Supplemental Notes

Transfer and Business Taxation

1. Define transfer tax:

Tax imposed upon the privilege of passing ownership of property without

any valuable consideration.

2. Kinds of Transfer Taxes under the NIRC

1) Estate tax
2) Donor’s tax

3. Transfer tax vs. income tax

TRANSFER TAX INCOME TAX

Upon What Imposed Privilege to transfer property Privilege to earn

income

Rates Applicable Rates are lower: Rates are higher:

Estate tax – 6% Individual income –
Donor’s Tax – 6% in excess of 20% to 35%
250,000 pesos

Exemptions Lesser exemptions More exemptions

4. Define estate tax:

Estate tax is an excise tax imposed upon the privilege of transmitting

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 take effect
upon death. Estate tax laws rest in their essence upon the principle that
death is the generating source from which the taxing power takes its
being, and that it is the power to transmit or the transmission from the
dead to the living on which the tax is more immediately based.

5. It is not a tax on property because their imposition does not rest upon
general ownership but rather they are privilege tax since they are
imposed on the act of passing ownership of property

6. Characteristics of estate tax:

1) It is a transfer tax.
2) It is an ad valorem tax.
3) It is a national tax.
4) It is a general tax.
 5) It is a direct tax.
6) It is an excise tax.

7. Requisites for imposition of estate tax:

1) Death of decedent.
2) Successor is alive at the time of decedent’s death.
3) Successor is not disqualified to inherit.

8. Purpose and object of estate tax

1) To generate additional revenue for the government

2) To compensate the government for the protection given to the decedent
that enabled him to prosper and accumulate wealth.
3) Remove the disparity in the tax treatment of a sale and transfer by
death.

Generally, the purpose of the estate tax is to tax the shifting of economic
benefits and enjoyment of property from the dead to the living.

9. Time and transfer of properties

The properties and rights are transferred to the successors at the time of
death. (Art. 777, Civil Code).
The statute in force at the time of death of the decedent governs the
imposition of the estate tax.

Estate tax accrues at the time of death of decedent. As such, succession

takes place and the right of the state to tax vests instantly. The tax is to
be measured by the value of the estate as it stood at the time of the
decedent’s death regardless of any postponement of actual possession or
any subsequent increase or decrease.

10. Classification of decedent:

Individuals liable to pay estate tax:

1) Resident citizens (RC)
2) Non-resident citizens (NRC)
3) Resident alien (RA)
4) Non-resident alien (NRA)

Only natural persons can be held liable for estate tax. Domestic and
foreign corporations cannot be liable because they are not capable of
death.
Supplemental Notes
Transfer and Business Taxation

1. Gross estate vs. Net estate

Gross Estate Net Estate

The total value of The value of the

all property, real gross estate since
or it is taxed at a flat
personal, tangible rate.
or intangible, the
actual and
beneficial
ownership of
which was in the
decedent at the
time of his
death (Sec. 85, NIRC).

2. Determination of gross estate

The value of the gross estate of the decedent shall be determined by

including the value at the time of his death of all property, real or
personal, tangible or intangible, wherever situated: Provided, however,

That in the case of a nonresident decedent who at the time of his death
was not a citizen of the Philippines, only that part of the entire gross
estate which is situated in the Philippines shall be included in his
taxable estate (Sec. 86, TRAIN Law).

3. Intangible personal property deemed 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; (domestic corporation)
3) Shares, obligations, or bonds by any foreign corporation 85% of its
business is located in the Philippines.
4) Shares, obligations, or bonds issued by any foreign corporation if such
shares, obligation or bonds have acquired a business situs in the
Philippines.
5) Shares or rights in any partnership, business or industry established
in the Philippines (Sec. 104, NIRC).
4. Basis for the valuation of gross estate:
PROPERTY VALUATION

Real property Whichever is

higher between
the:
1. Fair market value
as determined by
the
Commissioner
(zonal value) or
2. Fair market value
as shown in the
schedule of values
fixed by the
provincial and city
assessors

If there is an
improvement, the
value of
improvement is the
construction cost
per building permit
or the fair market
value per latest tax
declaration.

Fair market values

is the price at which
any seller will sell
and any buyer will
buy both
willingly without
any force or
intimidation. It is
the price which a
property will bring
when it is offered by
one who desires to
buy and one who is
not
compelled to sell.

Personal property Personal property

Whether tangible
or intangible,
appraised at FMV.
“Sentimental
value” is
practically
disregarded.
 Shares of stock Unlisted
1. Unlisted
common - book
value
2. Unlisted
preferred - par
value

Listed – Closing rate

AT THE TIME of
death. If none is
available, the FMV is
the arithmetic mean
between the

highest and lowest

quotation at a date
nearest the date of
death.
In determining the
book value of
common shares, the
following shall not
be
considered:
1 . Appraisal
surplus 2 . The
value assigned to
preferred shares, if
there is any.

Right to usufruct, Shall be taken into

use or habitation, account the
as well as that of probable life of the
annuity beneficiary in
accordance with the
latest basic standard
mortality table, to
be approved by the
Secretary of Finance,
upon
recommendation of
the Insurance
Commissioner.

5. Estate tax formula:

 GROSS ESTATE
(Less) 1. Deductions
2. Net share of surviving spouse
__________________________________________________
___ NET ESTATE
(Multiply) Tax rate
_____________________________________________________

ESTATE TAX DUE

(Less) Tax credit, if any

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__ ESTATE TAX DUE AND PAYABLE