Taxation Law 2 Reviewer

5/23/2018 Taxation Law 2 Reviewer

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REVIEW NOTES FOR TAXATION 1

BAR OPERATIONS COMMITTEE

TRANSFER TAXATION

Transfer Taxes

those imposed upon the gratuitous dispositionof private property

Under our law, they are taxes levied on thetransmission of private properties from a priordecedent to his heirs in the case of estate tax, orfrom a donor to a donee in the case of donorstax.

Kinds of Transfer Taxes

1. Death / Estate taxes- those levied on the gratuitous transfers of propertyupon ones death, formerly comprised of the estate andinheritance taxes: Both taxes are now integrated into one

estate tax.

2. Gift Taxes

- Are imposed on the gratuitous transfers of propertyduring ones lifetime, formerly comprised of the donorsand donees gift taxes; both taxes are now integratedinto a donors tax.

I. DEATH / ESTATE TAX

Estate tax

graduated tax imposed on the privilege of thedecedent to transmit property at death and isbase on the entire net estate, regardless of thenumber heirs and relations to the decedent.

a transfer tax not a property tax.

tax on the right to transmit property at deathand on certain transfers which are made by thestatute the equivalent of testamentarydispositions.

Nature of Estate Tax It is not a direct tax on property nor is it a

capitation tax, that is, the tax is laid neither onthe property, nor on the transferee or transferor,but on the right of the decedent to transmit hisestate.

It is not a property tax but an excise tax.

Purpose and justification of estate tax:The following theories have been advanced to justifydeath taxation: (BRAP)

a.) Benefit-Received TheoryFor the performance of services rendered by thegovernment in the distribution of the estate ofthe decedent and other benefits that accrue tothe estate and the heirs, the state collects the tax.

b.) Redistribution of Wealth TheoryEstate tax is a contributing factor to theinequalities in wealth and income. Theimposition of death tax reduces the propertyreceived by the successor bringing about a moreequitable distribution of wealth in society.

c.) Ability to pay theoryThe receipt of inheritance places assets in thehands of the heirs and beneficiaries therebycreating an ability to pay the tax and thus,

ability to contribute to governmental income;and

d.) Privilege theory or State Partnership theoryInheritance is not a right but a privilege grantedby the state and large estates have been acquiredonly with the protection of the state. The State,as a passive and silent partner in theaccumulation of property has the right to collectthe share which is properly due to it.

Incidence or burden of estate of tax

Three views on who is the taxpayer in estatetaxation:

1. PREDECESSOR the object of the tax is theproperty which has been held or accumulatedby the deceased and the tax has fallen upon himin the sense it has affected the amount of the

property which he could dispose.

2. SUCCESSOR the tax is not paid by thepredecessor who has no liability till he dies andwho is free to ignore the duty if he wishes, whilethe successor comes into less than he wouldhave, and has no kind of redress.

3. No Personal Incidence - the estate tax has nopersonal incidence at all, merely falling upon theestate as such.

Law applicableEstate taxation is governed by the statute in

force at the time of the death of the decedent.

ReciprocityThere is reciprocity if the foreign country of

which the decedent was a citizen or resident at the timeof his death:

1.) Did not impose an estate tax; or2.) Allowed a similar exemption from estate tax withrespect

to intangible personal property owned by Filipinocitizens

residing in that foreign country.

Note:1. Reciprocity applies only when:

a.) The property is an intangible; andb.) The decedent is a nonresident alien

2. The following intangibles are deemed located in thePhilippines: (an exception to the principle of Res MobiliaSequuntur Personam and Situs of Taxation)

a.) Franchises which must be exercised in thePhilippines;b.) Shares, obligations or bonds issued by anycorporation or

sociedad anonima organized or constituted in thePhilippines in accordance with its laws;

c.) Shares, obligations or bonds issued by any foreigncorporation 85% of the business of which is located inthe Philippines;

d.) Shares, obligations or bonds issued by any foreigncorporation if such shares obligations or bonds haveacquired a business situs in the Philippines; and

e.) Shares or rights in any partnership, business, orindustry

established in the Philippines.


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GROSS ESTATE

the total value of all property, whether real orpersonal, tangible or intangible belonging to thedecedent at the time of his death, situated withinor outside the Philippines, where such decedentwas a resident or citizen of the Philippines.

In the case of a nonresident alien decedent, itshall include only property situated in thePhilippines.

Property Included in the Gross Estate (INCLUSIONS):A. In case of resident citizens, nonresident citizens andresident aliens:1. Real Property within and without the Philippines;2. Tangible personal property within and without the

Philippines; and3. Intangible personal property within and without the

Philippines.

B. In cases of nonresident aliens:1.Real property within the Philippines;2.Tangible personal property within the Philippines

and;3.Intangible personal property within the Philippines,

unless there is reciprocity in which case, it is nottaxable.

Note:These are either:A) Properties actually owned at the time of deathB) Properties deemed by law to be owned by the

decedentunder Sec. 85

Inter Vivos Transfers Subject to Estate Tax

The gross estate extends to gratuitous transfersmade by the decedent during his lifetime which aretreated by the law as substitutes for testamentarydispositions. They are transfers inter vivos in formbut mortis causa in substance.

Rationale for taxability:

To reach such transfers which are reallysubstitutes for testamentary dispositions and thusprevent the evasion of the estate tax.

These transfers are:a.) transfers in contemplation of death (sec.85 b);b.) transfers with retention or reservation of

certain rights (sec.85 b);c.) revocable transfers (sec.85 c)d.) transfers of property arising under a general

power of appointment ( sec.85 d); ande.) transfers for insufficient consideration (sec.85

g)

Note:Transfers by virtue of a bona fide sale of

property for an adequate and full consideration inmoney or moneys worth are excluded and nottaxable.

INCLUSIONS IN THE GROSS ESTATE (CR2IG DIP)

1) Decedents interest at a specific property- To the extent of the interest therein of the decedent

at the time of his death. (Sec. 85 A)

- Ex: partnership interest, dividends

2) Transfer in contemplation of death

- A transfer with the thought of death.

- The term in contemplation of death means that theimpelling or controlling motive is the thought ofdeath, regardless of whether the transferor is nearthe possibility of death or not, which induces thedisposition of the property for the purpose ofavoiding the tax.

- Example: donation was made concurrently with theexecution of a will (Vidal de Rocs vs. Posadas, 58Phil 108)

Circumstances taken into account in determining inwhether the transfer was made in contemplation ofdeath:A.) Age and state of health of the decedent at the

time of the gift;B.) Length of time between the gift and the date of

death; andC.) Concurrent making of a will or making a will

within a short time after the transfer.

Note: Check the factual settings before and at time ofdeath because proximity to death is not alwaysconclusive.

Examples of motives precluding the category of atransfer in contemplation of death:

a.) To relieve the donor from the burden ofmanagement;

b.) To save income or property taxes;

c.)

To settle family litigated and unlitigateddisputes;

d.) To provide independent income for dependents;e.) To see the children enjoy the property while the

donor is alive;f.) To protect the family from hazards of business

operations;g.) To reward services rendered

Note:

The THREE (3) YEAR PRESUMPTION provides that

any transfer of a material part of his property in thenature of a final disposition or distribution thereof madeby the decedent within three years prior to his deathwithout such adequate and full consideration shall,unless shown to the contrary, be deemed to be havebeen made in contemplation of death.

This provision, however, has been already deleted inSec. 100 (b) now sec. 85 (B) of the Tax Code by PD No.1705.

Under BIR Ruling No. 261 September 2, 1987, the lawdoes not specify the number of years prior to adecedents death within which a transfer can beconsidered in contemplation of death.

Note: In relation to transfers with retention of rightswhich are made in contemplation of death if the rightof retention by the Decedent is co-terminous with hislifetime.

- Ex: X has a house and lot which he transferred to Ya) with the condition that X will use it while X lives

- Effect: Still part of estate of X as he has control over it

b) with the condition that X will use it only for 10 yearsand then X dies before 10 years

- Effect: Not part of the estate of X as he is not theactual owner


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3.) Transfer with retention or reservation of certainrights- This contemplates the instances where the ownertransfers his property during his lifetime but still retainseconomic benefits (the possession or enjoyment of theproperty or the power to designate the person who mayexercise such rights).

- It includes:A. Transfer without retention of interest but intended totake

effect at or after the decedents death.- Example: donations mortis causa.

B. Transfer with retention of interest in respect to:- 1. The possession or enjoyment of or the right to the

income from the property; or2. The right either alone or in conjunction with any

person, to designate the person who shall possess orenjoy the property or the income therefrom. Andsuch interest is retained by the decedent for his lifeor for any period which does not in fact end beforehis death.

C. Transfer with reversionary interest, wherein there is apossibility that the transferred property may returnto the decedent or his estate or that it may becomesubject to a power of disposition by the decedent.

- Ex: A transfers his property to B in naked ownershipand to C in usufruct throughout Cs lifetime subject to

the condition that if C predeceases A, the property shallreturn to A. If A dies during Cs lifetime, the value of thereversionary interest of A at death is included in hisgross estate.

3.) Revocable transfer- the decedent has full control of disposition of property- even if the control is not exercised, it is enough that it isexists

- A transfer where:a.) The decedent or in conjunction with any other

person has reserved the right to alter, amend,

revoke, or terminate; orb.) Any such power is relinquished in contemplation ofthe decedents death.

The power to alter, amend or revoke shall be consideredto exist on the date of the decedents death even though:

a.) the exercise of the power is subject to aprecedent giving of notice; or

b.) The alteration, amendment or revocation takeseffect only upon the expiration of a stated periodafter the exercise of the power.

If the notice has not been given or the

power has not been exercised on or before thedecedents death, such notice or the power shallbe considered to have been given or exercisedon the date of the decedents death.

4.) Transfer of property under a general power ofappointment

- A transfer where the donor of the power ofappointment authorizes the donee of such power todesignate any person he chooses to be given the rightover the appointed property.

- The transferee may choose freely any person who willown the property after he dies

- Rationale: the will of the transferee is followed; hence,part of transferees estate

* Note:the decedent is the transferee in this provision

General power of appointment vs. special power ofappointment:

A.) A power is general, when it authorizes thedonee of the power to appoint any person hepleases including himself, thus having a fulldominion over the property as if he owned it.

B.) It is special when, the donee can appoint onlyamong a restricted or designated class ofpersons other than himself.

Note:

If the power of appointment is general, it makes

the appointed property a part of the doneesproperty.

Under a general power of appointment, title tothe property is legally transferred to the donee.Therefore the property shall form part of the grossestate of the donee.

5.) Transfer for insufficient consideration- A transfer that is not a bona fide sale of property for

an adequate and full consideration in money or

moneys worth. The excess of the fair market valueat the time of death over the value of theconsideration received by the decedent shall formpart of his gross estate.

- However, if the purported absolute sale inter vivosby the decedent is shown to be fictitious, then thetotal value of the property transferred is subject toinclusion in the taxable estate.

- Ex: X owns a house and lot, he wants to help Y so hesells his house worth P5M for only P1M. At the time ofXs death, his house and lot is worth P10M.How much is included in the gross estatre of X? 10-1 =9M

- Ex: X bought a car worth P1.3M. X needed money so hesells his car to Y for only P1M. This is not a transfer forinsufficient consideration as this is a bona fide transfer atarms length; hence, a valid transfer.

6.) Proceeds of life insurance- Proceeds of life insurance taken by the decedent on hisown life shall be included in the gross estate if thebeneficiary:

A.) Is the estate of the decedent, his executor, oradministrator (regardless whether thedesignation is revocable or irrevocable); or

B.) Third person other than the estate, executor,administrator but the designation of thebeneficiary is revocable.

- Presumption: proceeds are revocable- include in the estate only if it is revocable as thedecedent retained control over the proceeds

7.) Prior Interest- Except as otherwise specifically provided therein,

subsections (B), (C), (E) of Section 85 referring totransfer in contemplation of death, revocable transferand proceeds of life insurance respectively shall applyto the transfers, trusts, estates, interests, rights, powers


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and relinquishment of powers as severallyenumerated and described therein, whether made,created, arising, existing, exercised or relinquishedbefore or after the effectivity of the CTRP.

NOTE:

In most of these transfers the property remainssubstantially that of the transferor during his lifetimenotwithstanding the transfer since he still retains eitherthe beneficial ownership or naked title to theproperty.

EXCLUSIONS FROM THE GROSS ESTATE

1. Merger of usufruct in the owner of the naked title

- ex: X has a house and lot. X gave the title to Z.X also allows Y to use the same and that in case Y dies,the use goes to Z. What are the effects?

a) If X dies include the house and lot in Xs estateb) If Y dies exclude from the estate of Y as the will of Xis being followed, there is a merger of usufruct in Z (theowner of the naked title).

2. Fideicommisary and transmissions from the firstheir, legatee, or donee in favor of another beneficiary,in accordance with the desire of the predecessor

- ex: X has a house and lot. In the will of X, Y may havethe title to the house and lot but in case Y dies, theproperty will go to Z. What are the effects?a) If X dies include as part of Xs estate as he actually

owns itb) If Y dies excluded from the estate of Y as he has nocontrol over its disposition

- Ex: X has a house and lot which he wants to give to Ybut Y is a minor at the moment so that X institutes T tohold the property in trust for Y until Y reaches the age ofmajority. X died. The property passed to T. T died. Yreached the age of majority. Effect if T dies: Not part ofestate of T.

Note:Common reasons for 1 and 2 the will of the firstdecedent is followed, the second decedent has no control

over the disposition.

3. Transfers to social welfare, cultural, and charitableinstitutions- Requisites:a) Qualified organizationb) Not more than 30% will be used for administrative

purposes

-Reason: to encourage such transfers

4. Proceeds of insurance not includible in the grossestate of the decedent

a) Amount receivable by any beneficiary irrevocablydesignated in the policy of insurance by the insured.b) Proceeds of a group insurance policy taken out by acompany for its employees.c) Proceeds of insurance policies issued by the GSIS togovernment officials and employees.d) Benefits accruing under the Social Security Act.e) Proceeds of life insurance payable to the heirs ofdeceased members of the military personnel of theUnited States Army or Philippine Army under lawsadministered by the United States VeteransAdministration.

f) Accident insurance proceeds.

5. Separate property of the surviving spouse.

Note:In the determination of the gross estate, the nature ofthe property, whether common property of thespouses, separate or exclusive property either of thedeceased or of the surviving spouse, becomes ofvital importance.

What regime of property relations shall govern thespouses?

Under the Civil Code, the husband and wifewho got married before August 3, 1988 are governedby the Conjugal Partnership of Gains, while thosewho got married on or after August 3, 1988 aregoverned by the Absolute Community of Property,unless a different regime was agreed upon in themarriage settlement.

EXEMPTION FROM ESTATE TAX

A. The first P200, 000.00 value of the estate (sec. 84NIRC)

B.The merger of the usufruct in the owner of the nakedtitle.

C. The transmission from the first heir, legatee, or doneein favor of another beneficiary in accordance with thedesire of the predecessor.

D. All bequest, devises, legacies or transfers to socialwelfare, cultural and charitable institutions, no partof the net income of which inured to the benefit ofany individual and provided that not more than 30%

of the said bequest, etc shall be used by suchinstitution for administration purposes.E. Intangible personal property of non-resident aliens

under the principle of reciprocity.F. Retirement benefits of employees of private firms

from private pension plans approved by the BIR.G. Amount received for war damages.H. Grants and donations to the Intramuros

administration.ALLOWABLE DEDUCTIONS FROM THE GROSSESTATE

- Granted by mere legislative grace

- Construed strictly against the taxpayer

- Requisites:

a) Substantiate the claim for deductionb) Identify the provision granting the deduction.

The provision must be clear and definite.

RESIDENT DECEDENT

A. Ordinary Deductions (ELIT):

1) Funeral Expenses- The amount deductible is equal to 5% of the grossestate or the amount of the actual funeral expenses

whichever is lower, but in no case to exceed P200,000;

- Actual funeral expenses are those which wereactually incurred in connection with the interment orburial of the deceased and paid for from the estate ofsaid deceased.

- Funeral expenses include:a) Costs of coffin, tombstone, mausoleum, and

burial lot;b) Funeral parlor fees;

c)

Mourning clothing of the surviving spouse andthe unmarried minor children;

d) Costs of obituary notices; ande) Expenses during the wake.


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- The following cannot be deducted under funeralexpenses:a) Cash advances of the surviving spouse and the

heirs;b) Expenses paid by the relatives and friends; andc) Expenses after the burial.

- Requisites:a) The expenses must be due to the interment, wake

and burial; hence, expenses on the deathanniversary are not included

b) The expenses must have been shouldered by theestate and not by other people

2) Judicial expenses of the testamentary or intestateproceedings

- Requisite: administration expenses to those actuallyincurred in the administration of the estate.

- Examples:a) fees of the executor or administrator;b) attorneys fees;c) accountants fees;d) court fees;e) salaries of employees; andf) All other expense related to the

administration of the estate.

Note:

This includes all expenses necessary to settle or

preserve the estate hence, extrajudicial expenses areincluded.

Expenses not essential to the proper settlementof the estate but incurred for the individual benefitof the heirs, legatees, or devisees are not allowed asdeductions.- ex: expenses to be declared as administrator vs. anoppositor is a personal expense

3) Claims against the decedents estate- Debts or obligations of the decedent that is enforceableagainst the estate provided that the following requisites

aremet:

a) They were contracted in good faith and for anadequate and full consideration in money ormoneys worth.

b) They must be existing against the estate.c) They must be legally enforceable obligations of

the decedent and ought to be enforced by theclaimants.

d) They must be reasonably certain in amount; and;e) At the time the indebtedness was incurred, the

debt instrument was duly notarized and if theloan was contracted within three (3) years beforethe death of the decedent, the administrator orexecutor shall submit a statement showing thedisposition of the proceeds of the loan.

4) Claims against the insolvent persons- Requisites for deductibility:

a) The amount of said claims has been initially

included as part of the gross estate; andb) The incapacity of the debtors to pay their

obligations is proven and not merely alleged.

5) Unpaid mortgages indebtedness

- Requisites for deductibility:

a) The fair market value of the property mortgagedwithout deducting the mortgage indebtednesshas been initially included as part of his grossestate;

b) The mortgage indebtedness was contracted ingood faith and for an adequate and fullconsideration in money or moneys worth.

- ex: X obtained a 3M loan from Y and executed a RealEstate Mortgage over his house and lot worth 5M. Xpaid 1M. X died.Effect: in the estate of X, include the 5M in the grossestate of X and claim as deduction the unpaid 2M.

Accommodated Loan

- Ex: X owns a house and lot worth 5M. Y obtained a 3M

loan from Z with Xs house and lot as collateral. Y paid1M. Z died. X died.Effect: Include in the gross estate of X the 5M asreceivable from Y (reason: right of reimbursement); andclaim as deduction the unpaid 2M.

6) Casualty Losses (TRECUSO)

- They include all losses incurred during the settlementof the estate arising from fires, storms, shipwreck orother casualties or from robbery, theft orembezzlement.

- Requisites for deductibility:

a)Losses not compensated by an insurance orotherwise;b) Losses that were not claimed as a deduction forincome tax purposes; andc) Losses incurred not later than the last day forpayment of the estate tax (6 months from death).

d) Include the worth of the property in the grossestate

e) File a sworn declaration of the fact of loss within45 days from its occurrence

7) Unpaid Taxes

- Unpaid income tax on income due or receivedbefore death of the decedent, and real propertytaxes, which have accrued prior to the death of thedecedent (real property taxes accrued at thebeginning of the year but may be paid before or atthe end of each quarter) are deductible.

- Income taxes upon income received after the deathof the decedent, or property taxes not accrued beforehis death, or any estate tax cannot be deductedbecause they are chargeable to the income of theestate.

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

B. Vanishing / Alternating Deduction Or PropertyPreviously Taxed

- an amount allowed to reduce the taxable estate of adecedent where the property was:

a. received by him from prior decedent by gift,bequest, devise or inheritance, or

b. transferred to him by gift, has been the object ofprevious transfer deduction.

- VANISHING DEDUCTION: because the rate ofdeduction gradually diminishes and entirely


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vanishes depending upon the time interval betweenthe two (2) successive transfers.

- ALTERNATING DEDUCTION: because the presentdecedents estate cannot claim it if the priordecedents estate claimed it

- Factorsnecessary in vanishing deduction, these are;a. There are two (2) deceased persons and the first is

the donor; andb. The second decedent dies within five (5) years after

the death of the prior decedent or in the case of giftsthe decedent donee dies within the same periodafter the date of the gift.

- Rationale:The deduction operates to ease the harshness of

successive taxation of the same property within arelatively short period of time.

Requisites for deductibility:

1. The present decedent must have acquired theproperty by inheritance or by donation.

2. The property must have been acquired within five(5) years prior to the death of the present decedent

3. The property must have formed part of the grossestate of the prior decedent if acquired by inheritance, orthe taxable gift of the donor if acquired by donation.

4. The estate tax or the donors tax, as the case may be,must have been paid on the previous transfer.

5. The property must be identified as the one received

from the prior decedent or from the donor, as the casemay be.

6. The estate of the prior decedent must not havepreviously availed of the vanishing deduction on thesubject property.

Procedure in computing vanishing deductions:

1. Value taken of property previously taxedLess:Mortgage paid by the present decedent onproperty previously mortgaged by prior decedent /donor, if any (Ist deduction)= Initial basis

2. Initial basis divided by the value of the gross estate ofpresent decedent X Expenses, and transfer for publicpurpose

=2nddeduction

3. Initial BasisLess: 2nddeductionFinal BasisMultiplied by rate deduction (sec.86 (A.2), NIRC)Vanishing Deduction

C. Transfers For Public Use- Requisites:

1. The disposition must be testamentary incharacter.

2. To take effect after death.3. In favor of the government of the Philippines, or

anypolitical subdivision thereof.

4. Exclusively for public purpose.5. Included in the gross estate

Query:If in a will the property was bequeathed to a city

and an NGO, are the tax effects the same? No.a) City - included in the gross estate and claimed asdeduction

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

D. Family Home

- Refers to the dwelling house, including the land onwhich it issituated, where the husband and wife, oran unmarried person who is the head of the familyand members of their immediate family resides ascertified by the Barangay Captain of the locality.

- For the purpose of availing of a family homededuction to the extent provided by law, a personmay constitute only one family home.

- The amount deductible is equivalent to the currentfair market value of the decedents family home ifsaid current fair market value exceeds P1,000,000,

the excess shall be subject to estate tax.

- Requisites to be deductible:

a. The family home must be the actual residential homeof the decedent and his family at the time of hisdeath. (Decedent is married and has dependents or isa head of family with dependents.)

b. Such fact must be certified by the Barangay Captainof the locality where the family is situated.

c. The total value of the family home must be includedin the gross estate of the decedent.

d. The allowable deduction must be in an amount

equivalent to the current fair market value of thefamily home as declared or included in the grossestate not exceedingP1, 000,000.

E. Standard Deduction Of P1, 000,000.00- on top of other deductions, unlike the optionalstandard deduction which is in lieu of other deductions;hence, it does not include the P 200,000 exemption

F. Medical Expenses- Requisites:

a. Must be incurred by the decedent within one (1)yearprior to his death

b. Must be duly substantiated by receipts; andc. Must not exceed P500, 000

*Opinion of JB: medical expense must be related to thecause of death as it is the estate that is being settled.Otherwise, if not related, it is a personal expense.

G. Amounts Received By Heirs Under RA 4917 FromThe Decedents Employer As A Consequence Of TheDeath Of The DecedentEmployee, Provided That

Such Amount Is Included In The Gross Estate Of TheDecedent.

- retirement benefits- Requisite: include in gross estate

H. NET SHARE OF THE SURVIVING SPOUSE INTHE CONJUGAL / COMMUNITY PROPERTY.

- Requisite: Include the entire amount in the gross estatethen deduct the share of the surviving spouse

- Ex: H owns a car worth 1M and a house and lot worth5M

W owns a truck worth 2M and jewelry worth 10M

H and W owns a conjugal lot worth 20MH died.

Gross estate of H:


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Exclusive Conjugal5 M house and lot 20 M lot1M car _________ _______6M 20 M

Total gross estate = 26 M

Then claim as deduction the 10M, which is the share of the surviving spouse in the conjugal lot.

- Ex: H and W died simultaneously. In computing thegross estate of H and W, their shares shares as to theconjugal lot may immediately be split as there is nosurviving spouse left.

I) Tax Credit For Estate Tax Paid To A ForeignCountry

- The estate tax imposed by the tax code shall be creditedwith the amount of any estate tax paid to a foreigncountry.

- Concept: if a property located in the Philippines wasalready subjected to estate tax abroad and the sameproperty is also subjected to estate tax in the Philippines,the foreign tax paid is allowed to reduce his Philippineestate tax

- Purpose: minimize the effect of international doubletaxation

- applicable only to residents and citizens, not to NRAsince he is taxed only on his properties within thePhilippines; hence, the NRA will not be made to pay

estate taxes twice for his property located abroad = nointernational double taxation = no tax credit. (Sec. 86(E)(2))

- Requisites:1. Prove that the foreign estate tax has been paid2. Prove reciprocity : that in the decedents foreigncountry, a similar tax credit is given to Filipinos

Limitations on tax credit:A.)The tax credit limit for estate taxes paid to oneforeign country is determined by the following:

TAX CREDIT LIMIT=

Decedents Net Estate situated in a foreign country xPhil. Estate tax of the Entire net estate

B.) The tax credit limit for estate taxes paid to two ormore countries is determined as follows:

TAX CREDIT LIMIT =

Decedents net estate situated outside of the Phil X Phil.Estate tax of Entire net Estate

Note:

1.) Under limitation A the allowable tax credit is thelower amount between the tax credit limit and theestate tax paid to the foreign country.

2.) Under limitation B the allowable tax credit is thelower amountbetween the tax credit limit computedunder (A) and that computed under (B)

B.) IF DECEDENT IS A NON RESIDENT ALIEN

The deductions allowed to citizens or residentsof the Philippines are also extended to a non-resident

alien decedent with respect to his estates situated in thePhilippines at the time of his death.

In case of deductions for expenses, losses,indebtedness and taxes, the amount of the allowablededuction is limited only to the proportion of suchdeductions with the value of such part of his gross estatewhich at the time of his death, is situated in thePhilippines, bears to the value of his entire gross estatewherever situated. (Sec. 86 (B))

Formula:Allowable deduction of non-resident estate =

Philippine Gross Estate x DeductionsClaimedEntire Gross estate

As a prerequisite to the deduction, it must be

included in the return required to be filed the value atthe time of his death, of that part of the gross estate ofthe non-resident not situated in the Philippines, todetermine the ratable portion of the deduction forexpenses allowable.

Valuation of Property

The estate shall be appraised at its fair market value(FMV) at the time of death of the decedent (Sec.88,NIRC). This is regardless of any subsequent contingencyaffecting the estate. (Lorenzo vs. Posadas, 64 Phil. 353)

1. Real Property- higher amount of :a) FMV as determined by the Commissioner

- This is the zonal value (of the land) as fixed by theCIR, and can be obtained from the BIR website orregional office

b) FMV fixed by the provincial or city assessor- This is the value as shown in the tax declaration of

the property- Use this amount for real properties with no zonal

values (i.e. real properties other than land such asbuildings and improvements)

* Note : The law does not state that the prevailingmarket rate or the consideration as a basis fordetermining the FMV

* Note: If there are no improvements in the property,get a Certificate of No-improvement, (which you can getonly after obtaining a Certificate of Non-taxdelinquency) and attach these to the estate tax return.

2. Personal Properties

a) Shares of Stock- book or par value at the time of death, and can beobtained by writing a letter of inquiry, asking for aformal certification from the corporation which issuedthe shares of stock as to the value of such stock at thetime of death of the decedent

b) Inventories

- value as stated in the invoices (i.e.: price at purchase);or the prevailing market rate (ask for the value fromthose engaged in the same business); or if value cannotbe definitely ascertained, state the approximate

reasonable value (but this will be subject to thediscretion of the BIR inspector)

c) Motor vehicles


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- these depreciate 20% per year from purchase- Hence, motor vehicles are fully liquidated and has noestate tax liability after 5 years but include in the grossestate placing zero as the amount (to secure a taxclearance therefor)

3. Right to Usufruct, use or habitation; or annuity- probable life of the beneficiary shall be taken intoaccount, in accordance with the latest basic mortalitytable, to be approved by the Sec. of Finance, uponrecommendation of the Insurance Commissioner

Filing of Notice of Death

Where the gross value of the estate exceeds P 20,000although exempt, the executor, administrator, or any ofthe legal heirs shall give, within 2 months after thedecedents death or within like period after the executor

or administrator qualifies as such, a written noticethereof, to the Commissioner of Internal Revenue. (Sec.89, NIRC)

- Contents of the letter:1. The fact that the decedent died2. Residence of the decedent3. Date of death

- Effect of failure to file notice: subject to penalty notlower than P1,000

* Note: Filing with the nearest Revenue District Office issufficient compliance.

Filing of Return and Payment of Tax

1.) By whom? An estate tax return under oath is required by

law to be filed by the executor, administrator, orany of the legal heirs:

a.) Where the gross value of the estate exceedsP200,000 though exempt from the estate tax;or

b.) Regardless of the gross value of the estate,where the said estate consists of registeredor registrable real property, such as realproperty (land, bank accounts, others withdefinite records), motor vehicle, shares ofstock or other similar property for which aclearance from the Bureau of InternalRevenue is required as a conditionprecedent for the transfer of ownershipthereof in the name of the transferee.

2.) When to file? The return shall be filed within 6 months

from the decedents death.

The Commissioner shall have the authorityto grant, in meritorious cases, a reasonableextension not exceeding 30 days for filingthe return.

3.) Where to file?Except in cases where the Commissioner otherwisepermits, the return shall be filed with:

* if the decedent is a residenta) an authorized agent bankb) Revenue District Officerc) Revenue Collection Officer

d) duly authorized treasurer of the city ormunicipality where the decedent wasdomiciled at the time of his death, or

* if the decedent is a non-residenta)

with the Revenue District Office where hisexecutor/administrator is registered

b) with the Revenue District Office havingjurisdiction over the residence of theexecutor/administrator

e) with the Office of the Commissioner if thedecedent has no executor or administrator

4.) Copies:The return shall be filed in triplicate, two (2) for theBIR and one (1) copy for the taxpayer.

5.) When to PayPay the estate tax at the time you will file your estatetax return. (Pay as you file system)

6.) Extension for Payment:- allowed in meritorious cases when theCommisioner finds that the payment of the esate taxon the due date would impose undue hardshipsupon the estate or any heir :

At most 2 years if estate extrajudiciallysettled

At most 5 years if estate judicially settled

- NOTE:The taxpayer must not be guilty ofa) negligenceb) intentional disregard of the rules and regulations, orc) fraud

- the taxpayer may also be required to pay a bond notexceeding double the amount of tax and with suchsureties, as the Commissioner deems necessary

* Note: The filing of the estate tax return is not sufficientto obtain a tax clearance, theadministrator/executor/heir must submit additionaldocuments to determine the correctness of the valuesstated by him in the estate tax return.- such as the title of the land, tax declaration of the landand its improvements or Certificate of No-improvement,vicinity map to fix the exact location and zonal value,etc.(Read: Revenue Memorandum Order 15-2003)

* Note: To avoid the imposition of penalties while thereis no extra/judicial settlement yet, any heir may file a

sworn declaration to the BIR stating the fact of death,that the estate has not yet been settled and the list of theproperties included in the estate, as basis for payment ofestate tax.

If Gross Estate >2M, additional requirement:

- must submit a certificate of an independent CPAstating:1. itemized assets of the decedent with

corresponding gross value at the time of hisdeath;or if NRA, that part of his gross estate situated

in the Philippines2. itemized deductions from the gross estate3. amount of tax due, whether paid or still due and

outstanding


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Liability for Payment of Estate Tax

Primarily Liable : Executor or administrator - beforedelivery to any beneficiary of his distributive shares.After due payment, the executor or administratorshall be discharged frompersonalliability.

Subsidiarily Liable : Beneficiary - to the extent of hisdistributive share, liable for the portion of the estatetax as his distributive share bears to the value of thetotal net estate.

NOTE:There are two ways the government may enforcecollection of estate taxes from the decedents heirs:1. It can collect from all the heirs the amount of the estate

tax proportionate to the inheritance they received.2. It can subject properties of the estate which are in the

hands of the heirs/transferees to the payment of the

tax. (CIR vs. Pineda, 21 SCRA 105)

NOTE:The heirs have a solidary obligation to settle theestate. Hence, the BIR can collect from or sue any of theheirs, but only up to the amount of that heirs share inthe hereditary estate. This is without prejudice to suchheirs right of reimbursement from his co-heirs of theirshare in the payment of the estate tax. (CIR vs. Pineda,21 SCRA 105)

Measures to Insure Payment of Estate Tax

a. No judge shall authorize the executor orjudicial administrator to deliver a distributive share toany party interested in the estate unless a certificationfrom the Commissioner that the estate tax has been paidas shown. (Sec.94)- by the court requiring the executor/administrator tosubmit an inventory of properties of the estate, theseproperties are to be distributed only after payment ofestate taxes and receipt of clearance by theCommissioner or his duly authorized representative- NOTE: The approval of the probate court is not

required before estate taxes may be collected. Theenforcement and collection of taxes are executive innature. (Marcos II vs. CA, 273 SCRA 47)

b. Registers of Deeds shall not register in theRegistry of Property any document transferring realproperty any document transferring real property or realright therein or any chattel mortgage, by way of giftinter vivos or mortis causa, legacy or inheritance, unlesscertification from the commissioner that the tax has beenpaid and the y shall immediately notify theCommissioner, Regional Director, Revenue DistrictOfficer, or Revenue collection Officer or treasurer of thecity or municipality where their officer are located, ofthe non-payment of the tax discovered by them. (Sec. 95)- before the properties are transferred in the name of theheirs, a Certificate Authorizing Registration (CAR) mustbe shown

c. Any lawyer notary public, or any GovernmentOfficer who, by reason of his official duties, intervenesin the preparation or acknowledgement of documentsregarding partition or disposal of donation inter vivos ormortis causa, legacy or inheritance, shall have the dutyof furnishing the Commissioner, etc., with copies of such

documents and any information whatsoever, which mayfacilitate the collection of the aforementioned tax. (Sec.95)- ex: deed of extrajudicial settlement, deed of donation

d. Neither shall a debtor of a deceased pay hisdebts to the heirs, legatees, executor or administrator ofhis creditor, unless a certification of the Commissionerthat the tax fixed has been paid is shown; but he maypay the executor or judicial administrator without saidcertification if the credit is included in the inventory ofthe estate of the deceased. (Sec. 95)- else: debtor may be personally liable for the payment ofthe lost tax, like a withholding agent who fails towithhold taxes

e. Corporations, sociedad anonima,partnerships, business or industry organized in thePhilippines shall not transfer in their books any sharesobligations, bonds or rights by way of gift inter vivos ormortis causa, legacy or inheritance to the new ownerunless a certification from the Commissioner that thetaxes fixed and due thereon have been is shown; (Sec.

97)- obligation of corporate secretary

f. If a bank has knowledge of the death of aperson who maintained a bank deposit account alone or

jointly with another, it shall not allow any withdrawalfrom the said joint deposit account unless theCommissioner has certified that the estate taxes imposedthereon have been paid. However, the administrator ofthe estate or any of the heirs of the decedent may, uponauthorization by the Commissioner of Internal Revenuewithdraw an amount not exceeding P 20,00 without the

said certification . (Sec. 97)

- For this purpose, all withdrawal slips shall contain astatement to the effect that all of the joint depositors arestill living at the time of withdrawal by any one of the

joint depositors and such statement shall be under oath.Otherwise, the joint depositor will be liable for perjury(Sec. 267).

- joint accounts covered by this rule include and andand/or accounts, but do not include an accountsubject to a Survivorship Agreement with a survivor-

take-all feature (because there is an automatic transfer ofright to the survivor; hence, not included in gross estateof the joint depositor who died tax avoidance scheme)

g. The estate tax together with interest,penalties, and costs that may accrue in addition theretoconstitutes a lien upon all property and rights toproperty belonging to the taxpayer. The lien attacheswhen the taxpayer neglects or refuses to pay afterdemand. (Sec. 219)

h. In judicial settlement of estates, the court isrequired to furnish the commissioner of InternalRevenue a certified copy of the schedule of participationand the court order approving the same within 30 daysafter its promulgation. (Sec. 91(b));

i. The estate tax shall be paid by the executor oradministrator before delivery to any beneficiary hisdistributive share of the estate (Sec. 91 (c)). He may bedischarged from personal liability for deficiency in theestate tax only after written application to thecommissioner and upon determination that no suchdeficiency appears. (Sec. 92)

NOTE: Additional Readings1. Revenue Regulation 2-20032. Revenue Memorandum Order 15-2003


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TAX TIPS: Avoidance of Estate Tax Liability

1. Maximize your claims for deductions such as the useof the transfers falling under the exclusions from grossestate.

2. Donate properties to your relatives as the tax rates fordonors taxes are lower than for estate taxes.

3. Estate Planning (Section 40 (c), NIRC)- execute a Deed of Exchange; the properties of at most5 persons in exchange for shares of stock in order toobtain control of the corporation (more than 51%ownership)- this exchange is not taxable for income tax purposes- more tax savings if real properties are exchanged- the properties in the deed will no longer be part ofthe gross estate as it is now owned by the corporation- the stock shares will be included in the gross estate

but the tax would be lower as the value at time ofdeath might still be the same original value at the timeof exchange; on the other hand, if there was noexchange the estate tax for the land would be higher asthe value of the land at time of death will be higherthan at the time of the acquisition.

4. Set up a living trust- Trust: obligation imposed by a person regarding his

property- Create an irrevocable trust over your properties sothat they will not form part of your gross estate when

you die. This is because the Irrevocable Trust is a newtaxpayer created.- Ex: grandfather (Grantor) during his lifetime wouldlike to give certain properties to his grandchild. Untilhe reaches the age of maturity, the properties will beheld in trust by X (trustee) for the grandchild(Beneficiary).

DISTINCTION BETWEEN DONORS AND ESTATETAX

DONORS TAX ESTATE TAX

Tax on the privilege totransmit property duringthe lifetime of the donor

Tax on the privilege totransmit property uponones death

Tax rates are lower (2 to15)

Tax rates are higher (5to20)

Exemption is only P

100,000.00

Tax exemption is

P200,000.00Notice of donation isgenerally not required

Notice of death isrequired

Extension of payment isnot provided

Extension of paymentmay be granted by theCommissioner of InternalRevenue

Payable within 30 daysfrom the date of gift

Payable within 6 monthsfrom the date of death

Imposed on the net gift Imposed on the net estate

II. DONORS TAX / GIFT TAX

A. NATURE

- It is an excise (privilege) tax, imposed on the privilegeof the donor to give or on the privilege of the done toreceive. It is not a tax on the property as such because itsimposition does not rest upon general ownership.

- The tax is imposed without reference to the death ofthe donor unlike in the case of estate tax.

Donation / Gift

- an act of liberality whereby a person disposesgratuitously of a thing or right in favor of another whoaccepts it.

- For tax purposes, the term has a much wider meaning,it includes:

a. any transfer in trust or otherwise, whether the giftis direct or indirect, and whether the property isreal or personal, tangible or intangible. (Sec. 98)

b. any transfer of property by gift, except in forcedsales and in the sale of real property which is acapital asset, for less than and adequate and fullconsideration in money or moneys worth. (Sec.100)

c. Condonation or remission of debt, where thecreditor merely desires to benefit a debtor andwithout any consideration therefore cancels thedebt.

Requisites Of A Taxable Gift:1.) CAPACITY of the donor to make the donation;2.) DONATIVE INTENT or INTENT on the part of

the donor to make a gift;3.) DELIVERY, whether actual or constructive, of

the gift; and4.) ACCEPTANCE of the gift by the donee.

Note:

A. The donee, unlike the donor need not be capacitated.B. donors tax applies now to both natural and juridical

persons.

C. donative intent must be present in direct gift but withrespect to indirect gift, e.g. transfer of property forless than an adequate and full consideration,donative intent is superfluous. Thus, donative intentis not always essential to constitute a gift.

D. In Abello vs. CIR (Feb. 25, 2005), donative intent isevidenced by a reduction of patrimony of one and anincrease in patrimony to the other.

Purposes Of Gift Tax

1.) The gift tax was enacted originally to supplementthe estate and inheritance taxes by preventing theiravoidance through the taxation of gifts inter vivos.

2.) The donors tax is also intended to prevent theavoidance of income tax through the device ofsplitting income among numerous/different doneeswith the donor thereby escaping the effect of theprogressive rates of income taxation.

Kinds Of Gift Taxes:

1. Donors tax or tax levied on the act of giving; itsupplements the estate tax; and

2. Donees tax or tax levied on the act of receiving; itwas formerly the counterpart of the inheritance tax,which has been integrated into an estate tax.

*Both taxes have now been integrated into a donors tax.

Parties To A Donation:


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1. Donor - the Person who disposes of his property orright.2. Donee - the Person who receives the property or right.

Properties Included In The Term Gift

(A). In the case of resident citizens, non-resident

citizens and resident aliens:1. Real property within and without the Philippines.2. Tangible personal property within and without

the Philippines; and3. Intangible personal property within and without

the Philippines.

(B.) In the case of non-resident aliens :1. Real property within the Philippines.2. Tangible personal property within the

Philippines.3. Intangible personal property within the

Philippines, unless there is reciprocity in whichcase, it is not taxable.

Note:

The specific items includible in the gross estate areapplicable to and are embraced by the term gift.

B. FACTORS AFFECTING LIABILITY FOR GIFTTAXES

1. Relationship of the donor and the donee

a) when the donee is considered a stranger to thedonor, the donors tax shall be 30% of the net gifts.b) when the donee is a relative of the donor, the tax

shall be based on the 2-15% table under Sec. 99(A).

Stranger1.) one who is not a :

(a) brother/sister (whole or half blood), spouse,ancestor and lineal descendant

(b) relative by consanguinity in the collateral linewithin the fourth degree of relationship

2.) donations made between individuals and businessorganizations are considered donations tostrangers

3.) donations made between business organizationsare considered donations made to strangers(RR 2-2003)

Note:Donees who have no blood relation to the donorare considered strangers to the donor, such as thosemade to ones in-laws or to juridical persons.

2. Value of the Gift

- the higher the value of the gift, the higher the gift taxes

C. DEDUCTIONS / EXEMPTIONS FROM GIFT TAX

1. Gifts Made by a Resident:

a.) Dowries or gifts made on account of marriage beforeits celebration or within one year thereafter by parents toeach of their legitimate, illegitimate or adopted childrento the extent of the first P10,000.00.

Requisites:

1. The donation must be given on account of

marriage.2. The parent must give it to his child.

3. The child must be either the legitimate,recognized natural or legally adopted child ofthe donor, and;

4. It must be given before or one year after thecelebration of the marriage.

b.) Gifts made to or for the use of the NationalGovernment or any of its agencies which is notconducted for profit, or to any political subdivision ofthe said government.

c.) Gifts in favor of educational, charitable, religious,cultural or social welfare corporation, institutions,foundations, trust or philanthropic organization,research institution or organization, or accredited non-government organization. Provided, that no more than30% of said gifts shall be used by such donee foradministration purposes.

Note:For purposes of exemption, a non-profit

educational and/or charitable corporation,institution, accredited non-governmentorganization, trust or philanthropic organization isdefined as:

school, trust or university and/ or charitablecorporation, foundation trust or philanthropicorganization and/ or research institution ororganization incorporated as a non-stock entity:

paying no dividends.

governed by trustees who receive no

compensation; and devoting all its income to the accomplishment

and promotion of the purposes enumerated inits articles of incorporation.

Note:

Only donations made to non-stock, non-profiteducational institutions are exempt from gift taxes asalthough Article 14 of the Constitution states thatproprietary educational institutions may be given the

same privileges subject to a guideline; as a guideline, theNIRC does not provide for such exemption to them.

2. Gifts made by a Non-Resident Aliena.) Gifts made to or for the use of the National

Government or any entity created by of itsagencies which is not conducted for profit, or toany political subdivision of the said government.

b.) Gifts in favor of educational, charitable, religious,cultural or social welfare corporation, institution,foundations trust or philanthropic organization,research organization or institution; Provided, thatno more than 30% of said gifts shall be used bysuch donee for administration purposes.

Note:doesnt include accredited NGONote:1. Intangible personal property in the gross gift of aNON-RESIDENT ALIEN donor shall be taxable in thePhilippines, if the PRINCIPLE OF RECIPROCITY is notcognizable.

2. Intangible personal properties considered situated inthe Philippines.

Franchise which must be exercised in thePhilippines


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Shares of stocks issued by any corporation orsociedad anonima organized or constituted inthe Philippines in accordance with its laws.

Shares of stocks issued by any foreigncorporation 85% of the business of which issituated in the Philippines.

Shares of stock issued by a foreign corporation,if such shares, obligations, or bonds, haveacquired a business situs in the Philippines; and

Shares or rights in any partnership, business orindustry established in the Philippines.

D. TAX TREATMENT OF PROPERTIESTRANSFERRED FOR LESS THAN FULL /ADEQUATE CONSIDERATION

General Rule: The amount by which the FMV of theproperty exceeded the value of the consideration shallbe deemed a gift

Exception: real properties classified as capital assets (notused in business) as there were already subjected toCapital Gains Tax

E. TAX TREATMENT OF POLITICALCONTRIBUTIONS

- any contribution in cash or in kind to any candidate,political party or coalition of parties for campaignpurposes shall be governed by the Election Code; hence,this is not subject to gift tax (report to COMELEC?)

F. TAX CREDIT FOR DONORS TAXES PAID TO AFOREIGN COUNTRY1. Donor was a Filipino citizen or resident alien, at the

time of foreign donation2. Donors taxes of any character and description are

imposed and paid by the authority of a foreigncountry.

Limitations:A.) For donors tax paid to one foreign country;

The amount of tax credit in respect to the taxpaid to any country shall not exceed the sameproportion of the tax against which credit is takenwhich the net gifts situated within such country

taxable under the National Internal Revenue Codebears to his entire net gift, and

B.) For donors tax paid to two or more foreigncountries:

The total amount of the credit shall not exceedthe same proportion of the tax against which suchcredit is taken, which the donors net gift situatedoutside the Philippines taxable under the NationalInternal Revenue Code bears to his entire net gift.

Formula:

1. Donors Tax Paid to 1 Foreign Country

Tax Credit Limit =

Net gift situated in a foreign country X Phil. Donors Tax

Entire net gifts

2. Donors Taxes paid to 2 or more Foreign Countries

Tax Credit Limit =

Net gifts outside the Philippines X Phil. DonorsTax

Entire net gifts

Note: Under limitation A the allowable tax credit limit

is the LOWER AMOUNT between the tax creditlimit and the gift tax paid to the foreign country.

Under limitation B the allowable tax credit is theLOWER AMOUNT between the tax credits;limit computed under A and that computedUnder B.

Note: Void Donations Are Not Subject To Donors TaxSuch as:

Between husband and wife, even if the relationshiphas not been solemnized.

Between persons guilty of adultery or concubinage.

Between those found guilty of the same criminaloffenses.

Between those made to a public officer or his wife,descendants, ascendants by reason of his office.

Note: Effects Of General And Specific Renunciation

- An heirs general renunciation of inheritance in favorof a co-heir is not subject to donors tax, but if it isspecifically renounced in favor of a co-heir to the

exclusion of others, it shall be subject to donors tax.

Note: Renunciation of a surviving spouse of his/hershare in the conjugal partnership or absolutecommunity after dissolution of marriage- whether made in favor of the heirs of the deceasedspouse or in favor of a third person, the same is subjectto donors tax

G. NET GIFT- the total amount of gifts less the allowable deductionsand specific exemptions.

- thetotal net gifts made during the SAME calendar yearis used as basis for computing the donors tax

H. VALUATION- the gift tax is based on the fair market value of the giftat the time it was given

I. LAW APPLICABLE

- the law in force at the time of the perfection /completion of the donation shall govern the impositionof donors tax. A donation is considered as completed

FOR TAX PURPOSES at the time the donee accepts thegift.

J. ADMINISTRATIVE PROVISIONS


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1. Filing of notice of donation

General Rule: Filing of notice of donation is not requiredException: if the donor wishes to claim exemption fromtax and the donee is an organization under Sec.101(A3)and Sec. 101 (B2)

Requisites to be exempt from gift tax :1. Donor is engaged in business

2. Donee is any of the organizations mentionedunder Sec. 101(A3) and Sec. 101 (B2)

3. Donor must give notice to the RDO on everydonation worth at least P50,000.

4. The notice must be given within 30 days from theissuance by the donee of a Certificate of Donation.

5. The certificate of Donation must be attached to thenotice.

2. Filing of Donors Tax Return- within 30 days after the completion of the gift- donation is completed FOR TAX PURPOSES at thetime the donee accepts the gift- Contents:

1. Gifts made during the calendar year2. Deductions claimed and allowed3. Previous net gifts made during the year4. Name of the done5. Relationship of the donor and the done6. Other information as may be required

3. Payment of Donors Tax- pay as you file the tax return- Note: if the donors tax was paid for the transfer, thereis no more need to subject the transfer again to estatetax. Applying the Back Tax Theory, there is no tax thatremained unpaid regarding this transfer.

4. Extensions For Payment Of Donors Tax

- the NIRC does not provide for any extension forpayment of gift tax, as it is presumed that if you candonate, you still have sufficient properties to pay for thetax. Unlike in estate tax where extension is granted,because the payment of the tax may cause unduehardship on the heirs specifically for non-liquidproperties which requires time to be sold first to beconverted into cash for payment of the estate tax.

TAX TIPS : Avoidance of Gift TaxesExecute a Deed of Extra-judicial Settlement withsimultaneous general renunciation of all inheritance(by operation of law, the renounced inheritance will goto the co-heirs anyway).

PROBLEMS ON DOWRY DEDUCTION

1. A is the child of H and W

January A got married, H and W gave him P2,000March H and W gave A P2,000April H and W gave A another P2,000

Can the parents claim dowry deduction even if thesewere made on a staggered basis?

- Yes, provided these were made on account of marriage,before the marriage or 1 year thereafter.

2. January - A married B and was given dowryFebruary B diedDecember A married C and was given dowry

Can the parents of A still claim dowry deduction even ifit was claimed already for the January dowry?

- There is no rule on the matter yet but it is submittedthat as it was made on account of 2 different marriages,the deduction for the December dowry may be made.

3. A and C are the children of H and WJanuary - A married B, given dowryFebruary C married D, given dowryCan H and W claim dowry deduction for both?

-Yes, as the dowries were given to different children

4. H and W jointly donated to their child A 1M onaccount of his marriage to B. Show computation.

For each of H and W the computation is:500,000 to A 250,000

- to B 250,000

A B250,000 250,000

-10,000 _______240,000 250,000

*2 to 15% * 30%3, 600 75,000

Note:Do not deduct the first 100,000 in case of donee-relatives as this is incorporated already in the tableunder Section 99.

General Rule: H and W are considered separate anddistinct taxpayers for purposes of donors tax.Exception: What was donated is a conjugal property and

only H signed. There is only one donor, withoutprejudice to the right of W to question the validity ofthe donation without her consent.

PROBLEMS

1. Donations made by XJanuary 300,000 to his brotherApril 400,000 to his sisterAugust 500,000 to his mother

Compute donors tax:a) For January donation

= 300,000 * (percentage in the 2 to 15% table) = taxb) For April Donation

= (300,000 + 400,000) * (2 to 15% table) = taxc) For August Donation

= (300,000 + 400,000 + 700,000) * (2 to 15% table)= tax less tax paid for January and April

2. X wants to give Y 200,000, will there be tax savings toX if he will donate one time the amount of 200,000 orshould he split by donating 100,000 on December 2007and 100,000 on January 2008?

- It depends if X and Y are relative or not.

a) relatives yes, there will be savings as under the tablein Section 99, the first 100,000 is exempt from Donorstax. No donors tax will then be paid for both donations.

b) strangers nom there will be no tax savings. A flatrate if 30% is imposed on donations made betweenstrangers; hence, the same amount of P60,000 donorstax will be paid whether made one time or split.

3. X died and left 1M each to his heirs A, B, C. The heirsagreed to settle extrajudicially.

a) A renounced his inheritance in favor of B. Is thereliability for donors tax?


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- Yes, this is a case of waiver. A is deemed to haveaccepted the property before he gave it to B as onecannot give what one does not own. A specificrenunciation is taxable.

b) A renounced his share without specifying a co-heirwho will receive the same. Is there liability for donorstax?

- No donors tax because as if A never inheritedanything from X and the transfer was made directlyfrom X to B and C.

VALUE ADDED TAX

A. Value Added Tax-Indirect Tax-It is not the tax itself which is shifted or passed but it is

the burden to pay the tax Why? Tax is Personal. Seller is still liable, only that

the economic burden is shouldered by the buyer.

B. Transactions Subject to VAT (ISBEL)a. Importation whether or not in the regular course of

businessb. Sale conducted in thec. Barter regular coursed. Exchange of businesse. Lease

* The phrase in the course of business means the regularconduct or pursuit of a commercial or an economic activity,including transactions incidental thereto, by any personregardless of whether or not the person engaged therein is anon-stock, non-profit private organization (irrespective of thedisposition of its net income and whether or not it sellsexclusively to members or their guests), or government entity.

* VAT becomes due when the following conditioned concur:

a. There is sale, barter, exchange, transfer or similartransactions, either for nominal or valuableconsideration, intended to transfer ownership of, or titleto, articles imported, milled, produced or manufactured;and

b. The sale is consummated, not merely perfected, in thePhilippines. The place where the title to the thing passesdetermines the place of delivery or tax situs.

C. Specific Characteristics of VATa. Consumption Based Tax

- the person who last consumes the product

absorbs the effect of VAT

1. Destination Principle- Goods are destined to be consumed in the

Philippines

2. Cross-border principle- Goods going out of the Philippines shall not

be subjected to tax since these goods are notdestined to be consumed in the Phils.

*VAT is imposed only on whatever value was added.

D. Exempt Transactions (Sec. 109, NIRC, as amendedby RA 9337)

E. Zero rating vs. Exemptiona. A zero-rated scale is taxable transaction, but

does not result in an output tax while anexempted transaction is not subject to the outputtax;

b. The input VAT on the purchases of VAT-registered person with zero-rated sales may beallowed as tax credits or refunded while theseller in an exempt transaction is not entitled toany input tax on his purchases despite theissuance of a VAT invoice or receipt; and

c. Persons engaged in transactions which are zero-rated, being subject to VAT, are required toregister while registration is option for VAT-exempt persons.

F. Tax Creditsa. Transitional Input Tax Credits (Sec. 111(A),

NIRC, as amended by RA 9337)b. Presumptive Input Tax Credits (Sec. 111(B),

NIRC, as amended by RA 9337)

TAX ADMINISTRATION AND ENFORCEMENT

A. Tax Administration: Its general concepts- is the power of the Bureau of Internal

Revenue (BIR) to enforced andadminister taxes.

B. Government agencies involved in taxadministration

- the BIR and Bureau of Customs aretasked to implement revenues laws asthe case may be.

C. The Bureau of Internal Revenuea. Composition Functions

- The Bureau of Internal Revenue shallhave a chief to be known asCommissioner of Internal Revenue,

hereinafter referred to as theCommissioner and four (4) assistantchiefs to be known as DeputyCommissioners. (Sec. 3, NIRC)

b. Powers and Duties

i. In general

- The Bureau of Internal Revenue shallbe under the supervision and controlof the Department of Finance and itspowers and duties shall comprehend

the assessment and collection of allnational internal revenue taxes, fees,and charges, and the enforcement of allforfeitures, penalties, and finesconnected therewith, including theexecution of judgments in all casesdecided in its favor by the Court of TaxAppeals and the ordinary courts. TheBureau shall give effect to andadminister the supervisory and policepowers conferred to it by this Code orother laws. (Sec. 2, NIRC)

ii. Specific1. Interpret tax laws and decidecases (Sec.4, NIRC)


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- The power to interpret the provisionsof this Code and other tax laws shall beunder the exclusive and original

jurisdiction of the Commissioner,subject to review by the Secretary ofFinance.

The power to decide disputedassessments, refunds of internal revenuetaxes, fees or other charges, penaltiesimposed in relation thereto, or othermatters arising under this Code or otherlaws or portions thereof administeredby the Bureau of Internal Revenue isvested in the Commissioner, subject tothe exclusive appellate jurisdiction ofthe Court of Tax Appeals.

a.

BIR Issuances and rulesrelevant thereto

The power to issue regulationsis expressly conferred in the TaxCode. Thus, the Secretary ofFinance, upon therecommendation of theCommissioner, shallpromulgate all needful rulesand regulations for the effectiveenforcement of the provisions of

the Tax Code. (see Sec.244,NIRC). The rules andregulations of the Bureau shallcontain, among others,provisions specifying,prescribing or defining the timeand manner of canvassingrevenue regions, form of labels,conditions to be observed byrevenue officers respecting theinstitutions and conduct of legalactions. (see Sec.245, NIRC)

- the Bureau has the power to issue rulesand issuances as the case may be butsubject to the following rule:

SEC. 246.Non-Retroactivity of Rulings.- Any revocation, modification or reversal ofany of the rules and regulations promulgated inaccordance with the preceding Sections or anyof the rulings or circulars promulgated by theCommissioner shall not be given retroactiveapplication if the revocation, modification or

reversal will be prejudicial to the taxpayers,except in the following cases:

(a) Where the taxpayer deliberately misstates oromits material facts from his return or anydocument required of him by the Bureau ofInternal Revenue;

(b) Where the facts subsequently gathered bythe Bureau of Internal Revenue are materiallydifferent from the facts on which the ruling isbased; or

(c) Where the taxpayer acted in bad faith.

2. Examination of Books of Accounts(Sec. 5, NIRC)

- the Bureau has the power to examinebooks of accounts of every person(taxpayer) engaged in a business

a. however before a tax officialcould inquire into said booksof accounts a letter ofauthority is required.

b. What is third-partyverification rule?

- In ascertaining the correctness of anyreturn, or in making a return when none hasbeen made, or in determining the liability ofany person for any internal revenue tax, orin collecting any such liability, or in

evaluating tax compliance, theCommissioner is authorized to obtain on aregular basis from any person other than theperson whose internal revenue tax liabilityis subject to audit or investigation, or fromany office or officer of the national and localgovernments, government agencies andinstrumentalities, including the BangkoSentral ng Pilipinas and government-ownedor -controlled corporations, any informationsuch as, but not limited to, costs and volumeof production, receipts or sales and gross

incomes of taxpayers, and the names,addresses, and financial statements ofcorporations, mutual fund companies,insurance companies, regional operatingheadquarters of multinational companies,

joint accounts, associations, joint ventures ofconsortia and registered partnerships, andtheir members;

c. Inquiry into bank deposits (Sec 6 {f}),NIRC)

General Rule:

The Bureau of Internal Revenue has nopower to inquire into the bank deposits of aperson or taxpayer.

Exceptions:

Notwithstanding any contrary provisionof Republic Act No. 1405 and other general orspecial laws, the Commissioner is herebyauthorized to inquire into the bank deposits of:

1) a decedent to determine his grossestate; and

(2) any taxpayer who has filed anapplication for compromise of his tax liabilityunder Sec. 204 (A) (2) of this Code by reason offinancial incapacity to pay his tax liability.

In case a taxpayer files an application tocompromise the payment of his tax liabilities on hisclaim that his financial position demonstrates a clearinability to pay the tax assessed, his application shall not

be considered unless and until he waives in writing hisprivilege under Republic Act No. 1405 or under othergeneral or special laws, and such waiver shall constitute


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the authority of the Commissioner to inquire into thebank deposits of the taxpayer.

Such limited power of the Commissioner doesnot conflict with R.A 1405 or the Secrecy of BankDeposits Law because the provisions of the Tax Codegranting this power are an exception to the saidlegislation.

If the bank has knowledge of the death of aperson, who maintained a bank deposit account eitheralone or jointly with another, it shall not allow anywithdrawal from the said deposit account, unless theCommissioner has certified that the transfer taxesimposed thereon have been paid. However theadministrator of the estate or any one of the heirs of thedecedent may, upon authorization by theCommissioner, withdraw an amount not exceedingtwenty thousand pesos (P20, 000.00) without the

certification. For this purpose all withdrawal slips shallcontain a statement to the effect that all of the jointdepositors are still living at the time of withdrawal byany one of the joint depositors and such statement shallbe under oath by the said depositors.

d. Summons persons, take testimony

In ascertaining the correctness of any return, orin making a return when none has been made, or indetermining the liability of any person for any internalrevenue tax, or in collecting any such liability, or in

evaluating tax compliance, the Commissioner isauthorized:

1. To summon the person liable for tax orrequired to file a return, or any officer or employee ofsuch person, or any person having possession, custody,or care of the books of accounts and other accountingrecords containing entries relating to the business of theperson liable for tax, or any other person, to appearbefore the Commissioner or his duly authorizedrepresentative at a time and place specified in thesummons and to produce such books, papers, records,

or other data, and to give testimony (Sec.5 {c}, NIRC)

2. To take such testimony of the personconcerned, under oath, as may be relevant or material tosuch inquiry (Sec.5 {d}, NIRC)

- To summon the person liable for tax orrequired to file a return, or any officer or employee ofsuch person, or any person having possession, custody,or care of the books of accounts and other accountingrecords containing entries relating to the business of theperson liable for tax, or any other person, to appearbefore the Commissioner or his duly authorizedrepresentative at a time and place specified in thesummons and to produce such books, papers, records,or other data, and to give testimony.

3. Power to assess and prescribe requirementsfor tax administration

a. Power to examine returns (Sec. 6{a}, NIRC)

- After a return has been filed asrequired under the provisions of thisCode, the Commissioner or his duly

authorized representative mayauthorize the examination of anytaxpayer and the assessment of thecorrect amount of tax: Provided, however;

That failure to file a return shallnot prevent the Commissioner fromauthorizing the examination of anytaxpayer.

Any return, statement ofdeclaration filed in any officeauthorized to receive the same shall notbe withdrawn: Provided, That withinthree (3) years from the date of suchfiling, the same may be modified,changed, or amended: Provided, further,That no notice for audit orinvestigation of such return, statementor declaration has in the meantimebeen actually served upon thetaxpayer.

i. Amendment of Returns

When a report required by lawas a basis for the assessment of anynational internal revenue tax shall notbe forthcoming within the time fixed bylaws or rules and regulations or whenthere is reason to believe that any suchreport is false, incomplete or erroneous,the Commissioner shall assess theproper tax on the best evidenceobtainable.

In case a person fails to file arequired return or other document at

the time prescribed by law, or willfullyor otherwise files a false or fraudulentreturn or other document, theCommissioner shall make or amend thereturn from his own knowledge andfrom such information as he can obtainthrough testimony or otherwise, whichshall be prima facie correct andsufficient for all legal purposes. (Sec. 6{b}, NIRC)

ii. Rule on confidentiality of taxreturns and exceptions thereto(Sec.71 and 270, NIRC)

- After the assessment shall havebeen made, as provided in this Title, thereturns, together with any correctionsthereof which may have been made bythe Commissioner, shall be filed in theOffice of the Commissioner and shallconstitute public records and be open toinspection as such upon the order of thePresident of the Philippines, under rulesand regulations to be prescribed by theSecretary of Finance, uponrecommendation of the Commissioner.

The Commissioner may, in eachyear, cause to be prepared andpublished in any newspaper the listscontaining the names and addresses ofpersons who have filed income taxreturns.(see Sec.71, NIRC)

Any internal revenue officerwho is or shall become interested,directly or indirectly, in themanufacture, sale or importation of anyarticle subject to excise tax under Title


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VI of this Code or in the manufacture orrepair or sale, of any die for printing, ormaking of stamps, or labels shall uponconviction for each act or omission, bepunished by a fine of not less than Fivethousand pesos (P5,000) but not morethan Ten thousand pesos (P10,000), orsuffer imprisonment of not less than two(2) years and one (1) day but not morethan four (4) years, or both. (see Sec.270,NIRC)

b. Power to make a returns (Sec.6 {b},NIRC)

What is Best EvidenceObtainable Rule?

- In case a person fails to file a requiredreturn or other document at the timeprescribed by law, or willfully orotherwise files a false or fraudulentreturn or other document, theCommissioner shall make or amendthe return from his own knowledgeand from such information as he canobtain through testimony or otherwise,which shall be prima facie correct andsufficient for all legal purposes.

c. Power to conduct inventory taking,surveillance and to issuepresumptive gross sales/receipts(see Sec.6 {c}, NIRC)

- The Commissioner may, at any timeduring the taxable year, order inventory-takingof goods of any taxpayer as a basis fordetermining his internal revenue tax liabilities,or may place the business operations of anyperson, natural or juridical, under observation

or surveillance if there is reason to believe thatsuch person is not declaring his correct income,sales or receipts for internal revenue taxpurposes. The findings may be used as the basisfor assessing the taxes for the other months orquarters of the same or different taxable yearsand such assessment shall be deemed prima faciecorrect.

When it is found that a person has failedto issue receipts and invoices in violation of therequirements of Sections 113 and 237 of the TaxCode, or when there is reason to believe that thebooks of accounts or other records do notcorrectly reflect the declarations made or to bemade in a return required to be filed under theprovisions of this Code, the Commissioner, aftertaking into account the sales, receipts, income orother taxable base of other persons engaged insimilar businesses under similar situations orcircumstances or after considering otherrelevant information may prescribe a minimumamount of such gross receipts, sales and taxablebase, and such amount so prescribed shall beprima facie correct for purposes of determining

the internal revenue tax liabilities of suchperson.

d. Power to terminate tax period (seeSec. 6 {d}), NIRC)

- When it shall come to the knowledgeof the Commissioner that a taxpayer isretiring from business subject to tax, oris intending to leave the Philippines orto remove his property therefore or tohide or conceal his property, or isperforming any act tending to obstructthe proceedings for the collection ofthe tax for the past or current quarteror year or to render the same totally orpartly ineffective unless suchproceedings are begun immediately,the Commissioner shall declare the taxperiod of such taxpayer terminated atany time and shall send the taxpayer anotice of such decision, together with arequest for the immediate payment of

the tax for the period so declaredterminated and the tax for thepreceding year or quarter, or suchportion thereof as may be unpaid, andsaid taxes shall be due and payableimmediately and shall be subject to allthe penalties hereafter prescribed,unless paid within the time fixed in thedemand made by the Commissioner.

- the BIR has the power to terminate taxperiod under the following instances:

when the taxpayer conceals hisproperties with the intention toevade taxes

when the taxpayer is leaving thePhilippines with the intention toevade taxes

when the taxpayer is obstructingproceedings for the collection oftaxes

when the taxpayer is removingproperties with the intention of

evading taxes when the taxpayer is retiring form

business

e. Power to fix real property values(see Sec.6 {e}, NIRC)

- The Commissioner is authorized todivide the Philippines into differentzones or areas and shall, uponconsultation with competent appraisersboth from the private and public sectors,determine the fair market value of realproperties located in each zone or area.For purposes of computing any internalrevenue tax, the value of the propertyshall be whichever the higher is of:

(1) The fair market value asdetermined by the Commissioner, or

(2) The fair market value asshown in the schedule of valuesof the Provincial and CityAssessors.

f. Power to accredit tax agents (seeSec.6 {g}, NIRC)

- The Commissioner shall accredit andregister, based on their professional


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competence, integrity and moralfitness, individuals and generalprofessional partnerships and theirrepresentatives who prepare and filetax returns, statements, reports,protests, and other papers with or whoappear before, the Bureau fortaxpayers. Within one hundred twenty(120) days from January 1, 1998, theCommissioner shall create nationaland regional accreditation boards, themembers of which shall serve for three(3) years, and shall designate fromamong the senior officials of theBureau, one (1) chairman and two (2)members for each board, subject tosuch rules and regulations as theSecretary of Finance shall promulgateupon the recommendation of the

Commissioner.

Individuals and general professionalpartnerships and their representativeswho are denied accreditation by theCommissioner and/or the national andregional accreditation boards mayappeal such denial to the Secretary ofFinance, who shall rule on the appealwithin sixty (60) days from receipt ofsuch appeal. Failure of the Secretary ofFinance to rule on the Appeal within

the prescribed period shall be deemedas approval of the application foraccreditation of the appellant.

g. Power to prescribeprocedural/documentary requirements

- the BIR has the power to prescribe themanner of filing of a returns

h. Power to delegate (see Sec.7, NIRC)

- The Commissioner may delegate thepowers vested in him under thepertinent provisions of the Tax Code toany or such subordinate officials withthe rank equivalent to a division chiefor higher, subject to such limitationsand restrictions as may be imposedunder rules and regulations to bepromulgated by the Secretary offinance, upon recommendation of theCommissioner: Provided, however, Thatthe following powers of theCommissioner shall not be delegated:

(a) The power to recommend the

promulgation of rules and regulationsby the Secretary of Finance;

(b) The power to issue rulings of firstimpression or to reverse, revoke ormodify any existing ruling of theBureau;

(c) The power to compromise or abate,under Sec. 204 (A) and (B) of this Code,any tax liability: Provided, however, Thatassessments issued by the regional

offices involving basic deficiency taxesof Five hundred thousand pesos(P500,000) or less, and minor criminalviolations, as may be determined by

rules and regulations to be promulgatedby the Secretary of finance, uponrecommendation of the Commissioner,discovered by regional and districtofficials, may be compromised by aregional evaluation board which shallbe composed of the Regional Director asChairman, the Assistant RegionalDirector, the heads of the Legal,Assessment and Collection Divisionsand the Revenue District Officer having

jurisdiction over the taxpayer, asmembers;

(d) The power to assign or reassigninternal revenue officers toestablishments where articles subject toexcise tax are produced or kept.

i. Non-delegable powers in relation toSection 16 of NIRC

- the following are the powers which theBureau of Internal Revenue cannotdelegate:

a. the power to compromise- as a general rule the power of the BIR

to compromise cannot be delegated toother administrative agencies unless in

the following grounds:1. a reasonable doubt as

to the validity of theclaim against thetaxpayer exists

2. financial inability topay

The compromise settlement of any tax liabilityshall be subject to the following minimumaccounts:

a. For cases of financial inability to pay, aminimum compromise rate equivalentto ten per cent (10%) of the basic taxassessed

b. For other cases, a minimumcompromise rate equivalent to fortypercent (40%) of the basic tax assessed.

Where the basic tax involved exceeds Onemillion pesos (P 1,000,000.00) or where thesettlement offered is less than the prescribedminimum rates, the compromise shall be subject

to the approval of the Evaluation Board whichshall be composed of the Commissioner and theD

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