taxation 2 part 1

8/13/2019 Taxation 2 Part 1

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T A X A T I O N II T R A N S C R I P T I O N S 2010 – 2011 of Atty. Emery Tiu Page | 1

ESTATE TAX

(Sections 84 to 97 of the Tax Code, as amended)

I. Nature and Purpose of Estate Taxation

- What is the nature of estate taxation? Is it a property tax or is it an excise tax or is it some type of tax?

o It is an excise tax. Excise tax is a tax on the conduct or exercise of a profession, the conducts of a business and all others

which includes the right to transmit property upon death.

o But do you think only gratuitous transfers of property are taxable? Is succession a gratuitous transfer or not?

It’s gratuitous. Is it taxable? YES.

o True or False. Only gratuitous transfers are subject to tax.

FALSE. What makes it false? Would the opposite of gratuitous transfer, which is onerous transfer of property, be

subject to tax? YES, it’s subject to income tax, VAT, percentage tax, other sales taxes.

So whatever mode of transfer, whatever the reason for transferring of property is, it is always taxable. The

difference is the type of tax.

o True or False. If you transfer a property gratuitously or onerously, it is always subject to tax.

TRUE.

o True or False. If you transfer a property gratuitously, it is always subject to estate tax.

FALSE, because gratuitous transfer, just like onerous transfer, can be branched out into different kinds of taxes.

Now, gratuitous transfer can be made mortis causa or during lifetime inter vivos.

- There are 2 types of gratuitous transfer:

o 1. During lifetime (inter vivos)

o 2. Upon death (mortis causa)

If it’s upon death, estate tax.

If it’s during lifetime, donor’s tax.

- True or False. Only gratuitous transfers made mortis causa are subject to estate tax.

o FALSE. Although generally speaking, only gratuitous transfers made mortis causa are subject to estate tax because it’s

presumely made upon death. However, there are inter vivos transfers or transfers made by the decedent during his

lifetime that partake and is considered by the tax authorities as taking the form of a testamentary disposition of property.

Example: When the person is transferring a property during lifetime but the transfer is made in contemplation of

death.

o If the thought of transferring is motivated by an impending death that you know, whether death will happen sooner o

not, the number of years is already taken – the benchmark years. So whether death happens within the timeframe that

you’re expecting to die, basta the motive was the thought of death, your property will be still be considered as part of the

estate and subject to tax.

o Illustration: You made a transfer in contemplation of death. So you donated the property. You paid donor’s taxes. One

year after, you died. The tax authorities found out that the property was considered as part of the estate upon death

because the motive was the thought of death. It will be considered as part of the estate subject to estate tax. Is it not

double taxation?

YES (Mai2x: not sure though) Would you be required to pay the full estate tax based on the property that you

transferred a year ago?

a. Pay the difference between the donor’s tax that you have paid before and the estate tax due today.

b. Paying full the estate tax.

c. File for refund of the donor’s tax paid but still pay in full the estate tax.

d. None of the above.

o Answer: C, pay the estate tax in full and if you still have the time to file a claim for refund

which is only 2 years from the date of payment of the donor’s tax, in this case it is allowed

because it is only 1 year after payment of the donor’s tax when the decedent died, you can

file a claim for refund of the donor’s tax paid. But if it happened more than 2 years ago

forget about claiming the refund but still pay the estate tax.




Why is the government interested in getting the estate tax when the donor’s tax has already been paid and the

purpose of both taxes are the same (to tax on the privilege of transmitting the property gratuitously)?

It’s because state taxes are higher in tax rates as against donor’s taxes.

The reason for the lower donor’s tax rates is to encourage the distribution of property in order for it to

be productively used with the younger generations.

- What is the purpose of imposing estate tax?

o The primary reason for all taxes is to raise revenues.

o But estate taxation has a very special purpose of reducing the undue accumulation of wealth in one person or in a smal

group of persons. That’s why whenever someone dies, the government has to partake into some portion of the wealth of

the decedent before the heirs will receive it.

- Is there an inheritance tax? Do you think imposing an inheritance tax is conscionable?

o There’s no inheritance tax. That has already been repealed. But before there was an inheritance tax and there was as wel

an estate tax. So the estate (giver) is taxed and the recipient heirs are taxed for the same property. It became an issue o

double taxation, therefore, it has already been repealed.

- Who again is liable primarily for the payment of estate tax?

o The estate. Payment of the estate taxes rest primarily on the estate itself. But somebody, a person, is actually has to do

the actual payment. But the liability falls on the estate.

- The reason for the imposition of taxes apart from raising revenues and apart from supplementing the needs of the government

aside from collecting income taxes is to reduce social inequality, reduce the undue accumulation of wealth in one single person or a

group of heirs. It is backed-up with 4 theories, which are the following:

o 1. Benefits-received theory – such theory in imposing taxes is defended as the State being paid or should be remunerated

for the services that it has rendered in a system of distribution of property.

o 2. State-partnership theory – is supported by the claim that the State is the silent-impassive partner of the decedent in the

increase or accumulation of his wealth. (Regalian doctrine – lands belong to the State)

o 3. Ability-to-pay theory – the mere fact that the heirs are allowed to partake of the properties left by the decedent gives

the estate the ability to pay the taxes due

o 4. Redistribution-of-wealth theory – which is the reduction of social inequality. Spread out the wealth and estate of the

decedent to the government for the government to render its services to the common good or community.

- The taxpayer in estate taxation is the estate itself, so that there is a difference between the taxpayer and the decedent. Remember

that the estate taxpayer has to pay taxes on the income generated by the property left during judicial settlement. Estate income tax

will cover for the income generated by the estate during judicial settlement. But the tax on the estate left, which covers the privilege

of transferring property gratuitously, is estate tax. So how do you classify decedents? Is it the same as classifying the taxpayers in

income tax?

o NO, since there is no juridical decedent in estate tax. However, to the extent of the 4 major classifications of taxpayers in

income tax, we still use it for estate tax. We have:

1. RC decedent

2. NRC decedent

3. RA decedent

4. NRA decedent – however, we do not subclassify NRA to NRA-ETB and NRA-NETB, unlike income taxation. NRAs

for income taxation are subclassified into NRA-ETB and NRA-NETB. But for the decedent, who has left estate in

the Phils., will only be considered as NRA only.

- For estate tax, there are only 2 categories for purposes of knowing how to tax the estate:

1. Resident or citizen

Resident – RC or RA

Citizen – RC or NRC

2. Non-resident, non-resident = NRA

- When is a decedent, who is not a citizen of the Phils., considered a resident for estate tax purposes? Or when is a decedent

considered a RA? Is a RA in income taxation the same as RA in estate taxation?




o NO. Why? (Tiu: Assignment for next meeting. Determine which has a more stricter requirement for residency between

income taxation or estate taxation)

November 10, 2010

- In brief, what have we discussed yesterday?

II. Applicable Law in Estate Taxation

- How about the applicable law in estate taxation. Did we discuss that? So what law should apply in case a person days? Statute at the

time of death. Regardless of when the tax is supposed to be paid? Why do you think the law applicable for estate taxation is the law

at the time of death and not at the time when the tax is to be paid?

o Succession takes effect at the time of death. By operation of the law, whatever properties are left by the decedent is

transmitted to the heirs or to the successors. Although, for tax purposes, it requires some formal proceedings such as

settlement and the payment of estate tax before partition takes effect.

o So regardless when the tax is supposed to be paid. Regardless of whether you have obtained an extension to pay the taxes, the

computation of the estate tax liability would have to follow which is in effect at the date the tax accrued. And the tax accrues at

the point of death of the decedent because it is at this time that his personality ceases.

III. Kinds of Decedent

- And who is the tax payer in estate taxation? The estate. Not the decedent.

o So what is the rule of classifying? Why do you have to classify decedents if the taxpayer is the estate?

In estate taxation, the primary liability for shouldering the burden of tax falls upon the estate itself. The estate would haveto be classified as to whether the decedent who left the estate is:

1. Resident Citizen

2. Resident Alien

3. Non-resident Citizen

4. Or non-resident alien

Because practically when you say estate, it’s not an individual, it is not living. So we have to go back to whoever left the

estate. We call him the decedent, the person who dies. Leaving a property or transmittal to the successors or to the heirs

as what we have learned in succession.

- Under the tax code, how are decedents classified?

1. Resident Citizen: Without question is a citizen of the Philippines, a Filipino who is a resident of the country.

2. Resident Alien: Is not a Filipino but residing in the Philippines.

3. Non-resident Citizen: Is a Filipino who is not residing in the Philippines.

4. Or non-resident alien

As presented yesterday, all the first 3 citizens, are treated under 1 classification as being taxable, or their estate are

treated the same in so far as taxing in estate taxation. But 1 is left differently, the non-resident alien.

So who is a non-resident alien in relation to estate taxation? Why do we have to subject a non-resident, not a citizen

of the Philippines to estate taxation? Why is it included in the classification?

o So they will be covered by Philippine estate taxation, once these non0-resident aliens have identifiable

properties left in the Philippines.

o When we say properties does it include all real and personal property?

- Yesterday, our last topic was regarding resident alien. A resident alien for estate tax purposes is categorized and taxed the same as a

resident citizen and non-resident citizen. What is residence for estate taxation? Do we not consider an alien as resident using the

factors that we have studied in income taxation? Is there days or are there days in income taxation in so far as resident aliens are

concerned?

o To recall, what makes an alien a resident alien for purposes of income taxation?

If you recall in income taxation class, an alien becomes a resident alien if his intention in the Philippines is not to become a

mere transient or sojourner. He has indefinite purpose of a lengthy stay in the Philippines. Making the Philippines his

R or C = RC, NRC, RA

NRNC = NA




temporary home country. If he gets hired in the Philippines for 3 years or 2 years, he may be considered a resident alien

for income tax purposes. In some cases, it is even considered, so long as an alien stays here continuously for slightly more

than a year, he may be considered a resident alien for income tax purposes.

But for estate tax purposes, residence means the domicile. So that if he is temporarily out of this country to stay in the

Philippines, necessarily making the Philippines as his home country, then he may not be considered as a resident alien o

the Philippines for estate tax purposes. We don’t have the same, entirely have the same factors. Residence for income

taxation and estate taxation.

Take note of this WRONG ANSWER. Do not confuse: In income taxation, if more than 180 days. If an alien stays here for

181 days, he will be considered a resident alien for income tax purposes. But for estate tax, he will not be considered aresident alien because the Philippines is not yet his domicile country? No!

IV. Properties Covered By Gross Estate, In General

- Since we are interested in taxing the estate left by the decedent, what is or what kind of properties are covered by gross estate? Are

all properties whether real or personal, tangible or intangible is covered by gross estate? Generally Yes.

o All properties whether real or personal, tangible or intangible wherever situated. Does this apply to all types of decedent? NoOnly to resident, Non-resident citizen and resident alien.

o All properties whether real or personal, tangible or intangible.

(1) For resident citizens:

Real properties can be within and without, it is covered by the gross estate for Philippine estate taxation.

As for personal tangible property, of a resident citizen, it must be within and without.

Personal intangible property, same.

o You classmate has said, that if the decedent is a resident or a citizen, all real properties, personal tangible and

personal intangible wherever located or situated, it shall form part of the gross estate of that decedent. But if

the decedent is a non-resident alien, only real properties, personal tangible properties and personal intangible

properties having situs within the Philippines is part of the gross estate.

o We don’t have any problem in determining where the location of the real property is located. It is where it has

situs. You remember situs of income taxation, we can apply that here.

(2) When we deal with a non-resident alien decedent. What properties are covered by gross estate? Only propertie

situated within.

A real property is situs where it is located.

A personal property also follow the situs or the factors of determining the situs of real properties, it is where

the personal tangible property is located.

Personal tangible property? Within.

o Regardless if it’s movable? Of course, it is movable.

o Let us say motor vehicle left by a non-resident alien decedent currently located in the United States. Is it covered

in the gross estate for Philippine estate taxation?

Personal intangible Property? As a GENERAL RULE, only properties located within. But the rule on reciprocity applies.

o With respect to intangible personal property, its inclusion in the gross estate is subject to the rule of reciprocity

as provided under Section 104 of the NIRC.

o Once we reach personal intangible property, it is easy to say within and without BUT give me an example an

intangible property having situs in the Philippines.

Would the listing in the stock exchange matter for share of stock? Why do we consider shares of stocks of

the domestic corporation to have situs here? Why do we consider it as taxable? Even in income taxation, we

consider shares of stocks and even dividends arising out of shares of stocks of domestic corporations taxable

in the Philippines?

Resident, Non-Resident Citizen, Resident Alien Non Resident Alien

Real Within and without Within

Personal Tangible Within and without Within

Personal Intangible Within and without Within (General Rule)




The domestic corporation being registered in the Philippines is expectedly receiving benefits although

not necessarily direct benefits. Under the benefits-received theory, we consider the domestic

corporation’s shares of stocks as having situs within.

How about shares of stocks of a foreign corporation, does it have situs within the Philippines?

Even foreign corporations in some cases who have, will produce shares of stocks having situs in the

Philippines, if the operation of such foreign corporation is atleast 85% here in the Philippines.

o There are many other intangible properties which is franchises, where the rights are exercised in the Philippines

patents, etc. So long as the exercise of these kinds of intangibles are exercised within or in the Philippines, itwill have situs within. And if it is part of the properties of a decedent, whether resident citizen or non-resident

alien, it will be considered initially as part of the gross estate.

Reciprocity Rule:

- But he mentioned of a reciprocity rule which is applicable only for intangible properties belonging to a non-resident alien. What

about the reciprocity rule? Does it apply to All Filipino citizens? Residing in that foreign country? What happened to reciprocity?

Should we have the same rules or not?

It will not be computed in the computation of the estate of a non-resident alien if reciprocity applies.

What about a resident alien who has a personal intangible property in the Philippines and his country of origin also

grants the same exemption not necessarily exemption where it does not impose transfer tax to Filipinos not residing

in that country of origin. Can the resident alien in the first classification consider or exclude the personal intangible

property from the gross estate?

o Yes.

- Does the rule on reciprocity on personal intangible properties would apply to all types of decedent? And they can exclude the

property in the gross estate?

o So in all cases, a resident alien, non-resident citizen, resident citizen having an intangible property will always be, the intangible

property will always form part of the gross estate.

o Again state the rule in reciprocity in so far as a NON-RESIDENT ALIEN is concerned. It is either:

1. The home country of the alien does not or totally does not impose any transfer tax against the intangible, talking only of

intangibles herein, tangible personal property of Filipinos not residing in their home country. OR

2. It imposes transfer taxes on intangibles but then it allows an exemption similar to the exemption that we can give non-

resident aliens in so far as intangible properties are concerned.

- Now that reciprocity rule would result to the exclusion from the gross estate the intangible personal property of non-resident aliens.But never the intangible personal properties of resident aliens, non-resident citizen, resident citizen. You will see that all of thei

properties, wherever situated, as a rule, are covered by gross estate. But non-resident aliens are taxable only to real properties in

the Philippines and personal properties in the Philippines. And we assume that intangible personal properties will be exempt, will be

excluded because of the rule of reciprocity.

V. Valuation of Properties

Real Properties:

- How do we value the real properties covered by gross estate? Based on the fair market value.

o What is the source of fair market value in so far as real properties are concerned?

According to Section 6-E of the tax code:

Fair market value for tax purposes which would apply to fair market values for estate tax purposes would be the fair

market value as determined by the Bureau of Internal Revenue Commissioner or the FMV or the zonal values as

determined by the local assessors in every local government unit. So whichever is higher as to FMWs would be the basis of

the FMV of the property, real property of the decendent.

o But in every point of time, the FMVs will differ. What FMV or what point should you determine the FMV for real property? Since

estate taxes accrue at the time of the decedent’s death, you consider the FMV always, the FMV at the time of death of the

decedent.

Personal Properties:

- How about personal properties? Since there is no listing of FMV in the directories of the BIR or the local government unit, FMVs

would be, the FMV in the market. The price at which the seller is not compelled to sell and the buyer is not compelled to buy.




- Example: Mr. A has a motor vehicle and he owns a sole proprietorship. We know that sole proprietorships are owned by 1 sole

proprietor, it becomes part of its assets. So when that sole proprietor dies, all assets of that sole proprietorship will be considered as

part of the gross estate. If the sole proprietorship has a computer, it was bought 2 years ago at Php 100,000 and you estimated the

life of the computer for 5 years.

o So it was already 2 years old, so 2/5 years or Php 40,000 has already been depreciated as you have already learned in income

taxation. You depreciate the life of an asset through wear and tear. The sole only valued Php 60,000 in the books. You

purchased it at Php 100,000, if the sole proprietor dies and the FMV of that property is still at Php 80,000 at the time of death.

Which figure shall you use? Php 100,000, Php 80,000 or Php 60,000? The book value, the value in the market or the cost of the

equipment when purchased? Why?

o Let me change the facts, what if the value in the market is Php 40,000. The books reflect Php 60,000 and the purchase price if

now Php 100,000, which amount shall you use and form part of the gross estate?

o In so far as personal properties is concerned, we do not have a bench mark, the government cannot provide us with fixed

standards and it does not even say in the tax code whichever is higher between the FMV or the book value of the persona

property, therefore, since the law only provides that it is the FMV of the personal property at the time of death, then we go fo

Php 40,000 FMW of the equipment. Php 60,000 or the book value, although higher is only an estimate of the sole proprietor or

the business. And the estimate of an equipment. What if for 2 years, it has been fully utilized, the value of the market is stil

used.

Intangibles

- Let’s go to intangibles. We we’re talking of intangibles in terms of shares of stocks. How do you value of shares of stock assuming a

non-resident alien dies, he has shares of stocks in a domestic corporation and a foreign corporation operating 85% in the Philippines

How do you value shares of stocks?

o Now if the corporation will have a share of stocks listed in the stock exchange, it is very easy how much the share is valued in

the market. So if a person dies today, and he owns shares of stock that is listed in the market. All you have to do is get the

highest price during the day of his death and the lowest price during the day of his death, average on both prices.

o The problem comes when the stocks are not listed in the stock exchange. Because the sources is not according to the market. It

is according to the books of the corporation issuing the shares. If the shares are not listed in the stock exchange, you only get

the BOOK VALUE. How much it values in the books of the corporation issuing it.

VI. Estate Tax Formula, In Brief

- In brief, Ms. Tiu said, as she has mentioned in the outline the formula for estate tax. What is the formula for estate tax? Recall as

well how we did it in income taxation?

o When we started with income taxation, we started discussing what would form part of the gross income of the tax payer, what

is excluded from the income of the tax payer, the deductions, if an individual which are the exemptions actually. But for a

corporation, you have itemized deductions, optional standard deduction in lieu thereof, then we arrive with the net taxable

income. Multiply with the tax rate. And if there is a tax credit, in accordance with our discussion, you only pay the net of the

amount.

o In the same manner, we move to discussing estate tax based on the formula. We will first determine what will be covered by

the gross estate. What are deductions from the gross estate.

Example of a deduction from the gross estate: Funeral. Of course there will be funeral expenses even if the body would be

thrown in the river, there would be expense of the person that you will hire to do that.

Then you remove the share of the surviving spouse. Once you reach the net after deductions of the surviving spouse. It’s

when you multiply tax rates as found in the book which is 5% - 20%. You have estate tax due. Similarly, just like in income

FORMULA ESTATE TAX

Gross estate

Less: (1) Deductions(2)½ share of surviving spouse

Net estate

X Estate Tax Rates

Estate tax due

Less: Tax Credits

Estate tax payable

VERSUS

FORMULA INCOME TAX

Gross estate

Less: (1) Cost

Gross Income

Less: Deductions

Net Taxable Income

Tax Rates

Tax Due

Less: Tax Credits

Income Tax Payable




taxation therefore, estate tax credits are available to be offsetted against the estate tax due in order to arrive at the estate

tax payable.

Your outline will begin with determining with what forms part of the gross estate. What will not form part fo the gross

estate, then deductions.

Composition of the Gross Estate

VII. Composition of the Gross Estate

- Let’s go the composition of the gross estate.

(1) Decedent’s Interest

(2) Transfer in Contemplation of Death

(3) Revocable Transfer

(4) Property under General Power of Appointment

(5) Proceeds of Life Insurance

(6) Prior Interests

(7) Transfers of Insufficient Consideration

(8) Capital of the Surviving Spouse

First, DECEDENT’s INTEREST. What is decedent’s interest?

o So it is the value of any interest in the property or rights which accrues in favor of the decedent at the point of his death. It may

be a money that he is to collect or the rents due from his apartment that he is leasing out to other people. SO the point of that

you have to recognize what may belong to the gross estate and it includes even receivables or claims against insolvent people.

o You have, all you have to do when somebody dies is to gather all information that there are rights, properties which are in favo

of the decedent, will have to be included as part and what are not part of the gross estate.

Second, Transfer in Contemplation of Death

o What about transfer in contemplation of death?

o What is the purpose transfers made in contemplation of death is still considered as part of the gross estate?

This is to avoid or for the purpose of not allowing tax payers to avoid the payment of estate taxes.

o Now, Mr. A donated this property today, a week later, he died. Can we say that the transfer was made in contemplation of

death? Will the property transfer form part of the gross estate?

Yesterday we said that the general rule is that all properties left by the decedent will be subject to estate tax because

estate tax is actually imposed on the privilege of gratuitously transferring property upon death. But here we are discussing

after decedent’s interest, decedent’s interest is claim whatever properties are left accrue in favor of the tax payer is part o

the gross estate.

But the remaining enumeration of what is covered by the gross estate, these are properties which are physically NOT with

the decedent at the time of death probably cause he made a transfer before but still considered as part of the gross estate

and there are inter vivos transfers taking the form of testamentary disposition because of some motive behind.

o In transfer in contemplation of death class cover those which are transfers during lifetime but are considered as part of the

gross estate. If the motive behind the transfer is due to an impending death that he has been called or he perceives. Then the

transfers may be in contemplation of death and at the time of his death it will be considered as transfer in contemplation o

death and it will be considered as part of his gross estate subject to estate tax. This is for the purpose not allowing decedents

escape estate taxation on their properties.

o So the transfer may be done days before, weeks before, even years before so long as the motive behind the transfer is the

thought of an impending death. Before there was a bench mark of 3 years, if the transfer was made within 3 years, it will be

considered as transfer in contemplation of death. But now, the 3 years has been scrapped off and it is based on the motive

behind.

o In that example given earlier, we cannot automatically say that it was a transfer in contemplation of death. If the transfer was

made today and he died, or he will die a week later you have to know the circumstances during the transfer and the

circumstances at the time of death. I he died or transferred without any thought of an impending death, it is NOT transfer in

contemplation of death.




If he died because there was an accident, without any thought of an impending death, no sickness etc, it’s not a transfer in

contemplation of death.

In some transfers in contemplation of death, the reason there is that these transfers are made conditional upon the wishes

of the decedent as well. It’s based on that, still if the property is still within the control of the decedent, it will form part o

the gross estate at the time of his death.

o What are the circumstances surrounding the transfer for which we can gather that the transfer is made in contemplation of

death? What again could be the possible reason why transfers are made in contemplation of death on the part of the decedent

or the person who make his transfer, what could be the motive in making the transfer before death?

Because he wants to evade estate tax which is higher than the donor’s tax.

Third, REVOCABLE TRANSFERS.

o What is a revocable transfer and why is it part of gross estate? A revocable transfer is made when there is a transfer of property

with the transferor or decedent retaining the rights to alter, amend, terminate or revoke the transfer during his lifetime

whether or not such rights to revoke, terminate, amend or alter has been exercised. So long as that right remains until the day

of his death, it is still under the control of the decedent, it is part of his properties because he actually will enjoy the income,

the rights and the enjoyment of the property.

o Revocable transfers is when there is a transfer of property, the transfer having reserved the rights to alter, revoke, amend or

terminate the enjoyment of the property by the transferee. Example is a CONDITIONAL TRANSFER of a property to an heir o

another person and when the transfer will sit or the transfer predeceases, the property reverts back to the transferor. It is a

conditional transfer, revocable transfer.

o In some cases, the book will say transfers with retention of rights. Is transfer with retention of rights the same with revocabletransfers? Transfer or retention or rights during his lifetime? No.

Why not? What’s the difference? How about transfers of property with retention or reservation of certain rights by the

donor or by the decedent during his lifetime. Is that an irrevocable transfer?

In revocable transfers, it the transfers of property with the transferor reserving his right to alter, amend revoke or

terminate the enjoyment of the property by the transferor, and such property even if transferred will form part of the

gross estate even if the transfer has not been exercised, the alteration, amendment, the termination or the

revocation of the property. Point is, so long as the transfer will retain those rights until the day of his death, it is as if

he has full dominion of his property and it is part of his gross estate.

Modified, there are transfers, as some books will call it, transfers with retention, transfer of a property still but with a

retention or reservation of some rights. Not totally the same as revocable transfers but somewhat takes the form of a

revocable transfer because there is a right that has been retained or reserved by the transferor during the time that

the property has been transferred during his lifetime. So long as the transfer has retained those rights until the day ofhis death, he can still say that he the transferor may have at anytime have taken back the property. So it’ s equivalen

to full dominion over the property, still part of his gross estate as if there was no transfer made.

The only exception to the rules that we have been saying is inter vivos transfers taking the form of testamentary

disposition. No. 1, transfers made in contemplation of death, revocable transfers, transfers with reservation or retention

of rights, these are part, these properties are still part of the gross estate. Except if: the transfer is made BONA FIDE for an

inadequate or insufficient consideration.

Fourth, Property passing under General Power of Appointment

- Is a property passing under the general power of appointment, forming part of the gross estate of the decedent? Can you give me an

example or property under the general power of appointment? Or what do you understand of this?

o When a property has passed on to the decedent and that decedent during his lifetime had a right to designate any person

including himself, the executor, the administrator, or creditors of the estate, to designate his estate then we consider that a

general power of appointment over him.

o This is different from the other transfers that we have discussed a while ago. In this case, the property is not totally in the name

of the decedent. A property has passed on to him under a general power of appointment and that decedent has the right to

designate over himself, his estate, his creditors, as if, if that happens, there are no restrictions as to how he will use the

property, then that is a general power of appointment, not special, it will form part of his gross estate.

Fifth, Proceeds of Life Insurance

Beneficiary: Estate / Executor / Administrator Always part of GROSS ESTATE

Part of the Gross Estate: If Revocable

Beneficiary: Other than Estate / Executor / Administrator

NOT Part of the Gross Estate: If Irrevocable




- Proceeds of life insurance, does this form part of the gross estate? Yes.

o I thought proceeds from life insurance are not taxable as we have discussed in income tax? What about the exclusions that

proceeds from life insurance are not subject to tax (what tax?)?

Proceeds from life insurance under Section 32-B are exempt from income tax but their exemption does not mean

exemption from estate tax. Because their exemption under 32-B is only for income tax.

o If the policies, the beneficiaries is the executor and designated as irrevocable beneficiary, part of the gross estate or not?

o Life insurance policies must be taken out by the decedent himself, because if it is not taken by the decedent himself, it is not

part of the estate and the requisites are not complied there.

o To which if the executor has been designated irrevocably, will the proceeds of that life insurance policy form part of the gross

estate or not? Yes, it will form part.

When a life insurance policy is taken out by the decedent upon his life, the rules are:

If the beneficiary is the ESTATE ITSELF, EXECUTOR OR THE ADMINSTRATOR, it forms part of the gross estate.

If the beneficiary is NOT other than estate, executor or administrator, it will form part of the gross estate or not form

part of the gross estate depending on the designation:

o If the designation of that 3rd

person is IRREVOCABLE: So it will all already belong to the 3rd

person and not the

executor, administrator or executor of the decedent, then an irrevocable designation of a 3rd

person other than

EEA, means that it will NOT FORM PART of the gross estate.

o But if the designation is REVOCABLE, which is the default in your insurance code, it will FORM PART of your gross

estate.

How about if the beneficiary is estate itself, executor, administrator? It will ALWAYS form part of the estate whether

revocable or irrevocable.

Why? Because it is the estate itself, executor, administrator.

o Executor: the person designated by the decedent in his will.

o Administrator: if there is no will, no one is designated in the will or an executor has been designated but is

incapacitated to become the executor.

o Do not get confused when we say irrevocable designation of an executor. Follow the rule that when an executor is a

beneficiary, the proceeds will form part of the gross estate.

Sixth, Prior Interests.

o Prior interests is a catch all provision. The government is making sure that everything will be considered in determining the

gross estate. So all transfers, trust estates, interests, rights, powers and relinquishments of powers made before or after the

effectivity of the tax code will still be pulled in together but it doesn’t matter now in determining the gross estate why the tax

code is already in effect 12 years ago.

Seventh, Transfers for Insufficient Consideration

o What is that? Give me a scenario? IS there a sale and if there was, when did it take place? How long before it took place? So if a

person died today and there was a sale which took place for insufficient consideration will it form part of the gross estate?

There is no time frame wherein which transfers for insufficient consideration. So when a person dies and an issue is

brought that the sale took place one, two, three or even 10 years ago and that the consideration was insufficient, it may

still happen that the property that was sold for insufficient consideration will still form part of the gross estate today at the

day of his death.

The scenario here is that a sale was made by the decedent during his lifetime and the exchange was for inadequate or

insufficient consideration. It will form part of the estate of the decedent at the time of death.

o But will it be the whole value of the porerty sold for insufficient consideration or for some amount? SOME amount.

It will only include the excess of the FMV at the time of death. Excess of the FMV over the value that you have otherwise

the value that would have otherwise formed part of the gross estate is the FMV at the time of death, so that would be

equal to 0.

In reality, a transfer for an insufficient consideration, usually, if it took place a long time ago, prior to the death of the

decedent will not be brought up already. Usually what will be brought up are those transfers made immediately

preceeding or within few months before the death of the decedent.

But as to what amount that will form part of the gross estate,




The GENERAL RULE is not the whole property because there was consideration. The problem was the consideration

for the sale was inadequate. The amount that will form part of the estate is the excess of the FMV at the time of

death over the value of the consideration paid for.

o If a property valued for Php1M at the time of sale, Php 1M motor vehicle FMV at the time of sale. Sold at Php

100,000, you can say that this is insufficient for the consideration is inadequate. Given the facts below, a few

months later, the FMV of the motor vehicle reduced to Php 100,000. How much will form part of the gross

estate?

o Is it logical to include Php1M in the gross estate? No. Php 900,000? Or some other amount? Php 800,000.

o In cases of transfers for insufficient consideration what will form part of the gross estate is only the difference

between the FMV at the time of death of the decedent vs. the consideration that he has actually received for the

property. These are for properties which depreciate.

But for properties which appreciate in value, it would be more burdensome for the estate. If the FMV at the time of death

is Php 2M, it was transferred for PHp 100,000. Php 1,900,000 will form part of the gross estate of the decedent.

It is treated as if there is no transfer actually made. Only an advance payment, which is the insufficient consideration was

given to the decedent.

o In what cases where there’ll be a sale can the full amount of the property, fair market value at the time of death be included as

part of the gross estate?

If it tantamount to a fictitious sale or simulated sale, no consideration was given, the entire FMV at the time of death will

be part of the gross estate of the decedent.

- Another item which is not part of the gross estate is the CAPITAL PROPERTY of the husband. Paraphernal property of the wife. In

short, the exclusive properties of the surviving spouse.

o This is included first then excluded in the formula.

o Because when somebody dies and that decedent is married not only will you account for the properties of the decedent but

you will also include all the other properties in relation to conjugal spouse and the exclusive properties of the spouse. AS you go

along the computation, capital of the surviving spouse, paraphernal property is weeded out. And ½ as well of the surviving

spouse from the conjugal properties.

- What is Republic Act 4917? We discussed that in income taxation.

The amount that will be received by the heirs under Republic Act 4917, it will form part definitely of the gross estate.

Republic Act 4917, the retirement benefits will form part of the gross estate. Remember retirement benefits received

under RA 4917, are exempt from income tax.

General Rule, it is exempt from income tax.

o Is it exempt from estate tax?

We just mentioned that its part of the composition of the gross estate. But further on, it is a deduction. So it will zero out

actually and will not be subject to estate tax.

It is part of the gross estate but it is also part of the deduction from the gross estate. There is no deduction from the gross

estate of the retirement benefits if you will not form part the retirement benefits in the gross estate. So whichever way, it

is NOT taxable the estate tax.

VIII. Acquisitions and Transmissions NOT subject to estate tax

a. Merger or Usufruct in the Owner of the Naked Title

FMV during Transfer Php 1,000,000

Gross Selling Price Php 100,000

FMV at the time of Death Php 900,000

Anser: Ph 800 000 Ph 900 000 – Ph 100 000

Property

which

depreciate

FMV during Transfer Php 1,000,000Gross Selling Price Php 100,000

FMV at the time of Death Php 2,000,000

Anser: Ph 1 900 000 Ph 2 000 000 – Ph 100 000

Property

which

appreciate




b. Transmission by the fiduciary heir or legatee to the Fideicommissary

c. Transmission from the First heir, legatee or Donee in favor of another Beneficiary (in accordance with the desire of the

predecessor)

d. Bequests, Devises, Legacies or Transfers to Social Welfare, Cultural and Charitable Institutions

e. Others

f. In the formula, the first part is the gross estate. Before we move on to the deductions, what are those transfers or transmittals

which will not give rise to estate tax? Even in some way it is connected to someone’s prior death? The acquisitions andtransmissions not subject to estate tax?

First, Merger or Usufruct in the Owner of the Naked Title

- The merger of the usufruct in the owner of the naked title is not subject to estate tax. Assuming the usufuctuary dies, and the use of

the property or the enjoyment of the property is merged with the naked owner.

o When the rights of the usufuctuary and the owner of the naked title because of the death of B, says there that this transmission

of right is not subject to estate tax.

o Why is it not subject to tax when in fact there is death? Why?

Because this transf er has already been subjected to estate tax or the donor’s tax. When A transmitted the property to C,

the title to C, separating the usufruct or the right to enjoy the property to another person and thereafter to be merged

upon death of B, the first instance of transfer, the transfer between A and B was already taxed. This is merely a

combination of the actual transfer made by A to be ultimately enjoyed by C. Therefore, the 2 nd transfer between B and C is

no longer subject to estate tax.

Second, Transmission by the fiduciary heir or legatee to the Fideicommissary

- Another transfer which is not covered by estate taxation is TRANSMISSION BY A FIDUCIARY HEIR TO THE FIDEICOMMISSARY

o What is this? So it will look like this:

o A the decedent transmitted property to B or to C? A transfer it to B who holds it in trust for C.

o Say for example the condition of A as the decedent in the will that B will be the fedeicommisary heir and upon death of B, it wil

be transferred to fedeicommissary C, will this be subject to estate tax?

The transfer between A and B will NOT be subject to estate tax because this will be eventually transfer to the 2nd

heir.

o In your opinion, do you think this is a method to avoid taxation? Are you not avoiding tax?

It’s a method of avoiding tax, because if in the will of A there was no designation of C as the 2nd

heir, the death of B wil

result to another transfer, a fresh transfer subject to estate tax. If you realy want to avoid estate tax, secondly, because i

you are wealthy and you want to transmit your property to your children in the will, just probably you could have 2 heirs

or successive transfers in order that when a fedeicommissary heirs give up the property, example:

A

B

C

Subject to Estate Tax

NOT Subject to Estate Tax

Decedent

Fideicommissary Heir

Fideicommissary




C is the grandchild of A, the transfer from B to C will no longer be covered by estate taxation. Otherwise, if it is never

mentioned in the will it stops between A and B. And when B dies, the transfer between B and C is all together another

estate taxation. So under this rule, you make the fedeicommissary enjoy the next state free of tax.

Third, Transmission from the First heir, legatee or Donee in favor of another Beneficiary (in accordance with the desire of t he

predecessor)

- And letter C, or third, transmission from the First heir, legatee or Donee in favor of another beneficiary.

o Kindly illustrate letter C.

So if in the will of the decedent A there is beneficiary B and beneficiary C, ½ was given to each. If B transfers his other half

to C wherein to become one whole. Will the transfer be considered as subject to estate tax? NO.

Why? Estate tax has already been imposed on the first transfer, now if in accordance with the will of the decedent A,

it says there the further transfer from one beneficiary to another beneficiary will not result to another taxation, this is

how it will look like:

If B will further transfer to C, the merger of the property in 1 beneficiary, so long it is in accordance with the will of

the decedent, it will not be subject to estate tax.

Fourth, Bequests, Devises, Legacies or Transfers to Social Welfare, Cultural and Charitable Institutions

- Next, Bequests, Devises, Legacies or Transfers to Social Welfare, Cultural and Charitable Institutions

o What are the 3 requisites in order to consider that non-taxable?

1. Transfer to a social welfare, cultural and charitable institution.

2. No part of the income inures to the benefit of any individual.

3. Provided that not more than 30% of the said bequests, devises, legacies or transfers shall be used for administrative

purposes.

o If a transfer mortis cause was made in favor of University of San Carlos, is it a transmission of property not subject to estate

tax? Social welfare, cultural and charitable. Is it subject to estate tax? No.

Nov. 11, 2010 Thursday

- What transmissions of properties by the decedent are not subject to estate tax?

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

A

B

C

Subject to Estate Tax

NOT Subject to Estate Tax

Decedent

Fideicommissary Heir

Fideicommissary

A

B C

Not subject to ESTATE TAX!

1/2

2nd Transfer

1/2

Sub ect to ESTATE TAX Sub ect to ESTATE TAX

B eventually transfers to C which causes the merger.




o 2. Transmission by the fiduciary heir or legatee to the fideicommissary

o 3. Transmission from the first heir, legatee or donee in favor of another beneficiary in accordance with the desire of the

predecessor

Why do you think that the merger of the usufruct in the owner of the naked title is exempt from estate tax and

so as transmission made by the fiduciary heir or legatee to the fideicommissary and transmission by the first heir

to another beneficiary in accordance with the will of the decedent? Why are they exempt from estate tax?

They’re exempt from estate tax because estate tax was already imposed when the first transmission of

the property was made to the usufructuary, as well as to the fiduciary heir and to the first heir. The

second transmission of the property will be exempt from estate tax since imposing such tax on such

property is double taxation.

o 4. Bequests, devises, legacies, or transfers to social welfare, cultural and charitable institutions

What are the requisites to make the transmission exempt from estate tax on the part of the estate of the

decedent?

1. The bequest, devise, legacy or transfer must be made to a social welfare, cultural or charitable

institution

2. No part of the income of such institutions inures to the benefit of any individual

3. Not more than 30% of the said bequest, devise, legacy or transfer shall be used for administrative

purposes

Does this include bequests made to non-stock, non-profit educational institutions?

YES, since Art. XIV Sec. 4(4) of the Constitution provides that bequests to be used actually, directly and

exclusively for educational purposes shall be exempt from tax. However, the bequests must be used

actually, directly and exclusively for educational purposes. Such bequest made does not need the

requisites for exemption in bequests made to social welfare, cultural or charitable institutions.

NOTE: There might be donation during lifetime that can be considered as subject to estate tax but there is no

donation mortis causa that can be subject to donor’s tax because the transfer is already upon death.

o 5. Others

NOTE: First 200K of the net estate is exempt from estate tax.

What other transmissions of property or receipts/proceeds by the estate of the decedent that is not subject to

estate tax?

1. Benefits received from SSS or GSIS

2. Benefits received from U.S. Veterans Administration

3. War benefits given by the Philippine government and U.S. government due to damages suffered

during the war

4. Grants and donations to the Intramuros Administration

5. If the decedent holds a property in trust for someone else, usually a beneficiary, the general rule is

that it does not form part of the estate of the decedent because ultimately, it will be in favor of the

beneficiary, unless it falls under the general power of appointment over which the decedent has been

holding on to it with the free reign to designate himself as the ultimate beneficiary (Tiu: something like

that)

6. Transfers by way of bona fide sales

7. Life insurance proceeds from GSIS and from private insurance companies so long as the beneficiary

designated irrevocably is a third person other than the estate, administrator, executor. It will neve

form part of the gross estate of the decedent.

8. Even if initially we consider what are the assets of both spouses during lifetime, we eventually

exclude the exclusive properties of the surviving spouse (Capital of the surviving spouse)

IX. DEDUCTIONS

- What are the deductions allowed against the gross estate of the decedent?

o 1. Expenses, Losses, Indebtedness and Taxes (ELIT)

What kind of expenses?




1. Funeral expenses

o As to the extent of what can be covered as funeral expense:

Mourning apparel of the surviving spouse and unmarried minor children of the

deceased, bought and used on the occasion of the burial

Expenses for the deceased’s wake, including food and drinks

Publication charges for death notices (obituaries)

Telecommunications expenses incurred in informing relatives of the deceased

Cost of burial plot, tombstones, monument or mausoleum but not their upkeep. In

case the deceased owns a family estate or several burial lots, only the value

corresponding to the plot where he is buried is deductible.

Interment and/or cremation fees and charges

All other expenses incurred for the performance of the rites and ceremonies

incident to interment

o Up to what point can you consider such expenses as funeral expenses deductible against the

gross estate?

Such expenses must be incurred from the moment of death until interment.

o Should the funeral expenses be paid in order to be deductible from gross estate?

NO.

So do you agree that funeral expenses are deductible whether paid or unpaid? YES

since what is required is that such funeral expenses are INCURRED.

o To what extent as to amount of funeral expenses can you deduct from gross estate?

Allowable deduction for funeral expenses is whichever is lower of the actua

funeral expenses (WON paid) up to the time of interment or an amount equal to

5% of the gross estate, but in no case exceed 200K.

o So how many options or choices do you have? 3 (5% of the gross estate, 200K, actual funera

expenses)

o Illustration: So if the decedent has the gross estate of 3M. Actual funeral expenses, both paid

and unpaid expenses, amounted to 180K. How much is the deductible funeral expense?

150K (5% of 3M), since this is lower than 200K and 180K.

For funeral expenses, you should be guided by three choices, whichever is lower of

the three. You go first with the actual funeral expense or 5% of the gross estate,

whichever is lower, and which must never go beyond 200K (the maximum funera

expense that can be claimed as deductible against the gross estate).

So if the actual funeral expense is higher than 200K, it will be 200K.

If 5% of gross estate is higher than actual funeral expense, go for 5%. So long as the

5% is never more than 200K.

So whichever is lower is the deductible funeral expense.

Gross estate 3,000,000

Funeral expenses (Actual payment) 180,000

5% of the gross estate 150,000

Maximum funeral expenses claimed to be deductible 200,000

Deductible amount




o Illustration: What happens to the unpaid funeral expense? Assuming, for example, gross

estate is 4M. Actual funeral expense is 250K. 5% of the gross estate is 200K. Maximum limit is

200K. If of the 250K actual funeral expense, 200K is paid while 50K is unpaid, at this point, we

know for a fact that only, however way you look at it, only 200K funeral expense is

deductible, which is the 200K actually paid as well. Can we claim 50K unpaid funeral expense

as claims against the estate which is part of the deductible items?

NO, because Revenue Regulations provide that the unpaid portion of the funera

expenses incurred which is in excess of the 200K threshold is NOT allowed to beclaimed as a deduction under “claims against the estate”. The claims against the

estate shall not include funeral expenses because it has been categorized

differently.

So whatever has been unsettled or any funeral expenses in excess of what can be

claimed, for example, the 50K, it remains as funeral expenses not deductible from

gross estate.

o NOTE: Funeral expenses to be deductible must be incurred by the family members. If the

funeral expense has been paid for voluntarily or as a donation by someone else, it cannot

form part as funeral expenses deductible. If somebody from a distant member of the family

or a friend offers to shoulder the casket, then the cost of that casket can never form part as

funeral expenses.

Any portion of the funeral and burial expenses borne or defrayed by relatives and

friends of the deceased, such expenses are not deductible as funeral expenses.

This rule is also applicable to judicial expenses. If judicial and funeral expenses are

shouldered by someone else other than the immediate family, such expensesagainst the estate is not deductible.

2. Judicial expenses

o Judicial expenses in relation to what?

Testamentary (there’s a will) and intestate (w/o a will) proceedings to settle the

estate

o What activities are specifically covered under judicial expenses?

Fees of executor or administrator

Attorney’s fees

Court fees

Accountant’s fees

Appraiser’s fees

Clerk hire

Costs of preserving and distributing the estate

Costs of storing or maintaining property of the estate

Brokerage fees for selling property of the estate

o So long as the expenses are in relation to the settlement of the estate, such as gathering o

inventories, having the inventories appraised, payment to brokers in order to have the

properties sold to liquidate the assets, even notarial fees, accountant’s fees, and in one case

Gross estate 4M

Actual Funeral Expenses 250K

5% of gross estate 200K

Maximum limit of funeral expenses 200K

200K paid

50K unpaid

Not deductible




it has been said that guardianship proceedings of one of the heirs in relation to the

settlement of the estate of the decedent is also part of the judicial expenses.

o If the estate is not settled judicially, what happens to the expenses in the extrajudicia

settlement? Deductible or not?

DEDUCTIBLE so long as it’s in relation to the settlement of the estate with the

ultimate goal of having the property distributed after payment of debts, expenses

are recognized as deductible expenses.

o Within what time frame should the judicial expenses be incurred in order for it to be

deductible? Can such expenses be incurred at any time?

The judicial expenses must be incurred during the settlement of the estate but not

beyond the last day prescribed by law, or the extension thereof, for the filing of the

estate tax return.

So when should the estate tax return be filed? GR: It must be filed within 6 months

from the decedent’s death. E: The Commissioner shall have authority to grant, in

meritorious cases, a reasonable extension not exceeding 30 days for filing the

return.

So only judicial expenses incurred within 6 months after death are deductible?

Expenses beyond 6 months would be non-deductible? NO, because there is an

exception wherein the Commissioner may extend the deadline of filing the estate

tax return, which must not exceed 30 days. Expenses within such extension granted

by the Commissioner are still deductible as judicial expenses.

3. Losses

o What kind of losses?

CASUALTY LOSSES (losses which arose from fires, storms, shipwreck or other

casualties) or from ROBBERY, THEFT or EMBEZZLEMENT)

o When should the loss occur?

The loss should occur during the settlement of the estate but not later than the last

day for payment of the estate tax

o Illustration: Assuming Mr. A went abroad. He left his house unattended. He was to come

back on Nov. 12 but on Nov. 11, his house was ransacked. His Nov. 12 flight met an accident

Mr. A died. Is the casualty loss deductible from his estate? NO, since the loss must occur after death.

What is the reason for requiring that the loss should occur after death? Because

losses before death are never deductible losses. Losses which occur before or prior

to the death of the decedent will never become a deductible casualty loss for the

simple reason that the gross estate that has been gathered at the point of death no

longer includes the property that has been lost.

So in the illustration, when should you start the gathering of the gross estate of Mr

A? Nov. 12.

So if the loss occurred on Nov. 11, you cannot already include the property lost on

Nov. 12.

Therefore, only losses occurring after the death because these are losses o

properties that have already been considered as part of the gross estate and

eventually lost.

As a rule, first requirement – the losses should occur after death and during the

settlement of the estate.

o Settlement of the estate may take 10 years. So would losses occurring on the 9th

year prior to

the ultimate settlement of the estate be deductible losses?

NO, since there is also a requirement that the losses were incurred not later than

the last day for payment of the estate tax.

o What are the requirements for losses to be deductible?

1. Were incurred after death and during the settlement of the estate




2. Arose from fires, storms, shipwreck or other casualties, or from robbery, theft o

embezzlement

3. Must not be compensated by insurance

Otherwise, if it’s compensated by insurance, it’s as if nothing has been

lost. It was just converted into a monetary amount.

4. Are not claimed as a deduction for income tax purposes in an ITR in favor o

either the decedent or the estate itself

5. Were incurred not later than the last day for payment of the estate tax

4. Claims against the estate

o What are claims?

They’re debts or demands of a pecuniary nature which could have been enforced

against the deceased in his lifetime and could have been reduced to simple money

judgment. They may arise out of contract, tort, or operation of law.

o Claims against the estate is simply collectibles from the decedent but now reduced to claims

against the estate because he already died. But not all claims can be deducted from the gross

estate. There are certain strict requirements because you can just make a bogus claim in

order to reduce the gross estate of the decedent.

o What are the requisites for claims against the estate to be deductible?

1. Must be a personal obligation of the deceased existing at the time of his death

(except unpaid funeral expenses and unpaid medical expenses)

2. Liability must have been contracted in good faith and for adequate and ful

consideration in money or money’s worth

Example of debt contracted in bad faith: When the decedent obtained a

loan at the time when he knew that he will only be living for 2 months. So

such contracted debt will not form part of claims against the estate.

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

4. Indebtedness not condoned by the creditor or the action to collect from the

decedent must not have prescribed

5. General rule: Must be duly substantiated.

Just like funeral expenses, you cannot claim funeral expenses w/o

presenting receipts, invoices for the costs.

o Such requirements are provided in order to protect the government from bogus claims

against the estate.

o What happens if particularly the claim against the estate arose from a contract of loan or a

promissory note? What other special requirements do we need?

1. The debt instrument must be duly notarized at the time the indebtedness was

incurred

Except: Loans granted by financial institutions where notarization is not

part of the business practice/policy of the financial institution-lender

2. Duly notarized certification from the creditor as to the unpaid balance of thedebt, including interest as of the time of death

3. Proof of financial capacity of the creditor to lend the amount at the time the loan

was granted, as well as its latest audited balance sheet with a detailed schedule of

its receivable showing the unpaid balance of the decedent-debtor

4. A statement under oath executed by the administrator or executor of the estate

reflecting the disposition of the proceeds of the loan if said loan was contracted

within 3 years prior to the death of the decedent.

5. If the claims against the estate arose from a simple purchase of goods or

services, it need not be substantiated by a contract or a pro missory note, dba? It’s

usually substantiated by invoices and receipts for the purchase of the goods o




services – a certification from the creditor still that the amount is collectible

including interest.

5. Claims against the insolvent person

o What’s the difference between a claim against the estate and a claim against insolvent

persons?

In claims against the estate, somebody – a third party creditor – is claiming agains

the decedent-debtor. In claims against the insolvent, it’s the decedent who is the

creditor who has extended a loan but can no longer collect the loan because the

debtor of the decedent is already insolvent.

o Why is it deductible if such claim against the insolvent is a receivable? What is the primary

requisite in order for claims against insolvent persons be deductible against the gross estate?

In claims against the estate, when the decedent is a debtor having a payable in

favor of a third person, there is no requirement that such amount of claim should

be included first in the gross estate and thereafter, deducted. Here, someone is

having a claim against the decedent’s/the estate and it’s a valid claim by that

creditor, therefore, it will reduce the estate.

In claims against the insolvent, it’s a claim by the estate against someone else – an

insolvent person – so it’s a receivable. Before such claim can be deducted agains

the gross estate, make sure that the receivable is included first in the gross estate,

then deduct the portion that is not collectible.

PRIMARY REQUIREMENT: The value of the decedent’s interest in the claim against

the insolvent is included in the value of the gross estate.

Illustration: Assuming he has receivables from 10 people. 5 of those have been

declared as insolvent. Include the receivables from those 10 persons in the gross

estate but deduct the receivable from those 5 persons who have been declared as

insolvent or having the financial incapacity to settle the obligation.

Make sure that we can support the insolvency of a person. When is a person

insolvent?

Insolvency would occur if his liabilities are more than his assets.

If it’s equal, can we declare such person as insolvent? NO.

Nov. 17, 2010 Wednesday

- Claims against the estate

o If the claim against the estate is condoned, the general is it should not be deductible dba? Point of contention, what if the

condonation came after death?

If you think about lifeblood doctrine, whatever point in time you should be looking at, it should not be deductible

in the computation of net estate.

In that case in 2008, the SC pointed out the 2 views by the U.S. First view is that condonation should be taken at

the point of death. So if it’s condoned during the lifetime of the decedent, it’s not deductible. If it’s condoned

after death, during the settlement of the estate, it is deductible. The second view is supported by the IRS of the

U.S., which is equivalent to our BIR. It stresses that if condonation came before death or even after death, it

doesn’t change the fact that the estate of the decedent will not be decreased. If the creditor forgives the

Claims against:

Decedent is:

1) the estate debtor PAYABLE

2) insolvent persons creditor RECEIVABLE

Reduced the estate Include first in gross estate,

then deduct!




indebtedness, the estate of the decedent will not be decreased when the condonation came before or afte

death. So it should not reduce the estate of the decedent. Which is more plausible?

LIFEBLOOD DOCTRINE should be the second view, which is what was followed by IRS.

But the SC followed the first view, which is against lifeblood doctrine.

Nonetheless, we follow what the SC decided in 2008.

- 6. Unpaid mortgages or indebtedness

o Why should it be allowed to reduce the gross estate of the decedent?

It is a payable on the part of the decedent in the form of a mortgage wherein the decedent is a mortgagor,

therefore, it should be reduced.

The scenario is that there is a claim against the estate in the form, not in the form of a promissory note, bu

mortgage.

So the decedent here, during his lifetime, has mortgaged his property, you know when a property is mortgaged,

there is a principal contract. In the principal contract, there is a loan.

o What are the requisites in order for unpaid mortgages to be deductible against the gross estate?

1. Value of the decedent’s interest in the property encumbered by such mortgage or indebtedness is included in

the value of the gross estate

To what extent of the value? The FMV at the time of death of the interest of the decedent on the

mortgaged property

2. Such deduction shall be limited to the extent that they were contracted bona fide and for an adequate and ful

consideration in money or money’s worth, if such unpaid mortgages or indebtedness were founde d upon a

promise or an agreement

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

If it’s the heirs who mortgaged the property, it’s another story. It should be an indebtedness of the

decedent during his lifetime.

It’s just like claims against the estate.

- 7. Unpaid taxes

o When is it allowable as an allowable deduction against gross estate?

1. They must have accrued as of the death of the decedent or prior to death of the decedent

Examples:

o 1. Property taxes accrued prior to decedent’s death

o 2. Unpaid taxes on income received by decedent before his death

o 3. Gift taxes on lifetime gifts (donation inter vivos) which are unpaid upon death

Is income tax a deductible unpaid tax against the gross estate of a decedent?

o In Tax I we learned that an individual person is governed by the calendar year basis o

determining his income and his expense. Therefore, all decedent’s income earned during his

lifetime until the moment of death will be considered one taxable person and from the time

of death until the end of the year, Dec. 31, is one taxable person, which is the estate.

o So all taxes which accrue, meaning which are due on income earned up to the point of deathwhether it’s paid, today, tomorrow or thereafter, will have to be considered deductibl e

against the gross estate. Because what we are gathering at the point of death is his entire

gross estate including the income he has earned until the date of his death. So all taxes which

are due from those income up to the point of death are deductible taxes. Any income earned

after death, example, if it’s an income-producing property, will be considered as a separate

taxable entity, the tax due here will not reduce the gross estate as of this point because the

income after death has not been considered in the gross estate at the time of death. So it’s

just matching the income and the tax at what point.

o So income taxes may be deductible or not deductible against the gross estate.




Real property taxes, deductible against the gross estate?

o We follow the same principle. Real property taxes which have accrued and remained unpaid

up to the point of death are deductible unpaid taxes while those which will accrue after

death are non-deductible.

o But real property tax would have a different pay day.

o If you have learned that income taxes will be due to on or before the 15th

of April following

the close of the taxable year. Real property taxes would only be due once every Jan. 1. So

every Jan. 1, payable before Jan. 31 or if you choose quarterly, during the entire year.o So if Mr. X has paid the real property tax for the entire year, after death, no real property tax

would be deductible. Only those which remain unpaid real property taxes before death of

Mr. X.

2. They were unpaid as of the time of death

3. This deduction does not include income tax upon income received after death, or property taxes not accrued

before his death, or the estate tax due from the transmission of his estate.

- MEDICAL EXPENSES

o Requisites for deductibility:

1. The expenses were incurred by the decedent within 1 year prior to his death

Example: If he died on Nov. 17, 2010, expenses must be incurred on Nov. 18, 2009 up to Nov. 17, 2010

2. The expenses are duly substantiated with receipts if paid or if unpaid, adequate records such as invoices,

billing statements, etc. by the doctor or the hospital

3. PROVIDED, that in no case shall the deductible medical expenses exceed 500K

o So all medical expenses, whether paid or unpaid, are considered.

o NOTE: If the medical expense is more than 500K, even if unpaid, it shall not belong to the claims against the estate, just

like funeral expenses. Any unpaid medical expenses or funeral expenses will not be covered by claims against the estate if

and when they exceed the maximum limit.

o Should the medical expenses pertain to the cause of death of the decedent for it to be a deductible medical expense such

that if Mr. X died of AIDS, the medical expense would have to be hospitalization for HIV AIDS treatment?

NO. So if he was treated by hypertension within 1 year from death, then he died in a plane crash, stil

deductible? Even if he did not die of any illness? YES.

Medical expenses need not be related to the cause of death of the decedent. It can be for any type of illness and

the cause of death may be illness, accident or otherwise so long as the requisites are followed.

- FAMILY HOME

o What is a family home?

Arts. 152 & 153 of the FC: It is the dwelling house, including the land on which it is situated, where the husband

and wife, or a head of the family, and members of their family reside, as certified to by the Barangay Captain of

the locality.

Jan. 1 Dec. 31Nov. 17 Death

Income earned before death

-

Income earned after

death




It is deemed constituted on the house and lot from the time it is actually occupied as the family residence and

considered as such for as long as any of its beneficiaries actually resides therein.

o What consists of a family home?

It consists of the house and the lot in which the house is situated.

o How many family can a person own?

Only one.

o Who can have a family home?

The family – husband and wife or a head of the family and their family members residing therein.

o How about a single individual w/o any dependents, can he have a family home? If for example, Mr. A died, single, living

alone in a mansion, can the mansion be considered a family home as a deductible item against the gross estate of Mr. A?

NO.

So when is the person considered single but head of the family?

If he has dependents.

Only head of the family, whether single, widowed, divorced, and married individuals can claim family home as a

deductible item against gross estate. If he’s single who cannot be considered as head of the family, no family

home can allowed as a deduction.

So who is the head of the family? If Mr. A, single and there is Mr. B, senior citizen and father of Mr. A, whom Mr.A is taking care of, can Mr. A, the one who is earning income solely, be considered as head of the family? If so,

can the house of Mr. A, where Mr. B also lives, be considered as a family home deductible against the gross

estate?

YES, Mr. A is considered a head of the family and as such, his house will be considered as a family

home deductible against the gross estate.

For income tax purposes, all individuals would have the same exemption of 50K. So it wouldn’t matter

whether the individual is single, head of the family or married. What will differentiate is that if that

taxpayer has a dependent child, which gives it an additional exemption of 25K each. So for income tax

purposes, head of the family is no longer a useful definition.

But that definition has been carried on to estate taxation. According to Revenue Regulations, a head of

the family is the same as head of the family in income tax:

o 1. It’s an individual who is single, legally separated or widowed, etc. who is chiefly supportinga child, whether legitimate, illegitimate, legally adopted or naturally acknowledged, not more

than 21 years of age, such child is not gainfully employed, unmarried and he can be more

than 21 if he is mentally incapacitated or physically disabled.

o 2. Another definition which makes a person a head of the family is not only the child, it’s also

a parent living with him and chiefly dependent for support on such head of the family.

o 3. Another definition of what makes a person head of the family is when you’re taking care o

your brother or sister, they’re dependent on you for chief support, they’re living with you,

not more than 21 years of age, unmarried, not gainfully employed.

o 4. 4th

category which makes a person a head of the family is when he’s taking care of a senior

citizen, 60 years of age or above and is not earning more than 5K per month, whether or not

related to you.

So for income tax purposes, among the 4 types of dependent to make you a head of the family (child,

brother or sister, parent or senior citizen), only a child can make you avail of the 25K deduction. The

other 3 will not allow you to benefit for income taxation. But for estate taxes, if you’re classified as a

married individual or single but head of the family, then your family home can be considered as a

deductible item.

o What are the requisites for family home to be deductible?

1. The family home must be actual residential home of the decedent and his family at the time of his death, as

certified by the barangay captain of the locality.

2. The total value of the family home must be included as part of the gross estate of the decedent

3. Allowable deduction must be in an amount equivalent to the current FMV of the family home as declared or

included in the gross estate but in no case shall the deduction exceed 1M (for both house and lot).




o Illustration: Mr. A, single but head of the family. If Mr. A died, house is 750K and lot is 500K, how much family home can he

deductible?

1M

o Illustration: Mr. A, single but head of the family. House is 250K. Lot is 500K, how much family home can be deductible?

750K.

o So it’s the actual value of the family home or an amount not exceeding 1M, whichever is lower.

o Illustration: Mr. A is married. House is 300K. Lot is 500K. How much family home can be deducted?

It depends. You have to know whether the property is conjugal property or exclusive property.

Let’s say both house and lot are exclusive properties, how much family home is deductible?

The entire 800K because both house and lot are exclusively belonging to the decedent. Since the 800K

does not exceed the 1M-limit, then the entire 800K is deductible.

If both are conjugal?

Only 400K [(300K/2) + (500K/2)] because the division between a husband and wife is always ½ or 50%

in the absence of a property relation before marriage.

If the house is exclusive and the lot is conjugal?

650K [(300K/2) + 500K]

If the house is 1.3M, conjugal and the lot is 500K, exclusive?

1.15M [(1.3M/2) + 500K] but since the limit is only 1M, then only 1M family home can be deductible.

o It is possible that the lot is exclusive and the house is conjugal when for example, the wife acquired the lot through

donation during marriage and both husband and wife build the house on the lot with their common funds.

o It is possible (but absurd according to Tiu) that the lot is conjugal and the house is exclusive when for example, the lot was

acquired by both husband and wife with their common funds and the house was donated on the lot by the parents of the

wife during marriage.

- PROPERTY PREVIOUSLY TAXED (Vanishing deductions)

o What is vanishing deduction?

Deduction allowed on the property left behind by the decedent which he had acquired previously by inheritance

or donation.o What vanishes in this vanishing deduction?

Basically, what diminishes is the amount that is deductible against the gross estate because we are talking of

deductible item.

o Vanishing deductions involve a property that was previously inherited from a prior decedent or a property that has been

received as a gift from a donor within 5 years from the death of the present decedent.

o We are concerned here with the taxability of the estate of the present decedent, not the prior decedent nor the donor of

the present decedent.

o Illustration: If Mr. A, present decedent, has a parcel of land. First requirement for a vanishing deduction to apply is that the

death of Mr. A must be within 5 years from the receipt (inheritance or gift) of the property from a prior decedent, who is

Mr. Z. If it’s an inheritance, the death of Mr. A should be within 5 years from the death of Mr. Z, the prior decedent. Why?

Upon death of Mr. Z, the property should flow already into the heir, Mr. A. If the gift of the parcel of land was received by

a prior donor, not necessarily a dead one, such gift must be within 5 years.

What we are really interested here is that Mr. A received something from Mr. Z. Can we deduct that something

(parcel of land) in order to make it non-taxable to the gross estate of Mr. A? Anyway, it has already been part of

Mr. Z’s gross estate or taxed already on the donation of Mr. Z. So first requirement, the prior taxable even

should have taken place within 5 years.

FIRST REQUIREMENT, there is a prior decedent or donor who gave a property

SECOND REQUIREMENT, present decedent died within 5 years after receiving the inheritance from the prior

decedent or gift from the prior donor

THIRD REQUIREMENT, identity of the property – the property with respect to which deduction is sough can be

identified as the one received from the prior decedent or the donor, or as the property acquired in exchange for

the original property so received.




So if Mr. Z transmitted property, a parcel of land, to Mr. A, it should be the same parcel of land that

will form part of the gross estate of Mr. A.

FOURTH REQUIREMENT, the transmitted property should for part of the gross estate of the present decedent

Mr. A

If Mr. A will inherit from Mr. Z, upon death as well of Mr. A, the parcel of land that he inherited from

Mr. Z will also form part of the gross estate of Mr. A.

FIFTH REQUIREMENT, previous taxation of the property – the donor’s tax on the gift or estate tax on the prio

succession (Mr. A’s succession) was finally determined and paid It may be subjected to donor’s tax when Mr. Z donated the property to A or estate tax when Mr. Z

transmitted the property to A.

SIXTH REQUIREMENT, vanishing deduction only once – no vanishing deduction on the property was allowed to

the estate of the prior decedent

The concept of vanishing deduction is when a person who becomes a present decedent has a property

in his gross estate which he has acquired within 5 years prior to his death from a prior decedent or a

donor, that property is assumed to have already been subjected to transfer taxes, either estate tax o

donor’s tax. 5 years is a small time frame within which to include the same property in Mr. A’s estate

and be subjected to transfer taxation all over again. So in order to diminish the harshness of double

taxation, the law allows Mr. A, the present decedent, to deduct the value of the parcel of land which

he has inherited or acquired as a gift within 5 years considering that the same parcel of land has, within

a relatively short period of time, already been subjected to transfer taxes. Basta lang, both events took

place within 5 years. Beyond 5 years, like 5 years and 1 day, no vanishing deduction is already allowed.

SEVENTH REQUIREMENT, the property should be located in the Philippines

o RECAP: When is vanishing deduction allowed for the present decedent?

1. There must be a previous inheritance or a donation made by the prior decedent or donor

2. A present decedent and such inheritance or gift should have been made with a time frame of 5 years

3. The property must be specifically identified as exactly the same property transmitted by the prior decedent o

donor down to the present decedent

4. Such property must be physically located in the Philippines at the time of death of the person whose estate

tax we are computing, so present decedent

5. It must first form part of the gross estate of the present decedent at the date of death for us to deduct the

property against such gross estate

6. Previous transfer taxes should have been paid by the prior decedent or the donor

7. It’s the first vanishing deduction

o Illustration: If Mr. A, after dying on Nov. 17, 2010, transmitted his property to Mr. B, the heir, the same property from Mr

Z and Mr. B died, the most present decedent, 2 years from the death of Mr. A. Can vanishing deduction be claimed against

the gross estate of Mr. B if it’s found out that among the gross estate of Mr. B, the land inherited from Mr. A is among

those properties? Can vanishing deduction be claimed by Mr. B on the same parcel of land? If Mr. A has claimed the

vanishing deduction for such parcel of land, can Mr. B further claim vanishing deduction for the same parcel of land?

NO. Vanishing deduction on one particular property can only be claimed once in the stage of Mr. A. If Mr. A has

already claimed such vanishing deduction, B, even if he dies within 1 day after the death of Mr. A, no more

vanishing deduction. Taxes would already have to be imposed on the part of Mr. B’s gross estate.

o Illustration: Lets say Mr. A, a RC, died in 2009. Among his properties, a motor vehicle, which was at the time of his deathlocated in the U.S. Mr. B is an heir, also a RC. Mr. B received the motor vehicle which was subsequently transferred here in

the Phils. Mr. B died within 1 year from Mr. A’s death. Can Mr. B’s estate claim vanishing deduction?

Lets go over to the requirements. Are all the requisites complied with?

Requisites 1-5: YES

Requisite 6: YES, because Mr. A is a RC whose worldwide properties are taxable, wherever situated, so

it is assumed to have been subjected to a prior estate tax.

Requisite 7: YES

It could have been different if the property has not been transferred to Philippine location, in which case, no

vanishing deduction if it has not been transferred in the Phils.




Related illustration: Lets say it’s vintage motor vehicle. So it appreciates its value over time. At the time of Mr.

A’s death, the FMV of the motor vehicle was 1M. At the time of Mr. B’s death, the FMV is 1.2M. This 1.2M,

unquestionably will form part of the gross estate of Mr. B. But will it be the same 1.2M that we will deduct as

vanishing deduction if Mr. B died within 1 year from the death of Mr. A?

If this is the case that the FMV of the property inherited was 1M at the time of the prior decedent’s

death and its FMV increased to 1.2M, in all cases, 1.2M will be part of the gross estate of Mr. B. But the

allowable deduction of vanishing deduction will be whichever is lower, lifeblood doctrine.

Your gross estate is 1.2M but what you can deduct is definitely lower than 1.2M.

o Illustration: Mr. A, a NRA-decedent, has a motor vehicle located in the U.S. at the time of his death. It was transmitted as

an inheritance to Mr. B, a RC of the Phils., who died as well within 1 year from receiving the motor vehicle. The motor

vehicle at the time of death of Mr. B was already in the Phils. Is vanishing deduction allowed?

Has this complied with the requisites of vanishing deduction?

Requisite 6: NO. Even if it has been transferred in the Phils., the problem is that Mr. A, when he died as

a NRA, all his properties located outside of the Phils. are not covered by Phil. estate taxation, which

means to say that it has not been subjected to a prior transfer tax. Not all requisites have been

complied with, therefore, no vanishing deduction is allowed.

o In so far as the formula of vanishing deduction is concerned, it’s a bit complicated.

In relation to the “Related Illustration” above: FMV is whichever is lower which is 1M. If and when Mr. B, during

his lifetime, after inheriting the property, he has shelled out money to pay mortgage which was taken by the

prior decedent. So if the motor vehicle that Mr. B inherited has an accompanying “utang” that Mr. A took andMr. B assumed, it shall be deducted. It is logical because what you inherited as 1M is not really 1M when you are

required to pay the mortgage taken out by the prior decedent. So what you really got in the end was only the ne

of the FMV and the utang that you paid. Assuming, to make it simple, the mortgage payments is 0 – it’s debt

free.

Then we have the pro rata deduction. The tax code and the tax authorities require you to reduce your initia

basis to the extent of the pro rata deductions because a portion of your expenses, the principle behind this is

that a portion of your expenses (ELIT expenses) that you’re claiming pertains to the percentage of your property

inherited for vanishing deduction over your total gross estate. It means to say that if the initial basis is 1M and

your total gross estate is 5M, what’s the rata? 1/5. 1/5 of your total expenses should reduce your initial basis. So

if your total expenses deductible against the gross estate of Mr. B is 500K, 1/5 of 500K, which is 100K, should

reduce the initial basis of 1M. Meaning to say that the vanishing deduction rate should only be computed against

the 900K [1M – 100K].

There are 2 deductions against your property that you have inherited:

1) If you paid any mortgage in the property taken out by the prior decedent, which actually reduces

what you have inherited;

2) The pro rata deductions – the percentage of your property against your total gross estate on the

expenses. It is assumed that your expenses, a portion of which has been spent for that property, which

is 100K in this case.

900K lang ang probable deductible for vanishing deduction out of the 1.2M. Can Mr. B fully deduct the 900K if

we use the facts here?

YES. Since the present decedent died within 1 year from the death of the prior decedent, so the estate

tax from Mr. A’s side has been recently paid. It’s within 1 year, the full 100% will be deductible.

If the present decedent dies within 1 year, it’s 100% deductible – the basis of 900K.

If the present decedent dies more than 1 year but not more than 2 years, it’s 80%.

If the present decedent dies more than 2 years but not more than 3 years, it’s 60%.

If the present decedent dies more than 3 years but not more than 4 years, it’s 40%

If the present decedent dies more than 4 years but not more than 5 years, it’s 20%.

Assuming that Mr. B died more than 4 years after the death of Mr. A, so this is only 180K vanishing

deduction [900K x 20%]

So do not be misled that in vanishing deduction, you multiply the 1M automatically with the rate.

So you put in 1.2M as part of your gross estate but your vanishing deduction is only 180K. Never will it

equate with the amount that you actually inherited.




o So what really is the effect of vanishing deduction? Is it totally taking out the full value of the property which you have

inherited within 5 years after getting it as an inheritance or a gift?

It’s not because the initial basis pa lng is whichever is lower between the FMV at the time of prior decedent’s

death and the present decedent’s death; and the various deductions and the rate.

What is vanishing here is the deduction, the rate of deduction that you can avail when you die within 5 years

from getting the inheritance or gift.

o Usually vanishing deduction is an exclusive property. Under the conjugal partnership of gains and absolute community of

property, whatever you inherited during marriage is considered as an exclusive property so we don’t need to divide the

vanishing deduction by 2 as share of the surviving spouse.

- AMOUNT RECEIVED BY HEIRS UNDER RA 4917

o Any amount received by the heirs from the decedent’s employer as a consequence of the death of the decedent-employee

in accordance with RA 4917 – this law provides that retirement benefits of private employees shall not be subject to

attachment, levy, execution or any tax – PROVIDED that such amount is included in the gross estate of the decedent.

o So it zeroes out in the end. The amount received by the heirs under RA 4917 is deductible so long as such amoun t has been

included as part of the gross estate, otherwise, not part of the gross estate, not deductible. In the end, it’s not a taxable

asset of the decedent or the estate.

- STANDARD DEDUCTION

o An amount equivalent to 1M shall be deducted from the gross estate without need of substantiation

o Standard deduction shall be considered as automatic deduction against the gross estate of a decedent and if the decedentis a married individual, it is considered as a conjugal deduction – shared by both spouses – so effectively, only half. [Tiu

We will try to show that in the formula later on]

- TRANSFERS FOR PUBLIC USE

o The whole amount of all the bequests, legacies, devises or transfers to or for the use of the Government of the RP, or any

political subdivision thereof, for exclusively public purposes shall be deductible from gross estate, provided such amount

or value had been included in the gross estate

o So transfers to the government or political subdivisions. Does it include government agencies, GOCCs?

NO.

Political subdivisions include only provinces, cities, municipalities, barangays.

o What about bequests to charitable institutions, social welfare, is it included in this one? Is it a deduction?

NO. Transfers for public use pertain only to recipients among the categories of the government of the RP and

political subdivision. It is a deductible item once the decedent makes such transfer.

But in so far as social welfare, charitable and cultural institutions are exempt transmission of property – a

different category. When it’s exempt, you no longer include that as part of the computation. But if it’s a

deduction, it’s included first as part of gross estate and subsequently deducted as a deductible item.

If the transfer has been previously made during lifetime and prior to the death of the decedent, it will never form

part of the gross estate of the decedent.

o Would all transmissions of property upon death to the government be deductible as transfers for public use?

NO. It must be for public purposes. If the purpose of the transfer is for private purposes, it is not covered by

transfers for public use. It is therefore not a deductible item.

Initial Basis, FMV (Prior or present, whichever is lower) 1M

Less: Mortgage Payments, if any 0

Less: Prorata deductions [(1M/5M) x total exp. of 500K] (100K)

Basis 900K

X Vanishing Deduction Rate x 100%

Vanishing deduction allowed 900K




o What do you think is the reason why transfers for public use is made as an allowable deduction?

To encourage decedents to put into writing or in the will or to make transfers to the government. To give them

incentives such as deductions and exemptions from tax.

- SHARE OF THE SURVIVING SPOUSE IN CONJUGAL PROPERTY

o ½ of the conjugal property

X. DEDUCTIONS ALLOWED TO A NRA, Special requisites

-

If the decedent is a NRA, would he avail of all types of deductions available to RC? Say for example, Mr. A, a NRA, died. What wilform part of his gross estate?

o The gross estate of Mr. A includes only that part of gross estate located in the Phils. All his real and personal properties,

tangible properties, which are located in the Phils., which means to say that his deductions would only be to the extent of

what he has declared.

o First allowable deduction available to a NRA is ELIT. Can he deduct the entire ELIT that the estate has incurred?

NO. It is limited in extent. What is the formula to be used?

[Phil. gross estate/Worldwide estate] x ELIT = ELIT deductible

In so far as NRAs are concerned, ELIT that are deductible is limited only to the extent of the proportion

of its Phil. gross estate that has been declared for Phil. tax purposes against its worldwide gross estate.

If his Phil. gross estate, which means real, personal and tangible properties, intangible not covered

under the reciprocity clause, is only 1M. His worldwide gross estate is 10M. Multiplied by his tota

expenses which is 10M as well, only 1M is deductible. [(1M/10M) x 10M = 1M deductible]

So only the proportion or the ratio of his Phil. gross estate against his worldwide estate will the

expense be deductible in the Phils.

How about transfers for public use? Is it limited by a ratio of his Phil. gross estate against his worldwide

gross estate?

o In cases for transfers of public use, the government, of course seeking to encourage even

foreigners to bequest properties to the government, does not seek to limit the allowable

deduction for transfers for public use. The NRA can even entirely transmit the property to the

Phil. government in so far Phil. gross estate is concerned just so in order to avoid Phil. estate

taxation. That is of course if it does not violate the national law of the decedent who is a NRA

in the Phils.

o What are the other deductions allowed for a NRA?

Basically the same as that allowed for RC, NRC, RA decedents except family home, standard deduction, medica

expenses and amounts received under RA 4917.

Why can’t RA deduct family home?

A NRA cannot be considered to have a domicile or a family home in the Phils. so in no way can a family

home be considered a deductible item.

Is vanishing deduction allowed to a NRA?

YES, so long as the 7 requisites are met and one of those which seems to borderline NRA against RC or

RA is a question of whether such property that is subject to vanishing deduction is located in the Phils.

or not at the time of his death because usually, NRA would not have lots of properties located in the

Phils.

XI. NET ESTATE AND ESTATE TAX RATES

- In the estate tax table, what is exempt from estate tax or how much is exempt from estate tax?

o The first 200K of the net estate is not subject to estate tax.

o What is net estate?

Gross estate less deductions (inclusive of deducting ½ share of the surviving spouse)

o Estate tax rates are in the range of 5%-20% when you are subject to estate tax beyond the first 200K

- Will you be allowed to claim estate tax credits when you are a NRC-decedent? Are NRC-decedents allowed to claim estate tax credits

against the Phil. estate tax due? YES. Okay, what is the principle behind tax credits?




o We learned in income taxation that only RCs are allowed to offset foreign income taxes against Phil. income tax while all

others are not allowed to claim income tax credits.

o However, in estate taxation, only NRAs are not allowed to offset foreign estate tax against Phil. estate tax while all others

are allowed to claim estate tax credits.

o The reason why a NRC is allowed to claim foreign estate tax credit is in order to lessen the burden of double taxation on

properties that are located outside the Phils., NRCs are allowed to claim estate tax credits against the Phil. estate tax due

under the principle that the Phil. estate tax due refers to the tax on the worldwide properties. If you tax worldwide

properties and the properties outside are also taxed, it’s as if there’s double taxation although indirectly. In order to lessen

such burden, we offset the foreign estate tax against a portion of the Phil. estate tax which refers to properties outside,which means to say that RCs who are also taxable on worldwide properties can claim tax credit.

How about RAs? Can RAs claim foreign estate tax credits?

YES, because they’re taxable as well on their worldwide properties – so Residents or Citizens

How about NRAs? Are they allowed to claim foreign estate tax credits?

NO, because NRAs, the Phil. estate tax due would only refer to properties located in the Phils. so there

can be no double taxation.

The difference is that in income taxation, only RCs can claim foreign income tax credits because only RCs are

taxable on income within and without. Others, NRCs, RAs, and NRAs, are only taxable on income within.

o o FORMULA (General rule): Phil. estate tax due – Foreign estate tax credits = Estate tax payable

LIMITATIONS (Exception):

Per country limitation – the amount of the tax 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 the NIRC bears to his entire net estate.

o Formula: (Net estate in a particular country/Net estate worldwide) x Phil. estate tax = Foreign

Estate Tax credit

Worldwide or overall limitation – the total amount of the credit shall not exceed the same proportionof the tax against which such credit is taken, which the decedent’s net estate situated outside the Phils

taxable under the NIRC bears to his entire net estate.

o Formula: (Net estate in all foreign countries/Net estate worldwide) x Phil. estate tax =

Foreign Estate Tax credit

XI. GROSS / NET ESTATE OF A DECEDENT

A. Single Decedent

November 23, 2010

- Still remember this formula? You put in together the decedent’s interest, transfers

equivalent to testamentary dispositions, etc., will form part of the gross estate.

- You reduce it with the deductions allowed by law and ½ share of the surviving spouse iever the decedent is married. You arrive at net estate.

- Only against the net estate will you multiply the estate tax rates available in the tax

code. You arrive at the estate tax due and further reduce by the foreign taxes or estate

taxes paid abroad.

o And this tax credit deduction will only apply if the decedent is a resident or a

citizen. Never a non-resident alien because he is not taxable to Philippine estate tax to properties outside of the Philippines.

o Then you arrive at the estate tax payable.

- Now as an exercise, I want you to compute the gross estate from a pool of assets left by a decedent. Let us assume, this is not to

scare you class, don’t even think this will only be understa ndable by accounting students. Believe me, Ms. Tiu as well does not

understand it. (Class laughs) Ms. Tiu adds: We are on the same footing daw. :(

Income Tax Credits Estate Tax Credits

RC NRC X

RA X

NRA X X

Gross estate

Less: Deductions

½ share of surviving spouse

Net estateX Estate Tax Rates

Estate tax due

Less: Tax Credits

Estate tax payable




Real Property – 4M

House and lot, inherited from Mr. Z – 2M

Personal properties – 3M

Revocable transfer – 1M

Property sold – 1M

Life insurance proceeds – 1.5M

Amounts received under RA 4917 – 1M

Receivable from Mr. B, insolvent – 500K

TOTAL GROSS ESTATE: 14M

o When somebody will approach you and ask about estate tax, you can offer them your professional fee of course based on the

ESTATE TAX DUE. You don’t base it on the gross estate, why would you? If there are lots of deductions, you would prejudice the

estate. So if you were to ask what will compose of the gross estate, you will encounter values. You will further meet possible

deductions.

- You were asked by Mr. A’s brother, the executor to determine what comprises his gross estate. Part of the gross estate, you were

presented by the brother or executor of Mr. A and asked to compute the gross estate. You are presented with this portfolio.

o You found out that real properties of Mr. A, all exclusive properties being single Php4M real properties inherited a house and

lot from his father by November 23, 2007 with a fair market value today of Php 2M with an unpaid mortgage left by the

decedent. Personal properties amount to PHp 3M. Other details are shown below. How much is the gross estate? Do noinclude expenses

- You will see in the bar exams last year, there is one full page completely devoted to figures, estate tax. So imagine you are taking the

exam right now.

- Answer for Gross Estate:

Mr. A, RC, single (no dependent), died on Nov. 22, 2010

1) Decedent’s interest

- Real property (conjugal) Php 4,000,000

- House and lot (inherited from Mr. Z, father) Php 2,000,000 (FMV today)

FMV, Nov. 23, 2007 (Mr. Z’s death) Php 1,500,00

w/ unpaid mortgage Php 100,000

- Personal properties Php 3,000,000

2) Previous transfers

- Revocable transfer (Date of transfer: Nov. 27, 2008) Php 1,000,000

- Property sold (Date of sale: Dec. 15, 2005) Php 100,000 (consideration of sale)

FMV Dec. 15, 2005 Php 1,200,000 (FMV at time of sale)

FMV Nov. 22, 2010 Php 1,100,000 (FMV at time of death)3) Others (amounts expected to be received by heair after death)

- Life Insurance proceeds (estate is the beneficiary) Php 1,500,000

- Amount received under RA 4917 Php 1,000,000

- Receivable from Mr. B, judicially declared Bankrupt Php 500,000

4) Expenses

- Funeral expenses Php 250,000

- Judicial expenses Php 250,000

- Casualty losses on Nov. 23, 2010 Php 500,000 (A day after death)

- Outstanding bank loan (date of death)

(duly supported by a notarized document)

Principal Php 700,000

Interest Php 100,000

- Unpaid mortgage taken out by Mr. Z (father)

and paid by Mr. A during his lifetime Php 100,000 – note: not the unpaid mortgage that is deductible

- Accrued income taxes as of the date of death Php 150,000




- Let’s go over the data:

o Decedent’s interest:

Real properties exclusive properties, the full amount would have to be included in his gross estate.

Mr. A inherited from father the house and lot.

So of the house and lot, Php 2M (FMV at time of death) will form part of the gross estate. Remember that for

purposes of determining the value of the gross estate it’s the FMV at the time of death for both real, persona

tangible and intangible personal properties.

If you remember one thing which we determined between both amounts, that was only for purposes of computing

vanishing deductions which is not part of the gross estate. Vanishing deductions should be construed against the

decedent estate. Therefore, which is the lower amount. But for gross estate, its always FMV at the time of death.

The unpaid mortgage, practically at the time you inherited the property was only Php 1.4M. When you inherited on

November 23, 2007, of the Php 1.5M but with an unpaid mortgage of Php100k, it was only actually Php 1.4M. But wil

this value matter? No. Because in the gross estate, we consider only the FMV at the time of death.

Personal properties, we have no problem with that. The full amount of Php3M will have to be included as part of the gross

estate.

o Let’s go to the previous transfers that we have. Assuming that it will be laid out on the table for you to determine whether i

will form part of the gross estate or not. In actual probably, in reality, this will never be brought out. Otherwise, this will be to

the prejudice of the estate.

For the revocable transfer made in 2008 November of Php 1M. This is part of the gross estate because it is an inter vivostransfer taking the form of testamentary disposition whereby at the point of or until the date of death, the decedent had

the right to alter, amend, terminate or revoke the enjoyment of rights or the transfer of rights which is still in the favor of

Mr. A the decedent. Therefore, all revocable transfers will form part of gross estate.

For the property sold which was sold for Php 100,000 at December 15, 2005 but the FMV at the date of sale was Php 1.2M

the FMV today was Php 1.1M. The value that will form part of the estate is the difference between the FMV at the date o

death versus the consideration received, so its Php 1M.

But for the others that the estate is expecting to receive like life insurance proceeds, where the beneficiary irrevocably

designated his estate, it will form part of the estate. Whenever the estate, executor, administrator is designated whethe

revocably or irrevocably it will ALWAYS form part of the gross estate.

Only when a third person who is IRREVOCABLE designated will it not form part of the gross estate.

Amount received under RA 4917, it is part of gross estate. But it will also be considered as a deductible item. So of course,

not really taxable.

But for purposes of determining of the gross estate, it will have to be included because we have to multiply 5%

funeral expense against gross estate, whichever is higher.

Finally receivable from B judicially declared bankrupt. This belongs under the category on claims against insolvent persons

actually receivables by the decedent against an insolvent person for it to be deductible, as a requirement, it must form

part of the gross estate before it will be deductible.

o So which brings us to a total of Php 14M gross estate.

o But we are not done with the computation of the estate tax due. There are expenses.

Answer for Expenses

Total gross estate 14,000,000

Less:ELIT: (2,400,000)

Funeral expenses – [200K]

Judicial expenses – [250K]

Casualty losses – [500K]

Claims against the estate – [800K]

Claims against insolvent – [500K]

Unpaid taxes – [150K]

Vanishing deduction (696,000)

Standard deduction (1,000,000)

RA 4917 (1,000,000)

TOTAL NET ESTATE 8,904,000

- Receivable from Mr. B, declared Bankrupt Php 500,000

Given Expenses

- Funeral expenses Php 250,000

- Judicial expenses Php 250,000

- Casualty losses on Nov. 23, 2010 Php 500,000


Principal Php 700,000

Interest Php 100,000

- Unpaid mortgage taken out by Mr. Z (father)

and paid by Mr. A during his lifetime Php 100,000

- Accrued income taxes as of date of death Php 150,000




- I just need 9 deductions.

- First item for deduction is Funeral expense. Actual of Php250k with a limit of Php 200k or 5% of gross estate. 5% of the gross estate

of Php14M is PHp 700,000. So which is lower, Php 200k is deductible.

- Judicial expense can be deducted whether paid or unpaid so long as it is a judicial expense.

- Casualty losses, if they are to occur after death, within 6 months after, it is deductible.

- Outstanding bank loan, this is a claim against the estate, assuming all requisites are present. Accrued income taxes which accrue as

of the date of death, it is deductible.

- Claim against the insolvent person. ELIT, those are expense which you have to consider in lot for purposes of determining vanishing

deductions diba. Expenses, losses, indebtedness (outstanding bank loans and claims against insolvent persons), and taxes (ELIT) for a

total of ELIT of Php 2.4M.

- What are the other 3 deductions.

o Family home cannot be deductible because he is a single individual with no dependent.

o The 3 standard deductions:

Amount Received under RA 4917

Vanishing deductions.

Here, it has an initial basis of Php 1,400,000.

Less: Unpaid Mortgage

Less: Pro-rated deductions (1,500,000-100,000 = 1,400,000)

o Php 1,400,000 over gross estate of Php 14,000,000 which is about 10% of Php 2,400,000.

o You inherited the property 3 years ago. Since he died 3 years, it is 60%. (This is difficult na daw)

In the exam, she will make sure the amounts are easy to compute daw.

- The total is Php 8,904,000. The deduction is Php 5,096,000.

-

What area of the computation is difficult? Class says Vanishing. Tiu says, vanishing lang? Are you suuuure??Nov. 24, 2010 Wednesday

A. Married Decedent

PROBLEM, Compute for the net estate:

Mr. A, RC, Married (no dependent), died on Nov. 22, 2010

1) Decedent’s interest

- Real property (conjugal) – 4M

- Agricultural land (inherited from Mr. Z, father during marriage) –2M

FMV, Nov. 23, 2007 (Mr. Z’s death) – 1.5M

Given:

- House and lot (inherited from Mr. Z, father) Php 2,000,000

FMV, Nov. 23, 2007 (Mr. Z’s death) Php 1,500,00

w/ unpaid mortgage Php 100,000

H&L (Lesser FMV) 1,500,000

Less: Unpaid Mortgage 100,000

Equals: Initial Basis 1,400,000

Divided: Gross Estate ÷ 14,000,000

Proportionate Deduction Percentage 10%

ELIT Expenses 2,400,000

Multiply: Proportionate Deduction Percentage 10%

Proportionate Deduction Allowed 240,000

Initial Basis 1,400,000

Less: Proportionate Deduction Allowed 240,000

Basis of Vanishing Deduction 1,160,000

X Percentage of Deduction Level (at 3 years) 60%

Vanishin Deduction 696 000




- Personal properties (exclusive) – 3M

- Family home, lot (exclusive) – 600K & house (conjugal) – 900K

2) Previous transfers

- Revocable transfer (conjugal) (Date of transfer: Nov. 27, 2008) – 1M

- Property sold (exclusive) (Date of sale: Dec. 15, 2005) – 100K consideration

FMV Dec. 15, 2005 – 1.2M

FMV Nov. 22, 2010 – 1.1M

3) Others (all conjugal)

- Amount received under RA 4917 – 1M

- Receivable from Mr. B, judicially declared Bankrupt – 500K

4) Expenses

- Funeral expenses – 250K

- Judicial expenses – 250K

- Casualty losses – 500K


Principal – 700K

Interest – 100K

- Unpaid mortgage taken out by Mr. Z and paid by Mr. A during his lifetime – 100K

- Accrued income taxes, date of death – 150K

ANSWER:

Exclusive Conjugal Total

6,600,000 7,400,000 14,000,000 (Total property/Gross estate)

[2,400,000] (Total conjugal ordinary

deductions/expenses)

6,600,000 5,000,000 (net conjugal estate)

[2,500,000] (Exclusive deductions/expenses as

share of the surviving spouse)

[1,000,000] (Standard deduction)

[696,000] (Vanishing deduction)

[600,000] [400,000] (Family home)

[1,000,000] (RA 4917)

5,304,000 100,000 5,404,000 (Net taxable estate)

Computations:

- Gross exclusive properties:

o Agricultural land inherited from Mr. Z – 2M

o Personal properties – 3M

o Family home (lot) – 600K

o Property sold – 1M (1.1M-100K)

TOTAL – 6,600,000

- Gross conjugal properties:

o Real property – 4M

o Family home (house) – 900K

o Revocable transfer – 1M

o Amounts received under RA 4917 – 1M

o Receivable from Mr. B judicially bankrupt – 500K




TOTAL – 7,400,000

- Total conjugal ordinary deductions:

o Funeral expenses – 200K

o Judicial expenses – 250K

o Casualty losses – 500K

o Accrued income taxes – 150K

o Claims against insolvent – 500K

o Claims against the estate – 800K

TOTAL – 2,400,000

- Exclusive deductions:

o [Gross conjugal properties – Total conjugal ordinary deductions]/2 (as share of surviving spouse) = Exclusive deductions

Exclusive deductions = [7,400,000 – 2,400,000]/2 = 2,500,000

- Vanishing deductions:

o Initial basis = FMV – unpaid mortgage

Initial basis = 1.5M – 100K = 1.4M

o Final basis = Initial basis – [(Initial basis/gross estate) x ELIT]

Final basis = 1.4M – [(1.4M/14M) x 2.4M) = 1.16M

o Vanishing deduction = Final basis x 60%

Vanishing deduction = 1.16M x .6 = 696,000

Rules in Property Ownership between Spouses

- Inherited property from Mr. Z, in the absence of any other facts contradicting, we use absolute community of property on the

assumption that marriage took place after August 1998 – the effectivity of the new FC. Under the absolute community of property,

whatever you bring into marriage is usually considered as conjugal. What remains as exclusive is when during marriage, one of the

spouses receives a donation or an inheritance and there is no indication that such property belonged to the spouses, it will be

considered as exclusive, such as the inherited property from Mr. Z.

- In conjugal partnership of gains, whether during marriage or before marriage, any inheritance or donation received will be

considered as exclusive property of such spouse. Any property brought into marriage is still exclusive property of the spouse.

- Expenses usually than not are considered as conjugal expenses/conjugal deductions. Even to the extent of standard deduction of

1M, it shall be offsetted against the conjugal property but it’s not an expense. Standard deduction is an arbitrary amount deducted.

- What will become exclusive deduction or expenses are those expenses incurred on an exclusive property. So if it’s an encumbrance

or a mortgage taken out by the spouse on an exclusive property, such expense would be exclusive. If it’s a vanishing deduction on an

exclusive property, such vanishing deduction is also exclusive. It will not reduce the conjugal property. Why is it important?

o It’s important not all the time. It’s important only if the decedent is a married individual. Why? Because we really have to

know how much is the net conjugal estate for purposes of taking out the 50% belonging to the surviving spouse.

o If you recall, we did not change anything with the expenses. Vanishing deductions stay as is. Standard deduction as is.

Everything is the same, only that we identified 9 expenses yesterday for a single individual, but for today, we will have the

10th

expense, which is the share of the surviving spouse. How much is the share of the surviving spouse in this case?

Share of the surviving spouse is 2.5M. How did we get 2.5M?

Conjugal properties is 7.4M in bulk. How much is the conjugal expense? Is funeral expense conjugal?

YES. Judicial expense? YES. ELIT is conjugal expenses. So if you add up all, total is 2.4M.

Is vanishing deduction a conjugal expense? NO because the property subject of the vanishing

deduction is exclusive and in most books that you will read, vanishing deduction is always treated as

exclusive deduction. But that’s not absolute. What if the inheritance or the will stated that it will be

given to both spouses? It will become conjugal nah. But the default is exclusive.

So 2.4M used to deduct the conjugal properties of 7.4M, you have the net conjugal property of 5M.

What’s the ½ share of the surviving spouse? That’s 2.5M.

- What are the other deductions not covered by the 2.4M?




o We still have 4 other deductions. What are they?

Standard deduction, conjugal

Vanishing deduction, exclusive

Family home, conjugal 900K and exclusive 600K. 600K is deducted against exclusive property. Supposedly half of

the 900K, which is 450K will be deducted against the conjugal property, but since 450K of the house will exceed

1M (if you add it up with the 600K exclusive lot), so the total would only be 1M, not 1.05M. So you only deduct

to the extent of 400K.

RA 4917, conjugal

- How do you compute the share of the surviving spouse?

o Total conjugal properties less the conjugal ordinary deductions, which excludes family home, standard deduction

vanishing deduction, RA 4917, medical expenses. After deducting, then divide the difference by 2 to arrive at the share of

the surviving spouse.

XII. Net Estate and Estate Tax Rates

- If we have a net taxable estate of 5,404,000, is the whole amount of 5.4M taxable?

o NO, because the first 200K is exempted from tax.

o So how much is the tax due?

465K + 15% of 404,000 = 525,600

Were we able to consider 200K as an exempt portion or is it absorbed already in the computation of the tax

rates? ABSORBED ALREADY. Do not think that if you use the tax rate, the exemption is no longer given. It’s stil

given. If we use the table below, we don’t lose the exemption. It’s given automatically.

- TAX RATES APPLICABLE:

OVER BUT NOT OVER TAX IS PLUS OF THE EXCESS OVER

200,000 Exempt

200,000 500,000 0 5% 200,000

500,000 2 million 15,000 8% 500,000

2 million 5 million 135,000 11% 2 million

5 million 10 million 465,000 15% 5 million

10 million And over 1,215,000 20% 10 million

- TAX CREDITS

o Tax credits would have to be offsetted against the tax due. Assuming that we have already the tax due, we simply deduct

the foreign tax credit but subject to limitations. What’s the limitation?

PER COUNTRY LIMITATION

GLOBAL or OVERALL LIMITATION

o For estate tax credits, you cannot automatically deduct the actual estate taxes paid abroad. We have to observe whicheve

is lower between the actual foreign estate tax paid as against the limitation per country and as against the global limitation

for the worldwide estate.

XIII. ADMINISTRATIVE MATTERS

o Do you have to notify the Commissioner every time that someone dies? In all cases? What is the purpose of notifying the

BIR?

For purposes of the government to be prepared in computing estate tax, there should be a notice of death.

Is notice of death necessary?

Not in all cases

When is it necessary?

1. In all cases of transfers subject to tax or

2. Where, though exempt from tax, the gross value of the estate exceeds 20K

o So would every death require notice?

NO. Notice of death is not necessary at all times. Only if the death would result to

estate taxation, meaning it will be subject to tax beyond the 200K limitation. But it




also extends to saying that even estates which are not subject to estate tax so long

as the gross value of the property exceeds 20K, a notice of death is necessary to be

given to the Commissioner or his alter-ego.

When should it be given?

It should be given within 2 months after the death of the decedent or within a period after the

executor or administrator qualifies as such

o If the decedent has a bank deposit, do you think that the heirs or the surviving spouse can withdraw the money before

settling the estate tax? But is the bank obligated to know that somebody dies? How do you give notice to the bank? Or

would you want to give notice to the bank? Say for example that you posted an obituary. The bank officials did not read it.

They weren’t able to read it. It allowed a withdrawal after a SPA executed before death in favor of a child. The child

withdrew the amount – the full amount. Is the bank liable for allowing the withdrawal or not?

LIABLE. The obituary is sufficient notice. The bank should not allow the withdrawal.

Under the unclaimed balances law that once money becomes dormant for 10 years – no withdrawal, no claims

no deposits, etc. – it will belong to the government – escheated with the government.

Is there an exception to the rule that no withdrawals can be made during the settlement of the estate before

the payment of taxes? Actually the government just wants it to be protected. No money shall be withdrawn

unless the estate taxes have been duly paid. But is there an exception?

YES. That is when the Commissioner has certified that the estate taxes have been paid or that the heirs

of the decedent may, upon authorization by the Commissioner, withdraw an amount not exceeding

20K without the said certification. (Sec. 97, NIRC)

Why do you think the law allows withdrawals of 20K even without the estate taxes having been paid?

o As a general rule, no withdrawals can be made unless a certification from the Commissioner

is shown saying that all estate taxes have been paid but in some cases, it will allow

withdrawals of not exceeding 20K even without the certification so long as the Commissioner

or his alter-ego has authorized the withdrawal. What is the purpose of this minimum

withdrawal?

In order to cover for the expenses in the settlement of the estate because in some

cases, a decedent may have left all tangible items excluding cash and the cash is in

the bank. In order to answer for the costs or expenses, withdrawals may be made.

o Is it necessary that in every notice of death that you submit, an estate tax return has to be filed?

NO. So it’s possible that you have notified the BIR of someone’s death but no estate tax return is expected to befiled? YES.

What are the instances when an estate tax return is required?

1. In all transfers where an estate tax has to be paid, meaning more than the first 200K net estate, an

estate tax return has to be filed. Whenever the decedent has left property and the transmission of

property would result to an estate tax liability, meaning a taxable transfer.

2. Whenever the gross value of the estate exceeds 200K, you have to file an estate tax return, even if

you’re not liable for estate tax.

o Example: Your gross estate is 250K. Standard deduction pa lng, 1M nah, so you’re not liable

for estate tax. But since the gross value of your estate exceeds 200K, you have to file an

estate tax return.

o Non-filing of such estate tax return. Would you be liable to the government for non-filing?You did not file because anyway, you are not liable for estate tax, it’s useless, you don’t have

to pay any tax.

YES because the purpose is for the government to monitor whether or not the

gross estate is indeed subject to estate tax. So it is a requirement for you to file an

estate tax when required to do so in the NIRC even if you’re not liable for paying

estate tax.

But what’s the liability for non-filing? What’s your penalty for non-filing?

Usually, if you don’t file a tax return, you have a penalty. (Tiu: To be

discussed later)




3. Regardless of the gross value of the estate, when the said estate consists of registered or registrable

property such as real property, motor vehicle, shares of stock or other similar property for which a

clearance from the BIR is required as a condition precedent for the transfer of ownership thereof in the

name of the tranferee.

o Example: These are the only properties left by the decedent:

Estate tax return

Motor Vehicle 50K

Bicycle 50K X

o If it’s a parcel of land not exceeding 200K, still you have to file an estate tax return.

o What could be the purpose why estate tax return is necessary for these registrable

properties?

It is required as a condition precedent for the transfer of ownership in the name of

the transferee. For example, if it’s a parcel of land, the RD will not transfer the

ownership from the decedent down to the heirs unless proof is shown that the

taxes have been paid.

o Now if it is not covered to taxation because the amount does not exceed the standard

deduction of 1M, still there must be proof that estate tax return has been filed and the

clearance from the tax authorities has been given so that transfer can smoothly be made.

If the gross value exceeds 2M, what is that special requirement?

There must be a statement duly certified by a CPA containing the following:

o Itemized assets of the decedent with their corresponding gross value at the time of his death

or in the case of a nonresident, not a citizen of the Phils., of that part of his gross estate

situated in the Phils.

o Itemized deductions from gross estate allowed in Sec. 86; and

o The amount of tax due whether paid or stil l due and outstanding

o Who is the person primarily liable to pay the estate tax?

It is the estate that is primarily charged for the estate taxes but it will have to be coursed through the executor o

administrator who shall be considered as the person primarily liable to pay the estate tax

If and when the estate taxes have been paid, you as an executor or an administrator, what do you need to do inorder to protect yourself? Take this case, if you’re an executor or administrator of an estate, you settle 5M of

estate taxes. A year later, an assessment was made by the tax authorities, it was found that the tax liability

should have been 10M but all properties have been distributed to the heirs already. Will you still be liable for the

estate tax deficiency? Will you be liable to the government? So that if you say yes, what must an executor or

administrator do in order to protect himself from liability? What is that that you should do in order to protect

yourself from personal liability afterwards? Remember that every tax return that has been filed, the governmen

has 3 years within which to look at the return for its truthfulness and validity. In case something is wrong

assessment can still be made. In order to protect yourself, you must do something. As executor or administrator

of an estate, how do you escape personal liability after the settlement of estate taxes?

SEC. 92. Discharge of Executor or Administrator from Personal Liability. - If the executor o

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 madebefore 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 o

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.

After estate taxes have been paid and settled, the best thing for an executor or administrator to do is

to ask the court a written discharge from personal liability on such settlement of estate so that if later

on, it is found out that there has been miscalculations, he cannot be considered as personally liable.

When do you have to file the estate tax return?

Within 6 months from the date of death.




Now there’s difficulty in gathering the properties of the decedent, can you seek for an extension?

o YES. The Commissioner shall have authority, to grant, in meritorious cases, a reasonable

extension not exceeding 30 days for filing the return.

But still there’s difficulty in gathering the estate of the decedent and your 30 days is about to expire.

Should you file the estate tax return or would you still be granted an extension? Mr. Santillan: You

have to file an estate tax return.

So if you need to file, what happens if the data that you have submitted is not correct? Would you be

liable for it? What happens if the data that you were able to submit during the 30-day period extensionis not accurate or is not correct? Would you be liable for it?

o [NO ANSWER by Mam Tiu at this point in time.=( However, Mam Tiu answered later in

discussing penalties for non-compliance. Just read on….=)]

o When should you pay estate tax due?

At the time the return is filed by the executor, administrator or the heirs, which is 6 months from the decedent’s

death. However, the Commissioner may allow an extension of payment, if he 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.

Extension not to exceed 5 years, in case the estate is settled judicially or 2 years, in case the estate is settled

extrajudicially.

What is it to the government if payment is extended? How do we protect the government from such extension

of payment?

If extension granted, the Commissioner may require the executor, or administrator, 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.

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.

o Where should the estate tax return be filed and paid? You notice that there are many offices in different districts of the

Phils. – offices of the BIR – we call it Revenue District Offices. Where do you file and pay the tax?

Except in cases where the Commissioner otherwise permits, the return shall be filed with:

An Authorized Agent Bank (AAB)

Or Revenue District Office (RDO), or Collection Officer, or

Duly authorized Treasurer of the city or municipality in which the decedent was domiciled at the time

of his death, or

If there be no legal residence in the Phils., with the Office of the Commissioner

Since we have delegated to AABs the right to collect taxes, we simply determine where the domicile of the

decedent is and what RDO he belongs. So if he belongs to this RDO, determine what banks can accept payments

– the AABs, not just any bank.

o PENALITIES FOR NON-COMPLIANCE: What happens if you file and pay in the wrong venue, meaning not in the place where

the decedent is domiciled? Is there any penalty? So if the decedent is residing in Cebu City, but the payment was made in

Land Bank – AAB of Lapu-Lapu City, do you think the RDO of Cebu City would be happy about it? Do we get penalized for

filing and paying at the wrong venue?

Illustration: Date of death is Nov. 24, 2010. 6 months after, May 24, 2011, an estate tax return should have been

filed, you were able to seek for an extension of filing of 30 days since there’s difficulty in gathering the gross

estate. 30 days thereafter, June 24, 2011, you were able to file the estate tax return but you were able to seek

for an extension of payment for 2 years. Now the data that you submitted were inaccurate although not

fraudulently made. It was due to still difficulty in gathering the data. It was settled extrajudicially. So 2 years

extension of payment. From the point of payment of tax going back to 2010, are you liable for any penalty? Or

no penalty is due because you were able to file it on time and pay it on time, although extended? Is there any

penalty on top of the estate tax liability for the payment 2 years and 30 days after the 6 months or would the

administrator or executor be liable solely for the estate tax due? Do you think the government is rightful in

collecting interest from the money that should have been paid 6 months after death but was paid 2 years after

death? So is interest due?




Even if there was an extension granted to the executor or administrator, still, because you have

withheld money from going into the coffers of the government, the government is rightful in collecting

20% interest per annum based on the estate tax due.

When is surcharge as a penalty imposable? The 25% surcharge?

o If it’s a simple extension of time to pay, the add-on penalty would only be the interest.

o Surcharge would only come in for absolute non-compliance with the requirement. If you file

the return late, you will be imposed of a 25% surcharge.

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

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

o The surcharge will be totally based on the basic amount of taxes due and on top of that,

interest from the time that money could have been collected by the government up to the

time that the money was actually collected by the government.

o And on top of these, if you filed at the wrong venue, the 2 things can happen:

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

or

2. You could totally be considered as no-payment in the proper venue, you have to

pay the full amount 100% plus the surcharge of 25% in the proper venue. So wha

you can do is simply file a refund in the wrong venue where you make the

payment.

However, once we reach remedies for taxation, in meritorious cases, you can seek

for abatement of such penalties if it was an honest mistake in determining where

the decedent was domiciled at the time of his death.

DONOR’S TAX

(Sections 98 to 104 of the Tax Code, as ammended)

I. Nature and Purposes of Donor’s Tax

- Is donor’s tax a property tax or an excise tax?

o It is an excise tax.

- What is the nature of a donor’s tax?

o Donor’s tax is imposed on gratuitous transfers of rights and property that shall take effect during the lifetime of the donor

(Donation inter vivos)

- Can it happen that there is a donation mortis causa that will be considered as donation inter vivos? In estate tax, we identified

donations inter vivos taking the form of testamentary dispositions, which are donations mortis causa. Now in donor’s taxation, i

there a donation mortis causa that will be considered donation inter vivos?

o NO. It cannot be the other way around because if somebody dies, automatically that’s mortis causa. You cannot say that

he donated it in his free will as donation inter vivos.

- The purpose of donor’s tax is simply to?

o To raise revenues – LIFEBLOOD DOCTRINE.

II. Applicable Law in Donor’s Taxation

- What is the applicable law in donor’s taxation?

o The law in force at the time of the perfection and completion of the donation.

o The law governing donations is not strictly limited to the Tax Code. It can expand to other different laws. So say for

example, electoral campaign contributions, it will be covered by the Election Code.

Example: Under R.A 1, donations to politicians for election purposes are subject to donor’s tax. On Nov. 24

2009, the law was repealed by R.A. 2 making it exempt from donor’s tax. If donation was made Nov. 20, 2009 in

a written document – one of the formalities for a personal property that will be donated once it reaches more

than 5K. The written document was transmitted to the donee-politician through mail. On. Nov. 25, 2009, just

before the politician took hold of it, he died of heart attack. Will the donation be subject to donor’s tax and

under what law? Which law will govern in this case?




Was there acceptance made? NO, because the donee-politician died. Therefore, there was no

perfected and completed donation when it was not accepted. Therefore, both laws will not apply.

Now lets say the donee-politician did not die. He accepted the donation on Nov. 26, 2009, which law

will apply? R.A. 2 because it is the law at the time that the donation is perfected and completed.

Now if there was an offer of donation on Nov. 20, 2009. But it came to the knowledge of the donee

only on Nov. 26, 2009 and accepted and completed on Nov. 26, 2009, then the law in effect at the time

of completion of the donation would apply. It will now be exempt from donor’s tax because the

current law (R.A. 2) is not imposing any donor’s tax.

III. Kinds of Donors

- In estate tax, the decedents were all individual persons – natural individual persons. In donor’s taxation, do we have a juridica

donor? YES. So can a juridical person become a donor? YES. So what are the kinds of donors?

o A. Individual persons

1. RC

2. NRC

3. RA

4. NRA

o B. Juridical person

1. Corporation

2. Partnership

IV. Kinds of Donees, as to relationship to Donor

- Who are the donees? What kinds of donees do we have in relation to the donor?

o A. Stranger

Stranger is not a brother, sister (whether by whole or half-blood), spouse, ancestor and lineal descendants; or a

relative by consanguinity in the collateral line within the 4th

degree of relationship

Example: If your great-great-grandfather (GGF) makes a donation to you, can you consider your relationship to

your GGF as a stranger or non-stranger relationship?

NON-STRANGER relationship because GGF is an ancestor regardless of the number of degrees.

o B. Non-stranger

Brother, sister (whether by whole or half-blood), spouse, ancestor and lineal descendants; or a relative by

consanguinity (not affinity) in the collateral line within the 4th

degree of relationship

For ancestors or ascendants, would it matter as to how many degrees they are connected to you? NO.

Lineal descendants, number of degrees does not matter. Legally Adopted child and illegitimate child

also covered by lineal descendants.

Relative by consanguinity in the collateral line within the 4th

degree of relationship – up to the exten

of your 1st

degree cousin.

Of the non-strangers, there are 2 persons who are not in blood relations to you?

o Spouse

o Legally Adopted child covered under lineal descendants

Why is there a need to distinguish between a non-stranger and a stranger relationship?

Because they have different donor’s tax rates when the donee is a stranger or a non-stranger

Which is more favorable?

o The more favorable is when the donee is a non-stranger

o If the donor to the donee has a relationship of a stranger relationship, the taxability is at a

flat rate of 30%. So that’s high. If the relationship between the donor and the donee is that o

a non-stranger, it will be covered by the first 100K-exempt and to the first rate of 2% up to




the maximum rate of 15%. So as much as possible, you are probably encouraged to donate

only to non-stranger.

o However, not all of our co-non-strangers are capacitated to receive a donation from us such

as spouse to spouse.

V. Requisites of a Taxable Gift

- What are the requisites to make a gift a taxable gift?

o 1. Donative intent

What’s a donative intent?

Intent of the donor to donate without consideration since it’s a gratuitous transfer. It refers to the

proper declaration of the legal owner of a property or right to transfer ownership to another without

consideration.

True or False. Only transfers of gifts which are coupled with a donative intent are subject or covered by donor’s

taxation.

FALSE, because there are gifts wherein donative intent is not necessary but are still subject to donor’s

tax, such as transfers for inadequate consideration.

Not all items covered by donor’s taxation always have a donative intent. In some cases, there is such transfer

although you did not have the intent to donate, but still it is subject to donor’s taxation because the transfer, for

example, is for an insufficient consideration.

Our law on donor’s tax provides that the transfer for insufficient consideration is subject to donor’s tax. And it is

also subject to estate tax. Is it not double taxation?

Example: Mr. A sold a property for 100K even if the FMV is 1.1M. He sold it during his lifetime on Nov.

24, 2009. Is this transfer for insufficient consideration? Is this subject to a tax?

o It is a transfer for insufficient consideration, and thus, subject to donor’s tax to the extent of

the difference between the FMV and the insufficient consideration (1M).

o When is it subject to estate tax? When the donor (Mr. A) dies because estate taxation as wel

says that part of the gross estate would be transfers for insufficient consideration.

o So if it’s subject to donor’s and estate tax, is it not double taxation – taxing the same transfe

on the same property?

YES, there is double taxation. However, although both estate taxation and donor’s

taxation provides that both taxes can be imposed whenever a transfer or a sale is

made for an insufficient consideration, only one can be imposed and it depends at

what point the discovery is made.

If the discovery is made during the lifetime of the person who made the insufficient

consideration transfer, then donor’s tax would be imposed.

If discovery is made at the time that gross estate is gathered at the time of death,

then only estate tax would be imposed.

After the transfer for insufficient consideration is paid of donor’s tax, at the time

that the donor dies, such transfer is already erased in the gross estate of the donor

decedent.

Nov. 25, 2010 Thursday

- Transfers inter vivos when ownership still belongs to the donee is considered a disposition mortis causa because the ownership stil

belongs to the donee despite the existence of the transfer or donor. But if such transfer during lifetime still falls or is classified

among the dispositions which is actually a testamentary disposition, a very good example would have to be the revocable transfer

wherein the donor would withhold certain rights in the transfer of the property such that if the transfer during lifetime carries with i

the absolute will of the donor to alter, amend, revoke or terminate the transfer or enjoyment of property rights enjoyed by the

donee, it will still be considered as disposition mortis causa. It’s not subject to donor’s tax.

- In cases where these transfers have been considered as donations subject to donor’s tax and later on found out to be testamen tary

dispositions because of the withholding of certain rights and privileges by the transferor, we have to pay all over a new kind of tax,

which is the estate tax and the donor’s tax that have been erroneously paid earlier would have to be a subject of a claim for refund.




then, it becomes subject to income tax because it becomes compensation on the

part of the donee.

If you remember in Tax 1, we have one exception to the rule – condonation o

indebtedness that does not result to increase in the patrimony of the donee’s

assets will not as well result to donor’s tax and not even income tax according to a

SC ruling.

o 2. Capacity of the donor

In so far as donor’s taxation is concerned, what is meant by capacity of the donor?

Capacity of the donor refers to the condition and legal capacity of the donor to enter into a valid

contract.

So every donation to be valid, you must identify whether the donor has the legal capacity to enter into

a valid contract.

What makes a person incapacitated to donate?

Insane

Minor

Donations between spouses

o So if you get married, you cannot donate to your spouse at all?

NO. Husbands and wives, as a general rule, are not allowed to make donations toeach other except in cases where it tantamount to moderate gifts in times of family

rejoicing or distress.

Or another exception, which is not really an exception, you can transfer to your

wife and husband at the time of death, which is transfer mortis causa.

o If you get married, you donate to your wife a diamond ring worth 2M? Do you think that’s

taxable to donor’s tax? Lets say if you’re Manny Pacquiao, you can really give the 2M

diamond ring, so that is moderate gift?

YES. It’s a valid donation because moderate gifts depend on the financial capacity

of the donor. Therefore, it’s subject to donor’s tax.

If it’s not a valid donation, then it’s not subject to donor’s tax.

o Lets day Mr. A gave a diamond ring to his wife and Mr. B gave also a diamond ring to his wifeMr. A is a multimillionaire and Mr. B is ordinary. 1 gift is valid and the other one is void. What

are the tax implications of the 2 gifts?

Mr. A’s gift was a valid donation, therefore subject to donor’s tax. But Mr. B’s gift

was not a valid donation, therefore not subject to donor’s tax.

Although husbands and wives are not allowed to donate in favor of the other as a

general rule, there are cases when they are allowed to donate moderate gifts.

If and when the gift would come within the meaning of a moderate gift in

accordance with the financial capacity of the donor-spouse, it does not mean tha

it will not be subject to donor’s tax. Husbands and wives will be subject to donor’s

tax but only in cases where the donation or a gift was validly made, meaning not

excessive.

On the other hand, if the donation was void because it does not come within the

ambit of moderate gifts, it is not subject to donor’s tax.

What happens if the donee-wife does not return it – the void donation (diamond

ring)? Do you think there’s a tax implication to that?

YES. There is no donor’s tax in a void donation but there are cases if and

when it would result to a valid transfer but not a donation, when in cases

it will be considered as increasing the assets of the donee, but not really

donee because donation is void, the transferee, it may be subject to

another tax, which is income tax.

Income tax is a tax on whatever source – so whether it’s a source that is

legal or illegal, it will be subject to income tax so long as you properly




declare it. If you don’t declare it, it will not be subject to income tax bu

your conscience will dictate otherwise. All income from whatever source

is subject to income tax.

In order to make a valid gift that is subject to donor’s tax, must the donee have a legal capacity?

NO. The donee need not be capacitated to receive the gift to make the donation valid. It is enough that

the duly authorized representative of the incapacitated donee received the donation. This refers only

to minors and insane persons.

Whenever you want to donate to a minor, although legally he cannot as yet accept, he can berepresented by a guardian.

However, there are incapacitated donees, such as:

o Those under civil interdiction

o Spouse

Can a man and a woman living together as husband and wife without the benefit o

a valid marriage donate in favor of the other?

NO, because the reason behind the law is to avoid undue influence over

each other.

A lawyer who notarized the will and testament is not incapacitated to accept

donation or as a donee or to inherit.

If an heir, who is disinherited from sharing in the estate of the decedent, is given a property by the decedent in

the will. Is that subject to estate tax or donor’s tax? Dba, there are grounds for disinheritance in the law. If he

falls under those grounds but still the will provides for him a certain portion – the free portion – in fact

designated to that heir who is supposedly to be disinherited. Subject to donor’s tax or estate tax? If for example,

the heir is disinherited in the will, but in the distribution of the estate, he was given a share by the executor, is

that subject to estate or donor’s tax?

Whenever a person, such as a disinherited heir, who has no legal right to enforce upon the estate of his

share, gets something out of it, it may be considered as again subject to donor’s tax. In the absence of

a legal right to inherit, there can be no inherited property. You call the asset that was given to you as a

gift subject to donor’s tax.

o 3. Donation must reduce the assets or patrimony of the donor

o 4. Acceptance of the donee during lifetime of the donor

Is acceptance necessary to make a donation a taxable donation?

YES,

Example: You made a donation. You informed your seatmate that you are to make a donation in her

favor through a letter transmitted to her. She was happy, she made a conforme, she signed, she

accepted and she mailed it back to you but before it reached you, something happened, you died

Subject to donor’s tax?

o NO. Acceptance for it to be a valid acceptance and making the donation valid, it must be

made by the donee during the lifetime of the donor. It’s not even during lifetime lng. It must

also be made known to the donor himself.

What are the forms of acceptance in order for a donation to be a taxable donation?

As one of the requirements, you add in there the forms to effect a donation. What are the 3 forms toeffect a donation?

o 1. Verbally – where the value of the personal property (movable property) donated is 5K o

less, the donation can be made orally. An oral donation requires simultaneous delivery of the

thing or of the document representing the right donated.

o 2. In writing – where the value of the personal property donated exceeds 5K, the donation

and the acceptance shall be made in writing, otherwise donation shall be void

o 3. In public instrument – in order that a donation of real property (immovable property) shal

be valid, it must be made in a public instrument (Deed of donation), specifying therein.

Illustration: If the donation of the real property valued at 3K is made in a non-

public document, is that a valid donation? NO, it’s void ab initio. The donation is




- For all these types of donors – RC, NRC, RA – they’re all taxable on properties within and without. But NRA-donor is only taxable fo

real properties located within the Phils., personal tangible properties within the Phils., and personal intangible properties that have

situs in the Phils. – will be subject to donor’s tax.

- However, we still follow the same principle in estate taxation that general rule is that NRA having intangible personal properties in

the Phils. will be subject to donor’s tax unless we can apply the reciprocity clause, which simply says that whenever the dom icile

country of the NRA does not impose a donor’s tax or allows an exemption from donor’s tax to Filipinos who are not residents o f thei

country on personal intangible properties of those Filipinos, we as well don’t impose any tax on personal intangible property of NRA

even if it has a situs in the Phils.

- What are these intangible personal properties having situs in the Phils.?

o 1. Shares of stocks of domestic corporations – due to the Benefits-received theory

o 2. Shares of stocks of foreign corporation so long as these foreign corporations are operational in the Phils. more than

85% and if 50%, pro rata, having situs in the Phils. But if it’s operational in the Phils. less than 50%, that foreign corporation

shares of stocks will not have Philippine situs.

o 3. Franchises, patents, copyright, royalties so long as it is exercised in the Phils., it will have Philippine situs.

- Where shall we include the corporations? Would corporations be taxable on donations of real properties within and without

personal tangible properties within and without or personal intangible properties within and without?

o It would depend on what type of corporation it is. Corporations can either be DC, RFC and NRFC.

o A DC is just like RC.

o RFC is like RA.

o NRFC is like NRA.

- Transfers or donations made directly or indirectly of real, personal tangible or intangible properties, wherever situated are taxable

to donor’s tax. We have identified what these direct transfers or direct gifts are – these are actually transfers with the intent to

donate. But when intent to donate is absent, it does not necessarily mean that there is no taxable donation, such as transfers fo

insufficient consideration and condonation/forgiveness of indebtedness – these are transfers indirectly made or donations without

intent to donate. But when the law says transfers made in trust or otherwise, what does it mean, what is covered by such statement

when we talk about donor’s tax? Which transfer is subject to donor’s tax? From the trustor to the trustee? Or from the trustee to

the beneficiary?

o FROM THE TRUSTOR TO THE TRUSTEE – we learned in the requisites that acceptance may be made personally or by

someone who is authorized to receive in behalf of the donee. So if the transfer is not directly made to the beneficiary but

transfer in trust in favor of someone else, is that not taxable? The basic difference between a transfer during lifetime

subject to donor’s tax plainly and a transfer during lifetime that is subject to estate tax and not donor’s tax is that in bo thwhile there may be a transfer of the ownership and title, in estate tax, there is no passage of control. Here, there is

transfer of ownership and title and passage of control. Dba if it’s revocable, subject to estate tax. In donor’s taxation, it

recognizes as well the direct transfer down to the beneficiary but so long as the control has been relinquished by the

trustor already, forget about estate tax, even if that control passes through an intermediary, the trustee.

o If the transfer is made in trust for someone else, i t is subject to donor’s tax as well. That’s why whether a transfer is made

in trust or otherwise, direct or indirect, it is subject to donor’s tax so long as there has been a relinquishment of the contro

from the donor-trustor. Dba one of the requisites – there is a reduction in the patrimony of the donor which results to the

increase in the patrimony of the donee and there is the intent to donate or no intent to donate.

o Beneficiaries of trust – where a gift is made to a trustee for the benefit of one or more beneficiaries, the beneficiaries, and

not the trustees, are the donees of the gift.

- Would the donor’s tax be a liability of the donor or the donee? Who is liable to pay the donor’s tax?

Real Property Personal Property

Resident Citizen / Domestic Corporation Within and without Within and without Within and without

Non Resident Citizen

Resident Alien /

Resident Foreign Corporation

Non-Resident Alien /

Non Resident Foreign CorporationWithin Within Within

General Rule: within

Exception: Reciprocity




o DONOR, otherwise it will be called donee’s tax.

o Donor’s tax is always the liability of the donor in the eyes of the law. But…..

For example: If you’re the donor of a 1M -value parcel of land. It’s the only property you have, therefore, you do

not wish to pay the tax. You commissioned your donee to shoulder the tax of 30% because you are in a stranger

kind of relationship. Is that possible? Is it possible to shift the burden of tax to the donee and make him liable for

the donor’s tax?

YES. The donor’s tax is a liability of the donor but in some cases, since this is just like any othe

contract, you can agree with the other party (may be donee) for him or her to shoulder the tax. But the

problem would arise if and when no tax is paid by that other party with whom you have agreed, the

law will always collect the tax from the statutory taxpayer (donor). So it’s always the donor. Liability

lies and belongs to the donor. If the donee wishes to shoulder the tax in your behalf, it is allowed.

VII. TRANSFERS FOR LESS THAN AN ADEQUATE CONSIDERATION

- Illustration: You (Mr. A) have a parcel of land valued at 1M, which you sold for 100K to your friend, Mr. B. It was discovered during

your lifetime that such transfer or sale was made for an insufficient/inadequate consideration. Subject to donor’s tax?

o IT DEPENDS.

o The difference between FMV and the consideration at the time of donation shall be subject to donor’s tax. But is it an

absolute rule? Or is there an exception wherein such transfer will not be subject to donor’s tax?

o Illustration:

Which of the 3 transfers in the table below is subject to donor’s tax, transfer A, B or C? All are transfers fo

inadequate consideration.

TRANSFERS A and C

The law simply says that all transfers for inadequate consideration are subject to donor’s tax except

those properties covered by Sec. 24(D) – real properties considered as capital assets and Sec. 27(D) –

capital gains from the sale of shares of stock not traded in the stock exchange.

Not all real properties are automatically taken out from the coverage of donor’s tax. In fact, if you look

at the general rule, all transfers for inadequate consideration discovered during the lifetime of the

donor or the seller is subject to donor’s tax except if that property happens to be a real property

classified as a capital asset located within the Phils.

In Sec. 24(D), we identified some real properties classified as capital assets located in the Phils. assubject to 6% capital gains tax.

Some of the books are not clear in distinguishing between an ordinary asset and a capital asset. I’ve

come across books which simply says that if the property transferred for inadequate consideration is a

real property, it’s not subject to donor’s tax. But it’s wrong, because real properties may be a capital

asset or an ordinary asset.

A commercial building used in business and a motor vehicle is an ordinary asset. A 2nd

residentia

property is a capital asset, thus not subject to donor’s tax.

Why do you think real properties classified as capital assets located in the Phils. are not subject to

donor’s tax?

Parcel of Land

FMV Php 1MSold at Php 100K to

MR. B

Php 900K

Cost

A B C

Motor Vehicle 2n

Resident Property Commercial Building

Fair Market Value = Php 1,000,000

Sold = Php 100,000


Sold = Php 100,000


Sold = Php 100,000

vs 50K




o Because they’re already subject to capital gains tax. Capital gains tax is a kind of income tax

and in fact, it’s one of the exceptions wherein it is a tax not necessarily on income but on the

capital.

Is it not subject to income tax as well when you sell an ordinary asset?

o YES, it is subject to income tax. What has been captured in income taxation is only the

difference between the selling price and the cost. If the difference is 50K, what is taxed is

only the 50K, never on the difference between the FMV and the selling price.

o But for capital gains tax on capital assets, everything is captured because it’s already on the

FMV of the BIR or zonal value of the local assessor, whichever is higher.

If real property is used in business, it’s an ordinary asset. If it’s used for personal purposes, it’s a capital asset.

Would all real properties owned by a corporation be considered as ordinary assets?

No. But to such extent is has been considered as YES – why would you put in a real property in a

business if you don’t intend to use it. The only exception is, under Revenue Regulations, when that

property has been held as an investment for so long that it has remained undeveloped, unutilized for a

number of year, then, you may ask for an opinion from the BIR that it is already considered as capita

asset but that’s a long and tedious process. The BIR is more interested in taxing your property to

ordinary tax of 30% than 6% capital gains tax.

Real estate companies so long as they have real properties put in together in one corporation, genera

rule is it is always an ordinary asset. Why? If you put in an asset of 100K 10 years ago and the value

now is 10M, it’s really hard to dispose it as capital asset. If it’s capital asset, it could have been 6% onthe 10M. But if it’s treated as ordinary asset, the difference of 9.9M is 30% + 12% VAT. So do not

mistakenly just put in all your assets in a real estate corporation.

VIII - IX. Exemptions of Cetain Gifts vs. Deductions from Gross Gifts

- What are the exempt gifts for RC, NRC, and RA that are not subject to donor’s tax?

o 1. Dowries or gifts on account of marriage

o 2. Gifts made to or for the use of the National government, its agencies or political subdivisions

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

o 3. Gifts in favor of an educational and/or charitable, religious, cultural or social welfare corporation, etc.

Would that educational institution have to be accredited? Would it require accreditation before you can give

them a tax-free donation?

NO, what is required is that it is only a non-stock, non-profit educational institution.

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 o

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.

If you donate to any of the mentioned institutions, would it automatically be exempt from donor’s tax?

National Government

Local Government Units

Agencies (Non-Profit)

EducationalCharitable

Religious

Cultural

Social Welfare

Accredited NGOs

Philantrophic

Research Institutions




NO.

What are the requisites in order for the donation to these entities to be exempt from donor’s tax?

o 1. Not more than 30% of said gifts will be used by such donee for administration purposes

o 2. Incorporated as a non-stock entity

o 3. Paying no dividends

o 4. Governed by board of trustees who receive no compensation

o 5. Devoting all its income, whether students’ fees or gifts, donations, subsidies or othe r form

of philanthropy, to the accomplishment and promotion of the purposes enumerated in its

AOI

o 6. If it’s a NGO, it must be accredited

These are the strict requirements in order for the donation to be an exempt donation.

So if you are a prospective donor, all you have to look into is whether that entity your eyeing for a

donation is any of the institutions mentioned that are non-stock, non-profit and the other requisites

aforementioned are complied with.

Example: You donated to the College of Law Alumni Association of USC, exempt or taxable donation?

TAXABLE donation.

X. Exemptions of Cetain Gifts Allowed to a Non-Resident Alien

- If the donor is a NRA, what are his exempt gifts?

o 1. Gifts made to or for the use of the National Government, its agencies or political subdivisions

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.

o 2. Gifts in favor of an educational and/or charitable, religious, cultural or social welfare corporation, etc.

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.

Example: A NRA wishes to donate to a religious organization but not all the requisites are present. It does not

comply that all its income, whether students’ fees or gifts, donations, subsidies or other forms of philanthropy

must be devoted to the accomplishment and promotion of the purposes enumerated in its AOI; it payscompensation to its board of trustees. Will it be an exempt donation?

YES, because what is required for the donation to be an exempt donation when the donor is a NRA is

only that not more than 30% of the gifts shall be used by such donee for administration purposes and

that the donee is a non-stock, non-profit institution.

So it is easier for a NRA to look for a donee so long as it’s non -stock, non-profit and not more than 30%

would be used for administrative purposes, it may be an exempt donation for a NRA. So it simply

means we are encouraging NRAs to donate even to those which are not among the strict requirements

for a donation of a RC, NRC, RA to these types of institutions. Although it’s the same types of

institutions, but the requirements differ – lesser requirements when the donor is a NRA.

Dec. 1, 2010 Wednesday

- We have learned from income taxation that exemptions from gross income vs. deductions from gross income are 2 different things,

dba. Exemptions from gross income, automatically, we don’t consider it as part of the income that we have to declare to the

government. But deductions from gross income are simply outflows of money or incurrence of expenses that should at least form

part first of the gross income before they are considered as deductions or deductible expenses.

- But in donor’s taxation, when we say exemptions from gross gifts vs. deductions from gross gifts, these are basically almost the

same. When we say that a particular gift is exempt from donor’s tax or exemptions of certain gifts from donor’s tax, it will still be

form part of the gross gifts that needs to be declared for tax purposes for the reason that we need to give the BIR or the tax

authorities the chance to validate whether our assumption of a certain gift is correct – whether it’s really exempt from donor’s tax o

not. So exemptions partake deductions in so far as presenting it in the donor’s tax return is concerned. You put in all the d onation

that you’ve made, whether it’s exempt or not, and after which, if it’s found to be exempt, simply deduct it from the gross gifts tha

you’ve declared.

- We have 3 gross gifts that are actually exempt from donor’s tax.




o First, when you make donations to the national government, political subdivisions or government agencies that have not

been created for profit, whether the donor is a Resident or Citizen or a NRA – all these donors can claim as an exempt gift

the donations made to the government or its agencies not created for profit

o Second, gifts made in favor of an educational, charitable, religious, cultural, social welfare organization, trust,

philanthropic or research organizations, including accredited NGOs, so long as the donations made to them, not more than

30% of which will be used for administrative purposes. But strictly, if the donor is a Resident or Citizen, the recipient of the

donation must have been created:

1. As a non-stock, non-profit entity

2. Governed by a board of trustees, who is not a receiving any compensation from the entity

3. No income of which will inure to any private individuals, meaning it’s not paying dividends

4. All income or proceeds of such entities receiving the donation will be used for the furtherance of the purpose

for which it was created

Slightly different is that if the donor is NRA, so long as the donation is given to entities such as

educational, cultural, scientific, religious, social welfare, and etc. including accredited NGOs, the

requirement is that these entities must not spend more than 30% of the donation for administrative

purposes for it be exempt.

o Third, dowries or gifts on account of marriage

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)

Dowries or gifts made by whom?

Made by the parents to legitimate, recognized natural (those who will soon to be legitimated children

because they were conceived and born of parents without legal impediment to marry each other), o

adopted children.

Does it include illegitimate children?

o YES.

So legitimate, illegitimate, recognized natural, legally adopted children may be recipients of these

dowries from parents given on account of marriage not exceeding 10K.

When should it be given?

Before marriage or within 1 year after marriage

Example: If marriage is to take place Dec. 25, 2011 and a dowry is made or given on Dec. 1, 2010, can it

be considered as an exempt gift?

o YES, because there is no limit for the period when dowry is made before marriage and since

in this case, dowry was made before marriage, such dowry is considered as exempt gift to

the extent of the first 10K.

Whenever a dowry is given and you’re trying to determine whether it’s still exempt or not, there is no time

frame within which you have to reckon if it’s given before marriage so long as it’s given on account of marriage

as long as the marriage is valid or legally recognized by law, it may be considered as an exempt gift to the extent

of the first 10K pesos. But if the dowry is given after marriage or after the celebration of marriage, it should be

made within 1 year.

How many times can a parent claim an exempt dowry?

Only one exempt dowry for each child for each legal marriage

Example: If the parents give a dowry in a value of 500K, how much exempt dowry can the parents claim?

10K for each parent. Whenever dowry is given to a child on account of marriage, both parents can

claim the dowry as exempt gift. Is this an absolute rule?

o NO. There’s an exception. It depends on what type of property is given as a dowry. If it’s

conjugal property, parents are considered as separate donors to the child. But if the property

given is an exclusive property, only the parent who owns the exclusive property can claim the

10K dowry as an exempt gift.




Illustration: An American national, who is not a resident of the Phils., gave 1M to the woman that his son is going

to marry in the Phils. coming from his bank account in the Phils. Can that NRA claim 10K exempt gift as dowry

given on account of marriage?

NO, NRAs are not allowed to claim dowry as an exempt gift.

Change of facts: Lets make him a NRC. Would that change the answer?

o NO, he cannot claim dowry as an exempt gift because the recipient of the dowry is not the

child. It was given to the daughter-in-law, therefore, there is no exempt dowry even to the

extent of 10K. So strictly, in order to claim dowries as an exempt gift to the extent of 10K, thedonor must be the parent, the donee-recipient must be the child of such donor-parent. In

the absence of such relation, dowries cannot be claimed as an exempt gift.

Illustration: Mr. A & Mrs. A, they have a child Mr. X, who is going to marry Ms. Y. Assuming that the dowry will be

given by Mr. A and Mrs. A in the amount of 1M to both Mr. X and Ms. Y. How much net gift is taxable?

Who is the donor of Mr. X? His parents

Are parents treated as separate donors? YES, since what is donated in this case is a conjugal property

of Mr. A and Mrs. A.

So how much did Mr. X receive? 500K, since the dowry was given in favor of both Mr. X and Ms. Y,

which means the other 500K is to Ms. Y.

Who is the giver of Mr. X? Mr. A and Mrs. A.

Can the 10K dowry exemption be claimed by both parents, Mr. A and Mrs. A? YES, Mr. A and Mrs. Aare the parents of Mr. X, so any dowry given to the child can be reduced of the exempt dowry to the

extent of 10K so long as it is given on account of marriage before the celebration or within 1 year after

the celebration of marriage. Whenever a gift is given to 2 spouses, it is assumed that it is given to both

of them unless the donor specifies otherwise – this is the default. 1M was intended for both Mr. X and

Ms. Y, the problem says so, so the donor of Ms. Y are both the parents of Mr. X – each parent giving

250K each to Mr. X and Ms. Y, so a total of 1M.

Can the 10K dowry exemption be claimed by the parents in so far as the gift given to Ms. Y is

concerned? NO dowry because the recipient is not a child but the daughter-in-law.

So how much is the taxable net gift? Refer to illustration below [Note: DTR – Donor’s Ta x Rates in the

donor’s tax table in a non-stranger relationship]. So the first 100K is exempt to both parents in so far as

the gift to their son is concerned because of their non-stranger relationship with their son. Taxable to

the father in so far as his gift to his son is concerned is only 140K. The gift of the mother to her child is

also taxable at 140K. However, the first 100K is not exempt in so far as the gift to Ms. Y is concerned

because of their stranger relationship, which is taxable at a flate rate of 30%, thus, taxable gift in so fa

as Ms. Y is concerned is 250K.

Php 1M

Mr. X

Mr. A and Mrs. A

Ms. Y

Php 500,000 Php 500,000

Mr. A

250,000

- 10,000

240,000

100,000

140,000

X DT Rate

Mrs. A

250,000

- 10,000

240,000

100,000

140,000

X DT Rate

Mr. A

250,000

- 0

250,000

0

250,000

X 30%

Mrs. A

250,000

- 0

250,000

0

250,000

X 30%

Section 99 first Php

100,000 exemption.

Net Gift

Taxable Net Gift




If the gift is given to a stranger, meaning not in accordance with who we identified as non-strangers

example daughters-in-law can never be a non-stranger, she’s not within the 4th

degree o

consanguinity in the collateral line but she’s related by affinity, therefore, the donor’s tax table will not

apply.

The donor’s tax table starting with exempt of first 100K up to 15% for anything beyond 10M will only

apply if the relationship of the donor and donee is that of a non-stranger. If stranger relationship, it’s

automatically at a flat rate of 30%, no exemption of the first 100K.

If both parents will contribute funds and such funds, we assume this as a conjugal property of both

spouses, if given to Mr. X and Ms. Y on account of marriage, not specifically to Mr. X nor Ms. Y, will be

assumed as both parents giving to each person and the parents will be considered as separate donors.

How many returns will have to be filed here? 4 – Mr. A and Mrs. A will file their separate donor’s tax

returns for each donation to Mr. X and Ms. Y since donation to Mr. X will follow the donor’s tax table

while donation to Ms. Y will not follow such table.

XI. Deductions from Gross Gifts

- What are the other items that will reduce the gross gift before we come up with the taxable net gift subject to donor’s tax rates?

o Encumbrances and diminutions

What do you mean by encumbrances (such as mortgage) and diminutions? Would all encumbrances attaching toa donated property be allowed to reduce the value of the gift?

YES, so long as the donee assumed the payment of such mortgage/encumbrance. Whenever a donated

property has an attaching encumbrance, such as mortgage, security, interest, unpaid taxes on the

donated property (not donor’s tax liability) by the donor and that there is an agreement that the donee

will assume all of these encumbrances or liabilities, it will be considered as deductions against the

gross gift for the simple reason that the actual benefit received by the donee is only net of the

encumbrances that the donee will have to shoulder.

What are diminutions?

Whenever the donor puts a condition in his donation that the donee will have to spend for or shoulder

it will be considered as a diminution to the value of the gross gift that is given.

Example: If the donor is donating 10M to Mr. X but with the condition that Mr. X will have to donate

half of it to a charity or foundation of the donor’s choice, only half of the gross gift will be co nsidered

as a taxable net gift from Mr. X because it is the true economic value that has benefits the donee, Mr

X.

It’s simple – any charge that you would like the donee to shoulder, it will be a diminution of the gross

gift.

XII. Net Gift and Donor’s Tax Rates

- What is the principle of accumulation? What is really accumulated here? Why do we follow the principle of accumulation?

o Principle of accumulation – each gift made during the calendar year must be set forthed in the return which is to be

included in computing net gift

o Calendar year always? YES

o Why do we have to accumulate it during the calendar year? Why not pay the tax every time that the donation is made andforget about the previous donations that you have made during the calendar year? Why do you have to recall the past

donations that you made? Why is that not followed in estate taxation? Why do you have to accumulate?

One reason is that, you can only have one 100K exemption every calendar year donation, otherwise, if you are

not required to accumulate your donation, every time you make a donation during the calendar year, you simply

have to separate 100K each per donation and you’re not liable for any donor’s tax, dba?

Second reason is that, as you go along the calendar year and you have accumulated various donations, your tax

liability would have to increase in accordance with the total number of donations in what bracket it belongs, so if

your total donations would exceed 10M during the calendar year, then your tax bracket would have to be at 15%

already.




o Just like in estate taxation, since RC, NRC, and RA are taxable on donations of properties located within and without,

therefore they’re expectedly liable on foreign donor’s taxes for properties donated and loca ted abroad. Any foreign taxes

paid in accordance with the proportion that we have fully mastered already are deductible against the Phil. donor’s tax

What is that limitation?

Only to the extent of the proportion of your donated properties outside against your donated properties

worldwide against your Phil. donor’s tax.

If only 10% of your worldwide donation comes from foreign donation, then only 10% of your Phil. donor’s tax is

offsettable against your foreign donor’s tax, not to exceed – whichever is lower between your actual foreign

donor’s tax paid and the maximum limitation per country or the global limitation.

Per country limitation: *Net gift of foreign country/Entire net gifts) x Phil. donor’s tax

Global limitation: [Net gift of all foreign countries/Entire net gifts+ x Phil. donor’s tax

XIII. Manner of Computing Donor’s Tax

- Manner of computing the donor’s tax

o Each of the spouses shall be considered as separate donors for the common or conjugal property to the extent of the

spouse’s share, which is automatically ½.

o Both spouses are expected to file separate donor’s tax returns.

o But if the property donated by a spouse belongs to its exclusive property, then only that donating spouse is required to file

a donor’s tax return.

XIV. Administrative matters

- When should you file the donor’s tax return?

o It should be filed within 30 days after the date the gift is made or completed.

- When should you pay the tax?

o At the same time the return is filed. So pay as you file.

- Where do you pay the donor’s tax?

o An authorized agent bank

o Revenue district office

o Revenue collection office

o Duly authorized treasurer of the city or municipality where the donor was domiciled at the time of the transfer, or

o If there be no legal residence in the Phils., with the Office of the Commissioner

- If the donor is a non-resident, where should he file the return and pay the donor’s tax?

o The Phil. embassy or Consulate in the country where he is domiciled at the time of the transfer, or

o Directly with the Office of the Commissioner

- Whenever payment of taxes to be made, we make the payment to an authorized agent bank that is located within the same

revenue district office of the BIR where the donor is a domicile.

o Example: So if the donor is a resident of Mandaue, you have to pay it with the bank that has been authorized by the

BIR to receive tax payments. So it’s usually Land Bank of the Phils. It’s an instance where tax collection may be made

by a private entity.

- But if the donor is not a resident of the Phils., say for example an immigrant, NRC or NRA, it has an option of paying directly

with the CIR in Quezon City or with the Phil. embassy where he is a domicile.

- Penalties for non-compliance is the same.

o For late filing or late payment, the BIR imposes surcharge of 25%.

o For fraudulent declaration of donation, it’s 50% surcharge.

o And in all instances where the government is deprived for a time of the proper taxes, the donor has to pay interest of

not more than 20% pa. So if it’s found out later after more than 2 years, you have to pay more than 40% because it’s

20% pa based on the basic donor’s tax deficiency.




- As of this point, how many distinctions can you give us in so far as donor’s tax and estate tax is concerned?

DONOR’S TAX ESTATE TAX

Imposed upon the privilege to give Imposed upon the privilege to transmit property to

heirs

Transfer is between the living Transfer is from the deceased, through his/her estate,

to the living

Transfer may take place between natural and juridical

persons

Transfer takes place only between natural persons

Less deductions More deductions

Lower tax rates in case of non-stranger relationship,

which ranges from 2-15%

Higher tax rates which ranges from 5-20%

Exemption of first 100K in case of non-stranger

relationship

Exemption of first 200K

Payment and Filing must be made within 30 days Payment and filing must be made within 6 months

Principle of accumulation is applicable Principle of accumulation is not applicable

VALUE-ADDED TAX

(Sections 105 – 115 of the Tax Code, as amended)

I. Nature and Characteristics of VAT

- What is VAT?

o It is an indirect tax, the amount of which may be shifted to or passed on the buyer, transferee, or lessee of the goods,

properties or services.

- What is the nature of VAT and what are its characteristics? Is it a regressive tax or is it prohibited by the Constitution?

o It’s not prohibited by the Constitution.

o When you say that VAT is imposed on the sale of goods, properties or services, does it include real properties? Are rea

properties subject to VAT? Is VAT imposable on the sale of real properties made in the course of business?

Basically, as defined, VAT is a 12% tax imposed on the gross selling price or gross receipts derived from the sale

barter or even exchange of goods, properties, or services.

Properties – only recently, real properties come within the coverage of VAT. Before, VAT is not imposed on real

properties. This is a big thing because if you have gone into house hunting or even condo hunting, the first 1.5M

value of a parcel of land used for residential purposes is totally VAT-exempt. But once you reach the border of

1.51M or 1.6M, you add-on 12% VAT, which is quite big. If you go condo-hunting, you notice that condominium

unit owners are offering you a strategy because under the VAT law, first 2.5M of a residential house and lot

including condominium unit not exceeding 2.5M, lot only – 1.5M, house and lot or condo unit – 2.5M – if i

reaches more than 2.5M, that’s imposable of VAT. 2.5 below – that’s VAT-free or VAT-exempt. Now wha

condominium unit owners are offering is that if the 1 bedroom condo unit is already 2.6M, they will offer to sel

it at 2.5M and 100K miscellaneous charges and other charges so long as it is not attached to the house and lot or

condo unit so you can get rid of the 12% VAT.

What is 12% VAT of 2.5M? That is 300K.

So, it’s a really big impact on the purchases of consumers. Supposedly, these real properties should not be

imposed of VAT – supposedly lng because it’s not a consumption. But then it’s covered by properties, that is

found in Secs. 105 & 106 of the tax code. We can do nothing about it except buy small portions of parcel of land.

You cannot even escape.

If you purchase 2 parcels of land at 1M each, will you be subject to VAT?

It depends. You can escape the VAT so long as the 2 parcels of land are not adjacent to each other. If

it’s adjacent lots – so a total of 2M – you pay the VAT because that’s more than 1.5M. If it’s not

adjacent, then not subject to VAT because for 1M each, it’s not more than 1.5M.

- Is it an indirect tax or direct tax?

o Indirect. Why is it an indirect tax?




Since in principle, the VAT is designed to be borne by the consumers, and the sellers are merely acting as tax

collectors.

o Whose liability is VAT? Is it yours or the supermarket owner if for example you buy wine, which is subject to VAT, in the

supermarket? Who has the statutory liability of the VAT?

The supermarket owner or the seller because VAT is a tax on the sale, barter or exchange of goods, properties or

services. Whenever VAT is not paid to the government for a sale of something made in the course of business,

the government does not run after the consumer, who is supposed to shoulder the burden. The government will

have to have a person or a juridical entity who is liable for it. It’s easier to track down businessman t han the

purchase or consumer. That’s why the VAT is still a statutory liability of the businessman -seller as a general ruleAlthough it is the consumer who will ultimately shoulder the burden because every time a VAT is collected by the

government, it is already assumed that that VAT has been collected from the consumers.

- VAT is a regressive tax. The Phils. has no regressive system of taxation because regressive system of taxation, which is the opposite

of progressive, tax rates increases as the income decreases. VAT is simply a tax which is regressive in nature because the impact o

VAT increases as the income of the consumer decreases. So it has a higher impact on low-income earners. Is it violative of the

constitutional provision which says that we should develop a progressive system of taxation?

o NO, because there is a need to collect indirect taxes as well because it fully supplements the income tax. It is a business tax

that has long been there for more than 30 0r 40 years.

o VAT by its very nature, is regressive. But the Constitution does not really prohibit the imposition of indirect taxes (which is

essentially regressive).

o What it simply provides is that Congress shall “evolve a progressive system of taxation”.

o Direct taxes are to be preferred and as much as possible, indirect taxes should be minimized…but not avoided entirely

because it is difficult, if not impossible, to avoid them.

o Regressivity is not a negative standard for courts to enforce. The provision in the Constitution is placed as moral incentives

to legislation, not as judicially enforceable rights.

- What do you mean by VAT is a tax on consumption?

o In the case of CIR vs. Magsaysay Lines Inc., the SC said that VAT is ultimately a tax on consumption even though it is

assessed on many levels of transactions on the basis of a fixed percentage. It is the end-user of the goods or services who

ultimately shoulders the tax as the liability therefrom is passed on to end-users by the providers of such goods or services.

o So the final purchase of the end-consumer represents a final link in the production chain that involves several transactions

and several asset consumptions.

o It simply means that every time there is a passage of the goods, properties or services from one hand to the other in thecourse of trade or business, generally, a VAT is imposed.

o By the word itself, until it rests in the hands of the final consumer who does not intend to sell the product in the course of

trade or business.

o So if there are 10 production chains or links in the passage of 1 and the same product, there will be 10 VATs that will be

imposed.

o The reason why it’s called VAT is because it is a tax on every value that the seller adds to it.

Example: (Refer to illustration below) A fisherman spent 80 pesos in catching fish. Sold to the market at 100

pesos, does it impose of the VAT? NO. 0 because it is still an agricultural product. You will learn later on tha

agricultural products in its original stage which has not undergone chemical processes are still exempt from VAT.

The market vendor sells it to MEGA sardines for 200, will it be subject to VAT? NOT as yet because it did not

undergo the process of production.

But if MEGA sardines sells it to a wholesaler for 300, will it be subject to VAT? YES. What’s 12% of 300? That’s 36

The wholesaler sells it to a retailer of a supermarket for 400, how much will be the VAT? What’s 12% of 400? 48.

If the retailer sells it to a hotel chain for 500? So 12% of 500 is 60.

When the hotel sold it to the consumer who dined in the hotel for 560, it is the consumer who shouldered the

VAT from the original 80.

In the Phils., we follow the tax-inclusive sales. So whatever you see in the market, assuming it is a vatable good

in the price, there is already a VAT. The selling price is inclusive of the VAT.

Why is VAT a tax on the value added?




If you reverse it, it’s a tax on the value added for a simple reason that every time in the production

chain that it actually paid for the VAT on what it sold, it can deduct the VAT that it paid for the

puhunan.

What the government will only collect from the wholesaler is 12 pesos, not really the 48 because every

time that you are able to sell a product, you are allowed to deduct the tax that you have also paid from

your purchase. In your purchase of these products from originally 300, you paid VAT of 36, you were a

consumer in so far as the wholesaler is concerned. You are to deduct the 36 puhunan input tax against

the output tax on your sales because VAT is a value added tax on the sales. Ang lugi is the consumer

who really paid the 60 pesos VAT.

Why is this a tax on value added?

o Because VAT is simply that what you really pay to the government as a statutory taxpayer is

simply the VAT on the value that you have added. How much value have you added? 100

dba. You purchase something at 300 and you sell it at 400. What is the VAT on the 100? 12.

So this 12 pesos is what you will pay to the government.

But bottomline, it is the consumer who will ultimately shoulder the burden of the tax because the

consumer who pays directly to the hotel will have nothing against which to deduct it from because it’s

not selling. (Tiu: To be further discussed once we reach output-input tax)

II. Applicable Laws

- The applicable law in VAT is still RA 8424 – the 1997 Tax Code, as amended lengthily by RA 9337 in 2005.

III. Status in Relation to VAT

- What is the status of every person, whether juridical or natural, in relation to VAT?

o 1. A person in relation to VAT may be subject to VAT at 12% or 0% or

o 2. He may be exempt from VAT; it depends on the status of the person or the type of transaction that he is entering into

- Who are required to register for VAT purposes? Are we, as individuals, required to register for VAT purposes?

o Every person who, in the course of trade or business, sells, leases goods, properties or services subject to VAT is required

to register under the VAT system if the aggregate amount of his actual or expected gross sales exceed 1.5M during any 12-

month period.

o So are you saying that if you are exempt from VAT, no way will you be allowed to register for VAT?

Persons or transactions, whether subject to VAT, whether the VAT rate may be 0% (zero-rated VAT) or 12%

they’re required mandatorily to register for VAT purposes. Non -registration would mean penalties such a

suspension of business operations, etc.

If you belong to an exempt-person who is not liable for VAT or your transactions in the course of your trade or

business are not vatable, such as fish vendors selling fishes in its original state, then, you’re not a ctually required

to register for VAT purposes but there are instances when you have the option to register, meaning it’s an

optional registration depending on the benefits that you will get from VAT registration.

IV. Persons Liable to VAT

- Who are the persons liable for VAT?

o A. Seller or Transferor (including non-stock, non-profit entities engaged in the course of trade or business)

1. of goods or properties

2. of services

Problem: If you sell a motor vehicle at least thrice every calendar year, can you be considered as

subject to VAT? Say for example, you but a motor vehicle but 3 months after, you get tired of seeing it,

Fisherman – Market vendor – MEGA sardines – Wholesaler – Retailer- Hotel chain – Consumer

80 100 200 300 400 500 560

+ -0- + -0- +36 (12%) +48 (12%) +60 (12%)

GSP – 336 448 560

48 – 36 = 12 60 – 48 = 12




you sell it then you buy, you sell it, you buy, you sell it. Are you covered by the phrase “person subject

to VAT”? Even if the motor vehicles that you’re selling are your personal vehicles but you simply

wanted to change it as often as you change your cellphones? What comes within the coverage of a

seller or transferor? Who is a seller? Who is a transferor?

o Seller or transferor engaged in the course of trade or business.

o What do you mean by “in the course of trade or business” for VAT purposes?

It means the regular conduct or pursuit of a commercial or an economic activity,

including transactions incident thereto, by any person regardless of whether or not

the person engaged therein is a non-stock, non-profit organization irrespective o

the disposition of its net income and whether or not it sells exclusively to members

or their guests, or government entity.

o Does it include the conduct of an activity by a non-stock, non-profit entity?

YES.

o How about a government entity? So are you saying that the government can be subject to

VAT? Are government entities exempt from VAT? Would the sale by the Nationa

Development Company (NDC), a government entity, of 5 shipping vessels to a shipping line

company, a private entity, pursuant to the declared policy of the government for

privatization of the operation of shipping vessels subject to VAT? Would only transactions in

the course of trade or business be subject to VAT or would it include other transactions as

well?

When you say that VAT is imposed on the gross selling price or gross receipts of

every sale, barter or exchange of goods, properties, or services made in the course

of trade or business, it means to say that there is a regular conduct or pursuit of

economic or commercial activity including transactions incidental thereto or even

transactions entered into by a non-stock, non-profit entity, irrespective of where

the proceeds will be used and transactions by the government.

So would NDC be subject to VAT for the sale of the 5 shipping vessels? According toCIR vs. Magsaysay, the SC said that this transaction is not subject to VAT because it

was not done in the course of trade or business of NDC but it does not mean to say

that government entities are not subject to VAT. If the transaction is in the course

of trade or business of a government entity or even non-stock, non-profit

institution, it will be subject to VAT. This is one where the extent of the tax is far-

reaching. Even government entities or non-stock, non-profit so long as you can

identify that these activities are in the course of trade or business. The sale in this

case is not in the course of trade or business because the reason for selling was

pursuant to the policy of the government to relinquish its right over the shipping

vessels due to the privatization policy.

What do you mean by sale or exchange or services? What kind of services are subject to VAT? (Tiu: to

be discussed next meeting)

o B. Importer

Should you be engaged in the course of trade or business to become subject to VAT as an importer?

NO. The importer, whether an individual or corporation and whether or not made in the course of his

trade or business, shall be liable to pay VAT.

December 2, 2010

- PERSONS LIABLE TO VAT:

o 1. Seller or transferor of goods, properties or services

You can call someone who provides service as a seller of services and it should be made in the course of trade or

business

NDC 5 Shipping Vessels Shipping Company

VAT?




EXAMPLE: When you bring in the Philippines personal household effects not in

commercial quantities w/ the intent of using here in the Philippines, you’re either

coming here as a balikbayan or as a NRC finally deciding to resettle in the Phils – al

personal household effects that you’re bringing, except vehicle, aircraft ma chinery

etc, are not subject to VAT or customs duties.

EXPORTATION. If you’re an exporter, will you be subject to vat?

YES, but GR: Subject to zero-percent VAT rate.

What is the reason why importers are subject to VAT regardless of whether or not engaged in trade or business?

Why do we have to charge huge taxes on importations?

Cross border doctrine/destination principle – Whenever there is a sale of goods or services, it is subject

to VAT if made in the course of trade or business in the Phils. Any sale of goods or services outside the

Phils. is the beyond the reach of VAT.

We actually frown upon importations because importations decrease foreign currencies backing our

local legal tenders and in order to regulate goods coming in the Philippines, we subject them to vat on

top of custom duties and also for protection of the local/domestic industries.

o 3. NON-RESIDENT PERSONS WHO PERFORM SERVICES IN THE PHILS.

MUST HE BE ENGAGED IN THE TRADE OR BUSINESS IN THE PHILIPPINES?

SEC. 105 NIRC. The rule of regularity, to the contrary notwithstanding, services as defined in this Code

rendered in the Philippines by nonresident foreign persons shall be considered as being in the course

of trade or business.

GR: For VAT, you always look at the regularity of the conduct of trade or business, except importers

BUT, when it comes to determining the VAT liability of non-resident persons rendering service here in

the Philippines, we disregard the rule of regularity. So any service rendered by a NON-RESDIENT

PESRON, whether natural or juridical, even if it is an isolated transaction, case or service, it will be

subject to VAT because the law treats it as done in the course of trade and business.

EXAMPLE: Any foreign artist for a 1 night concert in the Phils. or modeling service or modeling contract

and goes back to his own country, subject to VAT.

WHAT IF THE NON-RESIDENT PERSON SELLS GOODS OR PROPERTIES HERE IN THE PHILIPPINES, NOT IN THE

ORDINARY COURSE OF TRADE OR BUSINESS, IN AN ISOLATED CASE, IS IT SUBJECT TO VAT?

NO. SEC. 105, it only mentions of non-resident persons performing services in the Philippines. Now if a

non-resident person sells goods or properties in the Phils. not in the course of trade or business, he isnot subject to VAT. Only when he sells it in the course of trade or business will he be covered by vat.

Vat is actually based on consumptions within the Philippines. Now if you purchase services from a non-resident

who comes to the Philippines and render services here, even if it’s not in the course of trade or b usiness, then i

was consumed in the Philippines, it will be subject to vat. But if you purchase goods from a non-resident person

that is simply brought in the Philippines, dba if you purchase raw materials, etc., it will not be necessarily subject

to vat unless it passes through importation.

But the rule on regularity exception does not include goods, only services.

Now in vat, there are persons liable for vat, you will have transactions subject to vat. You maybe a person who is not liable for vat but

since you have entered into a transaction that is vatable, you may have to give up 12% of that value and shoulder the vat.

V. TRANSACTIONS SUBJECT OF VAT:

- 1. Transactions made in the course of trade or business requiring rule of regularity except non-resident aliens performing services inthe Philippines.

- 2. Transactions made incidental to the principal business.

o WHY IS IT SUBJECT TO VALUE ADDED TAX?

An incidental transaction is something that is necessary appertaining to or depending upon another business

which is named or termed as a principal business of the seller or transferor. So in the course of trade or business

you have your main business and you have your transactions incidental to your main business and it is subject to

value added tax.

Example: Manufacturing business, what is an incidental transaction that you can derive from your manufacturing

business?

Delivery charges, handling charges are incidental transactions, which are subject to value added tax.




o INCIDENTAL TRANSACTION VS. ISOLATED TRANSACTION

Is an isolated transaction subject to vat? NO.

ISOLATED TRANSACTION:

If a company, that is engaged in leasing of motor vehicle, decides to sell the motor vehicle because it is

already non-performing or obsolete. Incidental or isolated? Subject to vat or not? SUBJECT TO VAT

because it is an incidental transaction since that property is part of the business itself.

Along the way of your business, you meet these kind of events – obsoleteness – even compute

equipments used in a manufacturing company that becomes obsolete is considered as an incidentatransaction when it’s sold. It is incidental to the business because that property is part of the business

itself and you will actually meet those kind of transactions more often than isolated.

Incidental transaction is subject to vat because it is included in the definition of “in the course of trade or

business”. Isolated transaction is not included in the definition of “in the course of trade or business”.

Example of isolated transaction (not in the course of trade or business) in a manufacturing business:

Manufacturing company may enter into an isolated transaction of selling of real property or of a

manufacturing plant or etc. perhaps when a division of its company closes. Since you are selling a real

property, you don’t intentionally sell it in a regular basis and it does not depreciate in value, it will be

considered as an isolated transaction not subject to vat.

Another example is when it sells a trademark, goodwill, etc., it is isolated, it is not subject to vat, you

don’t sell it in the usual course of trade or business.

- 3. Importations, except those conditionally free importation, meaning exempt if you comply w/ documentary requirements, free

from vat.

o Exportation not subject to vat unless it is made in the course of trade or business.

- 4. Subsequent sale of tax-free importation

o Why is a subsequent sale of an imported product that has entered in the Phils. tax-free subject to vat? Say for example the

subsequent sale is not made in the ordinary course of trade or business, would it still be subject to vat? Corporation A

imported a product into the Philippines free of tax, now corporation A, founding no use of the property sold it to an

individual, not in the course of trade or business, lets just say in an isolated case. Why is it considered as a vatable

transaction?

There are 2 cases of subsequent sale of tax-free importations:

1. Importation of a tax free product regardless of the status of the importer subsequently sold; or

2. Importation of the product that is taxable but exempt because the status of the importer is tax-

exempt and subsequently sold to a non-exempt person

WOULD THE TWO SUBSEQUENT SALE SUBJECT TO VAT?

If the original importation refers to the exemption of the product itself, its subsequent sale would no

be subject to vat. The number of passages or transfers from one person to another will not matter if

the exemption is on the product itself – not subject to vat.

But if the exemption of the original importation was due to the status of the importer being tax-free

its subsequent sale, whether or not made in the course of trade or business, would be subject to vat.

The reason there is to prevent/avoid circumvention of the law. If you look into the economic zones,

these corporations are exempt from vat, customs duties on goods, equipments, even vehicles coming

into the Philippines. If you’d want to purchase a vehicle that is outside of the country and purchase it

tax-free, have it been no provision of this law, you just have to simply request these companies within

the economic zones, who are tax-exempt, to import the vehicle and you will purchase it from them

you avoid the tax. But because of this provision, you will be subject to vat because the law treats you

as a technical importer. The subsequent sale of these tax-free importations is considered as anothe

importation subject to vat or customs duties.

VI. Transactions Deemed Sale

- Transactions deemed sale. Why is it subject to vat? Is it really a sale? NOT REALLY.

1. Transfer, Use or Consumption Not in the Ordinary Course of Trade or Business

o 1. Transfer, use or consumption, not in the course of business, of goods or properties originally intended for sale or for use

in the course of business




Example: When a vat-registered person withdraws goods from his business for his personal use

There are movements in your business w/c are not necessarily made in the ordinary course of trade or business

You consume a particular product of your business, you use, you transfer, although the consumption, transfer o

use is personal and not in the course of trade or business, it maybe considered a transaction subject to vat being

a transaction deemed sale if what you are transferring, consuming or using is a good or property that is originally

intended for sale or for use in the course of trade or business.

Why? Because you are depriving the government of collecting value added tax had that property been sold to a

third party or a consumer, so in order to cover up for that deprivation of taxes that could have been collected or

due, the government will collect from you vat based on the market value of the product or inventories.

December 7, 2010

2. Distribution or transfer to shareholders/investors and creditors

- 2.1. Distribution or transfer to shareholders/investors

o What do you mean by shareholdings?

It is the interest in the corporation. You don’t give out your interest in a corporation. Your interest in the company

remains as your capital and whatever is earned by your interest in the company is called profits/dividends

o So what is it that are transferred to stockholders/investors that are subject to VAT?

There is distribution / transfer of ___ as profits to shareholders/investors

Property dividend.

o But what kind of properties?

Not all property dividends are VAT-able.

Property dividends which constitute stocks in trade or properties primarily held for sale or lease distributed

to stockholders/sharholders.

Ex. In a furniture manufactiuring business what may be given to Shareholders/investors that can be

subject to tax? Their furnitures.

o Shareholders and investors in corporations have invested capital to expect something in return as dividends. We have

indentified many types of dividends before – property dividends, cash dividends, liquidating dividends, etc and these types of

dividends if not categorized as stock dividends will be subject to income tax. But there is one type of dividend that is not only

subject to income tax but maybe exposed to the liabilty for payment of VAT.

This is property dividend distribution. When properties are distributed as dividends would fall under the category ofgoods which are intended for sale as part of its inventory or used in business.

o The reason here is that:

Had this properties not been distributed as dividends and sold to consumers, the government would have

collected VAT from the sale, or

Had the corporation first sold this properties in order to have it converted into cash and later on convert it to

cash dividends, the government could have collected VAT.

So in every business, whenever there are inventories/goods primarily held for sale, the government has already

earmarked or put attention into those inventories and expects to collect the entire 12% VAT on these items. Anything

that has been missing, whether it’s been disposed of in an outright sale or personally consumed by the owner o

distributed as profits/property dividends by the corporation to its stockholders, this does not deviate from the

payment of VAT, which the government already expects to collect.

o So if there are 100 furnitures in the business, 50 items of which are distributed to the owners. The government

treats it as a deemed sale transaction subject to VAT.

If it’s a property dividend you not only pay the withholding tax of 10% for resident citizens, 20% for NRA-ETB, 25% fo

NRA-NETB. ON top of these income taxes withheld by the corporation, the corporation may also be paying 12% VAT

So the best way to distribute dividends, is not really thru property dividends but cash. But if you really have no cash,

your option may only have to sell your inventories first then pay cash dividends. But still did not avoid 12% VAT.

- 2.2 Distribution or transfer to creditors

o Distribution or transfer of goods that are originally intended for sale or used in business distributed to the creditors for the

purpose of paying debts.




o In some instances you might be paying your creditors not in cash, if you are not liquid, but offer to pay in goods. And if the

goods that you are transferring to your creditors in settlement of your obligation is either:

o is a good that is intended originally for sale or

o part of your inventory or

o is a good that is used in business

which could have gathered VAT had it been sold first to consumers and the proceeds pay the creditors this will be subject to the

VAT, if you use the shortcut of paying these goods to the creditors.

o What value should we base for the VAT?

Ex: If your indebtedness is 3M and you’re engaged in a realty business. You used up one subdivision lot to pay off your

debt of 3M and the selling price of the property is 3.5 M. The creditor gladly accepted it.

What is the basis of your VAT? The indebtedness of 3M or the FMV of 3.5M?

o VAT is based on the value of goods or property that you are selling/bartering/exchanging and the value of tha

property is 3.5M.

o You do not look at the value of indebtedness because had you sold the property for 3.5M, you could have been

liable to the government for 12%.

How about if the value of the property is 2.5M and the creditor accepted it.

o The base is still the value of the property. Any difference is considered a condonation of indebtednesss subject

either to income tax or donor’s tax.

o FMV at the time of payment since it is the time that it has been sold

How about if it’s services you use to pay off the deb t?

o If you are NOT primarily engaged in rendering that service

It’s not VAT but income tax

o For it to be covered by VAT, it has to be something that the government would have expected to collect VAT

Ex: Free Rent

Only if it’s VAT-able in the first place; if it is not covered by the exemption like the first 10,000 for

residential unit.

You base it on the valued at the time the exchange took place.

3. Consignment of goods

- Ex. Mr. RG is into the business of selling clothes and he consigned the RTWs to Ms. MO

o When is the reckoning point for the imposition of VAT

Regardless of WON you were able sell the goods, so long as it is not withdrawn by Mr. RG within 60days from consigning it

VAT has to be collected

o Who is deemed the statutory taxpayer?

Mr. RG because he is the seller. Ms. MO is only the purchaser.

o How to avoid payment of VAT in this situation?

(a) Return the goods, or

(b) The consignor withdraws the items before the 60-day would lapse and reconsign it again.

- These supermarkets/department stores are actually holding most items under consignment basis and in order to avoid VAT being

collected by the government from the consignor it would have to be returned before the lapse of the 60-day

o Ex: if you consign 100 items and on the first day you sold 1 item, that item is considered sold. And if 60days would lapse and the

remaining items has not been returned, everything is considered sold, the remaining items are considered sold.

- Note that consignment does not involve physical change of the goods consigned (e.g. flour to bread)

o If you convert that, it’s actual usage and it’s considered sold.

4. Retirement from or cessation of business

- Ways




o 1. Entirely stop business

o 2. Change business form (e.g. from sole proprietorship to partnership/corporation)

o 3. Merge/consolidate

- If you cease operations or retire your business, why would you be paying VAT when no sale of good actually took place?

o Just like any other transactions deemed sale, whenever it concerns of a property that is originally intended for sale to

consumers, the government is already eyeing the collection of VAT for all these items of inventories.

o What is peculiar in retirement or cessation of business is that you are not actualy making any transfer nor distribution, yousimply stop business operation or continue with another type of business operation.

- One of the reason why it’s also imposed with VAT is that these inventories actually form part of your earlier purchases from which

you claim tax credit thru the input taxes which if you do not declare any output tax or VAT as if deemed sold it would have deprived

the government, not only the VAT of the those items left at the time of cessation but also depriving the government of the input

taxes that you have claimed when you purchased the items. So it’s a double whamming for the government.

- There are many types of retirement from or cessation of business that will be considered transactions deemed sale, including:

o Change of ownership of business (single proprietorship to corporation);

o Dissolution and

o Creation of a new partnership taking over the new business.

- Another type of cessation of business but not really stopping the business is 1 and 2:

o Change in business activity from VAT-status to VAT-exempt.

Now this is just like you cease VAT operations but not really your business. Now if you move from being vatable to exempt

either:

(1) because you have optionally registered from VAT even if you are not vatable in the first place or

(2) you realized that you are not going to meet the 1.5M mark for any 12-month period, you want to be exempt na

after the irrevocable etc etc. (we will reach that once we are in the second page).

o But the point is once you become free from VAT registration, you move to the next phase of being exempt. It

will be treated at that point a retirement or cessation of your VAT operations. Any inventory at that point will be

subject to VAT in order to cover for the input taxes that you have claimed when you purchase these items for

sale.

VII. VAT Rates

- What are the different VAT rates involve in VAT?

o 12% and 0%

- When did we increase our VAT rates from 10% to 12%?

o The amendments to the provisions of VAT in 8424 came about in RA 9337 which took effect July of 2005. Int that law, 9337,

Congress stipulated that VAT may be increased from 10 to 12% if the GNP factors will be met and the increase shall be

promulgated by the President. It will be easy to meet the factors required so less than a year after in February of 2006

President Arroyo increase the tax rate from 10% to 12%.

- Is this not unconstitutional? Is she not venturing into lawmaking or promulgation of statutes which is not covered by the executive

branch of the government? Is this not violative of the non-delegation of the authority to promulgate laws that remains exclusively to

Congress?

o No!

o It is only ministerial on the part of the President to increase the rates as provided by the standards and parameters set by

Congress in the first place. Without those standards and parameters, it would have been illegal for President Arroyo to increase

the rate from 10 to 12% because the provision of the law cannot be changed without an act of congress.

- What is covered by 0% vat? Why do we even considere this zero-rated or subject to zero? Why not just say exempt from tax? IS

there a difference between the two?

o There is a big difference. It may be similar in a sense that whenver a seller of transaction will not collect VAT from the

consumers, it will not pass on VAT to the consumers and in turn will not remit VAT to the government. But they are different in

the sense that in zero-rates, whatever purchases you have and you have paid VAT in your purchases, you recognize it as a credi

against the zero.




o So later on, you file for a refund. So whatever VAT you paid to your supplier, you will recognize it as a VAT. IN exempt sellers

whatever you paid input VAT to your suppliers, you do not recognize it as a VAT. You simply recognize it as part of your cost of

purchase.

- What is the dominant transaction subject to 0%?

o Export sales – in order to encourage inflow of foreign currency.

- Why is sale of gold to BSP zero rated? Why not exempt?

o If you look into the transactions subject to zero percent you will know that there is an underlying reason why they extend favo

to these type of transactions, either we encourage exportation of certain products in the Philippines in order to have inflow oforeign currency, in order to strengthen the reserves we have with the legal tender we are issuing. More of these transactions

are intended for the economy.

Cross Border Doctrine or Destination Principle

- What is cross-order doctrine?

o No VAT shall be imposed to form part of the cost of goods destined for consumption outside the territorial borders of the

Philippines. IF it is intended for consumption abroad, no VAT shall be imposed on that item that you are selling for abroad.

o An actual export of item will be considered free from VAT. Because if it physically exported outside, it is deemed that

consumption is also outside. But if you look into the enumeration of these transactions, you will notice that there are sale

delived in the Philippine territory but subject to zero-rate. But there are requisited to follow.

- Is cross-border doctrine same as destination principle?

o The essence of both are the same. One underlying principle. Where it is destined for consumption will the VAT be collected. I

the consumption is destined for abroad, no VAT will be imposed but if destined for consumption here in the Philippines, then it

will be subject to VAT. That is why services rendered by non-residents even in an isolated case will be subject to VAT because

the consumption of the one who hired the non-resident, consumption will be in the Philippines.

o Slight difference is that in cross-border doctrine it mentions of territorial borders, beyond the territorial borders of the taxing

jurisdiction of the Philippines. In destination principle, so long as goods and services are destined for consumption in anothe

country, then it not be subject to VAT.

o As a general rule, our jurisdiction uses the destination principle or cross-border doctrine as a basis for the jurisdictional reach of

the tax. We can only tax wherein it is consumed in the Philippines.

- Consumption subject to VAT: It is can be categorized to three: Sale of goods, property or service.

REAL PROPERTY

- Sale of real property not primarily held for sale, is it subject to VAT?

o It will depend on who is selling it. If the seller of the real property is in a realty business (seller/lessor), whenever you sell rea

property it will be automatically subject to 12% VAT.

o But a real property may be sold by an individual person not into business or a corporation that is into business but not rea

property business.

- If seller is a person not engaged in trade or business, forget about VAT.

- If the seller is a corportation that is not engaged in realty business, it may be subject to VAT or may not be subject to VAT depending

on the use of property and how was it sold.

o Was it sold incidentally or isolated? If isolated, no VAT.

o If incidental, not held for investment/speculative purposes but part of that which is used as an office space etc, it may be

subject to VAT. It will be on a case-to-case basis.

- Now, when you say sale of goods/property in the course of trade or business, property here usually we mean property sold by a

realty business.

o We have learned last meeting that if the property sold by one engaged in realty business is a residential unit 1.5M exempt i

residential lot, 2.5M or below still exempt for residential house and lot. Anything beyond this amount is subject to tax.

- What if the property sold is a commercial lot sold at 1M? Is it subject to VAT if seller is in realty/leasing business?

o Yes. If it is a commercial lot or any type of lot aside from residential, there is no threshold or limit or ceiling for exemption.

Everything is taxable. If the one selling is in a realty business.

SERVICES

- For services, is a domestic common carrier by air or sea subject to VAT? Yes.




o By land?

If it is with regards to persons, 3% percentage tax. But if cargo/goods, it will be subject to 12%VAT.

- Sale of electricity?

o It is subject to VAT.

o But there are exemptions/discount for senior citizens).

- Non-life Insurance companies? Fire insurance? Fidelity insurance?

o Non-life – subject to VAT

o Life – not subject to VAT

- What is the difference between effective and automatic zero-rated transactions?

o Automatic – the best example is export sale. Generally the actual exports of goods/supplied services abroad

o Effectively zero rating – it is as if it is zero-rated. You associate it with sale of goods or supply of services to those entities which

are IN the Philippines but are granted indirect tax exemptions by special laws or international agreement. Like PEZA companies.

DECEMBER 9, 2010

- There are certain transactions enetered into by VAT registered persons that are considered as zero-rated. So you have to take note

in order for a transaction to be zero-rated, the seller has to be VAT registered.

o What did we say earlier as to VAT registration? Who are required to register under the VAT System?

It is both persons who are

(1) subject to the 12% vat or

(2) subject to the 0% vat.

If no VAT registration is made and it is an export sale, we cannot that consider that as zero-rated, it is simply an exempt

sale.

But still the effect as we have said, in so far as the passing on of the tax to the consumer is the same. No value added tax

will be passed on or shifted to the consumer in both zero-rated transactions and exempt transactions. So it will differ in so

far as claiming input taxes (which at this point you are still not very well verse).

IX. TRANSACTIONS SUBJECT TO ZERO-RATE

- So let’s proceed discussing the different zero-rated transactions.

ZERO-RATED OF GOODS AND PROPERTIES:

- What are the zero-rated sale of goods under the law (without reading)?

o 1. Export Sales

o 2. Foreign Currency Denominated Sales

o 3. Sales to persons or entities whose exemption under special laws or international agreements to which the

Philippines is a signatory effectively subjects such sales to zero-rate.

Export Sales

o (1) If it’s an export sale

What do you mean an export sale?

o The sale and actual shipment of goods from the Philippines to a foreign country.

So if we sell goods to a consumer who is outside the Philippines, we can categorize that as an export sale and

we get the benefits under the zero-rated tax system? No.

o What are the export sales under the law which can result to zero-rating of the sales?

FIRST. Under the law, the sale and actual shipment of goods from the Philippines to a foreign country

irrespective of the shipping arrangement that may be agreed upon, can be considered as an actual export

sale. But there are other 2 requirements:

(a) Paid for in acceptable foreign currency or its equivalent in goods or services




(b) And accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas.

o What does “accounted for in accordance…” mean? Does payment have to be made o

coursed through BSP?

It means it must be in accordance with the rules and regulations of the BSP. Not

necessarily coursed through BSP.

What is the basic difference or what are the differences between an actual export sale and an export

sale that is not directly made? (Not answered)

SECOND. Another kind of sale that may qualify as a zero-rated export sale which is not really an actual exportor an actual shipment abroad is the shipment or the sale of raw materials or packaging materials to an export

oriented enterprise whose export sales exceed 70% of total annual production.

o The sale of raw materials or packaging materials to an export-oriented enterprise i

considered as a constructive export because the raw materials or packaging materials that

you are selling to these kinds of export oriented enterprises will form part of the products

that will be manufactured and eventually sold abroad by these export-oriented enterprises.

Again, what is an export-oriented enterprise? What do you mean export-oriented enterprise as the

recipient of the goods that you are selling?

o "Export-oriented enterprise" is one primarily devoted to the production of goods and

services for export that demonstrably contributes foreign exchange to the economy

(Remains unanswered. Thus, made a research)

Must the sale be made in acceptable foreign currency for it to be considered as zero-rated transaction?

Must it be accounted for under the rules of BSP? Give me an example of an export-oriented enterprise

Is it possible that a certain company outside any economic zones may be considered as export-oriented

enterprise and the sales to it will be zero-rated?

o Export-oriented enterprises are not limited to corporations that are located within the

economic zone. It can be any corporation located anywhere in the Philippines.

o And for these to be met, the zero-rated transactions, there is no requirement that it must be

paid in acceptable foreign currency or accounted for by the BSP.

Why? Because eventually when it will be sold by the export-oriented enterprise to an

outside or foreign buyer, then it will be covered by no. 1 actual export sale.

THIRD. We’ll move on to the other type of export sales. Sales of raw materials or packaging materials to a

non-resident buyer.

So (Ms. Tiu makes a summary first):

(a) The first that we have identified as an actual export sale is the sale of goods. It is not raw

materials.

(b) The second export sale that we have identified is the sale of raw materials or packaging

materials to an export-oriented enterprise in the Philippines and eventually will form part of

the product that will be sold abroad.

(c) Now the third type of export sale is the sale of raw materials still or packaging materials

sold to non-resident buyer.

In the third, is this an actual export sale? So are you saying that the delivery of these raw materials or

packaging materials are made directly abroad? Who is that non-resident? Subcontractors?

o In the third scenario, what we are selling is raw materials or packaging materials intended for

a buyer abroad but its delivery is not for shipment abroad but rather delivered to a resident

buyer who will convert or use the products as intended by the non-resident buyer.

o The other 2 requirements for it to considered zero-rated are:

(a) Paid for in acceptable foreign currency or its equivalent in goods or services

(b) And accounted for in accordance with the rules and regulations of the Bangko

Sentral ng Pilipinas.

FOURTH. Sale of gold to the Bangko Sentral ng Pilipinas.

So if we sell gold to other banks other than BSP or other buyers to BSP considered as zero-rated

transaction? NO.




Sale of silver or other mineral products to BSP zero-rated? No.

White gold or yellow gold? (hehehehe)

FIFTH. Sales of goods, supplies, equipment and fuel to persons engaged in international shipping or

international air transport operations.

Again, what is sold? Goods, supplies, equipment and fuel.

To whom? To persons engaged in international shipping or international air transport operations.

So if we sell goods, supplies, equipment and fuel to PAL or Cathay Pacific in Cebu Mactan airport, isthat zero-rated? Yes.

Is there a special requirement for it to be considered as zero-rated?

o Yes.

o In order to avail of such zero-rated sale of goods, supplies, equipment and fuel, it must be

the sale must be limited (when you say international shipping or international air transport)

to transport of goods and passengers from the port in the Philippines directly to a foreign

port without any stop over or without docking even if it’s a simple stopover. Otherwise, tha

portion between Philippine ports will not be considered as zero-rated.

Example: You sell fuel to PAL. Flight is Cebu-Manila-LA and back. Is that zero-rated? No.

SIXTH. Is there other zero-rated sales as identified by the regulations? Yes. Sale under the Omnibu

Investments Code.

If you look into the regulations, there are 3 categories of zero-rated of goods or properties:

o First, export sales.

o Second, foreign currency denominated sales.

o Third, sales to persons who are granted indirect tax exemptions by international laws or our

own special laws.

We are still in export sales and in export sales we can have actual export sales, constructive indirect

export sales or other export sales. At this point, we have identified already:

o Actual export sales

o Indirect export sales which is sale of packaging materials and raw materials to a non-resident

buyer but delivered to a resident buyer.

o Constructive exports or indirect sale to an export-oriented enterprise.

o Another indirect export is when you sell goods, fuels, supplies and equipment to an entity

that is engaged exclusively in international shipping or air transport operations.

o And sale of gold to BSP.

o One more is left which is sale under the Omnibus Investments Code which is considered as

constructive export. Although sale to export processing zones can still be covered by those

granted indirect tax exemption by a special law which is RA 7916.

So what we will consider under the Omnibus Investments Code strictly are sales to:

o Bonded manufacturing warehouses

o Export traders operating bonded trading warehouses

o Sales to diplomatic missions and other agencies including sales probably to embassies and

consulate officers.

Foreign Currency Denominated Sales

- What is a foreign currency denominated sale?

o A sale

- If you make a sale of a jewelry and the buyer is a non-resident but it was delivered to a resident in the Philippines paid for and

acceptable in foreign currency accounted for in the rules of BSP. Can this be considered as a foreign currency denominated sale that

can be considered as zero-rated transaction?

o NO.




o What is excluded in the coverage of FCD Sales or Foreign Currency Denominated Sales are sale of:

o A. Jewelry

o B. Precious Metals or semi-precious metals

o C. And automobiles.

If these are sold, whether its to a non-resident buyer delivered to a resident person paid in foreign currency, it will not be

considered as foreign currency.

Why? Because it is specifically excluded in the coverage.

What is an automobile? Trucks have 4 wheels.

Sale of motor vehicle to a non-resident buyer, delivered to a resident, paid in foreign currency and underwent inward

remittance in accordance with the BSP. Zero-rated? No. It is pertaining only to 4-wheel motor vehicles.

When you say automobiles, it is strictly pertaining to 4-wheel motor vehicles. That excludes 2-wheels nor trucks

buses, vans, etc.

Sales to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory.

- And the last zero-rated sale of goods or properties would be: Sales to persons or entities whose exemption under special laws or

international agreements to which the Philippines is a signatory effectively subjects such sales to zero-rate.

- If you remember in general principles, we have said that whenever a company is granted exmeption whether total partia

exemption, it does not include exemption from indirect taxes. Unless, there is a law which specifically provides for exemption for

indirect taxes.

o And these special laws or international agreement for example with the Philippines Economic Zone locators or companies

inside, they have been granted indirect tax exemption, granted VAT exemption, under a special law which is RA 7916. The

general principle would not apply to them.

o For this reason, they cannot be passed on with VAT. If the seller is VAT registered, the seller would simply treat the transaction

or sale to these PEZA companies as zero-rated. If the seller is NON-VAT registered, simply treat the sale as exempt.

ZERO-RATED SERVICES:

- Zero-rated services would it differ from zero-rated sale of goods? We don’t actually have an actual export of service unless. I mean

how do we actually export service? Can it happen? How? Example? Under the law or regulations, what is covered by the zero-rated

sale of services? Is the service limited to the processing, manufacturing, or repacking goods?

o Let’s make this easier class. What you find in export sale of goods and in export sale of services are just the same. One is

categorized as sale of goods, the other is categorized as sale of service.

No. 1, export sale of goods is a sale on actual shipment of goods. No. 1 sale of service is the manufacturing, processing, or

repacking of goods for persons doing business outside the Phils.

No. 2 in sale of goods is not the actual shipment of goods but the sale of raw materials. The second sale of service is simply

other services not covered by No. 1. So it’s just the same.

When you look at No. 3 of export sale of goods, you sell raw materials and packaging materials to export-oriented

enterprise, is it the same as any of the export sale of services? Can you sell services to an export-oriented enterprise and

still be considered zero-rated?

YES, in No. 5 sale of service, services performed by subcontractors and contractors in processing, converting, o

manufacturing goods for an enterprise, whose export sales exceed 70% of its total annual production.

o So basically, you can just compare both sale of service and sale of goods

o Sale of power fuels, is that a sale of service? Or is that a sale of goods?

SALE OF SERVICE. Why is it classified as a sale of service?

The sale of power and fuel is considered as just simply a sale of electricity by VECO. Sale of power or

fuel, why is it considered as exempt? Does the sale have to be made to a company that is an export-

oriented company or directed to a buyer abroad?

o What it simply says is that if you sell power or fuel that is generated through renewable

sources of energy, that would be zero-rated regardless of who will avail of your service or

electricity. But this shall not extend to the sale of service in the maintenance and operation

of the equipments or plants generating such power. So it’s only limited to the electricity or

fuel that is generated. Any maintenance services, repairs on the equipments, etc,. will not be

considered as zero-rated.




How about international shipping and air-transport operations, can they avail of zero-rated services in the Phils.?

That’s basically the same as what you have learned earlier in sale of goods, fuels, supplies and

equipments to those engaged in international shipping and aircrafts.

What other sale of services are zero-rated?

Services rendered to persons or entities whose exemption under special laws or internationa

agreements

Example: Entities that are located in the economic zone. How about those entities which have been

granted exemption under international agreements? IRRI (International Rice Research Institute) andAsian Development Bank.

So if you can sell goods or properties to companies that have been granted indirect tax exemption

under international laws or special laws, you can also sell services which are zero-rated to the same

institutions.

If you purchase a ticket for the U.S., airline ticket, is that subject to VAT?

YES as to the sale of goods, supplies, equipments. But in the transport of passengers and cargo by PAL

Cebu pacific or even sea carriers from the Phils. to a foreign country, it is zero-rated. You don’t pay any

VAT.

Try purchasing a ticket to San Francisco or L.A., you won’t be imposed of any VAT. The only tax that you

will be paying is airport tax.

X. TRANSACTIONS EXEMPT FROM VAT

- EXEMPT SALE

o What is the difference between an exempt sale and a zero-rated sale?

0% Exempt

Registration X

Pass-on/shift X X

Input VAT on purchases X

Usually, when you say automatic zero-rated sales, it pertains to sales that are actually exported. Indirect or

constructive sales are simply considered as effective zero-rating such that if you sell to an export-oriented

enterprise, you need to seek for approval from the BIR that you’re sales of raw materials is co nsidered as zero

rated. The difference between exempt sales and zero-rated sales:

1. If you are zero-rated, do you need to register with the BIR as a vat-taxpayer? YES. You need to

because you are selling vatable transaction. The difference lng is that it’s not 12% vat but zero-rated

Exempt transactions, do you need to register with BIR? NO. You don’t need to register under the vat

system.

2. Can you pass-on/shift 12% tax on your sales if you’re zero -rated? NO. If you sell an internationa

ticket, do you pass-on vat to your client or customer? NO, zero. You pass vat at 0 – anything multiplied

by zero is 0. In exempt sales, if you sell roasted chicken, takeout, do you pass-on vat? NO. You’re no

required to pay vat to the BIR.

3. Any one of us will become purchasers of goods or services, even a zero-rated seller of goods wil

purchase something and convert it and sell it as well. Even exempt sellers of goods will have to

purchase a raw material, convert it and sell it again.

o If you’re a zero-rated seller of goods and you purchased your raw materials from someone

will you be passed on with vat? It can be a yes or a no. If you’re passed -on with vat, will you

recognize it as an input vat on purchases? You’re registered under the vat system, therefore,

any vat that has been passed-on to a vat-registered person will always be considered as vat

in the books.

o If you’re exempt, such as USC, exempt from vat, if USC pays vat on a certain table, when it

purchased such table, vat was passed on. Why was it passed on? Because the seller of the

table is actually selling a vatable goods. Will USC recognize the vat on such table as input vat?

NO.




o VATABLE.

The dried fish in the grocery or rice, etc. is not subject to vat.

Is cotton or cotton seeds subject to vat? YES, even in the raw state of cotton or cotton seeds, it’s

already subject to vat.

How about copra? Subject to vat or not? NO. So it remains as exempt.

How about petroleum products and its raw materials? Exempt from vat or subject to vat? SUBJECT TO

VAT. This is one of the items which have been stricked off its exemption.

- Electricity? NOT EXEMPT. It’s vatable. This is again a service that has been removed from exempt services. Electricity is alr eady

subject to vat.

- How about legal services? Are lawyers subject to vat? So if a lawyer is connected with a multinational corporation as its in-house

legal counsel, will the lawyer be liable for vat?

o Legal services are subject to vat, general rule. There are exceptions, such as when there is employer-employee

relationship.

o If you’re a lawyer as an in-house legal counsel for a company, your income or compensation or salary from that company is

not subject to vat.

o GR: If you are a professional with PRC license or the IBP, etc., you will be subject to vat except:

1. If your income is derived from an ER-EE relationship, there’s no vat.

2. If your income as a lawyer does not exceed 1.5M in any 12- month period, you’re not subject to vat

- Hospital services, is it the same as medical services and professional services of doctors subject to vat? Same rules as the lawyers. If

a doctor, just like any other professional, derives income from independent professional services, not from ER-EE relationship, it wil

be subject to vat unless the income during any 12-month period does not exceed 1.5M. If it exceeds 1.5M, you have to registe

under the vat system.

- Would your payments, say for example, a friend of yours gets hospitalized. In the bill, there’s hospital service inclu ding operating

room, doctor’s professional fees and bills from the pharmacy inside the hospital – the drugs were used for the operation. Which of

those items are subject to vat and which are exempt?

o Hospital service fees are not subject to vat including the charges for the drugs and medicines.

- If the hospital operates a pharmacy within, would the sales of medicines be subject to vat?

o It depends.

o In the case of CIR vs PROFESSIONAL SERVICES INC., CTA en banc case, sale of medicines and drugs by a pharmacy ins ide the

hospital may or may not be subject to vat. If the medicines or drugs are sold to an in-patient and included in the hospita

bill, it’s exempt because it will be absorbed by hospital services and bills. But if it’s sold to outsiders or out -patients, it wil

be subject to vat.

taxation 2 part 1

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