Transfer Tax-Estate Tax Reviewer

MARIVIC DE GRACIA TRANSFER TAX

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

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

KINDS OF TRANSFER TAXES:

ESTATE TAX DONOR’S TAX TAX ON THE TRANSFER OF

REAL PROPERTY

NIRC NIRC LGC

Donation mortis causa Donation inter vivos Tax levied on the

transmission of properties from decedent to his heirs

Tax levied on the transmission of properties from a living person to another living person. Tax on the privilege to

transmit property at death

Excise tax or privilege tax

Excise tax or privilege tax Effective upon death Effective during the

life time of the donor Tax base is the net

estate

Tax base is the net gift within the calendar year Net estate amounting

to P200,000 is exempted

Net gift amounting to P100,000 is

exempted 20% highest rate highest rates:

15%-relative 30%-stranger Filing: within 6 months

from the date of death

Filing: within 30 days from the date of donation

ESTATE TAX

FORMULA:

Gross Estate (Sec. 85)

Less: Ordinary Deductions (Sec. 86)_____________

Equals: Net Estate before share of surviving spouse Less: Share of surviving spouse________________

Equals: Net estate before special deductions

Less: Special deductions______________________

Equals: Net taxable estate

Multiply:Tax Rate (Sec 84)______________________ Equals: Estate Tax Payable

If there’s tax credit available: Estate tax payable

Less: Tax credit____________ Equals: Final estate tax payable

LAW GOVERNING THE IMPOSITION OF ESTATE TAX

-all properties and interests in properties of the decedent at the time of his death shall be included in his gross estate. -the properties included in the gross estate of the decedent would depend on whether or not the decedent is a citizen or alien and whether or not the alien decedent is a resident of the Philippines at the time of his death.

ESTATE:

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

-RCD, NRCD, RAD, NRAD are subject to estate tax

IMMOVABLE AND TANGIBLE PERSONAL PROPERTY INTANGIBLE PERSONAL PROPERTY WITHIN WITHOUT WITHIN WITHOUT

RCD RAD NRCD     NRAD  -  - NRAD WITH RECIPROCITY1  - - -

RECIPROCITY- in order to prevent multiplicity of taxation, the tax code provides that the tax imposed by this title shall be credited with the amounts of any estate tax imposed by the authority of a foreign country.

NO TAX SHALL BE IMPOSED IN RESPECT OF INTANGIBLE PERSONAL PROPERTY OF CITIZEN AND RESIDENT OF A FOREIGN: a. No transfer tax clause- when the foreign country does not impose transfer tax of any character in respect of intangible personal property of citizens of the Philippines not residing in that foreign country, or

b. Exemption clause- when the foreign country imposes transfer taxes but grants similar exemption from transfer taxes in respect of intangible personal property

MARIVIC DE GRACIA

COMPOSITION OF DECEDENT’S GROSS ESTATE

DECEDENT’S INTEREST TRANSFER IN CONTEMPLATION OF

DEATH REVOCABLE TRANSFER

PROPERTY PASSING UNDER GENERAL POWER OF APPOINTMENT Kinds:

1. Property owned- decedent possesses all the attributes of ownership.

2. Interest in property possessed- interests accrued

in favour of the decedent at the time of his death. (accrued income)

Example:

a. dividends declared by a corporation before death of the stockholder although paid after death

b. partnership profits even if paid after death of the partner c. proceeds of a life insurance policy payable to a designated revocable beneficiary

d. right of usufruct

3. Property or interest transferred.

-does not refer to the GENERAL

EXPECTATION OF DEATH but to the THOUGHT OF DEATH, as a controlling motive which induces the disposition of the property for the purpose of avoiding tax.

Kinds:

1. By trust or otherwise, in contemplation

of or intended to take effect in possession or enjoyment at or after death.

2. By trust or otherwise, under which he

has retained for his life or for any period which does not in fact end before his death:

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

Exception:

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

Circumstances taken into account:

a. age and state of health of the decedent at the time of gift

b. length of time between the gift and the date of death (short interval)

c. concurrent making of a will

-transfer made by the decedent

during his lifetime but the use, enjoyment and possession thereof is subject to his power to alter, amend, revoke or terminate at the time of his death.

-the decedent retains tremendous power and control over the property

Exception:

In case of bona fide sale for an adequate and full consideration in money or money’s worth

POWER OF APPOINTMENT

-refers to a right to designate the person or

persons who shall enjoy or possess certain property from the estate of a prior decedent

a. GENERAL- when it gives to the donee

the power to appoint any person he pleases, including himself, his spouse, his estate, executor or administrator, and his creditor, thus having as full dominion over the property as though he owned it.

b. SPECIAL- when the done can appoint

only among a restricted or designated class of persons other than himself.

Rationale:

The property passing under a general power of appointment comes from the donor and the donee-decedent.

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

Note: to determine whether included in

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

COMPOSITION OF DECEDENT’S GROSS ESTATE

PROCEEDS OF LIFE INSURANCE PRIOR INTEREST TRANSFER FOR INSUFFICIENT CONSIDERATION

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

Beneficiary:

1. Estate- included in the Gross Estate whether revocable or not.

2. Other than the decedent’s estate, executor or

administrator- included in gross estate if revocable

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

Policy taken before marriage- source of funds

determines ownership of the proceeds

Policy taken during marriage-

a. beneficiary is the estate- proceeds are conjugal (1/2

share of spouse not taxable)

b.beneficiary is other than estate- proceeds are payable

to the beneficiary even if paid out of the conjugal partnership

Not taxable:

a. accident insurance proceeds

b. group insurance policy taken out by a company for its employees

c. amount receivable by any beneficiary irrevocably d. proceeds of insurance issued by GSIS to government officials and employees and benefits under SSS

e. proceeds payable to heirs of deceased members of military personnel.

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

1. transfer in contemplation of death 2. revocable transfer, and

3. proceeds of life insurance

-applied when the transfer was made due to an impending death, say, due to a terminal illness.

Exception:

Bona fide sale for an adequate and full consideration in money or money’s worth

Requisites:

1. the transfer is either:

a. in contemplation of death b. revocable transfer, or

c. property passing under a general power of appointment

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

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

FMVT P1M P1M FMVD 500K 1.5M CONSIDERATION 300K 1M INCLUDED GE 200K 0

Procedure:

1.Compare the FMVT and the FMVD

2. if the FMVT is greater, determine between the FMVD and consideration received.

MARIVIC DE GRACIA

THE FF. INTANGIBLE PERSONAL PROPERTIES2 HAVE SITUS IN THE PHILIPPINES:

1. Franchise which must be exercised in the Philippines;

2. Shares, obligations, or bonds issued by any corporation organized or constituted in the Philippines in accordance with its laws;

3. Shares, obligations, or bonds issued by any foreign corporation 85% of the business of which is located in the Philippines;

4. Shares, obligations, or bonds issued by any foreign corporation if such shares, obligations or bonds have acquired a business situs in the Philippines;

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

EXEMPTION OF CERTAIN ACQUISITIONS AND TRANSMISSIONS, the ff shall NOT be taxed: (SEC. 87)

a. the merger of usufruct in the owner of the naked title;

b. The transmission or delivery of the inheritance or legacy by the fiduciary heir or legatee to the fideicommissary;

c. The transmission from the first heir, legatee or done in favour of another beneficiary, in accordance with the desire of the predecessor; d. All bequest, devise, legacies, or transfer to social welfare, cultural and charitable institutions no part of the net income of which insures to the benefit of any individual: provided, however, that not more than 30% shall be used institution for administrative purposes.

e. bequest to be used actually, directly, and exclusive for educational purposes.

f. Exemptions under reciprocity clause. g. Exemptions under special laws.

2

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

VALUATION OF THE PROPERTY

PERSONA L PROP.

REAL PROPERTY (SEC. 88 B)

SHARES OF STOCKS USUFRUCT

SEC. 88(A) FMV at the time of death FMV at the time of death appraised value of real property as of the time of death shall be, WHICHEVER IS HIGHER of: a. FMV determined by the commissioner b. FMV fixed by the provincial or city assessors UNLISTED SHARES LISTED SHARES (PSE) -taken into account the probable life of the beneficiary in accordance with the latest BASIC STANDARD MORTALITY TABLE, approved by Sec. of Finance, upon recommendatio n of the Insurance Commissioner. common shares: Book Value preferred shares: at par value FMV= arithmetic mean between the highest and lowest quotation at a date nearest the date of death if none is available on the date of death

Q: Is there a conflict between sec. 87a and sec 88a because under sec. 88A, the value of the usufruct is determined in order to be included in the

GE, while SEC.87A, upon the death of the usufructuary, the merger of the usufruct to the naked owner is exempt from that estate?

A: NONE. Under Sec 87A, the usufruct referred to is one without a fixed

period such that upon the death of the usufructuary, the usufruct is extinguished. On the other hand, Sec 88A contemplates a situation where the usufruct is for a fixed period such that upon the death of the usufructuary, the usufruct forms part of the estate since the period is not yet lapsed. Hence, it is material to determine the value of such usufruct.

ALLOWABLE DEDUCTIONS

ORDINARY DEDUCTIONS (RR 2-2003)

1. Expenses, losses, indebtedness, taxes and etc. (ELITE) (Sec 86 A)

a. Funeral expenses (Sec 86 A1a)

-amounts for actual funeral expenses or in an amount equal to 5% of the GE, whichever is LOWER, but in NO CASE

to exceed P200k shall be deducted to GE.

b. Judicial expenses (Sec 86 A1b)

-expenses incurred in the testamentary or intestate proceedings for the settlement of the estate

-expenses must be essential to the proper settlement of the estate

Note: Extrajudicial expenses shall be allowed as deductions from the gross estate provided that these are incurred for

the settlement of the estate of the deceased. (Pajonar v. CIR)

c. Claims Against the Estate (Sec 86 A1c) -the decedent is the DEBTOR

Requisites:

the amount of indebtedness must be included in the GE.

the debt instrument or the contract of loan must be notarized at the time of indebtedness was incurred. if the loan was contracted within 3 yrs. Before the death of the decedent, the administrator or executor shall submit a statement showing the disposition of the proceeds of the loan; and

a duly notarized certification as to the unpaid balance of the debt from the creditor, if the creditor is a corporation, such sworn certification shall be signed by the president, or Vice President, or other principal officer of the corporation.

Note:

- An indebtedness that has been condoned or has prescribed may not be claimed as deduction.

-Unpaid taxes that accrued after the death of the decedent are not deductible from gross estate, they are properly chargeable to the income of the estate.

d. Claims Against Insolvent Persons (Sec 86 A1d) -the decedent is the CREDITOR

Requisite:

the amount of the claims has been initially included as part of the gross estate of the decedent; and incapacity of the debtors to pay their obligations is proven, not merely alleged.

MARIVIC DE GRACIA

e. Unpaid mortgages, taxes and casualty losses (Sec 86 A1e)

3 Expenses:

i. mortgage indebtedness

-the decedent is the mortgagor-debtor

-limited to the extent that they were contracted bona fide and for an adequate and full consideration in money or money’s worth

-The value of the property mortgaged must be included as part of the gross estate

ii. taxes which accrued before the death of the decedent -taxes accrued prior to the death of the decedent

Note: estate tax is not included under this section since it only accrues upon the death of the decedent

iii. loss by virtue of natural calamity

-fires, storms, shipwrecks, or other casualties, or from robbery, theft or embezzlement

Requisites:

Losses are not compensated for by insurance

At the time of the filing of the return, such losses have not been claimed as a deduction for income tax purposes

Such losses were incurred not later than the last day for the payment of the estate tax (6 months after the death of the decedent)

2. Property Previously Taxed (PPT) or Vanishing deductions (Sec 86) -applicable to both estate and donor’s tax

-refers to property which forms part of the gross estate situated in the Philippines of any person died within 5 years prior to his death.

-operates to ease the harshness of successive taxation of the same property within a relatively short period of time upto 5 years, occasioned by the untimely death of the transferee after the death of the prior decedent-donor

Requisites:

the property situated in the Philippines must be part of the gross estate of the present decedent-donee the present decedent-donee must have died within 5 yrs prior to the death of the prior decedent-donor or the property was transferred by donation to the present decedent-donee within 5 years to his death

the estate tax or donor’s tax must have been paid on the property transferred

such property can be identified as having been received by the present decedent-donee from the prior decedent-donor by gift, or inheritance

no previous vanishing deduction on the property given the value of the net estate of the prior decedent-donor.

Percentage:

i. if the prior decedent died within 1 year prior to the death of the present decedent-100% ii. more than 1 year but not more than 2 years- 80%

iii. more than 2 years but not more than 3 years- 60% iv. more that 3 years but not more than 4 years- 40% v. more than 4 years but not more than 5 years- 20%

3. Transfer for public use (Sec 86)

-for the use of the Government, or any political subdivision thereof shall be considered as deduction from the gross

estate

-allowed as a deduction is that the bequest, devise or property transferred should be used exclusively for public purposes.  

SPECIAL DEDUCTIONS (RR 2-2003)

1. The family home (Sec 86)

-means the dwelling house, including the land on which it is situated, where the husband and wife, or a head of the

family, and members of their family resides, as certified to by the Brgy. Captain of the locality.

Conditions for allowance of family home as deduction from the gross estate:

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

certified by the brgy. Captain of the locality where the family home is situated;

ii. the total value of the family home must be included as part of the gross estate of the decedent; and

iii. allowable deduction must be in an amount equivalent to the current FMV of the family home as declared or included

in the gross estate or the extent of the decedent’s interest, whichever is lower, but not exceeding P1,000,000.

 -

2. Standard Deduction (Sec 86)

-the deduction is automatic without need for substantiation

-P1,000,000.00

 -

3. Medical Expenses (Sec 86)

Requisites:

all medical expenses incurred within 1 year prior to the death of the decedent must be duly substantiated with official receipts

total amount must not exceed P500,000

MARIVIC DE GRACIA

ESTATE TAX TABLE

OVER BUT NOT OVER TAX PAYABLE PLUS OF THE EXCESS

OVER P200,000 EXEMPT - P200,000 P200,000 P500,000 P0 5% P500,000 500,000 2,000,000 15,000 8% 2,000,000 2,000,000 5,000,000 135,000 11% 5,000,000 5,000,000 10,000,000 465,000 15% 10,000,000 10,000,000 AND OVER 1,215,000 20% 10,000,000

4. Benefits under R.A. 4917

-amount received by the heirs of decedent-employee PROVIDED that such amount is included in the gross estate of

the decedent employee.

Requisites provided in RA 4917:

The decedent-employee has been employed for at least 10 years Must not be less than 50 years old at the time of retirement The benefit can be availed only once

the benefits granted must be in accordance with a reasonable private benefit plan maintained bu the employer duly approved by the BIR.

 -

5. Share of the surviving spouse (Sec 86)

-the capital of the surviving spouse of a decedent shall not be deemed a part of the decedent’s gross estate

-applicable only to spouse legally married

 

MISCELLANEOUS PROVISION (SEC. 86 D)

NRA- no deduction shall be allowed UNLESS the executor, administrator or heirs includes in the estate tax return of the decedent the value at

the time of death, that part of the gross estate of the non-resident not situated in the Philippines.

Even if a NRA is taxable only for properties situated in the Philippines, for purposes of the estate tax return, ALL PROPERTIES WHETHER SITUATED IN THE PHILIPPINES OR OUTSIDE SHALL BE INCLUDED IN THE RETURN.

NOTICE OF DEATH (SEC. 89)

-Filing of notice of death in cases of:

Transfer subject to tax

Where though exempt, the gross value of the estate exceeds P20,000

-Who will file:

Executor; Administrator; or Any of the legal heirs

-Time of filing:

Within 2 months after the decedent’s death, or

Within a like period after qualifying as such executor or administrator, shall give a written notice thereof to the Commissioner.

ESTATE TAX RETURN (SEC. 90)

-Instances when the Code requires the filing of an estate tax return:

In all cases of transfer subject to the tax imposed herein, or Where, though exempt from tax, the gross value of the estate exceeds P200,000, or

Regardless of the gross value of the estate, where the said estate consists of registered or registrable property such as real

property, motor vehicle, shares of stock or other similar property fro which a clearance from the BIR is required as a condition precedent for the transfer of ownership thereof in the name of the transferee.

-Who will file:

Executor; Administrator; or Any of the legal heirs

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

Value of the GE of the decedent at the time of his death (NRAD only GE situated in the Philippines)

Deductions allowed from GE

Ascertainable and supplemental data as may be necessary to establish the correct taxes.

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

-Time of filing:

Within 6 months from decedent death

The commissioner shall have authority to grant a reasonable extension for filing the return not exceeding 30 days.

-Place of filing:

An authorized agent bank, or Revenue district Officer, Collection Officer,

Duly authorized treasurer of the city or municipality in which the decedent was domiciled at the time of his death or

if there is no legal residence in the Philippines, with the Office of the Commissioner.

MARIVIC DE GRACIA

PAYMENT OF TAX (SEC. 91)

GR: pay-as-you-file system

EX: when the Commissioner finds that the payment on the due date of

the estate tax would impose undue hardship upon the estate, he may extend not to exceed:

Judicial settlement- 5years Extrajudicial settlement- 2 years

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

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

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

COLLECTION OF ESTATE TAX

-Being a NATIONAL TAX as provided under SEC 21b of the NIRC is collected by the BIR.

-Being the lifeblood of the government, the collection is not conditioned upon any outcome of a probate proceeding.

-There is nothing in the Tax code, and in the pertinent remedial laws that implies the necessity of the probate or estate settlement court’s approval of the state’s claim for estate taxes,before the same can be enforced and collected. (Marcos II v. CA)

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

-should make a written application to the Commissioner for determination of the amount of the estate tax and discharge from personal liability therefor.

-the executor or administrator, upon payment of the estate tax shall be discharged from personal liability for any deficiency in the tax thereafter found to be due.

DEFICIENCY (SEC 93)

-the amount by which the estate tax exceeds the amount shown in the estate tax return, or

-if no amount is shown upon the return or if there is no return, the amount by which the tax exceeds the amounts previously assessed.

PAYMENT BEFORE DELIVERY BY EXECUTOR OR ADMINISTRATOR

-No judge shall authorized the executor or judicial administrator to deliver

a distributive share to any party interested in the estate UNLESS a certification from the Commissioner that the estate tax has been paid is shown. (Sec. 94)

Distribution of the estate properties can only be made:

1. After all the debts, funeral charges, expenses of administration, allowance to the widow, and ESTATE TAX have been paid; or 2. Before payment of said obligations only if the distributes or any of

them gives a BOND in a sum fixed by the court conditioned upon the payment of said obligations within such time as the court directs, or when provision is made to meet those obligations. (Estate of Hilario Ruiz)

DUTIES OF CERTAIN OFFICERS AND DEBTORS (SEC. 95)

-The Registry of deeds shall not register the property unless a certification from the Commissioner that the tax fixed had been paid. -attorney who executed the extrajudicial partition or the judicial settlement is obliged to file a petition or pleading with the court -the notary public who notarized the settlement of the estate -the city or provincial engineer who made the cadastral survey for purposes of partition.

-a debtor of the deceased to pay only after a certification of the Commissioner that the tax has been paid is shown.

-such debtor may be allowed to pay his debt even without such certification, provided that the amount of the debt is included in the enventory of the estate of the deceased.

RESTITUTION OF TAX UPON SATISFACTION OF OUTSTANDING OBLIGATIONS (SEC. 96)

-If after the payment of the estate tax, NEW obligations of the decedent shall appear, and the person interested shall have satisfied they by order of court,

-they shall have a right to the restitution of the proportional part of the tax paid.

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

-For the transfer to the NEW owner to be effected, there must be a

showing of the certification from the Commissioner that the estate tax has been paid.

-If a bank has knowledge of the death of a person, who maintained a bank deposit account alone or jointly with another, shall not allow any withdrawal from the said deposit account, unless the Commissioner has certified that estate tax had been paid.

-the administrator or any of the heirs of the decedent may, upon authorization by the commissioner withdraw an amount not exceeding P20,000 without the said certification.