ESTATE TAXATION

(Section 84-97, Tittle III of the NIRC of 1997)

SEC. 84. Rates of Estate Tax. - There shall be levied, assessed, collected and paid upon
the transfer of the net estate as determined in accordance with Sections 85 and 86 of every
decedent, whether resident or nonresident of the Philippines, a tax based on the value of
such net estate, as computed in accordance with the following schedule:

If the net estate is:

Over But Not Over The Tax Shall Be Plus Of the Excess
Over

P 200,000 Exempt

P 200,000 500,000 0 5% P 200,000

500,000 2,000,000 P15,000 8% 500,000

2,000,000 5,000,000 135,000 11% 2,000,000

5,000,000 10,000,000 456,000 15% 5,000,000

10,000,000 And Over 1,215,000 20% 10,000,000

Discussion:

IMPOSITION OF ESTATE TAXES

1. When the estate tax accrues. The estate tax accrues as of the death of the decedent
and the accrual of the tax is distinct from the obligation to pay the same. Upon the
death of the decedent, succession takes place and the right of the State to tax the
privilege to transmit the estate vests instantly upon death. (Rev Regs. No. 2-2003, 1s '
par, Sec. 3)

2. Rates of Estate Tax

-***See Section 84

3. Determination of the net estate. For purposes of imposing the estate tax the value of
the estate tax shall be determined by deducting the deductions allowed to the estate
 of the decedent, whether a citizen, a resident or a non-resident alien. (NIRC of 1997,
Sec. 86)

4. Steps in the Determination of the Estate Tax.

a. Determine the nationality and residence of the decedent.
b. Determine the nature and location of the properties of the decedent.
c. Determine the composition and value of the gross estate.
d. Determine the nature and value of the allowable deductions and subtract from the
gross estate in order to arrive at the net estate.
e. Apply the rates of the estate tax that are applicable to the net estate.
f. Determine the applicable penalties and surcharges, if any.

SITUS OF ESTATE TAXATION

1. Situs of real property for estate taxation. The place where the real property is
located.
2. Situs of tangible personal property. The rule to follow is the mobilia sequuntur
personam (movables follow the person). Thus the situs of taxation is the place
where the owner is found not the place where the tangible personal property is
physically located.
3. Situs of intangible personal property. Where the intangible personal property
has obtained a business situs is the taxing authority. For example, shares of stock
of domestic corporations have obtained a business situs in the Philippines such
that they are part of the gross estate no matter where they are found or where the
owner is domiciled.
4. The situs of estate taxation may also be determined by the domicile or
citizenship of the decedent. The reader should note that the above concepts
may be used in combination for the purpose of determining what pro parties are to
be included in the gross estate of a decedent. Refer to the following discussions.

COMMON DEFINITIONS THATAPPLY TO ALL GROSS ESTATES WHETHER OF

DECEDENT FILIPINOS, RESIDENT ALIENS, AND NON RESIDENT ALIENS

1. Real property for estate tax purposes. The NIRC of 1997 has not defined the
meaning of real property for estate tax purposes but Revenue Regulations No. 7-
2003 has defined real property, for purposes of capital gains taxation, as having
"the same meaning attributed to that term under Article 415 of Republic Act No.
386, otherwise known as the 'Civil Code of the Philippines.' (Rev. Regs. No. 7-
2003, Sec. 2.c.)
2. Personal property for purposes of imposing the estate tax. The NIRC of 1997
has not defined the meaning of personal property for estate tax purposes. The
author submits that in the definitions of personal property under civil law would find
application as well to estate taxation.
 3. Classification of personal property. The NIRC of 1997 has not classified
personal property for estate tax purposes. While this may be so, the reader should
note that there are two kinds of personal property and the tax treatment for each of
them may be different. Personal property may be classified into
a. Tangible personal property, and
b. Intangible personal property

IMPORTANCE OF KNOWING WHETHER PERSONAL PROPERTY IS TANGIBLE OR

INTAGIBLE

Intangible personal property of nonresident aliens are included in the decedent's gross estate
only if they are situated in the Philippines. Intangibles of Filipinos and those of resident aliens
wherever situated are included in the decedent's gross estate.

SEC. 85. Gross Estate. - the value of the gross estate of the decedent shall be determined
by including the value at the time of his death of all property, real or personal, tangible or
intangible, wherever situated: Provided, however, that in the case of a nonresident decedent
who at the time of his death was not a citizen of the Philippines, only that part of the entire
gross estate which is situated in the Philippines shall be included in his taxable estate.

(A) Decedent's Interest. - To the extent of the interest therein of the decedent at the time of
his death;

(B) Transfer in Contemplation of Death. - To the extent of any interest therein of which the
decedent has at any time made a transfer, by trust or otherwise, in contemplation of or
intended to take effect in possession or enjoyment at or after death, or of which he has
at any time made a transfer, 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 (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; except in case of a bona fide sale for an adequate and full
consideration in money or money's worth.

(C) Revocable Transfer. -

(1) To the extent of any interest therein, of which the decedent has at any time made a
transfer (except in case of a bona fide sale for an adequate and full consideration in money
or money's worth) by trust or otherwise, where the enjoyment thereof was subject at the
date of his death to any change through the exercise of a power (in whatever capacity
exercisable) by the decedent alone or by the decedent in conjunction with any other person
(without regard to when or from what source the decedent acquired such power), to alter,
amend, revoke, or terminate, or where any such power is relinquished in contemplation of the
decedent's death.

(2) For the purpose of this Subsection, the power to alter, amend or revoke shall be
considered to exist on the date of the decedent's death even though the exercise of the
power is subject to a precedent giving of notice or even though the alteration, amendment or
revocation takes effect only on the expiration of a stated period after the exercise of the
power, whether or not on or before the date of the decedent's death notice has been given or
the power has been exercised. In such cases, proper adjustment shall be made representing
the interests which would have been excluded from the power if the decedent had lived, and
for such purpose if the notice has not been given or the power has not been exercised on or
before the date of his death, such notice shall be considered to have been given, or the
power exercised, on the date of death.

(D) Property Passing Under General Power of Appointment. - To the extent of any
property passing under a general power of appointment exercised by the decedent: (1) by
will, or (2) by deed executed in contemplation of, or intended to take effect in possession or
enjoyment at, or after his death, or (3) 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 (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
persons who shall possess or enjoy the property or the income therefrom; except in case of a
bona fide sale for an adequate and full consideration in money or money's worth.

(E) Proceeds of Life Insurance. - To the extent of the amount receivable by the estate of
the deceased, his executor, or administrator, as insurance under policies taken out by the
decedent upon his own life, irrespective of whether or not the insured retained the power of
revocation, or to the extent of the amount receivable by any beneficiary designated in the
policy of insurance, except when it is expressly stipulated that the designation of the
beneficiary is irrevocable.

(F) Prior Interests. - Except as otherwise specifically provided therein, Subsections (B), (C)
and (E) of this Section shall apply to the transfers, trusts, estates, interests, rights, powers
and relinquishment of powers, as severally enumerated and described therein, whether
made, created, arising, existing, exercised or relinquished before or after the effectivity of this
Code.

(G) Transfers for Insufficient Consideration. - If any one of the transfers, trusts, interests,
rights or powers enumerated and described in Subsections (B), (C) and (D) of this Section is
made, created, exercised or relinquished for a consideration in money or money's worth, but
is not a bona fide sale for an adequate and full consideration in money or money's worth,
there shall be included in the gross estate only the excess of the fair market value, at the
time of death, of the property otherwise to be included on account of such transaction, over
the value of the consideration received therefor by the decedent.

(H) Capital of the Surviving Spouse. - The capital of the surviving spouse of a decedent
shall not, for the purpose of this Chapter, be deemed a part of his or her gross estate.

Discussion:

THE GROSS ESTATE OF DECEDENT FILIPINOS AND RESIDENT ALIENS

1. Gross estate for purposes of estate taxation of decedent Filipino citizens,

whether residents or nonresident.
a. The value at the time of death of all:
i. real property, wherever situated,
ii. personal property
1. Whether tangible or intangible, or mixed,
2. Wherever situated. (NIRC of 1997, Secs. 85, 1s t par., and 104,
numbering and arrangement supplied);
b. to the extent of the interest therein of the decedent at the time of his death.
[Ibid., Sec. 85 (A)]

2. Kinds of estates of decedents for the purpose of imposing the estate tax:
a. Estates of decedent Filipinos, whether residents or not, and estates of
decedent resident aliens;
b. Estates of decedent non-resident aliens.

3. Filipinos for purposes of estate taxation. The NIRC of 1997 has not defined who
are considered as Filipinos for purposes of estate taxation. The author submits that
the constitutional definition of who are Filipinos would find application. The following
are citizens of the Philippines.
a. Those who are citizens of the Philippines at the time of the adoption of the 1987
Philippine Constitution;
b. Those whose fathers or mothers are citizens of the Philippines;
c. Those born before January 17, 1973, of Filipino mothers, who elect Philippine
citizenship upon reaching the age of majority; and
d. Those who are naturalized in accordance with law (1987 Philippine
Constitution, Article IV, Sec 1)

Notes and Comments

Filipino citizen and a citizen of another country may be subject to the Philippine laws
on estate taxation.
 NIRC of 1997 does not make a distinction between a resident Filipino and a non-
resident Filipino with regard to the determination of what constitutes the gross estate
of a decedent Filipino The rationale behind this absence of distinction with regard to
residency is the symbiotic relation of protection and support between a citizen and his
State It does not matter where the property of the decedent is located so long as he is
a Filipino, such property shall form part of his gross estate because protection is given
to him by the Philippine government by reason of his citizenship

4. Residence for purposes of estate taxation, definition. Residence is the permanent

home, the place to which, whenever absent for business or pleasure, one intends to
return, and depends on facts and circumstances in the sense that they disclose intent.
The term "residence: is synonymous with "domicile".

5. Determinant for abandonment of domicile. There must be a deliberate and

provable choice of a new domicile, coupled with actual residence in the place chosen,
with a declared or provable intent that it should be one's fixed and permanent place of
abode, one's home.

6. Gross estate for purposes of estate taxation of decedent resident aliens.

a. The value at the time of death of all:
1. real property, wherever situated,
2. personal property
i. whether tangible or intangible, or mixed,
ii. wherever situated. (NIRC of 1997, Secs 85, 1s t par., and 104,
numbering and arrangement supplied);
b. to the extent of the interest therein of the decedent at the time of his death.
[Ibid.. Sec 85 (A)]
Notes and Comments
The composition of the gross estate for estate tax purposes of a resident alien is the
same as that of Filipinos.

7. Resident aliens for purposes of estate taxation. "The term 'resident alien' means
an individual whose residence is within the Philippines and who is not a citizen
therefor." [NIRC of 1997, Sec. 22 (F)J

Revenue Regulations provide an interpretation of who may be considered as

resident aliens:

a. An alien actually present in the Philippines who is not a mere transient or

sojourner.
b. Whether he is a transient or not is determined by his intentions with regard to
the length and nature of his stay.
 c. A mere floating intention indefinite as to time, to return to another country is
not sufficient to constitute such alien as a transient. If he lives in the
Philippines and has no definite intention as to stay, he is a resident.
d. One who comes to the Philippines for a definite purpose which in its nature
may be promptly accomplished is a transient. But if his purpose is of such a
nature that an extended stay may be necessary for its accomplishment, and
to that end the alien makes his home temporarily in the Philippines, he
becomes a resident though it may be his intention at all times to return to his
domicile abroad when the purpose for which he came has been
consummated or abandoned. (Rev Regs. No 2, Sec. 5, numbering supplied)

GROSS ESTATE OF DECEDENT NON-RESIDENT ALIEN

1. Gross estate for purposes of estate taxation of a non-resident alien decedent.

The gross estate of a non-resident alien decedent shall be determined by including:
a. the value at the time of his death of his:
1. real property situated in the Philippines;
2. personal property
i. whether tangible, intangible or mixed,
ii. situated in the Philippines. (NIRC of 1997, Sees. 85 and 104,
numbering arid arrangement supplied)
b. to the extent of the interest therein of the decedent at the time of his death.
[Ibid., Sec. 85 (A.)

2. Intangible property of a non-resident alien decedent considered as situated in

the Philippines.
a. Franchise which must be exercised in the Philippines;
b. shares, obligations or bonds
1. issued by any corporation or sociedad anonima organized or constituted
in the Philippines in accordance with its laws;
2. issued by any foreign corporation eighty-five per centum (85%) of the
business of which is located in the Philippines;
3. issued by any foreign corporation if such shares, obligations, or bonds
have acquired a business situs in the Philippines;
c. shares or rights in any partnership, business or industry established in the
Philippines. (NIRC of 1997, Sec 104, 1" par., numbering and arrangement
supplied)

All of the above items are includible in the gross estate of a non-resident alien
decedent.
COMMON RULES FOR THE DETERMINATION OF ITEMS THAT ARE INCLUDIBLE IN
ALL GROSS ESTATE WHETHER OF DECEDENT FILIPINOS, RESIDENT ALIENS, AND
NON-RESIDENT ALIENS

EXTENT OF THE DECEDENTS INTERST AT THE TIME OF HIS DEATH

1. Transfers of property by death that are subject to the estate tax.
a. Transfers of property to the extent of the interest of the decedent in the property
at the time of his death;
b. Transfers in contemplation of death;
c. Revocable transfers;
d. Property passing under general power of appointment;
e. Some kinds of life insurance proceeds;
f. Prior interests; and
g. Transfers for insufficient consideration. (NIRC of 1997,Sec 85)

2. The gross estate of decedent Filipinos, resident and non-resident alien

decedents is limited only to "the extent of the interest therein of the decedent at
the time Of his death." [NIRC of 1997, Sec. 85 (A)]. An estate tax is imposed upon
the privilege to transfer properties mortis causa. If the decedent has no interest in a
property at the time of his death, then he could not transfer it. There is therefore
nothing to tax.
The above is a general rule, because there are certain .instance where the decedent
does not have any title to a property but may have a beneficial interest in a property at
the time of his death. Thus, such properties are included as part of the gross estate.

3. Extent of "interest" in properties which a decedent may have in properties for

the same to be included as part of his gross estate.There are certain kinds of
"interests" over property which may be exercised by a person even if the said property
is not titled in his name or even if he does not own these properties. The "interests"
may be attributes of ownership which the owner has allowed the decedent to exercise,
or in certain instances the property is disposed of but there is no complete transfer of
some attribute of ownership. Such retained interest may include the following:
a. the right to possess the property;
b. the right to enjoy the fruits to the property;
c. the right to use the property;
d. the right to dispose of the property;
e. the right to determine who shall possess, enjoy the fruits, or dispose of the
property.

4. "Interests" in properties that are considered by the NIRC of 1997 to be included

as part of gross estate:
 a. Interest of a decedent in any property transferred in contemplation of death
[NIRC of 1997, Sec. 85 (B)J;
b. Interest of a decedent in a revocable transfer of property [NIRC of 1997, Sec.
85 (C)J; and
c. Transfers for insufficient consideration [NIRC of 1997, Sec. 85 (G)].

5. Common rules for determination of items includible in gross estate of resident

or non-resident Filipino citizens, alien residents and nonresident aliens with
respect to:
a. Transfers in contemplation of death,
b. Revocable transfers;
c. Property passing under general power of appointment;
d. Proceeds of life insurance;
e. Transfers for insufficient consideration; and
f. Capital of the surviving spouse.

TRANSFERS IN CONTEMPLATION OF DEATH

1. Transfers in contemplation of death when includible as part of a decedent's

gross estate. To the extent of any interest therein of which:
a. The decedent,
1. has at any time
2. made a transfer, by trust or otherwise,
3. in contemplation of, or Intended to take effect in possession or
enjoyment
4. at or after his death, OR
b. The decedent
1. has at any time
2. made a transfer, by trust, or otherwise,
3. under which he has retained
i. for his life or
ii. for a period not ascertainable without reference to his death or
iii. for any period which does not in fact end before his death;
4. The possession or enjoyment of, or the right to the income from the
property, or
5. The right either alone or in conjunction with any person to designate
the person who shall
i. possess or
ii. enjoy the property or the income therefrom. [NIRC of 1997, Sec.
85 (B), numbering and arrangement supplied]
2. Kinds of transfers under the NIRC of 1997, Sec. 85 (B) Transfer in Contemplation
of Death.
a. a Transfers taking effect at death; and
b. Transfers retaining certain interests
1. the decedent retained the possession or enjoyment of, or the right to
the income from the property
2. the decedent retained the right to designate the person who shall
possess or enjoy the property or the income.

3. Fgh
4.