REVIEW NOTES FOR TAXATION 2TRANSFER TAXATION Transfer Taxes y those imposed upon the gratuitous disposition of private property Under our law, they are taxes levied on the transmission of private properties from a prior decedent to his heirs in the case of estate tax, or from a donor to a donee in the case of donors tax.

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ability to contribute to governmental income; and d.) Privilege theory or State Partnership theory Inheritance is not a right but a privilege granted by the state and large estates have been acquired only with the protection of the state. The State, as a passive and silent partner in the accumulation of property has the right to collect the share which is properly due to it. Incidence or burden of estate of tax Three views on who is the taxpayer in estate taxation: 1. PREDECESSOR the object of the tax is the property which has been held or accumulated by the deceased and the tax has fallen upon him in the sense it has affected the amount of the property which he could dispose. SUCCESSOR the tax is not paid by the predecessor who has no liability till he dies and who is free to ignore the duty if he wishes, while the successor comes into less than he would have, and has no kind of redress. No Personal Incidence - the estate tax has no personal incidence at all, merely falling upon the estate as such.

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Kinds of Transfer Taxes 1. Death / Estate taxes - those levied on the gratuitous transfers of property upon ones death, formerly comprised of the estate and inheritance taxes: Both taxes are now integrated into one estate tax. 2. Gift Taxes - Are imposed on the gratuitous transfers of property during ones lifetime, formerly comprised of the donors and donees gift taxes; both taxes are now integrated into a donors tax.

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3. I. DEATH / ESTATE TAX Estate tax y graduated tax imposed on the privilege of the decedent to transmit property at death and is base on the entire net estate, regardless of the number heirs and relations to the decedent. a transfer tax not a property tax. tax on the right to transmit property at death and on certain transfers which are made by the statute the equivalent of testamentary dispositions.

Law applicable Estate taxation is governed by the statute in force at the time of the death of the decedent. Reciprocity There is reciprocity if the foreign country of which the decedent was a citizen or resident at the time of his death: 1.) Did not impose an estate tax; or 2.) Allowed a similar exemption from estate tax with respect to intangible personal property owned by Filipino citizens residing in that foreign country. Note: 1. Reciprocity applies only when: a.) The property is an intangible; and b.) The decedent is a nonresident alien 2. The following intangibles are deemed located in the Philippines: (an exception to the principle of Res Mobilia Sequuntur Personam and Situs of Taxation) a.) Franchises which must be exercised in the Philippines; b.) Shares, obligations or bonds issued by any corporation or sociedad anonima organized or constituted in the Philippines in accordance with its laws; c.) Shares, obligations or bonds issued by any foreign corporation 85% of the business of which is located in the Philippines; d.) Shares, obligations or bonds issued by any foreign corporation if such shares obligations or bonds have acquired a business situs in the Philippines; and e.) Shares or rights in any partnership, business, or industry established in the Philippines.

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Nature of Estate Tax y It is not a direct tax on property nor is it a capitation tax, that is, the tax is laid neither on the property, nor on the transferee or transferor, but on the right of the decedent to transmit his estate. y It is not a property tax but an excise tax. Purpose and justification of estate tax: The following theories have been advanced to justify death taxation: (BRAP) a.) Benefit-Received Theory For the performance of services rendered by the government in the distribution of the estate of the decedent and other benefits that accrue to the estate and the heirs, the state collects the tax. b.) Redistribution of Wealth Theory Estate tax is a contributing factor to the inequalities in wealth and income. The imposition of death tax reduces the property received by the successor bringing about a more equitable distribution of wealth in society. c.) Ability to pay theory The receipt of inheritance places assets in the hands of the heirs and beneficiaries thereby creating an ability to pay the tax and thus,

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REVIEW NOTES FOR TAXATION 2GROSS ESTATE y the total value of all property, whether real or personal, tangible or intangible belonging to the decedent at the time of his death, situated within or outside the Philippines, where such decedent was a resident or citizen of the Philippines. y In the case of a nonresident alien decedent, it shall include only property situated in the Philippines. -

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A transfer with the thought of death. The term in contemplation of death means that the impelling or controlling motive is the thought of death, regardless of whether the transferor is near the possibility of death or not, which induces the disposition of the property for the purpose of avoiding the tax. Example: donation was made concurrently with the execution of a will (Vidal de Rocs vs. Posadas, 58 Phil 108)

Property Included in the Gross Estate (INCLUSIONS): A. In case of resident citizens, nonresident citizens and resident aliens: 1. Real Property within and without the Philippines; 2. Tangible personal property within and without the Philippines; and 3. Intangible personal property within and without the Philippines. B. In cases of nonresident aliens: 1. Real property within the Philippines; 2. Tangible personal property within the Philippines and; 3. Intangible personal property within the Philippines, unless there is reciprocity in which case, it is not taxable. Note: These are either: A) Properties actually owned at the time of death B) Properties deemed by law to be owned by the decedent under Sec. 85 Inter Vivos Transfers Subject to Estate Tax The gross estate extends to gratuitous transfers made by the decedent during his lifetime which are treated by the law as substitutes for testamentary dispositions. They are transfers inter vivos in form but mortis causa in substance. Rationale for taxability: To reach such transfers which are really substitutes for testamentary dispositions and thus prevent the evasion of the estate tax. These transfers are: a.) transfers in contemplation of death (sec.85 b); b.) transfers with retention or reservation of certain rights (sec.85 b); c.) revocable transfers (sec.85 c) d.) transfers of property arising under a general power of appointment ( sec.85 d); and e.) transfers for insufficient consideration (sec.85 g) Note: Transfers by virtue of a bona fide sale of property for an adequate and full consideration in money or moneys worth are excluded and not taxable. INCLUSIONS IN THE GROSS ESTATE (CR2IG DIP) 1) Decedents interest at a specific property - To the extent of the interest therein of the decedent at the time of his death. (Sec. 85 A) Ex: partnership interest, dividends

Circumstances taken into account in determining in whether the transfer was made in contemplation of death: A.) Age and state of health of the decedent at the time of the gift; B.) Length of time between the gift and the date of death; and C.) Concurrent making of a will or making a will within a short time after the transfer. Note: Check the factual settings before and at time of death because proximity to death is not always conclusive. Examples of motives precluding the category of a transfer in contemplation of death: a.) b.) c.) d.) e.) f.) g.) To relieve the donor from the burden of management; To save income or property taxes; To settle family litigated and unlitigated disputes; To provide independent income for dependents; To see the children enjoy the property while the donor is alive; To protect the family from hazards of business operations; To reward services rendered

Note: The THREE (3) YEAR PRESUMPTION provides that any transfer of a material part of his property in the nature of a final disposition or distribution thereof made by the decedent within three years prior to his death without such adequate and full consideration shall, unless shown to the contrary, be deemed to be have been made in contemplation of death. This provision, however, has been already deleted in Sec. 100 (b) now sec. 85 (B) of the Tax Code by PD No. 1705. Under BIR Ruling No. 261 September 2, 1987, the law does not specify the number of years prior to a decedents death within which a transfer can be considered in contemplation of death. Note: In relation to transfers with retention of rights which are made in contemplation of death if the right of retention by the Decedent is co-terminous with his lifetime. - Ex: X has a house and lot which he transferred to Y a) with the condition that X will use it while X lives - Effect: Still part of estate of X as he has control over it b) with the condition that X will use it only for 10 years and then X dies before 10 years - Effect: Not part of the estate of X as he is not the actual owner

2) Transfer in contemplation of death

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REVIEW NOTES FOR TAXATION 2

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3.) Transfer with retention or reservation of certain rights - This contemplates the instances where the owner transfers his property during his lifetime but still retains economic benefits (the possession or enjoyment of the property or the power to designate the person who may exercise such rights). - It includes: A. Transfer without retention of interest but intended to take effect at or after the decedents death. - Example: donations mortis causa. B. Transfer with retention of interest in respect to: - 1. The possession or enjoyment of or the right to the income from the property; or 2. The right either alone or in conjunction with any person, to designate the person who shall possess or enjoy the property or the income therefrom. And such interest is retained by the decedent for his life or for any period which does not in fact end before his death. C. Transfer with reversionary interest, wherein there is a possibility that the transferred property may return to the decedent or his estate or that it may become subject to a power of disposition by the decedent. - Ex: A transfers his property to B in naked ownership and to C in usufruct throughout Cs lifetime subject to the condition that if C predeceases A, the property shall return to A. If A dies during Cs lifetime, the value of the reversionary interest of A at death is included in his gross estate. 3.) Revocable transfer - the decedent has full control of disposition of property - even if the control is not exercised, it is enough that it is exists - A transfer where: a.) The decedent or in conjunction with any other person has reserved the right to alter, amend, revoke, or terminate; or b.) Any such power is relinquished in contemplation of the decedents death. The power to alter, amend or revoke shall be considered to exist on the date of the decedents death even though: a.) the exercise of the power is subject to a precedent giving of notice; or b.) The alteration, amendment or revocation takes effect only upon the expiration of a stated period after the exercise of the power. If the notice has not been given or the power has not been exercised on or before the decedents death, such notice or the power shall be considered to have been given or exercised on the date of the decedents death. 4.) Transfer of property under a general power of appointment - A transfer where the donor of the power of appointment authorizes the donee of such power to designate any person he chooses to be given the right over the appointed property. - The transferee may choose freely any person who will own the property after he dies

- Rationale: the will of the transferee is followed; hence, part of transferees estate * Note: the decedent is the transferee in this provision General power of appointment vs. special power of appointment: A.) A power is general, when it authorizes the donee of the power to appoint any person he pleases including himself, thus having a full dominion over the property as if he owned it. B.) It is special when, the donee can appoint only among a restricted or designated class of persons other than himself. Note: If the power of appointment is general, it makes the appointed property a part of the donees property. Under a general power of appointment, title to the property is legally transferred to the donee. Therefore the property shall form part of the gross estate of the donee.

5.) Transfer for insufficient consideration - A transfer that is not a bona fide sale of property for an adequate and full consideration in money or moneys worth. The excess of the fair market value at the time of death over the value of the consideration received by the decedent shall form part of his gross estate. However, if the purported absolute sale inter vivos by the decedent is shown to be fictitious, then the total value of the property transferred is subject to inclusion in the taxable estate.

- Ex: X owns a house and lot, he wants to help Y so he sells his house worth P5M for only P1M. At the time of Xs death, his house and lot is worth P10M. How much is included in the gross estatre of X? 10-1 = 9M - Ex: X bought a car worth P1.3M. X needed money so he sells his car to Y for only P1M. This is not a transfer for insufficient consideration as this is a bona fide transfer at arms length; hence, a valid transfer. 6.) Proceeds of life insurance - Proceeds of life insurance taken by the decedent on his own life shall be included in the gross estate if the beneficiary: A.) Is the estate of the decedent, his executor, or administrator (regardless whether the designation is revocable or irrevocable); or B.) Third person other than the estate, executor, administrator but the designation of the beneficiary is revocable. - Presumption: proceeds are revocable - include in the estate only if it is revocable as the decedent retained control over the proceeds 7.) Prior Interest - Except as otherwise specifically provided therein, subsections (B), (C), (E) of Section 85 referring to transfer in contemplation of death, revocable transfer and proceeds of life insurance respectively shall apply to the transfers, trusts, estates, interests, rights, powers

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REVIEW NOTES FOR TAXATION 2and relinquishment of powers as severally enumerated and described therein, whether made, created, arising, existing, exercised or relinquished before or after the effectivity of the CTRP. NOTE: In most of these transfers the property remains substantially that of the transferor during his lifetime notwithstanding the transfer since he still retains either the beneficial ownership or naked title to the property.

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Note: In the determination of the gross estate, the nature of the property, whether common property of the spouses, separate or exclusive property either of the deceased or of the surviving spouse, becomes of vital importance. What regime of property relations shall govern the spouses? Under the Civil Code, the husband and wife who got married before August 3, 1988 are governed by the Conjugal Partnership of Gains, while those who got married on or after August 3, 1988 are governed by the Absolute Community of Property, unless a different regime was agreed upon in the marriage settlement. EXEMPTION FROM ESTATE TAX A. The first P200, 000.00 value of the estate (sec. 84 NIRC) B. The merger of the usufruct in the owner of the naked title. C. The transmission from the first heir, legatee, or donee in favor of another beneficiary in accordance with the desire of the predecessor. D. All bequest, devises, legacies or transfers to social welfare, cultural and charitable institutions, no part of the net income of which inured to the benefit of any individual and provided that not more than 30% of the said bequest, etc shall be used by such institution for administration purposes. E. Intangible personal property of non-resident aliens under the principle of reciprocity. F. Retirement benefits of employees of private firms from private pension plans approved by the BIR. G. Amount received for war damages. H. Grants and donations to the Intramuros administration. ALLOWABLE DEDUCTIONS FROM THE GROSS ESTATE - Granted by mere legislative grace - Construed strictly against the taxpayer - Requisites: a) Substantiate the claim for deduction b) Identify the provision granting the deduction. The provision must be clear and definite. RESIDENT DECEDENT A. Ordinary Deductions (ELIT): 1) Funeral Expenses - The amount deductible is equal to 5% of the gross estate or the amount of the actual funeral expenses whichever is lower, but in no case to exceed P200,000; - Actual funeral expenses are those which were actually incurred in connection with the interment or burial of the deceased and paid for from the estate of said deceased.

EXCLUSIONS FROM THE GROSS ESTATE 1. Merger of usufruct in the owner of the naked title - ex: X has a house and lot. X gave the title to Z. X also allows Y to use the same and that in case Y dies, the use goes to Z. What are the effects? a) If X dies include the house and lot in Xs estate b) If Y dies exclude from the estate of Y as the will of X is being followed, there is a merger of usufruct in Z (the owner of the naked title). 2. Fideicommisary and transmissions from the first heir, legatee, or donee in favor of another beneficiary, in accordance with the desire of the predecessor - ex: X has a house and lot. In the will of X, Y may have the title to the house and lot but in case Y dies, the property will go to Z. What are the effects? a) If X dies include as part of Xs estate as he actually owns it b) If Y dies excluded from the estate of Y as he has no control over its disposition - Ex: X has a house and lot which he wants to give to Y but Y is a minor at the moment so that X institutes T to hold the property in trust for Y until Y reaches the age of majority. X died. The property passed to T. T died. Y reached the age of majority. Effect if T dies: Not part of estate of T. Note: Common reasons for 1 and 2 the will of the first decedent is followed, the second decedent has no control over the disposition. 3. Transfers to social welfare, cultural, and charitable institutions - Requisites: a) Qualified organization b) Not more than 30% will be used for administrative purposes - Reason: to encourage such transfers 4. Proceeds of insurance not includible in the gross estate of the decedent a) Amount receivable by any beneficiary irrevocably designated in the policy of insurance by the insured. b) Proceeds of a group insurance policy taken out by a company for its employees. c) Proceeds of insurance policies issued by the GSIS to government officials and employees. d) Benefits accruing under the Social Security Act. e) Proceeds of life insurance payable to the heirs of deceased members of the military personnel of the United States Army or Philippine Army under laws administered by the United States Veterans Administration. f) Accident insurance proceeds. 5. Separate property of the surviving spouse.

- Funeral expenses include: a) Costs of coffin, tombstone, mausoleum, and burial lot; b) Funeral parlor fees; c) Mourning clothing of the surviving spouse and the unmarried minor children; d) Costs of obituary notices; and e) Expenses during the wake.

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REVIEW NOTES FOR TAXATION 25) Unpaid mortgages indebtedness - The following cannot be deducted under funeral expenses: a) Cash advances of the surviving spouse and the heirs; b) Expenses paid by the relatives and friends; and c) Expenses after the burial. Requisites: a) The expenses must be due to the interment, wake and burial; hence, expenses on the death anniversary are not included b) The expenses must have been shouldered by the estate and not by other people 2) Judicial expenses of the testamentary or intestate proceedings - Requisite: administration expenses to those actually incurred in the administration of the estate. - Examples: a) fees of the executor or administrator; b) attorneys fees; c) accountants fees; d) court fees; e) salaries of employees; and f) All other expense related to administration of the estate.

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- Requisites for deductibility: a) The fair market value of the property mortgaged without deducting the mortgage indebtedness has been initially included as part of his gross estate; b) The mortgage indebtedness was contracted in good faith and for an adequate and full consideration in money or moneys worth. - ex: X obtained a 3M loan from Y and executed a Real Estate Mortgage over his house and lot worth 5M. X paid 1M. X died. Effect: in the estate of X, include the 5M in the gross estate of X and claim as deduction the unpaid 2M. y Accommodated Loan - Ex: X owns a house and lot worth 5M. Y obtained a 3M loan from Z with Xs house and lot as collateral. Y paid 1M. Z died. X died. Effect: Include in the gross estate of X the 5M as receivable from Y (reason: right of reimbursement); and claim as deduction the unpaid 2M. 6) Casualty Losses (TRECUSO) - They include all losses incurred during the settlement of the estate arising from fires, storms, shipwreck or other casualties or from robbery, theft or embezzlement. - Requisites for deductibility: a) Losses not compensated by an insurance or otherwise; b) Losses that were not claimed as a deduction for income tax purposes; and c) Losses incurred not later than the last day for payment of the estate tax (6 months from death). d) Include the worth of the property in the gross estate e) File a sworn declaration of the fact of loss within 45 days from its occurrence 7) Unpaid Taxes - Unpaid income tax on income due or received before death of the decedent, and real property taxes, which have accrued prior to the death of the decedent (real property taxes accrued at the beginning of the year but may be paid before or at the end of each quarter) are deductible. Income taxes upon income received after the death of the decedent, or property taxes not accrued before his death, or any estate tax cannot be deducted because they are chargeable to the income of the estate.

the

Note: This includes all expenses necessary to settle or preserve the estate hence, extrajudicial expenses are included. Expenses not essential to the proper settlement of the estate but incurred for the individual benefit of the heirs, legatees, or devisees are not allowed as deductions. - ex: expenses to be declared as administrator vs. an oppositor is a personal expense

3) Claims against the decedents estate - Debts or obligations of the decedent that is enforceable against the estate provided that the following requisites are met: a) They were contracted in good faith and for an adequate and full consideration in money or moneys worth. b) They must be existing against the estate. c) They must be legally enforceable obligations of the decedent and ought to be enforced by the claimants. d) They must be reasonably certain in amount; and; e) At the time the indebtedness was incurred, the debt instrument was duly notarized and if the loan was contracted within three (3) years before the death of the decedent, the administrator or executor shall submit a statement showing the disposition of the proceeds of the loan.

- except: estate tax because estate tax liability is determined at the time of death

4) Claims against the insolvent persons - Requisites for deductibility: a) The amount of said claims has been initially included as part of the gross estate; and b) The incapacity of the debtors to pay their obligations is proven and not merely alleged.

B. Vanishing / Alternating Deduction Or Property Previously Taxed - an amount allowed to reduce the taxable estate of a decedent where the property was: a. received by him from prior decedent by gift, bequest, devise or inheritance, or b. transferred to him by gift, has been the object of previous transfer deduction. VANISHING DEDUCTION: because the rate of deduction gradually diminishes and entirely

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REVIEW NOTES FOR TAXATION 2vanishes depending upon the time interval between the two (2) successive transfers. ALTERNATING DEDUCTION: because the present decedents estate cannot claim it if the prior decedents estate claimed it Factors necessary in vanishing deduction, these are; There are two (2) deceased persons and the first is the donor; and The second decedent dies within five (5) years after the death of the prior decedent or in the case of gifts the decedent donee dies within the same period after the date of the gift.

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b) NGO excluded from the gross estate and subject to the limitation that not more than 30% must be used for administrative purposes

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D. Family Home - Refers to the dwelling house, including the land on which it is situated, where the husband and wife, or an unmarried person who is the head of the family and members of their immediate family resides as certified by the Barangay Captain of the locality. For the purpose of availing of a family home deduction to the extent provided by law, a person may constitute only one family home. The amount deductible is equivalent to the current fair market value of the decedents family home if said current fair market value exceeds P1,000,000, the excess shall be subject to estate tax.

- Rationale: The deduction operates to ease the harshness of successive taxation of the same property within a relatively short period of time. Requisites for deductibility: 1. The present decedent must have acquired the property by inheritance or by donation. 2. The property must have been acquired within five (5) years prior to the death of the present decedent 3. The property must have formed part of the gross estate of the prior decedent if acquired by inheritance, or the taxable gift of the donor if acquired by donation. 4. The estate tax or the donors tax, as the case may be, must have been paid on the previous transfer. 5. The property must be identified as the one received from the prior decedent or from the donor, as the case may be. 6. The estate of the prior decedent must not have previously availed of the vanishing deduction on the subject property. Procedure in computing vanishing deductions: 1. Value taken of property previously taxed Less:Mortgage paid by the present decedent on property previously mortgaged by prior decedent / donor, if any (Ist deduction) = Initial basis 2. Initial basis divided by the value of the gross estate of present decedent X Expenses, and transfer for public purpose =2nddeduction 3. Initial Basis Less: 2nd deduction Final Basis Multiplied by rate deduction (sec.86 (A.2), NIRC) Vanishing Deduction

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- Requisites to be deductible: a. The family home must be the actual residential home of the decedent and his family at the time of his death. (Decedent is married and has dependents or is a head of family with dependents.) b. Such fact must be certified by the Barangay Captain of the locality where the family is situated. c. The total value of the family home must be included in the gross estate of the decedent. d. The allowable deduction must be in an amount equivalent to the current fair market value of the family home as declared or included in the gross estate not exceeding P1, 000,000. E. Standard Deduction Of P1, 000,000.00 - on top of other deductions, unlike the optional standard deduction which is in lieu of other deductions; hence, it does not include the P 200,000 exemption F. Medical Expenses - Requisites: a. Must be incurred by the decedent within one (1) year prior to his death b. Must be duly substantiated by receipts; and c. Must not exceed P500, 000 *Opinion of JB: medical expense must be related to the cause of death as it is the estate that is being settled. Otherwise, if not related, it is a personal expense. G. Amounts Received By Heirs Under RA 4917 From The Decedents Employer As A Consequence Of The Death Of The DecedentEmployee, Provided That Such Amount Is Included In The Gross Estate Of The Decedent. - retirement benefits - Requisite: include in gross estate H. NET SHARE OF THE SURVIVING SPOUSE IN THE CONJUGAL / COMMUNITY PROPERTY. - Requisite: Include the entire amount in the gross estate then deduct the share of the surviving spouse - Ex: H owns a car worth 1M and a house and lot worth 5M W owns a truck worth 2M and jewelry worth 10M H and W owns a conjugal lot worth 20M H died. Gross estate of H:

C. Transfers For Public Use - Requisites: 1. The disposition must be testamentary in character. 2. To take effect after death. 3. In favor of the government of the Philippines, or any political subdivision thereof. 4. Exclusively for public purpose. 5. Included in the gross estate Query: If in a will the property was bequeathed to a city and an NGO, are the tax effects the same? No. a) City - included in the gross estate and claimed as deduction

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REVIEW NOTES FOR TAXATION 2Exclusive 5 M house and lot 1M car _________ 6M Total gross estate = 26 M Conjugal 20 M lot _______ 20 M

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alien decedent with respect to his estates situated in the Philippines at the time of his death. In case of deductions for expenses, losses, indebtedness and taxes, the amount of the allowable deduction is limited only to the proportion of such deductions with the value of such part of his gross estate which at the time of his death, is situated in the Philippines, bears to the value of his entire gross estate wherever situated. (Sec. 86 (B)) Formula: Allowable deduction of non-resident estate = Philippine Gross Estate Entire Gross estate x Deductions Claimed

Then claim as deduction the 10M, which is the share of the surviving spouse in the conjugal lot. - Ex: H and W died simultaneously. In computing the gross estate of H and W, their shares shares as to the conjugal lot may immediately be split as there is no surviving spouse left. I) Tax Credit For Estate Tax Paid To A Foreign Country - The estate tax imposed by the tax code shall be credited with the amount of any estate tax paid to a foreign country. - Concept: if a property located in the Philippines was already subjected to estate tax abroad and the same property is also subjected to estate tax in the Philippines, the foreign tax paid is allowed to reduce his Philippine estate tax - Purpose: minimize the effect of international double taxation - applicable only to residents and citizens, not to NRA since he is taxed only on his properties within the Philippines; hence, the NRA will not be made to pay estate taxes twice for his property located abroad = no international double taxation = no tax credit. (Sec. 86 (E)(2)) - Requisites: 1. Prove that the foreign estate tax has been paid 2. Prove reciprocity : that in the decedents foreign country, a similar tax credit is given to Filipinos Limitations on tax credit: A.)The tax credit limit for estate taxes paid to one foreign country is determined by the following: TAX CREDIT LIMIT= Decedents Net Estate situated in a foreign country x Phil. Estate tax of the Entire net estate B.) The tax credit limit for estate taxes paid to two or more countries is determined as follows: TAX CREDIT LIMIT = Decedents net estate situated outside of the Phil X Phil. Estate tax of Entire net Estate Note: 1.) Under limitation A the allowable tax credit is the lower amount between the tax credit limit and the estate tax paid to the foreign country. 2.) Under limitation B the allowable tax credit is the lower amount between the tax credit limit computed under (A) and that computed under (B)

As a prerequisite to the deduction, it must be included in the return required to be filed the value at the time of his death, of that part of the gross estate of the non-resident not situated in the Philippines, to determine the ratable portion of the deduction for expenses allowable.

Valuation of Property The estate shall be appraised at its fair market value (FMV) at the time of death of the decedent (Sec.88, NIRC). This is regardless of any subsequent contingency affecting the estate. (Lorenzo vs. Posadas, 64 Phil. 353) 1. Real Property - higher amount of : a) FMV as determined by the Commissioner - This is the zonal value (of the land) as fixed by the CIR, and can be obtained from the BIR website or regional office b) FMV fixed by the provincial or city assessor - This is the value as shown in the tax declaration of the property - Use this amount for real properties with no zonal values (i.e. real properties other than land such as buildings and improvements) * Note : The law does not state that the prevailing market rate or the consideration as a basis for determining the FMV * Note: If there are no improvements in the property, get a Certificate of No-improvement, (which you can get only after obtaining a Certificate of Non-tax delinquency) and attach these to the estate tax return. 2. Personal Properties a) Shares of Stock - book or par value at the time of death, and can be obtained by writing a letter of inquiry, asking for a formal certification from the corporation which issued the shares of stock as to the value of such stock at the time of death of the decedent b) Inventories - value as stated in the invoices (i.e.: price at purchase); or the prevailing market rate (ask for the value from those engaged in the same business); or if value cannot be definitely ascertained, state the approximate reasonable value (but this will be subject to the discretion of the BIR inspector) c) Motor vehicles - these depreciate 20% per year from purchase

B.) IF DECEDENT IS A NON RESIDENT ALIEN The deductions allowed to citizens or residents of the Philippines are also extended to a non-resident

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REVIEW NOTES FOR TAXATION 2- Hence, motor vehicles are fully liquidated and has no estate tax liability after 5 years but include in the gross estate placing zero as the amount (to secure a tax clearance therefor) 3. Right to Usufruct, use or habitation; or annuity - probable life of the beneficiary shall be taken into account, in accordance with the latest basic mortality table, to be approved by the Sec. of Finance, upon recommendation of the Insurance Commissioner

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d) duly authorized treasurer of the city or municipality where the decedent was domiciled at the time of his death, or

Filing of Notice of Death Where the gross value of the estate exceeds P 20,000 although exempt, the executor, administrator, or any of the legal heirs shall give, within 2 months after the decedents death or within like period after the executor or administrator qualifies as such, a written notice thereof, to the Commissioner of Internal Revenue. (Sec. 89, NIRC) - Contents of the letter: 1. The fact that the decedent died 2. Residence of the decedent 3. Date of death - Effect of failure to file notice: subject to penalty not lower than P1,000 * Note: Filing with the nearest Revenue District Office is sufficient compliance. Filing of Return and Payment of Tax 1.) By whom? y An estate tax return under oath is required by law to be filed by the executor, administrator, or any of the legal heirs: a.) Where the gross value of the estate exceeds P200,000 though exempt from the estate tax; or b.) Regardless of the gross value of the estate, where the said estate consists of registered or registrable real property, such as real property (land, bank accounts, others with definite records), motor vehicle, shares of stock or other similar property for which a clearance from the Bureau of Internal Revenue is required as a condition precedent for the transfer of ownership thereof in the name of the transferee. 2.) When to file? y The return shall be filed within 6 months from the decedents death. y The Commissioner shall have the authority to grant, in meritorious cases, a reasonable extension not exceeding 30 days for filing the return. 3.) Where to file? Except in cases where the Commissioner otherwise permits, the return shall be filed with: * if the decedent is a resident a) an authorized agent bank b) Revenue District Officer c) Revenue Collection Officer

* if the decedent is a non-resident a) with the Revenue District Office where his executor/administrator is registered b) with the Revenue District Office having jurisdiction over the residence of the executor/administrator e) with the Office of the Commissioner if the decedent has no executor or administrator 4.) Copies: The return shall be filed in triplicate, two (2) for the BIR and one (1) copy for the taxpayer. 5.) When to Pay Pay the estate tax at the time you will file your estate tax return. (Pay as you file system) 6.) Extension for Payment: - allowed in meritorious cases when the Commisioner finds that the payment of the esate tax on the due date would impose undue hardships upon the estate or any heir : At most 2 years if estate extrajudicially settled At most 5 years if estate judicially settled - NOTE: The taxpayer must not be guilty of a) negligence b) intentional disregard of the rules and regulations, or c) fraud - the taxpayer may also be required to pay a bond not exceeding double the amount of tax and with such sureties, as the Commissioner deems necessary

* Note: The filing of the estate tax return is not sufficient to obtain a tax clearance, the administrator/executor/heir must submit additional documents to determine the correctness of the values stated by him in the estate tax return. - such as the title of the land, tax declaration of the land and its improvements or Certificate of No-improvement, vicinity map to fix the exact location and zonal value, etc. (Read: Revenue Memorandum Order 15-2003) * Note: To avoid the imposition of penalties while there is no extra/judicial settlement yet, any heir may file a sworn declaration to the BIR stating the fact of death, that the estate has not yet been settled and the list of the properties included in the estate, as basis for payment of estate tax. If Gross Estate >2M, additional requirement: - must submit a certificate of an independent CPA stating: 1. itemized assets of the decedent with corresponding gross value at the time of his death; or if NRA, that part of his gross estate situated in the Philippines 2. itemized deductions from the gross estate 3. amount of tax due, whether paid or still due and outstanding

BAR OPERATIONS COMMITTEE

REVIEW NOTES FOR TAXATION 2

9

Liability for Payment of Estate Tax y Primarily Liable : Executor or administrator - before delivery to any beneficiary of his distributive shares. After due payment, the executor or administrator shall be discharged from personal liability. Subsidiarily Liable : Beneficiary - to the extent of his distributive share, liable for the portion of the estate tax as his distributive share bears to the value of the total net estate.

y

d. Neither shall a debtor of a deceased pay his debts to the heirs, legatees, executor or administrator of his creditor, unless a certification of the Commissioner that the tax fixed has been paid is shown; but he may pay the executor or judicial administrator without said certification if the credit is included in the inventory of the estate of the deceased. (Sec. 95) - else: debtor may be personally liable for the payment of the lost tax, like a withholding agent who fails to withhold taxes e. Corporations, sociedad anonima, partnerships, business or industry organized in the Philippines shall not transfer in their books any shares obligations, bonds or rights by way of gift inter vivos or mortis causa, legacy or inheritance to the new owner unless a certification from the Commissioner that the taxes fixed and due thereon have been is shown; (Sec. 97) - obligation of corporate secretary f. If a bank has knowledge of the death of a person who maintained a bank deposit account alone or jointly with another, it shall not allow any withdrawal from the said joint deposit account unless the Commissioner has certified that the estate taxes imposed thereon have been paid. However, the administrator of the estate or any of the heirs of the decedent may, upon authorization by the Commissioner of Internal Revenue withdraw an amount not exceeding P 20,00 without the said certification . (Sec. 97) - For this purpose, all withdrawal slips shall contain a statement to the effect that all of the joint depositors are still living at the time of withdrawal by any one of the joint depositors and such statement shall be under oath. Otherwise, the joint depositor will be liable for perjury (Sec. 267). - joint accounts covered by this rule include and and and/or accounts, but do not include an account subject to a Survivorship Agreement with a survivortake-all feature (because there is an automatic transfer of right to the survivor; hence, not included in gross estate of the joint depositor who died tax avoidance scheme) g. The estate tax together with interest, penalties, and costs that may accrue in addition thereto constitutes a lien upon all property and rights to property belonging to the taxpayer. The lien attaches when the taxpayer neglects or refuses to pay after demand. (Sec. 219) h. In judicial settlement of estates, the court is required to furnish the commissioner of Internal Revenue a certified copy of the schedule of participation and the court order approving the same within 30 days after its promulgation. (Sec. 91(b)); i. The estate tax shall be paid by the executor or administrator before delivery to any beneficiary his distributive share of the estate (Sec. 91 (c)). He may be discharged from personal liability for deficiency in the estate tax only after written application to the commissioner and upon determination that no such deficiency appears. (Sec. 92) NOTE: Additional Readings 1. Revenue Regulation 2-2003 2. Revenue Memorandum Order 15-2003

NOTE: There are two ways the government may enforce collection of estate taxes from the decedents heirs: 1. It can collect from all the heirs the amount of the estate tax proportionate to the inheritance they received. 2. It can subject properties of the estate which are in the hands of the heirs/transferees to the payment of the tax. (CIR vs. Pineda, 21 SCRA 105) NOTE: The heirs have a solidary obligation to settle the estate. Hence, the BIR can collect from or sue any of the heirs, but only up to the amount of that heirs share in the hereditary estate. This is without prejudice to such heirs right of reimbursement from his co-heirs of their share in the payment of the estate tax. (CIR vs. Pineda, 21 SCRA 105)

Measures to Insure Payment of Estate Tax a. No judge shall authorize the executor or judicial administrator to deliver a distributive share to any party interested in the estate unless a certification from the Commissioner that the estate tax has been paid as shown. (Sec.94) - by the court requiring the executor/administrator to submit an inventory of properties of the estate, these properties are to be distributed only after payment of estate taxes and receipt of clearance by the Commissioner or his duly authorized representative - NOTE: The approval of the probate court is not required before estate taxes may be collected. The enforcement and collection of taxes are executive in nature. (Marcos II vs. CA, 273 SCRA 47) b. Registers of Deeds shall not register in the Registry of Property any document transferring real property any document transferring real property or real right therein or any chattel mortgage, by way of gift inter vivos or mortis causa, legacy or inheritance, unless certification from the commissioner that the tax has been paid and the y shall immediately notify the Commissioner, Regional Director, Revenue District Officer, or Revenue collection Officer or treasurer of the city or municipality where their officer are located, of the non-payment of the tax discovered by them. (Sec. 95) - before the properties are transferred in the name of the heirs, a Certificate Authorizing Registration (CAR) must be shown c. Any lawyer notary public, or any Government Officer who, by reason of his official duties, intervenes in the preparation or acknowledgement of documents regarding partition or disposal of donation inter vivos or mortis causa, legacy or inheritance, shall have the duty of furnishing the Commissioner, etc., with copies of such documents and any information whatsoever, which may facilitate the collection of the aforementioned tax. (Sec. 95) - ex: deed of extrajudicial settlement, deed of donation

BAR OPERATIONS COMMITTEE

REVIEW NOTES FOR TAXATION 2

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TAX TIPS: Avoidance of Estate Tax Liability 1. Maximize your claims for deductions such as the use of the transfers falling under the exclusions from gross estate. 2. Donate properties to your relatives as the tax rates for donors taxes are lower than for estate taxes. 3. Estate Planning (Section 40 (c), NIRC) - execute a Deed of Exchange; the properties of at most 5 persons in exchange for shares of stock in order to obtain control of the corporation (more than 51% ownership) - this exchange is not taxable for income tax purposes - more tax savings if real properties are exchanged - the properties in the deed will no longer be part of the gross estate as it is now owned by the corporation - the stock shares will be included in the gross estate but the tax would be lower as the value at time of death might still be the same original value at the time of exchange; on the other hand, if there was no exchange the estate tax for the land would be higher as the value of the land at time of death will be higher than at the time of the acquisition. 4. Set up a living trust - Trust: obligation imposed by a person regarding his property - Create an irrevocable trust over your properties so that they will not form part of your gross estate when you die. This is because the Irrevocable Trust is a new taxpayer created. - Ex: grandfather (Grantor) during his lifetime would like to give certain properties to his grandchild. Until he reaches the age of maturity, the properties will be held in trust by X (trustee) for the grandchild (Beneficiary).

- It is an excise (privilege) tax, imposed on the privilege of the donor to give or on the privilege of the done to receive. It is not a tax on the property as such because its imposition does not rest upon general ownership. - The tax is imposed without reference to the death of the donor unlike in the case of estate tax. y Donation / Gift - an act of liberality whereby a person disposes gratuitously of a thing or right in favor of another who accepts it. - For tax purposes, the term has a much wider meaning, it includes: a. any transfer in trust or otherwise, whether the gift is direct or indirect, and whether the property is real or personal, tangible or intangible. (Sec. 98) b. any transfer of property by gift, except in forced sales and in the sale of real property which is a capital asset, for less than and adequate and full consideration in money or moneys worth. (Sec. 100) c. Condonation or remission of debt, where the creditor merely desires to benefit a debtor and without any consideration therefore cancels the debt. Requisites Of A Taxable Gift: 1.) CAPACITY of the donor to make the donation; 2.) DONATIVE INTENT or INTENT on the part of the donor to make a gift; 3.) DELIVERY, whether actual or constructive, of the gift; and 4.) ACCEPTANCE of the gift by the donee. Note: A. The donee, unlike the donor need not be capacitated. B. donors tax applies now to both natural and juridical persons. C. donative intent must be present in direct gift but with respect to indirect gift, e.g. transfer of property for less than an adequate and full consideration, donative intent is superfluous. Thus, donative intent is not always essential to constitute a gift. D. In Abello vs. CIR (Feb. 25, 2005), donative intent is evidenced by a reduction of patrimony of one and an increase in patrimony to the other. Purposes Of Gift Tax 1.) The gift tax was enacted originally to supplement the estate and inheritance taxes by preventing their avoidance through the taxation of gifts inter vivos. 2.) The donors tax is also intended to prevent the avoidance of income tax through the device of splitting income among numerous/different donees with the donor thereby escaping the effect of the progressive rates of income taxation. Kinds Of Gift Taxes: 1. Donors tax or tax levied on the act of giving; it supplements the estate tax; and 2. Donees tax or tax levied on the act of receiving; it was formerly the counterpart of the inheritance tax, which has been integrated into an estate tax. *Both taxes have now been integrated into a donors tax.

DISTINCTION BETWEEN DONORS AND ESTATE TAX DONORS TAX Tax on the privilege to transmit property during the lifetime of the donor Tax rates are lower (2 to 15) Exemption is only P 100,000.00 Notice of donation is generally not required Extension of payment is not provided ESTATE TAX Tax on the privilege to transmit property upon ones death Tax rates are higher (5 to20) Tax exemption is P200,000.00 Notice of death is required Extension of payment may be granted by the Commissioner of Internal Revenue Payable within 6 months from the date of death Imposed on the net estate

Payable within 30 days from the date of gift Imposed on the net gift

II. DONORS TAX / GIFT TAX A. NATURE Parties To A Donation:BAR OPERATIONS COMMITTEE

REVIEW NOTES FOR TAXATION 21. Donor - the Person who disposes of his property or right. 2. Donee - the Person who receives the property or right. Properties Included In The Term Gift (A). In the case of resident citizens, non-resident citizens and resident aliens: 1. Real property within and without the Philippines. 2. Tangible personal property within and without the Philippines; and 3. Intangible personal property within and without the Philippines. (B.) In the case of non-resident aliens: 1. Real property within the Philippines. 2. Tangible personal property within the Philippines. 3. Intangible personal property within the Philippines, unless there is reciprocity in which case, it is not taxable. Note: The specific items includible in the gross estate are applicable to and are embraced by the term gift. 3.

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4.

The child must be either the legitimate, recognized natural or legally adopted child of the donor, and; It must be given before or one year after the celebration of the marriage.

b.) Gifts made to or for the use of the National Government or any of its agencies which is not conducted for profit, or to any political subdivision of the said government. c.) Gifts in favor of educational, charitable, religious, cultural or social welfare corporation, institutions, foundations, trust or philanthropic organization, research institution or organization, or accredited nongovernment organization. Provided, that no more than 30% of said gifts shall be used by such donee for administration purposes. Note: For purposes of exemption, a non-profit educational and/or charitable corporation, institution, accredited non-government organization, trust or philanthropic organization is defined as: y school, trust or university and/ or charitable corporation, foundation trust or philanthropic organization and/ or research institution or organization incorporated as a non-stock entity: y paying no dividends. y governed by trustees who receive no compensation; and y devoting all its income to the accomplishment and promotion of the purposes enumerated in its articles of incorporation.

B. FACTORS AFFECTING LIABILITY FOR GIFT TAXES 1. Relationship of the donor and the donee a) when the donee is considered a stranger to the donor, the donors tax shall be 30% of the net gifts. b) when the donee is a relative of the donor, the tax shall be based on the 2-15% table under Sec. 99(A). y Stranger 1.) one who is not a : (a) brother/sister (whole or half blood), spouse, ancestor and lineal descendant (b) relative by consanguinity in the collateral line within the fourth degree of relationship 2.) donations made between individuals and business organizations are considered donations to strangers 3.) donations made between business organizations are considered donations made to strangers (RR 2-2003)

Note: Only donations made to non-stock, non-profit educational institutions are exempt from gift taxes as although Article 14 of the Constitution states that proprietary educational institutions may be given the same privileges subject to a guideline; as a guideline, the NIRC does not provide for such exemption to them. 2. Gifts made by a Non-Resident Alien a.) Gifts made to or for the use of the National Government or any entity created by of its agencies which is not conducted for profit, or to any political subdivision of the said government. b.) Gifts in favor of educational, charitable, religious, cultural or social welfare corporation, institution, foundations trust or philanthropic organization, research organization or institution; Provided, that no more than 30% of said gifts shall be used by such donee for administration purposes. Note: doesnt include accredited NGO Note: 1. Intangible personal property in the gross gift of a NON-RESIDENT ALIEN donor shall be taxable in the Philippines, if the PRINCIPLE OF RECIPROCITY is not cognizable. 2. Intangible personal properties considered situated in the Philippines. y Franchise which must be exercised in the Philippines

Note: Donees who have no blood relation to the donor are considered strangers to the donor, such as those made to ones in-laws or to juridical persons. 2. Value of the Gift - the higher the value of the gift, the higher the gift taxes

C. DEDUCTIONS / EXEMPTIONS FROM GIFT TAX 1. Gifts Made by a Resident: a.) Dowries or gifts made on account of marriage before its celebration or within one year thereafter by parents to each of their legitimate, illegitimate or adopted children to the extent of the first P10,000.00. Requisites: 1. The donation must be given on account of marriage. 2. The parent must give it to his child.

BAR OPERATIONS COMMITTEE

REVIEW NOTES FOR TAXATION 2y Shares of stocks issued by any corporation or sociedad anonima organized or constituted in the Philippines in accordance with its laws. Shares of stocks issued by any foreign corporation 85% of the business of which is situated in the Philippines. Shares of stock issued by a foreign corporation, if such shares, obligations, or bonds, have acquired a business situs in the Philippines; and Shares or rights in any partnership, business or industry established in the Philippines.

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1. Donors Tax Paid to 1 Foreign Country Tax Credit Limit = Net gift situated in a foreign country X Phil. Donors Tax Entire net gifts

y

y

y

2. Donors Taxes paid to 2 or more Foreign Countries Tax Credit Limit = Net gifts outside the Philippines X Phil. Donors Tax Entire net gifts

D. TAX TREATMENT OF PROPERTIES TRANSFERRED FOR LESS THAN FULL / ADEQUATE CONSIDERATION General Rule: The amount by which the FMV of the property exceeded the value of the consideration shall be deemed a gift Exception: real properties classified as capital assets (not used in business) as there were already subjected to Capital Gains Tax

Note: y

Under limitation A the allowable tax credit limit is the LOWER AMOUNT between the tax credit limit and the gift tax paid to the foreign country. Under limitation B the allowable tax credit is the LOWER AMOUNT between the tax credits; limit computed under A and that computed Under B.

y

E. TAX TREATMENT OF POLITICAL CONTRIBUTIONS - any contribution in cash or in kind to any candidate, political party or coalition of parties for campaign purposes shall be governed by the Election Code; hence, this is not subject to gift tax (report to COMELEC?)

Note: Void Donations Are Not Subject To Donors Tax Such as: y Between husband and wife, even if the relationship has not been solemnized. y Between persons guilty of adultery or concubinage. y Between those found guilty of the same criminal offenses. y Between those made to a public officer or his wife, descendants, ascendants by reason of his office. Note: Effects Of General And Specific Renunciation - An heirs general renunciation of inheritance in favor of a co-heir is not subject to donors tax, but if it is specifically renounced in favor of a co-heir to the exclusion of others, it shall be subject to donors tax. Note: Renunciation of a surviving spouse of his/her share in the conjugal partnership or absolute community after dissolution of marriage - whether made in favor of the heirs of the deceased spouse or in favor of a third person, the same is subject to donors tax

F. TAX CREDIT FOR DONORS TAXES PAID TO A FOREIGN COUNTRY 1. Donor was a Filipino citizen or resident alien, at the time of foreign donation 2. Donors taxes of any character and description are imposed and paid by the authority of a foreign country.

Limitations: A.) For donors tax paid to one foreign country; The amount of tax credit in respect to the tax paid to any country shall not exceed the same proportion of the tax against which credit is taken which the net gifts situated within such country taxable under the National Internal Revenue Code bears to his entire net gift, and B.) For donors tax paid to two or more foreign countries: The total amount of the credit shall not exceed the same proportion of the tax against which such credit is taken, which the donors net gift situated outside the Philippines taxable under the National Internal Revenue Code bears to his entire net gift.

G. NET GIFT - the total amount of gifts less the allowable deductions and specific exemptions. - the total net gifts made during the SAME calendar year is used as basis for computing the donors tax H. VALUATION - the gift tax is based on the fair market value of the gift at the time it was given I. LAW APPLICABLE - the law in force at the time of the perfection / completion of the donation shall govern the imposition of donors tax. A donation is considered as completed FOR TAX PURPOSES at the time the donee accepts the gift. J. ADMINISTRATIVE PROVISIONS

Formula:

BAR OPERATIONS COMMITTEE

REVIEW NOTES FOR TAXATION 21. Filing of notice of donation General Rule: Filing of notice of donation is not required Exception: if the donor wishes to claim exemption from tax and the donee is an organization under Sec.101(A3) and Sec. 101 (B2) Requisites to be exempt from gift tax : 1. Donor is engaged in business 2. Donee is any of the organizations mentioned under Sec. 101(A3) and Sec. 101 (B2) 3. Donor must give notice to the RDO on every donation worth at least P50,000. 4. The notice must be given within 30 days from the issuance by the donee of a Certificate of Donation. 5. The certificate of Donation must be attached to the notice. 2. Filing of Donors Tax Return - within 30 days after the completion of the gift - donation is completed FOR TAX PURPOSES at the time the donee accepts the gift - Contents: 1. Gifts made during the calendar year 2. Deductions claimed and allowed 3. Previous net gifts made during the year 4. Name of the done 5. Relationship of the donor and the done 6. Other information as may be required 3. Payment of Donors Tax - pay as you file the tax return - Note: if the donors tax was paid for the transfer, there is no more need to subject the transfer again to estate tax. Applying the Back Tax Theory, there is no tax that remained unpaid regarding this transfer. 4. Extensions For Payment Of Donors Tax - the NIRC does not provide for any extension for payment of gift tax, as it is presumed that if you can donate, you still have sufficient properties to pay for the tax. Unlike in estate tax where extension is granted, because the payment of the tax may cause undue hardship on the heirs specifically for non-liquid properties which requires time to be sold first to be converted into cash for payment of the estate tax. TAX TIPS : Avoidance of Gift Taxes Execute a Deed of Extra-judicial Settlement with simultaneous general renunciation of all inheritance (by operation of law, the renounced inheritance will go to the co-heirs anyway). PROBLEMS ON DOWRY DEDUCTION 1. A is the child of H and W January A got married, H and W gave him P2,000 March H and W gave A P2,000 April H and W gave A another P2,000 Can the parents claim dowry deduction even if these were made on a staggered basis? - Yes, provided these were made on account of marriage, before the marriage or 1 year thereafter. 2. January - A married B and was given dowry February B died December A married C and was given dowry Can the parents of A still claim dowry deduction even if it was claimed already for the January dowry?

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- There is no rule on the matter yet but it is submitted that as it was made on account of 2 different marriages, the deduction for the December dowry may be made. 3. A and C are the children of H and W January - A married B, given dowry February C married D, given dowry Can H and W claim dowry deduction for both? -Yes, as the dowries were given to different children 4. H and W jointly donated to their child A 1M on account of his marriage to B. Show computation. For each of H and W the computation is: 500,000 to A 250,000 - to B 250,000 A 250,000 -10,000 240,000 *2 to 15% 3, 600 B 250,000 _______ 250,000 * 30% 75,000

Note: Do not deduct the first 100,000 in case of doneerelatives as this is incorporated already in the table under Section 99. General Rule: H and W are considered separate and distinct taxpayers for purposes of donors tax. Exception: What was donated is a conjugal property and only H signed. There is only one donor, without prejudice to the right of W to question the validity of the donation without her consent. PROBLEMS 1. Donations made by X January 300,000 to his brother April 400,000 to his sister August 500,000 to his mother Compute donors tax: a) For January donation = 300,000 * (percentage in the 2 to 15% table) = tax b) For April Donation = (300,000 + 400,000) * (2 to 15% table) = tax c) For August Donation = (300,000 + 400,000 + 700,000) * (2 to 15% table) = tax less tax paid for January and April 2. X wants to give Y 200,000, will there be tax savings to X if he will donate one time the amount of 200,000 or should he split by donating 100,000 on December 2007 and 100,000 on January 2008? - It depends if X and Y are relative or not. a) relatives yes, there will be savings as under the table in Section 99, the first 100,000 is exempt from Donors tax. No donors tax will then be paid for both donations. b) strangers nom there will be no tax savings. A flat rate if 30% is imposed on donations made between strangers; hence, the same amount of P60,000 donors tax will be paid whether made one time or split. 3. X died and left 1M each to his heirs A, B, C. The heirs agreed to settle extrajudicially. a) A renounced his inheritance in favor of B. Is there liability for donors tax?

BAR OPERATIONS COMMITTEE

REVIEW NOTES FOR TAXATION 2- Yes, this is a case of waiver. A is deemed to have accepted the property before he gave it to B as one cannot give what one does not own. A specific renunciation is taxable. b) A renounced his share without specifying a co-heir who will receive the same. Is there liability for donors tax? - No donors tax because as if A never inherited anything from X and the transfer was made directly from X to B and C. E. Zero rating vs. Exemption

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VALUE ADDED TAX A.

A zero-rated scale is taxable transaction, but does not result in an output tax while an exempted transaction is not subject to the output tax; b. The input VAT on the purchases of VATregistered person with zero-rated sales may be allowed as tax credits or refunded while the seller in an exempt transaction is not entitled to any input tax on his purchases despite the issuance of a VAT invoice or receipt; and c. Persons engaged in transactions which are zerorated, being subject to VAT, are required to register while registration is option for VATexempt persons.

a.

Value Added Tax F. Tax Credits - Indirect Tax a. Transitional Input Tax Credits (Sec. 111(A), - It is not the tax itself which is shifted or passed but it is NIRC, as amended by RA 9337) the burden to pay the tax b. Presumptive Input Tax Credits (Sec. 111(B), Why? Tax is Personal. Seller is still liable, only that NIRC, as amended by RA 9337) the economic burden is shouldered by the buyer.

B.

Transactions Subject to VAT (ISBEL) a. Importation whether or not in the regular course of business b. Sale conducted in the c. Barter regular course d. Exchange of business e. Lease

TAX ADMINISTRATION AND ENFORCEMENT A. Tax Administration: Its general concepts is the power of the Bureau of Internal Revenue (BIR) to enforced and administer taxes. B. Government agencies involved in tax administration the BIR and Bureau of Customs are tasked to implement revenues laws as the case may be. C. The Bureau of Internal Revenue a. Composition Functions - The Bureau of Internal Revenue shall have a chief to be known as Commissioner of Internal Revenue, hereinafter referred to as the Commissioner and four (4) assistant chiefs to be known as Deputy Commissioners. (Sec. 3, NIRC) b. Powers and Duties i. In general The Bureau of Internal Revenue shall be under the supervision and control of the Department of Finance and its powers and duties shall comprehend the assessment and collection of all national internal revenue taxes, fees, and charges, and the enforcement of all forfeitures, penalties, and fines connected therewith, including the execution of judgments in all cases decided in its favor by the Court of Tax Appeals and the ordinary courts. The Bureau shall give effect to and administer the supervisory and police powers conferred to it by this Code or other laws. (Sec. 2, NIRC) ii. Specific 1. Interpret tax laws and decide cases (Sec.4, NIRC)

* The phrase in the course of business means the regular conduct or pursuit of a commercial or an economic activity, including transactions incidental thereto, by any person regardless of whether or not the person engaged therein is a non-stock, non-profit private organization (irrespective of the disposition of its net income and whether or not it sells exclusively to members or their guests), or government entity. * VAT becomes due when the following conditioned concur: a. There is sale, barter, exchange, transfer or similar transactions, either for nominal or valuable consideration, intended to transfer ownership of, or title to, articles imported, milled, produced or manufactured; and b. The sale is consummated, not merely perfected, in the Philippines. The place where the title to the thing passes determines the place of delivery or tax situs. C. Specific Characteristics of VAT a. Consumption Based Tax - the person who last consumes the product absorbs the effect of VAT 1. Destination Principle - Goods are destined to be consumed in the Philippines Cross-border principle - Goods going out of the Philippines shall not be subjected to tax since these goods are not destined to be consumed in the Phils.

2.

*VAT is imposed only on whatever value was added. D. Exempt Transactions (Sec. 109, NIRC, as amended by RA 9337)BAR OPERATIONS COMMITTEE

REVIEW NOTES FOR TAXATION 2- The power to interpret the provisions of this Code and other tax laws shall be under the exclusive and original jurisdiction of the Commissioner, subject to review by the Secretary of Finance. The power to decide disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties imposed in relation thereto, or other matters arising under this Code or other laws or portions thereof administered by the Bureau of Internal Revenue is vested in the Commissioner, subject to the exclusive appellate jurisdiction of the Court of Tax Appeals. a. BIR Issuances and rules relevant thereto

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2. Examination of Books of Accounts (Sec. 5, NIRC) the Bureau has the power to examine books of accounts of every person (taxpayer) engaged in a business a. however before a tax official could inquire into said books of accounts a letter of authority is required. third-party

b. What is verification rule?

The power to issue regulations is expressly conferred in the Tax Code. Thus, the Secretary of Finance, upon the recommendation of the Commissioner, shall promulgate all needful rules and regulations for the effective enforcement of the provisions of the Tax Code. (see Sec.244, NIRC). The rules and regulations of the Bureau shall contain, among others, provisions specifying, prescribing or defining the time and manner of canvassing revenue regions, form of labels, conditions to be observed by revenue officers respecting the institutions and conduct of legal actions. (see Sec.245, NIRC) the Bureau has the power to issue rules and issuances as the case may be but subject to the following rule:

- In ascertaining the correctness of any return, or in making a return when none has been made, or in determining the liability of any person for any internal revenue tax, or in collecting any such liability, or in evaluating tax compliance, the Commissioner is authorized to obtain on a regular basis from any person other than the person whose internal revenue tax liability is subject to audit or investigation, or from any office or officer of the national and local governments, government agencies and instrumentalities, including the Bangko Sentral ng Pilipinas and government-owned or -controlled corporations, any information such as, but not limited to, costs and volume of production, receipts or sales and gross incomes of taxpayers, and the names, addresses, and financial statements of corporations, mutual fund companies, insurance companies, regional operating headquarters of multinational companies, joint accounts, associations, joint ventures of consortia and registered partnerships, and their members; c. Inquiry into bank deposits (Sec 6 {f}), NIRC) General Rule: The Bureau of Internal Revenue has no power to inquire into the bank deposits of a person or taxpayer. Exceptions: Notwithstanding any contrary provision of Republic Act No. 1405 and other general or special laws, the Commissioner is hereby authorized to inquire into the bank deposits of: 1) a decedent to determine his gross estate; and (2) any taxpayer who has filed an application for compromise of his tax liability under Sec. 204 (A) (2) of this Code by reason of financial incapacity to pay his tax liability. In case a taxpayer files an application to compromise the payment of his tax liabilities on his claim that his financial position demonstrates a clear inability to pay the tax assessed, his application shall not be considered unless and until he waives in writing his privilege under Republic Act No. 1405 or under other general or special laws, and such waiver shall constitute

SEC. 246. Non-Retroactivity of Rulings. - Any revocation, modification or reversal of any of the rules and regulations promulgated in accordance with the preceding Sections or any of the rulings or circulars promulgated by the Commissioner shall not be given retroactive application if the revocation, modification or reversal will be prejudicial to the taxpayers, except in the following cases: (a) Where the taxpayer deliberately misstates or omits material facts from his return or any document required of him by the Bureau of Internal Revenue; (b) Where the facts subsequently gathered by the Bureau of Internal Revenue are materially different from the facts on which the ruling is based; or (c) Where the taxpayer acted in bad faith.

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REVIEW NOTES FOR TAXATION 2the authority of the Commissioner to inquire into the bank deposits of the taxpayer. Such limited power of the Commissioner does not conflict with R.A 1405 or the Secrecy of Bank Deposits Law because the provisions of the Tax Code granting this power are an exception to the said legislation. If the bank has knowledge of the death of a person, who maintained a bank deposit account either alone or jointly with another, it shall not allow any withdrawal from the said deposit account, unless the Commissioner has certified that the transfer taxes imposed thereon have been paid. However the administrator of the estate or any one of the heirs of the decedent may, upon authorization by the Commissioner, withdraw an amount not exceeding twenty thousand pesos (P20, 000.00) without the certification. For this purpose all withdrawal slips shall contain a statement to the effect that all of the joint depositors are still living at the time of withdrawal by any one of the joint depositors and such statement shall be under oath by the said depositors. d. Summons persons, take testimony In ascertaining the correctness of any return, or in making a return when none has been made, or in determining the liability of any person for any internal revenue tax, or in collecting any such liability, or in evaluating tax compliance, the Commissioner is authorized: 1. To summon the person liable for tax or required to file a return, or any officer or employee of such person, or any person having possession, custody, or care of the books of accounts and other accounting records containing entries relating to the business of the person liable for tax, or any other person, to appear before the Commissioner or his duly authorized representative at a time and place specified in the summons and to produce such books, papers, records, or other data, and to give testimony (Sec.5 {c}, NIRC) 2. To take such testimony of the person concerned, under oath, as may be relevant or material to such inquiry (Sec.5 {d}, NIRC) To summon the person liable for tax or required to file a return, or any officer or employee of such person, or any person having possession, custody, or care of the books of accounts and other accounting records containing entries relating to the business of the person liable for tax, or any other person, to appear before the Commissioner or his duly authorized representative at a time and place specified in the summons and to produce such books, papers, records, or other data, and to give testimony. 3. Power to assess and prescribe requirements for tax administration Power to examine returns (Sec. 6 {a}, NIRC) After a return has been filed as required under the provisions of this Code, the Commissioner or his duly authorized representative may authorize the examination of any taxpayer and the assessment of the correct amount of tax: Provided, however;BAR OPERATIONS COMMITTEE

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That failure to file a return shall not prevent the Commissioner from authorizing the examination of any taxpayer. Any return, statement of declaration filed in any office authorized to receive the same shall not be withdrawn: Provided, That within three (3) years from the date of such filing, the same may be modified, changed, or amended: Provided, further, That no notice for audit or investigation of such return, statement or declaration has in the meantime been actually served upon the taxpayer. i. Amendment of Returns

When a report required by law as a basis for the assessment of any national internal revenue tax shall not be forthcoming within the time fixed by laws or rules and regulations or when there is reason to believe that any such report is false, incomplete or erroneous, the Commissioner shall assess the proper tax on the best evidence obtainable. In case a person fails to file a required return or other document at the time prescribed by law, or willfully or otherwise files a false or fraudulent return or other document, the Commissioner shall make or amend the return from his own knowledge and from such information as he can obtain through testimony or otherwise, which shall be prima facie correct and sufficient for all legal purposes. (Sec. 6 {b}, NIRC)

ii. Rule on confidentiality of tax returns and exceptions thereto (Sec.71 and 270, NIRC) After the assessment shall have been made, as provided in this Title, the returns, together with any corrections thereof which may have been made by the Commissioner, shall be filed in the Office of the Commissioner and shall constitute public records and be open to inspection as such upon the order of the President of the Philippines, under rules and regulations to be prescribed by the Secretary of Finance, upon recommendation of the Commissioner. The Commissioner may, in each year, cause to be prepared and published in any newspaper the lists containing the names and addresses of persons who have filed income tax returns. (see Sec.71, NIRC) Any internal revenue officer who is or shall become interested, directly or indirectly, in the manufacture, sale or importation of any article subject to excise tax under Title

a.

REVIEW NOTES FOR TAXATION 2VI of this Code or in the manufacture or repair or sale, of any die for printing, or making of stamps, or labels shall upon conviction for each act or omission, be punished by a fine of not less than Five thousand pesos (P5,000) but not more than Ten thousand pesos (P10,000), or suffer imprisonment of not less than two (2) years and one (1) day but not more than four (4) years, or both. (see Sec.270, NIRC)

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b. Power to make a returns (Sec.6 {b}, NIRC) What is Best Evidence Obtainable Rule? In case a person fails to file a required return or other document at the time prescribed by law, or willfully or otherwise files a false or fraudulent return or other document, the Commissioner shall make or amend the return from his own knowledge and from such information as he can obtain through testimony or otherwise, which shall be prima facie correct and sufficient for all legal purposes.

d. Power to terminate tax period (see Sec. 6 {d}), NIRC) When it shall come to the knowledge of the Commissioner that a taxpayer is retiring from business subject to tax, or is intending to leave the Philippines or to remove his property therefore or to hide or conceal his property, or is performing any act tending to obstruct the proceedings for the collection of the tax for the past or current quarter or year or to render the same totally or partly ineffective unless such proceedings are begun immediately, the Commissioner shall declare the tax period of such taxpayer terminated at any time and shall send the taxpayer a notice of such decision, together with a request for the immediate payment of the tax for the period so declared terminated and the tax for the preceding year or quarter, or such portion thereof as may be unpaid, and said taxes shall be due and payable immediately and shall be subject to all the penalties hereafter prescribed, unless paid within the time fixed in the demand made by the Commissioner. the BIR has the power to terminate tax period under the following instances: y when the taxpayer conceals his properties with the intention to evade taxes when the taxpayer is leaving the Philippines with the intention to evade taxes when the taxpayer is obstructing proceedings for the collection of taxes when the taxpayer is removing properties with the intention of evading taxes when the taxpayer is retiring form business

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Power to conduct inventory taking, surveillance and to issue presumptive gross sales/receipts (see Sec.6 {c}, NIRC) The Commissioner may, at any time during the taxable year, order inventory-taking of goods of any taxpayer as a basis for determining his internal revenue tax liabilities, or may place the business operations of any person, natural or juridical, under observation or surveillance if there is reason to believe that such person is not declaring his correct income, sales or receipts for internal revenue tax purposes. The findings may be used as the basis for assessing the taxes for the other months or quarters of the same or different taxable years and such assessment shall be deemed prima facie correct. When it is found that a person has failed to issue receipts and invoices in violation of the requirements of Sections 113 and 237 of the Tax Code, or when there is reason to believe that the books of accounts or other records do not correctly reflect the declarations made or to be made in a return required to be filed under the provisions of this Code, the Commissioner, after taking into account the sales, receipts, income or other taxable base of other persons engaged in similar businesses under similar situations or circumstances or after considering other relevant information may prescribe a minimum amount of such gross receipts, sales and taxable base, and such amount so prescribed shall be prima facie correct for purposes of determining the internal revenue tax liabilities of such person.

c.

y

y

y

y

e. Power to fix real property values (see Sec.6 {e}, NIRC) The Commissioner is authorized to divide the Philippines into different zones or areas and shall, upon consultation with competent appraisers both from the private and public sectors, determine the fair market value of real properties located in each zone or area. For purposes of computing any internal revenue tax, the value of the property shall be whichever the higher is of: (1) The fair market value as determined by the Commissioner, or (2) The fair market value as shown in the schedule of values of the Provincial and City Assessors. f. Power to accredit tax agents (see Sec.6 {g}, NIRC) The Commissioner shall accredit and register, based on their professional

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REVIEW NOTES FOR TAXATION 2competence, integrity and moral fitness, individuals and general professional partnerships and their representatives who prepare and file tax returns, statements, reports, protests, and other papers with or who appear before, the Bureau for taxpayers. Within one hundred twenty (120) days from January 1, 1998, the Commissioner shall create national and regional accreditation boards, the members of which shall serve for three (3) years, and shall designate from among the senior officials of the Bureau, one (1) chairman and two (2) members for each board, subject to such rules and regulations as the Secretary of Finance shall promulgate upon the recommendation of the Commissioner. Individuals and general professional partnerships and their representatives who are denied accreditation by the Commissioner and/or the national and regional accreditation boards may appeal such denial to the Secretary of Finance, who shall rule on the appeal within sixty (60) days from receipt of such appeal. Failure of the Secretary of Finance to rule on the Appeal within the prescribed period shall be deemed as approval of the application for accreditation of the appellant. g. Power to prescribe procedural/documentary requirements the BIR has the power to prescribe the manner of filing of a returns h. Power to delegate (see Sec.7, NIRC) The Commissioner may delegate the powers vested in him under the pertinent provisions of the Tax Code to any or such subordinate officials with the rank equivalent to a division chief or higher, subject to such limitations and restrictions as may be imposed under rules and regulations to be promulgated by the Secretary of finance, upon recommendation of the Commissioner: Provided, however, That the following powers of the Commissioner shall not be delegated: (a) The power to recommend the promulgation of rules and regulations by the Secretary of Finance; (b) The power to issue rulings of first impression or to reverse, revoke or modify any existing ruling of the Bureau; (c) The power to compromise or abate, under Sec. 204 (A) and (B) of this Code, any tax liability: Provided, however, That assessments issued by the regional offices involving basic deficiency taxes of Five hundred thousand pesos (P500,000) or less, and minor criminal violations, as may be determined byBAR OPERATIONS COMMITTEE

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rules and regulations to be promulgated by the Secretary of finance, upon recommendation of the Commissioner, discovered by regional and district officials, may be compromised by a regional evaluation board which shall be composed of the Regional Director as Chairman, the Assistant Regional Director, the heads of the Legal, Assessment and Collection Divisions and the Revenue District Officer having jurisdiction over the taxpayer, as members; (d) The power to assign or reassign internal revenue officers to establishments where articles subject to excise tax are produced or kept. i. Non-delegable powers in relation to Section 16 of NIRC the following are the powers which the Bureau of Internal Revenue cannot delegate: a. the power to compromise

as a general rule the power of the BIR to compromise cannot be delegated to other administrative agencies unless in the following grounds: 1. a reasonable doubt as to the validity of the claim against the taxpayer exists 2. financial inability to pay

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The compromise settlement of any tax liability shall be subject to the following minimum accounts: a. For cases of financial inability to pay, a minimum compromise rate equivalent to ten per cent (10%) of the basic tax assessed

b. For other cases, a minimum compromise rate equivalent to forty percent (40%) of the basic tax assessed. Where the basic tax involved exceeds One million pesos (P 1,000,000.00) or where the settlement offered is less than the prescribed minimum rates, the compromise shall be subject to the approval of the Evaluation Board which shall be composed of the Commissioner and the Deputy Commissioners. All criminal violations may be compromised except those a. those already filed in court b. those involving fraud (see Sec. 204 {a}, NIRC) The taxpayers offer to compromise shall not be considered, unless and until he waives in writing his privilege under RA 1405 or under other general or special laws, and such waiver shall

REVIEW NOTES FOR TAXATION 2constitute the authority of the Commissioner to inquire into his bank deposits. (see Sec. 6 {f}, NIRC) b. power to abate The BIR may abate or cancel tax liability when: a. the tax or any portion thereof appears to be unjustly or excessively assessed b. the administration and collection costs involved do not justify the collection of the amount due

19For cases of financial incapacity, a minimum compromise rate equivalent to ten percent (10%) of the basic assessed tax; and For other cases, a minimum compromise rate equivalent to forty percent (40%) of the basic assessed tax.

Where the basic tax involved exceeds One million pesos (P1,000.000) or where the settlement offered is less than the prescribed minimum rates, the compromise shall be subject to the approval of the Evaluation Board which shall be composed of the Commissioner and the four (4) Deputy Commissioners. (B) Abate or Cancel a Tax Liability, when: (1) The tax or any portion thereof appears to be unjustly or excessively assessed; or (2) The administration and collection costs involved do not justify the collection of the amount due. All criminal violations may be compromised except: (a) those already filed in court, or (b) those involving fraud. D. The rule on estoppel in relation to tax administration a. Against the government The error made by a tax official in the assessment of his tax liabilities does not have the effect of relieving the taxpayer from the obligation to pay the full amount of his tax liability, for taxes are fixed by law and the government is never estopped to collect the legitimate taxes because of the errors committed by its agents. However, like other principles, the principle of estoppel also admits exceptions in the interest of justice and fair play. The Commissioner is precluded from adopting a position inconsistent with one previously taken where in justice would result therefore or where there has been a misrepresentation. Any mistakes committed by the agents of the sovereign, namely government officials and employees are their own and cannot bind the government, which cannot be placed on estoppel on account of the mistakes of its agents. b. Against the taxpayer E. Assessments and its governing principles a. Definition The notice and demand for payment of a tax liability should not be confused with assessment relative to real property taxation which refers to the listing and evaluation of taxable real property. b. What constitutes an assessment

The power to compromise or abate shall not be delegated by the Commissioner, except in the following cases; a. assessments issued by the regional offices involving basic taxes of P 500,000.00 or less b. Minor criminal violations. These cases may be compromised by the regional evaluation board. (see Sec.7, NIRC) i. Enforcement of police power (see Sec.15, NIRC)

The Commissioner, the Deputy Commissioners, the Revenue Regi