Business and Transfer Taxes Notes

Estate Tax
Basic Terms in Taxation
RIGHT VS. PRIVILEGE
Taxation – power of the Government to impose burden > Right – The basics of human existence.Those things
upon the people to earn Revenue. that are Necessary to live. You cannot live without these.
Eg. Right to breathe, right to live, right to vote, Freedom
3 Inherent Powers of the State ( definition: Acaylar, PJ) of speech. Etc.
1. Police Power – power to monitor people for the
general welfare. > Privilege– Are Rights that you can live without.
2. Eminent Domain – power to expropriate private These are things that are allowed and granted by the
property for public use. state. These privileges can be Taxed.
3. Taxation – power of the government to impose Eg. Driver’s license, Professional Licenses, etc. You can
burden upon the people to earn revenue. live without having to drive or be a lawyer, etc.
U Note:
Taxation is the foundation wherein government is U Note:
founded on. Taxes and the government have a symbiotic Government requires us to pay taxes so that we can
relationship. exercise the privileges that they have granted upon us
and these taxes also work for the protection of our rights
“Without taxation there is no government” and privileges.
- Judge Cooley
To understand taxation, one must understand the
KINDS OF TAXES concept of rights and privileges. Rights are usually not
taxable while Privileges are usually taxable.
1. Income Taxes – taxes levied on the financial
income of persons, corporations, or other legal Double Taxation - illegal in the Philippines. You cannot
entities. tax the same thing twice for the same period and for the
2. Business Taxes- taxes levied on the privilege to same purpose.
enter into business
a. Value Added Taxes Capital Gains tax – A capital gains tax (abbreviated: CGT)
b. Other Percentage Taxes is a tax charged on capital gains, the profit realized on the
c. Excise Tax – tax imposed on SIN products sale of a non-inventory asset that was purchased at a
( products that are harmful and wasteful) lower price.

3. Transfer Taxes – taxes on the privilege to 2 Basic Questions in Taxation

transfer of property from one person to another. 1. Are you a Citizen?
a. Estate Taxes – takes effect after death 2. Are you a Resident
b. Donor’s Taxes – takes effect during lifetime
a. Donation Inter Vivos - during life If the answer is YES to anyone of these this is TAXABLE.
b. Donation Mortis Causa – takes effect
after death. ( Last will and Principles of Succession
Testament)
ELEMENTS OF SUCCESSION
4. Documentary Taxes – taxes levied on the 1. Deceased/ Decedent –Person who died.
privilege to enter into contract. Testator/ Testatrix (F) – person who wrote the last
will and testament. Also called the decedent.
2. Estate- a bulk of property left behind by the
decedent.

Notes from: The New Philippine Business and Transfer Taxes (Principles, Law and Problems) by Virgilio D. Reyes (Nov 2007)
Business and Transfer Taxes Notes from G. Mendoza
And Lectures by: ATTY. PRACKIE JAY ACAYLAR, CPA (EAC- Manila)
 Business and Transfer Taxes Notes
Estate Tax
3. Successors/ Heir- the persons to whom the
estate is given to.
4. Executor/Administrator – person who will take
charge of the estate before the distribution.
** Executor- person named in the will by the
testator
** Administrator- person appointed by the
courts in the absence of an assigned executor.
Succession – mode of acquisition by virtue of which the
property rights and obligations, to the extent of the value
of the Estate of a person are transmitted through his
death to others by will or operation of Law. ( Reyes)
Things Transmissible in Succession
1. Property – things that the decedent owned
before the time of his death.
a. Real Estate/ Property- land, building or
anything that is attached to the soil with
permanence.
b. Tangible Property- property that can be
seen or touched.
Eg. Cars, Jewelry, Electronic Gadgets,
etc.
c. Intangible Property- property that
cannot be seen or touched.
Eg. Rights, Franchises, Shares, bonds,
etc.
2. Rights – legal claims, franchises, (could be the
same as intangible property)
3. Obligations – unpaid debt
Kinds of Succession
1. Testamentary Succession- succession which
results from a designation of heirs made in the
last will and testament executed by the testator.
2. Intestate/Legal Succession- succession which
results from the operation of law where there is
no last will and testament or the LW&T is void for
any reason given by law.
3. Mixed Succession – succession which results
partly from the LW&T and Partly from the
operation of law.
Kinds of Heirs
~ Primary Compulsory Heirs – heirs in a succession
whether there is or there is no last will and
testament. These include:
W Legitimate Children &Legitimate
Descendants
W Legitimate Surviving Spouse
W Legitimated Children
Legitimate Children- all children born & conceived NOT
out of wedlock.
♪ Legitimate Child
♪ Legally Adopted Child
♪ Legitimated Child
Illegitimate Children – all children born & conceived out
of wedlock.
“All Children conceived and born outside a valid marriage
are considered illegitimate.”
~(Art 165, Family Code of the Philippines)
~ Secondary Compulsory Heir – only can get part
of the estate in the absence of the primary
compulsory heirs.
W Legitimate Ascendants
W Illigitimate Ascendants
~ Voluntary Heirs – Heirs determined through the
last will
and testament.
LAST WILL AND TESTAMENT– a will or testament is a
document by which a person (the testator) regulates the
rights of others over his or her property or family after
death. For the devolution of property not disposed of by
will, see inheritance and intestacy. In the strictest sense,
"will" is a general term, while "testament" applies only to
dispositions of personal property (this distinction is
seldom observed). A will is also used as the instrument in
a trust.
- A written instrument wherein the testator would
administer his properties rights and obligation after
his death. (acaylar)
Codicil- addendums or attachments to the will.
Kinds of Last Will and Testaments
~ Holographic Will - a will entirely written or
created by the testator himself, signed and dated
and NOT subject to legal formalities on form,
witnesses, or acknowledgement before a notary
public.
 Business and Transfer Taxes Notes
>>> This kind of will does not need formalities
because many people can recognize his
handwriting and it can be verified by a
penmanship expert.
~ Notarial Will- a will that is created FOR the
testator by a 3rd party, usually his lawyer, follows
proper form, signed and dated in front of the
required number of witnesses
acknowledged by the presence of a notary
public.
2 PARTS OF THE ESTATE
~ Legitime– This is a secured portion of the estate that
the law reserves for compulsory heirs.
~ Free Portion – Portion of the will that the testator
can freely dispose of.
PROBATE OF THE LAST WILL AND TESTAMENT– This is a
Special Proceeding validating the last will and testament.
“No property of a testator shall pass to an heir unless
proven that all terms in the Last will and testament is
legal and valid in court.”
Revocation of Will– the testator may revoke his last will
and testament at any time before he dies. If he executed
more than one Last will and testament the last one
before he dies will be the prevalent one
DiSINHERITANCE– A compulsory heir may be deprived of
his legitime for a cause provided by law and effected by
will where the legal cause of which is stated. If there is
any discrepancy, there must be proof or evidence.
Estate Tax
Applies to:
a) Citizens of the Philippines
b) Residents of the Philippines
Non-resident aliens with properties in the Philippines
Where to file- municipality in which the decedent was
domiciled at the time of his death or if there be no legal
and residence in the Philippines, with the Office of the
Commissioner.
GROSS ESTATE
A. Gross Estate of Citizen and Resident Decedent
1. Real Property located within and without the
Philippines
2 Tangible personal property located within and without
the Philippines
3. Intangible personal property located within and
without the Philippines
B. Gross Estate of a Non-Resident Alien Decedent
1. Real Property located within the Philippines
2. Tangible personal property located within the
Philippines
3. Intangible personal property located within the
Philippines unless there is reciprocity in which case it is
not taxable in the Philippines.
Situs or PLACE OF TAXATION
Property has a situs or location or a jurisdiction for tax
purposes. Situs is decisive in determining the estate of a
deceased person taxable in the Philippines.

EXECUTOR/ ADMINISTRATOR– Carries out the provisions SUBJECT TO TAX

of the last will and testament that is appointed by the WITHIN WITHOUT
testator. If he does not accept, the court shall appoint. Citizen / Resident y y
Resident Alien y y
Non Resident y N
Articulo MORTIS– testator dies within 3 months of the Alien/
time of marriage Non Resident
Citizen
ESTATE TAXES Non Resident y Y
Citizen
A tax on the right of transmitting property at the time of
death and on the privilege that a person is given control Real Property- country where they are situated
to a certain extent to the disposition of his property to Tangible Personal Property- country where they are
take effect upon death. actually located at the time of death of the decedent
 Business and Transfer Taxes Notes
Estate Tax
Intangible Personal Property- considered as intangible
personal properties situated in the Philippines:
~ franchise which must be exercised in the
Philippines
~ shares, obligations or bonds issued by any
corporation organized in the Philippines
~ shares, obligations or bonds issued by any
foreign corporation 85% of the business of which
is located in the Phils
~ shares, obligations or bonds issued by a foreign
corporation if such shares have acquired a
business situs in the Phils.
~ Shares or rights in any partnership, business or
industry established in the Phils.
PROPERTIES INCLUDIBLE IN THE GROSS ESTATE
DECEDENT’S INTEREST - shall include all properties,
rights and interest which the decedent owns at the time
of death. It shall include:
Properties owned by the decedent actually and
physically present in his estate at the time of his death
such as land, buildings, shares of stock, vehicles, bank
deposit, etc
The value of any interest in property owned or possessed
by the decedent at the time of his death such as
dividends declared before his death but received after
his death, partnership profits which have accrued before
his death, usufructuary rights, etc.
The value of property, right or interest in the property,
transferred by the decedent during his lifetime which,
under the law, are in the nature of testamentary
dispositions such as life insurance proceeds in favor of a
revocable beneficiary.
TAXABLE TRANSFERS
Value of the property or interest in property transferred
by the decedent during his lifetime which is in the nature
of testamentary disposition:
♪ Transfers in contemplation of death
♪ Revocable transfers
♪ Property passing under a general power of
appointment
♪ Transfer with retention or reservation of certain
rights over the income or enjoyment of the
property transferred
♪ Transfer for insufficient consideration
Transfers in Contemplation of Death
Impelled by the thought of death, or the motivating
factor or controlling motive for the transfer of the
property is the thought of death without regard to the
state of health of the transferor.
Donation Mortis Causa
Takes effect upon the death of the donor. Its
characteristics are:
♪ there is no conveyance of title or ownership to
the donee or transferee
♪ the transfer is revocable by the donor at will
during his lifetime
♪ the transfer shall be void id the donor survives
the donee
REVOCABLE TRANSFERS
Where the enjoyment of the property transferred may
be altered, amended, revoked or terminated by the
decedent. The revocability is not affected by the failure
of the decedent to exercise the power to revoke during
his lifetime. If the notice has not been given, the power
to revoke has not been exercised on of 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.
PROPERTY PASSING UNDER A GENERAL POWER OF
APPOINTMENT
The rule is the gross estate shall include any property
passing or transferred under a general power of
appointment exercised by the decedent
♪ By will
♪ By deed to take effect in possession or
enjoyment at or after his death
♪ By deed under which he has retained for his life
or any 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 from the property
♪ The right, either alone, or in conjunction with
any person to designate the persons who shall
possess or enjoy the property or the income
therefrom
 Business and Transfer Taxes Notes
Estate Tax
The donee of a general power of appointment holds the
appointed property with all the attributes of ownership
thus, the appointed property shall form part of the gross
estate of the donee of the power upon his death.
Transfers with Retention and Reservation of Certain
Rights Over the Income or Enjoyment of the Property
Transferred
Transfers where the donor reserves the right to the
income of the property until death; or
Transfers where the donor reserves the right to the
possession or enjoyment of the property until death
These transfers do not actually convey full ownership
over the property transferred hence the property still
remains part of the gross estate of the transferor.
TRANFERS FOR INSUFFICIENT CONSIDERATION
→ If the transfer is a bona fide sale for adequate
and full consideration in money or money’s
worth, no value shall be included in the gross
estate.
→ If the transfer 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 of the property at the time of death over
the value of the consideration received by the
decedent.
→ If an inter vivos transfer of the decedent is
proven to be fictitious, the total value of the
property at the time of death shall be included in
the gross estate.
Reasons for Taxability of the Transfers
It will be seen that in most of these transfers, the
property remains substantially that of the transferor
during his lifetime notwithstanding the transfer as he still
retains either the “Beneficial Ownership” or “Naked
Title” to the property. Hence, the transfer is essentially
similar in respect to a transmission by testacy or
intestacy upon the death of the owner. In order to be
exempted from the purview of the taxing provisions, the
transfer by inter vivos must be absolute and outright
with no strings attached whatsoever by the decedent.
PROCEEDS OF LIFE INSURANCE
Proceeds of life insurance under policies taken out
by the decedent upon his own life shall be included in his
gross estate in the following cases:
♪ when the beneficiary is the estate of the
deceased, his executor or administrator whether
or not the deceased retained the power of
revocation
♪ when the beneficiary is other than the estate of
the deceased, his executor or administrator and
the decedent retained the power of revocation
CLAIMS AGAINST INSOLVENT PERSONS
Are receivables due or owing from persons who are not
financially capable of meeting their obligations. The
receivables shall be included in the gross estate at their
full amount.
CAPITAL OF THE SURVIVING SPOUSE
The gross estate of a married decedent shall consist of
the following:
♪ conjugal or community properties
♪ exclusive properties
The capital of the surviving spouse shall not be deemed
part of the gross estate.
EXEMPT ACQUISITIONS AND TRANSACTIONS FROM
PAYMENT OF ESTATE TAXES
♪ the merger of the usufruct in the owner of the
naked title
♪ the transmission or delivery of the inheritance or
legacy by the fiduciary heir or legatee to the
fideicommissary
♪ the transmission from the first heir, legatee or
donee in favor of another beneficiary in
accordance with the desire of the predecessor
♪ all bequests, devises, legacies or transfers to
social welfare, cultural and charitable
institutions, no part of the income of which
inures to the benefit of any individual; Provided,
however, that no more than 30% of the said
bequests, devices, legacies or transfers shall be
used by such institutions for administration
purposes.
 Business and Transfer Taxes Notes
Estate Tax
VALUATION OF THE ESTATE
♪ Valuation Date- time of death
♪ Basis of Valuation- fair market value, which is
the price which a property will bring when it is
offered for sale by one who desires, but is not
obligated to sell and is bought by one who is
under not necessity of buying it
♪ Valuation of Usufruct- probable life of the
beneficiary in accordance with the latest Basic
Standard Mortality Table
♪ Valuation of Real Property –
1) FMV as determined by the Commissioner; or
2) FMV as shown in the schedule of values fixed by the
Provincial or City Assessors
♪ Valuation of Personal Properties- FMV at the
time of the decedent’s death
DEDUCTIONS FROM THE GROSS ESTATE
The estate tax is computed based on the net estate. The
net estate is determined by subtracting from the gross
estate the deductions authorized by law.
A) Funeral Expenses
The limit is the actual funeral expenses or the amount
equal to 5% of the gross estate, whichever is lower, but
in no case to exceed P200,000.
Funeral expenses include the expenses for the mourning
clothing of the spouse and unmarried minor children,
fees and charges for masses, rites, ceremonies incident
to the interment, expenses of interment, and the cost of
the coffin, burial plot, tombstone, mausoleum or niche.
The cost of obituary notices, flowers and expenses of the
wake preceding the burial are also part of funeral
expenses. Expenses incurred after burial can no longer
be deducted.
B) Judicial Expenses
Refers primarily to court expenses and expenses of
administration. The expenses of administration include
those actually and necessarily incurred in the
administration of the estate.
C) Claims Against Insolvent Persons
The gross estate shall include receivables of the
decedent at their full amount due from debtors who are
insolvent. The deduction is the amount of the receivable
which cannot be collected due to insolvency.
D) Unpaid Mortgage
Unpaid mortgage in respect to property is a deduction
from the gross estate subject to the condition that the
decedent’s interest in the property, undiminished by the
mortgage, is included in the gross estate.
E) Losses
Requisites:
1. loss is not compensated by insurance or
otherwise
2. loss was not claimed as a deduction in the
income tax return
3. loss must occur not later than the last day for
payment of the estate tax
F) Vanishing Deduction
The purpose is to minimize the effect of a double
taxation on the same property within a short period of
time
Conditions:
a) Decedent died within five (5) years from receipt of the
property from a prior decedent or donor;
b) Property on which vanishing deduction is being
claimed must be located in the Philippines;
c) Property must have formed part of the taxable estate
of the prior decedent, or of the taxable gift of the donor;
d) Estate tax on the prior succession or the donor’s tax
on the gift must have been finally determined and paid;
e) Property on which vanishing deduction is being taken
must be identified as the one received from the prior
decedent or from the donor, or something acquired in
exchange therefore.
f) No vanishing deduction on the property was allowable
to the estate of the prior decedent
G) Family Home
A deduction from the gross estate is an amount
equivalent to the current fair market value of the
decedent’s family home. The maximum is P1M.
As a condition for the deduction for the family home, it
must be certified to as family home by the barangay
captain of the locality where it is located.
 Business and Transfer Taxes Notes
Estate Tax
H) Standard Deduction
The law provides an amount equivalent to P1M.
I) Medical Expenses
There is a deduction for medical expenses incurred by
the decedent within 1 year prior to his death,
substantiated with receipts. In no case shall the
deductible medical expenses exceed P500,000.
J) Amount Received under RA 4917
Any amount received by the heirs from the decedent’s
employer as a consequence of the death of the
decedent-employee in accordance with RA 4917 shall be
deductible if such amount is included in the gross estate
of the decedent.
K) Procedural Requirements
Notice of death (Sec. 89) in all cases of transfers subject
to tax, or if exempt from tax, the gross value of the estate
exceeds P20,000.00 must be filed two (2) months after
the decedent’s death or after qualifying as executor or
administrator.
Estate Tax Returns
1. Requirements: in all cases of transfers though exempt,
gross value exceeds P200, 000 regardless of value, the
estate consists of registered or registrable property such
as real property. Motor vehicle x x x . in which case the
legal heirs, admin, exec files a return under oath in
duplicate setting forth: value of estate at the time of
death, deductions allowed and other info.
If gross value exceeds P2,000,000.00 the return shall be
supported by a statement duly certified to by a CPA:
 itemized assets
 itemized deductions from gross estate
 amount of tax due whether paid or outstanding
Time for filing: 6 months from the decedent’s death
Extension of time: Commissioner has authority to grant
in meritorious cases a reasonable extension not
exceeding 30 days.
Place of filing: Authorized agent bank, RDO, Collection
officer, duly authorized treasurer of city/municipality
where decedent was domiciled or if there be no legal
residence in the Philippines, with the Office of the
commissioner.
IX. Payment of Estate Tax
Time of Payment: at the time the return is filed by
executor, admin, and heir
Extension: When Commissioner finds that payment
would impose undue hardship on estate or heirs, he may
grant an extension
 not exceeding 5 years, if estate is settled through
the courts
 not exceeding 2 years, if estate is settled
extrajudicially
No extension in cases of assessment by reason of
negligence, intentional disregard of rules and regulations
or fraud on part of taxpayer.
Who pays : Executor, administrator before delivery to
beneficiary.
 Beneficiary subsidiarily liable to the extent of
distributive share.
X. Rates of Estate Tax – Section 84
XI. Duties of government agencies
a. Sec. 94 – No judge shall authorize the executor or
administrator to deliver the distributive share to any
party interested in the estate unless a Certification from
the Commissioner shows that the estate taxes have been
paid.
Sec. 95 – The Register of Deeds shall not register transfer
of real property or real rights by way of gifts inter vivos
or mortis causa unless tax is shown to have been paid.
Sec. 97 – No transfer of shares, obligations, bonds in the
books of a new corporation by way of gifts inter vivos or
mortis causa unless there is a certification that the taxes
have been paid.
 Business and Transfer Taxes Notes
Estate Tax
The lawyer preparing the document relating to partition such shares, the price at which such shares exchanged
or disposition shall furnish the Commissioner, Regional hands should be taken or considered as FMV.
Director, RDO with such copies to facilitate collection

The debtor of the deceased shall not pay his debts to the
heirs unless there is a Certification that the taxes have
been paid.
A bank where deposit is maintained by decedent shall
not allow withdrawal unless there is a Certification that
the taxes have been paid.
Some BIR Rulings
BIR 423-87 (Life Insurance)
The taxability of insurance proceeds will depend on
whether the designation of the beneficiary is revocable
or irrevocable. If revocable, the proceeds form part of
the Gross Estate even if the decedent- insured failed to
revoke. But if the designation is irrevocable, proceeds
of the life insurance vest upon the beneficiary
immediately and they no longer form part of the
decedent’s gross estate.
BIR 066-98
The estate tax return is required to be filed within 6
months from the decedent’s death, and in meritorious
cases, a reasonable extension not exceeding 30 days for
filing the return may be granted by the CIR. The
payment of estate tax shall be made upon the filing of
the return or on such date as fixed if an extension is
granted by the CIR as when payment of the same would
impose undue hardship on the estate or any of the heirs,
but in no case to exceed 5 years if the estate is settled
through the courts or 2 years in case the state is settled
extra judicially.

BIR 186-81

Receivables as well as expected tax refunds at the time

of death of the decedent form part of the gross estate.

BIR 095-98

The estate tax shall be appraised at its FMV as of the time

of death or as of 6 months thereafter at the election of
the executor or administrator. However the appraised
value of real property as of the time of death or at the
election of the executor or administrator as of 6 months
after death shall either be (a) the current and FMV as
shown in the schedule of values by the provincial or city
assessor or (b) the FMV as determined by the CIR,
whichever is higher.

BIR 011-86

Shares of stock which had been either suspended, de

listed or where no transactions invoking them have been
made, shall be valued at their book value nearest the
valuation date which is the decedent’s death. The book
value is prima facie considered as FMV. However, if
there had been previous bona fide sales/exchanges of