Business and Transfer Taxes Notes

Estate Tax
Basic Terms in Taxation
Right – The basics of human existence.Those things that
Taxation – power of the Government to impose burden upon are Necessary to live. You cannot live without these.
Eg. Right to breathe, right to live, right to vote, Freedom of speech. Etc.
the people to earn Revenue.

3 Inherent Powers of the State ( definition: Acaylar, PJ)
1. Police Power – power to monitor people for
the general welfare.
2. Eminent Domain – power to expropriate
PRivilege– Are Rights that you can live without.
These are things that are allowed and granted by the state.
These privileges can be Taxed.
Eg. Driver’s license, Professional Licenses, etc. You can live without having to drive
or be a lawyer, etc.

private property for public use.

3. Taxation – power of the government to
impose burden upon the people to earn
U Note:
Government requires us to pay taxes so that
revenue.
we can exercise the privileges that they have
U Note: granted upon us and these taxes also work for
the protection of our rights and privileges.
Taxation is the foundation wherein government
is founded on. Taxes and the government have
To understand taxation, one must understand the
a symbiotic relationship.
concept of rights and privileges. Rights are
usually not taxable while Privileges are usually
“Without taxation there is no government” taxable.
- Judge
Cooley Double Taxation - illegal in the Philippines. You
cannot tax the same thing twice for the same
KINDS OF TAXES
period and for the same purpose.
1. Income Taxes – taxes levied on the financial
income of persons, corporations, or other legal Capital Gains tax – A capital gains tax
entities. (abbreviated: CGT) is a tax charged on capital
2. Business Taxes- taxes levied on the privilege gains, the profit realized on the sale of a non-
to enter into business inventory asset that was purchased at a lower
a. Value Added Taxes price.
b. Other Percentage Taxes
c. Excise Tax – tax imposed on SIN 2 Basic Questions in Taxation
products ( products that are harmful 1. Are you a Citizen?
and wasteful) 2. Are you a Resident

If the answer is YES to anyone of these this is

3. Transfer Taxes – taxes on the privilege to
transfer of property from one person to
TAXABLE.
another.
a. Estate Taxes – takes effect after death
b. Donor’s Taxes – takes effect during
lifetime
a. Donation Inter Vivos - during
life
b. Donation Mortis Causa – takes
effect after death. ( Last will
and Testament)

4. Documentary Taxes – taxes levied on the

privilege to enter into contract.

RIGHT VS. PRIVILEGE

Notes from: The New Philippine Business and Transfer Taxes (Principles, Law and Problems) by Virgilio D. Reyes (Nov 2007)
Business and Transfer Taxes Notes from G. Mendoza
And Lectures by: ATTY. PRACKIE JAY ACAYLAR, CPA (EAC- Manila)
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 Business and Transfer Taxes Notes
Estate Tax
Principles of Succession
EleMENTS OF SUCCESSION
1. Deceased/ Decedent –Person who died.
Testator/ Testatrix (F) – person who wrote the last
will and testament. Also called the decedent.
2. Estate- a bulk of property left behind by the
decedent.
3. Successors/ Heir- the persons to whom the
estate is given to.
4. Executor/Administrator – person who will take
charge of the estate before the distribution.
** Executor- person named in the will by the
testator
** Administrator- person appointed by the
courts in the absence of an assigned executor.
succession – mode of acquisition by virtue of which the property
rights and obligations, to the extent of the value of the Estate of a
person are transmitted through his death to others by will or operation
of Law. ( Reyes)
Things Transmissible in Succession
1. Property – things that the decedent owned
before the time of his death.
a. Real Estate/ Property- land, building or
anything that is attached to the soil
with permanence.
b. Tangible Property- property that can be
seen or touched.
Eg. Cars, Jewelry, Electronic Gadgets, etc.
c. Intangible Property- property that
cannot be seen or touched.
Eg. Rights, Franchises, Shares, bonds, etc.
2. Rights – legal claims, franchises, (could be the
same as intangible property)
3. Obligations – unpaid debt
Kinds of Succession
1. Testamentary Succession- succession which
results from a designation of heirs made in the
last will and testament executed by the
testator.
2. Intestate/Legal Succession- succession which
results from the operation of law where there is
no last will and testament or the LW&T is void
for any reason given by law.
3. Mixed Succession – succession which results
partly from the LW&T and Partly from the
operation of law.
Kinds of Heirs
~ Primary Compulsory Heirs – heirs in a
succession whether there is or there is no last
will and testament. These include:
W Legitimate Children &Legitimate
Descendants
W Legitimate Surviving Spouse
W Legitimated Children
Legitimate Children- all children born & conceived
NOT out of wedlock.
♪ Legitimate Child
♪ Legally Adopted Child
♪ Legitimated Child
Illegitimate Children – all children born & conceived
out of wedlock.
“All Children conceived and born outside a valid
marriage are considered illegitimate.”
~(Art 165, Family Code of the
Philippines)
~ Secondary Compulsory Heir – only can get
part of the estate in the absence of the
primary compulsory heirs.
W Legitimate Ascendants
W Illigitimate Ascendants
~ Voluntary Heirs – Heirs determined through
the last will
and testament.
LAST WILL AND TESTAMENT– a will or testament is a document
by which a person (the testator) regulates the rights of others over his
or her property or family after death. For the devolution of property not
disposed of by will, see inheritance and intestacy. In the strictest
sense, "will" is a general term, while "testament" applies only to
dispositions of personal property (this distinction is seldom observed).
A will is also used as the instrument in a trust.
- A written instrument wherein the testator would administer his
properties rights and obligation after his death. (acaylar)
Codicil- addenums or attachments to the will.
Kinds of Last Will and Testaments
~ Holographic Will - a will entirely written
or created by the testator himself, signed
and dated and NOT subject to legal
formalities on form, witnesses, or
acknowledgement before a notary public.
>>> This kind of will does not need
formalities because many people can
recognize his handwriting and it can be
verified by a penmanship expert.
~ Notarial Will- a will that is created FOR the
testator by a 3rd party, usually his lawyer,
follows proper form, signed and dated in
front of the required number of witnesses
and acknowledged by the presence of a
notary public.
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 Business and Transfer Taxes Notes
Estate Tax
2 PARTS OF THE ESTATE 2. Tangible personal property located within the
Philippines
~ Legitime– This is a secured portion of the estate that the law 3. Intangible personal property located within the
reserves for compulsory heirs.
Philippines unless there is reciprocity in which
~ Free Portion – Portion of the will that the testator can freely
dispose of. case it is not taxable in the Philippines.

Situs or PLACe OF TAxATION

PROBATE OF THE LAST WILL AND TESTAMENT– This is a Special
Proceeding validating the last will and testament.
Property has a situs or location or a jurisdiction for tax
“No property of a testator shall pass to an heir unless proven that all purposes. Situs is decisive in determining the estate of a
terms in the Last will and testament is legal and valid in court.” deceased person taxable in the Philippines.
Revocation of Will– the testator may revoke his last will and
testament at any time before he dies. If he executed more than one
Last will and testament the last one before he dies will be the
prevalent one

DiSINHERITANCE– A compulsory heir may be deprived of his

legitime for a cause provided by law and effected by will where the SUBJECT TO TAX
legal cause of which is stated. If there is any discrepancy, there must WITHIN WITHOUT
be proof or evidence.
Citizen / Resident y y
EXECUTOR/ ADMINISTRATOR– Carries out the provisions of the last Resident Alien y y
will and testament that is appointed by the testator. If he does not
accept, the court shall appoint. Non Resident y N
Alien/
Articulo MORTIS– testator dies within 3 months of the time of
Non Resident
marriage Citizen
Non Resident y Y
ESTATE TAXES Citizen
A tax on the right of transmitting property at the time of death
and on the privilege that a person is given control to a certain Real Property- country where they are situated
extent to the disposition of his property to take effect upon Tangible Personal Property- country where they
death. are actually located at the time of death of the
decedent
Applies to: Intangible Personal Property- considered as
a) Citizens of the Philippines intangible personal properties situated in the
b) Residents of the Philippines Philippines:
Non-resident aliens with properties in the ~ franchise which must be exercised in the
Philippines Philippines
~ shares, obligations or bonds issued by any
Where to file- municipality in which the corporation organized in the Philippines
decedent was domiciled at the time of his ~ shares, obligations or bonds issued by any
death or if there be no legal residence in the foreign corporation 85% of the business of
Philippines, with the Office of the which is located in the Phils
Commissioner. ~ shares, obligations or bonds issued by a
foreign corporation if such shares have
GROSS ESTATE acquired a business situs in the Phils.
~ Shares or rights in any partnership,
A. Gross Estate of Citizen and Resident Decedent business or industry established in the
Phils.
1. Real Property located within and without the
Philippines PROPERTIES INCLUDIBLE IN THE GROSS ESTATE
2 Tangible personal property located within and
DECEDENT’S INTEREST - shall include all properties, rights and
without the Philippines interest which the decedent owns at the time of death. It shall include:
3. Intangible personal property located within
and without the Philippines Properties owned by the decedent actually and
physically present in his estate at the time of his
B. Gross Estate of a Non-Resident Alien Decedent death such as land, buildings, shares of stock,
vehicles, bank deposit, etc
1. Real Property located within the Philippines

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 Business and Transfer Taxes Notes
Estate Tax
The value of any interest in property owned or
possessed by the decedent at the time of his
death such as dividends declared before his
death but received after his death, partnership
profits which have accrued before his death,
usufructuary rights, etc.
The value of property, right or interest in the
property, transferred by the decedent during his
lifetime which, under the law, are in the nature of
testamentary dispositions such as life insurance
proceeds in favor of a revocable beneficiary.
TAXABLE TRANSFERS
Value of the property or interest in property
transferred by the decedent during his lifetime
which is in the nature of testamentary
disposition:
♪ Transfers in contemplation of death
♪ Revocable transfers
♪ Property passing under a general power of
appointment
♪ Transfer with retention or reservation of
certain rights over the income or
enjoyment of the property transferred
♪ Transfer for insufficient consideration
Transfers in Contemplation of Death
Impelled by the thought of death, or the
motivating factor or controlling motive for the
transfer of the property is the thought of death
without regard to the state of health of the
transferor.
Donation Mortis Causa
Takes effect upon the death of the donor. Its
characteristics are:
♪ there is no conveyance of title or
ownership to the donee or transferee
♪ the transfer is revocable by the donor at
will during his lifetime
♪ the transfer shall be void id the donor
survives the donee
REVOCABLE TRANSFERS
Where the enjoyment of the property transferred
may be altered, amended, revoked or terminated
by the decedent. The revocability is not affected
by the failure of the decedent to exercise the
power to revoke during his lifetime. If the notice
has not been given, the power to revoke has not
been exercised on of before the date of his death,
such notice shall be considered to have been
given, or the power exercised on the date of his
death.
PROPERTY PASSING UNDER A GENERAL POWER
OF APPOINTMENT
The rule is the gross estate shall include any
property passing or transferred under a general
power of appointment exercised by the decedent
♪ By will
♪ By deed to take effect in possession or
enjoyment at or after his death
♪ By deed under which he has retained for
his life or any period not ascertainable
without reference to his death or for any
period which does not in fact end before
his death
♪ The possession or enjoyment of, or the
right to the income from the property
♪ The right, either alone, or in conjunction
with any person to designate the persons
who shall possess or enjoy the property or
the income therefrom
The donee of a general power of appointment
holds the appointed property with all the
attributes of ownership thus, the appointed
property shall form part of the gross estate of the
donee of the power upon his death.
Transfers with Retention and Reservation of
Certain Rights Over the Income or Enjoyment of
the Property Transferred
Transfers where the donor reserves the right to
the income of the property until death; or
Transfers where the donor reserves the right to
the possession or enjoyment of the property until
death
These transfers do not actually convey full
ownership over the property transferred hence
the property still remains part of the gross estate
of the transferor.
TRANFERS FOR INSUFFICIENT CONSIDERATION
→ If the transfer is a bona fide sale for
adequate and full consideration in money
or money’s worth, no value shall be
included in the gross estate.
→ If the transfer is not a bona fide sale for an
adequate and full consideration in money
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 Business and Transfer Taxes Notes
Estate Tax
or money’s worth, there shall be included
in the gross estate only the excess of the
fair market value of the property at the
time of death over the value of the
consideration received by the decedent.
→ If an inter vivos transfer of the decedent is
proven to be fictitious, the total value of
the property at the time of death shall be
included in the gross estate.
Reasons for Taxability of the Transfers
It will be seen that in most of these transfers, the
property remains substantially that of the
transferor during his lifetime notwithstanding the
transfer as he still retains either the “Beneficial
Ownership” or “Naked Title” to the property.
Hence, the transfer is essentially similar in
respect to a transmission by testacy or intestacy
upon the death of the owner. In order to be
exempted from the purview of the taxing
provisions, the transfer by inter vivos must be
absolute and outright with no strings attached
whatsoever by the decedent.
PROCEEDS OF LIFE INSURANCE
Proceeds of life insurance under policies taken
out by the decedent upon his own life shall be
included in his gross estate in the following cases:
♪ when the beneficiary is the estate of the
deceased, his executor or administrator
whether or not the deceased retained the
power of revocation
♪ when the beneficiary is other than the
estate of the deceased, his executor or
administrator and the decedent retained
the power of revocation
CLAIMS AGAINST INSOLVENT PERSONS
Are receivables due or owing from persons who
are not financially capable of meeting their
obligations. The receivables shall be included in
the gross estate at their full amount.
CAPITAL OF THE SURVIVING SPOUSE
The gross estate of a married decedent shall
consist of the following:
♪ conjugal or community properties
♪ exclusive properties
The capital of the surviving spouse shall not be
deemed part of the gross estate.
EXEMPT ACQUISITIONS AND TRANSACTIONS
FROM PAYMENT OF ESTATE TAXES
♪ the merger of the usufruct in the owner of
the naked title
♪ the transmission or delivery of the
inheritance or legacy by the fiduciary heir
or legatee to the fideicommissary
♪ the transmission from the first heir,
legatee or donee in favor of another
beneficiary in accordance with the desire
of the predecessor
♪ all bequests, devises, legacies or transfers
to social welfare, cultural and charitable
institutions, no part of the income of which
inures to the benefit of any individual;
Provided, however, that no more than 30%
of the said bequests, devices, legacies or
transfers shall be used by such institutions
for administration purposes.
VALUATION OF THE ESTATE
♪ Valuation Date- time of death
♪ Basis of Valuation- fair market value,
which is the price which a property will
bring when it is offered for sale by one
who desires, but is not obligated to sell
and is bought by one who is under not
necessity of buying it
♪ Valuation of Usufruct- probable life of the
beneficiary in accordance with the latest
Basic Standard Mortality Table
♪ Valuation of Real Property -
1) FMV as determined by the Commissioner; or
2) FMV as shown in the schedule of values fixed
by the Provincial or City Assessors
♪ Valuation of Personal Properties- FMV at
the time of the decedent’s death
DEDUCTIONS FROM THE GROSS ESTATE
The estate tax is computed based on the net
estate. The net estate is determined by
subtracting from the gross estate the deductions
authorized by law.
A)Funeral Expenses
The limit is the actual funeral expenses or the
amount equal to 5% of the gross estate,
whichever is lower, but in no case to exceed
P200,000.
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 Business and Transfer Taxes Notes
Estate Tax
Funeral expenses include the expenses for the
mourning clothing of the spouse and unmarried
minor children, fees and charges for masses,
rites, ceremonies incident to the interment,
expenses of interment, and the cost of the coffin,
burial plot, tombstone, mausoleum or niche. The
cost of obituary notices, flowers and expenses of
the wake preceding the burial are also part of
funeral expenses. Expenses incurred after burial
can no longer be deducted.
B) Judicial Expenses
Refers primarily to court expenses and expenses
of administration. The expenses of
administration include those actually and
necessarily incurred in the administration of the
estate.
C) Claims Against Insolvent Persons
The gross estate shall include receivables of the
decedent at their full amount due from debtors
who are insolvent. The deduction is the amount
of the receivable which cannot be collected due
to insolvency.
D) Unpaid Mortgage
Unpaid mortgage in respect to property is a
deduction from the gross estate subject to the
condition that the decedent’s interest in the
property, undiminished by the mortgage, is
included in the gross estate.
E) Losses
Requisites:
1. loss is not compensated by insurance or
otherwise
2. loss was not claimed as a deduction in the
income tax return
3. loss must occur not later than the last day
for payment of the estate tax
F) Vanishing Deduction
The purpose is to minimize the effect of a double
taxation on the same property within a short
period of time
Conditions:
a) Decedent died within five (5) years from
receipt of the property from a prior decedent or
donor;
b) Property on which vanishing deduction is
being claimed must be located in the Philippines;
c) Property must have formed part of the taxable
estate of the prior decedent, or of the taxable gift
of the donor;
d) Estate tax on the prior succession or the
donor’s tax on the gift must have been finally
determined and paid;
e) Property on which vanishing deduction is
being taken must be identified as the one
received from the prior decedent or from the
donor, or something acquired in exchange
therefore.
f) No vanishing deduction on the property was
allowable to the estate of the prior decedent
G) Family Home
A deduction from the gross estate is an amount
equivalent to the current fair market value of the
decedent’s family home. The maximum is P1M.
As a condition for the deduction for the family
home, it must be certified to as family home by
the barangay captain of the locality where it is
located.
H) Standard Deduction
The law provides an amount equivalent to P1M.
I) Medical Expenses
There is a deduction for medical expenses
incurred by the decedent within 1 year prior to
his death, substantiated with receipts. In no case
shall the deductible medical expenses exceed
P500,000.
J) Amount Received under RA 4917
Any amount received by the heirs from the
decedent’s employer as a consequence of the
death of the decedent-employee in accordance
with RA 4917 shall be deductible if such amount
is included in the gross estate of the decedent.
K) Procedural Requirements
Notice of death (Sec. 89) in all cases of transfers
subject to tax, or if exempt from tax, the gross
value of the estate exceeds P20,000.00 must be
filed two (2) months after the decedent’s death or
after qualifying as executor or administrator.
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 Business and Transfer Taxes Notes
Estate Tax
Estate Tax Returns
1. Requirements: in all cases of transfers though
exempt, gross value exceeds P200,000.00
regardless of value, the estate consists of
registered or registrable property such as real
property. Motor vehicle x x x . in which case the
legal heirs, admin, exec files a return under oath
in duplicate setting forth: value of estate at the
time of death, deductions allowed and other info.
If gross value exceeds P2,000,000.00 the return
shall be supported by a statement duly certified
to by a CPA:
• itemized assets
• itemized deductions from gross estate
• amount of tax due whether paid or
outstanding
Time for filing: 6 months from the decedent’s
death
Extension of time: Commissioner has authority to
grant in meritorious cases a reasonable extension
not exceeding 30 days.
Place of filing: Authorized agent bank, RDO,
Collection officer, duly authorized treasurer of
city/municipality where decedent was domiciled
or if there be no legal residence in the Philippines,
with the Office of the commissioner.
IX. Payment of Estate Tax
Time of Payment: at the time the return is filed by
executor, admin, and heir
Extension: When Commissioner finds that
payment would impose undue hardship on estate
or heirs, he may grant an extension
• not exceeding 5 years, if estate is settled
through the courts
• not exceeding 2 years, if estate is settled
extrajudicially
No extension in cases of assessment by reason of
negligence, intentional disregard of rules and
regulations or fraud on part of taxpayer.
Who pays : Executor, administrator before
delivery to beneficiary.
• Beneficiary subsidiarily liable to the extent
of distributive share.
X. Rates of Estate Tax – Section 84
XI. Duties of government agencies
a. Sec. 94 – No judge shall authorize the
executor or administrator to deliver the
distributive share to any party interested in the
estate unless a Certification from the
Commissioner shows that the estate taxes have
been paid.
Sec. 95 – The Register of Deeds shall not register
transfer of real property or real rights by way of
gifts inter vivos or mortis causa unless tax is
shown to have been paid.
Sec. 97 – No transfer of shares, obligations, bonds
in the books of a new corporation by way of gifts
inter vivos or mortis causa unless there is a
certification that the taxes have been paid.
The lawyer preparing the document relating to
partition or disposition shall furnish the
Commissioner, Regional Director, RDO with such
copies to facilitate collection
The debtor of the deceased shall not pay his
debts to the heirs unless there is a Certification
that the taxes have been paid.
A bank where deposit is maintained by decedent
shall not allow withdrawal unless there is a
Certification that the taxes have been paid.
Some BIR Rulings
BIR 423-87 (Life Insurance)
The taxability of insurance proceeds will depend
on whether the designation of the beneficiary is
revocable or irrevocable. If revocable, the
proceeds form part of the Gross Estate even if
the decedent- insured failed to revoke. But if the
designation is irrevocable, proceeds of the life
insurance vest upon the beneficiary immediately
and they no longer form part of the decedent’s
gross estate.
BIR 186-81
Receivables as well as expected tax refunds at
the time of death of the decedent form part of
the gross estate.
BIR 095-98
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 Business and Transfer Taxes Notes
Estate Tax
The estate tax shall be appraised at its FMV as of
the time of death or as of 6 months thereafter at
the election of the executor or administrator.
However the appraised value of real property as
of the time of death or at the election of the
executor or administrator as of 6 months after
death shall either be (a) the current and FMV as
shown in the schedule of values by the provincial
or city assessor or (b) the FMV as determined by
the CIR, whichever is higher.

BIR 011-86

Shares of stock which had been either

suspended, de listed or where no transactions
invoking them have been made, shall be valued
at their book value nearest the valuation date
which is the decedent’s death. The book value is
prima facie considered as FMV. However, if there
had been previous bona fide sales/exchanges of
such shares, the price at which such shares
exchanged hands should be taken or considered
as FMV.

BIR 066-98

The estate tax return is required to be filed within

6 months from the decedent’s death, and in
meritorious cases, a reasonable extension not
exceeding 30 days for filing the return may be
granted by the CIR. The payment of estate tax
shall be made upon the filing of the return or on
such date as fixed if an extension is granted by
the CIR as when payment of the same would
impose undue hardship on the estate or any of
the heirs, but in no case to exceed 5 years if the
estate is settled through the courts or 2 years in
case the state is settled extra judicially.

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