Transfer Tax-Estate Tax Reviewer

COMPILED NOTES: SABABAN, MAMALATEO & CHAVEZ

MARIVIC B. DE GRACIA TAXATION 2 MARIVIC DE GRACIA

TRANSFER TAX -refers to the burden imposed upon the right to gratuitously transfer or transmit property, tangible or intangible from one person to another.

Filing: within 6 months from the date of death

15%-relative 30%-stranger Filing: within 30 days from the date of donation

-are taxes imposed upon the gratuitous disposition of private property.

ESTATE TAX FORMULA:

KINDS OF TRANSFER TAXES: ESTATE TAX

NIRC Donation mortis causa Tax levied on the transmission of properties from decedent to his heirs Tax on the privilege to transmit property at death Excise tax or privilege tax Effective upon death Tax base is the net estate Net estate amounting to P200,000 is exempted 20% highest rate

DONOR’S TAX

NIRC Donation inter vivos Tax levied on the transmission of properties from a living person to another living person.

Gross Estate (Sec. 85)

TAX ON THE TRANSFER OF REAL PROPERTY LGC

Less:

Ordinary Deductions (Sec. 86)_____________

Equals: Net Estate before share of surviving spouse Less:

Share of surviving spouse________________

Equals: Net estate before special deductions Less:

Special deductions______________________

Equals: Net taxable estate Multiply:Tax Rate (Sec 84)______________________ Equals: Estate Tax Payable If there’s tax credit available:

Excise tax or privilege tax Effective during the life time of the donor Tax base is the net gift within the calendar year Net gift amounting to P100,000 is exempted highest rates:

Estate tax payable Less: Tax credit____________ Equals: Final estate tax payable LAW GOVERNING THE IMPOSITION OF ESTATE TAX -statute in force at the time of death of the decedent governs.

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COMPILED NOTES: SABABAN, MAMALATEO & CHAVEZ

MARIVIC B. DE GRACIA TAXATION 2 MARIVIC DE GRACIA

GROSS ESTATE

TWO FACTORS AFFECTING THE COMPOSITION OF THE GROSS ESTATE:

-all properties and interests in properties of the decedent at the time of his death shall be included in his gross estate.

1. Citizenship and residence of the decedent at the time of death 2. Location of the property, whether within or without the Philippines.

-the properties included 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. -RCD, NRCD, RAD, NRAD are subject to estate tax IMMOVABLE AND TANGIBLE PERSONAL PROPERTY WITHIN WITHOUT RCD RAD NRCD NRAD NRAD WITH 1 RECIPROCITY

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INTANGIBLE PERSONAL PROPERTY WITHIN   -

WITHOUT  -

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RECIPROCITY- 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. NO TAX SHALL BE IMPOSED IN RESPECT OF INTANGIBLE PERSONAL PROPERTY OF CITIZEN AND RESIDENT OF A FOREIGN: a. No transfer tax clause- 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. Exemption clause- when the foreign country imposes transfer taxes but grants similar exemption from transfer taxes in respect of intangible personal property owned by citizens of the Philippines not residing in that foreign country.

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COMPILED NOTES: SABABAN, MAMALATEO & CHAVEZ

MARIVIC B. DE GRACIA TAXATION 2 MARIVIC DE GRACIA

COMPOSITION OF DECEDENT’S GROSS ESTATE DECEDENT’S INTEREST Kinds: 1. Property owned- decedent possesses all the attributes of ownership. 2. Interest in property possessed- interests accrued in favour of the decedent at the time of his death. (accrued income) Example: a. dividends declared by a corporation before death of the stockholder although paid after death b. partnership profits even if paid after death of the partner c. proceeds of a life insurance policy payable to a designated revocable beneficiary d. right of usufruct 3. Property transferred.

or

interest

TRANSFER IN CONTEMPLATION OF DEATH -does not refer to the GENERAL EXPECTATION OF DEATH but to the THOUGHT OF DEATH, as a controlling motive which induces the disposition of the property for the purpose of avoiding tax. Kinds: 1. By trust or otherwise, in contemplation of or intended to take effect in possession or enjoyment at or after death. 2. By trust or otherwise, under which he has retained for his life or for any period which does not in fact end before his death:

REVOCABLE TRANSFER -transfer made by the decedent during his lifetime but the use, enjoyment and possession thereof is subject to his power to alter, amend, revoke or terminate at the time of his death. -the decedent retains tremendous power and control over the property Exception: In case of bona fide sale for an adequate and full consideration in money or money’s worth

PROPERTY PASSING UNDER GENERAL POWER OF APPOINTMENT POWER OF APPOINTMENT -refers to a right to designate the person or persons who shall enjoy or possess certain property from the estate of a prior decedent a. GENERAL- when it gives to the donee 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. b. SPECIAL- when the done can appoint only among a restricted or designated class of persons other than himself. Rationale: The property passing under a general power of appointment comes from the donor and the donee-decedent.

a. the possession or enjoyment of, or the right to the income from the property, or b. the right, either alone or in conjunction with any person, to designate the person who shall possess or enjoy the property or the income therefrom.

The power to dispose of property at death by the exercise of a power of appointment is the equivalent of ownership. It is a potential source of wealth to the appointee.

Exception: The transfer is a bona fide sale for an adequate and full consideration in money or money’s worth

Note: to determine whether included in estate or not, know who has the choice to nd designate the 2 heir, if the transferor/donor instructs the transferee/donee/recipient/decedent that he can transfer the property to whomever he wants included in the gross estate of the latter at the time of his death.

Circumstances taken into account: a. age and state of health of the decedent at the time of gift b. length of time between the gift and the date of death (short interval) c. concurrent making of a will

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COMPILED NOTES: SABABAN, MAMALATEO & CHAVEZ

MARIVIC B. DE GRACIA TAXATION 2 MARIVIC DE GRACIA

COMPOSITION OF DECEDENT’S GROSS ESTATE

PROCEEDS OF LIFE INSURANCE

PRIOR INTEREST

-depend on the designated beneficiary, the manner of designation whether revocable or irrevocable, and the period and source of the funds used in paying the premiums.

-applies to the transfer, trust, estates, interest, rights, powers and relinquishment of powers either as:

Beneficiary: 1. Estate- included in the Gross Estate whether revocable or not. 2. Other than the decedent’s estate, executor or administrator- included in gross estate if revocable

1. transfer in contemplation of death 2. revocable transfer, and 3. proceeds of life insurance

TRANSFER FOR INSUFFICIENT CONSIDERATION -applied when the transfer was made due to an impending death, say, due to a terminal illness. Exception: Bona fide sale for an adequate and full consideration in money or money’s worth

Insurance proceeds are presumed to be revocable, absence of express stipulation of its irrevocability.

Requisites: 1. the transfer is either: a. in contemplation of death b. revocable transfer, or c. property passing under a general power of appointment

Policy taken before marriage- source determines ownership of the proceeds

funds

2. consideration received is less than the FMV at the time of transfer

Policy taken during marriagea. beneficiary is the estate- proceeds are conjugal (1/2 share of spouse not taxable) b.beneficiary is other than estate- proceeds are payable to the beneficiary even if paid out of the conjugal partnership

3. the difference between the FMV at the time of death and consideration shall be included in the gross estate of the decedent.

of

FMVT P1M FMVD 500K CONSIDERATION 300K INCLUDED GE 200K

Not taxable: a. accident insurance proceeds b. group insurance policy taken out by a company for its employees c. amount receivable by any beneficiary irrevocably d. proceeds of insurance issued by GSIS to government officials and employees and benefits under SSS e. proceeds payable to heirs of deceased members of military personnel.

P1M 1.5M 1M 0

Procedure: 1.Compare the FMVT and the FMVD 2. if the FMVT is greater, determine between the FMVD and consideration received. 3. the difference-included in the GE

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COMPILED NOTES: SABABAN, MAMALATEO & CHAVEZ

MARIVIC B. DE GRACIA TAXATION 2 MARIVIC DE GRACIA

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THE FF. INTANGIBLE PERSONAL PROPERTIES HAVE SITUS IN THE PHILIPPINES:

VALUATION OF THE PROPERTY PERSONA L PROP.

1. Franchise which must be exercised in the Philippines; 2. Shares, obligations, or bonds issued by any corporation 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 if such shares, obligations or bonds have acquired a business situs in the Philippines; 5. Shares or rights in partnership, business or industry established in the Philippines.

FMV at the time of death

REAL PROPERTY (SEC. 88 B)

FMV at the time of death appraised value of real property as of the time of death shall be, WHICHEVER IS HIGHER of: a. FMV determined by the commissioner b. FMV fixed by the provincial or city assessors

EXEMPTION OF CERTAIN ACQUISITIONS AND TRANSMISSIONS, the ff shall NOT be taxed: (SEC. 87) a. the merger of usufruct in the owner of the naked title; b. The transmission or delivery of the inheritance or legacy by the fiduciary heir or legatee to the fideicommissary; c. The transmission from the first heir, legatee or done in favour of another beneficiary, in accordance with the desire of the predecessor; d. All bequest, devise, legacies, or transfer to social welfare, cultural and charitable institutions no part of the net income of which insures to the benefit of any individual: provided, however, that not more than 30% shall be used institution for administrative purposes. e. bequest to be used actually, directly, and exclusive for educational purposes. f. Exemptions under reciprocity clause. g. Exemptions under special laws.

SHARES OF STOCKS UNLISTED SHARES

common shares: Book Value preferred shares: at par value

LISTED SHARES (PSE)

FMV= arithmetic mean between the highest and lowest quotation at a date nearest the date of death if none is available on the date of death

USUFRUCT SEC. 88(A)

-taken into account the probable life of the beneficiary in accordance with the latest BASIC STANDARD MORTALITY TABLE, approved by Sec. of Finance, upon recommendatio n of the Insurance Commissioner.

Q: Is there a conflict between sec. 87a and sec 88a because under sec. 88A, the value of the usufruct is determined in order to be included in the GE, while SEC.87A, upon the death of the usufructuary, the merger of the usufruct to the naked owner is exempt from that estate? A: NONE. Under Sec 87A, the usufruct referred to is one without a fixed period such that upon the death of the usufructuary, the usufruct is extinguished. On the other hand, Sec 88A contemplates a situation where the usufruct is for a fixed period such that upon the death of the usufructuary, the usufruct forms part of the estate since the period is not yet lapsed. Hence, it is material to determine the value of such usufruct.

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Principle of mobile sequuntur personal- refers to the principle that taxation of intangible personal property generally follows the residence or domicile of the owner thereof.

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COMPILED NOTES: SABABAN, MAMALATEO & CHAVEZ

MARIVIC B. DE GRACIA TAXATION 2 MARIVIC DE GRACIA

ALLOWABLE DEDUCTIONS

RCD, RAD, NRCD (Sec 86 A)

NRAD (Sec. 86 B)

ORDINARY DEDUCTIONS (RR 2-2003) 

1. Expenses, losses, indebtedness, taxes and etc. (ELITE) (Sec 86 A) a. Funeral expenses (Sec 86 A1a) -amounts for actual funeral expenses or in an amount equal to 5% of the GE, whichever is LOWER, but in NO CASE to exceed P200k shall be deducted to GE. b. Judicial expenses (Sec 86 A1b) -expenses incurred in the testamentary or intestate proceedings for the settlement of the estate -expenses must be essential to the proper settlement of the estate Note: Extrajudicial expenses shall be allowed as deductions from the gross estate provided that these are incurred for the settlement of the estate of the deceased. (Pajonar v. CIR) c. Claims Against the Estate (Sec 86 A1c) -the decedent is the DEBTOR Requisites: the amount of indebtedness must be included in the GE. the debt instrument or the contract of loan must be notarized at the time of indebtedness was incurred. if the loan was contracted within 3 yrs. Before the death of the decedent, the administrator or executor shall submit a statement showing the disposition of the proceeds of the loan; and a duly notarized certification as to the unpaid balance of the debt from the creditor, if the creditor is a corporation, such sworn certification shall be signed by the president, or Vice President, or other principal officer of the corporation. Note: - An indebtedness that has been condoned or has prescribed may not be claimed as deduction. -Unpaid taxes that accrued after the death of the decedent are not deductible from gross estate, they are properly chargeable to the income of the estate. d. Claims Against Insolvent Persons (Sec 86 A1d) -the decedent is the CREDITOR Requisite: the amount of the claims has been initially included as part of the gross estate of the decedent; and incapacity of the debtors to pay their obligations is proven, not merely alleged.

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COMPILED NOTES: SABABAN, MAMALATEO & CHAVEZ

MARIVIC B. DE GRACIA TAXATION 2 MARIVIC DE GRACIA

e. Unpaid mortgages, taxes and casualty losses (Sec 86 A1e) 3 Expenses: i. mortgage indebtedness -the decedent is the mortgagor-debtor -limited to the extent that they were contracted bona fide and for an adequate and full consideration in money or money’s worth -The value of the property mortgaged must be included as part of the gross estate ii. taxes which accrued before the death of the decedent -taxes accrued prior to the death of the decedent Note: estate tax is not included under this section since it only accrues upon the death of the decedent iii. loss by virtue of natural calamity -fires, storms, shipwrecks, or other casualties, or from robbery, theft or embezzlement Requisites: Losses are not compensated for by insurance At the time of the filing of the return, such losses have not been claimed as a deduction for income tax purposes Such losses were incurred not later than the last day for the payment of the estate tax (6 months after the death of the decedent) 2. Property Previously Taxed (PPT) or Vanishing deductions (Sec 86) -applicable to both estate and donor’s tax -refers to property which forms part of the gross estate situated in the Philippines of any person died within 5 years prior to his death. -operates to ease the harshness of successive taxation of the same property within a relatively short period of time upto 5 years, occasioned by the untimely death of the transferee after the death of the prior decedent-donor Requisites: the property situated in the Philippines must be part of the gross estate of the present decedent-donee the present decedent-donee must have died within 5 yrs prior to the death of the prior decedent-donor or the property was transferred by donation to the present decedent-donee within 5 years to his death the estate tax or donor’s tax must have been paid on the property transferred such property can be identified as having been received by the present decedent-donee from the prior decedent-donor by gift, or inheritance no previous vanishing deduction on the property given the value of the net estate of the prior decedent-donor.

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COMPILED NOTES: SABABAN, MAMALATEO & CHAVEZ

MARIVIC B. DE GRACIA TAXATION 2 MARIVIC DE GRACIA

Percentage: i. if the prior decedent died within 1 year prior to the death of the present decedent-100% ii. more than 1 year but not more than 2 years- 80% iii. more than 2 years but not more than 3 years- 60% iv. more that 3 years but not more than 4 years- 40% v. more than 4 years but not more than 5 years- 20% 3. Transfer for public use (Sec 86) -for the use of the Government, or any political subdivision thereof shall be considered as deduction from the gross estate -allowed as a deduction is that the bequest, devise or property transferred should be used exclusively for public purposes.

SPECIAL DEDUCTIONS (RR 2-2003) 1. The family home (Sec 86) -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 resides, as certified to by the Brgy. Captain of the locality.

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RCD, RAD, NRCD (Sec 86 A, NIRC) 

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NRAD (Sec. 86 B, NIRC) -

Conditions for allowance of family home as deduction from the gross estate: i. 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 brgy. Captain of the locality where the family home is situated; ii. the total value of the family home must be included as part of the gross estate of the decedent; and iii. allowable deduction must be in an amount equivalent to the current FMV of the family home as declared or included in the gross estate or the extent of the decedent’s interest, whichever is lower, but not exceeding P1,000,000. 2. Standard Deduction (Sec 86) -the deduction is automatic without need for substantiation -P1,000,000.00 3. Medical Expenses (Sec 86) Requisites: all medical expenses incurred within 1 year prior to the death of the decedent must be duly substantiated with official receipts total amount must not exceed P500,000 Note: medical expenses in excess of P500,000 shall no longer be allowed as deduction

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COMPILED NOTES: SABABAN, MAMALATEO & CHAVEZ

MARIVIC B. DE GRACIA TAXATION 2 MARIVIC DE GRACIA

4. Benefits under R.A. 4917 -amount received by the heirs of decedent-employee PROVIDED that such amount is included in the gross estate of the decedent employee. Requisites provided in RA 4917: The decedent-employee has been employed for at least 10 years Must not be less than 50 years old at the time of retirement The benefit can be availed only once the benefits granted must be in accordance with a reasonable private benefit plan maintained bu the employer duly approved by the BIR. 5. Share of the surviving spouse (Sec 86) -the capital of the surviving spouse of a decedent shall not be deemed a part of the decedent’s gross estate -applicable only to spouse legally married

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MISCELLANEOUS PROVISION (SEC. 86 D) NRA- no deduction shall be allowed UNLESS the executor, administrator or heirs includes in the estate tax return of the decedent the value at the time of death, that part of the gross estate of the non-resident not situated in the Philippines. Even if a NRA is taxable only for properties situated in the Philippines, for purposes of the estate tax return, ALL PROPERTIES WHETHER SITUATED IN THE PHILIPPINES OR OUTSIDE SHALL BE INCLUDED IN THE RETURN. -Failure to comply with this requirement, the estate of NRA shall not be allowed to claim any deduction.

ESTATE TAX TABLE OVER

BUT NOT OVER

TAX PAYABLE

PLUS

P200,000 500,000 2,000,000 5,000,000 10,000,000

P200,000 P500,000 2,000,000 5,000,000 10,000,000 AND OVER

EXEMPT P0 15,000 135,000 465,000 1,215,000

5% 8% 11% 15% 20%

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OF THE EXCESS OVER P200,000 P500,000 2,000,000 5,000,000 10,000,000 10,000,000

COMPILED NOTES: SABABAN, MAMALATEO & CHAVEZ

MARIVIC B. DE GRACIA TAXATION 2 MARIVIC DE GRACIA

-Who will file:

NOTICE OF DEATH (SEC. 89) -Filing of notice of death in cases of:

Executor; Administrator; or Any of the legal heirs

Transfer subject to tax Where though exempt, the gross value of the estate exceeds P20,000

-The return must be under oath in duplicate setting forth:

-Who will file:

Value of the GE of the decedent at the time of his death (NRAD only GE situated in the Philippines) Deductions allowed from GE Ascertainable and supplemental data as may be necessary to establish the correct taxes.

Executor; Administrator; or Any of the legal heirs -Time of filing:

*ESTATE TAX RETURNS SHOWING A GROSS VALUE EXCEEDING P2,000,000 SHALL BE SUPPORTED WITH A STATEMENT DULY CERTIFIED BY A CPA.

Within 2 months after the decedent’s death, or Within a like period after qualifying as such executor or administrator, shall give a written notice thereof to the Commissioner.

-Time of filing: Within 6 months from decedent death The commissioner shall have authority to grant a reasonable extension for filing the return not exceeding 30 days.

ESTATE TAX RETURN (SEC. 90) -Instances when the Code requires the filing of an estate tax return:

-Place of filing: In all cases of transfer subject to the tax imposed herein, or Where, though exempt from tax, the gross value of the estate exceeds P200,000, or Regardless of the gross value of the estate, where the said estate consists of registered or registrable property such as real property, motor vehicle, shares of stock or other similar property fro which a clearance from the BIR is required as a condition precedent for the transfer of ownership thereof in the name of the transferee.

An authorized agent bank, or Revenue district Officer, Collection Officer, Duly authorized treasurer of the city or municipality in which the decedent was domiciled at the time of his death or if there is no legal residence in the Philippines, with the Office of the Commissioner.

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COMPILED NOTES: SABABAN, MAMALATEO & CHAVEZ

MARIVIC B. DE GRACIA TAXATION 2 MARIVIC DE GRACIA

PAYMENT OF TAX (SEC. 91)

DISCHARGE OF EXECUTOR OR ADMINISTRATOR FROM PERSONAL LIABILITY (SEC. 92)

GR: pay-as-you-file system EX: when the Commissioner finds that the payment on the due date of the estate tax would impose undue hardship upon the estate, he may extend not to exceed:

-should make a written application to the Commissioner for determination of the amount of the estate tax and discharge from personal liability therefor. -the executor or administrator, upon payment of the estate tax shall be discharged from personal liability for any deficiency in the tax thereafter found to be due.

Judicial settlement- 5years Extrajudicial settlement- 2 years -application to file for extension of time shall be filed with the Revenue district officer (RDO) where the estate required to secure its TIN and file the return.

DEFICIENCY (SEC 93) -the amount by which the estate tax exceeds the amount shown in the estate tax return, or -if no amount is shown upon the return or if there is no return, the amount by which the tax exceeds the amounts previously assessed.

-No extension will be granted by the Commissioner in cases of negligence, intentional disregard of rules and regulations, or fraud on the part of the taxpayer.

PAYMENT BEFORE DELIVERY BY EXECUTOR OR ADMINISTRATOR

-in case the available cash of the estate is not sufficient to pay its total estate tax liability, the estate may be allowed to pay the tax by instalment and a clearance shall be released only with respect to the property corresponding on which has been paid.

-No judge shall authorized the executor or judicial administrator to deliver a distributive share to any party interested in the estate UNLESS a certification from the Commissioner that the estate tax has been paid is shown. (Sec. 94)

COLLECTION OF ESTATE TAX

Distribution of the estate properties can only be made:

-Being a NATIONAL TAX as provided under SEC 21b of the NIRC is collected by the BIR. -Being the lifeblood of the government, the collection is not conditioned upon any outcome of a probate proceeding. -There is nothing in the Tax code, and in the pertinent remedial laws that implies the necessity of the probate or estate settlement court’s approval of the state’s claim for estate taxes,before the same can be enforced and collected. (Marcos II v. CA)

1. After all the debts, funeral charges, expenses of administration, allowance to the widow, and ESTATE TAX have been paid; or 2. Before payment of said obligations only if the distributes or any of them gives a BOND in a sum fixed by the court conditioned upon the payment of said obligations within such time as the court directs, or when provision is made to meet those obligations. (Estate of Hilario Ruiz)

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COMPILED NOTES: SABABAN, MAMALATEO & CHAVEZ

MARIVIC B. DE GRACIA TAXATION 2 MARIVIC DE GRACIA

DUTIES OF CERTAIN OFFICERS AND DEBTORS (SEC. 95)

PAYMENT OF TAX ANTECEDENT TO THE TRANSFER OF SHARES, BONDS, OR RIGHT (SEC. 97)

-The Registry of deeds shall not register the property unless a certification from the Commissioner that the tax fixed had been paid.

-For the transfer to the NEW owner to be effected, there must be a showing of the certification from the Commissioner that the estate tax has been paid.

-attorney who executed the extrajudicial partition or the judicial settlement is obliged to file a petition or pleading with the court

-If a bank has knowledge of the death of a person, who maintained a bank deposit account alone or jointly with another, shall not allow any withdrawal from the said deposit account, unless the Commissioner has certified that estate tax had been paid. -the administrator or any of the heirs of the decedent may, upon authorization by the commissioner withdraw an amount not exceeding P20,000 without the said certification.

-the notary public who notarized the settlement of the estate -the city or provincial engineer who made the cadastral survey for purposes of partition. -a debtor of the deceased to pay only after a certification of the Commissioner that the tax has been paid is shown. -such debtor may be allowed to pay his debt even without such certification, provided that the amount of the debt is included in the enventory of the estate of the deceased. RESTITUTION OF TAX UPON SATISFACTION OF OUTSTANDING OBLIGATIONS (SEC. 96) -If after the payment of the estate tax, NEW obligations of the decedent shall appear, and the person interested shall have satisfied they by order of court, -they shall have a right to the restitution of the proportional part of the tax paid.

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