Transfer

and
Business Tax
 MODULE 1
Introduction to Transfer Taxation

Introduction

In a narrow legal sense, the transfer tax is basically a transaction fee enforced
on the transfer of ownership of property from one entity to another. This module presents
the fundamentals of transfer taxation that will sets forth the very essence of gratuitous
and onerous transfers.

Learning Objectives

After studying this module, you should be able to:

1. Explain the concept of transfer.
2. Differentiate types of transfers.
3. Compare inter-vivos and mortis causa donation.
4. Describe the rationale and nature of transfer tax.
5. Interpolate the general rule in transfer taxation as affected by the
classification of tax payer and situs of transfer.
6. Identify the validity of a transfer.

Learning Content

What Is a Transfer Tax?

A transfer tax is a charge levied on the transfer of ownership or title to property
from one individual or entity to another. A transfer tax may be imposed by a state, county,
or municipality. It is usually not deductible from federal or state income taxes, although it
may be added to the cost basis when profit on the sale of securities and investment
property is calculated. Transfer tax is considered an excise tax in some states (Kagan,
2020).
Transfer taxes are excise or privilege taxes.

Types of transfers:
1. Bilateral transfer
–transfer for consideration
–onerous transaction/exchange
–subject to income taxation for realized gain
Ex. Sale –exchange for money
Barter –exchange for another property
2. Unilateral transfer
–transfer without consideration
–gratuitous transactions or transfer

Types of Unilateral Transfer

1. Donation (donation inter-vivos) – gratuitous transfer from living donor
2. Succession (donation mortis causa) – gratuitous transfer from deceased person
upon death to his heirs
Comparison Inter-vivos vs Mortis causa
Inter-vivos Mortis causa
Transferor
Nature
Reason
Scope of the transfer of
properties
Property given
Transferee
Transfer tax
Timing of valuation of
donation

3. Complex transfer
–transfer for less than full and adequate consideration
–sales made lower FMV of property
Tax rules on transfer for adequate consideration
 Pure exchanges, subject to income tax only
Transfer for less than adequate & full consideration
 Transfer element (gratuity) – subject to transfer tax either mortis causa or inter-
vivos
 Exchange element (indirect donation) –subject to income tax
Example:
Assume a property with a fair market value of P50,000 and tax basis of P10,000
is sold for merely P30,000.

P20,000 will be subjected to transfer tax (transfer element)

P20,000 will be subjected to income tax (exchange element)
Rationale of transfer taxation
1. Tax evasion/minimization theory – a way to defeat income taxation with the
intention/ illegal
2. Tax recoupment theory –natural decreasing of income taxation
3. Benefit received theory –most dominant rationalization of transfer taxation
4. State partnership theory –gov’t is taking fair share by taxing the transfer of wealth
to another person
5. Wealth redistribution theory –transfer tax is redistributed to benefit society
6. Ability theory –transfer property is ability to pay tax

Nature of Transfer Taxes

1. Privilege tax
Transfer tax is as a form of privilege tax rather than a form of penalty it is imposed
because the transferor (donor or decedent) is exercising privilege in the form of
assistance rendered by the government in effecting the transfer of properties by way of
donation or succession.
2. Ad valorem tax
The amount of transfer tax is dependent on the value of the properties transferred.
Thus, valuation of the property transferred is needed in order to determine the amount of
the tax.
3. Proportional tax
Transfer taxes under the TRAIN law Imposed at flat 6% of the net estate or gift.
4. National Tax
Transfer taxes are levied by the national government. Local government units are
legally precluded from imposing the same.
5. Direct tax
Transfer taxes cannot be shifted. Transferor-donor or transferor-decedent is the
one subject to tax.
6. Fiscal tax
Transfer taxes are levied to raise money for the support of the government.

Classification of Transfer Taxpayers

1. Residents or Citizens such as:
Resident citizens
Resident aliens
Non-resident citizens
These are taxable on global transfers of property.
2. Non-resident Aliens
These are taxable on Philippine transfers of property.

The citizenship of juridical persons is determined by the incorporation tests. Juridical

persons that are organized in the Philippines are considered Philippine citizens. Those
organized abroad are considered aliens.

In donor's taxation, the term resident citizen or alien includes domestic or resident foreign
corporation. Obviously, corporations are not subject to estate taxation.
Situs of Transfer
Transfers occur in the location of the property. Properties are transferred mortis
cause in the place where they are located at the point of death. Likewise, properties are
transferred inter-vivos in the place where they are located at the date of donation.

General Rule in Transfer Taxation

1. Resident/Citizen – subject to tax on all transfer of properties, global transfer of
properties
2. Non-resident alien (NRA) –taxable only on properties located in the Philippines
at the date of transfer
Situs of Properties –location of the property
The ff. properties considered located in Philippines
1. Franchise exercisable in Philippines
2. Shares, obligations, or bonds issued by any corporation or sociedad anonima or
constituted in the Phil,
3. Shares, obligations or bonds by any foreign corporation 85% of the business is
located in Phil.
4. If such shares, obligations or bonds issued by any foreign corporation acquired
business situs in Philippines.
5. Shares or rights in any business or industry established in Philippines
6. Any personal property, tangible/intangible located in Philippines

Reciprocity rule on non-resident aliens

*intangible personal properties of NRA or Filipino non-resident are exempt from
Philippine transfer tax
Examples of intangible properties:
1. Financial assets 2. Accounting
a. Cash intangible assets
b. Receivables or a. Patent
credit b. Franchise
c. Investment in c. Leasehold right
bonds d. Copyright
d. Shares of stock e. Trademark
in a corp.
e. Interest in
partnership

Motive of donation is the determining factor

Example of motives (inter-vivos)
1. reward services rendered
2. relieve the donor of the burden of management of the property
3. save on income tax
4. see children financially dependent
5. see children enjoy property while still alive
6. settle family disputes
Example of motives (mostis causa)
1. take effect at the death of donor
2. last will and testament
3. retention of certain rights until death
4. revocable transfer
5. conditional transfer

Non-Taxable Transfers
1. Void Transfer –prohibited by law; invalid transfer
 property not owned
 donation between spouses
 refusal of done
 oral donation
2. Quasi-transfer –transfer that not involve transfer of ownership
 right to usufruct over the property to the owners naked title
 transfer of property to real owner
 transfer from first heir to second, predecessor
3. Incomplete transfer – transfer or deliver but ownership is not, it will transfer upon
happening future events/conditions
Types of Incomplete transfer
1. Conditional transfer
2. Revocable transfer
3. Transfer in contemplation of death
4. Transfer with reservation of title until death
How to incomplete transfer are completed?
1. Conditional transfer inter-vivos
a. Fulfillment of condition by transferee
b. Waiver of the same by the transferor
2. Revocable transfer to inter-vivos
a. Waiver by transferor exercising his right of revocation
b. Lapse of his reserved right to revoke
3. Reservation of title of property until death are completed

Learning Activity

Identify inter-vivos and/or mortis causa donation in the following illustration.

Don Juan owns a hotel and a commercial building. He promised to donate the hotel to
son Juanito and the building to his other son Juanico. Don Juan was able to donate the
hotel Juanito when the property has a FMV of P40M. While finalizing the deed of donation
of the building to Juanico, Don Juan met an accident and died, during which the FMV of
the hotel and building is P45M and P50M respectively. A year after his death, the
properties have FMV of P48M and P52M.
 Learning References

Banggawan, R. (2019). Business and transfer taxation. 2019 ed. Pasay, Philippines: Real
Excellence Publishing.

De Leon, H. & De Leon, H. Jr. (2013). The law on transfer and business taxation. 15th ed.
Manila, Philippines: Rex Book Store.

Kagan, J. (2020). What is a transfer tax? Retrieved January 26, 2021 from
[Link]
 MODULE 2
The Concept of Succession and Estate Tax

Introduction

The Bureau of Internal Revenue defines estate tax is a tax on the right of the
deceased person to transmit his/her estate to his/her 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. This module discusses only
the basic rules of succession and introduces estate tax.

Learning Objectives

After studying this module, you should be able to:

1. Explain the concept of succession.
2. Present examples of types and elements of succession.
3. Interpolate the nature of estate tax.
4. Discuss taxation rules for different types of decedents
5. Discourse the model of estate taxation

Learning Content

Succession –mode of acquisition of property, rights, and obligation of a person to the

extent of the value of inheritance are transfer through his death
*Inheritance includes all property, rights and obligation of a person which are not
extinguished by death
Decedent –deceased or dead person

Types of SUCCESSION
1. Testamentary Succession –made in a will
o last and will and testament –written document
o testate – having left a valid will
2. Intestate Succession –without will or with invalid one
3. Mixed Succession –partly with written will and partly by operation of law
 Will –act whereby person is permitted to control to a certain degree of the
disposition of this estate, to take effect after his death
–expression of the decedent’s desire

Types of will
1. Holographic will –written, dated and signed by testator
2. Notarial will –notarized, signed by decedent and witnesses
3. Codicil –supplement or addition to a will, made after execution of a will; need to
be executed to be valid
Note: Every will must be acknowledged before notary public by testator and
witnesses

Nature of succession
Succession –is gratuitous transfer from deceased person in favor of his successor;
donation mortis causa
–involves net properties of decedent; heirs will inherit remaining of
decedent after satisfying decedent’s indebtedness and obligation incl. estate tax
Note: Heir shall not inherit the debt of decedent

Elements of Succession
1. Decedent –person who transfer properties through his succession, whether or
not with will
 testator - a person who has made a will or given a legacy
(universal)
 testatrix - a woman who has made a will or given a legacy
2. Estate –transfer of right, obligation and properties not extinguished by his death;
also called: inheritance of the decedent
3. Heirs –person called to the succession either by will or operation of law

Who are the heirs?

Compulsory heir –certain person who is identified by law
Types of Compulsory Heirs
1. Primary Heirs –legitimate children and direct descendants
2. Secondary Heirs –legitimate/illegitimate parents/ascendants
3. Concurring Heirs –surviving spouses and illegitimate descendants
Classification of Children
Under Civil Code of the Philippines, children are classified as follows:
1. Legitimate Children – those children conceived and born during marriage of
parents whose marriage is perfectly valid or voidable as long as the marriage has
not yet been annulled
2. Legitimated Children – those children conceived and born of unmarried parents
who have no legal impediments to marry each other and who subsequently
contracted marriage and recognized the children as their own. A child of a widow
who contracted marriage within six months from the death of her first husband due
to the question of the paternity of the child
3. Illegitimate Children
a. Natural Children – those born outside wedlock of parents, at the time of
the conception of the former, were not disqualified by any impediment to
marry each other (ex: natural children proper, natural children by legal
fiction)
b. Not Natural Children - those born outside wedlock of parents, at the time
of the conception of the former, were disqualified by any impediment to
marry each other (ex. adulterous, incestuous, spurious)
4. Adopted Children – children made by virtue of a judicial process or those
judicially ordered by the competent court and adjuring that the children to all legal
intents and purposes

Definition of terms
1. Direct descendants –children or grandchildren
2. Legitimate parents –biological parents
3. Illegitimate parents –adopting parents
4. Surviving spouse –widow/widower of descendants
5. Illegitimate descendants –illegitimate children
Note: under family revised code, adoptive parents can now qualify as secondary heirs
sharing 50:50 with biological parents

*in absence of compulsory heirs, ff. shall inherit in order of priority:

1. Collateral relatives up to 5th degree of consanguinity
2. Philippine gov’t
*priority is given to collateral relative in closest degree
Summary of Rules:
1. Concurring heirs
a. Descendants
b. Ascendants
2. Relatives in the collateral line up to 5th degree
3. Republic of the Philippines

Note: second cousins are on 6th degree, cannot inherit

ORDER OF INTESTATE SUCCESSION

Compulsory Heirs in Legitimes Intestate Heirs

1. Legitimate child/descendant 1. Legitimate child/descendant
2. Illegitimate child/descendant 2. Illegitimate child/descendant
3. Legitimate parent/ascendant 3. Legitimate parent/ascendant
4. Illegitimate parent 4. Illegitimate parent
5. Surviving Spouse 5. Surviving Spouse
6. Brother/sister
Nephew/niece
7. Other collaterals up to the 5th
degree
8. State

Notes:
- The first 5 intestate heirs exclude the last 3, except intestate heirs 5&6, who will
concur

Legitime –part of testator’s property which he cannot dispose of because the law has
reserve it for certain heirs, called compulsory heirs

Disinheritance and Repudiation

 Decedent can disinherit an heir on certain grounds
 Heirs may repudiate their share in inheritance of decedent

Other persons in succession

1. Legatee –person whom gifts of personal property is given by a will
2. Devisee –person whom gifts of real property is given by a will
3. Executors –person named by decedent who shall carry out the provision of will
4. Administrators –person appointed by court to manage distribution of estate of
decedent

Estate Taxation –pertain to the taxation of gratuitous transfer of properties of decedent

to the heir upon his death; governed by law

NATURE OF ESTATE TAX:

1. EXCISE TAX –estate tax is not tax on property but privilege tax to transfer
property through death
2. REVENUE/GENERAL TAX –estate tax is intended as revenue or fiscal measure
3. AD VALOREM TAX –estate tax is depending upon the value of estate
4. NATIONAL TAX –estate tax is imposed by gov’t
5. PROGRESSIVE TAX –estate tax is tax based on progressive rates
Classifications of Decedents for taxation Purposes
1. Resident or Citizen Decedents
2. Non-Resident Decedents

ESTATE TAX MODEL

Gross Estate Ᵽ XXX
Less: Deductions from gross estate XXX
Net Taxable estate Ᵽ XXX

GROSS ESTATE –pertains to the totality of the properties owned by decedent at point
of his death
Two concepts under gross estate:
a. Exclusion gross estate –not included from estate taxation
b. Inclusion gross estate –included as part of taxable gross estate

Deduction (expenses of death, obligation of decedent, losses of property which also

exemption from estate tax)

Net Taxable estate –net properties of the decedent after deductions allowable by law;
subject to estate tax

Learning Activity

Identify the validity of the will in the following illustrations.

1. Assume Maria named Jose in her will as her sole beneficiary. Jose died ahead of Maria.

2. Juan Dela Cruz wrote his last will and testament as follows:
“I am devising my parcel of land in Camella Homes – Batangas to my closest and favorite
daughter.”

Sgd Juan Dela Cruz

Date: November 15, 2020

Juan died on January 5, 2021 leaving 5 legitimate daughters.

3. On the eve of December 24, 2020, Pedro Penduko accidentally obliterated his last will
and testament. On December 25, 2020, he died due to heart attack.
 Learning References

Banggawan, R. (2019). Business and transfer taxation. 2019 ed. Pasay, Philippines: Real
Excellence Publishing.

De Leon, H. & De Leon, H. Jr. (2013). The law on transfer and business taxation. 15th ed.
Manila, Philippines: Rex Book Store.

Tabag, E. & Garcia, E. (2020). Transfer and business taxation. 2020 ed. Quezon
City, Philippines: EDT Book Publishing.
 MODULE 3
Gross Estate – Inclusions and Common Rules

Introduction

Estate tax is governed by the statute in force at the time of death of the decedent.
Upon the decedent’s death, succession takes place, and the right of the State to tax the
privilege to transmit the estate automatically arises. As of January 1, 2018, the Philippine
Tax Code imposes an estate tax at the rate of six percent (6%) based on the net value
of the estate whether the decedent is a resident or a non-resident of the Philippines. This
module presents the inclusions and common rules alongside gross estate.

Learning Objectives

After studying this module, you should be able to:

1. Define the composition of gross estate.
2. Explain the sharing of legitimes.
3. Identify the legitimes and free portion of the estate.
4. Compute for testate and intestate inheritance.

Learning Content

Composition of Gross Estate

The gross estate is divided into two main categories for succession purposes, the
legitime and free portion as shown below:

Decedent’s Estate To be inherited by:

Legitime Compulsory Heirs:
This portion of the estate is reserved by
law specially to compulsory heirs
Free portion Compulsory Heirs and/or Voluntary
Heirs
 As provided in the last will and
testament
 In the absence of a will, this
portion of the estate shall be
distributed to “intestate heirs”
based in the order of priority
 Legitime is part of a testator’s property which he cannot dispose of because the
law has reserved it for certain heirs who are, therefore called compulsory heirs. The
compulsory heirs cannot be deprived of their legitime by the testator except by
disinheritance. On the other hand, free portion is that portion of the estate which the
testator can freely dispose of. Hence, anyone may inherit from free portion (compulsory
or voluntary heirs). Voluntary heirs are those institute by the testator in his will to succeed
to the inheritance of the portion thereof of which the testator can freely dispose.

Sharing of Legitimes by the Compulsory Heirs

Survivor Legitime Notes
LC ½ Divide by the number of LC, whether they survive
alone or with CH
1 LC ½
SS ¼

2 or more LC ½
SS Equal to 1 LC

LC ½ All the CH get from the half free portion, the share
SS ¼ of the SS having preference over that of the IC,
IC ½ of 1 LC whose share may suffer reduction pro-rata
because there is no preference among
themselves
LPA ½ Whether they survive alone or with CH

LPA ½ IC succeed in the ¼ in equal shares

IC ¼

LPA ½
SS ¼

LPA ½
SS 1/8
IC ¼

IC ½ Divide equally among the IC

SS 1/3
IC 1/3
SS ½ 1/3 if marriage is in articulo mortis and deceased
spouse dies within 3 months after marriage
IP ½

IP ¼ Only the parents of IC are included. Grand

SS ¼ parents and other ascendants are excluded
Illustrations:
Case A: Mr. Jo Ng died leaving an estate valued at 12,000,000. The surviving heirs
were his spouse, 2 legitimate children and 1 illegitimate child.
The distribution of his estate should be as follows:
Legitimate Children (1/2): P6,000,000
LC 1 P3,000,000
LC 2 3,000,000
Illegitimate child (1/2 of 1 LC) 1,500,000
Surviving Spouse (1/4) 3,000,000
Free Portion (remainder) 1,500,000
Total P12,000,000

Case B: Assume that the estate is P12,000,000 and the decedent is survived only by his
2 illegitimate children.
The distribution of the estate should be as follows:
Illegitimate Child (1/2) P6,000,000
IC 1 P3,000,000
IC 2 3,000,000
Free Portion (remainder) 6,000,000
Total P12,000,000

Case C: Assume the same date in Case A except that Mr. Ng provided a last will and
testament giving P5,000,00 to his secretary.
The distribution of his estate should be as follows:
Legitimate Children (1/2): P6,000,000
LC 1 P3,000,000
LC 2 3,000,000
Illegitimate child (1/2 of 1 LC) 1,500,000
Surviving Spouse (1/4) 3,000,000
Free Portion (Secretary) 1,500,000
Total P12,000,000

A will is an act whereby a person is permitted, with the formalities prescribed by

law, to control to a certain degree the disposition of his estate to take effect after his death
(Art. 783 NCC). The making of a will is a strictly personal act. It cannot be left in whole or
in part of the discretion of a third person, or accomplished through the instrumentality of
an agent or attorney. All persons who are not expressly prohibited by law may make a
will. The persons prohibited by law to make a will are those below 18 years old and those
who are not of sound mind at the time of its execution.
The law presumes that every person is of sound mind, in the absence of proof to
the contrary. The burden of proof that the testator was not of sound mind at the time of
making his dispositions is on the person who opposes the probate of the will. If the
testator, one month, or less, before making his will was publicly known to be insane, the
person who maintains the validity of the will must prove that the testator made it during a
lucid interval. Supervening incapacity does not invalidate an effective will, nor is the will
of an incapable validated by the supervening of capacity. A married woman may make a
will without the consent of her husband, and without the authority of the court. A married
woman may dispose by will of all her separate property as well as her share of the
conjugal partnership or absolute community property.

Requisites for a valid Notarial Will

a. it must be in writing and executed in a language or dialect known to the testator
b. it must be subscribed at the end thereof by the testator himself or by the testator’s
name written by some other person in his presence and by his express direction
c. it must be attested and subscribed by three or more credible witnesses in the presence
of the testator and of one another

The following are disqualified from being witnesses to a will:

 Any person not domiciled in the Philippines
 Those who have been convinced of falsification of a document, perjury, or false
testimony

Foreign Wills
The will of an alien who is abroad produces effect in the Philippines if made with
the formalities prescribed by the law of the place in which he resides, or according to the
formalities observed in his country, or in conformity with those which the Philippine civil
code prescribes. A will made in the Philippines by a citizen or subject of another country,
which is executed in accordance with the law of the country of which he is a citizen or
subject, and which might be proved and allowed by the law of his own country, shall have
the same effect as If executed according to the laws of the Philippines.
When a Filipino is in a foreign country, he is authorized to make a will in any of the
forms established by the law of the country in which he may be. Such will may be probated
in the Philippines (Art. 815 NCC).

Important Things to know

1. Wills must still follow the laws on compulsory heirs. The so called “free-portion”
is the only part of the estate that the owner can give to whomever they wish.
2. Wills cannot remove an heir from the estate unless there is a court proceeding
called disinheritance that has been undertaken.
3. When a child has passed away before a parent or grandparent, his children are
entitled to inherit through the right of representation. However, the share the children
inherit is the share of their parent and not more than that.
4. If the parent has passed away, nephews and nieces may inherit from their uncle
or aunt who have no children or will through the right of representation. However, the
share the children inherit is the share of their parent and not more than that.
5. Legitimate, illegitimate and adopted children inherit in all situations. Ampons do
not inherit unless formally adopted or unless they are specified in the will.
Illustrations:
Case D: Suppose there is 1 Legitimate child or Legitimate children. If the estate is worth
P1M, then the legitimate child must inherit _________.

With a will:
Legitimate children (or their children) – 1/2 of the estate divided amongst them
Free portion – 1/2 of the estate

LC (1/2) P500,000
Free portion (1/2) 500,000
If there are 4 legitimate children, then each inherits P125,000. The remaining P500,000 can be left to
whomever the estate owner wants as stated in the will.

Without a will:
LC P1,000,000
If there are 4 legitimate children, then each inherits P250,000.

Case E: Mr. Ritz Rich died leaving P45,000,000 (intestate) estate for his two legitimate
children, Harold and Alex, and two illegitimate children, Elon and Etan.
The estate shall be partitioned as follows:
Heir Share Partition Inheritance
Harold 1.0 1/3 P15,000,000
Alex 1.0 1/3 15,000,000
Elon 0.5 0.5/3 7,500,000
Etan 0.5 0.5/3 7,500,000
Total 3.0 P45,000,000

Revocation of wills and testamentary dispositions

A will may be revoked by the testator at any time before his death any waiver or
restriction of this right is void (Art. 828). A revocation done outside the Philippines, by a
person who does not have his domicile in the Philippines, is valid when it is done
according to the law of the place where the will was made, or according to the law of the
place in which the testator had his domicile at the time and if the revocation takes place
in the Philippines when it is in accordance with the provisions of the new civil code.

Requisites of Disinheritance
1. effected only through a valid will
2. for a cause expressly stated by law
3. cause must be stated in the will itself
4. cause must be certain and true
5. unconditional
6. total
7. the heir disinherited must be designated in such a manner that there can be no doubt
as to his identity
Common Causes for Disinheritance of children or descendants, parents or
ascendants, and spouse:
1. When the heir has been found guilty of an attempt against the life of the testator, his/her
descendants ascendants, and spouse in case of children and parents
2. When the heir has accused the testator of a crime for which the law prescribes
imprisonment for 6 years or more, if the accusation has been found groundless
3. When the heir by fraud, violence, intimidation or undue influence causes the testator
to make a will or to change one already made
4. Refusal without justifiable cause to support the testator who disinherits such heir

Peculiar Causes for Disinheritance

Children/Descendants:
a. When the child or descendant has been convicted of adultery or concubinage
with the spouse of the testator
b. Maltreatment of the testator by word or deed by the child/descendant
c. When the child or descendant leads a dishonorable or disgraceful life
d. When the child or descendant is convicted of a crime which carries with it a
penalty of civil interdiction.

Parents/Ascendants:
a. When the parents have abandoned their children or induced their daughters to
live a corrupt or immoral life, or attempted against their virtue
b. When the parent or ascendant has been convicted of adultery or concubinage
with the spouse of the testator
c. Loss of parental authority for causes specified in the Civil Code
d. Attempt by one of the parents against the life of the other, unless
there has been reconciliation between them

Spouse:
a. When the spouse has given cause for legal separation
b. When the spouse has given grounds for loss of parental authority

The decedent’s gross estate is comprised of all the properties, whether real
or personal, tangible or intangible, wherever situated. This includes any interest in
the properties at the time of death including transfers in contemplation of death,
transfers for insufficient consideration, revocable transfers, properties passing
under a general power of appointment, and proceeds of life insurance.

However, if the decedent was neither a resident nor a citizen of the Philippines at the time
of his or her death i.e. a non-resident alien, only the portion of the estate situated in the
Philippines is included in the taxable estate, except intangible personal property, whose
exclusion from the gross estate is subject to the rule on reciprocity.

Real property includes land and whatever is built on the land or attached to it. It includes
buildings (like houses and grain silos), fences, tile lines, and mineral rights, for example.
Tangible personal property has physical substance and can be touched, held, and felt.
Examples of tangible personal property are numerous, just a few examples are furniture,
vehicles, baseball cards, cars, comic books, jewelry, and art.

Intangible personal property includes assets such as bank accounts, stocks, bonds,
insurance policies, and retirement benefit accounts. Intangible personal property
includes:

 franchise which must be exercised in the Philippines;

 shares of stock, obligations or bonds issued by corporations organized or
constituted in the Philippines;
 shares, obligations or bonds issued by a foreign corporation 85 percent of the
business of which is located in the Philippines;
 shares of stock, obligations or bonds issued by a foreign corporation if such
shares, obligations or bonds have acquired a business situs in the Philippines,
that is, they are used in the furtherance of its business in the Philippines; and
 shares, rights in any partnership, business or industry established in the
Philippines.

Excluded from the gross estate:

 proceeds/benefits coming from the Government Service Insurance System if the

decedent is a government employee;
 accruals from the Social Security System when the deceased person worked in
the private sector;
 proceeds of life insurance where the beneficiary is irrevocably appointed;
 proceeds of life insurance under a group insurance taken by the employer (not
taken out upon his life);
 transfer by way of bona fide sales;
 transfer of property to the national government or to any of its political
subdivisions;
 exclusive property of the surviving spouse;
 merger of usufruct in the owner of the naked title;
 properties held in trust by the decedent; and
 acquisition and/or transfer expressly declared as not taxable.

Valuation of Gross Estate

Properties subject to estate must be appraised at FV @ point of death
Fair value –refers to the amount at which 2 willing buyers and sellers could transact an
exchange
Valuation rules:
1. FV of property at time of death, included in gross estate
2. FV rules set by law or revenue regulation
3. In default of such FV rules, reference under GAAP is applied
4. Encumbrances on the property or decrease in value after death shall be ignored
Fair Value Rules on the ff. assets:
1. Real properties (whichever is higher)
a. Value at CIR (zonal value), if no zonal value it shall be based on FMV appears at
latest tax declaration
b. Value fixed by Provincial/City Assessor (Assessed value)

2. Shares of stock
a. Preferred share at par value
b. Unlisted common or ordinary share at Book Value
c. Listed in the stock exchanges or PSE, FMV closest at date of death or trading price
at date nearest to the date of death, if none is available on the date of death.

3. Usufruct and annuities

*included in gross estate
*Annuity at present value
*Usufruct right to income over property

4. Other properties
a. Used properties: brand new (purchase price), FV at second hand
b. Pawned jewelry properties (loan-to-value ratio)
c. Loan receivables –fair value at fixed amount in the contract

5. Taxable Transfer –transfer without consideration are included in gross estate at

fair value at date of death less consideration paid at the date of transfer.

Summary of rules on gross estate

Residents or NRA without NRA with
Citizens reciprocity reciprocity
Property location PhilippinesAbroad PhilippinesAbroad PhilippinesAbroad
Real properties    x  x
Personal properties:
Tangible    x  x
Intangible    x x x

Illustration:
Case F: A non-resident alien decedent left the following estate:
House & Lot in Hongkong, inherited before marriage P15,000,000
Car, acquired during marriage in Cebu 1,500,000
Shares of stock issued by a foreign corporation 250,000
Bank deposit with PNB branch in New York 500,000
Shares of stock issued by PLDT group of companies 500,000
5-year, 12% promissory note, received 2 years ago during
Marriage from a resident in the Philippines 500,000
If with no reciprocity
Solution:
Car, acquired during marriage in Cebu P 1,500,000
Shares of stock issued by PLDT group of companies 500,000
5-year, 12% promissory note, received 2 years ago during
Marriage from a resident in the Philippines 500,000
Interest Income (P500,000 x 12% x 2years) 120,000
P 2,620,000
If with reciprocity
Solution:
Car, acquired during marriage in Cebu P 1,500,000

Learning Activity

1. Thomas bought a new car with cash price of P3,000,000. He bought the car on
installment with the following terms: down payment of P500,000 and annual installment
of P700,000 for four years. On his way, he run over an approaching truck and died.
Determine the gross estate.

2. The decedent devised to his son a 1,000 sq.m. lot in Global City, Taguig with the
following valuation:
Fair value as determined by city assessors P20,000/sq.m.
Zonal value as determined by the CIR 17,000/sq.m.
FB determined by independent assessors 18,500/sq.m.
Determine the gross estate.

3. Don Valentin died leaving his wife Tina, is legitimate children, Val and Valen, and
illegitimate children Tine, Alen, and Valerie. The spouse has the following properties:
Exclusive property of Don Valentin P18,000,000
Exclusive property of Donya Tina 16,000,000
Net common properties 36,000,000
Determine the distributable estate and compute for the inheritance of each heir.

Learning References

Banggawan, R. (2019). Business and transfer taxation. 2019 ed. Pasay, Philippines: Real
Excellence Publishing.

De Leon, H. & De Leon, H. Jr. (2013). The law on transfer and business taxation. 15th ed.
Manila, Philippines: Rex Book Store.
Tabag, E. & Garcia, E. (2020). Transfer and business taxation. 2020 ed. Quezon City,
Philippines: EDT Book Publishing.
Villaraza & Angangco. (2020). The Unspoken Cost of Dying: A Summary of Philippine
Taxes After Life. Retrieved February 10, 2021 from
[Link]
7cfd715710fd
Who are compulsory heirs under Philippine law? Retrieved February 10, 2021 from
[Link]
 MODULE 3 cont.
Gross Estate – for Married Decedents

Learning Content

Gross Estate of Married Decedents

1. Decedent’s exclusive properties
2. Common properties of spouses
Exclusive Conjugal/Common Total
GROSS Ᵽxxx,xxx Ᵽxxx,xxx Ᵽxxx,xxx
ESTATE
Less:
Deductions

Common types of property regimes:

1. Absolute separation of property (ASP) –all properties of spouses are separate
properties, except those properties which they may acquire jointly
2. Conjugal partnership of gains (CPG) –all properties that accrues fruit of their
individual or joint labor or fruits of their properties during marriage will be common
properties of spouses
3. Absolute community of property (ACP) –all present properties owned by spouses
at date of celebration of marriage shall be common properties including future fruit of
separate or joint industry or fruits of their common properties

Applicable property regime in default of an agreement

*in absence of an agreement or regime agreed by spouses is void.

Basic Rules in the Determination of Property Interest

1. Presumption in the inventory taking of the estate
Under ASP, properties are presumed separate of either spouse unless proven to
be joint properties
Under CPG and ACP, properties of spouses are presumed common unless
proven exclusive properties
2. The sale or exchange of properties do not alter their classification
*properties acquired using separate properties are still separate properties vice
versa, common properties are still common properties.
3. Accruals in value or gains on sale of properties
*increase in value or gains on the sale properties are fruits subject to rules of the
property regime agreed upon spouses
CONJUGAL PARTNERSHIP OF GAINS (CPG)
–common properties begin to accrue only from the date of marriage describe as
Prospective
Ex. of fruits during marriage
1. Salaries, profits or gains of labor or industry of either spouses
2. Income of properties acquired during marriage
3. Income of separate properties of either husband or wife
Exception to prospectivity: acquisitions by gratuitous such as donation and inheritance
unless designate to both spouses
acquired before marriage acquired during marriage (prospective)
All properties are exclusive All properties are common except
gratuitous acquisitions received by either spouse

Acquired before marriage during marriage

Fruits of labor or industry exclusive conjugal
Fruits of properties exclusive conjugal
Inheritance or donation received exclusive exclusive*
*conjugal if designated to both spouses

ABSOLUTE COMMUNITY OF PROPERTIES (ACP)

–union of the present property of the spouses including fruits of labor and industries of
the spouses during marriage
Special feature of ACP
1. Retrospective feature –properties brought into the marriage will be common
properties
2. Prospective feature –spouses may acquire during the marriage shall be common
Exclusive properties
1. Properties by gratuitous title during marriage
2. Fruits of separate properties of spouses
3. Properties for exclusive personal use, except jewelry
4. Properties brought into marriage by either spouse with a descendant by a prior
marriage
Exceptions to prospectivity feature of ACP:
a. Properties by gratuitous title
b. Fruits of separate properties during marriage
*’fruits follow principal’ –fruit of common property is a common property
acquired before marriage (retrospect) acquired during marriage (prospective)
All properties are common except All properties are common except
-properties of spouse with descendants - gratuitous acquisitions received by either spouse
in a prior marriage -fruits of exclusive property
-properties of personal exclusive use except jewelry
 Acquired before marriage during marriage
Inheritance or donation received communal exclusive*
Fruits of labor or industry communal communal
Fruits of properties
- separate property communal exclusive
- community property communal communal
Exclusive use of spouse
- jewelry communal communal
- non-jewelry exclusive exclusive
*communal if designated to both spouses

Acquisition of Exempt Properties –either common or separate properties shall be

excluded in computation of the gross estate
Exempt properties of NRA Decedents –exempt foreign properties of married NRA
decedent must be excluded in gross estate
Paraphernal property –bride’s property
Capital property -exclusively owned by the husband

Learning References

Banggawan, R. (2019). Business and transfer taxation. 2019 ed. Pasay, Philippines: Real
Excellence Publishing.

De Leon, H. & De Leon, H. Jr. (2013). The law on transfer and business taxation. 15th ed.
Manila, Philippines: Rex Book Store.

Tabag, E. & Garcia, E. (2022). Transfer and business taxation. 2020 ed. Quezon City,
Philippines: EDT Book Publishing.
 MODULE 4
Deductions from Gross Estate and TRAIN Law Updates

Introduction

There are charges which naturally diminish the amount of the inheritance of the
heirs. Hence, the law allows deductions from gross estate. In addition to these charges,
the law also allows certain deductions in the nature of incentives from gross estate. This
module will attempt to lay down the basic information regarding gross estate deductions
in accordance with the TRAIN Law. Some general provisions will also be discussed.

Learning Objectives

After studying this module, you should be able to:

1. Discuss the classification of deductions.
2. Identify the limit of each deduction.
3. Determine the net estate of the decedent.
4. Explain the changes in estate tax computation as affected by the TRAIN
Law.

Learning Content

Exclusive Conjugal/ Total

GROSS ESTATE Pxxx,xxx Pxxx,xxx Pxxx,xxx
Less: Ordinary Deductions
Claims against the estate xxx,xxx xxx,xxx xxx,xxx
Claims against insolvent persons xxx,xxx xxx,xxx xxx,xxx
Unpaid mortgages xxx,xxx xxx,xxx xxx,xxx
Property previously taxed xxx,xxx xxx,xxx xxx,xxx
Transfer for public use xxx,xxx xxx,xxx xxx,xxx
Others xxx,xxx xxx,xxx xxx,xxx
Estate after ordinary deductions Pxxx,xxx Pxxx,xxx Pxxx,xxx
Less: Special Deductions
Family home xxx,xxx
Standard Deduction xxx,xxx
Others xxx,xxx
Net Estate Pxxx,xxx
Less: Share of the Surviving Spouse x 1/2 xxx,xxx
NET TAXABLE ESTATE Pxxx,xxx
NET TAXABLE ESTATE x % of Estate Tax = Estate Tax Payable

The Tax Reform for Acceleration and Inclusion (TRAIN) Act, otherwise known as Republic
Act (RA) 10963, is basically a blend of increases as well as reductions in tax rates. While
it increased the tax on certain passive incomes, documentary stamp as well as excise on
petroleum products, minerals, automobiles and cigarettes, it also reduced the tax on
personal income, estate and donation. The overall effect is seen to generate
approximately P130 billion in revenues which shall be used to fund the government’s
“Build, Build, Build infrastructure program” and “socio-economic programs”.

Prior to RA 10963, the Net Taxable Estate (Estate Tax Base) of a citizen or resident
decedent can generally be computed as follows:

Estate

Real Property xxx

Personal Property xxx

Gross Estate Xxx

Less: Allowable Deductions

– Funeral expenses (5% x gross estate, not to exceed P200,000) Xxx

– Judicial Expenses of testate or intestate proceedings xxx
– Claims against the estate – debt instrument was notarized, statement xxx
showing disposition of proceeds of loan, if contacted within 3 years from
date of death
– Unpaid taxes and mortgages
– Medical expenses (incurred within 1 year prior to his death, xxx
substantiated with receipts, and not exceeding P500,000 xxx
– Family Home (not to exceed 1,000,000) supported by a Barangay xxx
Clearance
– Standard Deduction of P1,000,000
– Properties previously taxed (vanishing deduction) xxx
– Transfer for public use xxx
– Amount received by heirs under RA 4917 (Retirement Benefits law), xxx
provided such amount is included in the gross estate of the decedent xxx
– Share of the surviving spouse (50% of the net conjugal estate) xxx Xxx

Net Taxable Estate Xxx

 Some of the amendments introduced under RA 10963 on estate tax include the adoption
of a fixed flat tax rate, the allowable deductions in computing a decedent’s net taxable
estate, and procedural matters intended to streamline processes.

In particular, the following are the amendments primarily aimed to simplify its
computation, procedures and payment:

o The estate tax rate was reduced from graduated rates of 5% to 20% of the net estate to
a fixed flat rate of 6% on the amount in excess of P5 million.
o Estates with a net value of P5 million and below will be exempted from paying the estate
tax.
o Judicial, funeral (threshold is up to P200,000) and medical expenses (threshold is up to
P500,000) are no longer allowed.
o Standard deduction (wherein no substantiation is required) is however increased from
P1,000,000 to P5,000,000
o Family home threshold for exemption has been increased from P1,000,000 to
P10,000,000. Barangay Certification is no longer a requirement
o Deduction for Expenses, Losses, Indebtedness and Taxes for non-residents are no
longer allowed. In lieu thereof, non-residents are now allowed to have a standard
deduction of 500,000
o Proportionate deduction allowed to non-residents is now limited to claims against the
estate, claims of the deceased against insolvent persons, and unpaid mortgages
o Notice of death is no longer a requirement
o CPA certification is required only if the gross estate is above P5,000,000. Previous
threshold is up from P2,000,000.
o The deadline for filing of estate tax return has been extended from 6 months from death
to one (1) year from death
o Payment of estate tax can be made in installment up to two years if cash of the estate is
insufficient to pay tax due
o In lieu of a required certification from the BIR that the estate tax has been paid, the new
law permits withdrawal of funds in bank deposit accounts (left by the decedent) by the
heirs, subject only to 6% withholding tax. Prior to RA 10963, only withdrawals up to
P20,000 is allowed
Penalty
For late filing of Tax Returns with Tax Due to be paid, the following penalties will be
imposed upon filing, in addition to the tax due:

1. Surcharge
There shall be imposed, in addition to the tax required to be paid, a penalty equivalent to
twenty-five percent (25%) of the amount due, in the following cases:
(1) Failure to file any return and pay the tax due thereon as required under the provisions
of this Code or rules and regulations on the date prescribed; or
(2) Unless otherwise authorized by the Commissioner, filing a return with an internal
revenue officer other than those with whom the return is required to be filed; or
(3) Failure to pay the deficiency tax within the time prescribed for its payment in the notice
of assessment; or
(4) Failure to pay the full or part of the amount of tax shown on any return required to be
filed under the provisions of this Code or rules and regulations, or the full amount of tax
due for which no return is required to be filed, on or before the date prescribed for its
payment.

2. Interest
In General. - There shall be assessed and collected on any unpaid amount of tax, interest
at the rate of twenty percent (20%) per annum, or such higher rate as may be prescribed
by rules and regulations, from the date prescribed for payment until the amount is fully
paid.

Additional reading:
[Link]
[Link]
ctions%20for%20BIR%20Form%20No.%[Link]

Learning References

Banggawan, R. (2019). Business and transfer taxation. 2019 ed. Pasay, Philippines: Real
Excellence Publishing.

De Leon, H. & De Leon, H. Jr. (2013). The law on transfer and business taxation. 15th ed.
Manila, Philippines: Rex Book Store.

Tabag, E. & Garcia, E. (2020). Transfer and business taxation. 2020 ed. Quezon City,
Philippines: EDT Book Publishing.