TAXATION REVIEW: ESTATE AND DONORS TAX

Transfer Taxes
Fundamentals – amended by train law

Aspects of estate and donors tax that were amended by train law
So that you will have an idea,

Both Estate and donors tax are called transfer tax- Why?
Because you TRANSFER TITLE in the case of :

ESTATE TAXES- The transfer of title occurs at the time of death why? Because
successional rights attach at the time of death hence the transfer of title
already is transmitted or occurs at the time of death even if not yet registered
why? Because the law upholds so far as which part is really owned which
properties.

So while the decedent is not yet dead successional rights are really inchoate
but not at the time of death will transfer off rights right away to the heirs.

There is a difference however with respect to heirs who waived their inheritance
rights and I must discuss that in light with the donors tax, which is also a
transfer of ownership to the Donee. So this is a situation where in the case of
donations there is a specific beneficiary or Donee that must be named by the
donor for that donation to be perfected. Why? Because there must be an offer
that must be accepted, for them to have meeting of the minds for them to be
perfection of contract. (this donations are really contracts) If you refused to
accept then there is no donation and you have the right to refuse any persons
liberality.

Now, why is there consideration in donations? Because it is sheer liberality on

the other hand in the case of estate taxes, what is the consideration there?
Death and the legal consequences of such death which is the transmission of
successional rights.

Taxation Review: Atty. Antonio Bonilla.

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So, if someone simply waives his inheritance or her inheritance rights without
naming a specific beneficiary of it, that is NOT a donation because there in no
donee involved which must accept or which is presumed to accept thus, would
he be subject to donors tax? NO. When he waives his successional rights.
On the other hand, if he waives it specifically for the benefit of anyone of the
heirs or all of the heirs there must be a specific naming of who the beneficiary
of his rights are in effect he is giving as gifts his rights and as such it is subject
to Donor’s tax.

Now, when it comes to the ESTATE TAX what is important is that there is a
gross estate for which allowable deductions are allowed. Insofar as the gross
estate is concerned we have all the rights and interest of the decedent at time
of death over certain properties and then certain taxable transfers which are
not full transfers of ownership because some right is retained by the decedent
which only is transferred at time of death. Hence, whether or not he exercise
that right he has retained it does not matter because the property will still be
part of his taxable estate

And then you have LIFE INSURANCE proceeds where the rule is:
If the beneficiary is irrevocable then the amount of the life insurance proceeds
do not form part of the gross estate BUT this does not apply if the irrevocable
beneficiary still the decedents estate, his executor or administrator. (Bar exam)

The rule is that:

IRREVOCABLE: Not part of the Gross Estate UNLESS even if irrevocable the
beneficiary is the estate or executor or administrator of the estate.

NOW, after you determine the gross estate you are allowed certain deductions
against the gross estate to come up with the net estate. The NET ESTATE is
what is taxable.

Taxation Review: Atty. Antonio Bonilla.

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 TAXATION REVIEW: ESTATE AND DONORS TAX

In the case of both the estate tax and the donor’s tax do not confuse them with
the kinds of taxpayers you deal with when it comes to income tax. Why?
Because with respect to the estate and donor’s tax there are only two types of
taxpayers.

1.) CITIZEN OF THE PHILIPPINES whether resident or not and;

2.) RESIDENT ALIEN. They are taxed the same way.

Meaning to say, for all properties wherever in the world found.

That’s why do not confused them with the resident alien as far as incomes are
concerned.
This is taxed all their incomes within the Philippines.

But when it comes to RESIDENT ALIENS, it doesn’t matter where the

properties are located.

Then you have NON RESIDENT ALIENS who are taxed on their gross estate
located in the PH. Which means to say such properties must have a tax situs in
the PH. And for that purpose you have to be very comfortable with
Section 104.

Section 104 Deals with the general rule that all the properties of the decedent
whether tangible or intangible, personal or real must be subject to estate tax
and donor’s tax UNLESS these are INTANGIBLE PROPERTIES, PERSONAL
PROPERTIES which are INTANGIBLE which therefore follows the general rule
of (Mobilla Sequuntur Personam) meaning to say the tax situs of such
intangible properties followed the tax situs of the person who owns them BUT

FIRST XPN: If such intangible properties owned by the non resident alien
have acquired a tax situs in the PH.

What are these possible intangible properties which will have acquired tax
situs in the PH?

Let’s look at 104

1.) If the intangible property was a debt.(Any form of debt for that matter? Yes)
2.) Obligations or bonds issued by a Philippine Corporation.
3.) Shares of stocks issued by a domestic corporation on a debts but because
issued by Domestic Corporation are given PH tax situs.
Taxation Review: Atty. Antonio Bonilla.
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SECOND XPN: Franchises which must be exercised in the PH.

So if such Franchise is an international franchise, Is it necessary used in the
PH? – No.

But if it is a local franchise Is it necessary exercise in the PH? – Not also.

So it is critical to know that franchise must be used in the PH

So if it’s a PH franchise of McDonald’s obviously it must be used in the PH.

But if it’s a Jollibee franchise it is not necessarily used in the PH even if it is for
a franchise in SanFo or even in Dubai.
Now if it’s a Foreign Corporation who issues shares or debts that 85% of its
business or income is generated in the PH then local tax situs.

Partnership rights or business rights of partnerships doing business in the PH,

again, that has PH tax situs.

THE XPN TO THIS XPN

So you have 3 exceptions there:

One is Intangible properties generally follows the tax situs of the owner unless
intangible properties acquired tax situs in the PH unless the country of which
the owner is both a resident and a citizen. So it is not sufficient that he is just
a resident or a citizen of that country. They must be both a resident and a
citizen of that foreign country and that foreign country allows its laws and
exemption also for non-resident Filipino citizens who own intangible properties
with a tax situs in that foreign country exemption from transfer taxes of that
foreign country (Reciprocity clause) Which is even if they have acquired tax
situs in the PH they won’t be subject to PH tax.

Now what is interesting for you I’m sure will be I’ve never seen taxable transfers
asked in the bar exams. Never. That’s a relief, right?

Now, what will be interesting for you will be the amendments of the train which
would then be asked in the bar exams.

Taxation Review: Atty. Antonio Bonilla.

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What are these: TRAIN AMENDMENTS

1st: The estate tax is no longer schedular. It is now a flat 6% estate tax on any
net value of the state. So walang exempted amount, wala ding high rate of
20% . WALA. 6% FLAT on the value of the net estate whatever that may be.

So it’s good for those with big estate but a little discombobulating for those
with very little estate. Diba?

Then there in good because thus, allowable deductions have also been
amended thoroughly. So there probably won’t be unlike in the past that there
was always a threshold on allowable deductions.

A lot has been changed (20:39)

1st Change: Funeral expenses, Judicial expenses and Health and Clinical
expenses have been repealed.
WALA NA YON. So ang pwede pa rin andon is claims against the estate yung
utang
And the claims against the extate if you recall, these are personal debt that
must be notarized you must have them with the statement from…

Claims against the estate does if it is personal debt, the debt instrument must
be duly notarized and the debt it contracted, will ____before debt.
(21:36)
The administrator, executor shall ascend it as statement showing the business
proceeds.

***Accdg to Atty. Roque: Duly notarized and if the loan was contracted within 3
years before the death of the decedent, the administrator or executor shall
submit a statement showing the disposition of the proceeds of the loan.

Other than that like Judgment debts you don’t need that to be notarized or
creditcard debts or backloan debts you shall fully document it.

Another allowable deduction are claims against insolvent persons but in the
case against insolvent persons you must first add them as part of the assets
before you can deduct it. You cannot just outright deduct it.

Taxation Review: Atty. Antonio Bonilla.

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Another change is well, did I mention medical expenses?

What has also been repealed is unpaid mortgages or indebtedness on property,

still retained.

Your favorite vanishing deductions still retained.

Transfers for public use.

Amounts received by heirs from the time… you must add them first before you
can deduct. It’s an allowable deduction still.

The changes are aside from those repealed, standard deduction increased from
1 million to 5 million now remember- favorite in the bar- They ask you to
determine the net estate and then give you a set of assets and deductions but
that never mention standard deduction. So do not forget standard deduction.

I did that on the midterms of tax 2

Because I asked them to compute, pero the assets are less than 5 million- you
see there is nothing to compute because zero yun, nothing to tax .
—edi nothing. Hahahahahahahahaha

2nd Change:
Family home – has been increased from 1 million to 10 Million deduction.
So if your family home is less than 10 Million you can deduct the full amount.

But if it’s more than 10 Million you can deduct only 10 Million- So you must
first put the whole amount then deduct.

Now, in the case of non residence standard deduction is only Php 500,000
(liit ano?) BUT claims against estate , claims against insolvent person, unpaid
mortgages, all of these claims must be in proportion to the value of their gross
estates situated in the PH.

Taxation Review: Atty. Antonio Bonilla.

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So what happens there is that Gross estate in the PH over world wide gross
estate which include the PH times whatever the amount of the claim is.

Gross Estate
------------------ X Whatever the amt.
WW G.E. of the Claim is
(Including PH)

Why because all assets will answer to all the debts.

What are these debts?
1.) Claims against the estate
2.) Claims against insolvent person- This is deductible against the estate
but then only that part of the estate that has PH share will have a share
in that deduction.
3.) Transfers for Public use is now also there still
4.) Property Previously taxed is also still there—the vanishing deduction
but only with respect to what? Properties located in the PH.

Now in the case of vanishing deductions you remember the 5 year rule.

The donor’s or estate tax must be paid—If not paid the VD will not apply.

Why is vanishing deductions allowed? To mitigate, to minimize the tax burden

arising from subjecting the same property to a transfer tax, twice within a short
period of 5 years from the time it was first transferred to the time the transferee
died.

The key is knowing if it is 5 years or not

Likewise, the requirement for filing notice of death has been repealed.
Filing within 2 months- WALA NA YON

The filing of the estate tax returns has been increased from 6 months
from date of death to 1 whole year.

In the case of casualty losses, embezzlement, etc., remember, it used to be the

only deduction which is allowed after death diba? So long as the loss occurred
no later than the last day of the 6 month from date of death diba?

Taxation Review: Atty. Antonio Bonilla.

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Do you remember?

BUT NOW, since the filing has been increased to 1 year so therefore, the
casualty loss can still occur before that 1 year’s up after death and still allowed
as a deduction. Do you remember that deduction? Casualty losses.

So namatay na nga dahil sa whatever dengue and then after that binagyo,
nawala yun properties casualty loss, so therefore even if occurred almost a year
na after death you can still deduct that. It used to be 6 months lang kasi.

A new change is that naging mabait sila eh.

In case the available cash of the estate is insufficient to pay the total estate tax
due payment by installment shall be allowed. Yes. Within 2 years.
It used to be depended whether the commissioner allows it. Extra Judicial or
Judicial 5 years diba. BUT NOW JUST 2 YEARS FROM THE DATE OF
PAYMENT WHICH IS 1 YEAR. Without civil penalty and interest.

This is the fun part also, remember, I used to say yung may mga bank accounts,
ilipat mo na bago mamatay.

BUT NOW the law says the bank accounst of the decedent can be withdrawn
even after death, BUT withdrawal is subject to a 6% INTEREST RATE.
At least na withdraw, diba? So wala na yung,

PERO DAPAT MO PA DIN ILIPAT BAGO MAMATAY kasi para walang 6% diba,
hahahahaha kasi if you withdraw if you are alive walang interest diba? But
now the amount you withdrawn is subject to 6% interest.

Okay, So we move to Donor’s tax.

Taxation Review: Atty. Antonio Bonilla.

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DONOR’S TAX

Marami ding change diyan

The schedular rate has also been repealed.

Now what we have is also 6%.
Based on annual total gifts. So still consider all the years dominations.

Exceeding 250k subject to the 6% So since the Loss is exceeding 250k unlike
in the past na wala yung ganun so therefore now, if you have a gift of 500k
deduct 250k first that is exemept. Balance is 6% taxable. The 6% applies
whether or not the Donee’s a stranger.

So wala na yung usual bar problem where they mislead you where there is a
wedding gift to a bride and groom where the bride is the daughter and the groom
is a stranger. Diba? Taxation is different diba? Schedular doon sa child (bride)
30% doon sa ano groom (WALA NA YUN) So more likely than not they won’t ask
you on the donor’s tax, but they may ask you on those section 104.

This is the fun part, because in tax 2 if you recall I assigned Philamlife v. SOF.
Diba? Where there was always a case of whether or not the issue is --- is it a
capital asset or ordinary asset, if it is a capital asset real property always even
if sold for institution consideration it is never subject to the Donor’s tax
only to the CAPITAL GAINS TAX, so long as it is a capital asset which is the
real properties attached are taxed.

In the case of ordinary assets- this Philamlife v. SOF case apparently is of a lot
of the congressmen because before this case, I used to teach sec. 100 saying
there must be a donative intent in the say of insufficient consideration for there
to be a donor’s tax.
BUT the case of Philamlife v. SOF said that it does not matter whether or not
there is a donative intent if it is an ordinary asset real property not used in
business is subject to 2 kinds of taxes, income tax and donor’s tax.

BUT NOW, THE TRAIN SAID:

If sold for less than insufficient consideration there must be a donative
intent. (So balik sa dati) Where then the difference is subject to donor’s tax.
So if there is a mere business reason for selling less than sufficient
consideration it is not subject to donor’s tax.
Taxation Review: Atty. Antonio Bonilla.
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It could be subject to income tax. If you sold it less than FMV consideration
but more than its original value. Why? Because there is still a gain.

So what do you look for in problems like that? Key here is that is it an original
asset? Which real property? If it is not, it is not an ordinary asset.
Is it an ordinary asset? In which real property we are dealing is sold?

If it is not used in business then it is Capital Asset then you don’t apply the
donor’s tax only the capital gains tax which is 6%.

Now. If it is an ordinary asset being sold for less than its FMV, is there donative
intent? If none—No donor’s tax, but there could be income tax if the selling
price is higher than the original acquisition cost.

Now, the interesting thing about that is that, even if sold for less than its FMV
and even if there is no donative intent we said that it may be subject to income
tax diba? BUT if it is an ordinary asset being sold and then the ones selling is a
VAT tax payer it is still subject to VAT.

They could be subject to income tax if sold for higher than its acquisition cost
plus 12% VAT.

So as a result of that well, we pretend that there is donative intent na lang?

hahahahaha ganon ba? 6% lang din lang.
Donative intent na lang at least walang income tax, wala ding VAT, I did not
teach you that ha, hahahahaha. Wag niyo na ibenta, i-donate niyo na lang.
hahahahha—Wala ng income tax, 6% lang, wala pang VAT, diba? Don’t you
agree? Kasi I proportion pa yun 30%, income tax, tapos 12% VAT pa, oh. donate
ka na lang ng donate, diba? Deed of donation—Donative Intent -6% Donor’s tax.

BUT if it is real property that’s NOT used in business ayun, still 6% CGT,
donor’s tax does not apply.

Likewise, in the case of Dowry’s case --- Deleted, repealed, wala na yung 10k
exemption.

So ano na lang natira? –Tax Credits. DONOR’S TAX CREDITS. Still the same
way.

Taxation Review: Atty. Antonio Bonilla.

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So the ___________ are:

In the case of Estate tax:

Net estate in that foreign country as a proportion of total net estate worldwide
times PH estate tax due that is the maximum amount of tax credit you can pay
for foreign estate taxes paid abroad. (46:04)

In the case of Donor’s tax:

You just change it from estate to net donation in the foreign country but only
with respect to for both tax credits only with respect to citizens or resident
aliens. (Don’t forget that ha)
Does not apply to Non-Resident Aliens

That’s it.

Wala ng : Judicial expenses, EJ Expenses, Medical expenses.

So pwede pa bang mag estate/ exceed value? Yes, Insurance

Or what you can do is also if you don’t want the estate to be burden – transfer
your bank accounts right away.

Then in the case of donations, mag donate na lang ng 250k each year.
TAX FREE- DIBA?

They usually don’t ask questions on how to compute donor’s tax, but just in
case, What amt. is taxable in donor’s tax unlike in the estate tax there is
specified deductions right? In the donor’s tax there are no specified deductions
BUT whatever pecuniary obligation is imposed by the donor on the donee
is an allowable deduction. It must be pecuniary, meaning there is a value to
it that the obligation is specified that it can’t merit in amount, you must deduct
that from the gross amt. the donation to come up with the net donation. You
follow?
That would be the net gift, subject to the 6% if in excess of 250k.
But as I said, that won’t be asked in the bar exams because 6% .

That’s it.

Taxation Review: Atty. Antonio Bonilla.

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