Sec.

84 (5 to 20%)

Estate Tax- excise, direct, progressive, general, national, ad valorem. One of the most burdensome tax.

Prior to the distribution of property, the estate tax must already be paid.

Theories why estate tax is being imposed: (most common)

1. Redistribution of wealth theory- the fact that the person has more property, he should be subject to higher tax. Ideally,
the imposition would redound to the benefit of the public.
2. State partnership theory- deceased when still alive has benefited from the gov’ts protection. Presumption that partly,
the gov’t owns the property of the deceased through the protection it gives to the owner when still alive.

Sec. 23 (General Principles of Taxation)

Resident Citizen and Domestic Corp. are taxed of income derived both from sources inside and outside PH.

Only natural persons are subject to estate tax.

In estate tax, the subject is the property (location/situs).

Taxpayer Income Income Estate Tax

Within PH Outside
PH
RC Yes Yes
NRC Yes No
RA Yes No
NRAETB Yes No
NRANETB Yes No
DC Yes Yes n/a
RFC Yes No n/a
NRFC Yes No n/a

Group 1 (Gray)

Subject to estate tax for real properties located within and without the PH.

Group 2 (Orange)

Subject to estate tax for real properties located within the PH.

Mobilia sequuntur personam- applies to intangible property. Movables follow the person. Where the owner resides/domiciles.

Exception to the rule:

1. Where the property acquires situs in another place. Ex: shares of stock (nationality of the corp./place of incorp.)
2. When the law provides otherwise. Ex: Sec. 104 , reciprocity rule

GROSS ESTATE

LESS: DEDUCTIONS

NET ESTATE

Sec. 104 –applies both to estate and donor’s tax

Next meeting:

1. Study Secs. 84 to 97 including 104

2. Read Rev. Reg. 2-2003, BIR Ruling 10-2003 (8 Sept 2003, see Lex Libris)
3. Marcos II vs CA, GR. 120880, 5 June 1997
4. CIR vs CA & Josefina Pajonar, GR. 123206, 22 March 2000
5. Dizon vs CTA, GR 140944, 30 April 2008
6. Basic Principles and Theories of Estate Tax

a. Benefit Received Theory- For the performance of services rendered by the government in the distribution of the
estate of the decedent and other benefits that accrue to the estate and the heirs, the state collects the tax

b. Privilege Theory/State Partnership Theory- Inheritance is not a right but a privilege granted by the state and large
estates have been acquired only with the protection of the state. The State, as a passive and silent partner in the
accumulation of property has the right to collect the share which is properly due to it.

c. Redistribution of Wealth Theory- Estate tax is a contributing factor to the inequalities in wealth and income. The
imposition of death tax reduces the property received by the successor bringing about a more equitable
distribution of wealth in society.

d. Ability to Pay Theory- The receipt of inheritance places assets in the hands of the heirs and beneficiaries thereby
creating an ability to pay the tax and thus ability to contribute to governmental income.

7. Classification of Decedents

Sec. 85
a. Resident Citizen
b. Non-resident Citizen
c. Resident Alien
d. Non-resident Alien

8. Situs

Situs- territory or place where taxes upon subjects may be imposed

a. Immovable property- where the place is located
b. Tangible personal property- where the place is located
c. Intangible personal property- mobilia sequuntur personam (movables follow the person, in other words, the situs
is the domicile of the owner)
Exceptions:
a. When the property acquires situs in another jurisdiction (ex: shares of stocks)
b. When expressly provided by law (i.e. Sec.104)
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 any foreign corporation if such shares, obligations or bonds
have acquired a business situs in the Philippines
5. Shares or rights in any partnership, business or industry established in the Philippines

9. Rule of Reciprocity

Sec.104 Intangible personal property, with a situs in the Philippines, of a decedent who is a non-resident alien shall not
form part of his gross estate if
1. NO IMPOSITION OF ESTATE TAX: The decedent at the time of his death was a citizen and resident of a foreign
country which at the time of his death
a. Did not impose any transfer tax or death tax of any character
b. In respect of any intangible personal property of citizens of the Philippines not residing in that foreign
country; or
2. EXEMPTION FROM ESTATE TAX: The laws of the foreign country of which the decedent was a citizen and resident
at the time of his death
 a. Allow a similar exemption from transfer taxes or death taxes of every character
b. In respect of any intangible personal property owned by citizens of the Philippines not residing in that foreign
country.

10. Determination of Gross and Net Estate

Gross Estate-Deductions= Net Estate

11. Composition of Gross Estate (Sec. 85)

Succession takes place by operation of law upon the death of a person.

a. Decedent’s Interest (ex: fruits, rental income)

b. Transfer in contemplation of death (ex: donation mortis causa)

- Applies also to a situation where death is not imminent like the person is healthy
- In estate tax, take note of the “control” of the person over the property or rights
- If there is control over the property, it is still part of the gross estate of the decedent
- Exception: bona fide sale for an adequate and full consideration

c. Revocable transfer (ex: donation subject to donor’s right to revoke)

d. Proceeds from life insurance

1. Beneficiary is the estate, administrator, executor, designation is revocable- included
2. Beneficiary is the estate, administrator, executor, designation is irrevocable- included
3. Beneficiary is a third person other than the estate, executor, administrator; revocable-included
4. Beneficiary is a third person other than the estate, executor, administrator; irrevocable-EXCLUDED

Executor- appointed by the decedent in his will

Administrator-appointed by the court when the decedent left no will or has left a void will

5. Group insurance and GSIS- excluded

e. Power of appointment

General- a general power of appointment gives the holder very broad power to give away the
decedent’s property. For example, if a holder of the power (the donee) can give the property to anyone
in the world.

Special- A special power of appointment gives the donee power to give the decedent’s assets to a select
group of individuals. The objects of the power in a special power of appointment cannot be the donee
herself, her estate, her creditors or creditors of her estate. For example, if the donee had the power to
select only amongst the decedent’s children, that is a special power of appointment.

X--------------------------------------------Y----------------------------------------------Z
Here, X still retains the control. General or special, the estate should be included in the gross estate of X.
From Y, if general, it is included in the gross estate of Y (Y has control). If special, excluded (Y has no
control).

f. Transfers for insufficient consideration

- Estate is valued based on the FMV at the time of death.
- Donation inter vivos (donor’s tax); mortis causa (estate tax)
- Imposition of tax is based on the law in force at the time of the death of the decedent.

g. Prior Interests
-transitional provision from old to new NIRC. No longer applicable.
 h. Capital of the Surviving Spouse
-more of a deduction

12. Exclusions from Gross Estate

Sec. 87
a. Merger of usufruct in the owner of the naked title
- Usufruct is extinguished upon death of the usufructuary. Upon his death, there is merger of
usufruct (right of use + naked title).
b. Transmission or delivery of the inheritance or legacy by the fiduciary heir or legatee to the
fideicommissary
*Fiducuiary heir- holding the property for fideicommissary heir
*Fideicommissary heir- one designated to inherit the property after the period of time

Decedent-------------------Fiduciary----------------------- Fideicommissary

- Decedent to Fiduciary- included in the gross estate of the decedent. (control)

- Fiduciary to Fideicommissary- excluded from the gross estate of the fiduciary. (no control)

c. Same principle in b. (See Sec. 87, C)

d. Sec. 87, D
*LPDR (Legacy is to Personal; Devise is to Real)
*Legacy for personal property.
*Devise for real property
-above 30% is included in the gross estate, entire gift not just the excess

13. Deductions from Gross Estate

RR 2-2003

Important to remember the two groups of decedent.

Group A Group B
Medical Expenses not included.
No special deductions.

 Funeral expenses- the lowest of the three

a. Actual expenses
b. 5% of the gross estate
c. P200,000
- Casket and burial clothes are not part of the funeral expenses
- Expense must be incurred though not yet paid to be deductible.
 Judicial expenses
- Expenses for disputes among the heirs for the enforcement of their rights are not deductible.
- Extrajudicial expenses for settlement of estate are deductible.
 Indebtedness
- All other reqs present exc. Schedule on how the loan was utilized ca
 Claims against Insolvent person
- Why allowable as deduction and not as inclusion?
- Why include it in the deduction when it can be offset in the gross estate? Because there are claims
which are based in the gross estate like funeral expenses (5% of the gross estate)
- Proof of insolvency: person’s liabilities are higher than assets, tax code is silent, judicial declaration
of solvency is not required; enough if other dox available to prove insolvency
 Transfers for public use
- Properties transferred to gov’t agencies, instrumentalities, and GOCCs
- Also deductible for Group 2 taxpayers
 Casualty losses
- Unique because it can be claimed within 6 months after death
 Unpaid mortgages
 Taxes
 Properties previously taxed (vanishing deductions)
 - Specifically identifiable, transfer should have been made within 5 years,
- A died, transfer to B, B died: vanishing deduction (succession to succession)
- A donated to B, B donated to C: vanishing deduction (donation to succession)
- A died, transfer to B, B donated to C: not applicable (second transfer must always be through
succession)
- You do not directly multiply the % to the FMV of the property.
- A donated to B, B sold to C, C transferred through succession to D: not applicable (there must be
no intervening transfer; also, it is required that prior transfer must be gratuitous)
- Can be claimed only once
 Medical Expenses
- Not necessary that the expenses should pertain to the cause of death
 Family Home
- Certification from the barangay that the house is the decedents family home
- For declaration purposes, the whole FMV should be indicated even if exceeding 1 million. But the
deductible value is only 1 million.
 Amounts received under RA 4917

- Mr. X, resident Filipino, single

1. Parcel of land located in Makati City 3,000,000
2. Parcel of land located in USA 2,000,000
3. House and lot located in Quezon City (Family Home) 2,000,000
4. Car located in Pasay City 1,000,000
5. Actual Funeral Expenses 100,000
6. Judicial Expenses 100,000
7. Medical Expenses 300,000

Gross estate 8,000,000

Less: Deductions (5 to 7) 500,000
Less: Standard Deductions 1,000,000
Family Home 1,000,000
Net Estate 5,500,000
Estate Tax 540,000

- Mr. X, resident of Japan, Canadian, single

8. Parcel of land located in Makati City 3,000,000
9. Parcel of land located in USA 2,000,000
10. House and lot located in Quezon City (Family Home) 2,000,000
11. Car located in Pasay City 1,000,000
12. Actual Funeral Expenses (pro-rata) 100,000
13. Judicial Expenses (pro-rata) 100,000
14. Medical Expenses 300,000

Gross estate 6,000,000

Less: *
Net Estate
Estate Tax 540,000

*ELIT X (Phil. Gross Estate/Total Gross Estate) 200,000 X (6,000,000/8,000,000)

14. Vanishing Deduction/Property Previously Taxed

15. Exemption from certain acquisitions and transmissions

 16. Date-of-death valuation principle
- Post-death developments are not material in determining the amount of the deduction.

17. Filing of notice of death and estate tax return

Notice: within 2 months after death
ETR: within 6 months after death
Extension: not exceeding 30 days from filing of ETR
Reason: meritorious grounds
Payment extension: (a) judicial- 5 years; (b) extrajudicial- 2 years
Reason: undue hardship on the estate
Posting of bond: double the amount of tax
18. Payment of Estate Tax

Situation: Decedent, resident Filipino, only property left is 1.2 million cash in bank.

Question 1: Is there a need to pay estate tax? NO.

Question 2: How much? ZERO. Exempt.

Cash 1,200,000

Standard Deduction 1,000,000

Net Estate 200,000

*200,000 is exempt from estate tax.

Question 3: Is there a need to file an ETR? YES. Because the gross value exceeded 200,000.

More than 20,000 file notice of death

More than 200,000 file ETR

More than 2,000,000 need to attach an independent CPA report

Situation: Property left is motor vehicle with a value of 80,000.

ETR has to be filed because motor vehicle is registrable property. It cannot be transferred without
registration in the LTO. CAR (Certificate of Authority to Register) issued by the BIR must be
presented to LTO prior to registration.

Survivorship Agreement- has an effect of a donation mortis causa or transfer in contemplation of death. Thus, clearance
from BIR must be secured before the bank should allow the withdrawal of the deposits by the
surviving spouse. Note that estate tax of the deposits would apply to the 50% of the deposits, i.e.
the deposit share of the decedent.

19. Tax Credit for estate taxes paid in foreign countries

- If a Group 1 decedent has paid estate tax abroad, he may credit the amount paid from the estate
tax due in the PH.
- Applicable only to Group 1 (RC, NRC, RA) because only they can be taxed for their properties within
and without PH.
- In income tax, only RC and DC can claim income tax credit (same reason).

20. Obligations of the executor, administrators, heirs, officers, and other persons concerned (Sec 97)
- CAR must be presented to the Registrar of Deeds as proof that estate tax has already been paid.
- Same: Motor vehicles (LTO), shares of stock (corporate secretary)
 - Php 20,000 may be withdrawn from the account of the decedent without certification from BIR,
but still with authority from Commissioner.
21. Basic Principles (purpose of donor’s tax)
- Burden (direct)- donor is liable and under obligation to pay
- Amount (ad valorem) –based on the value
- Rate (progressive)- as the value of the property increases, the amount imposed increases
- Object (national)-
- Purpose (general) -
- Subject matter (excise)- exercise of privilege to transfer property
Gross gift less deductions= net gift

- No more inheritance tax for donees. Do not use gift tax, old term for donor’s tax.
- Illustration: A donor sent a letter to B on Jan 5, 2016 expressing intention to donate. On Feb 1, 2016, B
received the letter. The letter-acceptance of B was sent to A on Feb 8, 2016. Feb 10, 2016, knew about the
acceptance but received the acceptance on Feb 12, 2016. When was the donation perfected? Feb 10, 2016,
the time A had knowledge of the acceptance of the done B.
- Movable: donation and acceptance may be verbal, but if the value exceeds 5,000 it must be in writing but
need not be in public instrument.
- Immovable: donation must always be in public instrument including the acceptance.
- Fair market value of the property at the time of the perfection of the donation.
- Dowries as exemptions can only be claimed by group 1.
- Donations to NGO, to be exempted from donor’s tax, must be made to PCNC accredited NGOs. (Phil. Council
for NGO Certification)

22. Classification of donor

- Schedular rate applies to non-strangers (maximum of 15%)
- Fixed rate applies to strangers (30% of the net gift)
- Collateral affinity does not apply to non-strangers.
- Illustration: Mar 1, 2015, A donated to B 80,000.
May 30, 2015, A donated to C 100,000.
Sept 18, 2015, A donated to D 300,000.
-First donation is exempt.
-On the second donation, add the prior net gift (180,000) in computing the donor’s tax
due. Hence, 1,600.
-On the third donation, still add all the prior net gifts (480,000) in computing the donor’s
tax. But, deduct the donor’s tax already been paid (1,600). Hence, 11,600.
-Supposing, A donated 200,000 on Jan, 2,2016, you no longer consider the donation
made on the previous years. Hence, the donor’s tax is 4,000.
- Filing: 30 days after the perfection
- Payment: at the time of payment
- Why no extension? It is presumed that the donor, by the act of donation, has money to pay immediately the
donor’s tax due. In estate tax, financial capability of the decedent cannot be presumed.
- No notice of donation is required except when the donor is a taxpayer engaged in business donating to NGO.
- Transaction deemed donation

23. Situs (intangible personal properties deemed located in the Philippines)

24. Reciprocity rule
25. Determination of gross gift and net gift
- Net gift is based on the economic benefit received by the donee.
26. Composition of gross gift
27. Deductions from gross gift
28. Donation to a stranger
29. Donation to a qualified done institution
30. Cumulative method and splitting method
- Splitting method is a tax saving device. P100,000 is exempt from donor’s tax. If the taxpayer wants to donate
higher than that amount, he can split the amount up to P100,000 each calendar year to avoid the imposition
of donor’s tax.
 - Not practical for real property covered by one title. Partition is more costly than paying the donor’s tax one
time.

31. Transfers for less than adequate and full consideration

Sec.100
- Sec.24: donor’s tax may apply.
- CGT on shares of stocks
o Sale, barter, exchange, or other disposition
o Shares of stocks of domestic corporation
o Held as capital assets
o Except shares of stocks sold or disposed through the stock exchange
- Illustration: 1,000 share of PLDT
o SP P100/share
o Cost P60/share
o FMV P120/share
o BV P110/share
 SP (100 x 1000 shares) 100,000
 Less: Cost (60x1000 shares) 60,000
 Net Capital Gains 40,000
 Thus, the CGT is P2,000
- Here, there is insufficient consideration because FMV is higher than the SP. Difference is considered as a
gift and thus subject to donor’s tax.
- Assuming stranger is a donee (30%), P120 less P100 is P20, multiply to 1000 shares, 3,000 must be paid
as donor’s tax, in addition to the CGT of P2,000.
- Donative intent is not a requisite in Sec.100. (PhilamLife vs Sec of Finance)
- Always compare SP to either FMV (traded stocks) or BV (non-traded stocks). If SP is lower than the
either, there is deemed donation.
- In listed corps., they have FMV and BV. So compare, whichever is higher. If unlisted, they do not have
FMV, so BV is considered as FMV.
- CGT of real property:
o Sale, exchange, barter of real property located in the PH
o Held as capital assets
- Illustration: Zonal Value 1,000,000
SP 800,000
Cost 900,000
FMV (tax dec.) 850,000
 In sale of real property, it is presumed that the seller earned income out of
it. CGT is imposed regardless if the seller actually suffered a loss.
 Basis of CGT Real Property is zonal value or FMV, whichever is higher.
 CGT= 1,000,000 x 6%= 60,000
 Sec.100 admits one exception (i.e. Sec 24 D-CG from sale of real property).
 Why Sec. 24-D excluded? Because in the computation of CGT-Real
Property, unlike CGT-Shares of Stocks, taxpayer does not have an
opportunity to manipulate the amount to of CGT to be paid. Whatever is
the SP, the law requires the CGT to be based on zonal value or FMV,
whichever is higher. Both values cannot be controlled or changed by the
taxpayer.
- In CGT Real Property, cost is immaterial. Cost is taken into consideration in the computation of CGT of
shares of stocks.
- Supposedly, sale of MV below its value is subject to donor’s tax because in the first place, it is not a real
property.
- Illustration: A (husband) died, leaving B (wife) and children X1 and X2. C is indebted to A. B renounced
her share in favor to X1 and X2. She also condoned C’s debt.
- Rule: Distinguish exclusive from conjugal.
- Rule: Renunciation of surviving spouse of share of conjugal, subject to donor’s tax.
- Rule: Hereditary share is renounced in favor to all the heirs or- not subject to donor’s tax. If heirs are
deprived/prejudiced-with donors tax.
 Exclusive Property Communal/ Conjugal Property Total

32. Transfers which may be constituted as donation

- Condonation of debt
33. Filing of Donor’s Tax Return
34. Payment of Donor’s Tax

35. Sec. 105 –“ transactions incidental thereto”

A. Illustration: ABC Steel Corp. Bldg 1: manufacturing area, Bldg2: Administration. Corp sold Bldg 1. Is the sale subject to
VAT? What if Bldg 2 is sold? Sale of Bldg 1 is subject to VAT. Although, isolated, the sale is incidental because the sale is
done to carry on the business of the corporation. Sale of Bldg 2 is still subject to VAT for the same reason. Any property
used for business purposes, if sold, is subject to VAT.

*Mindanao Geothermal Case- just because the transaction is isolated does not mean that it is not incidental to the
business.
*Magsaysay and Imperial Case do not apply to Mindanao Geothermal because the sale in those cases were involuntary.
Thus, the sale is not subject to VAT.

36. Zero-rated Sales

Example: Foreign Currency Denominated sales, export sales, sales to persons/entities whose exemption under special
laws or int’l agreements to which the Philippines is a signatory

Illustration: Mr. A sold gold to Mr. X, dealer. Is it subject to 0% VAT? NO. If gold is sold to persons other than BSP, it is
subject to VAT.

Illustration: Sale made in the PH but denominated in foreign currency. Is it subject to 0% VAT? NO because the sale
must be made to a NON-RESIDENT CITIZEN (registered in BSP). This is the technical meaning of “foreign currency
denominated sale”. Exceptions: automobiles and jewelry (Sec. 149 and 150)

37. Zero-rated and Effectively Zero-rated Sales

Automatic Zero rated Effectively Zero-rated
Subject to 0% VAT; burden cannot be shifted to another Subject to 0% VAT; burden cannot be shifted to another
Export Sales and FCD sales Sale is local, but the person is exempted by special law
or int’l agreements (ex: MEPZA, IT Park)
Before: No need to register in BIR Before: Has to register as Tax-registered entity

38. Zero-rated VAT and VAT-Exempt Transactions

Zero-rated VAT VAT-Exempt
Subject to 0% VAT Subject to 0% VAT
Seller can claim input VAT credit Seller cannot claim input VAT credit

39. VAT-Exempt Transaction and VAT-Exempt Party

VAT-Exempt Transaction VAT-Exempt Party
Whoever is the buyer cannot be subject to VAT The transaction is subject to VAT, the party is
exemption. So exemption lies to whoever is the buyer.

40. Oplan-Kandado Program

a. Surveillance (Overt or Covert)
b. Findings will be sent to the board
c. In there is non-compliance, Mission Order will be issued
d. 5-day VCN

*Copy of Memorandum Receipt-proof that the violation has already been rectified.

*5 days- period within which the violation has to be rectified.

 *Invoice is for sale of goods; receipt is for sale of services.

*Invoice is also used as proof of sale, but it does not necessarily mean that the seller has already been paid
(evidenced by receipt).

41. Security Agency

-Only the agency fee, and not including the salary of the security guard, is subject to VAT.

-The salary of the security guards are just held in trust by the security agency.

-There must be segregation of amount of salary and agency fee in the contract. Otherwise, the whole amount of the
contract price will form part of the gross receipts of the agency and will be subject to VAT.

-If not a security agency, example is manpower service provider, even if there is segregation of admin and salary
amounts, the whole amount is subject to VAT.

-Observation: Salary of manpower employees should not be subject to VAT because of the employer-employee
relationship (exempted under Sec 109). However, BIR justified the distinction because the manpower agency can pass the
burden of VAT.

42. Director’s Fees

-Not subject to VAT because

43. Senior Citizen

-Not limited to OSCA ID for as long as the IS has birthdate to determine the age of the senior citizen

-Funeral expenses of the deceased senior citizen are covered.

-Senior citizen is exempt from VAT, PWDs are not.

-not exceeding 100kw/30 cbm for water, 5% discount, bill must be named to the senior citizen. Subject to VAT.

44. Business Tax

a. VAT
b. Percentage Taxes
c. Excise Tax (motor vehicles, alcoholic beverages, jewelries)
-The state cannot impose VAT and percentage tax at the same time.
-Professional services-not required to register as VAT Taxpayer if annual receipt is at least or below P1,919,500.00

Mode of Transport Common Carriers

Goods Passengers

Air Domestic 12% VAT 12% VAT

International 0% VAT 0% VAT

Water Domestic 12% VAT 12% VAT

International 0% VAT 0% VAT

Land 12% VAT 3% PT

Question:

Corporation machinery used in business - DONATED

Is it subject to donor’s tax?

No settled rule. Subject to VAT because transaction deemed sale.

Not subject because if you impose it with donor’s tax then it is gratuitous

ATTY YU: Not subject. ‘originally intended for sale’ refers to inventory goods. If it is a natural person, why not impose VAT on the
properties.