TRANSFER TAXES

• By Rosemary GL Saldo
• University of Baguio
• Tax II
 I- ESTATE TAX
FUNDAMENTAL PRINCIPLES
• Estate Tax is a tax on the transfer of the net
estate to lawful heirs and beneficiaries at the
time of death and on certain transfers, which are
made by law as equivalent to testamentary
disposition.
• It is not a tax on property. It is a tax imposed on
the privilege of transmitting property upon the
death of the owner.
• The Estate Tax is based on the laws in force at the
time of death notwithstanding the postponement
of the actual possession or enjoyment of the
estate by the beneficiary.
What is an Estate ?
Property of a Decedent
-Tangible and intangible assets
-rights; interests
Parties Involved
Decedent

Estate

Recipient HEIRS

STRANGERS

Juridical persons
What is Estate Tax

TRANSFER
 Determination of Estate
• SEC. 85. Gross Estate.
Value at the time of his death of all
property, real or personal, tangible or intangible,
wherever situated: Provided, however, that in
the case of a nonresident decedent who at the
time of his death was not a citizen of the
Philippines, only that part of the entire gross
estate which is situated in the Philippines shall
be included in his taxable estate.
GROSS ESTATE (Sec 85, NIRC)
POINT OF VALUATION– AT THE TIME OF DEATH OF ALL PROPERTY

WHEREVER
SITUATED

NON-RESIDENT
DECEDENT NOT A
CITIZEN AT THE
TIME OF DEATH

PROPERTY IN
PH
 GROSS ESTATE

(A) Decedent's Interest. - To the extent of the

interest therein of the decedent at the time of
his death;
B. Transfers In Contemplation of Death
Transfer – by trust or In contemplation of death –
otherwise thought of death

During lifetime of decedent,

he retains the
• Possession or enjoyment of
property or the right to the income
of the property
• Right (alone or in conjunction with
any person) to designate the person
who shall possess or enjoy the
property or income therefrom
Intention of Decedent is for the
possession or enjoyment of
transferred property to take effect
after his/her Death
Presence of control

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

– POINT TO CONSIDER –CONTROL OVER THE PROPERTY

• except in case of a bona fide sale for an adequate and full

consideration in money or money's worth)
 C. Revocable Transfer. -

DONOR/DECEDENT
TRANSFERRED
PROPERTY DURING
LIFETIME

CHANGE IN ENJOYMENT, DONEE/RECIPIENT

POSSESSION
DECEDENT’S
CONTROL
C. Revocable Transfer
2) The power to alter, amend or revoke shall be considered
 to exist on the date of the decedent's death even though the
exercise of the power is subject to a precedent giving of
notice or
 even though the alteration, amendment or revocation takes effect
only on the expiration of a stated period after the exercise of the
power, whether or not on or before the date of the decedent's
death, notice has been given or the power has been exercised.
 In such cases, proper adjustment shall be made representing
the interests which would have been excluded from the
power if the decedent had lived, and for such purpose if the
notice has not been given or the power has not been
exercised on or before the date of his death, such notice shall
be considered to have been given, or the power exercised, on
the date of death.
(D) Property Passing Under General Power of
Appointment
RECIPIENT/DECEDENT
TRANSFER PROPERTY retained for his life or
any period not
DONOR ascertainable without
reference to his death
1) by will, or for any period which
2) by deed does not in fact end
executed in before his death
contemplation
(a) the possession or enjoyment
of, or intended CONTROL of, or the right to the income
to take effect in
from, the property,
possession or
enjoyment at, b) the right, either alone
or after his or in conjunction with any
3) by deed person, to designate the
persons who shall possess
or enjoy the property or
the income therefrom;
 E) Proceeds of Life Insurance
• To the extent of the amount receivable by the
1)estate of the deceased,
2) his executor,
3) or administrator,
as insurance under policies taken out by the
decedent upon his own life, irrespective of whether
or not the insured retained the power of revocation,
• or to the extent of the amount receivable by any
beneficiary designated in the policy of insurance,
except when it is expressly stipulated that the
designation of the beneficiary is irrevocable.
 (F) Prior Interests

Transfers In
Contemplation
of Death

exercised or
relinquished
Revocable before or after
Transfer the effectivity
of this Code.

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

• The capital of the surviving spouse of a

decedent shall not, for the purpose of this
Chapter, be deemed a part of his or her gross
estate.
– Take note of property relations
 VALUATION OF ESTATE
Fair Market Value (FMV) At the Time of Death
• Real Property – whichever is higher
As determined by the Commisssioner
As shown in the Schedule of Values fixed by the
Provincial and City Assessors

• Personal Property
Fair Market Value (FMV)
 VALUATION OF ESTATE
Shares of Stock – Fair Market Value
• Listed
 the closing price on the day when the shares are sold, transferred, or
exchanged.
 When no sale is made in the Local Stock Exchange on the day when the
listed shares are sold, transferred, or exchanged, the closing price on
the day nearest to the date of sale, transfer or exchange of the shares shall
be the fair market value. (RR 6-2008)

• Unlisted and traded in the stock exchange

 the value of the shares of stock at the time of sale shall be the fair market
value.
 In determining the value of the shares, the Adjusted Net Asset Method shall be
used whereby all assets and liabilities are adjusted to fair market values. The
net of adjusted asset minus the liability values is the indicated value of the
equity.
(RR 8-2013)
COMPUTATION OF NET ESTATE
GROSS ESTATE

ALLOWED
DEDUCTIONS

NET
ESTATE
 DEDUCTIONS ALLOWED
A. FILIPINO CITIZENS/RESIDENT

Standard deduction of P5M Claims against the Estate

Receivables from Insolvent Amount Received

persons by Heirs Under RA
No. 4917
Unpaid Mortgages or (retirement
Indebtedness
benefits from
Property Previously Taxed private firms)
Transfers
for Public Family Home
Use
LOSSES
 DEDUCTIONS ALLOWED
• Claims against the Estate
At the time of indebtedness, debt instrument was
duly notarized
Loan was contracted within three (3) years before
the death of the decedent
Administrator/executor shall submit a statement
showing the disposition of the proceeds of the
loan
Bona fide loan and for an adequate consideration
in
 DEDUCTIONS ALLOWED
• Receivables from Insolvent persons/Claims
of the deceased from Insolvent Persons
Value of decedent’s interest therein is included in
the value of Gross Estate
 DEDUCTIONS ALLOWED
• Unpaid mortgages or INDEBTEDNESS
o Value of decedent’s interest, gross of mortgage or
indebtedness is included in the GE
o Except Internal Revenue Taxes
o Bona fide loans
• Losses incurred during settlement of the estate
Not compensated by insurance
Not claimed as deductions from income tax at the time
of filing
Incurred not later than the last day for the payment of
tax
 DEDUCTIONS ALLOWED
• Property Previously Taxed(PPT)/Vanishing
Deduction (VD)
Purpose - To minimize the burden of taxation
involving one property within a period of five (5)
years
Refers to the Property received by Decedent thru:
• Gift/donation
• Inheritance/bequest/will

Transfer previously subjected to transfer taxation

 DEDUCTIONS ALLOWED – VD
CIRCUMSTANCES

TRANSFER

Deed of PROPERTY
Donation
Donor
RECIPIENT/DECEDENT
Gift/Bequest/Inheritance
/Devise PROPERTY

TRANSFEROR/DECEDENT
DEDUCTIONS ALLOWED -VD- DONATION

Deed of Donation

REQUIRED CONDITIONS FOR DEDUCTION

Included in the GE LOCATED IN THE PH

Donor’s taxes No Vanishing

Transfer made paid Deduction
within five (5) yrs
previously claimed
from death of
by donor
decedent
 DEDUCTIONS ALLOWED -VD– Transfer from a Dead
person

Prior decedent Gift/Bequest/Inheritance/Devise

Present decedent

REQUIRED CONDITIONS FOR DEDUCTION

LOCATED IN
Included in the GE
THE PH
Transfer made No Vanishing
within five (5) yrs Deduction
from death of the previously claimed
prior decedent by prior decedent Estate taxes paid
 DEDUCTIONS ALLOWED -Vanishing Deduction –
How to Compute
1. Determination of Initial Basis (IB)
-Higher FMV of the PPT between the time of donation or
death of prior decedent and present decedent less unpaid
mortgages if any
2. Deductions must be pro-rated and subtracted
from the IB to arrive at Final Basis (FB)
2 A. Deductions to consider and add
-claims against the estate (CE)
-claims against insolvent persons (CIP)
-unpaid mortgages/indebtedness/losses (UMIL)
-transfers for Public use (TPU)
 DEDUCTIONS ALLOWED -Property Previously
Taxed/Vanishing Deduction – Computation
2b - Get the Proportionate share of PPT to the
Deductions
Formula
Initial Basis
_______________
X Total Deductions (A)
Gross Estate
CE+ CIP+ UMIL
+ TPU
 DEDUCTIONS ALLOWED -Property Previously
Taxed/Vanishing Deduction – Computation
2B. Deduct Share (2B) from Initial Basis (IB)
3. Multiply FB to percentage to get Vanishing
Deduction (VD)
Time interval from transfer / Applicable percentage
death of prior decedent to
death of present decedent
0 to 1 year 100%
more than 1 year to 2 years 80%
more than 2 years to 3 years 60%
more than 3 years to 4 years 40%
more than 4 years to 5 years 20%
DEDUCTIONS ALLOWED -Vanishing Deduction –
Computation
Illustration:
In December 5, 2015, Mr. A, donated a parcel of lot
located in the PH with FMV of 5M to Mr. B, Fil citizen and
single. On Jan 5, 2018, Mr. B died. In the will of Mr. B, he
stated that he is giving a parcel of lot with FMV of 10M to
the government for public use. The only property left by
Mr. B are his five cars with FMV of 6M, other real
properties including the lot from Mr. A with FMV of 50 M.
The FMV of the lot from Mr. A at the time of Mr. B’s death
is 10M. He has claims against insolvent persons as of his
death in the total amount of 3M. Mr. B did not have any
liabilities at the time of his death.
Compute for the vanishing deduction if any.
DEDUCTIONS ALLOWED -Property Previously
Taxed/Vanishing Deduction – Computation
1. Initial Basis – 10M
2. Final Basis
10 M
56 M X 13M 2.3M

3. Final Basis X Percentage = VD

time interval – more than 2 yrs to 3 years = 60 %
2.3M x .60 = 1.38M
 Allowed Deductions – Transfers for
Public Use
• The amounts of all bequests, legacies, devises
or transfers to or for the use of the
Government of the Republic of the
Philippines, or any political subdivision
thereof, FOR EXCLUSIVELY PUBLIC PURPOSES.
Allowed Deductions – Family Home

Or 1OM
(FMV)
NOTES:
-What constitutes the FH?
-total value of FH must be included in the GE
Allowed Deductions – Amounts received
under RA No. 4917
• RA NO. 4917 - AN ACT PROVIDING THAT
RETIREMENT BENEFITS OF EMPLOYEES OF
PRIVATE FIRMS SHALL NOT BE SUBJECT TO
ATTACHMENT, LEVY, EXECUTION, OR ANY TAX
WHATSOEVER. Approved: June 17, 1967
• Requirements
The decedent-employee has been employed for at least
ten (10) years;
Not less than 50 yrs old at the time of retirement;
Must have availed of the benefit only once
Benefits received must be in accordance with a
reasonable private benefit plan maintained by the
employer duly approved by the BIR
 Allowed Deductions – Share in the
Conjugal Property
1. Determine Gross Conjugal Estate (GCE)
Take note of property relations
2. Deduct Conjugal deductions to arrive at NET CONJUGAL
ESTATE

3. Divide by two to arrive at SHARE IN THE CONJUGAL

PROPERTY
 DEDUCTIONS ALLOWED TO NON-
RESIDENT ESTATES (?)
1. Standard Deductions – P 500,000.00
2. Proportionate deductions in
3. Vanishing Deduction on Property Previously
Taxed
- claims against the estate;
- Claims of the deceased against insolvent persons
- Unpaid mortgages, indebtedness, losses, taxes (except
income taxes)

4. Transfers for Public Use

 Computation of Estate Tax Due
Gross Estate
Less: Allowed Deductions
Net Estate
Multiply by rate
Estate Taxes Due
Less Taxes paid to foreign country (Tax credit)
Estate Tax Payable
 Tax credit versus Tax deduction
• tax credit - generally refers to an amount that is
subtracted directly from ones total tax liability.
– It is an allowance against the tax itself or a
deduction from what is owed by a taxpayer to the
government.

• tax deduction -- defined as a subtraction from income/(or what is

being taxed) for tax purposes,[ or an amount that is allowed by law to reduce
income prior to [the] application of the tax rate to compute the amount of
tax which is due.
– An example of a tax deduction is any of the allowable deductions
enumerated in Section 34 of the Tax Code.
 Tax credit versus Tax deduction
Tax credit
Directly reduces the tax due
used only after the tax has
been computed
There must be tax liability; no
tax liability, no application of
tax credit
• CIR versus CENTRAL LUZON DRUG CORPORATION ; G.R. No. 159647; April 15, 2005
Tax deduction
Reduces the amount of the subject of
taxation (i.e. –income, estate, etc) in
order to arrive at the taxable
income/estate
used only before the tax has been
computed
If no subject of taxation then tax
deduction do not apply
eg – no income, no deduction; no
estate, no deduction
 Tax credit – Estate Taxation
• Taxes paid to foreign country
 Remedy against international double taxation to
minimize the onerous effect of taxing the same
property twice.
 Only the estate of a citizen or a resident alien at the
time of death can claim tax credit for any estate taxes
paid in a foreign country.
 Limitations in estate tax credit:
1. The amount of the credit in respect to the tax paid to any
country shall not exceed the same proportion of the tax
against which such credit is taken, which the decedent’s net
estate situated within such country taxable under the NIRC
bears to his entire net estate (per country basis); and
 2. The total amount of the credit shall not exceed the same
proportion of the tax against which such credit is taken, which
the decedent’s net estate situated outside the Philippines
taxable under the NIRC bears to his entire net estate (overall
basis).
 Tax credit – Estate Taxation
• Illustration
A. One country (estate located in one country
aside from the PH)
Whichever is lower between
1. Share of one country
Net Estate in Foreign Country X Phil Estate Tax
World Net Estate
2. Actual taxes paid in foreign country
Lowest is what is to be deducted as Tax Credit
 Tax credit – Estate Taxation
• B. Two or more foreign countries
Limit 1 – Per Foreign country
• Compute for portion per country
Net Estate per Foreign Country Phil Estate
Entire Net Estate
Tax
• Add all results of all countries

Limit 2 – By Total
Net Estate All Foreign Country
Phil Estate
Entire Net Estate Tax
 Tax credit – Estate Taxation
• Compare which is the lowest among the
following:
Limit 1
Limit 2
Actual foreign taxes paid
• Lowest is what is to be deducted as Tax
Credit
 EXCLUSIONS FROM GROSS ESTATE
 Sec. 85 and 86 NIRC:
– 1. Exclusive Property (capital/paraphernal) of surviving spouse (Sec. 85
(H), NIRC);
– 2. Property outside the Philippines of a non-resident alien decedent;
– 3. Intangible personal property in the Philippines of a non-resident alien
if there is reciprocity.

 Sec. 87 NIRC
1. The Merger of the usufruct in the owner of the naked title
2. The transmission or the delivery of the inheritance or legacy by the
fiduciary heir or legatee to the Fideicommissary
3. The transmission from the first heir, legatee or donee in favor of Another
beneficiary, in accordance with the desire of the predecessor
4. All the bequests, devises, legacies or transfers to social welfare, cultural
and charitable Institutions no part of the net income of which inures to the
benefit of any individual: provided that not more than 30% of the value
given is used for administrative purposes .
 EXCLUSIONS FROM GROSS ESTATE
1. The merger of usufruct in the owner of the
naked title
• E.g. A died leaving a building, the naked title
belongs to B and usufruct to C for a period of 5
years, then C died after two years. Upon the
death of C, the usufruct will merge into the
owner of the naked title B who shall become the
absolute owner of the said building. The transfer
from C to B is excluded from the computation of
GE for estate tax purposes.
 EXCLUSIONS FROM GROSS ESTATE
2. The transmission or delivery of the inheritance or
legacy by the fiduciary heir or legatee to the
fideicommissary, Provided that:
a. The substitution must not go beyond one degree
from the heir originally instituted
b. The fiduciary or the first heir must be both living
at the time of death of the testator.
e.g. A dies and leaves in his will a lot to his brother, B, who
is entrusted with the obligation to transfer the lot to C, a
son of A, when C reaches legal age. B is the fiduciary heir
and C is the fideicommissary. The transfer from A to B is
subject to estate tax. But the transmission or delivery to C
upon reaching legal age shall be exempt from estate tax.
 EXCLUSIONS FROM GROSS ESTATE
 Exclusions from estate under special laws:
1. Benefits received by members from the
Government Service Insurance System (PD 1146) and
the Social Security System (RA 1161, as amended) by
reason of death
2. Amounts received from the Philippine and
United States governments for damages suffered
during the last war (RA 227)
3. Benefits received by beneficiaries residing in the
Philippines under laws administered by the U.S.
Veterans Administration (RA 360)
4. Grants and donations to the Intramuros
Administration (PD 1616) (Mamalateo, 2014).
 NOTES
• For purposes of Estate and Donor’s tax, do we adhere to mobilia sequutur
personam?
• A: NO. As a general rule, the situs of an intangible property is determined
by the domicile or residence of the owner. This is known as the principle of
“mobilia sequentur personam.” The principle, however, is not controlling
– (a) when it is inconsistent with the express provisions of statute, or
– (b) when justice does not demand that it should be, as when the property has in fact a
situs elsewhere (Mamalateo, 2014). The maxim mobilia sequuntur personam, upon which
the rule rests, has been described as a mere "fiction of law having its origin in
consideration of general convenience and public policy, and cannot be applied to limit or
control the right of the state to tax property within its jurisdiction.
– (Fargo v. Collector, G.R. No. L-46720, June 28, 1940) Since Sec. 104 of the NIRC provides
that NRA may be imposed an estate or donor’s tax with respect to his intangible
properties which has situs in the Philippines, we are not bound by this maxim.
Estate Taxation - Intangibles
• The following are intangible properties of a nonresident alien
decedent which are considered as situated in the Philippines,
hence treated as part of the gross estate:
– 1. Franchise which must be exercised in the Philippines;
– 2. Shares, obligations or bonds issued by any corporation or sociedad
anonima Organized or constituted in the Philippines in accordance with
its laws; (domestic corporation)
– 3. Shares, obligations or bonds by any foreign corporation 85% of its
business is located in the Philippines;
– 4. Shares, obligations or bonds issued by any Foreign corporation if such
shares, obligations or bonds have acquired a business situs in the
Philippines;
– 5. Shares or rights in any partnership, business or industry Established
in the Philippines (Sec. 104, NIRC)
Estate Taxation - Intangibles
• NOTE: These intangible personal properties are in
effect exceptions to the Latin maxim of Mobilia
Sequuntur Personam. This enumeration of intangible
properties are significant only for non-resident alien
and for foreign corporation because they are the only
set of taxpayers where the situs of the property is
considered in determining whether their property
shall form part of the gross estate or not. Remember
that in case of Filipino citizens (whether resident or
non-resident) and resident aliens all of their properties
whether real or personal wherever situated shall form
part of the gross estate.
Estate Taxation - Intangibles
When shall the intangible properties of the nonresident be
excluded from the gross estate?
• A: These shall be excluded on the basis of reciprocity. No
donor’s or estate tax shall be collected in respect of intangible
personal property:
– 1. Total exemption - If the decedent at the time of his death or
the donor at the time of the donation was a citizen and
resident of a foreign country which at the time of his death or
donation did not impose a transfer tax of any character, in
respect of intangible personal property of citizens of the
Philippines not residing in that foreign country, or

– 2. Partial exemption - If the laws of the foreign country of

which the decedent or donor was a citizen and resident at the
time of his death or donation allows a similar exemption from
transfer or death taxes of every character or description in
respect of intangible personal property owned by citizens of
the Philippines not residing in that foreign country (Sec. 104,
NIRC).
Estate Taxation - Intangibles
• NOTE: Reciprocity in exemption does not require
the “foreign country” to possess international
personality in the traditional sense (i.e.,
compliance with the requisites of statehood).
Thus, Tangier, Morocco (Collector v. Campos-
Rueda, 42 SCRA 23) and California, a state in the
American Union (Collector v. de Lara, 102 Phil
813) were held to be foreign countries within the
meaning of Section 104.
 Notes

• DISCLOSURE OF PROPERTIES outside the

Philippines?
– There is a NEED to declare properties outside the
PH, whether resident or non-resident.
• A resident decedent is taxed on properties within or
without. On the other hand, while a non-resident
decedent (NRA) is taxed only on properties within the
Philippines, it is a requirement that his estate tax return
should disclose the value of his gross estate outside the
Philippines in order to avail of the allowable deductions
(Sec. 86 (D), NIRC).