Transfer Taxes

Class: BSAcc3
Room: MPHC
Days: Tuesday
Time: 1:00 – 4:00 p.m.
 Transfer Taxes

Class: BSEntrep 3
Room: 304T
Days: Wednesday
Time: 8:00 – 11:00 a.m.
 Teaching-Learning Strategies

• Lecture and Class Discussions

• Actual Demonstrations and Computations
• Problem Solving and Case Analysis
 Course Requirements
• Attendance and Attitude
• Class Participation
• Quizzes/Long Tests
• Assignments/Discussions
• Major Exams (Prelim, Midterm, Final)
 Attendance
• Tardiness:
– Arrives 1 minute after scheduled start of class
– 3 tardiness = 1 absence
• Absences:
– Beyond 15 minutes late is considered absent.
– Maximum # of absences = 8
– Beyond 8 absences = failure due to absences
(FDA)
 Grading System
• Class Participation 20%
• Quizzes/Long Tests 20%
• Assignments/Discussions 20%
• Major Exams (Prelim, Midterm, Final) 40%

 Final Grade = Prelim + Midterm + Final

3
 Where We Stand
• Everyone starts with a perfect grade
• How you maintain that mark until the end of
the semester is entirely within your control
– Attendance and Attitude
– Class Participation
– Quizzes/Long Tests
– Assignments/Discussions
– Major Exams (Prelim, Midterm, Final)
 Introduce yourself
• Name – course – level
• Class expectations:
– Of the Subject
• What do you expect to learn from this class?
• How do you want the class to proceed?
– Of the teacher
• What do you expect of me as your teacher?
• How can we make this a truly fulfilling learning
experience?
 My Expectations
• At the end of the semester :
– Students should be able to:
• Demonstrate acceptable level of mastery
of the basic concepts and principles of
transfer and business taxes. (Competence)
• Foster adherence to tax laws and
recognize the importance of taxes in
business as well as in their individual
lives. (Character)
• Manifest a drive to understand how taxes can
affect business such that it leads the student
to formulate ideas on how to improve taxation
in the country. (Commitment to achieve)

• Share knowledge learned and ideas

formulated from assigned topics and
harmoniously work within a group to draft
plans and innovate ways to determine a tax
framework that is friendly to business.
(Collaboration)
• Discover sources of information to widen
knowledge about business and other transfer
taxes. (Creativity)
 First Assignment
for submission next meeting
• ¼ size index card
• FAMILY NAME, First Name (NICKNAME) –
upper left
• Course & Year – upper middle
• 1x1 or 2x2 - ID picture – upper right
• Contact# (1st row)
• Email address (2nd row)
 Lecture Topics
Week 1: Basic Concepts and Principles of Taxation
– Introduction
– Definition, Nature & Basis of Taxation
– State Power
– Objectives of Taxation
– Limitations on the Power of Taxation
– Basic Principles of a Sound Tax System
– Essential Characteristics of a Tax
– Tax distinguished from a license fee
– Classification of Taxes
 What is Taxation?
• Inherent power of a sovereign state
(government) to impose a charge or financial
burden on persons, properties or rights to
– Raise revenues for its use and support
– Enable it to discharge its appropriate functions
• Dictated by the needs of the government -
exact any amount, except when
– There are prescribed limitations
– There is abuse of power
• Power is shared by the three branches of
government
1. Legislative: enacts the laws that impose the tax
2. Executive: promulgates the regulations that
implement the law
3. Judicial: sees to it that
• the laws do not violate inherent and constitutional
limitations on the power of taxation, and
• the implementation is according to the letter and spirit
of the law
• Inherent limitations:
– Must be levied for a public purpose
– Cannot be delegated
– Government instrumentalities through which the
government exercise sovereign powers are
exempt from tax
– Limited to the territorial jurisdiction of the taxing
state
– Cannot apply to the property of foreign
governments (international comity)
• Constitutional limitations:
– No law impairing the obligations of contracts shall
be passed
– No person shall be imprisoned for debt or non-
payment of a poll tax
– The rule on taxation shall be uniform and
equitable
– Charitable and religious institutions and non-profit
cemeteries and all kinds of lands, buildings and
improvements actually, directly or indirectly, used
for charitable and religious purposes shall be
exempt from taxation
Basic Principles of a Sound Tax System
1. Fiscal adequacy – sources of revenue as a whole
should provide enough funds to meet the
expanding expenditures of the government
2. Theoretical justice – taxes must be based on the
taxpayer’s ability to pay
3. Administrative feasibility:
– clear to the taxpayer,
– not unduly burdensome and discouraging to business,
– convenient as to time and manner of payment and
– capable of enforcement by competent public officials
 Essential Characteristics of a Tax
• Forced contribution
• Exacted pursuant to the legislative authority
• Proportionate in character
• Payable in money
• Imposed for the purpose of raising revenue
• Used for a public purpose
Tax Distinguished from License Fee

Taxes License Fee

Purpose Raise revenue Police power of the state

Maintain government Regulate certain business

function or occupation

Amount Unlimited Should not unreasonably

exceed the expenses of
issuing the license and
supervision
 Classification of Taxes
• As to subject matter
– Personal, capitation or poll tax (persons or
residents of a specified territory)
– Property tax (properties located within a
taxing jurisdiction)
– Excise tax (performance of an act or
enjoyment of a privilege)
• As to who bears the burden
– Direct (whom the law intends to pay)
– Indirect (shifted or transferred to someone
else)
• As to determination of amount
– Specific (standard of weight or measurement)
– Ad Valorem (value of the subject)
• As to purpose
– General
– Special
• As to scope
– National
– Local
• As to proportionality
– Progressive (tax rate increases is proportional
to the tax base increases)
– Regressive (tax rate increases is not
proportional to the tax base increases)
– Proportional (fixed percentage of amount of
the base)
 Gross Estate
1. Gross estate includes real properties
a) Land
b) Building
c) Anything attached to the soil with permanence
2. Tangible personal property – can be seen &
touched
3. Intangible personal property – cannot be
seen and touched
 Classification of Decedent
• Class A
1) Citizen of the Philippines, residing in the
Philippines
2) Citizen of the Philippines, residing abroad
3) Citizen of a foreign country, residing in the
Philippines
• Class B
– Citizen of a foreign country, residing abroad
 Inclusions to Gross Estate
• Gross estate of a resident or citizen of the
Philippines (Class A) consists of
1) real estate and
2) personal property (tangible or intangible),
regardless of location.
• Gross estate of a non-resident who’s not a citizen
of the Philippines (Class B) consists of
1) real estate located in the Philippines and
2) tangible personal property in the Philippines, and
3) subject to exception (reciprocity clause), intangible
personal property in the Philippines.
Exercises
Compute for Gross Estate if the deceased is (1) Class A
decedent or (2) Class B decedent with reciprocity and (3)
Class B decedent without reciprocity
1. Obligations issued by foreign corporation P 500,000
2. Lot in Angeles, Pampanga 1,500,000
3. Land in Marinduque 350,000
4. Notes receivable, debtor in Europe 2,000,000
5. Furniture in Las Piñas City 200,000
6. Shares in domestic Corporation 250,000
7. Truck in San Jose, Nueva Ecija 1,200,000
8. Bonds of US based corporation 750,000
9. Business right in a domestic corporation 500,000
10. House & lot in Parañaque 5,000,000
 Estate Tax Computation (OLD)
but not of excess
over over tax shall be plus over

200,000 exempt

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

500,000 2,000,000 15,000 8% 500,000

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

5,000,000 10,000,000 465,000 15% 5,000,000

10,000,000 and over 1,215,000 20% 10,000,000

Under TRAIN Act = flat 6% on taxable net estate

 Disposition of Transfers Prior to Death
• Transfers in contemplation of death – Motivated
by the thought of death although death may not
be imminent such as donation mortis causa.
• Revocable transfer – terms of enjoyment of the
property may be altered, amended, revoked or
terminated by the decedent. It is sufficient that
the decedent has the power to revoke though he
did not exercise the power to revoke.
• Transfer under the general power of
appointment – designate person or persons who
will succeed to the property of a prior decedent.
 Insurance Proceeds
Life insurance proceeds are included in the gross
estate if beneficiary is:
1) Estate of the decedent, his executor or
administrator
2) A revocable third person beneficiary
 Valuation of Gross Estate
• For personal property : at Fair Market Value at
time of death
• For real property (whichever is higher):
– Assessed value
– Fair Market Value
– Zonal value
 Deductions from Gross Estate
 Ordinary deductions
1) Funeral expenses: actual incurred or 5% of gross estate whichever is lower,
but not over P200,000. The term "FUNERAL EXPENSES" is not confined to its
ordinary or usual meaning. They include:
– (a) The mourning apparel of the surviving spouse and unmarried minor children of
the deceased bought and used on the occasion of the burial;
– (b) Expenses for the deceased’s wake, including food and drinks;
– (c) Publication charges for death notices;
– (d) Telecommunication expenses incurred in informing relatives of the deceased;
– (e) Cost of burial plot, tombstones, monument or mausoleum but not their upkeep.
In case the deceased owns a family estate or several burial lots, only the value
corresponding to the plot where he is buried is deductible;
– (f) Interment and/or cremation fees and charges; and
– (g) All other expenses incurred for the performance of the rites and ceremonies
incident to interment.
Expenses incurred after the interment, such as for prayers, masses, entertainment, or
the like are not deductible. Any portion of the funeral and burial expenses borne or
defrayed by relatives and friends of the deceased are not deductible. Actual funeral
expenses shall mean those which are actually incurred in connection with the
interment or burial of the deceased. The expenses must be duly supported by
official receipts or invoices or other evidence to show that they were actually
incurred.
 Deductions from Gross Estate
2) Judicial expenses or intestate proceedings : (Sec 6 (A)(2) of RR 2-2003)
Expenses allowed as deduction under this category are those incurred in the
inventory-taking of a assets comprising the gross estate, their
administration, the payment of debts of the estate, as well as the
distribution of the estate among the heirs. In short, these deductible items
are expenses incurred during the settlement of the estate but not beyond
the last day prescribed by law, or the extension thereof, for the filing of the
estate tax return. Judicial expenses may include:
– (a) Fees of executor or administrator;
– (b) Attorney’s fees;
– (c) Court fees;
– (d) Accountant’s fees;
– (e) Appraiser’s fees;
– (f) Clerk hire;
– (g) Costs of preserving and distributing the estate;
– (h) Costs of storing or maintaining property of the estate; and
– (i) Brokerage fees for selling property of the estate.
– Any unpaid amount for the aforementioned cost and expenses claimed
under “Judicial Expenses” should be supported by a sworn statement of
account issued and signed by the creditor.
 Deductions from Gross Estate
3) Claims against the estate: requisites for deductibility of claims against the
Estate? (Sec 6(A)(3) of RR 2-2003)
(a) The liability represents a personal obligation of the deceased existing at the time of his
death except unpaid obligations incurred incident to his death such as unpaid funeral
expenses (i.e., expenses incurred up to the time of interment) and unpaid medical
expenses which are classified under a different category of deductions pursuant to these
Regulations;
(b) The liability was contracted in good faith and for adequate and full consideration in
money or money’s worth;
(c) The claim must be a debt or claim which is valid in law and enforceable in court;
(d) The indebtedness must not have been condoned by the creditor or the action to collect
from the decedent must not have prescribed.
4) Claims against insolvent persons: after preferred creditors & ordinary
creditors are paid and the properties are not sufficient to pay the obligations
5) Expenses, losses, indebtedness, taxes, etc:
• Unpaid mortgage or indebtedness on property : Gross FMV reflected & unpaid
mortgage deducted
• Unpaid taxes: accrued before death such as income taxes due and property taxes
• Losses: not insured, not claimed as deduction in the ITR, occurred during settlement
of the estate and before last day of payment (6 months after death.
6) Transfer for public use – in the last will & testament, transfer in favor of the
government for public purposes
 Deductions from Gross Estate
7) Vanishing deduction:
• No consecutive deaths within 5 years of a previous
decedent
• Property located in the Philippines
• Part of the prior decedent’s estate, finally determined and
paid
• Identified as the one received from prior decedent or
something in exchange for
• No vanishing deduction on the property claimed by prior
decedent’s estate
• Rates applied as follows:
– 100% within one year to the death of the decedent
– 80% >1 <2 years to the death of the decedent
– 60% >2 <3 years to the death of the decedent
– 40% >3 <4 years to the death of the decedent
– 20% >4 <5 years to the death of the decedent
 Deductions from Gross Estate
 Special deductions (for class A only; not available
to the estate of a non-resident, non-citizen of the
Philippines.)
1) Family home: dwelling house where the person and his
family resides: from FMV or P1,000,000 whichever is
lower to FMV or P10,000,000.
2) Standard deduction: from P1,000,000 to P5,000,000.
3) Medical expenses: within one year from death
substantiated with receipts but not over P500,000
4) Amount receivable by heirs: from decedent’s employer
 Net Taxable Estate
1) Gross Estate: real property + tangible personal
property + intangible personal property
2) Less: Ordinary deductions (a. Expenses, losses,
indebtedness, taxes, etc; b. Transfer for public
use and c. Vanishing deduction)
3) Less: Special deductions (a. Family home; b.
Standard deduction: P5,000,000; c. Medical
expenses and d. Amount receivable by heirs
from employer)
4) Equals: Net Taxable Estate
• Mr. Jimenez, a citizen of the Philippines, single, died a
resident of the Phil., leaving the following properties:
– Real property in the U.S. inherited from
father 3 years ago P2,000,000
- Personal property in the Phil. inherited
from father 3,000,000
- Family home in the Phil. 1,400,000
Following expenses & obligations are being claimed
- Actual funeral expenses P 500,000
- Medical expenses 200,000
- Other obligations within the last 2 years 250,000
- Standard deductions 1,000,000
TRAIN Law
Estate Tax
The estate tax rate was also changed from 5% to 32% of the net estate to a flat rate of
6%. Additionally, the following deductions allowed in computing the net estate (to
be subjected to estate tax) were increased:

Simplified tax compliance

The following measures were adopted to simplify its computation and payment:
– In lieu of actual funeral expenses (up to P200,000) and medical expenses (up
to P500,000), Train increases the standard deduction (wherein no
substantiation is required) from P1,000,000 to P5,000,000
– Notice of death is no longer required
– CPA certification is now required only if the gross estate is above P5,000,000
(up from P2,000,000)
– The deadline for filing of estate tax return is now one year from death (before,
6 months from death)
– Bank deposits left by the decedent may be withdrawn by the heirs subject
only to 6% withholding tax. Before a certification from the BIR that estate tax
has been paid was required.
End of Prelim
 Tax 2 Assignment (Handwritten)
Read about and explain briefly:
1) Donor’s Tax
2) Business Taxes
3) Business Transactions
4) VAT Taxable Transactions
5) Mixed Business Transactions
6) Other percentage taxes
 Net Gifts and Donor’s Tax
Two kinds of donors:
1. Resident or citizen of the Philippines
a. real estate regardless of location
b. tangible personal property regardless of
location
c. intangible personal property regardless of
location
2. Non-resident, not citizen of the Philippines
a. real estate located in the Philippines
b. tangible personal property located in the
Philippines
c. intangible personal property located in the
Philippines, subject to “reciprocity clause” in the
donor’s law
Gross gifts:
1. Transfers for insufficient consideration
2. Cancellation of indebtedness

Exemptions - Donations to:

1. International Rice Research Institute (IRRI)
2. Ramon Magsaysay Award Foundation (RMAF)
3. Philippine Inventor’s Commission (PIC)
4. Integrated Bar of the Philippines (IBP)
5. Development Academy of the Philippines (DAP)
6. Social Welfare, cultural or charitable institution,
no part of the net income of which benefits any
individual
Computing for donor’s tax due on the net gifts

On the first donation of a calendar year:

Gross gifts
Less: Deductions from these gross gifts
Net gifts
Donor’s tax due on the net gifts
B. On subsequent donation in the same calendar year
Gross gifts made on this date
Less: Deductions from these gross gifts
Net gifts on this date
Add: all prior net gifts within the same calendar year
Aggregate net gifts
Donor’s tax on aggregate net gifts
Less: Donor’s tax on all prior net gifts within the same
calendar year
Donor’s tax due on the net gifts of this date
Valuation – Fair market value of property at the time
of the donation

Deductions from gross gifts:

A. Resident or citizen donor:
1. Dowries or gifts made on account of marriage
within one year by parents to legitimate, natural or
adopted children to the maximum of P10,000.
2. Gifts to the national government or its agency
which is not for profit.
3. Gifts in favor of an educational, charitable,
religious, cultural or social welfare institution, NGO,
trust, philanthropic or research organization.
Provided that not more than 30% of said gifts shall
be used for administration purposes
B. Non-resident, not citizen donor:
1. Gifts to the national government or its
agency which is not for profit.
2. Gifts in favor of an educational, charitable,
religious, cultural or social welfare institution,
NGO, trust, philanthropic or research
organization. Provided that not more than 30%
of said gifts shall be used for administration
purposes
C. Other deductions:
1. Encumbrance on the property donated, if
assumed by the donee
2. Those specifically provided by the donor as a
diminution of the property donated

Previously, when donee is a stranger, tax shall be

30% of the net gifts. > no more distinction under
TRAIN flat 6%

Stranger is a person who is:

1. not a brother, sister, spouse, ancestor or lineal
descendant
2. not a relative by consanguinity in the collateral
liner within the fourth degree of relationship
Mr. & Mrs. Herrera made donations of their conjugal property to the following:
Date Donee Property FMV
Jan 25 Son, Leonard & wife, Pam
on their wedding day Farm P1,600,000
Apr 8 Integrated Bar of the
Philippines Cash 800,000
May 13 Province of Cavite Lot for
public park 4,000,000
Jun 13 Mayor Roces, for his
mayoralty race Cash 600,000
Sept 20 Lance, Mrs. Herrera’s
brother on his bday Townhouse 1,400,000*
Dec 25 Patty, Mr. Herrera’s sister
for passing the Bar Cash 860,000**

*Has unpaid mortgage of P600,000

**of the P860,000, P60,000 must be donated to Sacred Heart Parish

Compute for donor’s taxes paid for each spouse.

 Mr. Herrera Mrs. Herrera
Regular Regular
25-Dec 430,000 20-Sep 700,000
-30,000 -300,000
25-Jan 400,000 25-Jan 400,000
-10,000 -10,000
Aggregate donation 790,000 Aggregate donation 790,000
Aggregate tax 31,400 Aggregate tax 31,400
Tax paid 9,600 Tax paid 9,600
Tax still payable 21,800 Tax still payable 21,800

Stranger Stranger
20-Sep 700,000 25-Dec 430,000
-300,000 -30,000
13-May 2,000,000 13-May 2,000,000
-2,000,000 -2,000,000
25-Jan 400,000 25-Jan 400,000
Aggregate donation 800,000 Aggregate donation 800,000
Aggregate tax 240,000 Aggregate tax 240,000
Tax paid 120,000 Tax paid 120,000
Tax still payable 120,000 Tax still payable 120,000
 OLD DONOR’S TAX TABLE

if the net gift is

over but not over tax shall be plus of excess over
100,000 exempt
100,000 200,000 2% 100,000
200,000 500,000 2,000 4% 200,000
500,000 1,000,000 14,000 6% 500,000
1,000,000 3,000,000 44,000 8% 1,000,000
3,000,000 5,000,000 204,000 10% 3,000,000
5,000,000 10,000,000 404,000 12% 5,000,000
10,000,000 1,004,000 15% 10,000,000
PROPOSED DONOR’S TAX AMENDMENT
• The House of Representatives has approved on third and final reading a
measure simplifying the donor’s tax by imposing a unitary rate of six
percent on all gifts with a net value above P250,000.
• During its Monday evening plenary session, 221 lawmakers voted to
approve House Bill No. 4903 filed by the ways and means committee
chair, Rep. Dakila Carlo Cua (Quirino), and Reps. Jesulito Manalo (Angkla
Party-list), Victoria Isabel Noel (An Waray Party-list) and Peter John
Calderon (Cebu, 7th District). No votes were cast against the bill.
• The bill aims to simplify the donor’s tax. The current rates for gifts above
P100,000 vary at 2 percent, 4 percent, 6 percent, 8 percent, 10 percent, 12
percent, or 15 percent depending on the bracket of the gift value.
• Besides imposing a unitary six-percent rate for taxable gifts, the bill retains
the tax exemption for gifts with a net value below P250,000 as currently
provided by Section 99 of the National Internal Revenue Code.
• In cases where the recipient is a “stranger,” the donor would only have to
pay a six-percent tax under the bill, reduced from the current 30 percent.
• The measure defines the “stranger” as someone who is not a sibling,
spouse, ancestor, lineal descendant, or relative by consanguinity in the
collateral line within the fourth degree of relationship.
• The approved bill will be sent to the Senate for another round of
deliberations. The Constitution provides for all tax measures to arise from
the House of Representatives.
• Approved and Effective 2018.
 Donor’s Tax Return
• Must be filed within 30 days after date of donation
• In case of husband and wife as donors, donor’s tax
return will be filed separately
• Donor’s tax return shall be filed with:
– Authorized agent bank
– Revenue district officer or collection officer
– Duly authorized Treasurer of the city or municipality
– Officer of the Commissioner of the BIR
– Philippine Embassy or Consulate
End of Lesson
 Payment & Credits
• Tax will be paid upon filing with the office where
the return is filed
• Donor’s tax credit will only be allowed for
donors who are resident citizens of the
Philippines
• Formula on tax credit
• Limitation A
– Donor’s tax paid to foreign country
– Proportion of foreign donation to total donation x Phil donor’s tax
– Whichever is lower
• Limitation B
– Total foreign donor’s taxes paid
– Proportion of foreign donation to total donation x Phil donor’s tax
– Whichever is lower
 Exercises
Donations were made by a resident citizen as
follows:
to son outside the Philippines , cash P1,250,000
to daughter property in the Philippines FMV
2,000,000
foreign donor’s tax paid P 75,000
How much was the donor’s tax paid after the
foreign donor’s tax credit?
Gross gifts made
to son P1,250,000
to daughter 2,000,000
total P3,250,000
less: non-taxable 250,000
Net taxable amount P3,000,000
Donor’s tax due (@6%) 180,000
Less : donor’s tax paid
Formula: 1.25/3.25 X P180 P 69,231
Actually paid 75,000
Allowed P 69,231
Donor’s tax still due P 110,769
Compute for tax credit & donor’s tax still
payable if a donor did the following in 2015:

Donation Gift Tax Paid

– Philippines 600,000
– India 400,000 10,000
– Cambodia 200,000 2,000
– Netherlands 600,000 25,000
 Donation
Tax Paid
–Philippines 600,000
–India 400,000 10,000
–Cambodia 200,000 2,000
–Netherlands 600,000 25,000
Aggregate donation 1,800,000
Aggregate Tax 108,000

Limit A Proportion Actual Liimitation

–India 24,000 10,000 10,000
–Cambodia 12,000 2,000 2,000
–Netherlands 36,000 25,000 25,000
37,000

Limit B 72,000 37,000 37,000

Aggregate Tax 108,000

Tax Credit 37,000
Tax still payable 71,000
Compute for tax credit & donor’s tax still
payable if a donor did the following in 2015:

Donation Gift Tax Paid

– Philippines 300,000
– Africa 150,000 10,000
– India 200,000 20,000
– Sri Lanka 300,000 25,000
– Vietnam 250,000 22,000
Seatwork
Compute for donor’s tax still payable if Mr.
Joaquin made the following donation in 2015:
Donation Gift Tax Paid
– Philippines 450,000
– Africa 800,000 50,000
– Indonesia 500,000 30,000
– Malaysia 750,000 35,000
 Old Donor’s Tax Table
if the net gift is
over but not over tax shall be plus of excess over
100,000 exempt
100,000 200,000 2% 100,000
200,000 500,000 2,000 4% 200,000
500,000 1,000,000 14,000 6% 500,000
1,000,000 3,000,000 44,000 8% 1,000,000
3,000,000 5,000,000 204,000 10% 3,000,000
5,000,000 10,000,000 404,000 12% 5,000,000
10,000,000 1,004,000 15% 10,000,000

New TRAIN Act = flat 6% of gifts > P250,000

 TRAIN Law
Donor’s tax
The donor’s tax rate was also amended to a
single rate of 6% regardless of the relationship
between the donor and the donee. In the old
law, the rates of donor’s tax were 2% to 15% if
the donor and donee are related, and 30% if
otherwise. However, the donation of real
property is now subject to Documentary
Stamp Tax of P15 for every P1,000.
End of Lesson