ESTATE TAXATION DECEDENT GROSS ESTATE* DEDUCTIONS (from the gross estate to arrive at the NET ESTATE) NOT ALLOWED AS DEDUCTIONS Filipinos and Resident Aliens Value of the property wherever situated to the extent of the interest therein of the decedent at the time of his death Expenses, losses, claims, indebtedness and taxes; (i) Actual Funeral expenses OR in an amount equal to 5% of the gross estate which but not to exceed P200,000.00, whichever is lower. The expenses must be duly supported by receipts or invoices or other evidence to show that they were actually incurred.
- Expenses incurred after the internment. - Any portion of the funeral and burial expenses borne or defrayed by relatives and friends of the deceased. - Medical expenses as of the last illness will not form part of funeral expenses but should be claimed as medical expenses if incurred within 1 year before the death of the decedent (ii) and Judicial expenses of the testamentary or intestate proceedings. Judicial expenses which have been allowed by the probate court are deductible even if the expenses were incurred after the estate taxes have been paid.
Losses incurred during the settlement of the estate arising from fires, storms, shipwreck, or other casualties, of from robbery, theft or embezzlement, when such losses are not compensated for by insurance or otherwise, and if at the filing of the return such losses have not been claimed as a deduction for income tax purposes in an income tax return, and Provided that such losses were incurred not later than the last day for the payment of the estate tax as prescribed by law.
(i) Claims against the estate (all unpaid obligations and liabilities of the decedent at the time of his death) (a) at the time the indebtedness was incurred, the debt instrument was duly notarized; (b) if the loan was contracted within 3 years before the decedents death, the executor or administrator shall submit a statement showing the disposition of the proceeds of the loan. Claims against the estate allowed as a deduction is an existing claim, not one that was previously condoned.
(ii) Claims of the deceased against insolvent persons where the value of the decedents interest is included in the gross estate and there is proof of insolvency
For unpaid mortgages upon, or any indebtedness in respect to property where the value of the decedents interest in the property undiminished by such mortgage or indebtedness, is included in the value of the gross estate, the mortgage or indebtedness is founded upon a promise or agreement; when founded upon a promise or agreement, the deduction is limited to the extent that the mortgage or indebtedness were contracted bona fide and for adequate consideration in money or moneys worth.
Income taxes upon income received after decedents death; Property taxes not accrued before decedents death Estate taxes Property previously taxed (VANISHING DEDUCTION); Transfers for public use; Net share of the surviving spouse in the conjugal partnership THESE ARE ALSO ALLOWED AS DEDUCTIONS FROM THE GROSS ESTATE OF THE NON- RESIDENT ALIEN DECEDENT
Amount received by heirs under RA 4917 (Tax Exempt retirement or separation; Provided that the amount of separation benefit is included as part of the gross estate of the decedent Medical Expenses;
Incurred by the decedents within 1 year prior to his death which shall be duly substantiated by receipts, Provided, That in no case shall the deductible medical expenses exceed P500,000. If it exceeds P500,000, the excess neither could it be deducted as claims against the estate. Standard Deduction; An amount equivalent to P1M shall be allowed as an additional deduction without need of substantiation. The Family Home;
Amount equivalent to the current market value of the decedents family home not exceeding P1M, only the excess shall be subject to estate tax, certified by the barangay captain of the locality as the dece3dents family home Non- Resident Aliens Value of the property situated in the Philippines to the extent of the interest therein of the decedent at the time of his death
Intangible property: - Franchise which must be exercised The proportion which expenses, losses, claims, indebtedness and taxes bears to the total value of the entire gross estate wherever situated; Phil. Gross Estate Expenses, Losses, Allowable ------------------------- X Indebtedness and Taxes = Deductions World Gross Estate from Gross estate Medical Expenses; Amount received by heirs under RA 4917 (Tax Exempt retirement or separation; Standard Deduction; The Family Home; Property previously taxed (VANISHING DEDUCTION); An amount equal to the value specified below of any property forming a part of the gross estate situated in the Philippines of any person who died within 5 years prior to the death of the decedent, or transferred to the decedent by gift within 5 years prior in the Philippines - Shares, Obligations or Bonds: issued by any corporation or sociedad anonima organized or constituted in the Philippines in accordance with its laws issued by any foreign corporation 85% of the business of which is located in the Philippines issued by any foreign corporation if such shares, obligations, or bonds have acquired a business situs in the Philippines. - Shares or rights in any partnership, business or industry established in the Philippines - The deduction allowed from the gross estates of citizens, resident and non-resident estates for properties which were previously subject to deduction because the deduction allowed diminishes over a period of 5 years - This is provided in order to reduce tax on property received from a prior decedent where the deceased died within 5 years after the death of the prior decedent. to his death, where such property can be identified as having been received by the decedent from the donor by gift, or from such prior decedent by gift, bequest, devise, or inheritance, or which can be identified as having been acquired in exchange for property so received: 100% of the value if the prior decedent died within 1 year prior to the death of the decedent, or if the property was transferred to him by gift within the same period prior to his death; 80% of the value if the prior decedent died more than 1 year but not more than 2 years prior to the death of the decedent, or if the property was transferred to him by gift within the same period prior to his death; 60% of the value if the prior decedent died more than 2 years but not more than 3 years prior to the death of the decedent, or if the property was transferred to him by gift within the same period prior to his death; 40 % of the value if the prior decedent died more than 3 years but not more than 4 years prior to the death of the decedent, or if the property was transferred to him by gift within the same period prior to his death; and 20 % of the value if the prior decedent died more than 4 years but not more than 5 years prior to the death of the decedent, or if the property was transferred to him by gift within the same period prior to his death.
FORMULA: Value of Property Previously Taxed LESS: Mortgage debt paid, if any (first deduction) = 1 st Basis
Value of gross estate of present decedent LESS: Expenses, etc. Transfers for public purposes, etc. = 2 nd deduction
1 st Basis LESS: 2 nd deduction = 2 nd Basis MULTIPLIED by: 80%,60%, etc =VANISHING DEDUCTION Transfers for public use; The amount of all bequests, legacies, devices, or transfers to or for the use of the Phil. Government, or any political subdivision thereof, for exclusively public purposes Net share of the surviving spouse in the conjugal partnership The net share of the surviving spouse in the conjugal partnership property as diminished by the obligations properly chargeable to such property shall, for the purpose of computing the net estate be deducted from the net estate of the decedent (Sec. 86(C), NIRC) This also applied equally to the net share of a surviving spouse in the absolute community of property. *GEN. RULE: Gross Estate shall consists of the value of all property, wherever situated, of the decedent (except non-resident aliens) to the extent of his interest at the time of his death. EXCEPTIONS: (There are certain instances where the decedent does not have any title to a property but may have a beneficial interest in a property at the time of his death. Thus, such properties are included as part of the gross estate.) PROPERTIES UPON WHICH THE DECEDENT DOES NOT HAVE INTEREST AT THE TIME OF HIS DEATH BUT STILL FORMS PART OF THE ESTATE: WHEN INCLUDED AS PART OF A DECEDENTS GROSS ESTATE To the extent of any interest therein of which WHEN NOT INCLUDED AS PART OF A DECEDENTS GROSS ESTATE (i) transfers in contemplation of death The decedent has at any time made a transfer, by trust or otherwise, in contemplation of, or intended to take effect in possession or enjoyment at or after his death, OR The decedent has at any time made a transfer, by trust or otherwise, under which he has retained for his life or for a period not ascertainable without reference to his death or for any period which does not in fact end before his death, the possession or enjoyment of, or the right to the income of the property, or the right either alone or in conjunction with any person to designate the person who shall possess or enjoy the property or the income therefrom. Where the transfer is a bonafide sale for an adequate and full consideration in money or moneys worth (ii) revocable transfers
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 when any such power is relinquished in contemplation of decedents death. When power to alter, amend or revoke considered to exist on date of decedents death: (i) Even though the exercise of the power is subject to a precedent giving of notice or (ii) 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 decedents death (a) notice has been given or (b) 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 his death. Where the transfer is a bonafide sale for an adequate and full consideration in money or moneys worth (iii) property passing under general power of appointment - power which is exercisable in favor of the decedent, his If the power of appointment is special or specific one which authorizes the done or holder of the power to consume principal, limited by an ascertainable standard relation to the decedents health, education, support or maintenance. AND/OR estate, his creditors, or the creditors of his estate Where the transfer is a bonafide sale for an adequate and full consideration in money or moneys worth (iv) proceeds of life insurance
General criteria: The life insurance proceeds are payable i. to the decedents estate ii. to beneficiaries other than the decedents estate and the decedent possessed incidents of ownership (the right or power of the insured that gives him economic benefits) in the policy N.B.: The insurance proceeds must arise from an insurance taken up on the life of the decedent, not upon the life of others. In order to negate the incidents of ownership which would result to the exclusion from gross estate of the insurance proceeds, the insured has to designate the beneficiary in an irrevocable capacity.
(v) transfers for insufficient consideration Amount included: i. Where the decedents property is transferred in contemplation of death, revocable transfer or passed under a general power of appointment for a consideration in money or moneys worth ii. but not for an adequate and full consideration in money or moneys worth, iii. the amount includible as part of the decedents gross estate should be the difference between the fair market value at the time of the decedents death and the actual consideration received by the decedent. FORMULA FOR COMPUTATION: Fair market value of property at decedents death LESS: Actual Consideration received by decedent Amount includible in decedents gross estate Where the transfer is a bonafide sale for an adequate and full consideration in money or moneys worth (vi) capital of surviving spouse
REMINDERS: Life insurance proceeds are always excluded from gross income, whether the designation of the beneficiary is revocable or irrevocable. The concept of irrevocability finds application to exclusions from gross because the proceeds pass on after death subject to the decedents control if the designation of the beneficiary is revocable. Thus, included as part of gross estate. The life insurance proceeds are excluded from gross estate if the designation is irrevocable because the decedent has not retained any interest which pass on after death. Thus excluded from gross estate.
ADMINISTRATIVE and OTHER REQUIREMENTS Instances where notice of death required to be filed In all cases of transfers subject to tax, or where, though exempt from tax (not over than 200,000.00), the gross value of the estate exceeds 20,000.00. Who should file written notice of death and the estate tax return? The executor, administrator or any of the legal heirs, as the case may be, Administrator of decedents property during her lifetime is not automatically administrator of her estate upon death. Thus, there was absolutely no obligation on the part of said administrator during the lifetime, to inform the BIR of the decedents death. (Estate of the late Juliana Diez vda. de Gabriel vs CIR, GR 155541, Jan. 27, 2004) Period for filing notice of death The written notice of death shall be filed with the Commissioner of IR within 2 months after the decedents death, or within a like period after qualifying as such executor or administrator Period for filing and payment of estate tax return shall be filed and paid within 6 months from the decedents death. PAY AS YOU GO concept the tax should be paid at the time of the filing of the tax return. a certified copy of the schedule of partition and the order of the court approving the same shall be furnished the Commissioner within 30 days after the promulgation of such order. The Commissioner or any Revenue Officer authorized by him shall have authority to grant, in meritorious cases, a reasonable extension, not exceeding 30 days, for filing the return. The application for the extension of time to file the estate tax return must be filed with the RDO where the estate is required to secure its TIN and file the tax returns of the estate, which RDO, likewise, has jurisdiction over the estate tax return required to be filed by any party as a result of the distribution of the assets and liabilities of the decedent. It may happen that the estate is suffering from liquidity problems because it does not have sufficient cash to pay the estate taxes. In such a case, the executor or administrator may opt to do either of the following: (a) Pay the tax in installments OR (b) apply for an extension of time within which to file the tax. When the Commissioner finds the payment on due date of the estate tax or of any part thereof would impose undue hardship upon the estate or any of the heirs, he may extend the time for payment or any part thereof not to exceed (a) 5 years, in case the estate is settled through the courts, or (b) 2 years, in case the estate is settled extrajudicially. GROUNDS FOR DENIAL OF EXTENSION: Where the taxes are assessed by reason of (i) negligence, (ii) intentional disregard of rules and regulations, or (iii) fraud on the part of the taxpayer. Place of filing estate tax return and payment of estate taxes Resident of the Philippines The administrator or executor shall register the estate of the decedent and secure a new TIN therefore from the RDOffice where the decedent was domiciled at the time of his death and shall file the estate tax return and pay the corresponding estate tax with the i. An authorized agent bank/Accredited Agent Bank, or ii. Revenue District Officer, or iii. Collection Officer, or iv. Duly authorized Treasurer of the city or municipality in which the decedent was domiciled at the time of his death, whichever is applicable, following prevailing collection rules and procedures. In any other place where the Commissioner of IR permits the estate tax to be filed. The Commissioner of IR may continue to exercise his power to allow a different venue/place in the filing of tax returns notwithstanding the provisions of the NIRC. Non-resident with no legal residence in the Philippines With the CIR In case of a non-resident citizen or alien, with executor or administrator in the Philippines, the estate tax return shall be filed with and the TIN for the estate shall be secured from the RDO where such executor or administrator is registered. In case the executor or administrator is not registered, the estate tax return shall be filed with and the TIN of the estate shall be secured from the RDO having jurisdiction over the executor or administrators legal residence. In case the decedent does not have an executor or administrator in the Philippines, the estate tax return shall be filed with and the TIN for the estate shall be secured from the CIR through RDO No. 39-South QC In any other place where the Commissioner of IR permits the estate tax to be filed. The Commissioner of IR may continue to exercise his power to allow a different venue/place in the filing of tax returns notwithstanding the provisions of the NIRC. Tax credit for estate taxes paid to a foreign country. Sec. 86 (E)(1): The estate taxes imposed shall be credited with the amounts of any estate tax imposed by the authority of a foreign country. It means that the foreign estate taxes shall be deducted from the Philippine estate taxes that are due from the estate. The amount of the credit shall be subject to each of the following limitations: 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 decedents net estate situated within such country taxable under the NIRC bears to his entire estate; and The total amount of the credit shall not exceed the same proportion of the tax against which such credit is taken, which the decedents net estate situated outside the Philippines taxable under the NIRC bears to his entire net estate. EXEMPTION OF CERTAIN ACQUISITIONS AND TRANSMISSIONS. (Sec. 87, NIRC) These are not included in all gross estates whether of decedent Filipinos, resident and non- resident aliens, hence tax exempt: (i) Merger of the usufruct in the owner of the naked title Valuation of usufruct subject to estate tax: to determine the value of the right of usufruct, use or habitation, as well as that of annuity, there shall be taken into account the probable life of the beneficiary in accordance to the latest Basic Standard Mortality Table, to be approved by the Finance Secretary (ii) Transmission from the fiduciary to the fideicommissary heir (iii) Transmission from the first heir to another beneficiary in accordance with the desire of the predecessor (iv) Transfers to social welfare, cultural and charitable institutions All bequests, devises, legacies or transfers to social welfare, cultural and charitable institutions, no part of which inures to the benefit of any individual: Provided, however, That not more than 30% of said bequests, devises, legacies or transfers shall be used by such institutions for administration purposes. (v) Acquisitions and Transfers of Intangible Personal Property (See NOTES in Gross Estate of Non-Resident Alien Decedent, page 1 Supra) Intangible property of a non-resident alien decedent considered as situated in the Philippines: - Franchise which must be exercised in the Philippines - Shares, Obligations or Bonds: issued by any corporation or sociedad anonima organized or constituted in the Philippines in accordance with its laws issued by any foreign corporation 85% of the business of which is located in the Philippines issued by any foreign corporation if such shares, obligations, or bonds have acquired a business situs in the Philippines. - Shares or rights in any partnership, business or industry established in the Philippines Is subject to RECIPROCITY PROVISION: When the non-resident alien decedents country (i) did not impose a transfer tax of any character in respect of intangible personal property of Filipino citizens not residing in such foreign country OR (ii) allows a similar exemption from transfer or death taxes of every character or description in respect of intangible personal property owned by Filipino citizens not residing in that foreign country, the Philippines will exempt from estate taxation intangible personal property situated in the Philippines of such non-resident alien decedent. Therefore, since intangible personal properties of a non-resident alien are included in his gross estate, it will be only tax exempt by virtue of the reciprocity provision.
DONORs TAXATION Tax treatment of transfers for insufficient consideration of property, other than real property subjected to the final capital gains tax. Where property, other than real property that has been subjected to the final capital gains tax, is transferred for less than an adequate and full consideration in money or moneys worth, then the amount by which the fair market value of the property at the time of the execution of Contract to Sell or execution of the Deed of Sale which is not preceded by a Contract to Sell exceeded the value of the agreed or actual consideration or selling price shall be deemed a gift, and shall be included in computing the amount of gifts made during the calendar year. (Sec. 100, NIRC; Sec. 11, 5 th par. Rev. Regs. No. 2-2003) Properties covered here include both movables and immovable that are not considered as capital assets Situs of donors taxation. Where the transfer took place. Thus, only transfers that take place within the Philippines are subject to donors taxes unless the donors are Filipino citizens who are residents of a foreign country. This is so because donors taxes are in the nature of taxes imposed upon the privilege to do something, which in this case is to transfer property. Consequently, if the donor is a non-resident alien, then the concept of reciprocity does not find application because the transaction is not taxable. The concept of reciprocity may be used to exempt from donors taxes only if the donation took place in the Philippines. Donations of Intangible Property that are not subject to donors tax (Concept of Reciprocity) If the donor at the time of the donation was a citizen and resident of a foreign country which at the time of the donation did not impose a transfer tax of any character, in respect of intangible personal property of citizens of the Philippines residing in that foreign country, or If the laws of the foreign country of which the donor was a citizen and resident at the time of the donation allows a similar exemption from transfer taxes of every character or description in respect of intangible personal property owned by citizens of the Philippines residing in that foreign country. Tax payable by the donor if the done is a stranger: 30% of the net gifts. Stranger for purposes of donors tax: a person who is NOT a (i) brother, sister (whether by whole or half-blood), spouse, ancestor, and lineal descendant, or (ii) a relative by consanguinity in the collateral line within the fourth degree of relationship. DONATIONS EXEMPT FROM THE PAYMENT OF DONORS TAXES 1. Total net gifts made during the calendar year not exceeding P100,000.00 Donation/Gift Splitting a) spreading the donation or gift over numerous calendar years in order to avail of the exemption from donors taxes or lower donors taxes. b) Spouses donate a common property. In such an instance, the donation or gift is to be treated as divided between the spouses. One or the other of the spouses may then avail of the beneficial tax treatment of splitting, such as availing of the lower tax brackets. 2. Donation for political campaign purposes Any contribution in cash or in kind to any candidate, political party or coalition of parties for campaign purposes shall be governed by the Election Code (Sec. 99 (C), NIRC) Exemption applies only if reported to the COMELEC. Any provision of law contrary notwithstanding, any contribution in cash or in kind to any candidate or political party or coalition of parties for campaign purposes, duly reported to the COMELEC, shall not be subject to the payment of any gift tax (R.A. 7166, Sec. 13, last par) Corporations are not allowed to make donations for partisan political activities including for political campaign purposes. No corporation, domestic or foreign, shall give donations in aid of any political party or candidate or for purposes of partisan political activity. (Corp. Code, Title IV, Sec.36.9) 3. Certain gifts made by a resident i) Dowry Exclusion: Dowries or gifts made on account of marriage and before its celebration or within 1 year thereafter by parents to each of their legitimate, recognized natural, or adopted children to the extent of the first 10,000; ii) Gifts made to or for the use of the Phil. Govt or any entity created by any of its agencies which is not conducted for profit, or to any political subdivisions of said Govt; iii) Gifts in favor of an educational and/or charitable, religious, cultural or social welfare corporation, institution, foundation, trust or philanthropic organization or research institution or organization; Provided, however, That not more than 30% of said gifts shall be used by such donee for administration purposes; For the purpose of this exemption, a non-profit educational and/or charitable corporation, institution, foundation, trust or philanthropic organization and/or research institution or organization is a school, college or university and/or charitable corporation, foundation, trust or philanthropic organization and/or research institution, or organization, (1) incorporated as a non-stock entity, (2) paying no dividends, (3) governed by trustees who received no compensation, and (4) devoting all its income, whether students fees or gifts, donations, subsidies or other forms of philanthropy, to the accomplishment and promotion of the purposes enumerated in its articles of incorporation. iv) All donations, contributions and gifts exempted under special laws made to the (a) Philippine American Cultural Foundation and (b) Ramon Magsaysay Awards Foundation Requirement for notice of donation by a donor engaged in business. In order to be exempt from donors tax and to claim full deduction of the donation given to qualified donee institutions duly accredited by the Philippine Council for NGO Certification, Inc. (PCNC), the donor engaged in business shall give a notice of donation on every donation worth at least P50,000.00 to the RDO which has jurisdiction over his place of business within 30 days after receipt of the qualified donee institutions duly issued Certificate of Donation, which shall be attached to the said Notice of Donation, stating that not more than 30% of the said donation/gifts for the taxable year shall be used by such accredited non-stock, non-profit corporation NGO institution (qualified-donee institution) for administration purposes. 4. Certain gifts made by non-resident aliens i) Gifts made to or for the use of the Phil. Govt or any entity created by any of its agencies which is not conducted for profit, or to any political subdivisions of said Govt; ii) Gifts in favor of an educational and/or charitable, religious, cultural or social welfare corporation, institution, foundation, trust or philanthropic organization or research institution or organization; Provided, however, That not more than 30% of said gifts shall be used by such donee for administration purposes Domondon opined that from a reading of the heading of Sec. 101 (B). In the Case of Gifts Made by a Nonresident not a Citizen of the Philippines, nonresidents Filipinos are not subject to the exemption. Applying the principle of strictissimi juris, nonresident Filipinos are not entitled to the tax exemption. This requires remedial legislation because it would be subjecting nonresident citizens to a higher burden than nonresident aliens. 5. Donations of Intangibles subject to reciprocity Concept of Reciprocity If the donor at the time of the donation was a citizen and resident of a foreign country which at the time of the donation did not impose a transfer tax of any character, in respect of intangible personal property of citizens of the Philippines residing in that foreign country, or If the laws of the foreign country of which the donor was a citizen and resident at the time of the donation allows a similar exemption from transfer taxes of every character or description in respect of intangible personal property owned by citizens of the Philippines residing in that foreign country. 6. Donations for athletes prizes and awards Conditions for exemption: (i) The donation must be prizes or awards (ii) given to athletes (iii) in local and international sports tournaments and competitions (iv) held in the Philippines or abroad, and (v) sanctioned by their respective national sports associations. Domondon submits that this exemption may be availed of by corporations and individuals, whether resident or non-resident. This is evident from the use of the unqualified word donors in RA 7549. 7. Donations under the adopt-a-school program Aid/help/contribution/donation provided by an adopting private entity under the provisions of RA 8525 (Adopt-a-School Act of 1998) to a government school, whether elementary, secondary, post-secondary or tertiary are exempt from donors taxes. (Sec. 3(b), Rev. Reg. 10-2003) The assistance may be in the form of, but not limited to, infrastructure, teaching and skills development, learning support, computer and science laboratories, and food and nutrition. TAX CREDITS FOR FOREIGN DONORs TAXES Paid to a foreign country a. Donor was a Filipino citizen or resident alien; b. at the time of foreign donation; c. donors taxes of any character and description; d. are imposed and paid by the authority of a foreign country Limitations on tax credit: a. 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 decedents net gifts situated within such country taxable under the NIRC bears to his entire net gift; and b. The total amount of the credit shall not exceed the same proportion of the tax against which such credit is taken, which the decedents net gift situated outside the Philippines taxable under the NIRC bears to his entire net gift.