Pamantasan ng Lungsod ng Valenzuela

College of Business and Accountancy

Department of Accountancy

BUSINESS AND TRANSFER TAXATION (TAX2)

Gross Estate

History of Estate Tax

• Act 2601 (July 1, 1916) – It imposes graduated estate tax rates computed on net inventories property left by a decedent. It was
subsequently amended by the Revised Administrative Code of the Philippines (March 17, 1917) and other several laws.
• RA 8424 or “Tax Reform Act” or “National Internal Revenue code (NIRC)” (January 1, 1998) – further restructured the tax base
and rates of both estate and donor’s taxes in addition to allowing the deduction of medical expenses from the gross estate.
• RA 10963 or “Tax Reform for Acceleration and Inclusion (TRAIN) Act” (January 1, 2018) – it substantially amended the estate
tax law by getting rid of the use of graduated tax rate and changed it to a single rate of 6% of the net taxable estate and other
amendments.

Estate Tax – tax imposed on the privilege that a person is given in controlling to a certain extent, the disposition of his property to take
effect upon death.

Justification for the Imposition of Estate Tax

1. Benefit-Received Theory – for the performance of the services rendered by the government in the distribution of the estate of
the decedent, either by law or in accordance with his wishes, the State collects the tax.
2. Privilege or State Partnership Theory – inheritance is not a right but a privilege granted by the state and legatees have been
acquired only with the protection of the State. Consequently, the State as a passive silent partner in the accumulation of property
has the right to collect the share which is properly due to it.
3. Ability to Pay Theory – receipt of inheritance which is in the nature of an unearned wealth or windfall, are place assets into the
hands of the heirs and beneficiaries. This creates an ability to pay the tax and thus contributes to government income.
4. Redistribution of Wealth Theory – the imposition of estate tax reduces the property received by the successor, thus helping to
promote equitable distribution of wealth in society.

Composition of Gross Estate based on citizenship and residency

DECEDENT GROSS ESTATE
Citizen 1. Property (Real or Personal) wherever situated
Resident Alien 2. Intangible personal property wherever situated
1. Real property situated in the Philippines
Nonresident Alien 2. Tangible personal property situated in the Philippines
3. Intangible personal property with situs in the Philippines, unless excluded on the basis of reciprocity.

RECIPROCITY CLAUSE – No tax shall be imposed with respect to intangible personal properties of a non-resident alien (NRA) decedent
situated in the Philippines:
1. When the foreign country, where such NRA is a resident and citizen, does not impose transfer tax with respect to intangible
personal properties of Filipino citizens not residing in that country; or
2. When the foreign country imposes transfer taxes, but grants similar exemption with respect to intangible personal properties of
Filipino citizens not residing in that country.

GROSS ESTATE (Sec. 85 of the Tax Code, as amended)

Consists of all properties and interests in properties of the decedent at the time of his death, as well as properties transferred during
lifetime (only in form), but in substance was only transferred at the time of death.

Components of the Gross Estate

PROPERTIES EXISTING AT THE TIME OF DEATH SUCH AS:

1. Real property and other tangible Personal property
2. Decedent’s interest and intangibles
a. Decedent’s Interest – refers to the extent of equity or ownership participation of the decedent on any property physically
existing and present in the gross estate, whether or not in his possession, control or dominion. It 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, transferred)
b. Intangible Properties considered located in the Philippines:
i. Franchise which must be exercised in the Philippines;
ii. Shares, obligations, or bonds issued by any corporation or sociedad anonima organized or constituted in the
Philippines;
iii. Shares, obligations, or bonds issued by any foreign corporation, at least 85% of the business of which is located
in the Philippines;
iv. Shares, obligations, or bonds issued by any foreign corporation if such shares, obligations, or bonds have
acquired a business situs (used in the furtherance of its business in the Philippines) in the Philippines;
v. Shares or rights in partnership, business or industry established in the Philippines.

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SITUS OF TANGIBLE AND INTANGIBLE PROPERTY

PROPERTY SITUS
Real Property and Tangible Personal Location of the property
Property
Shares, franchise, copyright, and the Where the intangible is exercised regardless of where the corresponding certificate is stored
like
Receivables Residence of the debtor
Bank deposit Location of the depository bank

Illustration 1
Determine the situs of the property and if it is included or excluded in the decedent’s gross estate.

Composition of Gross Estate

NRA
NO. PARTICULARS SITUS Citizen or
Without
Resident Alien With Reciprocity
Reciprocity
1 Parcel of Land – Makati
2 Parcel of Land – Bali, Indonesia
3 House and Lot (Family Home) – Taguig
4 Rest House - Batangas
5 Rest House - Palawan
6 Rest House – Malaysia
7 Cars – Philippines
8 Cars – Abroad
9 BPI Deposit – Philippine branch
10 BPI Deposit – U.S. branch
ABN Amro Bank (Foreign bank) –
11
Philippine Branch
ABN Amro Bank (Foreign bank) –
12
London Branch
13 Receivables – debtor from Philippines
14 Receivables – debtor from Canada
Shares of stocks of domestic
15 corporations. The certificates are stored
in the Philippines.
Shares of stocks of domestic
16 corporations. The certificates are stored
abroad.
Shares of stocks of foreign corporations.
17 The certificates are stored in the
Philippines.
Shares of stocks of foreign corporations.
18
The certificates are stored abroad.
Shares of stocks of foreign corporations,
19 90% of its operations is in the
Philippines
Shares of stocks of foreign corporations,
20 80% of its operations is in the
Philippines
Shares of stocks of foreign corporations
21 which acquired business situs in the
Philippines
Patents and copyrights exercised in the
22
Philippines
23 Patents and copyrights exercised abroad

c. Properties transferred gratuitously during lifetime, but in substance, transferred upon death:
i. Transfer in contemplation of death – the thought of death must be the controlling motive which induces the
disposition of the property.
EXCEPTION. When the transfer of property is a bona fide sale for an adequate and full consideration in money
or money’s worth.
ii. Transfer with retention or reservation of certain right – allows the transferor to continue enjoying, possessing or
controlling the property (beneficial ownership) because only the naked title has been transferred.
iii. Revocable transfer – decedent transfers the enjoyment of his property to another, subject to his right to revoke
the transfer at will, with or without notifying the transferee, any time before he dies.
iv. Property passing under General Power of Appointment (GPA).
v. Transfers for insufficient consideration – not a bona fide sale for an adequate and full consideration in money or
money’s worth [sale of property at substantially below its fair market value (FMV)]

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AMOUNT INCLUDED IN GROSS ESTATE:

FMV at the time of death P xxx
Less: Selling Price (xxx)
Excess of FMV over SP* P xxx
*Included in Gross Estate
vi. Proceeds from Life Insurance (on insurance under policies taken out by the decedent upon his own life). The
following are included in the gross estate:
a) Whether designated as REVOCABLE or IRREVOCABLE when the beneficiary is the:
• Estate of the deceased
• His executor; or
• Administrator
b) When the beneficiary is a third person (other those mentioned in letter “a”) and the designation is
REVOCABLE.

PROCEEDS OF LIFE INSURANCE (Taken out by the Decedent)

Beneficiary Designation Gross Estate
Estate Revocable or Irrevocable Included
Executor Revocable or Irrevocable Included
Administrator Revocable or Irrevocable Included
rd
3 Party (i.e. wife) Revocable Included
3rd Party (i.e. wife) Irrevocable Excluded

Exemptions and Exclusions from Gross Estate

a. UNDER SEC. 85 and 104 of the Tax Code, as amended
a. Capital or exclusive property of the surviving spouse [Sec. 85(H)]
b. Properties outside the Philippines of a non-resident alien decedent (Sec. 104)
c. Intangible personal property in the Philippines of a non-resident alien when the rule of Reciprocity applies (Sec. 104)
b. UNDER SEC. 87 of the Tax Code, as amended
a. The merger of the usufruct (right to use) in the owner of the naked title.
b. The transmission from the first heir, legatee or donee in favor of another beneficiary in accordance with the will of
the predecessor. This type of transfer is mist commonly known as “transfer under Special Power of Appointment
(SPA)”
• GPA – inclusion to the gross estate
• SPA – exclusion from the gross estate
c. The transmission or delivery of inheritance or legacy of the fiduciary heir or legatee to the fideicommissary.
• This is the same with SPA. The only difference is, in fideicommissary transfer, the relationship of the donor
and donee is only one degree apart (i.e., from a Parent to his/her son)
d. All bequests, devices, legacies or transfers to social welfare, cultural and charitable institutions, provided:
• No part of the net income of said institutions inure to the benefit of any individual;
• Not more than 30% of such transfers shall be used for administration purposes.
c. UNDER SPECIAL LAWS
• Proceeds of life insurance and benefits received by members of the GSIS (RA728).
• Benefits received by members from the SSS by reason of death (RA1792).
• Amounts received from Philippine and United States governments for war damages.
• Amounts received from United States Veterans Administration.
• Benefits received from the Philippines and US government for damages suffered during World War II (RA227).
• Retirement benefits of officials/employees of a private firm (RA4917).
• Payment from the Philippines of US government to the legal heirs of deceased of World War II Veterans and
deceased civilian for supplies/services furnished to the US and Philippine Army (RA136).
• Proceeds of life insurance under a group insurance taken out by employer (not taken out upon his life)
• Transfers by way of bona fide sales
• Transfer of property to the National government or to any of its political subdivisions.
• Personal Equity and Retirement Account (PERA) assets of the decedent-contributor (RA9505).
• Compensation paid to private and public health workers who contracted Covid-19 (in case of death) under RA 11494,
also known as BAYANIHAN ACT II.

VALUATION OF GROSS ESTATE (Sec. 88 of the Tax Code, as amended)

• In General – FMV upon death.
• Personal Properties – FMV
• Real Properties – the higher amount between:
o FMV
o Zonal Value
• Shares of stock
a. Traded in the Local Stock Exchange (LSE) – mean value between the highest and lowest quotations nearest the date of
death if none is available on the date of death itself.
b. Not traded in the LSE:
i. Common (ordinary) shares – Book value
ii. Preferred (preference) shares – Par value

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• Usufruct – based on latest Basic Mortality Table to be approved by the Secretary of Finance, upon recommendation of the
Insurance Commissioner.

Estate Tax Rate

Beginning January 1, 2018, the net estate of every decedent, whether resident or non-resident of the Philippines, shall be subject
to an estate tax at the rate of six percent (6%).

ADMINISTRATIVE REQUIREMENTS
Notice of Death Notice of death removed
Period to File Estate Tax Return Within one (1) year from date of death
(BIR Form 1801) Required to file when:
1. The transfer is subject to tax
2. Regardless of the gross value of the estate, where the estate consists of registered or
registrable property for which Certificate Authorizing Registration from the BIR is
required as a condition precedent to the transfer of title/ownership in the name of the
transferee, the executor, or the administrator or any of the legal heirs, as the case may be.

Registrable Properties include, but is not limited, to:

1. Real properties
2. Motor vehicles
3. Shares of stocks
4. Guns
Venue/Place of filing General Rule: In the Revenue District Office (RDO) of the City/Municipality where the
decedent is domiciled at the time of death
Exceptions for Non-residents (NRC or NRA):
a. In case executor or administrator is registered with the BIR - venue is the RDO where the
executor or administrator is registered
b. In case the executor or administrator is unregistered – venue is RDO where the legal
residence of the executor or administrator is.
c. In case there is no executor or administrator – venue is the Office of the Commissioner of
Internal Revenue thru RDO No. 39 – South Quezon City
Note: The CIR has power to allow different venue in the filing of tax returns.
Extension of time to file estate tax In meritorious cases, a reasonable extension for filing the return, not exceeding 30 days shall
return be granted by the BIR Commissioner or any authorized Revenue Officer
Time for payment General rule: At the time the return is filed (Pay as you file)
Extension of time to pay estate When the Commissioner finds that the payment of the estate tax or any part thereof would
tax impose hardship upon the estate or any of the heirs, he may extend the time of such tax or any
part thereof –
- Not to exceed five (5) years in case the estate is settled through the courts
- Two (2) years in case estate is settled extra-judicially

Posting of bond in case of
extension
No extension
CPA Certificate
Information in CPA Certificate
Payment of tax antecedent to the
transfer of shares, bonds, or rights
Enforce Action
Liability of parties in paying
estate tax
Any amount paid after the statutory due date of the tax, but within the extension period shall
be subject to interest but not to surcharge.
Not exceeding double the amount of estate tax and with such sureties as the CIR deems
necessary
Due to fraud
Intentional disregard of the rules
Negligence
Gross value of testate exceeds P 5,000,000 (Old rule is P 2 million)
Itemized assets with corresponding gross value
Itemized liabilities
Estate tax due whether paid or still due and outstanding
No transfer of shares, obligations, or bonds without electronic Certificate Authorizing
Registration (e-CAR)
If a bank has knowledge of the death of a person, who maintained a bank deposit account alone,
or jointly with another, it shall allow any withdrawal from the said deposit account, subject to
a final withholding tax of (6%).
Requirement for withdrawal: duly stamped received BIR Form 1904 (Application for TIN of
Estate)
The Commissioner may enforce action against the estate after the due date of the estate tax
provided that all the applicable laws and required procedures are observed.
Primary Liability – Executor or administrator
Secondary Liability – Heir or beneficiary

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INSTALLMENT PAYMENTS
Cash Installment
Payment shall be made within two years from the date of
filing of the estate tax return
Estate tax return shall be filed within one (1) year from the date
of decedent’s death
Frequency (monthly/quarterly/semi-annually or annually)
deadline and amount of each installment shall be indicated in
the return subject to BIR prior approval
No penalties shall be imposed during the installment period
In case of lapse of the two-year period without payment of the
entire tax due, the remaining balance shall be due and
demandable with penalties reckoned from the deadline of filing
Partial Disposition of Estate and Application of Proceeds
to Estate Tax
Disposition refer to the conveyance of property with equivalent
cash consideration
Estate tax return shall be filed within one (1) year from the date
of decedent’s death
The written request shall be approved by the BIR with
undertaking that the proceeds shall be exclusively used for the
payment of estate tax due
The estate tax due shall be allocated in proportion to the value
of each property. E-CAR shall be issued for the property
intended to be disposed of
In case of failure to pay total estate tax due out of the proceeds,
the estate tax due shall be immediately due and demandable
with penalties reckoned from the deadline of filing of return

Illustration 2
A decedent taxpayer died leaving the following:
Family home (land and residential house) in the Philippines P 8,000,000
Parcel of land with vacation house in Malaysia 5,000,000
Farm land in the Philippines, with a mortgage in favor of the Philippine National Bank for 3,000,000
P 600,000
Shares of stock of domestic corporation 2,000,000
Shares of stock of foreign corporation, the entire business of which is in the Philippines 500,000
Receivable from a friend who has no property whatsoever 300,000

Receivables under the following insurance policies:

• Life insurance policy, taken by the decedent on his own life, with his estate as 200,000
revocable beneficiary
• Life insurance policy, taken by the decedent on his own life, with his daughter as 300,000
revocable beneficiary
• Life insurance policy, taken by the decedent on his own life, with his son as 600,000
irrevocable beneficiary
• Life insurance (group) taken by the employer of the decedent, with the estate as 150,000
revocable beneficiary

Required:
Determine the correct Gross Estate assuming the decedent was:
a. Resident Citizen
b. Resident Alien
c. Non-resident alien with reciprocity
d. Non-resident alien without reciprocity

Illustration 3
For each of the following independent cases, determine the value of the property in the gross estate:
1. A parcel of land inherited from the father was acquired by the decedent’s father then for a cost of P250,000. Upon inheritance,
the FMV was P200,000 as shown in the schedule of values from the Assessor’s office and P230,000 as determined by the
office of the BIR Commissioner.
2. A property, acquired for P1,000,000, was transferred in contemplation of death for a consideration of P100,000. FMV at the
time of transfer, P1,500,000, while at the time of death, P1,200,000.
3. A property, acquired at a cost of P1,000,000, was transferred in contemplation of death for a consideration of P1,200,000.
FMV at the time of transfer, P1,500,000, while at the time of death, P1,200,000.
4. The decedent was about to present to his girlfriend a brand new car worth P5,000,000 cash. Installment price is valued at
P6,000,000. On his way to meet his girlfriend, he met a car accident and died.
5. On January 1, 2022, Pedro granted a loan worth P1,000,000 to Juan, due on January 1, 2024. The latter executed a promissory
note with an annual interest of 10%. Pedro died on June 30, 2023.

- END OF COURSE FILE -

References
Tabag, E. D., & Garcia, E. J. (2022). Transfer & Business Taxation.