tax 2 reviewer

Taxation II USC-Law Rm. 404 AY 2014-2015 Pre-mid Reviewer. ESTATE TAXATION ESTATE TAX – Estate tax is an excise tax imposed on the privilege of transmitting properties at the time of death. It is also a tax on inter-vivos transfers or transfers made by the decedent during his lifetime that partake and is considered by the tax authorities as taking the form of a testamentary disposition of property. It is not imposed on the property nor on the person who receives the estate nor on the decedent. It is an excise tax. RATE OF ESTATE TAX: Exempt to 20% PURPOSES OF ESTATE TAX 1. To raise revenues in order to defray the expenses of the government. (Supplements income tax) 2. Facilitates the distribution of wealth so that those who have more gets to be taxed more. 3. To prevent undue accumulation of wealth. THEORIES WHICH SUPPORTS THE ESTATE TAX Benefits-Received Theory – The State expects to be paid for the services that it has rendered which you benefited in a system of distribution or property. Ability to Pay Theory – Those who have more properties to transfer to their heirs upon death shall pay more estate taxes. Redistribution of Wealth Theory – This is founded upon the principle of reduction of social inequality. The taxes paid by rich people are programmed for disbursement by Congress more for the benefit of the poor in terms of social services, education, health, etc. State Partnership Theory or Privilege Theory – Succession to the property of a deceased person is not a fundamental right and consequently, the legislature can constitutionally burden such succession with a tax. The government is your partner in increasing you wealth. You get to have that privilege because you have a partner. CLASSIFICATIONS OF A TAXPAYER FOR PURPOSES OF ESTATE TAX 1. Resident Citizen – Taxable for estate within and without the Philippines 2. Non-Resident Citizen – Taxable for estate within and without the Philippines 3. Resident Alien – Taxable for estate within and without the Philippines 4. Non-Resident Alien – Taxable for estate within the Philippines RESIDENCE - refers to the permanent home or domicile, the place to which whenever absent, for business or pleasure, one intends to return. WHEN DO YOU DETERMINE THAT AN INDIVIDUAL IS A RESIDENT CITIZEN 1) You have to qualify as a Filipino citizen under the Constitution: 1. Those who are citizens of the Philippines at the time of the adoption of thisConstitution; 2. Those whose fathers or mothers are citizens of the Philippines; 3. Those born before January 17, 1973, of Filipino mothers, who elect Philippinecitizenship upon reaching the age of majority; and 4. Those who are naturalized in accordance with law. 2) You have to establish domicile or permanent residence here in the Philippines. HOW DO YOU BECOME A NON-RESIDENT CITIZEN 1) A citizen of the Philippines who establishes to the satisfaction of the Commissioner the fact of his physical presence abroad with a definite intention to reside therein. 2) A citizen of the Philippines who leaves the Philippines during the taxable year to reside abroad, either as an immigrant or for employment on a permanent basis. 3) A citizen of the Philippines who works and derives income from abroad and whose employment thereat requires him to be physically present abroad most of the time during the taxable year.  most of the time: it means that that particular citizen stays abroad for 183 days or more during a calendar year. 4) A citizen who has been previously considered as nonresident citizen and who arrives in the Philippines at any time during the taxable year to reside permanently in the Philippines shall likewise be treated as a nonresident citizen for the taxable year in which he arrives in the Philippines with respect to his income derived from sources abroad until the date of his arrival in the Philippines. 5) The taxpayer shall submit proof to the Commissioner to show his intention of leaving the Philippines to reside permanently abroad or to return to and reside in the Philippines as the case may be for purpose of this Section. RESIDENT ALIEN - A person not a citizen of Philippines who establishes permanent residency in the Philippines. NON-RESIDENT ALIEN - A person not a citizen of Philippines who fails to establish permanent residency in the Philippines. RECIPROCITY RULE AS TO INTANGIBLE PERSONAL PROPERTY OF NON-RESIDENT ALIEN A decedent’s (NRA) intangible personal property may be subject to transfer taxes both in his place of domicile or residence and in the place where such property has a situs or is located. In order to prevent multiplicity of taxation, the Tax Code provides that the tax imposed by this Title shall be credited with the amounts of any estate tax imposed by the authority of a foreign country, subject to limitation (Sec. 86[E], NIRC). If reciprocity applies, these intangible personal properties will not be included in the computation of the net estate of the NRA. In all other cases – RA, RC, NRC – their intangible personal property will always form part of the gross estate. RECIPROCITY RULE: No tax shall be imposed in respect to intangible personal property of the NRA: a) When the foreign country does not impose transfer tax of any character in respect of intangible personal property of citizens of the Philippines not residing in that foreign country, or b) When the foreign country imposes transfer taxes but grants similar exemption from transfer taxes in respect of intangible personal property owned by the citizens of the Philippines not residing in that foreign country. INTANGIBLE PERSONAL PROPERTIES THAT HAVE SITUS IN THE PHILIPPINES: “Everything not saved will be lost.” -Nintendo "Quit Screen" message

Page1

Taxation II USC-Law Rm. 404 AY 2014-2015 Pre-mid Reviewer. 1. Franchises, patents, copyrights and royalties exercised in the Philippines.  It may not be registered here in the Philippines as long as it is being used in the Philippines. 2. Shares, obligations, or bonds issued by any corporation or sociedad anonima organized or constituted in the Philippines in accordance with its laws; 3. Shares, obligations, or bonds issued by any foreign corporation 85% of the business of which is located in the Philippines; 4. Shares, obligations, or bonds issued by any foreign corporation is such shares, obligations or bonds have acquired business situs  they are used in furtherance of its business in the Philippines by the foreign corporation in the Philippines  Example: A US Corporation issued a bond to augment the funds of the corporation in order to expand its operations in the Philippines. That bond is considered as having situs here in the Philippines because it is used in furtherance of its business in the Philippines. 5. Sharesor rights in partnership, business or industry established in the Philippines (Sec 104, NIRC). 6. Bank deposits of banks located in the Philippines. 7. Accounts receivable from debtors residing in the Philippines. PROPERTIES COVERED BY GROSS ESTATE, IN GENERAL Allpropertiesand interests of the decedent at the time of his death shall be included in his gross estate including transfers akin to a testamentary disposition. The properties includible in the gross estate of the decedent would depend on whether or not the decedent is a citizen or alien and whether or not the alien decedent is a resident of the Philippines at the time of his death.  Requires ownership but not possession. COMPOSITION OF THE GROSS ESTATE The decedent’s gross estate includes the following (Except for No 8, all these are considered transfers akin to a testamentary disposition): 1. Decedent’s interest; 2. Transfers in contemplation of death; 3. Revocable transfers; 4. Property passing under general power of appointment; 5. Proceeds of life insurance; 6. Prior interests; 7. Transfers for insufficient consideration; 8. Capital of the surviving spouse (Sec. 85, NIRC) 1. DECEDENT’S INTEREST The general rule is that all property owned by the decedent has to be included in the gross estate, to the extent of the value of his interest in such property at the time of his death. Thus, if the decedent fully owns a piece of property, the value of such property shall be included in the gross estate. However, if he owns only a proportionate share in the property, or is entitled only to its use, it is only the value of such share or such use that has to be included.  Requires ownership but not possession.  The decedent may only own the legal title but not the beneficial ownership or vice-versa. o Example: Usufruct - To determine the value of the right of usufruct, use or habitation, as well as that of annuity, there shall be taken into account the probable life of the beneficiary in accordance with the latest Basic Standard Mortality Table, to be approved by the Secretary of Finance, upon recommendation of the Insurance Commissioner. 2. TRANSFERS IN CONTEMPLATION OF DEATH Transfers in contemplation of death cover those which are transfers made during the lifetime but are considered as part of the gross estate. If the motive behind the transfer is due to an impending death that he has been called or he perceives, then the transfers may be in contemplation of death and at the time of his death it will be considered as transfer in contemplation of death and it will be considered as part of his gross estate subject to estate tax.  Controlling motive is the thought of death which made him dispose of his property regardless of time from the transfer until the time of death.  Example: Mr. A thinks that he will die 10 years from now. He made a transfer to take effect at the time of his death. Is it a transfer in contemplation of death? Yes as long as it is the thought of death which made him dispose of his property regardless of time from the transfer until the time of death.  Before, if the transfer was made 3 years before the death of the decedent, it is already considered as in contemplation of death. Now, it is simply the thought of death which makes it a transfer in contemplation of death. CIRCUMSTANCES TAKEN INTO ACCOUNT INCLUDE: 1) Age and state of health of the decedent at the time of gift, especially where he was aware of a serious illness; 2) Length of time between the gift and the date of death. A short interval suggests the conclusion that the thought of death was in the decedent’s mind, and a long interval suggests the opposite. 3) Concurrent making of a will or making a will within a short time after the transfer. 3. REVOCABLE TRANSFER A revocable transfer is made when there is a transfer of property with the transferor or decedent retaining the rights to alter, amend, terminate or revoke the transfer during his lifetimewhether or not such rights to revoke, terminate, amend or alter has been exercised. So long as that right remains until the day of his death, it is still under the control of the decedent, it is part of his properties because he actually will enjoy the income, the rights and the enjoyment of the property.  TAKE NOTE: So long as the transferor will retain those rights until the day of his death, it is as if he has full dominion of his property and it willform part of his gross estate.  Example:Mrs. J transferred her car to Ms. L with the condition that she reserves the right to revoke the transfer during Ms. J’s lifetime. When Ms. J died, the car will form part of the gross estate of Ms. J.

“Everything not saved will be lost.” -Nintendo "Quit Screen" message

Page2

Taxation II USC-Law Rm. 404 AY 2014-2015 Pre-mid Reviewer. 

The right to alter, revoke, amend or terminate the enjoyment of the property by the transferee does not need to be actually exercised by the transferor as long as the right has been reserved, even if it is in conjunction with another person. o Example: Mrs. J, transferor, along with her husband, may reserve the right to alter, amend, terminate or revoke the transfer during their lifetime.

TRANSFERS WITH RETENTION Not totally the same as revocable transfers but somewhat takes the form of a revocable transfer because there is a right (to alter,amend, terminate or revoke) that has been retained or reserved by the transferor during the time that the property has been transferred during his lifetime. So long as the transferor has retained those rights until the day of his death, he can still say that he, the transferor, may have at anytime have taken back the property. So it’s equivalent to full dominion over the property, still part of his gross estate as if there was no transfer made. This may fall under Revocable Transfer or Transfers In Contemplation of Death, provided that the retention of the right relating to an intention of controlling the property. Example: You retain the right to income while you transfer the property during your lifetime and the enjoyment of the income is retained until your death. It may be considered a transfer in contemplation of death rather than a bona fide transfer. 4. PROPERTY PASSING UNDER GENERAL POWER OF APPOINTMENT A “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 decedent. GENERAL It is “general” when it gives to the donee (decedent) the power to appoint any person he pleases, including himself, his spouse, his estate, executor or administrator, and his creditor, thus having as full dominion over the property as though he owned it.  Example: Mr. A, during his lifetime gave a painting to Mrs. B along witha general power of appointment. Mrs. B appointed Mrs. C to enjoy or possess the painting. When Mrs. B dies, this painting will be considered part of her gross estate. SPECIAL It is “special” when the donee (decedent) can appoint only among a restricted or designated class of persons other than himself. The power to dispose of property at death by the exercise of a general power of appointment is equivalent of ownership. 5. PROCEEDS OF LIFE INSURANCE The life insurance policy must be taken out by the decedent himself. If it is not taken by the decedent himself, it shall not be part of the estate.  Taxation of the proceeds of life insurance will depend on the designated beneficiary and the manner of designation of such beneficiary, such that if the beneficiary is the estate itself, the executor or the administrator, IT FORMS PART OF THE GROSS ESTATE regardless of the manner of designation.  If the beneficiary is other than the estate, executor, or administrator and the designation is revocable (which is the default in the insurance code), THE INSURANCE PROCEEDS FORM PART OF THE GROSS ESTATE.  If the beneficiary is other than the estate, executor, or administrator and the designation is irrevocable, THE INSURANCE PROCEEDS WILL NOT FORM PART OF THE GROSS ESTATE. The transfer is absolute and the insured did not retain any legal interest in the insurance.  Example: Mr. A secured a life insurance in favor of his estate for P1M. Later on, Mr. A died and the proceeds of the insurance policy is now collected. Is it subject to income tax? No, it is exempted from income tax. Is it subject to estate tax? Yes, regardless of the manner of designation. o What if the beneficiary is the girlfriend of Mr. A?Is it subject to income tax? No. Is it subject to estate tax? It depends on the revocability of the designation. o What if the company of Mr. A secures a life insurance for the benefit of the girlfriend of Mr. A. The designation is irrevocable. Is it subject to income tax? Yes. How about estate tax? No, because it is the company was the one who secures the insurance. The revocability of the designation is irrelevant. 6. PRIOR INTERESTS - No longer relevant now considering that the law has been in effect for more than 17 years now. 7. TRANSFERS FOR INSUFFICIENT CONSIDERATION If during the lifetime of the decedent, he has entered into transactions for inadequate or insufficient consideration, the property that was sold for insufficient consideration will still form part of his gross estate at the time of his death provided that no prior donor’s tax has been paid on the said transaction. The law does not provide for a time frame wherein transfers may be classified as one with insufficient consideration. For as long as it transpired during the decedent’s lifetime, it should be included in the gross estate. In transactions TANTAMOUNT TO A FICTITIOUS SALE OR SIMULATED SALE, where no consideration was in fact given, the FMV at the time of death less the consideration paid, will form part of the gross estate of the decedent.  TAKE NOTE: Do not include Capital Assets subject to Capital Gains Tax for purposes of Transfers for Insufficient Consideration.  Classification of the property matters because if the sales involves a capital asset which is subject to Capital Gains Tax, the tax on that transfer has already been accounted for, based on an assumed gain. Thus, it can no longer be considered as transfers for insufficient consideration for purposes of Estate Tax. The property can no longer ba taxed again. o Example: Mr. M owns a land with a Fair Market Value of P1M. He sold the land to Mr. X for P200K (selling price). When Mr. M dies, such transfer would no longer be considered as transfer for insufficient consideration and the land will not form part of his gross estate because the asset has already been subjected to CGT.  For properties which falls under Transfers for Insufficient Consideration, you have to consider the FMV of the property at the time of the death of the decedent. o Example: Mr. M, during his lifetime, sold a property with a FMV of P1M for a gross selling price of P200,000. At the time of his death, the FMV of the property is P1.5M. The amount that will formed part of his gross estate would be P1.3M (P1.5M – P200K) o Had the FMV of the property gone down to P400K at the time of Mr. M’s death, the amount that will formed part of his gross estate would be P200K (P400K – P200K)

“Everything not saved will be lost.” -Nintendo "Quit Screen" message

Page3

Taxation II USC-Law Rm. 404 AY 2014-2015 Pre-mid Reviewer. TAKE NOTE: In all the transfers akin to testamentary disposition, the exception is when the transfer is made bona fide for an adequate and full consideration in money or money’s worth. The last two will form part of the gross estate of the decedent but will later be deducted as part of the Deductions: 8. CAPITAL OF THE SURVIVING SPOUSE 9.REPUBLIC ACT No. 4917 - An act providing that retirement benefits of employees of private firms shall not be subject to attachment, levy, execution, or any tax whatsoever. The 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 shall be exempt from all taxes and shall not be liable to attachment, garnishment, levy or seizure by or under any legal or equitable process whatsoever except to pay a debt of the official or employee concerned to the private benefit plan or that arising from liability imposed in a criminal action. Provided: 1. That the retiring official or employee has been in the service of the same employer for at least ten (10) years and 2. Is not less than fifty years (50) of age at the time of his retirement 3. Availed of by an official or employee only once: 4. That in case of separation of an official or employee from the service of the employer due to death, sickness or other physical disability or for any cause beyond the control of the said official or employee, any amount received by him or by his heirs from the employer as a consequence of such separation shall likewise be exempt as hereinabove provided.  The term "reasonable private benefit plan" means a pension, gratuity, stock bonus or profit sharing plan maintained by an employer for the benefit of some or all of his officials and employees, wherein contributions are made by such employer or officials and employees, or both. ACQUISITIONS AND TRANSMISSIONS NOT SUBJECT TO ESTATE TAX These involve transfers or transmittals which do not give rise to estate tax even though it is in some way connected to someone’s prior death. 1. MERGER OR USUFRUCT IN THE OWNER OF THE NAKED TITLE This involves a situation where upon the death of a decedent, property is transferred to one person (usufructuary) giving the latter the right to enjoy the property, and to a second person (naked or beneficial owner), the naked title to the property. When the usufructuary dies and that the enjoyment of the property is transferred to the naked owner (merger), this transfer is not subject to estate tax because the same property has already been subjected to tax upon the decedent’s death. The transfer between the decedent and the usufructuary has already been subjected to estate tax. The subsequent transfer from the usufructuary to the naked owner should be therefore no longer taxed. Example: Upon the death of Mr. D, the naked title of his property is transferred Mr. N, and the usufructuary of the same property to Mr. U. Upon the transfer of the property from Mr. D to Mr. U, such property will be subjected to estate tax. When Mr. U dies and the enjoyment of the property will be merge with the naked title of Mr. N, the property will no longer be subjected to estate tax. 2. TRANSMISSION BY THE FIDUCIARY HEIR OR LEGATEES TO THE FIDEICOMISSARY This involves fideicomissary substitution wherein the decedent provides in his will that upon the death of the fiduciary heir, the property shall be transferred to the fideicomissary heir. The subsequent transfer (from fiduciary heir to fideicomissary) shall be free from estate taxation because the same property has already been taxed upon the first transfer.

Example: Mr. A died, in his will, he named Mr. B as the fiduciary heir and Mr. C as the fideicommissary. Upon the transfer of the property from Mr. A to Mr. B, the fiduciary heir, it will be subjected to estate tax. Upon the death of Mr. B and the transfer of the property from Mr. B to Mr. C, the fideicommissary heir, the property will no longer be subjected to estate tax. Review: Requisites of Fideicommissary Substitution: 1) There must be a first heir (fiduciary) called primarily or preferentially to the enjoyment of the property. 2) There must also be a second heir (fideicommissary). 3) There must be an OBLIGATION CLEARLY IMPOSED upon the first heir to PRESERVE AND TRANSMIT to the second heir the whole or part of the inheritance 4) The first and the second heirs must be only one degree apart. 5) Both heirs must be alive, or at least conceived, at the time of the testator’s death. 3. TRANSMISSION FROM THE FIRST HEIR, LEGATEE OR DONEE IN FAVOR OF ANOTHER BENEFICIARY (in accordance with the desire of the predecessor) This contemplates a situation where the decedent’s will provides that his property shall be transmitted to two heirs proportionately. The subsequent transfer from the 1st heir to the 2nd heir will not be subject to estate tax if such transfer was made in accordance with the will of the decedent. This is so because the estate tax has already been imposed on the 1st transfer. Example: If in the will of decedent A there will be two beneficiaries, B and C, each given ½ of the property, if B transfers his half to C thereby making the property whole, this 2nd transfer is NOT SUBJECT TO ESTATE TAX.

“Everything not saved will be lost.” -Nintendo "Quit Screen" message

Page4

Taxation II USC-Law Rm. 404 AY 2014-2015 Pre-mid Reviewer.

4. BEQUESTS, DEVISES, LEGACIES OR TRANSFERS TO SOCIAL WELFARE, CULTURAL AND CHARITABLE INSTITUTIONS This transfer also includes transmissions made to NON-STOCK, NON-PROFIT EDUCATION INSTITUTIONS. Although not included in the enumeration provided for under the NIRC, such exemption is provided for in Art. XIV, Sec. 4(4) of the 1987 Constitution which provides that bequests to be actually, directly and exclusively used for educational purposes shall be exempt from tax. Requisites for this transmission to be considered non-taxable: 1. Transfer to a social welfare, cultural and charitable institutions; 2. No part of the income inures to the benefit of any individual; and 3. Not more than 30% of the said bequests, devises, legacies or transfers 5. OTHERS The other transmissions of property or receipts/proceeds of the estate of the decedent that are not subject to estate tax are the following: a. Benefits received from SSS or GSIS; b. Benefits received from U.S. Veterans Administration; c. War benefits given by the Philippine government and U.S. government due to damages suffered during the war; d. Grants and donations to the Intramuros Administration; e. If the decedent holds a property in trust for someone else, usually a beneficiary, the general rule is that it does not form part of the estate of the decedent because ultimately, it will be in favor of the beneficiary, unless it falls under the general power of appointment over which the decedent has been holding on to it with the free reign to designate himself as the ultimate beneficiary; f. Transfers by way of bona fide sales of adequate and full consideration; g. Life insurance proceeds from GSIS and from private insurance companies so long as the beneficiary designated irrevocably is a third person other than the estate, administrator, executor. It will never form part of the gross estate of the decedent; anf h. Capital of the surviving spouse. Even if initially we consider the assets of both spouses during lifetime, we eventually exclude the exclusive properties of the surviving spouse. FORMULA ESTATE TAX Gross estate Less: Deductions Less: ½ share of surviving spouse Net estate X Estate Tax Rates Estate tax due Less: Tax Credits Estate tax payable Nov. 18, 2014 TAKE NOTE: Transfers with retention may fall either: (1) Revocable Transfers; or (2) Transfers in contemplation of death, provided that the retention of the right could be relating to an intention of controlling the property. Example: you retain the right to receive income while you transfer the property during your lifetime and the enjoyment of the income is retained until your death, then it may be considered as transfer in contemplation of death. Except if the transfer involves a consideration which is substantial and adequate paid by the transferee. But for it to be considered as revocable transfer, what has to be retained is THE RIGHT TO ALTER, AMEND, REVOKE, or TERMINATE THE TRANSFER. DEDUCTIONS ALLOWED TO THE ESTATE OF CITIZEN OR A RESIDENT: A. EXPENSES, LOSSES, INDEBTEDNESS AND TAXES (ELIT) (1) Expenses, Losses, Indebtedness, and taxes. –Such amounts:
 (a) For actual funeral expenses or in an amount equal to five percent (5%) of the gross estate, whichever is lower, but in no case to exceed Two hundred thousand pesos (P200,000); (b) For judicial expenses of the testamentary or intestate proceedings; I For claims against the estate: Provided, That at the time the indebtedness was incurred the debt instrument was duly notarized and, if the loan was contracted within three (3) years before the death of the decedent, the administrator or executor shall submit a statement showing the disposition of the proceeds of the loan; (d) For claims of the deceased against insolvent persons where the value of decedent’s interest therein is included in the value of the gross estate; and (e) For unpaid mortgages upon, or any indebtedness in respect to, property where the value of decedent’s interest therein, undiminished by such mortgage or indebtedness, is included in the value of the gross estate, but not including any income tax upon income received after the death of “Everything not saved will be lost.” -Nintendo "Quit Screen" message

Page5

Taxation II USC-Law Rm. 404 AY 2014-2015 Pre-mid Reviewer. the decedent, or property taxes not accrued before his death, or any estate tax. The deduction herein allowed in the case of claims against the estate, unpaid mortgages or any indebtedness shall, when founded upon a promise or agreement, be limited to the extent that they were contracted bona fide and for an adequate and full consideration in money or money’s worth. There shall also be deducted losses incurred during the settlement of the estate arising from fires, storms, shipwreck, or other casualties, or from robbery, theft or embezzlement, when such losses are not compensated for by insurance or otherwise, and if at the time of the filing of the return such losses have not been claimed as a deduction for the income tax purposes in an income tax return, and provided that such losses were incurred not later than the last day for the payment of the estate tax as prescribed in Subsection (A) of Section 91. 1)

FUNERAL EXPENSES

For expenses to be considered under this category, such expenses must be incurred from the moment of death until interment/burial. Example: if you write a thank you letter to those who attended the burial, a year after the burial. --- no longer deductible because the expenses should be incurred FROM the moment of death UNTIL interment. If the thank you letter was given out on the day of the funeral --- it can be deducted. Provided that it has to be simultaneous. The following are considered funeral expenses: Mourning apparel of the surviving spouse and unmarried minor children of the deceased, bought and used on the occasion of the burial Expenses for the deceased’s wake, including food and drinks Publication charges for death notices (obituaries) Telecommunications 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. Interment and/or cremation fees and charges All other expenses incurred for the performance of the rites and ceremonies incident to interment Funeral expenses will not be deducted outright. The amount allowable as deductions is: The amount actually paid or incurred; OR 5% of the gross estate, WHICHEVER IS LOWER But in no case to exceed P 200,000 2)

JUDICIAL EXPENSES

These are incurred with respect to settlement of the estate, testamentary or intestate. CIR vs CA, CTA and Pajonar Judicial expenses are expenses for administration Deduction is limited to such administration expenses as are: (1) actually and necessarily incurred in the collection of the assets of the estate, (2) payment of the debts, and (3) distribution of the remainder among those entitled thereto Such expenses may include: o executor’s or administrator’s fees, o attorney’s fees, o court fees and charges, o appraiser’s fees, o clerk hire, o costs of preserving and distributing the estate and storing or maintaining it, o brokerage fees or commissions for selling or disposing of the estate, and the like. the notarial fee paid for the extrajudicial settlement is clearly a deductible expense since such settlement effected a distribution of Pedro Pajonar’s estate to his lawful heirs. Similarly, the attorney’s fees paid to PNB for acting as the guardian of Pedro Pajonar’s property during his lifetime should also be considered as a deductible administration expense. PNB provided a detailed accounting of decedent’s property and gave advice as to the proper settlement of the latter’s estate, acts which contributed towards the collection of decedent’s assets and the subsequent settlement of the estate. Take note of the 3 general classifications of judicial expenses as mentioned in the Pajonar case. But under the law, there is a reckoning point for which these judicial expenses will be allowed as deduction: Within 6 months from the death of the decedent which coincides with the date of filing of the estate tax return Or within the 30 days extension granted by the Commissioner under meritorious cases. TAKE NOTE: For FILING of Estate Tax Return: o Within 6 months from the death of the decedent; or o Within the 30 days extension (this is on top of the 6 months period) granted by the Commissioner under meritorious cases -

For PAYMENT of Estate Tax Return: o GR: paid at the time the ETR is filed o EXCEPT: if it will impose UNDUE HARDSHIP on the estate, extension of time of payment is allowed—  Within 5 years for judicial settlement  With 2 years for extrajudicial settlement

3)

LOSSES

These losses are: 1) Casualty losses from fire, storms, shipwreck, or other casualties “Everything not saved will be lost.” -Nintendo "Quit Screen" message

Page6

Taxation II USC-Law Rm. 404 AY 2014-2015 Pre-mid Reviewer. 2) 3) 4)

Losses from robbery Losses from theft Losses from embezzlement

These are the same type of losses that can be deducted in your income tax for estate. Similar as that of the losses under income tax of estate, if the loss or portion thereof is covered or indemnified by insurance, that loss or that portion of the loss is NOT DEDUCTIBLE. Does the executor or administrator of the estate have the option to deduct these losses from the income tax of the estate or from the gross estate of the decedent? After all they refer to the one and the same type of losses? The law states: “and if at the time of the filing of the return such losses have not been claimed as a deduction for the income tax purposes in an income tax return”. Take note of that. That tells us that the executor and the administrator has the option to either deduct it from the income or from the gross estate. The rule is that it is mutually exclusive. Once you already opted to deduct it from the income tax. You cannot deduct it anymore from your gross estate. When should the losses be incurred? From the death of decedent until the DATE OF PAYMENT. It also mean that because the law says “provided that such losses were incurred not later than the last day for the payment of the estate tax as prescribed in Subsection (A) of Section 91” only, it precludes losses that incurred during the 2 year or 5 year extension of payment as mentioned in subsection (B) of Section 91. So again you refer to what the law says. IOW, do not include losses incurred during the extension of payment. 4)

CLAIMS AGAINST THE ESTATE

Dizon vs CA the term “claims” required to be presented against a decedent’s estate is generally construed to mean debts or demands of a pecuniary nature which could have been enforced against the deceased in his lifetime, or liability contracted by the deceased before his death. Therefore, the claims existing at the time of death are significant to, and should be made the basis of, the determination of allowable deductions. Basis of this type of claim: date-of-death valuation or the value at the time of death of the decedent Reason why the SC use the date-of-death valuation principle in the Dizon case: First. There is no law, nor do we discern any legislative intent in our tax laws, which disregards the date-of-death valuation principle and particularly provides that post-death developments must be considered in determining the net value of the estate. It bears emphasis that tax burdens are not to be imposed, nor presumed to be imposed, beyond what the statute expressly and clearly imports, tax statutes being construed strictissimi juris against the government. Any doubt on whether a person, article or activity is taxable is generally resolved against taxation. Second. Such construction finds relevance and consistency in our Rules on Special Proceedings wherein the term “claims” required to be presented against a decedent’s estate is generally construed to mean debts or demands of a pecuniary nature which could have been enforced against the deceased in his lifetime, or liability contracted by the deceased before his death. Therefore, the claims existing at the time of death are significant to, and should be made the basis of, the determination of allowable deductions. ATTY A.: In other words, whatever is the value during the lifetime of the decedent should also be the value of the claims when you compute for the estate tax. The requirements for the deductibility of claims against the estate are: a.

Must be a personal obligation of the deceased existing at the time of his death (except unpaid funeral expenses and unpaid medical expenses);

b.

Liability must have been contracted in good faith and for adequate and full consideration in money or money’s worth; -

Example of debt contracted in bad faith: When the decedent obtained a loan at the time when he knew that he will only be living for 2 months. So such contracted debt will not form part of claims against the estate.

c.

The claim must be a debt or claim which is valid in law and enforceable in court

d.

Indebtedness not condoned by the creditorduring the lifetime of decedent or the action to collect from the decedent must not have prescribed

e.

General rule: Must be duly substantiated. -

Just like funeral expenses, you cannot claim funeral expenses w/o presenting receipts, invoices for the costs.

If the claim against the estate arose from a contract of loan or a promissory note, the following additional requirements are needed: a.

The debt instrument must be duly notarized at the time the indebtedness was incurred -

b.

Except: Loans granted by financial institutionswhere 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

“Everything not saved will be lost.” -Nintendo "Quit Screen" message

Page7

Taxation II USC-Law Rm. 404 AY 2014-2015 Pre-mid Reviewer. c.

Proof of financial capacity of the creditor to lend the amount at the time the loan was granted, as well as its latest audited balance sheet with a detailed schedule of its receivable showing the unpaid balance of the decedent-debtor

d.

A statement under oath executed by the administrator or executor of the estate reflecting the disposition of the proceeds of the loan if said loan was contracted within 3 years prior to the death of the decedent.

If the claims against the estate arose from a simple purchase of goods or services, it need not be substantiated by a contract or a promissory note. They are usually substantiated by invoices and receipts for the purchase of the goods or services – a certification from the creditor still that the amount is collectible, including interest. If the debt is condoned, the general rule is that it should not be deductible. Except: If the debt is condoned after the death,the same is deductible. Condonation should be taken at the point of death. (This exception goes against the lifeblood doctrine. Furthermore, whether or not the condonation is before or after the decedent’s death, such will not reduce his estate. The most plausible view must be to favour the lifeblood doctrine and that any condonation of debt must be non deductible. Nonetheless, the exception is upheld because of jurisprudence.) 5)

CLAIMS AGAINST THE INSOLVENT

It is the decedent who is the creditor who has extended a loan but can no longer collect the loan because the debtor is already insolvent. A person is insolvent when his liabilities exceeds his assets. For claims against insolvent persons to be deductible from the gross estate (Sec. 86(d), it is important to show that: a. b.

The amount of said claims has been initially included as part of his gross estate; and The incapacity of the debtors to pay their obligations is proven, not merely alleged.

CLAIMS AGAINST THE ESTATE Decedent is DEBTOR Claim is a PAYABLE Need not be included first in the gross estate

6)

CLAIMS AGAINST THE INSOLVENT Decedent is the CREDITOR Claim is a RECEIVABLE The value needs to be included first gross estate before it could be deducted

UNPAID MORTGAGES OR INDEBTEDNESS

Requisites in order for unpaid mortgages to be deductible against the gross estate: a.

b.

The FULL VALUE of the decedent’s interest in the property encumbered by such mortgage or indebtedness is included in the value of the gross estate; -

The value pertains to the property’s FMV at the time of the death of the decedent on the mortgaged property.

-

Where the indebtedness was secured by mortgage of a real property situated outside the Philippines, the value may not be deducted because the same is not includible in the gross estate for the reason that the decedent at the time of his death was a nonresident alien.

-

In an accommodation mortgage, the value may be deductible as long as the executor records the same as a receivable. Otherwise, it is non-deductible.

Such deduction shall be limited to the extent that they were contracted bona fide and for an adequate and full consideration in money or money’s worth, if such unpaid mortgages or indebtedness were founded upon a promise or an agreement; -

c.

Where the decedent owned only ½ of the property mortgaged, only half of its value should be included in the estate and thereafter deductible. This is true even if the executor paid the entire mortgage debt, inasmuch as the executor would be subrogated to the rights of the mortgagee as against the co-owner and co-mortgagor.

The mortgage must be contracted during the lifetime of the decedent.

It must be a mortgage personally contracted by the decedent. Otherwise, if the heirs were the ones who mortgaged the property, the value is not deductible. 7)

UNPAID TAXES

Requisites for unpaid taxes to be deductible against the gross estate: a.

The taxes must have accrued as of the death of the decedent or prior to the death of the decedent. -

The reckoning point is the point of death. So all taxes which accrue during the lifetime of the decedent up to the point of death is considered deductible against the gross estate. Note that the gathering of the gross estate is always reckoned upon the date of death. Any taxes accruing after death will be considered as a separate taxable entity.

-

Property taxes accrued prior to the decedent’s death, unpaid taxes on income received by decedent during his lifetime, donor’s taxes which are unpaid upon death are properly deductible against the estate.

“Everything not saved will be lost.” -Nintendo "Quit Screen" message

Page8

Taxation II USC-Law Rm. 404 AY 2014-2015 Pre-mid Reviewer. Income earned BEFORE death - DEDUCTIBLE

Income earned AFTER death – NOT DEDUCTIBLE

Jan. 1

Dec. 31 Oct. 1 (death)

The same rules apply to real property taxes. However, the difference lies in the due date when the real property taxes shall be paid. In income tax, the taxes shall be due on or th before the 15 of April following the close of the taxable year. Real property taxes are due once every January 1.

b.

They were unpaid as of the time of death

c.

This deduction shall not include income tax upon income received after the death, or property taxes not accrued before his death, or the estate tax due from the transmission of his estate.

ATTY. A: So if unpaid taxes, the reckoning point is the date of death of the decedent. Even if it is already incurred, so long as it is not yet paid, you can deduct it from the estate tax up to the point of death. So thereafter, it is no longer deductible. But fore real property tax, it’s due for payment on every January 31. It accrues on January 1, and should be paid on January 31. But it follows a “pay first, incur later” principle. Example, my property tax for this year 2014, I already paid it way back January 2014. And then I died in October 2014, i cannot anymore deduct my real property tax because I already paid it on January. (??? Wa ku kasabot ani nga part)

B. TRANSFERS FOR PUBLIC USE (3) Transfers for Public Use.- 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.
 

Requirements to be deductible: The whole amount of all the bequests, legacies, devises or transfers to or for the use of the Government of the RP, or any political subdivision thereof, for exclusively public purposes shall be deductible from gross estate, provided such amount or value had been included in the gross estate. -

The transfers to the government or political subdivisions include only provinces, cities, municipalities and barangays. IT DOES NOT INCLUDE GOCCs.

-

It must be in writing. It must be a testamentary disposition.



For bequests to charitable institutions, social welfare, etc., they are not deductible since in the first place, they are exempt transmission of property. In other words, they are not includible in the gross estate. Unlike a deduction which must first be included as part of the gross estate and subsequently deducted.



If the TFPU has been previously made during the lifetime and prior to the death of the decedent, it will not form part of the gross estate of the decedent.



Not all transmissions to the government are deductible. What is contemplated under the law are transfers for public use, if the purpose is private, it is not deductible.



TFPU are allowable deduction in order to encourage decedents to put into writing or in the will or to make transfers to the government, to give them incentives such as deductions and exemptions from tax.

C. VANISHING DEDUCTIONS (2) Property Previously Taxed. - An amount equal to the value specified below of any property forming a part of the gross estate situated in the Philippines of any person who died within five (5) years prior to the death of the decedent, or transferred to the decedent by gift within five (5) years prior to his death, where such property can be identified as having been received by the decedent from the donor by gift, or from such prior decedent by gift, bequest, devise or inheritance, or which can be identified as having been acquired in exchange for property so received: 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 to him by gift within the same period prior to his death; Eighty percent (80%) of the value, if the prior decedent died more than one (1) year but not more than two (2) years prior to the death of the decedent, or if the property was transferred to him by gift within the same period prior to his death; Sixty percent (60%) of the value, if the prior decedent died more than two (2) years but not more than three (3) years prior to the death of the decedent, or if the property was transferred to him by gift within the same period prior to his death; Forty percent (40%) of the value, if the prior decedent died more than three (3) years but not more than four (4) years prior to the death of the decedent, or if the property was transferred to him by gift within the same period prior to his death; Twenty percent (20%) of the value, if the prior decedent died more than four (4) years but not more than five (5) years prior to the death of the decedent, or if the property was transferred to him by gift within the same period prior to his death; These deductions shall be allowed only where a donor's tax or estate tax imposed under this Title was finally determined and paid by or on behalf of such donor, or the estate of such prior decedent, as the case may be, and only in the amount finally determined as the value of such property in determining the value of the gift, or the gross estate of such prior decedent, and only to the extent that the value of such property is included in

“Everything not saved will be lost.” -Nintendo "Quit Screen" message

Page9

Taxation II USC-Law Rm. 404 AY 2014-2015 Pre-mid Reviewer. the decedent's gross estate, and only if in determining the value of the estate of the prior decedent, no deduction was allowable under paragraph (2) in respect of the property or properties given in exchange therefor. Where a deduction was allowed of any mortgage or other lien in determining the donor's tax, or the estate tax of the prior decedent, which was paid in whole or in part prior to the decedent's death, then the deduction allowable under said Subsection shall be reduced by the amount so paid. Such deduction allowable shall be reduced by an amount which bears the same ratio to the amounts allowed as deductions under paragraphs (1) and (3) of this Subsection as the amount otherwise deductible under said paragraph (2) bears to the value of the decedent's estate. Where the property referred to consists of two or more items, the aggregate value of such items shall be used for the purpose of computing the deduction. This refers to properties previously taxed. There must have been a previous tax paid on the property. Requirements to be deductible: 1) Prior Transfer. There is a prior decedent or donorwho gave a property; Prior transfer could either be a prior donation or a prior death because the tax imposed in the prior transfer here could be an estate tax or a donor’s tax. 2)

Death. The present decedent died within 5 yearsafter receiving the inheritance from the prior decedent or gift from the prior donor;

3)

Identity of the Property. The property with respect towhich deduction is sought can be identified as the one received from the prior decedent or the donor, or as the property acquired in exchange for the original property so received; IOW, it should be the same property as what was previously taxed or it could be that the property is no longer in the hands of the decedent so long as you can identify the property for which it was exchanged for.

4)

Inclusion of the Property. The property must formpart of the gross estate of the present decedent.

5)

Previous Taxation of the Property. The estate tax onthe prior succession, or the donor’s tax on the gift, must have been finally determined and paid by the prior decedent or by the donor as the case may be.

6)

No Previous Vanishing Deduction on the Property.No such deduction on the property, or the property given in exchange therefore, was allowed in determining the value of the net estate of the prior decedent. It is incorrect to say that vanishing deduction is only allowed once every 5 years because it could happen that within 5 years from the first transfer, vanishing deductions could happen twice. JUST REMEMBER THAT there could be NO SUCCESSIVE DEDUCTIONS FOR VANISHING DEDUCTION BUT THERE COULD BE MULTIPLE VANISHING DEDUCTIONS for the same type of property.

7)

The property should be located in the Philippines.

FORMULA:

Less: Less: x

FMV (prior or present, whichever is lower) Mortgage payments INITIAL BASIS Allowable Deductions = [(ELIT+TPU)x(IB/GE) DEDUCTION BASIS Vanishing rate VANISHING DEDUCTION ALLOWED

*ELIT = Expenses, Losses, Indebtedness and Taxes *TPU = Transfer for Public Use *IB = Initial Basis *GE = Gross Estate Illustration: (please read discussion on the illustration below) FMV 1M Less: mortgage payments INITIAL BASIS Less: Allowable Deductions DEDUCTION BASIS 930K x Vanishing rate VANISHING DEDUCTION

40K 960K 30K 40K 372K

First, determine the initial basis. And under the law, the initial basis, it is the value of the property when it was previously taxed. IOW, it has to be value of the property at the time of the first transfer, or the value of the second transfer, WHICHEVER IS LOWER. So that if there was a property transferred in Jan. 1, 2010 and the FMV of the property then was 1M. And in Jan. 1, 2014, which is also the date of death of the decedent, the value was already 2M. How much do you include in the gross estate of this current decedent? 2M because we are talking here about the gross estate. But what will you consider as the INITIAL BASIS for purposes of computing the vanishing deduction allowed? 1M because it is the lower value. But what if there is a mortgage involved on the property? What are you suppose to deduct? So in this case, you should deduct in the initial basis the amount of mortgage already paid. Not the unpaid mortgage. *Tricky ni sa problem because ang ihatag nga value is the unpaid mortgage* “Everything not saved will be lost.” -Nintendo "Quit Screen" message

Page10

Taxation II USC-Law Rm. 404 AY 2014-2015 Pre-mid Reviewer. So now let’s assume that at the time it was transferred, there was a mortgage to be assume by this decedent at 100K. Now, at the time of his death, there remains an unpaid mortgage of 60K. How much do you deduct from your gross estate for purposes of unpaid mortgage? 60K. But how much do you deduct for purposes of computing initial basis for property previously taxed? 40K, which is the paid portion of the mortgage. So next, we determine the allowable deductions. And under the law, the allowable deductions are ELIT plus Transfer for Public Use. But take note that it is only the pro-rata value that can be deducted. And the formula for the proportion is Initial Basis divided by Gross Estate (IB/GE). So now let’s assume that the gross estate is 9.6M. ELIT is 200K. and TPU is 100K. So how much do we include as allowable deductions? ELIT+TPU = 200K+100K = 300K. Next, IB ÷ GE = 960K ÷ 9.6M = 10%. So 300K x 10% = 30K, this is the allowable deductions. So next, we determine deduction basis. 960K, as initial basis, less allowable deduction of 30K. So our deduction basis is 930K. Then, the vanishing rate. In our example, we will use the 40% because 2010 to 2014 is 4 years, which falls on the “more than three (3) years but not more than four (4) years” as what the law says. Therefore, 930K multiply by the vanishing rate of 40% = 372,000. VANSHING DEDUCTION Formula: st

Initial basis

Value @ 1 transfer nd Value @ 2 transfer

-

Allowable deduction (pro rata deduction)

Initial basis Gross estate

x

Deduction base Vanishing rate Vanishing deduction

Whichever is lower

x (ELIT + TPU)

TN: Vanishing deductions is otherwise known as property previously taxed, therefore there must be a previous tax paid in the form of donor’s or estate tax. Mr. X, a Filipino, died in the US. He has a motorcycle which is located in the US at the time of his death. He wrote in his will that the motorcycle will be given to his son Mr. Y who is in the Philippines. Two years after, Mr. Y died alsobut the motorcycle is already inhis possession when he died. Question: will the motorcycle be included in the gross estate of mr. Y? YES Will it be subject to vanishing deduction? YES “The property should be located in the Philippines” –required during the second transfer. Thus, the motorcycle is subject to vanishing deduction because the property is already in the possession of Mr. Y when he died. Suppose Mr. X is a NRA, will the motorcycle be included in the gross estate of mr. Y? YES Will it be subject to vanishing deduction? NO. Because the property was located outside the Phil during the first transfer, and being a NRA, the property was not previously taxed. MEDICAL EXPENSES  Requisites for deductibility of medical expenses: a.

The expenses (cost of medicines, hospital bills, doctors’ fees, etc.) were incurred within one (1) year prior to the death of the decedent; -

Example: If decedent died on Dec. 8, 2011, expenses must be incurred on Dec. 9 up to Dec. 8, 2011.

-

Leap years are irrelevant, that is to say that even if decedent died on a leap year, the same computation for the 1 year period applies.

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;

c.

Provided, that the total amount thereof, whether paid or unpaid, does not exceed Five hundred thousand pesos (P 500,000) -

So all medical expenses, whether paid or unpaid, for as long as they have been incurred are considered.

 Any amount of medical expenses exceeding P 500K, even if unpaid, shall not be allowed as deduction under the medical expenses. Neither can this excess amount beallowed to be deducted from the gross estate as claim against the estate (same rule in funeral expenses).  The medical expenses need not pertain to the cause of death of the decedent for it to be a deductible medical expense. It can be for any type of illness and the cause of death maybe any other illness, or accident, etc. for as long as the requisites are present.  it may not be paid as long as it is incurred. Question: if there is an unpaid medical expense, can it be treated as claims against the estatelater on if it already exceeded the P500k limit? NO, there is a separate category for medical expenses like the judicial expenses and funeral expenses. So anything in excess even if it’s unpaid cannot be treated as claims against the estate for the reason that they are given special categories under the law. So the intention must be to remain as it is, as classified under the law. FAMILY HOME Family home means the dwelling house, including the land on which it is situated, where the husband and wife, or a head of the family, and members of their family reside, as certified to by the Barangay Captain of the locality. The family home is deemed constituted on the house and lot

“Everything not saved will be lost.” -Nintendo "Quit Screen" message

Page11

Taxation II USC-Law Rm. 404 AY 2014-2015 Pre-mid Reviewer. 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). - The family home consists of the house and the lot on which the house is situated. - Only one family home can one person own. - Married individuals and heads of the family – whether single, widowed or divorced – can claim family home as a deductible item against the gross estate. - For income tax purposes, the head of the family no longer has a useful definition since all individuals regardless of the status is entitled to the personal exemption of P 50K. The difference lies in whether a taxpayer has dependents which entitles him/her to an additional exemption of P 25K for every dependent. Question: can a single individual claim as deduction family home?yes, as long as he is considered as the head of the family.(please verify) But for estate tax purposes, the definition of the head of the family is still significant. A head of the family is:

-





An individual who is single, legally separated or widowed, etc. who is chiefly supporting a child, whether legitimate, illegitimate, legally adopted or naturally acknowledged, not more than 21 years of age (TN: under the law, its 21 or below), where such child is not gainfully employed, unmarried and he can be more than 21 if he is mentally incapacitated or physically disabled.



An individual who is chiefly supporting a parent living with him. (TN: parents must not be gainfully employed too.)



An individual who is chiefly supporting a brother or sister living with the former, provided that the latter shall be no more than 21 years of age, unmarried and not gainfully employed.



An individual who is supporting a senior citizen whether or not related to each other, provided that the latter be 60 years of age or above and not earning more than P 5K a month (or P 60k a year-poverty line according to NEDA).

For income tax purposes, among the 4 types of dependents, only a child can entitle a taxpayer to avail of the P 25K additional exemption. But for estate taxes, if you’re classified as a married individual or single but head of the family, then your family home can be considered as a deductible item.

An amount equivalent to the current or fair market value of the decedent’s family home, whichever is higher: Provided, however, That if the said current or fair market value or zonal value exceeds one million pesos (P 1,000,000), the excess shall be subject to estate tax. As a sine qua non condition for the exemption or deduction, said family home must have been the decedent’s family home as certified by the barangay captain of the locality (Sec. 2, No.4, RA 7499) ATTY. A: RULE: fair market value of the property or P 1,000,000, whichever is lower. Question: If the property (family home) is owned by a married couple as part of their conjugal property, how do you determine the P1M? Is there a need for you to divide the value of the property for purposes of this deduction? TN: the family home has to form part of your gross estate, part of the deduction of the gross estate would be the share of the surviving spouse (SSS). So this family home is considered part of the special deductions. It is not accounted for prior to the deduction for SSS. That being the case, the gross estate, you claim there the full amount but you will deduct a portion of that, half of that, under SSS. So in effect, what was considered as gross estate or taxable estate for the decedent only pertains to half of the family home. So it’s only appropriate that when you make a deduction later on for the family home, you can claim half of that also. But the limit of P1M, does it change? NO, it will not change just because it is a conjugal property. Illustration: 1. Gross estate (family home) SSS Family home Net taxable estate

2,000,000 1,000,000 1,000,000 1,000,000 -0-

2. Gross estate (family home) SSS Family home Net taxable estate

3,000,000 1,500,000 1,500,000 1,000,000 500,000

TN: the structure itself maybe considered the family home because it may happen that the lot is owned by another person. In this case, only the value of the structure is considered family home excluding the value of the lot.



Conditions for the allowance of family home as deduction from the gross estate: 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; -

Gleaning from this requisite, the family home must be located in the Philippines because of the fact of need of a certification from

“Everything not saved will be lost.” -Nintendo "Quit Screen" message

Page12

Taxation II USC-Law Rm. 404 AY 2014-2015 Pre-mid Reviewer. the Barangay Captain. 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 or community, or exclusive property), whichever is lower, but not exceeding P 1,000,000. -



Any excess of the P 1,000,000 is subjected to estate tax.

Examples: Decedent: Mr. A, single but head of the family, owns a house worth P 750K and lot P 500K -

Only 1M can be deductible being the maximum amount allowed.

Decedent: Mr. A, single but head of the family, owns a house worth P 250K and lot worth P 500K. -

Only P 750K can be claimed as deduction because the deductible amount is the actual value of the family home or P 1M, whichever is lower.

Decedent: Mr. A, married, owns a house worth P 300K and lot worth P 500K. -

Determine first whether the property is conjugal or exclusive property.

-

If the house and lot are exclusive properties of the decedent, the entire P 800K is deductible.

-

If both the house and lot are conjugal properties, only P 400K [(300K/2) + (500K/2)] is deductible because the division between the spouses is always ½ or 50% in the absence of a property relation before marriage.

-

If the house is exclusive and the lot is conjugal, P 550K is deductible [300K + (500K/2)]

-

If the house is 1.3M conjugal and the lot is 500K exclusive, the result obtained is 1.15M [(1.3M/2) + 500K] but since P 1M is the maximum deductible amount, only P 1M can be claimed as deduction.

STANDARD DEDUCTION  An amount equivalent to 1M shall be deducted from the gross estate without need of substantiation  Not available to NRAs.  Standard deduction is an arbitrary amount of 1 million without any official receipt that you need to present.  Under regulation, deductions are classified into: 1. Ordinary 2. Special – it will not be accounted for in the share of the SS. It is deducted after deducting the SSS. a. Standard deduction b. Medical expenses c. Family home Thus, Standard deduction in itself pertains only to the deceased. The surviving spouse does not share with this deduction. To properly account for the taxable estate, you have to determine the type of property regime that governs the married individual. 1. Absolute community of properties – default regime if marriage occurred on or after August 3, 1988. GR: everything brought into the marriage and acquired thereafter is considered communal property. EXC: i. anything received gratuitously after/during the marriage is exclusive property. Any fruits of these properties are also exclusive. ii. Personal properties except jewelries iii. If there is a previous marriage, anything acquired during the first marriage, if there hasn’t been any liquidation. (FAMILY CODE) Art. 91. Unless otherwise provided in this Chapter or in the marriage settlements, the community property shall consist of all the property owned by the spouses at the time of the celebration of the marriage or acquired thereafter. Art. 92. The following shall be excluded from the community property: (1) Property acquired during the marriage by gratuitous title by either spouse, and the fruits as well as the income thereof, if any, unless it is expressly provided by the donor, testator or grantor that they shall form part of the community property; (2) Property for personal and exclusive use of either spouse. However, jewelry shall form part of the community property; (3) Property acquired before the marriage by either spouse who has legitimate descendants by a former marriage, and the fruits as well as the income, if any, of such property.

“Everything not saved will be lost.” -Nintendo "Quit Screen" message

Page13

Taxation II USC-Law Rm. 404 AY 2014-2015 Pre-mid Reviewer. 2.

Conjugal partnership of gains – default regime if marriage occurred before August 3, 1988. GR: anything bought during the marriage is conjugal property but anything owned before the marriage remains exclusive properties of the spouse. EXC: properties acquired by gratuitous title during the marriage are exclusive properties but the fruits of these properties are conjugal.

(FAMILY CODE) Art. 106. Under the regime of conjugal partnership of gains, the husband and wife place in a common fund the proceeds, products, fruits and income from their separate properties and those acquired by either or both spouses through their efforts or by chance, and, upon dissolution of the marriage or of the partnership, the net gains or benefits obtained by either or both spouses shall be divided equally between them, unless otherwise agreed in the marriage settlements. Art. 109. The following shall be the exclusive property of each spouse: (1) That which is brought to the marriage as his or her own; (2) That which each acquires during the marriage by gratuitous title; (3) That which is acquired by right of redemption, by barter or by exchange with property belonging to only one of the spouses; and (4) That which is purchased with exclusive money of the wife or of the husband. 3.

Complete separation of property

Deductions allowed for NRA: 1. Expenses, losses, indebtedness, taxes 2. Property previously taxed (vanishing deduction) 3. Transfer for public use 4. Share of surviving spouse, if married These deductions are considered to the extent of the amount attributable to properties located here in the Philippines. So: Allowable deductions= (ELIT + TPU + Vanishing deductions +SSS) x FMV of properties in the Philippines FMV of world wide properties Same computation for NRA on estate tax payable. Illustration: (problem) Mr. Ventura died on June 11, 2013 Gross Estate: 1. Property acquired by Mr. Ventura and his wife through combined effort P3,000,000 2. Property received as gift by Mr. Ventura from his uncle on May 7, 2009. His uncle died on Feb. 11, 2013. 625,000 3. Property inherited from his father who died on March 5, 2011. Mr. Ventura, the son, paid the estate tax on these property: Property 1 2 3 Total

FMV at the time of death Prior decedent (father) Present decedent (son) 150,000 125,000 250,000 312,500 375,000 437,500 775,000 875,000

Property no. 3 above was subject to a mortgage of P312,500 at the time it was inherited by Mr. Ventura. The mortgage was deducted from the gross estate in determining the net taxable estate and in computing the estate tax due from the estate of his father. Mr. Ventura paid P125,000 of this mortgage indebtedness before the death of his father. Deductions claimed: Funeral expenses P 100,000 Judicial expenses 162,500 Claims against the estate incurred 125,000 during the marriage Transfer to the government for 25,000 exclusive public purpose Total P 412,500 Determine the following: 1. Amount allowable as vanishing deduction on the property inherited. 2. Net share of the surviving spouse 3. Amount deductible as vanishing deduction on the property received as gift 4. Net taxable estate 5. Estate tax. Gross estate

Exclusive 625,000 875,000

“Everything not saved will be lost.” -Nintendo "Quit Screen" message

Conjugal 3,000,000

Total

Page14

Taxation II USC-Law Rm. 404 AY 2014-2015 Pre-mid Reviewer. 1,500,000 Deductions Funeral expenses Judicial expenses Claims against estate Transfer for public use Unpaid mortgage Vanishing deduction

4,500,000

100,000 162,500 125,000 25,000 187,500 (note1) 325,000 (note 2) 108,333 854,167

Net estate Share of surviving spouse Standard deduction Net taxable estate Tax: First P500,000 P660,417 x 8% Estate Tax

3,000,000

2,642,500

3,466,667 1,306,250 1,000,000 1,160,417

P15,000 P52,833 P67,833

Note 1: Vanishing deduction for property 1,2 & 3 1 2 3 (ELIT+TPU) x initial basis/gross estate 600,000* x 625,000/4,500,000 Vanishing rate

125,000 250,000 375,000 625,000 83,333 541,667 x 60% 325,000

*P600,000: FE 100,000 JE 162,000 CAE 125,000 TPU 25,000 UM 187,500 600,000 Note 2: Vanishing deduction for property from uncle (property #2) Initial basis P625,000 Deduction (ELIT+TPU) x initial basis/gross estate 600,000 x 625,000/4,500,000 P83,333 P541,677 Vanishing rate x 20% P108,333

Question: When do we pay the estate tax? Simultaneous with the filing of the estate tax return which is within 6 months from the death of the deceased. Filing period may be extended for not more than 30 days by the commissioner on meritorious grounds. Payment may be extended for not more than 2 years in case of extrajudicial settlement or not more than 5 years in case of judicial settlement from the 6 months on the ground on undue hardship on the part of the heirs or estate. Question: when you pay on the extension period, will you be subject to penalties? No, you only pay the interest plus the tax liability. Only in the instances where you deliberately fail to comply with the provisions of the law, you fail to observe the period including the extension granted, you pay surcharges. E. PENALTIES FOR NON-COMPLIANCE In the event of a violation of the law, in respect to the foregoing, as well as of regulations promulgated thereunder, criminal penalties and civil liabilities (surcharges, ad valorem penalties, and interest) are imposed (Secs. 93, 247, NIRC). o

If it’s a simple extension of time to pay, the add-on penalty would only be the 20 % interest. Atty. A: interest is not a penalty here, it is for the forbearance of money. Surcharge is the penalty.

o

Surcharge would only come in for absolute non-compliance with the requirement. If you file the return late, you will be imposed of a 25% surcharge.

o

If you filed an inaccurate return, you will be imposed of a 25% surcharge.

o

If you filed a fraudulent return, you will be imposed of a 50% surcharge.

The surcharge will be totally based on the basic amount of taxes due and on top of that, interest from the time that money could have been collected by the government up to the time that the money was actually collected by the government. And on top of these, if you filed at the wrong venue, the 2 things can happen:

“Everything not saved will be lost.” -Nintendo "Quit Screen" message

Page15

Taxation II USC-Law Rm. 404 AY 2014-2015 Pre-mid Reviewer. 

1. You may be imposed of a 25% surcharge for wrong-venue in payment and filing; or

3.

You could totally be considered as no-payment in the proper venue, you have to pay the full amount 100% plus the surcharge of 25% in the proper venue. So what you can do is simply file a refund in the wrong venue where you make the payment.

NOTICE OF DEATH  GR: Notice of death is required to be filed within two months from the death. Notice of death is not necessary in all cases. TheCommissioner shall be notified of the fact of death in the following cases: 1.

In all cases of transfers subject to tax, OR Notice of death shall be necessary when the death of the decedent would result to estate taxation, meaning it will be subject to tax beyond the 200K limitation.

Question: if the estate is exempt to pay estate tax, do you still file a notice of death? 2.



Where, though exempt from tax, the gross value of the estate exceeds 20K Even if the estate is not subjected to tax for as long as the gross value of the estate exceeds 20K, a notice of death shall be necessary.

Purpose. For purposes of the government to be preparedin computing for the estate tax.

The notice of death shall be given to the Commissioner or his/her alter ego within two months after the decedent’s death or within a like period after the executor or administrator qualifies as such. Question: if you have shares of stock amounting to 20k, do you file a notice of death? No, under the law, it has to exceed 20k. but you are required to file a return because it is a registrable property. If the net estate exceeds 200k, you are required to file a return. However, even if it does not exceed 200k but there are registrable properties, you have to file your return. B. FILING OF THE ESTATE TAX RETURN 

The estate tax return shall be filed within 6 months from the date of death, unless the period is extended for not more than 30 days by the Commissioner on meritorious grounds.



Instances when an estate tax return is required: 1.

Whenever the decedent has left property and the transmission of property would result to an estate tax liability. In all transfers where an estate tax has to be paid, meaning more than the first 200K net estate, an estate tax return has to be filed.

2.

Whenever the gross value of the estate exceeds 200K, an estate tax return is to be filed even if you’re not liable for estate tax.

3.

Regardless of the gross value of the estate, when the said estate consists of registered or registrable 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 thereof in the name of the tranferee. -

If it is not covered to taxation because the amount does not exceed the standard deduction of 1M, still there must be proof that estate tax return has been filed and the clearance from the tax authorities has been given so that transfer can smoothly be made.

TN: 20k – notice of death 200k – return 2M – statement certified from a CPA 

If the gross value of the estate exceeds P 2M, the return shall be supported with a statement duly certified to by a CPA containing the following: a. b. c.

Itemized assets of the decedent with their corresponding gross value at the time of his death, or in the case of a nonresident, not a citizen of the Phils., of that part of his gross estate situated in the Phils. Itemized deductions from gross estate allowed in Sec. 86; and The amount of tax due whether paid or still due and outstanding

CLARIFICATIONS:  As to head of the family: whether for income tax or estate tax, head of the family refers to the same definition but its just that we do not classify taxpayers whether a person is single, married individual or a head of the family. They are the same. The DIFFERENCE IS ON THE DEPENDENTS of the head family. WHERE DO YOU FILE&PAY YOUR ESTATE TAX RETURN: Except in cases where the Commissioner otherwise permits, the return shall be filed and the estate tax paid at: 1. 2. 3. 4.

An Authorized Agent Bank (AAB), or 
 Revenue District Office (RDO), or Collection 
Officer, or 
 Duly authorized Treasurer of the city or municipality in which the decedent was domiciled at the time of his death, or 
 If there be no legal residence in the Philippines, with the Office of the Commissioner 


“Everything not saved will be lost.” -Nintendo "Quit Screen" message

Page16

Taxation II USC-Law Rm. 404 AY 2014-2015 Pre-mid Reviewer. 

If a person does not have a domicile here in the Philippines such as a non-resident, you will have to file your return in the national office but it was designated that RDO 39 South District of Quezon City should be the RDO where you should file when you are a non-resident alien.14:23

TAX CREDITS OF TAXES PAID ABROAD: There is a limit of the tax credit, which may be granted to resident Citizens, Non-resident citizens or resident aliens for the reason that there is a chance they are paying foreign estate taxes since they are taxed for properties outside the Philippines. We do not include taxes paid by non-resident aliens paid outside because we did not account their properties outside the Philippines. TWO TYPES OF LIMITATIONS: 1.

PER COUNTRY Limitation – a. if you have only one foreign country you use this or the global limitation, it does not matter if you have only one foreign country. b. Formula: i. Net Estate of Foreign Country A divided by Global Net Estate then multiplied by the Philippine estate tax due equals per country limit (for essay exam purpose) ii. NE of Foreign Country x Philippine estate tax due Global Net Estate

2.

GLOBAL Limitation a. Formula: i. Total Foreign Country Net estate divided by the Global Net Estate then multiplied by the Philippine estate tax due equals the global limit (for exam purpose) ii. Total Foreign NE x Philippine estate tax due Global Net Estate

EXAMPLE: 1. One Foreign Country: (use either per country or global) X died with:  Philippine Estate Tax  Japan Estate Tax  Net Estate in Japan  Net Estate of Philippines

1M 50M 100M 300M

Per Country Limit = NE of Foreign Country x Philippine estate tax due Global Net Estate Per Country Limit = 100M (100M+300M=400M)

x 1M

Per Country Limit = 250K 

You then compare the per limit to the foreign estate tax and choose whichever is lower. In this case, the tax credit is only 250K which is lower than the 50M japan estate tax.

2. Two FC: X died with:  Philippine Estate Tax  Japan Estate Tax  Brazil Estate Tax  Net Estate in Japan  Net Estate of Philippines  Net Estate of Brazil

1M 50M 200K 100M 300M 200M

Since you have two countries here or even when there is more than two you apply both limitation to get whichever is lower from both formula. st

1 step: Apply the Per Country For Japan: Per Country Limit Japan = NE of Japan x Philippine estate tax due Global Net Estate Per Country Limit Japan = 100M x 1M (100M+300M+ 200M=600M) Per Country Limit Japan = 166,667

“Everything not saved will be lost.” -Nintendo "Quit Screen" message

Page17

Taxation II USC-Law Rm. 404 AY 2014-2015 Pre-mid Reviewer. For Brazil: Per Country Limit Brazil =

NE of Brazil Global Net Estate

x Philippine estate tax

Per Country Limit Brazil = 200M x 1M (100M+300M+ 200M=600M) Per Country Limit Brazil = 333,333 nd

2 step: Apply the Global Limit Global Limit = Foreign Country Estate x Philippine estate tax due Global Net Estate Global Limit = (100M+200M= 300M) x 1M 600M GLOBAL LIMIT = 500,000 rd

3 Step: Apply the Limit

Japan Brazil TOTAL Per Country

Estate Tax Paid

Per country Limit

50,000,000 200,000

166,667 333,333

Whichever Lower 166,667 200,000 366,667

is

TOTAL PER COUNTRY VS GLOBAL LIMIT = 366,667 vs 500,000  Since Per Country is lower, we the tax credit to be applied is 366,667.00

DONORS TAX Donation is an act of liberality whereby a person disposes gratuitously of a thing or right in favor of another, who accepts it. Take note there must be two acts that must concur for there to be a valid donation. First the acts of transfer and second the acceptance. For purpose of taxation this act is subject to tax, to be exact we are taxing the ACT OF LIBERALITY. Its is the privilege of transferring which is being taxed. You do not tax the person or the property but the privilege. TWO-FOLD PURPOSE OF DONORS TAX 1. 2.

To Supplement estate tax Avoid Payment of Income tax it is to prevent the transfer of properties without paying income tax. For Example when a person earns income(employeeee), instead of the boss compensating the employee, the ee will ask the boss to just donate it to the ee’s family. In this case, there is no income earned on the part of the ee because it is the family members who receive the income. So the ee was able to get away with the income tax, in order to prevent that situation, the government imposes donor’s tax so that if ever there is no tax imposed on your income at least there is a tax imposed on the donation made.

LAW TO BE IMPOSED ON ESTATE TAX  it should be the law prevailing at the time of the donation. Therefore if the donation was made before 1997, the 1997 NIRC is not applicable it will be the 1979 tax code.

FORMULA OF DONOR’s TAX GROSS GIFTS Less: Deductions (XX) NET GIFTS Multiply: Tax Rate % DONORS TAX PAYABLE XXX

XXX XXX

GROSS GIFTS Composition: Donations made during your lifetime in one calendar year. Take note that it should be during the calendar year and not fiscal year because the tax code provide so even if the corporation is using a fiscal year. “SEC. 99. Rates of Tax Payable by Donor. (A) In General. - The tax for each calendar year shall be computed on the basis of the total net gifts made during the calendar year in accordance with the following schedule..”

WHEN DO YOU APPLY DONOR’S TAX “Everything not saved will be lost.” -Nintendo "Quit Screen" message

Page18

Taxation II USC-Law Rm. 404 AY 2014-2015 Pre-mid Reviewer.   

Apply it during the point of completion. There is a completion when the object of the donation which is delivered either constructive or actual to the donee. As opposed to perfection, which is when there is knowledge on the part of the donor of the acceptance of the donee. TAKE NOTE: it is the knowledge of acceptance of the donee by the donor, which perfects the donation. Donor’s tax is applied when there is a completed donation. If it so that the date of perfection does not coincide with the date of completion the date COMPLETION should PREVAIL.

INCOMPLETE DONATIONS, WHICH BECOME COMPLETE DONATIONS DUE TO AN EVENT  These are DONATIONS subject to a CONDITION. Example when there is a donation with reservation of powers there is completion when there is renunciation or the donor cease to have that power or when the condition has been met.  Take note that there is also reservation of powers in estate tax. So you make a distinction when the power is withdrawn or the condition is met. If it is done during the life time of the donor then it is subject to donor’s tax and not estate tax.  Example: A donates his car to B on the condition that B passes the bar. If A during his lifetime withdraws the condition and gives the car to B, right then and there A is liable to donor’s tax. On the other hand, of B does pass the bar then A is liable to donor’s tax. TYPES OF DONORS for taxation: A. INDIVIDUAL PERSONS: 1. Residents or Citizens – Resident citizen (RC), Non-resident citizen (NRC) and Resident Alien (RA)  Properties donated within & without 2. Non-resident and non-citizen – Non-resident alien (NRA), whether engaged in trade or business is immaterial  Tangible Properties donated within, Intangible Properties within subject to rule on reciprocity B. JURIDICAL PERSONS: (Corporation
or Partnership) Note: Unlike in estate taxation wherein juridical persons cannot be the transferor of property 1. Domestic Corporation or Resident Foreign Corporation  Properties donated within & without 2. Non-Resident Foreign Corporation  Tangible Properties donated within, Intangible Properties within subject to rule on reciprocity ELEMENTS FOR THERE TO BE A TAXABLE DONATION: (AFRAID-C) 1. 2. 3. 4. 5. 6. 7.

A – Actual or Constructive Delivery F – Form to Effect Donation R – Reduce the Assets or Patrimony of the Donor A – Acceptance of the Donee During the lifetime of the Donor I – Increase in the Assets or Patrimony of the Donee D – Donative Intent C- Capacity of the Donor

DONATIVE INTENT   

Intent of the donor to DONATE without consideration since it’s a gratuitous transfer (act of liberality). As a RULE there must be an intent to donate these are the DIRECT DONATIONS such as those expressly made and follow the requirements of the law. As an EXCEPTION, there are instances though that donations are made but are done INDIRECTLY. These are those donations by OPERATION OF LAW. Such as: 1. Transfer of Insufficient/Inadequate consideration  this is the same as that in estate tax. To determine which should be taxed either donor’s tax or estate tax, we base it on the POINT OF DISCOVERY by the BIR whether during the lifetime of the transferring/giver/donor (donor’s tax) or after (estate tax).  As a rule all properties transferred for inadequate consideration is subject to donor’s tax.  As an exception, The ONLY transfer for inadequate consideration that may NOT be taxed with donor’s tax are transfers involving REAL PROPERTIES subjected to CAPITAL GAINS TAX. o SEC. 100. Transfer for Less Than Adequate and Full Consideration. - Where property, other than real property referred to in Section 24(D), is transferred for less than an adequate and full consideration in money or money's worth, then the amount by which the fair market value of the property exceeded the value of the consideration shall, for the purpose of the tax imposed by this Chapter, be deemed a gift, and shall be included in computing the amount of gifts made during the calendar year. o SEC. 24. (D) Capital Gains from Sale of Real Property. -
(1) In General. - The provisions of Section 39(B) notwithstanding, a final tax of six percent (6%) based on the gross selling price or current fair market value as determined in accordance with Section 6(E) of this Code, whichever is higher, is hereby imposed upon capital gains presumed to have been realized from the sale, exchange, or other disposition of real property located in the Philippines, classified as capital assets…  Reason: real property that are capital assets that are sold are taxed with a capital gains tax of 6% based on gross selling price or current fair market value, whichever is higher. So even if the sale was transferred for inadequate

“Everything not saved will be lost.” -Nintendo "Quit Screen" message

Page19

Taxation II USC-Law Rm. 404 AY 2014-2015 Pre-mid Reviewer.



 

2.

consideration the government does not lose any taxes because it taxed the transfer based on whichever is higher of the selling price or the market value. On the other hand, in the case of shares of stocks subject to capital gains tax, which are transferred for inadequate consideration, are still subject to donor’s tax. o Sec. 24 (C) Capital Gains from Sale of Shares of Stock not Traded in the Stock Exchange. - The provisions of Section 39(B) notwithstanding, a final tax at the rates prescribed below is hereby imposed upon the net capital gains realized during the taxable year from the sale, barter, exchange or other disposition of shares of stock in a domestic corporation, except shares sold, or disposed of through the stock exchange.  Not over P100,000......................................... 5%  On any amount in excess of P100,000............ 10% the LEGAL REASON is that law is clear that the only property exempted under sec. 100 of the NIRC are properties subject to CGT under par. D of sec. 24 which are real properties subject to CGT. The logic for this is because capital gains on shares of stocks are based on capital gains realized which is the difference of the selling price and the cost of the shares. Here if there is an inadequate consideration the government stands to lose taxes from the transaction therefore to supplement the loss it is subject to donor’s tax.

Condonation of a Debt  this is the gratuitous cancellation of a debt which is free from any material consideration. Its should not be predicated on a past or future service.  REVIEW: when there is a condonation of debt it could be subject to 3 types of taxes: o INCOME TAX – if it pertains to past service rendered o DONORS TAX – no material consideration either past or future service. o DIVIDEND TAX – if it pertains to a condonation of a debt of a stockholder(debtor); it could also be seen as an additional investment if the stockholder condones the corporation where the creditor is the stockholder.

CAPACITY OF THE DONOR  



As a rule, we look only at the capacity of the Donor however there are exceptions where the capacity of the donee is material such as those that are not able to receive as provided for by the civil code. Donors are capacitated if they are capacitated to enter into contracts. o Incapacitated donors: a. Insane persons
 b. Minors
 C. Spouses (to each other)  Art. 87. Every donation or grant of gratuitous advantage, direct or indirect, between the spouses during the marriage shall be void, except moderate gifts which the spouses may give each other on the occasion of any family rejoicing. o The prohibition shall also apply to persons living together as husband and wife without a valid marriage. Moderate gifts depend on the financial capacity of the donor o If donation was void because it is not a moderate gift, then such transfer will be considered as income tax (all income from whatever source is subject to income tax) on part of the donee. Again as a rule, The donee need not be capacitated to receive the gift. It can be received by his guardian or legal representative. o Exception – Incapacitated donees: a. Those under civil interdiction b. Spouses and man and woman living together without the benefit of marriage c. Lawyers who notarized the will is incapacitated to receive donation or inherit d. Gifts to public officers or their spouses or relatives by reason of public office e. Those incapacitated to receive in succession due to undue influence (i.e. priests, doctors, one who accuses the donor on an attempt on his life etc...) o

Gift received by a disinherited heir is subject to donor’s tax.


ACTUAL OR CONSTRUCTIVE DELIVERY  

Actual Delivery – delivery by physically placing the thing sold in the hands or in the physically placing it in the donee’s possession Constructive Delivery – by operation law or legal delivery o Traditio symbolica – symbolic delivery of a thing part of the thing to be delivered such as a key to the property o Traditio longa manu – delivery of a movable by long hand, usually by pointing at the thing o Traditio brevi manu – delivery by short hand, takes place when the donee is already in the possession of the thing to be donated before the donation and continues to be the owner thereof o By legal formalities – sale made through a public instrument, the execution is equivalent to the delivery of the thing donated.

ACCEPTANCE OF THE DONEE DURING THE LIFETIME OF THE DONOR  Must be made known to donor during his lifetime  As a rule, Acceptance must generally be made personally  As an exception, can be made through another as long as authorized to accept such SPECIFIC donation (authorized person with a special power for that purpose or with a general and sufficient power)  Such as when the donee is not capacitated to receive the gift. It can be received by his guardian or legal representative. December 2, 2014 0:00 – 0:30 Abello vs CA Donation has the following elements: (a) the reduction of the patrimony of the donor; (b) the increase in the patrimony of the donee; and, (c) the intent to do an act of liberality or animus donandi. “Everything not saved will be lost.” -Nintendo "Quit Screen" message

Page20

Taxation II USC-Law Rm. 404 AY 2014-2015 Pre-mid Reviewer. -

-

First of all, donative intent is a creature of the mind. It cannot be perceived except by the material and tangible acts which manifest its presence. This being the case, donative intent is presumed present when one gives a part of ones patrimony to another without consideration. Second, donative intent is not negated when the person donating has other intentions, motives or purposes which do not contradict donative intent. This Court is not convinced that since the purpose of the contribution was to help elect a candidate, there was no donative intent. Petitioners' contribution of money without any material consideration evinces animus donandi. The fact that their purpose for donating was to aid in the election of the donee does not negate the presence of donative intent. The present case falls squarely within the definition of a donation. Petitioners, the late Manuel G. Abello, Jose C. Concepcion, Teodoro D. Regala and Avelino V. Cruz, each gave P882,661.31 to the campaign funds of Senator Edgardo Angara, without any material consideration. All three elements of a donation are present. The patrimony of the four petitioners were reduced by P882,661.31 each. Senator Edgardo Angara's patrimony correspondingly increased by P3,530,645.24. There was intent to do an act of liberality or animus donandi was present since each of the petitioners gave their contributions without any consideration.

Atty. A: although in the above case SC said that it is a valid donation because the requisites for donation are present. But this case was decided before 1991 Omnibus Election Code. So the SC cautioned that the current omnibus election code already exempts donation provided that it must be reported to the COMELEC. Otherwise, it will be subject to tax. Also, this provision is now incorporated in the 1997 NIRC, which states that donations will have to comply with the provisions under the Omnibus Election Code. As to the FORM of the DONATION as a requisite: Under the Civil Code— For personal Property, 5K or less: no form. It could either be oral or written. For personal property, more than 5K: it should be written. It could either be a private or public instrument, both the donation and the acceptance. For real property: it should public instrument, both the donation and the acceptance of the donation. The acceptance need not be in the same instrument as that of the deed of donation, but the acceptance has to be known to the donor so that there would be complete donation. DEDUCTIONS for purposes of COMPUTING NET GIFTS

Type of

Real

Taxpayer

property

Citizen or Residents (RC, NRC, NRA) Non Resident and Non Citizen (NRA)

Intangible

Personal

Personal

property

property

Within and Without (Global)

Within

Domestic Corporation / Resident Foreign Corp. Non-Resident Foreign Corp.(NRFC)

Tangible

Within

Within but subject to Rule on reciprocity

Within and Without (Global)

Within

Within

Within but subject to Rule on reciprocity

Note: Only NRA and NRFC are taxed for donations involving properties within the Philippines and subject to Rule on Reciprocity on intangible personal properties. All others are taxed on global donations. FORMULA:

Less:

Gross gifts Allowable deductions Net Gift

Atty. A: Deductions under the Donor’s Tax, are not actually specified as deductions but they are termed as exemptions. But this is different from exclusions, because when you say exclusions, you do not include it in the computation for gross gifts at all. Here in exemptions, a part of it may be included or may not be included.

EXEMPT GIFTS FOR RESIDENTS AND CITIZENS (SEC. 101 A) – APPLICABLE TO RC, NRC AND RA (1) DOWRIES SEC. 101. Exemption of Certain Gifts. - The following gifts or donations shall be exempt from the tax provided for in this Chapter: (A) In the Case of Gifts Made by a Resident. (1) Dowries or gifts made on account of marriage and before its celebration or within one year thereafter by parents to each of their legitimate, recognized natural, or adopted children to the extent of the first Ten thousand pesos (P10,000); “Everything not saved will be lost.” -Nintendo "Quit Screen" message

Page21

Taxation II USC-Law Rm. 404 AY 2014-2015 Pre-mid Reviewer. Requirements on Dowries: 1. It must a donation made by the parent to his child, whether legally adopted, illegitimate, or legitimate; Example: if you receive a gift from your wife’s father, will it qualify as a dowry exemption? NO. because it was the wife’s father who gave a gift to you. 2. It would not exceed 10,000; st That means that it should be the 1 10,000 that is considered exempted. 3. It must be a gift in consideration of a marriage; If dowry is given before marriage: no period required. If dowry is given after marriage: it should be within 1 year after the marriage. Take note: FOR HUSBAND AND WIFE, it should be treated separated. This applies not only to dowries exemptions but for the entire donor’s tax coverage. Reason: there are certain properties that are paraphernal. So if the property is communal, how do you treat the donation? SEPARATELY. It means that you have to divide it by half. If it is a paraphernal property? No need to divide it. Example: IF the total amount of the donation is P1M made by the A and B, the parents of C, to C and D. We need to account the donation of A and B separately, P500k each. We need to divide it further because a dowries exemption, in this case, only applies to C, P250K to C and D. To compute for the taxes due on the donation of P500K attributable to A and B, P250K will be attributable to C and D. However, on the donation of A, B to C, you can deduct the amount of P10K for dowries exemption. The total net gift of A to C is P240K while A’s total net gift of A to D is still P250K. Total P480K. We cannot combine the donation made by A, B to C with the donation to D because they are governed by different tax rates. Tax rate of C = exempt to 15%, non-stranger; D = 30%, strangers. WHO ARE CONSIDERED NON-STRANGERS: 1) Spouse 2) Brothers and sisters, whether half-blood or full-blood 3) Ascendants 4) Lineal descendants 5) Collateral relatives within the fourth civil degree of consanguinity *Take note that the “fourth civil degree” only applies to collateral relatives. So that means that the grandfather of your grandfather is still considered as non-strangers because the law did not provide any degree requirement when you talk about ancestors or lineal descendants. Dec 2 00:30:00 Strangers – those who does not fall under the enumerated non-strangers. What if the marriage was declared void after the donation was made? Atty. A’s suggested answer: Before it was voided, you can still claim donor’s tax. You have only 30 days to file your return and pay the taxes due. When you claim dowries exemption during that period when it was not yet declared void, then it’s still a valid donation so you can still claim that. It’s up to the BIR to assess you. The BIR may say that you are not allowed to claim dowries exemption because there was no marriage but you can also argue that the donation was made in view of marriage; it could not be that marriage but some other future marriage because it was made before the marriage, it will still fall under dowries exemption. So, if the child subsequently married another? Can you still claim another exemption? Atty. A’s: supposedly no. You’re supposedly to only claim one dowries exemption for one child, but it’s actually not provided under the law. You can argue that, how about our muslim brothers/sisters, they are allowed to marry four times, can they claim only one dowries exemption? Supposedly no, because there are four marriages, one should be taken into separately from another. Caveat: there is still no actual case on this. Another exemption (2) Gifts made to or for the use of the National Government or any entity created by any of its agencies which is not conducted fo rprofit, or to any political subdivision of the said Government; Applies to any entity created by any of its agencies which is NOT conducted for profit This is a full exemption. It has the same category as an exemption under the tax code. This is included in the gross gifts, after all it is a gift made during the year but it is considered as an exemption under the law. Ex. National Water Resource Board, Bureau of Local Government Finance (BLGF) TN: these exemption are only available to Residents or Citizens. (2) Gifts in favor of: (memorize) a. educational and/or b. charitable, c. religious, d. cultural or e. social welfare corporation, institution, f. accredited nongovernment organization, g. trust or h. philanthropic organization or i. research institution or organization: Additional conditions/requisites: GAN a. Not more than thirty percent (30%) of said gifts shall be used by such donee for administration purposes (N) b. Non-stock, non-profit entity (N) c. Pays no dividends (D) d. Governed by trustees who receive no compensation (G) (however honorariums are allowed) “Everything not saved will be lost.” -Nintendo "Quit Screen" message

Page22

Taxation II USC-Law Rm. 404 AY 2014-2015 Pre-mid Reviewer. Not compensated in a way that they are treated as employees. Devoting all its income, whether students' fees or gifts, donation, subsidies or other forms of philanthropy, to the accomplishment and promotion of the purposes enumerated in its Articles of Incorporation (A) f. If NGO, must be duly accredited (N) NOTICE OF DONATION by a DONOR engaged in Business e.

In order to be exempt from donor’s tax and to claim full deduction of the donation given to a qualified donee institution, the donor engaged in business shall give notice of donation on every donation worth at least P50,000 to the Revenue District Office which has jurisdiction over his place of business within thirty (30) days after receipt of the qualified donee institution’s duly issued certificate of donation, stating that no more than 30% of the said donation shall be used for administration purposes The donation has to be accredited by the Philippine council for NGO Certification. EXEMPT GIFTS MADE BY A NONRESIDENT NOT A CITIZEN OF THE PHILS (SEC. 101 B) – APPLICABLE TO NRA  No dowry exemption   (1) Gifts made to or for the use of the National Government or any entity created by any of its agencies which is not conducted for profit, or to any political subdivision of the said Government. -

Same as for Residents / citizens

(2) Gifts in favor of an educational and/or charitable, religious, cultural or social welfare corporation, institution, foundation, trust or philanthrophic 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. -

Less stringent requirements

Only 2 requirements a. not more than 30% used for administration purposes b. non-stock and non-profit entity Here, NGO need not be accredited. Rationale is to encourage NRAs to donate. DEDUCTIONS FROM GROSS GIFT Gross gift – deductions = Net gift A. Encumbrances This pertains to mortgages, security interest, or unpaid taxes on the donated property (not donor’s tax) by the donor attaching to the property and there is an agreement that the donee will assume all of these encumbrances or liabilities. Hence, not all encumbrances are deductions. Only those that were assumed by the donee. Encumbrances are deductions because the actual benefit received by the donee is the value of the property less the encumbrance Ex. If the total value of the property is P1M, with a mortgage equivalent to P900k, the actual donation is only P100k. B. Diminutions This pertains to a charge or conditions made by the donor upon donation that the donee will have to spend or shoulder Ex. Donor gives P1M to Donee on the condition that P990,000 will be given to charity. Hence, the net gift is only 10,000. Taxable net gift When computing the total gifts, you don’t have to consider yet the first P100k as exempted; you will only discuss the P100k when you apply the table already. Besides, the P100k does not apply to strangers because it is only applicable when the table (donor’s tax rates) is used and the table is only used for non-strangers. DONOR’S TAX COMPUTATION Strangers: Donation: P1M Encumbrance: 100k Condition: 100k to be given to charity Thus: P1M (100k) (100k) 800k x 30% = 240K Non-strangers: It follows the principle of accumulation. All donations made during one (1) calendar year will have to be computed for purposes of computing your donor’s tax. Jan1 – 200k brother Feb 3 – 300k sister March 1 – 100k stranger Dec 25 – 500k TN: donor’s tax is paid 30 days after the complete donation, knowledge of donor of donee’s acceptance.

“Everything not saved will be lost.” -Nintendo "Quit Screen" message

Page23

Taxation II USC-Law Rm. 404 AY 2014-2015 Pre-mid Reviewer. Jan 1 donation: First 100k – exempt Excess (100k x 2%) = P2,000 Feb 3 donation: (200k + 300k) = 500k First 200k = P2,000 Excess (300k x 4%) = P12,000 Tax due P14,000 Tax paid (jan 31) P2,000 Tax payable P12,000 March 1 donation: Not included in the accumulation (answer not finished)

VALUE ADDED TAX DEFINITION OF VAT: Value Added Tax is:  a consumption tax on every stage of the distribution process on the sale, barter, exchange, lease of goods or properties, rendition of services and the importation of goods in the ordinary course of trade and business.  The value-added tax is an indirect tax and the amount of tax may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or services. The burden can be shifted from the seller to the buyer. The incidence of the taxation can be transferred from the seller to the buyer. BUT TAKE NOTE, the statutory taxpayer is always the SELLER. What is merely shifted is the incidence of taxation. So what is transferred to the buyer is no longer technically a value added tax but an additional cost on the part of the buyer.  A privilege tax. Not attach to a particular good or a person. It is attach to the privilege of transferring certain ownership over goods or properties or rendition of services including importation itself. Therefore it is considered as an EXCISE TAX under classification based on nature.  An ad valorem tax, meaning it is based on a fixed value. It is imposed either on the GROSS SELLING PRICE (GSP) or GROSS RECEIPTS (GR).

RULE OF REGULARITY NIRC SEC. 105. Persons Liable. - Any person who, in the course of trade or business, sells barters, exchanges, leases goods or properties, renders services, and any person who imports goods shall be subject to the value-added tax (VAT) 

In the same section in the third paragraph it states that:

The phrase "in the course of trade or business" means the regular conduct or pursuit of a commercial or an economic activity, including transactions incidental thereto, by any person regardless of whether or not the person engaged therein is a nonstock, nonprofit private organization (irrespective of the disposition of its net income and whether or not it sells exclusively to members or their guests), or government entity.  

Take note of the word regular, this is referred to as the RULE OF REGULARITY. This rule is generally applied to all taxpayers. EXCEPT, nonresident foreign entity. GR: we subject a particular transaction to rule of regularity. o EXC: Non-resident foreign person or entity. Therefore, when a NR foreign individual or entity engages in an activity here in the Philippines it is automatically subject to VAT provided all other requisites are complied with or it is not a vat exempt transaction.

WHY IS IT CALLED VALUE ADDED TAX:  

It is the tax in the value added. For example: o A to B: A sells a piece of wood. Sold it to B for 100. As a rule 12% will be VAT on the GSP. So total amount that will be paid by B is 112. o Now be wants to use the wood to make a chair and then sell it. So B sold it for 200 to C. so plus the vat of 12% the total price paid by C is 224. Notice that the difference of the value from a piece of wood @ 100 to a chair @ 200 there is an increase of value of 100 (200-100=100). TAKE NOTE: B here at first is liable for the vat of 24(12% of 200) upon sale to C which he then shifted. But B here already paid 12(12% of 100) which was passed by A to B. in effect the tax actually shouldered by B is 12. (2412=12). o Later on you will see that B here made an Output Vat from his sale of 24 less the Input VAT from his purchase of 12 giving him a Vat due of 12.  GUIDE: “PISO” P-urchase I-nput; S-ales O-utput o So as you see, B added a value of 100 to the wood therefore ultimately his shoulders the tax of 12 from the 100 value he added to his piece of wood. o B to C: So let say C bought from B the chair and added designs to the chair and sold it for 300. The vat of this is 36(12% of 300). Total is 336. The difference of the value from B to C is 100 (300-200=100). The vat actually shouldered by C is 12 (36-24=12) which is still equivalent to the vat on the value added which is 100 pesos. o So the tax shouldered by the people in the process is only the tax on the value added in each stage of the process. That is why its called value added tax.

“Everything not saved will be lost.” -Nintendo "Quit Screen" message

Page24

Taxation II USC-Law Rm. 404 AY 2014-2015 Pre-mid Reviewer. o

o

Take note, it its only called value added tax before it reaches the end user. This is because if you are the end user and you cannot make use of the property anymore or rather you did not add value to the property anymore you ultimately shoulder the full amount of the VAT. C to D: Lets say from C it was sold to D, the end user. D will shoulder the entire 36 from the GSP of 300.

STEPS in VAT problems/cases: 1. look at the taxpayer involved. Whether he is a VAT registered or NON-VAT registered. a. If he is a VAT registered then initially you may say this is subject to vat BUT it does not stop there. 2. Look at the TRANSACTION where the taxpayer is involved in.

WHO ARE VAT TAXABLE: 1. 2.

those whose annual gross sales EXCEED 1,919,500.00 (memory tip: 19-19-500); these taxpayers MUST register itself as a VAT REGISTERED TAXPAYER. Those who do not exceed but who OPT to register as a VAT REGISTERED TAXPAYER. o What if you were non-vat registered and your sales for the year exceeded 1,919,500. Are you subject to vat?  YES. More reason for you to pay in addition to other percentage tax you are liable for. So before you start a business you must project your sales in order to estimate if you will be subject to vat or not.

VAT IN TERMS OF TRANSCATIONS: it is imposed on the: 1. 2. 3.

Sale goods or properties, Rendition of services Importation of Goods

SALE OF GOODS OR PROPERTIES TAX RATE & TAX BASE 

GR: 12% on Gross Selling Price; EXC: 0% rated transactions

GROSS SELLING PRICE Gross selling price means the total amount of money or its equivalent, which the purchaser pays or is obligated to pay to the seller in consideration of the sale, barter or exchange of the goods or properties, excluding the value-added tax. 

The phrase “obligated to pay” is relevant because this means that even if you did not pay it because it was already incurred you have to automatically subject it to VAT. So when you are talking about SALE OF GOODS AND PROPERTIES, it does not depend on the payment it depends on the incurrence. When you are already allowed to record the transaction you are already liable to pay VAT regardless when the payment is made. o TAKE NOTE: that this is the DIFFERENCE BETWEEN GROSS SELLING PRICE & GROSS RECEIPTS because:  GROSS SELLING PRICE  taxable upon incurrence of the obligation  GROSS RECEIPT  taxable only when there is actual or constructive payment of goods.

GOODS OR PROPERTIES The term "goods" or "properties"shall mean all tangible and intangible objects which are capable of pecuniary estimation and shall include: (a) Real properties held primarily for sale to customers or held for lease in the ordinary course of trade or business; 
 (b) The right or the privilege to use patent, copyright, design or model, plan, secret formula or process, goodwill, trademark, trade brand or other like property or right; (c) The right or the privilege to use in the Philippines of any industrial, commercial or scientific equipment;
 (d) The right or the privilege to use motion picture films, tapes and discs; and (e) Radio, television, satellite transmission and cable television time.
    

as stated in the cases, the enumeration of goods and services stated in the NIRC are not exclusive. Moreover, from the use of the phrase “shall include” the enumeration is not exclusive therefore there may be other properties taxable. As to what are properties, this was discussed in property law. These maybe real or personal. As to what are goods this was covered in your sales law. These maybe fungible or non-fungible and others. This also includes the right and privilege to use intellectual properties.

ZERO RATED TRANSACTIONS OF SALE OF GOODS: 1. 2. 3.

EXPORT SALES FOREIGN CURRENCY DENOMINATED SALES (FCDS) EXEMPT UNDER SPECIAL LAWS or EFFECTIVELY ZERO RATED TRANSCATIONS

I. EXPORT SALES: (sec. 106) st 1) Direct Export (1 paragraph) “Everything not saved will be lost.” -Nintendo "Quit Screen" message

Page25

Taxation II USC-Law Rm. 404 AY 2014-2015 Pre-mid Reviewer. a) b) c)

Sale and there must be an actual shipments of goods FROM the PHIL to FOREIGN COUNTRY must involve payment of ACCEPTABEL FOREIGN CURRENCY accounted for under the rules and regulations of the Bangko Sentral (BSP)

Example 1:  A(Phil)  exports chairs to  B(US)  B  pays 1000USD through BPI to  A o This is a direct export sale. st o 1  there is a shipment of goods from Phil to foreign country. Take note it will not matter if FOB shipping point or destination as long it is exported. nd o 2  paid under an acceptable foreign country. Acceptable currencies are generally those currency of countries not at war with the Philippines. To be exact there is a complete list in the BSP website. rd o 3  paid for accordance with the rules of the BSP. If you pay with a banking facility then it is covered by the rules of the BSP. o Therefore, this is a zero rated sale under category no.1 as a direct export sale. Example 2:  A(Phil)  exports chairs to  B(US)  B  pays 1000USD directly to  A o This is a direct export sale. st o 1  there is a shipment of goods from Phil to foreign country. Take note it will not matter if FOB shipping point or destination as long it is exported. nd o 2  paid under an acceptable foreign country. Acceptable currencies are generally those currency of countries not at war with the Philippines. To be exact there is a complete list in the BSP website. rd o 3  BUT NOT accounted for accordance with the rules of the BSP. Because no bank was involve therefore BSP was not involve in the sale. o Therefore, not an export sale. 2)

nd

Indirect Export (2 paragraph) a) Sale of RAW materials or PACKAGING materials b) Sold to a NON RESIDENT BUYER c) DELIVERED to a RESIDENT LOCAL EXPORT ORIENTED enterprise d) For the purpose of MANUFACTURING, PROCESSING or PACKING of the said goods in the Philippines e) Paid for in acceptable foreign currency f) Accounted for under the rules of the BSP Example 1:  C(supplier) is selling rattan. B(US buyer) wanted to buy a chair from A(exporter).  B was so picky with the quality of the materials. So he bought from C the raw materials in the amount of 1000USD through BPI.  B also believes in the skills of A in manufacturing the furniture. So B here instructs C to deliver the rattan to A for the latter to manufacture it and then ship it to B for 2000USD through BPI.  This problem shows to kinds of transactions: o First: INDIRECT EXPORT: Sale of C to B st  1 there is a sale of RAW materials, which is rattan. nd  2 there is a sale to a NON RESIDENT BUYER rd  3 C is to DELIVER to A a RESIDENT LOCAL EXPORT ORIENTED enterprise the rattan th  4 it is for the purpose of MANUFACTURING of the said goods in the Philippines th  5 it was paid for in acceptable foreign currency which is 1000USD th  6 it was accounted for under the rules of the BSP by paying through BPI.  Therefore the sale of C to B was a zero rated transaction being a indirect export sale. o Second: DIRECT EXPORT SALE: Sale from A to B st  1  there is a shipment of goods from Phil to foreign country. nd  2  paid under an acceptable foreign country. rd  3  paid for accordance with the rules of the BSP..  Therefore, this is a zero rated sale under category no.1 as a direct export sale.

3)

Constructive Export (Paragraph 3) a) Sale of raw materials or packaging materials b) Sold To a local export oriented enterprise c) Sales of the export oriented enterprise MUST EXCEED 70% of its total annual production i) Export-oriented enterprise –primarily devoted to the production ofgoods and services for export that demonstrably contributes foreign exchange to the economy Example 1:  A is local export oriented enterprise. 100% of its sale is export. One of its customers is B who is in the US.  A is sourcing its raw materials which is rattan from C. so A buys rattan from C here in the Philippines and paid for in 1000 pesos per strip of rattan through BPI.  The sale of C to A of the rattan is considered as an export sale. st o 1 it is a sale of raw materials nd o 2 it is sold to a local export oriented enterprise rd o 3 sales of the export oriented enterprise EXCEED 70% of its total annual production o here it does not matter if it was paid in peso or not paid in accordance with the rules of BSP. Only 3 elements. This is considered as a export sale under paragraph 3.

4)

Sale of Gold to BSP a) Sale of GOLD b) To BSP

“Everything not saved will be lost.” -Nintendo "Quit Screen" message

Page26

Taxation II USC-Law Rm. 404 AY 2014-2015 Pre-mid Reviewer. 5)

Those considered export sales under ART. 23 Executive Order No. 226, otherwise known as the Omnibus Investment Code of 1987, and other special laws  According to the article there are three type of exports. 1. Actual Export. Actual is just the same as par. 1. 2.

Constructive Export

Article 23. xxx….Provided, further, That without actual exportation the following shall be considered constructively exported for purposes of this provision: (1) sales to bonded manufacturing warehouses of export-oriented manufacturers; (2) sales to export processing zones; (3) sales to registered export traders operating bonded trading warehouses supplying raw materials used in the manufacture of export products under guidelines to be set by the Board in consultation with the Bureau of Internal Revenue and the Bureau of Customs; (4) sales to foreign military bases, diplomatic missions and other agencies and/or instrumentalities granted tax immunities, of locally manufactured, assembled or repacked products whether paid for in foreign currency or not:  These are sales to foreign instrumentalities. These are exemptions to the DESTINATION PRINCIPLE & CROSS BORDER DOCTRINE.  As a RULE: Here in the Philippines we follow the DESTINATION PRINCIPLE. This states that when the goods are sold here in the Philippines for consumption then it is liable to value added tax.  There is also this CROSS BORDER DOCTRINE, which states that when it crosses the borders of the Philippines it will be taxed abroad not here.  These two doctrines are complimentary but not exactly the same.  If you are talking about the destination principle you look at the viewpoint of the Philippines.  If cross border you look at outside. If it is destined outside then Philippines has no jurisdiction.  THEREFORE as an EXCPETION by OPERATION LAW these sale to foreign instrumentalities are subject to VAT BUT ZERO RATED. (5) and Provided, finally, That exportation of goods on consignment shall not be deemed export sales until the export products consigned are in fact sold by the consignee.  From the Philippines it is shipped to an entity abroad that is just a consignee. Here it is still not considered an export sale. It will only be considered as an export sale once consignee actually sales the goods. So upon consignment what is subject to vat is the consignment fees BUT the sale of the goods will not be subject to vat because it is export.  Another school of thought is that you can argue that consignment fees should not be subject to vat because it is transacted abroad. But again BIR will argue that you perfected the contract within the country. This is highly debatable. Just take a position. THE POINT HERE is that upon shipment of the consignment it is not yet the export sale contemplated by the law it only when the consignee sells it. (6) A. Sales of locally manufactured or assembled goods for household and personal use to Filipinos abroad and other nonresidents of the Philippines as well as returning Overseas Filipinos under the Internal Export Program of the government and paid for in convertible foreign currency inwardly remitted through the Philippine banking systems shall also be considered export sales. 3. Sales made by a VAT-registered supplier to a BOI-registered manufacture/producers (6) The sale of goods, supplies, equipment and fuel to persons engaged in international shipping or international air transport operations. a) sale of goods, supplies, equipment and fuel b) to persons engaged in international shipping or international air transport operations c) Domestic entities  later on you will realize that in connection with services rendered to international air transport operations are also zero rates.  What if the business involves an international length and a local length. Will it affect the local length operations? It will depend on the stoppage at the airport of these entities engaged in international shipping or transport is for purposes of BOARDING or UNLOADING passengers but ultimately will go to an international airport then it maybe considered as part of the entire international length.  But if the reason of the stoppage is for inter country transfer only subject to vat. Therefore when we say: o “BOARDING” of passengers the trip here is TO THE foreign country. Ex. Trip is CEB to US but stopover MNL to board passengers to US. o “UNLOADING” of passengers the trip here is GOING BACK TO the phil from foreign country. Ex. US to CEB but stopover MNL first to unload passengers then unload in CEB. o So stoppage here is only to unload or load passengers ULTIMATELY going abroad.  TAKE NOTE THE AIRLINES HERE is a DOMESTIC ENITITY engage in international air transport or shipping. Foreign entities will be covered either by other % tax or under exempt transaction.

II. FOREIGN CURRENCY DENOMINATED SALES (FCDS) 1.

means sale to a nonresident of goods, except those mentioned in Sections 149 and 150, a. SEC. 149. Automobiles. Automobile shall mean any four (4) or more wheeled motor vehicle regardless of seating capacity, which is propelled by gasoline, diesel, electricity or any other motive power: i. Provided, That for purposes of this Act, buses, trucks, cargo vans, jeeps/jeepneys/jeepney substitutes, single cab, chassis, and special-purpose vehicles shall not be considered as automobiles b. SEC. 150. Non-Essential Goods i. All goods commonly or commercially known as jewelry, whether real or imitation, pearls, precious and

“Everything not saved will be lost.” -Nintendo "Quit Screen" message

Page27

Taxation II USC-Law Rm. 404 AY 2014-2015 Pre-mid Reviewer.

 











semi-precious stones and imitations thereof; goods made of, or ornamented, mounted or fitted with, precious metals or imitations thereof or ivory (not including surgical and dental instruments, silver-plated wares, frames or mountings for spectacles or eyeglasses, and dental gold or gold alloys and other precious metals used in filling, mounting or fitting the teeth); opera glasses and lorgnettes. The term "precious metals" shall include platinum, gold, silver and other metals of similar or greater value. The term ‘imitations thereof shall include platings and alloys of such metals; ii. Perfumes and toilet waters iii. Yachts and other vessels intended for pleasure or sports. 2. assembled or manufactured in the Philippines for delivery to a resident in the Philippines, 3. paid for in acceptable foreign currency and 4. accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP). This is different from a constructive export sale because it is not need to be a raw material or a packaging material and not delivered to local export oriented enterprise. Example 1. C sells lenses(not a raw material) to B who is in the US. B instructs that the lens be delivered to A for the latter to manufacture it further. (take note that under this there is no need for there to be a purpose of the delivery it may be for manufacturing or just a gift). B paid C 1000USD through BPI. Will these be export sales? o NO. because to fall under export sales. st  1 there is no actual shipment so it will not fall as a DIRECT EXPORT nd  2 it will not fall as an INDIRECT or a CONSTRUCTIVE export because the lens are not raw materials and is not sold to local export oriented enterprise. o it is considered an Foreign currency denominated sale (FCDS). Because: st  1 sale to a nonresident of good nd  2 assembled or manufactured in the Philippines for delivery to a resident in the Philippines, rd  3 paid for in acceptable foreign currency th  4 accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas Example 2. C sells cellphone (manufactured here in the Philippines) to B who is in the US. B instructs that the phone be delivered to A in the philippines. B paid C 1000USD through BPI. Will these be export sales? o NO. because to fall under export sales. st  1 there is no actual shipment so it will not fall as a DIRECT EXPORT nd  2 it will not fall as an INDIRECT or a CONSTRUCTIVE export because the lens are not raw materials and is not sold or delivered to local export oriented enterprise. o it is considered an Foreign currency denominated sale (FCDS). Because: st  1 sale to a nonresident of good nd  2 assembled or manufactured in the Philippines for delivery to a resident in the Philippines  Take note locally assembled. So iphone cannot qualify maybe cherry mobile or my phone manufactured here in the Philippine will qualify. rd  3 paid for in acceptable foreign currency th  4 accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas Example 3. C sells CAR (manufactured here in the Philippines) to B who is in the US. B instructs that the phone be delivered to A in the philippines. B paid C 1000USD through BPI. Will these covered by the FCDS? o NO. “means sale to a nonresident of goods, except those mentioned in Sections 149 and 150” SEC. 149. Automobiles. Automobile shall mean any four (4) or more wheeled motor vehicle regardless of seating capacity, which is propelled by gasoline, diesel, electricity or any other motive power: i. Provided, That for purposes of this Act, buses, trucks, cargo vans, jeeps/jeepneys/jeepney substitutes, single cab, chassis, and special-purpose vehicles shall not be considered as automobiles Example 4. C sells JEEPNEY to B who is in the US. B instructs that the phone be delivered to A in the philippines. B paid C 1000USD through BPI. Will these covered by the FCDS? o YES. “means sale to a nonresident of goods, except those mentioned in Sections 149 and 150” SEC. 149. Automobiles. Automobile shall mean any four (4) or more wheeled motor vehicle regardless of seating capacity, which is propelled by gasoline, diesel, electricity or any other motive power: Provided, That for purposes of this Act, buses, trucks, cargo vans, jeeps/jeepneys/jeepney substitutes, single cab, chassis, and special-purpose vehicles shall not be considered as automobiles Example 5. C sells Tricycle to B who is in the US. B instructs that the phone be delivered to A in the philippines. B paid C 1000USD through BPI. Will these covered by the FCDS? o YES. “means sale to a nonresident of goods, except those mentioned in Sections 149 and 150” SEC. 149. Automobiles. Automobile shall mean any four (4) or more wheeled motor vehicle regardless of seating capacity, which is propelled by gasoline, diesel, electricity or any other motive power: Provided, That for purposes of this Act, buses, trucks, cargo vans, jeeps/jeepneys/jeepney substitutes, single cab, chassis, and special-purpose vehicles shall not be considered as automobiles Example 6. C sells Fashion Jewelries to B who is in the US. B instructs that the phone be delivered to A in the philippines. B paid C 1000USD through BPI. Will these covered by the FCDS? 5. NO. means sale to a nonresident of goods, except those mentioned in Sections 149 and 150, SEC. 150. Non-Essential Goods i.

ii. iii.

All goods commonly or commercially known as jewelry, whether real or imitation, pearls, precious and semi-precious stones and imitations thereof; goods made of, or ornamented, mounted or fitted with, precious metals or imitations thereof or ivory (not including surgical and dental instruments, silver-plated wares, frames or mountings for spectacles or eyeglasses, and dental gold or gold alloys and other precious metals used in filling, mounting or fitting the teeth); opera glasses and lorgnettes. The term "precious metals" shall include platinum, gold, silver and other metals of similar or greater value. The term ‘imitations thereof shall include platings and alloys of such metals; Perfumes and toilet waters Yachts and other vessels intended for pleasure or sports.

“Everything not saved will be lost.” -Nintendo "Quit Screen" message

Page28

Taxation II USC-Law Rm. 404 AY 2014-2015 Pre-mid Reviewer. III. Sales to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects such sales to zero rate.  

First there has to be a treaty. When it says not subject to VAT then it is not. Second, are entities who are exempted under special laws such as ASIAN DEVELOPMENT BANK (ADB) or International Rice Institute (IRI) or those enterprise located in export zones. o As a rule if a person sells to ADB normally the seller will be subject to VAT but under the law the exemption of ADB is extended to the seller or any of its supplier.

TAKE NOTE: All this Zero rated sales are transacted by VAT REGISTERED PERSONS. Because if they were non- vat registered then it would have been another transaction which maybe covered by exempt transactions. Non-VAT registered individuals are NOT COVERED by the Zero Rated Transactions. TRANSACTIONS DEEMED SALE Reason: because the government wants to recover the taxes that is due to it. Because upon purchase of the materials you will be allowed to deduct your Input Vat as an expense but later on you did not sell your products you are in effect depriving the government of its Output Vat. (B) Transactions Deemed Sale. - The following transactions shall be deemed sale: (1) Transfer, use or consumption not in the course of business of goods or properties originally intended for sale or for use in the course of business; 

This is will only cover goods intended for sale. Ex. In a Sari2x Store, the sardines you give to carolers is deemed sale subject to VAT. So if you were selling the sardines for 10.00 then the Vat will be based on the 10.00.

(2) Distribution or transfer to: (a) Shareholders or investors as share in the profits of the VAT-registered persons; or o

The goods must be intended for sale. Ex. Real Estate Business. The shareholders are given property dividends which are condominium units intended for sale therefore the dividends will be subject to VAT. Basis of the VAT is the FMV of the property.

(b) Creditors in payment of debt; o

Ex. Engage in the Selling of Ferrari Cars. The creditor has an outstanding receivable from your company and you cannot pay cash so instead you give the creditor a Ferrari car. The distribution of the car will be subject to VAT.  If the debt is 1M and the car is worth 3M  this will always be subject to VAT and it will always be based on the FMV of the property.  If the debt is 10M and the car is worth 3M  again still subject to VAT based on the FMV of the property which is 3M.  the twist here is that the 7M (10M – 3M) of the debt that was condoned is subject to DONORS TAX who will be paid by the DONOR the creditor who condoned the debt.  In both case, the seller will be the one who will pay the VAT.

(3) Consignment of goods if actual sale is not made within sixty (60) days following the date such goods were consigned; and    

Here still the goods must be intended for sale because the fact that you are consigning it is there is an intention to sell. If it is over 60 days and its still not sold it is as if it was sold. So as a consignor before the 60 or at the 60 days days arrive pull out the goods from your consignor. Consignor will pay the VAT here if it is considered as a transaction deemed sale. Based still on the FMV of the goods sold.

(4) Retirement from or cessation of business, with respect to inventories of taxable goods existing as of such retirement or cessation.  

Here you closed shop. Ex. Sari2x Store you closed business but there were still sardines left. All these will be deemed sold and subject to VAT. No Mercy BIR. HOWEVER, if you are engage in the so called TAX FREE EXCHANGE: o Sec. 40(c) (2) (2) Exception. - No gain or loss shall be recognized if in pursuance of a plan of merger or consolidation o

 

(a) A corporation, which is a party to a merger or consolidation, exchanges property solely for stock in a corporation, which is a party to the merger or consolidation; or
 o (b) A shareholder exchanges stock in a corporation, which is a party to the merger or consolidation, solely for the stock of another corporation also a party to the merger or consolidation; or o (c) A security holder of a corporation, which is a party to the merger or consolidation, exchanges his securities in such corporation, solely for stock or securities in such corporation, a party to the merger or consolidation.
No gain or loss shall also be recognized if property is transferred to a corporation by a person in exchange for stock or unit of participation in such a corporation of which as a result of such exchange said person, alone or together with others, not exceeding four (4) persons, gains control of said corporation: Provided, That stocks issued for services shall not be considered as issued in return for property. This TAX FREE EXCHANGE will not be covered by VAT. Q: What about the Sari2x Store structure, will it be deemed as sold too? o This is contestable. But the current position of the BIR is YES it will be considered part of the inventoriable goods because it is incidental to your business and VAT extends to incidental activities.

“Everything not saved will be lost.” -Nintendo "Quit Screen" message

Page29

Taxation II USC-Law Rm. 404 AY 2014-2015 Pre-mid Reviewer. 

The phrase "in the course of trade or business" means the regular conduct or pursuit of a commercial or an economic activity, including transactions incidental thereto, by any person regardless of whether or not the person engaged therein is a nonstock, nonprofit private organization (irrespective of the disposition of its net income and whether or not it sells exclusively to members or their guests), or government entity.

Changes in or Cessation of Status of a VAT-registered Person. -

The tax imposed shall also apply to goods disposed of or existing as of a certain date if under circumstances to be prescribed in rules and regulations to be promulgated by the Secretary of Finance, upon recommendation of the Commissioner, the status of a person as a VATregistered person changes or is terminated. o You were so confident you would reach 1,919,500.00 and yet you can never reach it no matter how hard you try. You change to a non-vat taxpayer. Those goods bought during the status of VAT registered will be considered as deemed sold and are VAT taxable.

“Everything not saved will be lost.” -Nintendo "Quit Screen" message

Page30