. Amount received by heirs under R.A. 4917

The following refer to the amount


received by the heirs which are not subject to
any tax under R.A. 4917:

a. Retirement benefits received by officials


and employees of private firms, whether
individual or corporate, in accordance with a
reasonable private benefit plan maintained
by the employer; provided that:
i. the retiring official/employee has
been in the service of the same employer for
at least 10 years and is not less than 50 yrs.
of age at the time of his retirement; and
ii. The benefits granted under R.A.
4917 shall be availed only once by an
official/employee.
b. Benefits granted in case of separation of
official or employee from service of the
employer due to death, sickness or other
physical disability or for any cause beyond the
control of the said official/employee.
- As a rule, the amount received by the heirs
under R.A. 4917 shall be included as part of
the gross estate in order to be allowed as part
of deductions from the decedent’s gross estate
DEDUCTIONS:
Funeral
A. Ordinary Expenses Judicial
Deductions Losses
Indebtedness Claims against the estate
Claims against insolvent
persons
Unpaid mortgages
Taxes

B. Special Standard deduction


deductions Medical expense
Family home
Citizens/residents

1. ELIT or Ordinary Expenses:

a) Funeral expenses:

i) CA 466 (July 1, 1939) - 5% of gross estate


ii) PD 69 (January 1, 1973) - 5% of gross estate
but not exceeding P50,000.00
iii) RA 7499 (July 28, 1992)- 5% of gross estate
but not exceeding P100,000.00.
iv) RA 8424 (January 1, 1998)- actual funeral
expenses incurred or 5% of gross estate but not
exceeding P200,000.00
• Actual funeral expenses shall mean those which
are actually incurred in connection with the
interment or burial of the deceased.
The funeral expenses shall consist of the following:
• Mourning apparel of the surviving spouse and
unmarried minor children of the deceased bought and
used on the occasion of the burial;
• Expenses for decedent’s wake including food and
drinks before the burial;
• Fees ad charges for the rites and ceremonies
incident to the burial.
• Expenses for the death notice published, telegrams
and cable grams sent to relatives of the deceased.
• Cost of the burial lot, tombstone or monument but
excluding the cost of upkeep.
b) Judicial expenses – are allowed deductions
incurred for the administration, inventory taking of
properties, and settlement of the estate.

• To be deductible, judicial expenses should be


incurred during the settlement of the estate but
not beyond the last day prescribed by law, or
the extension thereof, for the filing of the
estate tax return. [Sec. 86 (A)(1)(a)]

• As a rule, a judicial expense allowed as


deduction from the gross estate must be for the
benefit of the estate.
c) Casualty losses – these include all losses incurred
during the settlement of the estate arising from
theft, embezzlement, fire, shipwreck, storms, and
other calamities [Sec. 86(A)(1)(e)]

• The loss should have been incurred (on the


property included in the gross estate) not later
than the last day for the payment of the estate
tax as long as:
- the amount of loss is not compensated
for by any insurance or extra-judicial settlement
- they have not been claimed as deduction
from gross income for purposes of income tax
computation at the time of the filing of the return.
d) Indebtedness
• Claims against the estate
Requisites:
- the liability represents personal obligation of
the deceased existing at the time of his death,
except: unpaid funeral or medical expenses;
- the liability was contracted in good faith and
for adequate and full consideration in money or
money’s worth;
-the claim must be a debt or claim which is valid
in law and enforceable in court;
- the indebtedness must not have been condoned
by the creditor or the action to collect from the
decedent must not have prescribed.
Substantiation Requirements:
- The debt instrument must be duly notarized at the
time the indebtedness was incurred.
Exception: Loans granted by financial
institutions where notarization is not part of the
business practice/policy of the financial institution-
lender.
- Duly notarized Certification from the creditor as to
the unpaid balance of the debt, including interest
as of the time of death.
- Proof of financial capacity of the creditor to lend
the amount at the time the loan was granted.
- A statement under oath executed by the
administrator/executor of the estate reflecting
disposition of the proceeds of the loan if said loan
was contracted within 3 years prior to the death of
the decedent.
• Claims against insolvent persons

Requisites:
- the amount of said claims has been initially
included as part of his gross estate.
- the incapacity of the debtor to pay his debt is
proven not merely alleged.

• Unpaid mortgages or indebtedness

- to be deductible, the property mortgaged must


be part of the gross estate at fair market value
gross of any unpaid mortgage.

e.) Unpaid taxes – taxes incurred prior to the date


of the decedent’s death and remained unpaid as of
the date of death.
- to be deductible, taxes should qualify as claims
against the estate.
Taxes that are deductible from gross estate:
a. Property taxes accrued prior to the decedent’s
death;
b. unpaid taxes on income received by decedent
before his death;
c. gift taxes on lifetime gifts which are unpaid
upon death;
Taxes that are not deductible:
a. income tax upon income received after the death
of the decedent;
b. Property taxes not accrued before the
decedent’s death; and
c. estate tax
2. Special Deductions – are deductions that are
categorically permitted by special law as allowance
to reduce the taxable estate.

a. Standard Deduction – a standard deduction of


P1,000,000 is allowed in addition to the allowable
deductions.
- this deduction is allowed from the estate of a
citizen or resident without need of substantiation.

b. Medical Expenses – cost of medicines, hospital


bills, doctor’s fees, etc. actually incurred with a
maximum amount of P500,000 is allowed as
deduction from gross estate.
Requirements:

i. It must be incurred by the decedent (Filipino


or resident alien) within one year prior to his death
which shall be duly substantiated with receipts.

ii. Any amount of medical expenses incurred


within one year from death in excess of P500,000
shall no longer be allowed as a deduction.

c. Family Home – the amount is equivalent to the


current fair market value of the decedent’s family
home, which shall not exceed P1,000,000 allowed
by law to be deducted from the gross estate.
- the excess shall be subject to estate tax.
- a decedent is entitled only to one family home.
Family home – the dwelling house, including the land
on which it is situated, where the husband and
wife, or head of the family, and members of their
family reside, as certified by the Barangay Captain
of the locality. (Rev. Reg. 2-2003)
Non-resident Aliens
1. ELIT or Ordinary Expenses - limited
Expenses not allowed:
a) Family home
b) Standard deduction
c) Medical expenses
d) Retirement pay (R.A. 4917)
2. Transfer for public use
3. Vanishing deduction on property in the
Philippines
* No allowed deductions if properties outside
the Phils. are not declared.
• Estate Tax Credit – application of tax
credit is available to citizen or resident
alien decedent whose properties outside the
Phils. Are also subjected to estate taxes in
the foreign country.

Administrative Requirements:
Exceeds P20,000 Exceeds P200,000 Exceeds P2,000,000
1. Notice of death Yes Yes Yes
(within 2 months)
2. Estate tax return No Yes Yes
(within 6 months,
extension-not
exceeding 30 days)
3. CPA certificate No No Yes
(within 6 months)
Additional Requirement:
There is an additional requirement of
registering the estate of the decedent and
getting a separate TIN for the estate
pursuant to Sec. 236(I) of the R.A. 8424.

Liability for payment of Estate Tax:


Primary liable: The estate through the
executor or administrator.
Subsidiary obligation: The heirs or
beneficiaries but its extent shall in no case
exceed that value of his share in the
inheritance.