TITLE IV

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amdg

Taxation Two

Estate Tax

Estate tax is the tax on the right to transmit property at death and on certain transfers by the decedent during his lifetime which are made by the law equivalent of testamentary dispositions.

It accrues upon the death of the decedent.

A transmission by inheritance is taxable at the time of the predecessors death, notwithstanding the postponement of the actual possession or enjoyment of the estate by the beneficiary. (Lorenzo v Posadas)

The tax is measured by the value of the property transmitted at the time of death, regardless of its appreciation or depreciation.

The accrual of the tax is distinct from the obligation to pay the tax.

SEC. 84. Rates of Estate Tax. - There shall be levied, assessed, collected and paid upon the transfer of the net estate as determined in accordance with Sections 85 and 86 of every decedent, whether resident or nonresident of the Philippines, a tax based on the value of such net estate, as computed in accordance with the following scheduleOverBut not overThe tax shall bePlusOf the Excess Over

P200kExempt

P200kP500k05%P200k

P500kP2mP15k8%P500k

P2mP5mP135k11%P2m

P5mP10mP465k15%P5m

P10mP1.215m20%P10m

Properties in the Estate

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

(A) Decedent's Interest. - To the extent of the interest therein of the decedent at the time of his death;

SEC. 104. Definitions. - For purposes of this Title, the terms "gross estate" and "gifts" include real and personal property, whether tangible or intangible, or mixed, wherever situated: Provided, however, That where the decedent or donor was a nonresident alien at the time of his death or donation, as the case may be, his real and personal property so transferred but which are situated outside the Philippines shall not be included as part of his "gross estate" or "gross gift": Provided, further, That franchise which must be exercised in the Philippines; shares, obligations or bonds issued by any corporation or sociedad anonima organized or constituted in the Philippines in accordance with its laws; shares, obligations or bonds by any foreign corporation eighty-five percent (85%) of the business of which is located in the Philippines; shares, obligations or bonds issued by any foreign corporation if such shares, obligations or bonds have acquired a business situs in the Philippines; shares or rights in any partnership, business or industry established in the Philippines, shall be considered as situated in the Philippines: Provided, still further, that no tax shall be collected under this Title in respect of intangible personal property: (a) if the decedent at the time of his death or the donor at the time of the donation was a citizen and resident of a foreign country which at the time of his death or donation did not impose a transfer tax of any character, in respect of intangible personal property of citizens of the Philippines not residing in that foreign country, or (b) if the laws of the foreign country of which the decedent or donor was a citizen and resident at the time of his death or donation allows a similar exemption from transfer or death taxes of every character or description in respect of intangible personal property owned by citizens of the Philippines not residing in that foreign country. For residents and citizens, gross estate includes ALL properties, real or personal, tangible or intangible, WHEREVER situated.

For non-resident aliens, gross estate includes only properties those situated in the Philippines.

Except with respect to INTANGIBLE personal property, its inclusion to the gross estate is the subject to the rule of reciprocity.

If the foreign country of the non-resident alien does not impose a transfer tax of any character on the IPP of Filipinos not residents of that foreign country; or

The foreign country of the non-resident alien allows a similar exemption from transfer tax in respect of IPP owned by Filipinos not residents of that foreign country,

Then IPPs of the non-resident alien here are exempt from the estate tax.

Reciprocity must be total. If any of the two states or countries collects or imposes and does not exempt any transfer, death, legacy, or succession tax of any character, reciprocity does not apply. (CIR v Fisher)

Reciprocity in exemption does not require the foreign country to possess international personality. (CIR v Campos Rueda)

The following, among others, are intangible personal properties located in the Philippines:

1. Franchise which must be exercised 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 ay foreign corporation if such shares, obligations or bonds have acquired a business situs in the Philippines, and

5. Shares or rights in any partnership, business or industry in the Philippines.

Properties not in the estate There may be properties which at the time of the decedents death are not in the estate because they were transferred by him during his lifetime.

These transfers are:

1. Transfers in contemplation of death,

2. Revocable transfers,

3. Transfers under a general power of appointment, and

4. Transfers for an insufficient consideration.

The values of these properties will be included in the determination of the gross estate for estate tax purposes.

As such, the gross estate, for purposes of the estate tax, may exceed the actual value of his assets at the time of his death as it includes the value of transfers of property by him during his lifetime that partake of the nature of testamentary dispositions.

These kinds of transfers have the following in common:

They are ostensible transfers, usually with the purpose to evade the estate tax

They are extension of interests

If the transfers are in fact for a bona fide consideration, then they will not form part of the gross estate (this proviso is present in all the provisions regarding these transfers)

Transfers in contemplation of death(B) Transfer in Contemplation of Death. - To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, in contemplation of or intended to take effect in possession or enjoyment at or after death, or of which he has at any time made a transfer, 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 (1) the possession or enjoyment of, or the right to the income from the property, or (2) 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; except in case of a bonafide sale for an adequate and full consideration in money or money's worth. A transfer in contemplation of death is a transfer motivated by the thought of death, although death may not be imminent.

The following are examples of circumstances which may be taken into consideration in determining whether the transfer was made in contemplation of death:

We can look at the age and state of health of the decedent at the time of the transfer (is he terminally ill?)

Length of time between the transfer and the date of the death.

Concurrent making of a will or making of a will within a short time after the transfer.

But again, in the case of a bona fide sale for an adequate and full consideration in money or moneys worth, the value of the property transferred will not be considered in determining the gross estate.

Revocable transfers

(C) Revocable Transfer. -(1) To the extent of any interest therein, of which the decedent has at any time made a transfer (except in case of a bona fide sale for an adequate and full consideration in money or money's worth) by trust or otherwise, where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power (in whatever capacity exerciseable) by the decedent alone or by the decedent in conjunction with any other person (without regard to when or from what source the decedent acquired such power), t o alter, amend, revoke, or terminate, or where any such power is relinquished in contemplation of the decedent's death.(2) For the purpose of this Subsection, the power to alter, amend or revoke shall be considered to exist on the date of the decedent's death even though the exercise of the power is subject to a precedent giving of notice or even though the alteration, amendment or revocation takes effect only on the expiration of a stated period after the exercise of the power, whether or not on or before the date of the decedent's death notice has been given or the power has been exercised. In such cases, proper adjustment shall be made representing the interests which would have been excluded from the power if the decedent had lived, and for such purpose if the notice has not been given or the power has not been exercised on or before the date of his

death, such notice shall be considered to have been given, or the power exercised, on the date of his death. A revocable transfer is a transfer where the terms of the enjoyment of the property may be altered, amended, revoked or terminated by the decedent.

It is sufficient that the decedent had the power to revoke, though he did not exercise the power to revoke.

Again, the same rule with bona fide sales applies.

Transfers under a General Power of Appointment

(D) Property Passing Under General Power of Appointment. - To the extent of any property passing under a general power of appointment exercised by the decedent: (1) by will, or (2) by deed executed in contemplation of, or intended to take effect in possession or enjoyment at, or after his death, or (3) by deed under which he has retained for his life or any period not ascertainable without reference to his death or for any period which does not in fact end before his death (a) the possession or enjoyment of, or the right to the income from, the property, or (b) the right, either alone or in conjunction with any person, to designate the persons who shall possess or enjoy the property or the income therefrom; except in case of a bona fide sale for an adequate and full consideration in money or money's worth. A power of appointment refers to the right to designate the person or persons who will succeed the property of a prior decedent.

A general power of appointment is one which may be exercised in favor of anybody.

Carles donated property to Andres, with a provision that Andres can transfer the property to anyone. Andres transferred it to Iker. The property should be included in the gross estate of Andres.

A limited power of appointment is one which may be exercised only in favor of a certain person or persons designated by the prior decedent.

Carles donated property to Andres, with a provision that Andres should transfer the property to Iker, and only Iker. The value of the property should not be included in the gross estate of Andres.

In order that property passing under a power of appointment may be included in the gross estate of the transferor, the power of appointment must be a general power of appointment. Again, the bona fide sale rule applies.

(F) Prior Interests. - Except as otherwise specifically provided therein, Subsections (B), (C) and (E) of this Section shall apply to the transfers, trusts, estates, interests, rights, powers and relinquishment of powers, as severally enumerated and described therein, whether made, created, arising, existing, exercised or relinquished before or after the effectivity of this Code.

(G) Transfers of Insufficient Consideration. - If any one of the transfers, trusts, interests, rights or powers enumerated and described in Subsections (B), (C) and (D) of this Section is made, created, exercised or relinquished for a consideration in money or money's worth, but is not a bona fide sale for an adequate and full consideration in money or money's worth, there shall be included in the gross estate only the excess of the fair market value, at the time of death, of the property otherwise to be included on account of such transaction, over the value of the consideration received therefor by the decedent. In the transfers in contemplation of death, revocable transfer, or transfer under a GPA, the value to include in the gross estate will be determined under the following rules:

If the transfer was in the nature of a bona fide sale for an adequate and full consideration in money or moneys worth, no value will be included in the gross estate;

If the consideration received on the transfer was less than adequate and full, the value to include in the gross estate will be the excess of the fair market value at the time of the decedents death over the consideration received;

If there was no consideration received on the transfer (donation mortis causa), the value to include in the gross estate will be the fair market value of the property at the time of the decedents death.

When looking at transaction, ask yourself, was the consideration insufficient?

a. If yes, then add the balance of the FMV at the time of death and the consideration.

b. If no, then it was a bona fide sale. Dont add the value to the gross estate.

Analysis of the cases of Zapanta, Tuason, Dizon and Vidal de Roces

Voluntary/Compulsory

HeirTime between transfer and deathWill?Remarks

ZapantaCompulsoryNoneYesNot considered advances.

TuasonVoluntary3 yearsYesConsidered as advances, because the donees became legatees in the will.

DizonCompulsory1 dayNoConsidered advances. The donee is a compulsory heir.

Vidal de RocesVoluntary9 monthsYesConsidered advances. Donees were legatees in the will

When it comes to transfers done during the lifetime of a decedent, there is a disputable presumption that the transfers are in contemplation of death if the recipients are compulsory heirs.

The government presumes that one is transferring property beforehand to escape the estate tax, and instead pay the lower donors tax.

The case of Zapanta showed that the presumption is disputable. There, the Court considered the gifts as not advances even if the recipients were compulsory heirs. The reason for this was the condition imposed upon the recipients by the decedent (they had to pay the decedent a certain amount of rice and money during his lifetime). It showed that the transfer was not in contemplation of death, because the decedent in fact, would benefit from the transfer.

The presence of a will also plays a part. In the cases of Tuason and Vidal de Roces, the Court considered the transfers as advances because a will was made making the transferees legatees. This played a part in the Courts impression that there was an intention of the decedent to minimize his gross estate.

Thus, when looking at cases like these, the totality of all the factors and facts must be taken into consideration.

Does the government always want to consider a transfer an advance (to be covered by the estate tax)? Not necessarily. There are instances where they will argue for it to be considered under the donors tax.

Life Insurance Proceeds

(E) Proceeds of Life Insurance. - To the extent of the amount receivable by the estate of the deceased, his executor, or administrator, as insurance under policies taken out by the decedent upon his own life, irrespective of whether or not the insured retained the power of revocation, or to the extent of the amount receivable by any beneficiary designated in the policy of insurance, except when it is expressly stipulated that the designation of the beneficiary is irrevocable. Proceeds of life insurance are paid by the insurance company directly to the beneficiary.

Proceeds of insurance under policies taken out by the decedent upon his life shall constitute part of the gross estate if the beneficiary is:

1. The estate of the decedent, his executor or administrator; or

2. A third person (not those in #1), and the designation of the beneficiary is revocable.

The Insurance Code states that the designation of a beneficiary is generally revocable.

Except of course, when the policy states that the designation is irrevocable. In such cases, the proceeds are not considered as part of the decedents estate.

So, gross estate is made up of:

1. The decedents interests at the time of his death

2. Transfers made during his lifetime (in contemplation of death, revocable, and under a GPA), and

3. Life insurance proceeds

4. Some other stuff required by law to be included in the gross estate in order to allow deductions (claims against insolvent persons, unpaid mortgage, value of the family home, and the retirement benefits under RA 4917)

Valuation of the gross estate

SEC. 88. Determination of the Value of the Estate. -(A) 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.(B) Properties. - The estate shall be appraised at its fair market value as of the time of death. However, the appraised value of real property as of the time of death shall be, whichever is higher of:(1) The fair market value as determined by the Commissioner, or(2) The fair market value as shown in the schedule of values fixed by the Provincial and City Assessors. The properties comprising the gross estate shall be valued based on the FMV as of the time of death. In case of real property, the fair market value shall be:

1. The FMV as determined by the Commissioner; or

2. The FMV as shown in the schedule of values fixed by the Provincial and City Assessors

Whichever is HIGHER

In case of personal property recently acquired by the decedent, the purchase price may indicate the FMV.

In case of personal property not recently acquired, there should be some evidence of the FMV.

For shares of stock, the FMV shall depend on whether the shares are isted or unlisted in the stock exchange.

If unlisted Common shares based on their book value

Preferred shares based on their par value

If listed The mean between the highest and lowest quotation on the date of death;

If none, then the date nearest the death.

For use of usufruct, there 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.

Computation for the net estate The basic equation to determine the net taxable estate is (gross estate deductions)

The complication arises when the decedent is married at the time of his death. Well tackle that later.

First, lets take a look at the deductions.

Deductions The deductions from the gross estate are:

1. Ordinary deductions

a. Expenses, losses, indebtedness, taxes, etc:

i. Funeral expenses

ii. Judicial expenses of testamentary or intestate proceedings

iii. Claims against the estate

iv. Claims against the insolvent persons

v. Unpaid mortgage or indebtedness on property

vi. Taxes paid

vii. Losses

b. Transfer for public use

c. Vanishing deductions

2. Special deductions

a. Family home

b. Standard deduction of P1,000,000

c. Medical expenses

d. Amounts received by heirs under RA 4917.

These deductions are allowed for a citizen or resident of the Philippines.

Non-resident aliens are not entitled to special deductions.

Ordinary deductions

Funeral expenses

(A) Deductions Allowed to the Estate of Citizen or a Resident. - In the case of a citizen or resident of the Philippines, by deducting from the value of the gross estate -(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); The deduction of funeral expenses is the

Amount of actual funeral expenses, or

An amount equal to 5% of the gross estate, whichever is LOWER,

But not to exceed P200,000.

Funeral expenses includes:

1. Mourning apparel of the surviving spouse and the unmarried minor children of the deceased bought and used on the occasion of the burial

2. Expenses for the deceased wakes

3. Publication charges for death notices

4. Telecommunication expenses incurred in informing relatives of the deceased

5. Cost of burial plot, tombstones, monument or mausoleum (BUT NOT THEIR UPKEEP)

6. Interment and/or cremation fees and charges, and

7. All other expenses incurred for the performance of the rites and ceremonies incident to interment

These arent deductible:

Expenses incurred AFTER the interment

Expenses borne or defrayed by relatives and friends

The cut-off point is interment. Thus, the expenses for the 9th day, thank you cards, 40th day arent included.

When some of the items which are actual funeral expenses are covered by a memorial plan, the value of the memorial plan must be included in the gross estate.

The value of the memorial plan plus other actual funeral expenses will give an aggregate which will be compared with the 5% limitation and with P200k.

Judicial expenses of the testamentary/intestate proceedings

(b) For judicial expenses of the testamentary or intestate proceedings; These are the expenses incurred during the settlement of the estate,

BUT not beyond the last day prescribed by law for the filing of the estate tax return (within 6 months from the date of death), or the extension period allowed.

These judicial expenses include

1. Fees of the executor or administrator

2. Attorneys fees

3. Court fees

4. Accountants fees

5. Appraisers fees

6. Clerk hire

7. Costs of preserving and distributing the estate

8. Costs of storing or maintaining property of the estate

9. Brokerage fees for selling property of the estate

Expenses on extrajudicial settlement of the estate are allowed as deductions. They come within the meaning of administration expenses.

The notarial fee paid for the extrajudicial settlement is deductible since such settlement effected a distribution of the decedents estate to his lawful heirs. (CIR v CA & Pajonar)

In that case, the notarial fees and the guardianship fee of the attorney were considered deductibles.

Expenditures incurred for the individual benefit of the heirs, devisees or legatees are not deductible.

Expenses for the improvement and renovation of the decedents residential house were allowed as a deductible. (Testate Estate of Felix de Guzman v de Guzman-Carillo)

Admin expenses should be those which are necessary for the management of the estate, for protecting it against destruction or deterioration, and possible for the production of fruits.

Attorneys fees paid by the heirs to their respective lawyers arising from conflicting claims are not deductible as judicial expenses. These shall be separately borne by them.

Claims against the estate

c) 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; Claims means debts or demands of a pecuniary nature which could have been enforced against the deceased in his lifetime and could not have been reduced to simple money judgments.

In other words, if enforceable against him when he was alive, the obligations will be claims against his estate when he shall be dead.

So, an obligation that has prescribed during his lifetime, or that was unenforceable against him, will not be a claim against his estate when he shall be dead.

Requisites:

1. The liability must represent a personal obligation of the deceased at the time of his death (except unpaid obligations incurred incident to his death and unpaid medical expenses classified as a deduction),

2. The liability was contracted in good faith and for adequate and full consideration,

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

4. The indebtedness must not have been condoned by the creditor during the lifetime of the decedent, or the actions to collect must not have prescribed.

Regarding the 4th requisite, if the debts were condoned AFTER the decedents death, the debts are deductible, following the date-of-death valuation rule. (Dizon v CTA)

If the claim arose out of a debt instrument, the debt instrument must be notarized.

EXCEPT for loans granted by financial institutions where notarization is not part of the business practice or policy of the institution.

If the loan was contracted within 3 years before the death of the decedent, the admin or executor must submit a statement showing the disposition of the proceeds of the loan.

If a monetary claim against the decedent did not arise out of a debt instrument, the requirement of a notarized debt instrument does not apply.

There is no requirement to add the amount to the gross estate (as compared to claims against insolvent persons/mortgage). This is a DIRECT DEDUCTION.

Claims against insolvent persons

(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;

Claims against insolvent persons are deductions from the gross estate

SUBJECT to the condition that the full amounts of the receivables are first included in the gross estate.

The deduction from the gross estate will be the uncollectible portion.Unpaid mortgage or indebtedness on property

(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 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 worthWhen a person leaves property encumbered by a mortgage or indebtedness, his gross estate must include the fair market value of the property, undiminished by the mortgage or indebtedness.

The mortgage or indebtedness will be claimed as a deduction from the gross estate.

Pique died leaving real property with a FMV of P1m, subject to a mortgage in the amount of P600k. Before he can deduct the P600k, he has to include the total FMV of his property to the gross income.

If the loan is merely an accommodation loan, where the proceeds of the loan went to another person, the value of the unpaid loan must be included in the receivable of the estate.

In the cases of claims against insolvent persons and unpaid mortgage/indebtedness on property, it is imperative that the values of each are first added to the gross estate.

These are called zero-sum computations. They dont really benefit the heirs because these transactions werent supposed to be part of the gross estate anyway.

Taxes Taxes are deductions from the gross estate if such taxes accrued prior to the decedents death.

Those that accrued after the decedents death are not deductions from gross estate.

These taxes can NOT be deducted:

1. Income tax on income received after death

2. Property taxes not accrued before death

3. Estate tax

LossesThere 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. Losses are deductible from the gross estate if:

1. Arising from fire, storm, shipwreck, or other casualty, robbery, theft or embezzlement

2. Not compensated by insurance or otherwise

3. Not claimed as a deduction in an income tax return of the estate subject to income tax

4. Occurring during the settlement of the estate, and

5. Occurring before the last day for the payment of the estate tax (6 months after the decedents death, or the allowed extension)

Example: Dude died January 1, 2010. A fire razed his house on March 1, 2010. His estate was settled January 1, 2012. He can claim a deduction (within 6 months!)

Dude died January 1, 2010. A fire razed his house on January 1, 2011.

He cant claim a deduction.

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. Transfers for public use mean dispositions in a last will and testament, or a transfer to take effect after death, in favor of the Government of the Philippines, or any political subdivision thereof, for exclusively public purposes.

You can deduct the value of the property transferred to the government.

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 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. Property may change hands within a very short period of time by reason of the early death of the owner who received it by inheritance or by donation (gift).

To provide relief to the burdened taxpayer, vanishing deductions are allowed to reduce the gross estate.

Vanishing deductions are allowed when:

1. The present decedent died within 5 years from receipt of the property from a prior decedent or donor;

2. The property on which the vanishing deduction is being claimed must be located in the Philippines

3. The property must have formed part of the taxable estate of the prior decedent, or of the taxable gift of the donor

4. The estate tax on the prior succession or the donors tax on the gift must have been finally determined and paid

5. The property must be identified as the one received from the prior decedent or donor, or something acquired in exchange therefore

6. No vanishing deduction on the property was allowable to the estate of the prior decedent

How do we compute?

Step 1: Get the basis. Either the value of the property in the prior estate/value used for donors tax purposes OR the value of the property in the present estate, whichever is LOWER.

Step 2: The Step 1 value will be reduced by any payment made by the present decedent on any mortgage or lien on the property (when such mortgage/lien was used as a deduction on the prior dead guys estate, or gift of the donor)

Step 3: The Step 2 value shall be further reduced by:

Step 2 value

xExpenses, losses, indebtedness, taxes and transfers for Gross Estate

public use

This is done to prevent double deduction.

Step 4: Look at the chart below and multiply to get the value which you can actually deduct.

%If received by inheritance or gift

100Within one year prior to death of the decedent

80More than one year but not more than two years

60More than two years but not more than 3 years

40More than 3 years but not more than 4 years

20More than 4 years but not more than 5 years

Example

Che inherited land from his pop with a fmv of P500k when inherited. Two and a half years later, Che died. The FMV of the land was P600k at that time. The gross estate, on which the land was part, was P2m. deductions from the gross estate (not including the family home, medical expenses, standard deduction or RA 4917 receivable) amounted to P400k. Whats the vanishing deduction?

Step 1: Get the lower value. -( P500k

Step 2: No mortgage mentioned, so (

P500k

Step 3: P500k

xP400k=

P100k

P2m

Basis of the vanishing deduction (500k-100k) =P400k

Vanishing deduction (60% of P400k) = P240

Special deductions

Family Home

(4) The Family Home. - An amount equivalent to the current fair market value of the decedent's family home: Provided, however, That if the said current fair market value exceeds One million pesos (P1,000,000), 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. The deduction is an amount equivalent to the current FMV of the decedents family home.

BUT the maximum is P1m only.

Do not forget to add the amount of the family home to the gross estate. Kasama yan! Zero-sum? Yes, but only to the extent of P1m. Lugi yung rich folk. The deduction will be allowed when the famly home is certified to be as such by the barangay captain of the locality where it is located.

For a person married at the time of death, and who was under a system of conjugal partnership or absolute community, the deduction for the family home is of the FMV, but should not exceed P1m, if such family home was conjugal property or community property. (Remember this!)

Standard deduction(5) Standard Deduction. - An amount equivalent to One million pesos (P1,000,000). Do not forget to deduct P1m every time! Its standard!

Medical expenses(6) Medical Expenses. - Medical Expenses incurred by the decedent within one (1) year prior to his death which shall be duly substantiated with receipts: Provided, That in no case shall the deductible medical expenses exceed Five Hundred Thousand Pesos (P500,000). All medical expenses incurred (whether paid or unpaid) within ONE YEAR before the death of the decedent shall be allowed as a deduction, PROVIDED,

that the same are duly substantiated with official receipts, and The total amount, whether paid or unpaid, does NOT exceed P500k.

If its more than P500k, can you deduct it as a claims against the estate? No. See requisites of claims against the estate.

Amounts receivable under RA 4917

(7) Amount Received by Heirs Under Republic Act No. 4917. - Any amount received by the heirs from the decedent - employee as a consequence of the death of the decedent-employee in accordance with Republic Act No. 4917: Provided, That such amount is included in the gross estate of the decedent. Retirement benefits received by employees of private firms in accordance with a reasonable benefit plan maintained by the employer are EXEMPT from all taxes, provided that the retiriing employee has been in the services of the same employer for at least 10 years and is not less than 50 years old at the time of his retirement.

The amount must:

have been received by the heirs of the decedent-employee as a consequence of the latters death, and

included in the gross estate of the descendent. (important!)

Deductions from the gross estate with ceilings

Funeral expenses

Actual funeral expenses, or

5% of the gross estate; or

P200kWhichever is the LOWEST

Medical expenses

Actual medical expenses, or

P500kWhichever is LOWER

Family home

FMV, or

P1mWhichever is LOWER

Deductions for a NON-RESIDENT, NOT CITIZEN of the Philippines

(B) Deductions Allowed to Nonresident Estates. - In the case of a nonresident not a citizen of the Philippines, by deducting from the value of that part of his gross estate which at the time of his death is situated in the Philippines:(1) Expenses, Losses, Indebtedness and Taxes. - That proportion of the deductions specified in paragraph (1) of Subsection (A) of this Section which the value of such part bears to the value of his entire gross estate wherever situated;(2) Property Previously Taxed. - An amount equal to the value specified below of any property forming 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; andTwenty 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 is 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 that part of the decedent's gross estate which at the time of his death is situated in the Philippines; and only if, in determining the value of the net estate of the prior decedent, no deduction is allowable under paragraph (2) of Subsection (B) of this Section, in respect of the property or properties given in exchange therefore. 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 paragraph 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 paragraph (2) bears to the value of that part of the decedent's gross estate which at the time of his death is situated in the Philippines. Where the property referred to consists of two (2) or more items, the aggregate value of such items shall be used for the purpose of computing the deduction.(3) Transfers for Public Use. - The amount of all 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. A non-resident decedent who was not a citizen of the Philippines at the time of death, with properties within and outside the Philippines, is subject to tax only on his estate within the Philippines.

Due to this, the estate in the Philippines is allowed deductions for:

1. Expenses, losses, indebtedness, taxes, etc, computed by:

Gross Estate, PhilippinesxWorld expenses, losses, indebtedness,

Gross Estate, World

taxes, funeral expenses, judicial

expenses, etc

It does not matter where the expenses are paid or incurred. On the total of the items, the formula provided by law will be applied.

Moreover, it also doesnt matter if you can pinpoint specifically where the expenses were incurred, you have to use the formula.

2. Transfers for public use of property in the Philippines

3. Vanishing deduction on property in the Philippines

A non-resident, not citizen is NOT allowed:

1. Deduction for family home

2. Standard deduction

3. Deduction for medical expenses

4. Deduction for amount receivable under RA 4917

D) Miscellaneous Provisions. - No deduction shall be allowed in the case of a nonresident not a citizen of the Philippines, unless the executor, administrator, or anyone of the heirs, as the case may be, includes in the return required to be filed under Section 90 the value at the time of his death of that part of the gross estate of the nonresident not situated in the Philippines. No deduction shall be allowed for a non-resident alien unless the executor, administrator or anyone of his heirs, includes in the return required to be filed under Sec. 90 the value at the time of the decedents death that part of his gross estate not situated in the Philippines. (Needed for the formula specified above)

Net Estate Computation of Married Persons

Section 85 (H) Capital of the Surviving Spouse. - The capital of the surviving spouse of a decedent shall not, for the purpose of this Chapter, be deemed a part of his or her gross estate.

Section 86 (C) Share in the Conjugal Property. - the net share of the surviving spouse in the conjugal partnership property as diminished by the obligations properly chargeable to such property shall, for the purpose of this Section, be deducted from the net estate of the decedent.Gross estate

The gross estate of a decedent who was married and who was under the system of absolute community of property during the marriage consists of:

1. The EXCLUSIVE properties of the decedent, and

2. The COMMUNITY properties

The exclusive properties are:

1. Property acquired during the marriage by gratuitous title (inheritance/donation) by either spouse, and the fruits as well as the income thereof

a. Unless the donor, testator or grantor states that they will be part of the community property

2. Property for personal and exclusive use of either spouse

a. But jewelry will form part of the community property

3. Property acquired BEFORE the marriage by either spouse who have legitimate descendants by a former marriage, and the fruits as well as the income of such property

Community property will consist of all properties owned by the spouses at the time of the celebration marriage or acquired thereafter (presumed to belong to the community)

The family home constituted by the husband and wife is community property.

Proceeds of life insurance taken out by the decedent on his own life, when includible in the gross estate, will be exclusive property if the premiums were paid out of exclusive funds.

They will be community property if the premiums were paid out of community funds.

A claim against an insolvent person will be included in the gross estate as exclusive or community depending on whether the claim is for exclusive or community property.

Deductions from gross estate

The same rules and ceilings which were discussed on the part of deductions will apply

The following are the community/conjugal deductions:

1. Funeral expenses and judicial expenses

2. Special deductions of family home, standard deduction, medical expenses and amounts receivable under RA 4917

3. Those obligations contracted during the marriage which are presumed to have benefited the family (debts incurred during the marriage, etc)

The following are exclusive deductions:1. Debts before the marriage by either spouse that did NOT redound to the benefit of the family

2. Support of the illegitimate children of either spouse

3. Liabilities incurred by either spouse of a crime

So, how do we get the net estate of a married person?

Step 0: Know which are community/conjugal and which are exclusive

Step 1: Get the net conjugal estate (gross conjugal estate conjugal deductions)

Step 2: Get the decedents share (net conjugal estate/2)

Step 3: Get the gross estate of the decedent (decedents share + exclusive properties)

Step 4: Get his net estate (gross estate of the decedent exclusive & special deductions)

Step 5: Once you reach step 4, yun na yon! Thats the decedents taxable estate.

Mao, a citizen and resident of the Philippines, was married under the system of absolute community of property during the marriage. He died leaving the following properties and obligations:

Real properties inherited from his father 10 years ago and before the marriage P200k

Real property received as a gift from the mother 7 years ago,

during the marriage

P1.115m

Cash income from the property received as gift

P5k

Real property owned by Mrs. Mao before the marriage

P300k

The family home

P500k

Medical expenses

P70k

Funeral expenses

P50k

Judicial expenses for settlement of estate

P100k

Obligations incurred during the marriage

P150k

Debt of Mao before the marriage

P120k

Step 0: Determine what are conjugal/community and what are exclusive

Step 1: Get the net conjugal estate (gross conjugal estate conjugal deductions)

(P200k + P300k +500k) - (P50k + P100k + P150k) = P700k

Step 2: Get the decedents share (Step 1s NCE/2)

P700k/2 = P350k

Step 3: Get the gross estate of the decedent (decedents share + exclusive properties)

P350k + P1.115m + P5k = P1.47m

Step 4: Get his net estate (Gross estate decedent exclusive deductions & special

deductions)

P1.47m (P120k + P250k + P70k + P1m) = P30k

Step 5: The net taxable estate is P30k. Check the schedular rate, and youll find out that his estate is tax exempt!

Tips:

Do not forget the limitations and ceilings imposed by the general rule of deductions.

Family home only up to P1m.

Funeral expenses only up to P200k whatevers lower of the actual expense and 5% of the gross estate (exclusive + conjugal)

Medical expenses not to exceed P500k

Remember that only of the family home is counted as a special deduction (since half belongs to the still living spouse).

And also remember that if the value of the family home (once halved) is above P1m, the deduction allowed is still P1m because of the ceiling imposed by law.

Dont forget to subtract the standard deduction. Its not usually given as part of the facts but you still have to deduct that.

Medical expenses are special deductions and are deducted from the gross estate of the decedent. Funeral deductions are conjugal deductions and are deducted from the gross conjugal/community estate.

Exemption from Estate Tax

SEC. 87. Exemption of Certain Acquisitions and Transmissions. - The following shall not be taxed:(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 donee in favor of another beneficiary, in accordance with the desire of the predecessor; and(D) All bequests, devises, legacies or transfers 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 thirty percent (30%) of the said bequests, devises, legacies or transfers shall be used by such institutions for administration purposes. The following are exempt from estate tax:

1. Merger of usufruct in the owner of the naked title

2. Transmission or delivery of the inheritance or legacy by the fiduciary heir or legatee to the fideicommisary

3. Transmission from the 1st heir, legatee or donee in favor of another beneficiary in accordance with the desire of the predecessor, and

4. All bequests, devises, legacies or transfers to social welfare, cultural and charitable institutions, no part of the net income inures to the benefit of any individual, provided that not more than 30% of the said bequests, devises, legacies or transfers shall be used by such institutions for the administration purposes

Tax Credit for Foreign Estate TaxE) Tax Credit for Estate Taxes paid to a Foreign Country. -(1) In General. - The tax imposed by this Title shall be credited with the amounts of any estate tax imposed by the authority of a foreign country.(2) Limitations on Credit. - The amount of the credit taken under this Section shall be subject to each of the following limitations:(a) The amount of the credit in respect to the tax paid to any country shall not exceed the same proportion of the tax against which such credit is taken, which the decedent's net estate situated within such country taxable under this Title bears to his entire net estate; and(b) The total amount of the credit shall not exceed the same proportion of the tax against which such credit is taken, which the decedent's net estate situated outside the Philippines taxable under this Title bears to his entire net estate. To minimize the onerous effect of taxing the same property twice, a tax credit against Philippine estate tax is allowed for estate taxes paid to foreign countries.One foreign country

What you paid to the foreign countryTax Credit Limit = Net foreign estatex Tax here in the Philippines

Entire Net Estate

Between what you paid to the foreign country and the tax credit limit here, you choose whatevers lower as what you can credit.

See example in donors tax part.

If tax is paid to 2 or more foreign countries:

Limitation A: see above

Limitation B: Tax Credit Limit = Total foreign net estate

x Tax here in the Philippines

Entire Net Estate

Between limitation A and B, you choose whatevers lower as your credit.

Admin Provisions

SEC. 89. Notice of Death to be Filed. - In all cases of transfers subject to tax, or where, though exempt from tax, the gross value of the estate exceeds Twenty thousand pesos (P20,000), the executor, administrator or any of the legal heirs, as the case may be, within two (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. A notice of death must be filed within two months after the decedents death:

1. In all cases of transfers subject to tax, or

2. When exempt, the value of the estate exceeds P20,000

SEC. 90. Estate Tax Returns. -

(A) Requirements. - In all cases of transfers subject to the tax imposed herein, or where, though exempt from tax, the gross value of the estate exceeds Two hundred thousand pesos (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 for which a clearance from the Bureau of Internal Revenue is required as a condition precedent for the transfer of ownership thereof in the name of the transferee, the executor, or the administrator, or any of the legal heirs, as the case may be, shall file a return under oath in duplicate, setting forth:(1) The value of the gross estate of the decedent at the time of his death, or in case of a nonresident, not a citizen of the Philippines, of that part of his gross estate situated in the Philippines;(2) The deductions allowed from gross estate in determining the estate as defined in Section 86; and(3) Such part of such information as may at the time be ascertainable and such supplemental data as may be necessary to establish the correct taxes.Provided, however, That estate tax returns showing a gross value exceeding Two million pesos (P2,000,000) shall be supported with a statement duly certified to by a Certified Public Accountant containing the following:(a) 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 Philippines, of that part of his gross estate situated in the Philippines;(b) Itemized deductions from gross estate allowed in Section 86; and(c) The amount of tax due whether paid or still due and outstanding.(B) Time for Filing. - For the purpose of determining the estate tax provided for in Section 84 of this Code, the estate tax return required under the preceding Subsection (A) shall be filed within six (6) months from the decedent's death.A certified copy of the schedule of partition and the order of the court approving the same shall be furnished the Commissioner within thirty (30) after the promulgation of such order. (C) Extension of Time. - The Commissioner shall have authority to grant, in meritorious cases, a reasonable extension not exceeding thirty (30) days for filing the return. (D) Place of Filing. - Except in cases where the Commissioner otherwise permits, the return required under Subsection (A) shall be filed with an authorized agent bank, or Revenue District Officer, 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. An estate tax return is required to be filed when the estate is:

1. Subject to estate tax,

2. Exempt from estate tax, but the gross estate exceeds P200,000

3. Regardless of the amount of the gross estate, where the said gross estate consists of registered or registerable property, motor vehicle or shares of stock, or other similar property for which clearance from the BIR is required as a condition precedent for the transfer of ownership thereof in the name of the transferee.

The return shall be under oath and shall include the following:

1. Value of the gross estate at the time of the decedent (for non-resident aliens, the value of the gross estate here in the Philippines)

2. Deductions allowed from the gross estate

3. Whatevers necessary to establish the correct estate tax

If the estate tax return shows that the gross estate exceeds P2,000,000, it should be accompanied by a statement certified by a CPA. See codal.

The estate tax return should be filed within 6 months after the decedents death.

The BIR can extend this, but not more than 30 days.

A return need not be complete in all particulars. It is sufficient if it complies substantially with the law. There is substantial compliance when:

The return is made in good faith and is not false or fraudulent;

It covers the entire period involved; and

It contains information as to the various items of income, deductions and credits with such definiteness as to permit the computation and assessment of the tax. (CIR v Gonzales)

Where the return was made on the wrong form, it was held that the filing thereof did not start the running of the period of limitations, and where the return was very deficient, there was no return at all. (same case)

SEC. 91. Payment of Tax. -

(A) Time of Payment. - The estate tax imposed by Section 84 shall be paid at the time the return is filed by the executor, administrator or the heirs.

(B) Extension of Time. - When the Commissioner finds that the payment on the due date of the estate tax or of any part thereof would impose undue hardship upon the estate or any of the heirs, he may extend the time for payment of such tax or any part thereof not to exceed five (5) years, in case the estate is settled through the courts, or two (2) years in case the estate is settled extrajudicially. In such case, the amount in respect of which the extension is granted shall be paid on or before the date of the expiration of the period of the extension, and the running of the Statute of Limitations for assessment as provided in Section 203 of this Code shall be suspended for the period of any such extension.Where the taxes are assessed by reason of negligence, intentional disregard of rules and regulations, or fraud on the part of the taxpayer, no extension will be granted by the Commissioner.If an extension is granted, the Commissioner may require the executor, or administrator, or beneficiary, as the case may be, to furnish a bond in such amount, not exceeding double the amount of the tax and with such sureties as the Commissioner deems necessary, conditioned upon the payment of the said tax in accordance with the terms of the extension.

(C) Liability for Payment. - The estate tax imposed by Section 84 shall be paid by the executor or administrator before delivery to any beneficiary of his distributive share of the estate. Such beneficiary shall to the extent of his distributive share of the estate, be subsidiarily liable for the payment of such portion of the estate tax as his distributive share bears to the value of the total net estate.For the purpose of this Chapter, the term "executor" or "administrator" means the executor or administrator of the decedent, or if there is no executor or administrator appointed, qualified, and acting within the Philippines, then any person in actual or constructive possession of any property of the decedent. Estate tax shall be paid at the time the return is filed.

The Commissioner may extend the payment of such tax.

It should not exceed 5 years in case of judicial settlement, and 2 years if extrajudicial settlement.

The running of the period of limitation for assessment shall be suspended for the period of such extension.

The estate tax shall be paid by the executor or administrator before delivery to any beneficiary of his distributive share of the estate.

Where there are two or more executors, all of them are severally liable for the payment of the estate tax. (CIR v Gonzales)

The inheritance tax, although charged against the account of each beneficiary, should be paid by the executor or administrator.

Such beneficiary shall be subsidiarily liable for the payment of such tax to the extent of his share

Claims for income tax need not be filed with the committee on claims and appraisals in the course of testate proceedings, and the amount thereof may be collected after the distribution of the decedents estate among his heirs, who shall be liable in proportion to their share in the inheritance. (Government v Pamintuan)

The government, in collecting unpaid taxes accruing before the death of the decedent, has two ways of collecting the said taxes. (CIR v Pineda)

1. By going after all the heirs and collecting from each one of them the amount of the tax proportionate to the inheritance received.

2. By subjecting said property of the estate which is in the hands of an heir or transferee to the payment of the tax due the estate. (or, go against one heir for the entire tax, subject to the heirs right of contribution from his co-heirs.)

Miscellaneous Provisions

SEC. 92. Discharge of Executor or Administrator from Personal Liability. - If the executor or administrator makes a written application to the Commissioner for determination of the amount of the estate tax and discharge from personal liability therefore, the Commissioner (as soon as possible, and in any event within one (1) year after the making of such application, or if the application is made before the return is filed, then within one (1) year after the return is filed, but not after the expiration of the period prescribed for the assessment of the tax in Section 203 shall not notify the executor or administrator of the amount of the tax. The executor or administrator, upon payment of the amount of which he is notified, shall be discharged from personal liability for any deficiency in the tax thereafter found to be due and shall be entitled to a receipt or writing showing such discharge.SEC. 93. Definition of Deficiency. - As used in this Chapter, the term "deficiency" means:(a) The amount by which the tax imposed by this Chapter exceeds the amount shown as the tax by the executor, administrator or any of the heirs upon his return; but the amounts so shown on the return shall first be increased by the amounts previously assessed (or collected without assessment) as a deficiency and decreased by the amount previously abated, refunded or otherwise repaid in respect of such tax; or(b) If no amount is shown as the tax by the executor, administrator or any of the heirs upon his return, or if no return is made by the executor, administrator, or any heir, then the amount by which the tax exceeds the amounts previously assessed (or collected without assessment) as a deficiency; but such amounts previously assessed or collected without assessment shall first be decreased by the amounts previously abated, refunded or otherwise repaid in respect of such tax.SEC. 94. Payment Before Delivery by Executor or Administrator. - No judge shall authorize 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. 95. Duties of Certain Officers and Debtors. - Registers of Deeds shall not register in the Registry of Property any document transferring real property or real rights therein or any chattel mortgage, by way of gifts inter vivos or mortis causa, legacy or inheritance, unless a certification from the Commissioner that the tax fixed in this Title and actually due thereon had been paid is show, and they shall immediately notify the Commissioner, Regional Director, Revenue District Officer, or Revenue Collection Officer or Treasurer of the city or municipality where their offices are located, of the non payment of the tax discovered by them. Any lawyer, notary public, or any government officer who, by reason of his official duties, intervenes in the preparation or acknowledgment of documents regarding partition or disposal of donation inter vivos or mortis causa, legacy or inheritance, shall have the duty of furnishing the Commissioner, Regional Director, Revenue District Officer or Revenue Collection Officer of the place where he may have his principal office, with copies of such documents and any information whatsoever which may facilitate the collection of the aforementioned tax. Neither shall a debtor of the deceased pay his debts to the heirs, legatee, executor or administrator of his creditor, unless the certification of the Commissioner that the tax fixed in this Chapter had been paid is shown; but he may pay the executor or judicial administrator without said certification if the credit is included in the inventory of the estate of the deceased.SEC. 96. Restitution of Tax Upon Satisfaction of Outstanding Obligations. - If after the payment of the estate tax, new obligations of the decedent shall appear, and the persons interested shall have satisfied them by order of the court, they shall have a right to the restitution of the proportional part of the tax paid.SEC. 97. Payment of Tax Antecedent to the Transfer of Shares, Bonds or Rights. - There shall not be transferred to any new owner in the books of any corporation, sociedad anonima, partnership, business, or industry organized or established in the Philippines any share, obligation, bond or right by way of gift inter vivos or mortis causa, legacy or inheritance, unless a certification from the Commissioner that the taxes fixed in this Title and due thereon have been paid is shown.If a bank has knowledge of the death of a person, who maintained a bank deposit account alone, or jointly with another, it shall not allow any withdrawal from the said deposit account, unless the Commissioner has certified that the taxes imposed thereon by this Title have been paid: Provided, however, That the administrator of the estate or any one (1) of the heirs of the decedent may, upon authorization by the Commissioner, withdraw an amount not exceeding Twenty thousand pesos (P20,000) without the said certification. For this purpose, all withdrawal slips shall contain a statement to the effect that all of the joint depositors are still living at the time of withdrawal by any one of the joint depositors and such statement shall be under oath by the said depositors.Donors Tax

SEC. 98. Imposition of Tax. -(A) There shall be levied, assessed, collected and paid upon the transfer by any person, resident or nonresident, of the property by gift, a tax, computed as provided in Section 99.(B) The tax shall apply whether the transfer is in trust or otherwise, whether the gift is direct or indirect, and whether the property is real or personal, tangible or intangible. Gifts and donors tax will be levied, assessed, collected and paid upon the transfer by any person, resident or nonresident, of property by gift

The property can be real or personal, tangible or intangible

The transfer can be in trust or otherwise

The gift can be direct or indirect

The donors tax shall not apply unless and until there is a completed gift. The transfer of property by gift is perfected from the moment the donor knows of the acceptance by the donee; it is completed by the delivery, either actually or constructively, of the donated property to the donee.Thus, the law in force at the time of the perfection/completion of the donation shall govern the imposition of the donors tax. (RR 02-03)Gross giftsSEC. 104. Definitions. - For purposes of this Title, the terms "gross estate" and "gifts" include real and personal property, whether tangible or intangible, or mixed, wherever situated: Provided, however, That where the decedent or donor was a nonresident alien at the time of his death or donation, as the case may be, his real and personal property so transferred but which are situated outside the Philippines shall not be included as part of his "gross estate" or "gross gift": Provided, further, That franchise which must be exercised in the Philippines; shares, obligations or bonds issued by any corporation or sociedad anonima organized or constituted in the Philippines in accordance with its laws; shares, obligations or bonds by any foreign corporation eighty-five percent (85%) of the business of which is located in the Philippines; shares, obligations or bonds issued by any foreign corporation if such shares, obligations or bonds have acquired a business situs in the Philippines; shares or rights in any partnership, business or industry established in the Philippines, shall be considered as situated in the Philippines: Provided, still further, that no tax shall be collected under this Title in respect of intangible personal property: (a) if the decedent at the time of his death or the donor at the time of the donation was a citizen and resident of a foreign country which at the time of his death or donation did not impose a transfer tax of any character, in respect of intangible personal property of citizens of the Philippines not residing in that foreign country, or (b) if the laws of the foreign country of which the decedent or donor was a citizen and resident at the time of his death or donation allows a similar exemption from transfer or death taxes of every character or description in respect of intangible personal property owned by citizens of the Philippines not residing in that foreign count There are two kinds of donors (similar to estate tax):

1. The resident or citizen of the Philippines, and

2. The non-resident, not citizen of the Philippines

If the donor is a resident or a citizen of the Philippines, gross gifts would consist of:

1. Real estate, regardless of location

2. Tangible personal property, regardless of location

3. Intangible personal property, regardless of location

If the donor is non-resident, not citizen of the Philippines, gross gifts would consist of:

1. Real estate located in the Philippines

2. Tangible personal property located in the Philippines

3. Intangible personal property located in the Philippines, subject to the reciprocity clause (Similar to the rules for estate tax, see discussion there for what constitutes intangible property)

a. If donor at the time of the donation was a citizen and resident of a foreign country which at the time of the donation did not impose a transfer tax of any character in respect of intangible personal property of Filipino citizens not residing in that country, or

b. If the laws of the foreign country of which the donor was a citizen and resident at the time of donation allow a similar exemption from transfer taxes of every character in respect of intangible personal property owned by citizens of the Philippines not residing in that country

A donation made by a corporation to the heirs of a deceased office out of gratitude for his past services is subject to the donees gift tax. It is not subject to deduction for the value of said services which do not constitute a recoverable debt. (Pirovano v CIR, the heirs here wanted to consider it remuneratory so it wont be taxed as a gift. In this case, the donees were the ones who were made liable to pay, not the donor) A donation for a political candidate is subject to donors tax. (ACCRA v CIR, wherein the ACCRA partners claimed that political and electoral contributions were not subject to donors tax)Also to be considered as gifts are the following:

1. Transfers for insufficient consideration

2. Cancellation of indebtedness

Transfers for insufficient consideration

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. A transfer of real property will be considered a donation/gift and subject to the donors tax when:

1. The transfer was for less than adequate and full consideration,

2. Such transfer was effective during his life time (inter vivos), and3. Other than real property in Sec 24 (d), i.e. the property was not subject to final capital gains tax (capital asset).

In cases like this, the amount by which the value of the property exceeded the consideration received shall be considered a donation.

Mos sold to Jango for P100k a property which had a FMV of P280k. the P180k will be considered a donation and thus subject to the tax.

With re: #3, what are the implications if the real property sold was a capital asset as against an ordinary asset?

For example, the real property had a cost of P100, a FMV of P200, but sold for only P170.

If it were classified as a capital asset, it will be taxed 6% of the FMV (remember, the base is either the consideration or the FMV, whichever is higher).

If it were classified as an ordinary asset, it will be taxed twice. First, it will be taxed for income tax purposes (tax base of P70). Second, it will be taxed for donors tax (tax base of P30). In this case, donors tax will be attracted unwittingly.

Cancellation of indebtedness

If a creditor desires to benefit a debtor, and without any consideration therefore, cancels the debt (and the debtor accepts), the amount of the debt is a donation by the creditor to the debtor.

Value of the gifts

SEC. 102. Valuation of Gifts Made in Property. - If the gift is made in property, the fair market value thereof at the time of the gift shall be considered the amount of the gift. In case of real property, the provisions of Section 88(B) shall apply to the valuation thereof. The fair market value of the property donated/given at the time of the donation shall be the value of the gross gifts.

Deductions from gross giftsSEC. 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):(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 for profit, or to any political subdivision of the said Government; and(3) Gifts in favor of an educational and/or charitable, religious, cultural or social welfare corporation, institution, accredited nongovernment organization, trust or philanthropic organization or research institution or organization: Provided, however, That not more than thirty percent (30%) of said gifts shall be used by such donee for administration purposes. For the purpose of the exemption, a 'non-profit educational and/or charitable corporation, institution, accredited nongovernment organization, trust or philanthropic organization and/or research institution or organization' is a school, college or university and/or charitable corporation, accredited nongovernment organization, trust or philanthropic organization and/or research institution or organization, incorporated as a nonstock entity, paying no dividends, governed by trustees who receive no compensation, and devoting all its income, whether students' fees or gifts, donation, subsidies or other forms of philanthropy, to the accomplishment and promotion of the purposes enumerated in its Articles of Incorporation. These exemptions of certain gifts should be taken to mean the deductions allowed by law to arrive at the taxable net gifts.

The deductions allowed for a resident or citizen donor: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

a. Only to the extent of P10,000b. Remember, this article only covers gifts of a parent to his/her child, not a parent to his future son-in-law/daughter-in-law. If the gift is given to a future son-in-law/daughter-in-law, no deductions will be allowed because the latter are considered strangers. (ouch naman!)

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 for profit

3. Gifts in favor of educational and/or charitable, religious, cultural or social welfare corporations, institutions, accredited NGOs, trust or philanthropic organizations, research institutions or organizations, provided that not more than 30% of said gifts shall be used by such donee for administration purposes

Deductions from the gross gifts by husband and wife

For deductions from gross gifts made by husband and wife, out of community/conjugal property, each donor has his or her own deductions. Their donations will be distributed equally among them. (1/2)

However, if what was donated is a conjugal or community property and only the husband signed the deed of donation, there is only one donor for donors tax purposes, without prejudice to the right of the wife to question the validity of the donation without her consent pursuant to the pertinent provisions of the Civil Code of the Philippines and the Family Code of the Philippines. Each of the spouses is entitled to a maximum deduction of P10,000 for donation on account of marriage.

Example Husband and wife donated P400k to son and daughter-in-law, on account of marriage out of community property. How do we break this down?

Gross gift byGross gift toDeductionKind of doneeNet GiftTax Rate (see schedule)Donors Tax

Father P200kSon ( P100kP10kNon-stranger90kExempt0

Daughter-in-law ( P100kNoneStranger100k30%30k

Mother P200kSon ( P100kP10kNon-stranger90kexempt0

Daughter-in-law ( P100knoneStranger100k30%30k

Deductions for a non-resident, not citizen donor

(B) In the Case of Gifts Made by a Nonresident Not a Citizen of the Philippines. -(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.(2) Gifts in favor of an educational and/or charitable, religious, cultural or social welfare corporation, institution, foundation, trust or philanthropic organization or research institution or organization: Provided, however, That not more than thirty percent (30%) of said gifts shall be used by such donee for administration purposes. Same as the resident or citizen donor EXCEPT that they arent allowed deductions for gifts on account for marriage

Other deductions

The BIR ahs allowed the following as deductions from gross gifts to arrive at net gifts:

1. Encumbrance on the property donated, if assumed by the donee

2. Those specifically provided by the donor as a diminution of the property donated.

Example Lhizavhel donated land which was subject to a mortgage to Chlahrihvel. The FMV of the land was P1m, but the mortgage was P400k. Chlahrihvel agreed to assume the mortgage, hence the deduction of P400k is allowed. The net gift is P600k. Tax rates Payable by Donor

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:If the net gift is:

OverBut not overThe tax shall bePlusOf Excess over

P100kExempt

P100k200k02%P100k

200k500k2k4%200k

500k1m14k6%500k

1m3m44k8%1m

3m5m204k10%3m

5m10m404k12%5m

10m1.004m15%10m

(B) Tax Payable by Donor if Donee is a Stranger. - When the donee or beneficiary is stranger, the tax payable by the donor shall be thirty percent (30%) of the net gifts. For the purpose of this tax, a "stranger", is a person who is not a:(1) Brother, sister (whether by whole or half-blood), spouse, ancestor and lineal descendant; or(2) Relative by consanguinity in the collateral line within the fourth degree of relationship.(C) Any contribution in cash or in kind to any candidate, political party or coalition of parties for campaign purposes shall be governed by the Election Code, as amended. The tax rate for donors are illustrated in the table above.

However, if donee or beneficiary is a stranger, the tax payable by the donor shall be 30% of the net gifts.

A stranger is a person who is NOT a:

1. Brother, sister (whether by whole or half-blood), spouse, ancestor and lineal descendant, or

2. Relative by consanguinity in the collateral line within the 4th degree of relationship.

Donation made between business organizations and those made between an individual and a business organization shall be considered as donation made to a stranger. (RR 02-03) The basic tax formula is as follows:

On the first donation of a calendar year

Gross gifts

Less: Deductions from these gross gifts

Net Gifts

X Donors tax rate

Donors tax due on the net gifts

On a subsequent donation in the same calendar year

Gross gifts made on this date

Less: Deductions from these gross gifts

Net gifts made on this date

Plus: All prior net gifts given with the same calendar year

Aggregate net gifts

Donors tax on aggregate net gifts

Less: Donors tax on all prior net gifts within the same calendar year

Donors tax due on the net gifts of this dateExample

Mr. and Mrs. Lumbat are Filipino residents. On Jan 3, 2010, they donated a lot with a FMV of P2m to their child, Zombie, and his wife, Honka Monka on account of their marriage. On June 3, 2010, they donated P200k to Mr. Lumbats brother, Piggie Boy.

Mr. LumbatMrs. Lumbat

Jan 3, 2010Non-strangerStrangerTotalNon-strangerStrangerTotal

Gross gifts made:

To Zombie, 500k500k500k500k

To Honka Monka, 500k500k500k500k

Total500k500k1m500k500k1m

Deduction:

For account of marriage10k010k10k010k

Net gifts made490k500k990k490k500k990k

Donors tax13,600

(use schedule)150,000

(use 30%)

163,600

13,600

(use schedule)150,000

(use 30%)

163,600

June 3, 2010

Gross gifts made:

To Piggie Boy100k100k100k100k

Total100k100k100k100k

Deduction:0

Net gifts made on this date100k0100k0100k100k

Add: All prior net gifts within the year490k500k490k500k

Aggregate net gifts590k500k490k600k

Donors tax on aggregate net gifts19,400150,00013,600180,000

Less: Donors tax on all prior net gifts within the year13,600150,00013,600150,000

Donors Tax Due5,80005,800030,00030,000

Donors Tax Return

SEC. 103. Filing of Return and Payment of Tax. -(A) Requirements. - any individual who makes any transfer by gift (except those which, under Section 101, are exempt from the tax provided for in this Chapter) shall, for the purpose of the said tax, make a return under oath in duplicate. The return shall se forth:(1) Each gift made during the calendar year which is to be included in computing net gifts;(2) The deductions claimed and allowable;(3) Any previous net gifts made during the same calendar year;(4) The name of the donee; and(5) Such further information as may be required by rules and regulations made pursuant to law.(B) Time and Place of Filing and Payment. - The return of the donor required in this Section shall be filed within thirty (30) days after the date the gift is made and the tax due thereon shall be paid at the time of filing. Except in cases where the Commissioner otherwise permits, the return shall be filed and the tax paid to an authorized agent bank, the Revenue District Officer, Revenue Collection Officer or duly authorized Treasurer of the city or municipality where the donor was domiciled at the time of the transfer, or if there be no legal residence in the Philippines, with the Office of the Commissioner. In the case of gifts made by a nonresident, the return may be filed with the Philippine Embassy or Consulate in the country where he is domiciled at the time of the transfer, or directly with the Office of the Commissioner. The donors tax return must be filed within 30 days after the date of the donation.

On all donations of one date, only one donors tax return is required.

In case of husband and wife as donors the donors tax return of the husband will be apart of the donors tax return of the wife.

Where to file? See codal.

When and where to pay? The donors tax will be paid at the time the return is filed, and with the office where the return is filed.

Donors tax credit

(C) Tax Credit for Donor's Taxes Paid to a Foreign Country. -(1) In General. - The tax imposed by this Title upon a donor who was a citizen or a resident at the time of donation shall be credited with the amount of any donor's tax of any character and description imposed by the authority of a foreign country.(2) Limitations on Credit. - The amount of the credit taken under this Section shall be subject to each of the following limitations:(a) The amount of the credit in respect to the tax paid to any country shall not exceed the same proportion of the tax against which such credit is taken, which the net gifts situated within such country taxable under this Title bears to his entire net gifts; and(b) The total amount of the credit shall not exceed the same proportion of the tax against which such credit is taken, which the donor's net gifts situated outside the Philippines taxable under this title bears to his entire net gifts. Only resident or citizen donors are allowed donors