TAXATION II

PART 1 – TRANSFER TAXES

Transfer taxes

Transfer taxes are taxes imposed upon the gratuitous disposition

of properties which takes place either during the lifetime of the
transferor or after his death.

Review: 3 Main Kinds of Taxes

(1) Personal tax (tax of fixed amount imposed upon all persons
of a certain class, e.g., community tax);

(2) Property tax (tax imposed on all property of a certain class,

e.g., real property tax); and

(3) Excise tax (tax imposed on the performance of an act, the

enjoyment of a right or privilege, or the engagement in an
occupation.

Nature of Transfer Taxes

Transfer taxes have the nature of excise or privilege taxes

imposed on –

(a) the right to transmit property at the time of death and on the
privilege that a person is given in controlling to a certain extent
the disposition of his property to become operative at or after
death, in the case of estate taxes; and

(b) the privilege of transmitting one’s property or property rights

to another or others without adequate and full valuable
consideration, in the case of donor’s taxes.
Warning: The TRANSFER TAX referred to under the NIRC is NOT
THE SAME from the transfer tax referred to under the Local
Government Code (LGC), which is a local tax.

The “transfer tax” under the LGC is a tax on the sale, donation,
barter, or any other mode of transferring ownership or title of real
property at the maximum rate of 50% of 1%, in case of provinces,
or 75% of 1%, in the case of cities, of the total consideration or of
the fair market value whichever is higher.

KINDS OF TRANSFER TAXES

1. Estate tax (death tax)
2. Donor’s tax (gift tax)

Donor’s Tax and Estate Tax, distinguished.

(1) Effectivity of Transfer –

Donor’s tax is a tax on the privilege to transfer property during

one’s lifetime (inter vivos). Estate tax is a tax on the privilege to
transfer property upon one’s death (mortis causa).

(2) Period of Transfers Covered –

Donor’s tax is computed on the basis of the net gifts given during
a calendar year. Estate tax is computed on the basis of the net
estate transferred at the time of death.

(3) Amount of Exemption –

Donor’s tax exempts the first P250,000 (P100,000 under the old
law) of the net gifts from tax. Estate tax has no base amount
exemption of the net estate (as amended by RA 10963, the
“TRAIN Law”)

(4) Rates –
Donor’s tax is 6% computed on the basis of the total gifts in
excess of P250,000 exempt gift made during the calendar year.
Estate tax rate is flat 6% based on the value of the net estate. (as
amended by the TRAIN Law)

Old Rates before TRAIN Law –

Donor’s Tax: 2% to 15% OR 30% (in case of donations to

STRANGERS) with tax exemption of up P100,000 donations

Estate Tax: 5% to 25% with tax exemption of up to P200,000 of the

gross estate

A. ESTATE TAX

Definition of Estate Tax

Estate tax is a tax that is levied, assessed, collected, and paid

upon the privilege of gratuitously transferring the net estate of a
decedent which are transmitted to his heirs or beneficiaries at
the time of his death and on certain transfers made by the
decedent during his lifetime which are considered by law as
equivalent to testamentary dispositions.

Nature of Estate Tax

Estate tax has the nature of excise or privilege tax imposed on

the right to transmit property at the time of death and on the
privilege that a person is given in controlling to a certain extent
the disposition of his property to become operative at or after
death.

Note: Aside from it being an excise tax, an estate tax is, likewise
–

(1) a transfer tax

(2) a national tax

(3) a direct tax (although the heirs are subsidiarily liable, it is still
the estate of the decedent that is directly liable)

Note: It used to be a progressive tax where the tax rate increases

as the taxable base amount increases. It now has a flat rate of
6% based on the value of the net estate under the TRAIN Law.

JUSTIFICATION OR THEORIES FOR THE IMPOSITION OF ESTATE TAX

(1) Benefit-Received Theory
(2) Privilege Theory or State Partnership Theory
(3) Ability to Pay Theory
(4) Redistribution of Wealth Theory

Benefit-Received Theory

Under this theory the State collects taxes for the services the
government provides in the distribution of the estate of the
decedent, either by law or in accordance with his wishes, and
for the benefits that accrue to the estate and the heirs.

Privilege Theory or State Partnership Theory

Under this theory, inheritance is not a right but a privilege

granted by the State, and large estates have been acquired
only with the protection of the State.

The State, as a “passive and silent partner” in the accumulation

of property, has the right to collect its share in that partnership.

Ability to Pay Theory

Under this theory, it asserts that the receipt of inheritance, which

is in the nature of unearned wealth or windfall, places assets into
the hands of the heirs and beneficiaries thereby creating an
ability to pay the tax and, thus, to contribute to government
income.

Redistribution of Wealth Theory

Under this theory, the receipt of inheritance is a contributing

factor to the inequalities in wealth and incomes. This is not
favored by government. Thus, in order to help promote a more
equitable distribution of wealth in society, an estate tax is
imposed which reduces the property received by the successor.

Note: Under the old law (prior to TRAIN Law) the tax base is the
value of the property and the progressive scheme of taxation
was precisely motivated by the desire to mitigate the evils of
inheritance in the present form. With the present flat rate of 6%
estate tax under the TRAIN Law, while it is still supports the
Redistribution of Wealth Theory, it may not be as equitable as it
was originally intended under this theory.

BASIC PRINCIPLES OF ESTATE TAXATION

(1) Extent of the Estate
(2) Valuation of the Estate
(3) Accrual of the Estate Tax
(4) The Governing Law

Extent of Estate Principle

Estate tax is levied on the extent of decedent’s interest at the

time of his death.

Valuation of the Estate Principle

Estate tax is based on the fair market value of the estate as of

the time of decedent’s death.

Accrual of Estate Tax Principle

The estate tax accrues as of the time of death of the decedent.

The properties and rights are transferred to the successors at the
time of death. Upon the death of the decedent, succession
takes place and the right of the State to tax the privilege to
transmit the estate vests instantly upon death.

Question: Once the estate tax accrues, is the estate already

obliged to pay the estate tax?

Answer: No. The accrual of the estate tax is distinct from the
obligation to pay said tax. It does not follow that the obligation
to pay the estate tax arises as of the time of death of the
decedent.

The time of payment is fixed by law, that is, 1 year from the date
of decedent’s death under the TRAIN Law (increased from 6
months under the old law)

Governing Law Principle

Estate taxation is governed by the statute in force at the time of

death of the decedent notwithstanding the postponement of
the actual possession or enjoyment of the estate by the
beneficiary.

Time and Transfer of Properties

2 Types of Gratuitous Transfers –

(1) Transfers Inter Vivos – transfers effected during the lifetime of

transferor (strictly speaking, a “donation”);

(2) Transfers Mortis Causa – transfers effected at the time of

death of transferor (strictly speaking, a “succession”)

Question: Are all inter vivos transfers considered donations?

Answer: No. There are transfers inter vivos which are treated by
law as transfers mortis causa or successions since they are
considered as substitutes for testamentary dispositions.

These are transfers which are inter vivos in FORM but mortis causa
in SUBSTANCE.

Transfers Inter Vivos Treated as Transfers Mortis Causa

(1) Transfers in contemplation of death;

(2) Transfer with retention or reservation of certain rights;
(3) Revocable transfers;
(4) Transfers of property arising under general power of
appointment; and

(5) Transfers for insufficient consideration.

Note: Under the foregoing gratuitous transfers, if the donee

proves to be the heir, devisee or donee mortis causa of the
donor, the law presumes that the gratuitous transfers have been
made in anticipation of inheritance, devise, bequest or gift
mortis causa, for the purpose of evading estate taxes.

Question: Is this still relevant with passage the TRAIN Law where
the rates of estate tax and donor’s tax are both 6%?

Answer: Yes. It is still relevant for tax planning purposes

considering the big amounts of deductions in estate taxation
(e.g. P5,000,000 standard deduction; P10,000,000 family home
deduction) under the TRAIN Law although there is also the
P250,000 basic tax exempt donations in gift taxation under the
same law

REVIEW: Suspensive Condition versus Resolutory Condition

A suspensive condition is a condition which suspends rights and

obligations until the uncertain future event occurs. If the
suspensive condition is not fulfilled, the suspended rights and
obligations does not come into existence. It is as though they
never existed.

In the case of a resolutory condition, there is no suspension or

postponement of terms in a contract. Rights and obligations
come into existence immediately upon agreement between the
parties. However, If a resolutory condition is fulfilled or occurs, the
operation of the rights and obligations cease.

Gratuitous Transfer Subject to a Resolutory Condition

Case: Tito donated his piece of land to Vic subject to the

condition that Vic shall give to Tito P50,000 every year for the rest
of Tito’s life. In case Vic fails to pay the said amount to Tito, the
donation shall be cancelled and the property shall revert back
to Tito. Vic accepted the donation and the property was
transferred to Vic’s name.

Question: Is the gratuitous transfer that is subject to a resolutory

condition a donation inter vivos or a donation mortis causa?

Answer: The gratuitous transfer from Tito to Vic is a donation inter

vivos. In a donation mortis causa it is the donor's death that
determines that acquisition of, or the right to, the property
donated, and the donation is revocable at the donor's will.
However, where the donation took effect immediately upon the
donee’s acceptance thereof but it was just subject to a
resolutory condition that the donation would be revoked if the
donee did not fulfill certain conditions, the donation is
considered inter vivos that is subject to donor’s tax.

Note: The CONTROL of whether or not the effect of the transfer

continues or not is on the donee and NOT ON THE DONOR.

Gratuitous Transfer Subject to a Suspensive Condition

Question: Are gratuitous transfers subject to a suspensive

condition considered as transfers mortis causa or transfers inter
vivos?

Answer: It depends.

(a) Gratuitous transfers that are subject to a suspensive

condition, which condition may happen after the death of the
donor, may be considered as donation mortis causa considering
that no rights are actually transferred until happening of the
suspensive condition.

(b) If the suspensive condition, however, happens before the

death of the donor, then donation inter vivos takes effect.

Example: Tito donated a piece of land to Vic subject to the

condition that the transfer of ownership shall take place only if
Vic graduates from college during Tito’s lifetime or within one
year after his death.

(a) If Vic graduates while Tito is still alive, donation inter vivos
takes place.

(b) If Vic graduates within one year after the death of Tito, mortis
causa transfer takes place.

(c) If Vic neither graduates while Tito is still alive, nor graduates
within one year after the death of Tito, no transfer inter vivos or
transfer mortis causa takes place.

CLASSIFICATION OF DECEDENTS

For purposes of estate taxation, decedents are classified as:

(1) Citizen (resident or non-resident);
(2) Resident Alien; or

(3) Non-Resident Alien.
Importance of Classifying Decedents

The importance of classifying decedents for purposes of estate

taxation lies on the extent of benefits as well as the resulting
extent of liabilities of the decedent.

Estate Taxation and the Benefits Protection Theory

For purposes of estate taxation, the BENEFITS PROTECTION

THEORY is used as basis in classifying decedents. Such
classification in turn determines the composition of the
decedent’s gross estate for purposes of estate taxation.

Thus, under the benefits protection theory –

(1) the Philippine Government provides protection to the persons

and properties of its citizens and to resident aliens wherever they
are situated.

(2) for non-resident aliens, the protection provided by the

government extends only to the persons and properties of said
non-resident aliens which are situated in the Philippines.
Estate Tax on Filipino Citizens

The NIRC does not distinguish whether a Filipino is a resident or a

non-resident. The reason for this is that under the benefits
protection theory, the Government of the Philippines provides
protection to its citizens WHEREVER THEY MAY BE.

Thus, with this protection benefit given to Filipino citizens, the

Government is given the authority to subject to estate tax all the
properties of its citizens, WHEREVER THEY MAY BE SITUATED.

Question: How about “Dual Citizens” or Filipino Citizens with other

citizenship? Do the rules on estate taxation for Filipino Citizens
apply to them?
Answer: The same rule applies to those with dual citizenships
since they are Filipino citizens.

They are, however, entitled to the benefits of availing tax credits

for estate taxes paid to a foreign country under Sec. 86 (E), NIRC.

General Rule: The estate tax imposed will be credited viz-a-viz

the amounts of any estate tax imposed by the authority of a
foreign country.

Resident Alien

Sec. 22 (F), NIRC defines “Resident Alien” as an individual whose

residence is within the Philippines and who is not a citizen
therefor.

Non-Resident Alien

The term “Non-Resident Alien” is defined as an individual whose

residence is not within the Philippines and who is not a citizen
thereof. He is, therefore, just a mere transient or sojourner.

Case 1: Chris Brown came to the Philippines to perform in a

concert. Immediately after his concert, he is scheduled to leave
for Indonesia to perform in another concert. However, on his way
to the airport, Chris Brown died of heart attack.

Question: Is Chris Brown considered a resident alien?

Answer: No. Chris Brown’s coming to the Philippines was for a

definite purpose, which by its very nature may be promptly
accomplished. He considered a transient or a non-resident alien.

Case 2: Michael Jordan came to the Philippines to play in an

exhibition match with Filipino basketball players. After the match
he decided to visit the beautiful beaches of the Philippines. He
enjoyed Boracay so much that he fell in love with the place. He
even fell in love with a Filipina who became his girlfriend. He has
decided to stay without any definite plans of going back to
America. On his 8th month of stay in the Philippines, Michael
Jordan died of heart attack.

Question: Is Michael Jordan considered a resident alien?

Answer: Yes. Michael Jordan may be considered as a resident

alien for purposes of estate taxation. Michael Jordan stayed in
the Philippines with no definite intention of going back to
America or without definite period or the length of time of his
stay in the Philippines. He is not a mere transient or sojourner. This
makes him a resident alien.

Case 3: Cooper Anderson went to the Philippines to cover the

effects the typhoon Haiyan (Yolanda) as well as to cover the
rehabilitation efforts of the government as well as the full
implementation of the rehabilitation projects funded by the
international donors. Cooper Anderson indefinitely extended his
stay in the Philippines and made Tacloban as his temporary
home with the intention of going back to his home abroad once
his assignment is consummated or terminated. After 2 years of
staying in the Philippines, Mr. Cooper died of dengue.

Question: Is Cooper Anderson considered a resident alien?

Answer: Yes. Cooper Anderson may be considered as a resident

alien. The purpose of Cooper Anderson’s stay in the Philippines is
of such a nature that an extended stay is necessary for its
accomplishment, and to that end he made his home
temporarily in the Philippines. Anderson Cooper became a
resident though it may be his intention at all times to return to his
domicile abroad when the purpose for which he came has been
consummated or abandoned.

Relevance of “Residence” in Estate Taxation

(1) It is relevant insofar as ALIENS are concerned for purposes of
determining which properties are to be included in the gross
estate of a decedent alien

(a) If a decedent alien is a resident alien, then his gross

estate shall include all his properties wherever situated

(b) If the decedent alien is a non-resident alien, only his

properties located in the Philippines shall be included as part of
his gross estate.

(2) It is also relevant insofar as complying with the requirement

on the place of filing of estate returns and payment of estate tax
is concerned.
(3) Residence is not relevant insofar as CITIZENS are concerned
in determining which properties are to be included in the Gross
Estate of the citizens-decedents since all properties, wherever
they may be located form part of the citizens-decedents Gross
Estate.

THE ESTATE TAX FORMULA

The following illustrates the basic formula in arriving at a

decedent’s estate tax:

GROSS ESTATE 50,000,000

Less: Deductions Allowed 44,000,000
NET ESTATE 6,000,000
Less: Share of Spouse in Conjugal Property 3,000,000
TAXABLE NET ESTATE 3,000,000
Applicable Tax Rate 6%
ESTATE TAX P180,000

THE GROSS ESTATE AND THE NET ESTATE

The Gross Estate

The gross estate is the starting point in determining the estate
liability of a decedent. In general, gross estate includes the total
value of the all the properties, rights and interests of the
decedent at the time of his death.

The Net Estate

The Net Estate is the determined value of the decedent’s estate

after all the allowable deductions have been deducted from
the value the gross estate.

The Taxable Net Estate

The Taxable Net Estate is the value of the decedent’s estate

after deducting the share of decedent’s spouse in conjugal
property, IF ANY, which value is subject to the 6% tax rate (as
amended by the TRAIN Law), otherwise, the Taxable Net Estate
is also the Net Estate.

INCLUSIONS IN GROSS ESTATE OF DIFFERENT TAXPAYERS

(1) As to citizen (resident or non-resident) and resident alien –

(a) Real properties wherever situated;

(b) Personal properties wherever situated (tangible or

intangible); and

(c) Mixed properties (e.g. Heirlooms, tombstones, monuments

in a church) wherever situated.

(2) As to non-resident alien –

(a) Real properties in the Philippines;

(b) Tangible personal properties in the Philippines;

 (c) Intangible personal properties in the Philippines, unless
excluded on the basis of reciprocity; and

(d) Mixed property in the Philippines.

The Reciprocity Rule on Intangible Personal Properties of Non-

Resident Aliens

The reciprocity rule applies only for purposes of determining

whether an intangible personal property forms part of the gross
estate of a non-resident alien. There is reciprocity if the foreign
country of which the decedent was a citizen and resident at the
time of his death:

(1) Did not impose a transfer tax of any character, in respect of

intangible personal property of citizens of the Philippines not
residing in that foreign country; or

(2) Allowed a similar exemption from transfer tax in respect of

intangible personal property owned by citizens of the Philippines
not residing in that country.

Note: In sum, both States must exempt non-residents (citizens of

the other State) from transfer taxes in respect of intangible
personal properties. Moreover, there must be total reciprocity.

Case: Canada adopts both estate tax and inheritance tax

where both the giver and receiver of the gratuitous transfer are
subject to death taxes. The Philippines adopts estate taxation
where only the estate of the decedent is subject to estate tax.

Question: Will the principle of reciprocity on intangible personal

property apply?

Answer: No. For reciprocity rule to apply, there must be total

reciprocity. In this case, Canada taxes both the giver and the
receiver. Our jurisdiction, however, only the estate of the
decedent is subject to estate tax.

Relevance of the “Reciprocity Rule”

The relevance of the “Reciprocity Rule” is to determine whether

certain INTANGIBLE PERSONAL PROPERTY OF DECEDENT NON-
RESIDENT ALIENS are to be included or excluded from their gross
estate.

If a similar exemption from transfer tax in respect of intangible

personal property owned by citizens of the Philippines not
residing in the decedent’s country is accorded to them, then the
non-resident alien’s intangible personal properties are likewise
excluded from his gross estate, otherwise, they must be included.

Intangible Personal Properties which are Considered Situated in

the Philippines

(1) Franchise which must be exercised in the Philippines;

(2) Shares, obligations or bonds issued by any corporation or

sociedad anonima organized or constituted in the Philippines in
accordance with its laws;

(3) Shares, obligations or bonds issued by any foreign

corporation, 85% of the business of which is located in the
Philippines;

(4) Shares, obligations or bonds issued by any foreign

corporation if such shares, obligations or bonds have acquired a
business situs in the Philippines; and

(5) Shares or rights in any partnership, business or industry

established in the Philippines.
Treatment of Intangible Personal Properties Situated in the
Philippines –

General Rule: The above-enumerated intangible properties

considered situated in the Philippines are to be included in the
gross estate of decedent non-resident alien.

Exception to the Rule: When “reciprocity rule” applies, in which

case, they shall be excluded from the gross estate of decedent
non-resident alien.

SPECIFIC ITEMS INCLUDED IN GROSS ESTATE OF DECEDENT

(1) Property owned by the decedent actually and physically

present in his estate at the time of his death;

(2) Decedent’s interest; and

(3) Properties not physically present in the estate but are

nevertheless subject to estate tax.

Properties Actually and Physically Present in the Estate

They may refer to land, buildings, shares of stock, vehicles, cash,

bank deposits, and others.

Decedent’s Interest

“Decedent’s interest” refers to the extent of equity or ownership

participation of the decedent on any property existing and
present in the gross estate, whether or not in his possession,
control or dominion; also refers to the value of any interest in
property owned or possessed by the decedent at the time of his
death (interest having value or capable of being valued or
transferred).

Examples: Dividends declared before his death but received

after death; partnership profits which have accrued before his
death.

Case: Ramon Ang is a stockholder of San Miguel Corporation.

He died on May 10, 2014. On May 25, 2014, San Miguel
Corporation declared dividends. The estate of Ramon Ang
received its dividend shares on May 30, 2014.

Question: Are the dividend shares received by the estate of

Ramon Ang to be included as part of his gross estate?

Answer: No. The dividend shares declared and received after

Mr. Ang’s death are not to be included as part of his gross estate
since said dividend shares did not yet accrue as the time of Mr.
Ang’s death.

Note: Had the dividends been declared or accrued before the

death of Mr. Ang, the dividend shares received by the estate
after his death would have formed part of the gross estate of the
decedent.

Question: If the dividends received do not form part of the estate

of Mr. Ang, how will they be treated?

Answer: The dividends received by the estate of Mr. Ang are to

be declared as an income of the Estate subject to income tax.

Properties Not Physically in the Estate

These include properties that have already been transferred

during the lifetime of the decedent but are nevertheless still
subject to payment of estate tax (transfer inter vivos in form BUT
transfer mortis causa in substance). They include the following:
(a) Transfers in contemplation of death;
(b) Transfers w/ retention or reservation of certain rights;
(c) Revocable transfers;
(d) Property passing under general power of appointment;
(e) Transfers for insufficient consideration;

(f) Proceeds of life insurance;
(g) Claims against insolvent persons; and

(h) Capital of the surviving spouse.

Note: In relation to items (a), (b), (c), and (d) – while the law
identifies them as gratuitous transfers mortis causa, if the transfer
is bona fide, meaning the sale, barter or any kind of onerous
transfer was for an adequate and full consideration, then such
transfer is to be EXCLUDED from the gross estate of the decedent
since it does not partake the nature of a gratuitous transfer mortis
causa.

EXCLUSIONS FROM THE GROSS ESTATE

(1) Exclusive Property (capital/paraphernal) of the surviving

spouse;

(2) Property outside the Philippines of a non-resident alien

decedent; and

(3) Intangible personal property in the Philippines of a non-

resident alien when the reciprocity rule applies.

Exclusions Under Special Laws –

(1) Proceeds of life insurance benefits received by members of

the GSIS;

(2) Benefits received by members from the SSS by reason of

death;

(3) Amounts received from the Philippine and the U.S.

Governments from the damages suffered during the last war;

(4) Benefits received by beneficiaries residing in the Philippines

under laws administered by the U.S. Veterans Administration;
and

(5) Grants and donations to the Intramuros Administration.

EXEMPTIONS FROM THE GROSS ESTATE

Basic Exemption

Under the old Tax Rule, estates which are not in excess of
P200,000 are exempted from estate taxes. Under the TRAIN Law
this is P200,000 exemption is now deleted and replaced with a
higher Standard Deduction of P5,000,000 compared to the
P1,000,000 Standard Deduction under the old Tax Rule.

Exemptions under the NIRC

The following acquisitions and transmissions are exempted from

the gross estate under the NIRC:

(1) The merger of the usufruct in the owner of the naked title;

(2) The transmission or delivery of the inheritance or legacy by

the fiduciary heir (1st heir) to the fideicomissary (2nd heir).
Pending transmission of the property, the fiduciary is entitled to
all the rights of a usufructuary, although the fideicomissary is
entitled to all the rights of a naked owner;

(3) The transmission from the first heir, legatee or donee in favor
of another beneficiary, in accordance with the desire of the
predecessor; and

(4) All bequests, devises, legacies or transfers to social welfare,

cultural and charitable institutions, no part of the net income of
which inures to the benefit of any individual; provided, however,
that not more than 30% of said bequest, devises, legacies or
transfers shall be used by such institutions for administration
purposes.
VALUATION OF THE GROSS ESTATE

As a general rule, the properties comprising the gross estate shall

be valued based on appraised fair market value (FMV) as of the
time of decedent’s death. The valuation of the property
depends on the kind of property involved.

Valuation of Real Properties

Real properties are valuated by getting the FMV as determined

by the BIR Commissioner (Zonal Value), or the FMV as shown in
the schedule of values fixed by the Provincial and City assessors
(as indicated in the Tax Declaration), whichever is higher at the
time of decedent’s death.

Valuation of Personal Properties, in General

In general, personal properties are appraised at their FMV at the

time of decedent’s death.

DEDUCTIONS TO THE GROSS ESTATE (as amended by the TRAIN

Law)

Types of Deductions

(1) Ordinary Deductions;

(2) Special Deductions; and

(3) Net Share of the Surviving Spouse in the conjugal

partnership property.

Ordinary Deductions

(1) Losses (calamity losses, claims against insolvent persons),

indebtedness (claims against the estate, unpaid mortgages),
unpaid taxes (LIT); (Note: no more Funeral and Judicial Expenses
under the TRAIN Law)

(2) Property previously taxed (vanishing deductions);

(3) Transfers for public purpose; and

(4) Amounts received by heirs from decedent’s employer under

RA 4917 (retirement benefits of decedent)

Special Deductions

(1) Family Home not to exceed P10,000,000 (increased from

P1,000,000 under the TRAIN Law); and

(2) Standard Deduction of P5,000,000 (increased from P1,000,000

under the TRAIN Law) only available to Filipino citizens whether
resident or non-resident and resident aliens; for non-resident
aliens, they are entitled P500,000 as Standard Deduction (Before
TRAIN Law: non-resident aliens were not allowed the Standard
Deduction)

Note: Medical expenses removed under the TRAIN Law. (Before:

Medical Expenses allowed as deduction for the maximum
amount of P500,000)

Net Share of the Surviving Spouse in the Conjugal Partnership

Property

The net share is equivalent to ½ or 50% of the conjugal property

after deducting the obligations chargeable to such property.

Importance of Classification of Deductions

(1) Decedent-citizens and decedent-resident aliens are entitled

to all types of deductions.
(2) Decedent non-resident aliens are entitled to –

(a) ordinary deductions in proportion to their assets

worldwide;

(b) the net share of the surviving spouse in the conjugal

partnership property;

(c) lower special deduction of P500,000 by way of

Standard Deduction by way of deductions, BUT they are NOT
ENTITLED to the special deduction of a family home, under the
TRAIN Law.

Property Previously Taxed (Vanishing Deductions)

A deduction is allowed on the property left behind by the

decedent, which he had acquired previously, by inheritance or
donation. The rationale of this allowed deduction is to minimize
the effects of a double tax on the same property within a short
period of time, i.e. five (5) years, considering that a previous
transfer tax had already been imposed on the property, either
the estate tax (if property is inherited) or the donor’s tax (if
property is donated).

Requisites for Deductibility of Property Previously Taxed:

(1) Death – the present decedent (Mr. A) died within five years
from date of death of the prior decedent (Mr. B) or date of gift;


(2) Identity of the property – The property with respect to which
deduction is sought can be identified as the one received from
the prior decedent or the donor, or as the property acquired in
exchange for the original property so received.

(3) Location of the property – The property on which vanishing

deduction is claimed must be located in the Philippines.
(4) Inclusion of the property – The property must have formed
part of the gross estate situated in the Philippines of the prior
decedent, or must have been included in the total amount of
the gifts of the donor made within five (5) years prior to the
present decedent’s death.

(5) Previous taxation of the property – the donor's tax on the gift
or estate tax on the prior succession (Mr. B’s succession) must
have been finally determined and paid by the donor or the prior
decedent, as the case may be.

(6) No previous vanishing deduction on the property, or the

property exchanged therefor, was allowed in determining the
value of the net estate of the prior decedent.

Case 1: Cory is the mother of Kris. On 04 August 2009 Cory died

leaving a parcel of land to Kris by way of inheritance. Estate
taxes were paid on the inheritance received by Kris. On 13
March 2011, Kris also died leaving the same property to Josh and
Bimby.

Question: In computing Kris’ net taxable estate, may a vanishing

deduction be claimed on the property received by Josh and
Bimby by way inheritance from decedent Kris?

Answer: Yes. Since the property was already previously taxed

and paid by Kris after inheriting it from Cory, and considering
further, that the death of Kris happened within 5 years after the
death of Cory, the same may be subject to a vanishing
deduction.

Case 2: With the same set of facts as in Case 1, Josh and Bimby
both died in a car accident on 12 June 2013 leaving the said
property to Noynoy by way of inheritance.

Question: In computing Josh’s and Bimby’s net taxable estate,

may vanishing deductions be claimed on the property received
by Noynoy by way inheritance from Josh and Bimby?

Answer: No. The property cannot be subject to any vanishing

deduction considering that the same property has already been
previously subject to a vanishing deduction. The fact that the
deaths of Bimby and Josh happened within 5 years from the
death of Kris or of Cory’s is no moment considering that the same
property has already been subject to a previous vanishing
deduction.

SPECIAL DEDUCTIONS

(1) Family Home (maximum of P10,000,000)

(2) Standard Deduction (P5,000,000)

Requisites for the Deductibility of Family Home:

(1) The family home must be the actual residential home of the
decedent and his family at the time of his death, as certified by
the barangay captain of the locality;

(2) The total value of the family home must be included as part
of the gross estate of the decedent;

(3) Allowable deduction must be in an amount equivalent to

the current FMV of the family home as declared or included in
the gross estate, or the extent of the decedent’s interest
(whether conjugal/community or exclusive property), whichever
is lower, but in no case shall the deduction exceed P10,000,000
(increased from P1,000,000 under the TRAIN Law);

(4) The decedent was married or if single, was a head of the

family;

(5) Along with the decedent, any of the beneficiaries must be

dwelling in the family home; and
(6) The family home as well as the land on which it stands must
be owned by the decedent.

Case 1: Mr. Salonga has constituted two family homes for his
family. Family Home 1 has a FMV of P5,500,000 while Family
Home 2 has a FMV of P4,500,000. Mr. Salonga died.

Question: For purposes of deductions from the gross estate of Mr.

Salonga, can the estate deduct the value of both family homes?

Answer: No. For purposes of availing family home as a

deduction, the estate of Mr. Salonga may claim only one family
home.

Case 2: Mr. Salonga has constituted two family homes for his
family. Family Home 1 has a FMV of P25,000,000 while Family
Home 2 has a FMV of P8,000,000. Mr. Salonga died.

Question: For purposes of deductions from the gross estate of Mr.

Salonga, can the estate choose Family Home 1 and claim its
entire value as a deduction to the gross estate?

Answer: The estate may choose Family Home 1 as decedent’s

family home. However, the estate can only deduct the
maximum of amount P10,000,000 and not the its full value
P25,000,000.

Standard Deduction

The amount of P5,000,000 is the standard deduction to the gross

estate (increased from P1,000,000 under the TRAIN Law) given to
a citizen or resident alien. However, non-resident aliens are only
entitled to the amount of P500,000.

Question: What are the requirements for the estate of the

decedent to avail of the standard deduction of P5,000,000?
Answer: None. The decedent must, however, be a citizen or a
resident alien for him to be entitled to the Standard Deduction
of P5,000,000, otherwise if he is a non-resident alien he is only
allowed the amount P500,000 as a Standard Deduction.

Note: The TRAIN Law has also eliminated “Medical Expenses” as

a special deduction from the gross estate of decedent.

NET SHARE OF THE SURVIVING SPOUSE IN THE CONJUGAL

PARTNERSHIP PROPERTY

The amount deductible is the net share of the surviving spouse in

the conjugal partnership property. The net share is equivalent to
½ or 50% of the conjugal property after deducting the
obligations chargeable to such property.

Question: The amount deductible is the net share of the surviving

spouse in the “conjugal partnership property”. Does this apply
also to the net share of the surviving spouse in the absolute
community property?

Answer: Yes. This should equally apply to the net share of the
surviving spouse in the absolute community property,
considering that the share of the surviving spouse – which also
amounts to ½ or 50% of the community property – does not
belong to the decedent and, thus, should not be included in the
gross estate of the decedent.

Note: As a general rule, all property acquired during the

marriage, whether the acquisition appears to have been made,
contracted or registered in the name of one or both spouses, is
presumed to be conjugal unless the contrary is proved.
Summary of Deductions –

Citizen or Resident Alien Non-Resident Alien

Gross Estate Gross Estate

All property at the time of Includes only that part of

death, wherever situated gross estate located in the
Philippines

Deductions – Deductions –

Ordinary Deductions: Proportionate Ordinary

Special deductions:
1. Family home (P10M Max)
2. Standard deduction (P5M)
Share in conjugal property
Deductions:
Special Deductions:
Only P500,000 as Standard
Deduction
Share in conjugal property

Case: Mr. Brad Pitt, a non-resident alien (NRA) died in the

Philippines while on vacation. While settling his estate located in
the Philippines, his estate’s Administrator failed to include the
value of his other properties not located in the Philippines as part
of his gross estate at the time of his death.

Question: What is the effect, if any, of the failure to include the

value of the deceased NRA’s other properties not located in the
Philippines as part of his gross estate at the time of his death?

Answer: The failure of the Administrator to include the value of

the NRA’s properties located outside the Philippines as part of his
gross estate at the time of his death shall disallow any claims for
deduction of the items under ordinary deductions, insofar as his
allowed deduction under the NIRC are concerned. As a NRA, his
estate is thus, only allowed as standard deduction of P500,000
and the share of the surviving spouse as deductions.
TAX RATE

The Net Taxable estate is subjected to a flat rate of 6% based on

the value of the net estate (note: amendment introduced under
the TRAIN Law; under the old law, estate tax was computed
based on a tax schedule where an estate worth P200,000 and
over was taxed from 5 percent to 20 percent)

TAX CREDIT FOR ESTATE TAXES PAID IN A FOREIGN COUNTRY

The system of “tax credit” in estate taxation is a remedy against

international double taxation. To minimize the onerous effect of
taxing the same property twice, tax credit against Philippine
estate tax is allowed for estate taxes paid to foreign countries.

Who May Avail of Tax Credit

Only the estate of a decedent who was a citizen or a resident of

the Philippines at the time of his death can claim tax credit for
any estate tax paid to a foreign country

Note: Non-resident aliens are not entitled to avail of tax credits.

General Rule: The estate tax imposed by the Philippines shall be

credited with the amounts of any estate tax imposed by the
authority of a foreign country.

Case (2016 Bar): Jennifer is the only daughter of Janina who was
a resident in Los Angeles, California, U.S.A. Janina died in the U.S.
leaving to Jennifer one million shares of Sun Life (Philippines), Inc.,
a corporation organized and existing under the laws of the
Republic of the Philippines. Said shares were held in trust for
Janina by the Corporate Secretary of Sun Life and the latter can
vote the shares and receive dividends for Janina. The Internal
Revenue Service (IRS) of the U.S. taxed the shares on the ground
that Janina was domiciled in the U.S. at the time of her death.
Question: Can the CIR of the Philippines also tax the same
shares? Explain.

Answer: Yes. It can be assumed from the facts of the case that
Janina is a Filipino citizen residing in the U.S. when she died.
Under the benefits received theory, as a citizen of the Philippines
her gross estate includes all her properties wherever located. This
includes the 1,000,000 shares of Sun Life (Philippines), Inc.
However, since that the same property is also subject to estate
tax by the U.S. IRS, the estate of Janina may claim the estate tax
paid to the U.S. IRS on the said shares by way of a tax credit.
(Note: If Janina is a non-resident alien, her estate may not claim
any tax credit. Furthermore, the CIR can subject said shares to
estate tax, unless reciprocity applies, in which case they are
excluded.)

ADMINISTRATIVE PROCEDURES IN ESTATE TAXATION

Filing of Estate Tax Return

When Required:

It is required, regardless of the gross value of the estate, 
when

the said estate consists of registered or registrable property such
as real property, motor vehicle, shares of stock or other similar
property for which a clearance from the Bureau of Internal
Revenue is required as a condition precedent for the transfer of
ownership thereof in the name of the transferee.

Contents:

(1) The value of the gross estate of the decedent at 
the time of
his death, or in case of a nonresident, not a citizen of the
Philippines, of that part of his gross estate situated in the
Philippines;

(2) The deductions allowed from gross estate in determining the

net taxable estate; and

(3) Such part of such information as may at the time be

ascertainable and such supplemental data as may be
necessary to establish the correct taxes.

(4) For estate tax returns showing a gross value exceeding

P5,000,000, there must be a statement duly certified to by a
Certified Public Accountant containing the following (amount
increased from P2,000,000 by the TRAIN Law):

(a) Itemized assets of the decedent with their corresponding

gross value at the time of his death, or in the case of a
nonresident, not a citizen of the Philippines, of that part of his
gross estate situated in the Philippines;

(b) Itemized deductions from gross estate allowed in Sec. 86,

NIRC; and

(c) The amount of tax due whether paid or still due and
outstanding.

When Filed:

As a general rule, estate tax returns are required to be filed within

1 year from the decedent's death (increased from 6 months by
the TRAIN Law)

Where Filed:

Estate tax returns are to be filed:

(1) In –
(a) An authorized agent bank (AAB);
(b) A Revenue District Officer (RDO);
(c) A Collection Officer;
(d) A Duly authorized Treasurer of the city or municipality,
where the decedent was domiciled at the time of his death;
 or
(2) With the Office of the Commissioner, if the decedent has no
legal residence in the Philippines.

Note: the filing of Notice of Death requirement is no longer

required and was repealed under the TRAIN Law.

Payment of Estate Tax

Who is liable to pay the estate tax –

Primarily, the estate, through the executor or administrator, is

liable for the payment of estate taxes.

Subsidiarily, the heirs or beneficiaries are liable for the payment

of that portion of the estate which his distributive share bears to
the value of the total net estate. The extent of the heir’s liability,
however, shall in no case exceed the value of his share in the
inheritance.

Note: As a rule, estate taxes are to be paid before the shares of

the heirs are distributed to them.

Question: Can the heirs still be liable for unpaid estate taxes after
they already received their inheritance share?

Answer: Yes. Claims for taxes, whether assessed before or after

the death of the deceased, can be collected from the heirs
even after the distribution of the properties of the decedent. The
heirs shall be liable therefor, in proportion to their share in the
inheritance.

When Paid:

The estate tax is paid at the time the return is filed by the
executor, administrator or the heirs. Since the estate tax return is
required to be filed within one year (as amended by the TRAIN
Law) from the decedent's death, the payment of the estate tax
must also be paid within one year and simultaneously upon filing
of the estate tax return.

Extension of Payment

The Commissioner may allow an extension of payment, if he finds

that the payment on the due date of the estate tax or of any
part thereof would impose undue hardship upon the estate or
any of the heirs. The extension, however, shall not exceed:
(a) Five (5) years, in case the estate is settled judicially; or
(b) Two (2) years in case the estate is settled extra-judicially.

Note: Under the TRAIN Law, payment by installment within 2

years from the statutory date for its payment without civil penalty
and interest, is now allowed in case the available cash of the
estate is insufficient to pay the total estate tax due.

Bank Withdrawals

Under the TRAIN Law, banks are now allowed to approve

withdrawal from the decedent’s deposit account, subject to a
final withholding tax of 6%. Under the old tax rule, the
administrator of the estate or any one of the heirs may, when
authorized by the commissioner, withdraw an amount not
exceeding P20,000.

B. DONOR’S TAX

Donor’s Tax, definition.

A donor’s tax is levied, assessed, collected and paid upon the

transfer by any person, resident or nonresident, of the property
by gift. It shall apply whether the transfer is in trust or otherwise,
whether the gift is direct or indirect, and whether the property is
real or personal, tangible or intangible.
Nature of Donor’s Tax

Donor’s tax is not a property tax but an excise tax or privilege tax
imposed on the transfer of property by way of gift inter vivos.

Principles of Donor’s Taxation

(1) The donor’s tax is imposed on donations inter vivos or those

made between living persons to take effect during the lifetime
of the donor.

(2) It supplements the estate tax by preventing the avoidance

of the latter through the device of donating the property during
the lifetime of the deceased.

(3) It shall not apply unless and until there is a completed gift. The
transfer of property by gift is perfected from the moment the
donor knows of the acceptance by the donee; it is completed
by delivery, either actually or constructively, of the donated
property, to the donee.

Note: Following the Governing Law principle, the law in force at

the time of the perfection/completion of the donation shall
govern the imposition of the donor’s tax.

Purpose or Object of Donor’s Tax –

(a) To raise revenues for the government;
(b) To supplement estate tax; and
(c) To prevent avoidance of income tax through the device of
splitting income among numerous donees, who are usually
members of a family or into many trusts, with the donor thereby
escaping the effect of the progressive rates of income tax.

Donation, defined

A donation is an act of liberality whereby a person (donor)

disposes gratuitously of a thing or right in favor of another
(donee) who accepts it.

Requisites of Valid Donation –

(1) The donor must have capacity at time of the making of
donation;
(2) There must be an intent to donate; and
(3) The donee must accept the donation.

Case (2016 Bar): In 2011, Solar Computer Corporation (Solar)

purchased a proprietary membership share covered by
Membership Certificate No. 8 from the Mabuhay Golf Club, Inc.
for P500,000.00. On December 27, 2012, it transferred the same
to David, its American consultant, to enable him to avail of the
facilities of the Club. David executed a Deed of Declaration of
Trust and Assignment of Shares wherein he acknowledged the
absolute ownership of Solar over the share; that the assignment
was without any consideration; and that the share was placed
in his name because the Club required it to be done. In 2013, the
value of the share increased to P800,000.00.

Question: Is the said assignment a "gift" and, therefore, subject

to gift tax? Explain.

Answer: The assignment is not a gift, thus, it is not subject to

donor’s tax. One of the requisites of donation is the existence of
the “intent to donate” which element is lacking in this case.
Further, this lack of intent to donate on the part of Solar is clearly
indicated by David’s execution of the Deed of Declaration of
Trust and Assignment of Shares, as required by the Club, wherein
he acknowledged the absolute ownership of Solar over the
share.

Renunciation of Spouse’s Share or Share in Inheritance in favor

of Co-heir

Case 1: John and Marsha are husband and wife. John died
causing the dissolution of the spouses’ property relations. The
surviving spouse, Marsha, renounced her share in the Conjugal
Partnership or Absolute Community of Properties in favor of her
children Maricel, Van, and Rolly.

Question: What is the effect of the Marsha’s renunciation of her

shares in favor of her children?

Answer: The renunciation by the surviving spouse (Marsha) of her

share in the Conjugal Partnership of Gains or Absolute
Community of Properties after the dissolution of marriage in favor
of the heirs or any other person is subject to donor’s tax.

Case 2: With the same set of facts as in Case 1, one of the heirs,
Maricel, renounced her share in the inheritance in favor of his
co-heirs.

Question: Is the renunciation subject to donor’s tax?

Answer: No. A general renunciation made by any heir in favor of

his co-heirs is not subject to donor’s tax. A general renunciation
of inheritance in favor of a co-heir is not a donation subject to
donor’s tax since the title to the property is not deemed to have
vested in favor of the repudiating heir. Since Maricel renounced
her share in the inheritance in favor of her co-heirs, the same is
not subject to donor’s tax.

Case 3: With the same set of facts as in Case 1, this time Maricel
renounced her share in the inheritance in favor of his co-heir,
Van.

Question: Is the renunciation subject to donor’s tax?

Answer: Yes, the renunciation of Maricel’s share in the

inheritance in favor of his co-heir Y is subject to donor’s tax. Since
the renunciation is specifically and categorically done in favor
of an identified heir to the exclusion of the other co-heirs, such
renunciation is subject to donor’s tax.
Transfers Which May be Constituted as Donation

(1) Sale, exchange, or transfer of property for insufficient

consideration;

(2) Condonation or remission of debt where the debtor did not

render service in favor of the creditor; and

(3) Transfer for less than adequate and full consideration.

Question: What is the tax consequence of a sale, exchange, or

transfer of a real property considered as an ordinary asset for
insufficient consideration?

Answer: Where a real property, classified as an ordinary asset, is

transferred for less than an adequate and full consideration in
money or money’s worth, the amount by which the FMV of the
property, at the time of the execution of the Contract of Sale 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 subject to donor’s tax.

Question: What if the real property that is subject to the sale,

exchange, or transfer insufficient consideration is a capital asset,
is it also subject to donor’s tax?

Answer: No. Real property considered capital assets under the

Tax Code are excepted from the rule considering that the FMV
itself, if higher than the gross selling price, is the base for
computing the capital gains tax imposed upon the sale of such
capital assets. Thus, what the seller avoids in the payment of the
donor’s tax, it pays for in the capital gains tax.

Question: What if the consideration is fictitious?

Answer: If the consideration is fictitious, then the entire value of
the property shall be subject to donor’s tax.

Note: The TRAIN Law clarified the provisions on the “Transfer less
than Adequate and Full Consideration” by providing that a sale,
exchange, or other transfer of property made in the ordinary
course of business (a transaction which is a bona fide, at arm’s
length, and free from any donative intent), will be considered as
made for an adequate and full consideration in money or
money’s worth, thereby eliminating an automatic presumption
of donation.

Gift-Splitting

Gift-splitting was tax-saving measure practiced in the past

before the TRAIN LAW which is done by spreading the donations
or gifts over a number of calendar years in order to avail of the
exemption from donor’s taxes (P100,000 exempted donations)
or lower donor’s taxes (graduated rates of donor’s tax of 2% to
15%). However, with the imposition of the same flat rate of 6% on
both donor’s tax and estate tax, this gift-splitting measure may
have its former tax saving purposes ineffective at with the
amendment under the TRAIN Law.

Note: The TRAIN Law still recognizes the tax exemption of

donations up to P250,000.

Classification of Donors

(1) Citizens and residents of the Philippines. They are taxable on

all properties located not only within the Philippines but also in
foreign countries.


(2) Nonresident Aliens. They are taxable on all real and tangible
personal properties within the Philippines, as well as intangible
personal properties, unless there is reciprocity, in which case
such intangible personal properties are not taxable.
Question: Does the “reciprocity rule” apply in Donor’s Taxation?

Answer: Yes. The reciprocity rule insofar as intangible properties

situated in the Philippines of a non-resident alien also applies to
donor’s taxation.

Determination of Extent of Gross Gift

The extent gross gift is determined as follows:

(a) Gifts of real property and personal property wherever

situated belonging to the donor who is either a resident or citizen
at the time of the donation; and

(b) Gifts of real and tangible personal property situated in the

Philippines, and intangible personal property with a situs in the
Philippines unless exempted on the basis of reciprocity,
belonging to the donor who is a non-resident alien at the time of
the donation.

Summary of What Constitutes Gross Gift –

Citizen or Resident Alien Non-resident Alien

Real property in the
Philippines
Tangible personal
properties; and
Intangible personal
properties (within or
outside the Philippines)
Real property in the Philippines
Tangible personal properties
(within the Philippines); and
Intangible personal properties
(within the Philippines) Except: If
reciprocity rule applies.

Valuation of Gifts Made in Property

Gifts made in property are valuated by taking their FMV at the

time of donation. More specifically:
(1) For real property – FMV as determined by the CIR (Zonal
Value) or FMV as shown in the latest schedule of values of the
provincial and city assessor (Market Value per Tax Declaration),
whichever is higher. If there is no zonal value, the taxable base is
the FMV that appears in the latest tax declaration.

(2) For improvements – the value of improvement is the

construction cost as per building permit and/or occupancy
permit plus 10% per year after year of construction, or the FMV
per latest tax declaration.
Case (Bar 2015):

Mr. L owned several parcels of land and he donated a parcel

each to his two children. Mr. L acquired both parcels of land in
1975 for P11,200,000. At the time of donation, the fair market
value of the two parcels of land, as determined by the CIR, was
P112,300,000, while the fair market value of the same properties
as shown in the schedule of values prepared by the City
Assessors was P112,500,000.

Question: What is the proper valuation of Mr. L's gifts to his

children for purposes of computing donor's tax?

Answer: For purposes of determining the donor’s tax, the proper

valuation of the Mr. L’s gifts to his children is the fair market value
of the gifts made at the time the donation was made as
determined by the CIR (Zonal Value) or fair market value as
shown in the latest schedule of values of the provincial and city
assessor (Market Value per Tax Declaration), whichever is higher.
In this case, since the fair market value as provided by the City
Assessor is higher than the fair market value as provided by the
CIR, the value of P112,500,000 shall be used as the basis in
valuing the gifts made by Mr. L to his children for purposes of
donor’s tax.
General Formula in Computing the Donor’s Tax

Gross gifts made


Less: Deductions from the gross gifts
Net gifts made

Multiplied by 6% rate of tax
Donor’s tax on the net gifts

If there were several gifts made during the year, the formula is as
follows:

Gross gifts made on this date


Less: Deductions from the gross gifts
Net gifts made on this date

Add: all prior net gifts during the year
Aggregate net gifts

Multiplied by 6%

Donor’s tax on the aggregate net gifts
Less: donor’s tax paid on prior net gifts
Donor’s tax due on the net gifts to date

Tax Rates Applicable

Under the TRAIN Law the tax rate is now a flat rate of 6%
computed on the basis of the total gifts in excess of P250,000
exempt gift made during the calendar year

Note: Under the TRAIN Law – (1) it increased the exempted

amount from P100,000 to P250,000; (2) there is no more
distinction whether donee is a relative or a stranger; and (3) no
more schedule of rates 2%-15%; (4) but subject to DST of
P15/P1,000, where before, there was no DST on donations.
Tax Credit for Donor’s Taxes Paid in a Foreign Country

The tax credit system also applies in donor’s taxation. A situation

may arise when the property given as 
a gift is located in a
foreign country and the donor may be subject to donor’s tax
twice on the same property: first, by the Philippine government
and second, by the foreign government where the property is
situated. The remedy of claiming a tax credit is, therefore, aimed
at minimizing the burdensome effect of double taxation by
allowing the taxpayer to deduct his foreign tax from his Philippine
tax.

Note: A tax credit may be claimed only by a resident citizen,

non-resident citizen and resident alien. Non-resident aliens are
not entitled to a tax credit.
Exemptions Of Gifts From Donor’s Tax

1. Gifts made to or for the use of the National Government or

any entity created by any of its agencies which is not conducted
for profit, or to any political subdivision of the said Government;

2. Gifts in favor of an educational and/or charitable, religious,

cultural or social welfare corporation, institution, accredited
non-government organization, trust or philanthropic
organization or research institution or organization, Provided not
more than 30% of said gifts will be used by such donee for
administration purposes; and

3. Political or electoral contributions duly reported to the

COMELEC.
Note: Under the old tax Rule, dowries or gifts made on account
of marriage and before its celebration or within one year
thereafter by resident parents to each of their legitimate,
recognized natural, or adopted children to the extent of the first
P10,000 are exempt from Donor’s Tax. However, under the TRAIN
Law, this is no longer exempted subject to the P250,000 tax
exempt cap on donations.
Political or Electoral Contributions

As a rule, contributions given to candidates or political parties

are not subject to donor’s tax as provided under the Omnibus
Election Code (OEC) and Republic Act No. (RA) 7166. Section 13
of RA 7166 specifically states that any provision of law to the
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 Commission shall not
be subject to the payment of any gift tax (donor’s tax).
Therefore, contributions are exempt from donor’s tax only if they
are duly reported to the Commission, which means campaign
contributions that are not reported will be subject to appropriate
donor’s tax.

Case (2014 Bar Question): Mr. De Sarapen is a candidate in the

upcoming Senatorial elections. Mr. De Almacen, believing in the
sincerity and ability of Mr. De Sarapen to introduce much
needed reforms in the country, contributed P500,000.00 in cash
to the campaign chest of Mr. De Sarapen. In addition, Mr. De
Almacen purchased tarpaulins, t-shirts, umbrellas, caps and
other campaign materials that he also donated to Mr. De
Sarapen for use in his campaign.

Question: Is the contribution of cash and campaign materials

subject to donor’s tax?

Answer: The campaign contributions of Mr. De Almacen to the

election campaign of Mr. De Serapen are not subject to donor’s
tax, provided, said political contributions are duly reported to the
COMELEC as campaign contributions, otherwise, the same are
subject to donor’s tax.

Note: Excess campaign contributions or such amount not fully

used in the political campaign is subject to income tax unless the
same is returned to the donors.
Donations Made to Entities Exempted Under Special Laws:
(a) Aquaculture Department of the Southeast Asian Fisheries
Development Center of the Philippines
(b) Development Academy of the Philippines
(c) Integrated Bar of the Philippines
(d) International Rice Research Institute
(e) National Museum
(f) National Library
(g) National Social Action Council
(h) Ramon Magsaysay Foundation
(i) Philippine Inventor’s Commission
(j) Philippine American Cultural Foundation

(k) Task Force on Human Settlement on the donation of
equipment, materials and services
(l) Rural Farm Schools under RA 10618
Persons Liable of Donor’s Tax

Every person, whether natural or juridical, resident or non-

resident, who transfers or causes to transfer property by gift,
whether in trust or otherwise, whether the gift is direct or indirect
and whether the property is real or personal, tangible or
intangible.

Tax Basis –
The tax for each calendar year shall be computed on the basis
of the total net gifts made during the calendar year.

Calendar Year, defined –

Calendar year refers to the 12 consecutive months starting on
January 1 and ending on December 31.

Net Gifts, defined

Net gift is the net economic benefit from the transfer that
accrues to the donee. Accordingly, if a mortgaged property is
transferred as a gift, but imposing upon the donee the obligation
to pay the mortgage liability, then the net gift is measured by
deducting from the fair market value of the property the amount
of the mortgage assumed.

Administrative Procedure in Settling Donor’s Tax

Filing of Donor’s Tax Return & Payment –

Contents of the Donor’s Tax Return:

(1) Each gift made during the calendar year which is to be
included in computing net gifts;
(2) The deductions claimed and allowable;
(3) Any previous net gifts made during the same 
calendar year;
(4) The name of the donee;
(5) Relationship of the donor to the donee; and
(6) Such further information as the Commissioner 
may require.

When Filed and Paid –

A donor’s tax return is to be filed within thirty (30) days after the
date the gift is made or completed. The donor’s tax due thereon
shall be paid at the same time that the return is filed.

Note: The time for payment is mandatory and a notice of

assessment or demand is not necessary before any gift must be
paid.

Where Filed and Paid –

Unless the Commissioner otherwise permits, the donor’s tax return

shall be filed and the tax paid to:
(1) An authorized agent bank;
(2) The Revenue District Officer;
(3) Revenue Collection Officer;
(4) Duly authorized Treasurer of the city or 
municipality where
the donor was domiciled at the time of the transfer; or
(5) If there be no legal residence in the Philippines, with the
Office of the Commissioner.
Note: In the case of gifts made by a non-resident, the return may
be filed with:

(1) The Philippine Embassy or Consulate in the country where he

is domiciled at the time of the transfer; or


(2) Directly with the Office of the Commissioner.