Transfer Tax

1. Estate tax

a. Basic Principles, Concept and Definition

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 (Lorenzo v. Posadas, 64 Phil 353).

The Estate Tax is based on the laws in force at the time of death notwithstanding the
postponement of the actual possession or enjoyment of the estate by the beneficiary

Definition:
- is a tax levied, assessed, collected and paid upon the transfer of the net estate of every
decedent, whether resident or non-resident of the Philippines

b. Nature, Purpose and Object

The Estate Tax is :

a. 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; and
b. It is a tax imposed on the privilege to transmit property a death and is measured by the value
of the property.

Purpose and Object

The generally accepted purposes for imposing the estate tax are as follows:
1. To generate additional revenue for the government
2. To reduce the concentration of wealth
3. Provide for an equal distribution of wealth
4. It is the most appropriate and effective method for taxing the “privilege” which the decedent
enjoys of controlling the dispositions
5. It is the only method of collecting the share which is properly due to the State as a partner in
the accumulation of property which was made possible on account of the protection given by the
Stat

c. 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.

NOTE: The estate tax accrues as of the death of the decedent. 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 (Sec. 3, RR 2-2003). The estate tax return shall be filed within six (6) months
from the decedent's death (Sec. 90, NIRC).

d. Classification of decedent

The following are the individuals who are liable to pay estate tax:

1. Resident decedent
a. Resident citizen
b. Non-resident citizen
c. Resident alien
2. Non-resident decedent
a. Non-resident alien

NOTE: Domestic and foreign corporations are subject only to donor’s tax and not to estate tax
because it is not capable of death but may enter into a contract of donation.

e. Gross estate and net estate

Gross Estate

The total value of all property, real or personal, tangible or intangible, the actual and beneficial
ownership of which was in the decedent at the time of his death (Sec. 85, NIRC).

Net Estate

Value of the estate after all deductions have been made against the gross estate; subject to the
graduated tax rates (Sec. 6, RR 2-2003).

The main distinction between the gross estate and the net estate is that the gross estate is the
totality of all the properties in which the decedent had an interest existing at the time of his death
while the net estate is what remains after subtracting from the gross estate the allowable
deductions. The gross estate is not subject to tax while the net estate is the basis for imposing
the estate tax.

f. Determination of gross and net estate

Determination of the 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. 85, NIRC).
 The same rule as the gross estate and afterwards subtracting the allowable deductions from the
gross estate.

NOTE: Before you can arrive at the value of the Net Estate, you have to determine first the value
of Gross Estate. The determination of the former is not separate from the determination of the
latter.

g. Items to be included in the gross estate

1. Decedent's interest

This 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.

The decedent’s interest includes any interest including its fruits, having value or capable of being
valued, transferred by the decedent at his death. Rental income from buildings and dividends
from investments, interest on bank deposits which have accrued at the time of his death qualify
as decedent’s interest which should be included in the gross estate.

2. Transfer in contemplation of death

It is a transfer motivated by the thought of impending death although death may not be imminent:

1. When the decedent has, at any time, made a transfer in contemplation of or intended to take
effect in possession or enjoyment at or after death; or
2. When decedent has, at any time, made a transfer under which he has retained for his life or for
a period not ascertainable without reference to his death or any period which does not in fact end
before his death:
a. Possession, enjoyment or right to income from the property; or
b. The right alone or in conjunction with any other person to designate the person who will
possess or enjoy the property or income there from.

XPN: In case of a bona fide sale for an adequate and full consideration in money or money’s
worth.

NOTE: The concept of transfer in contemplation of death has a technical meaning. This does not
constitute any transfers made by a dying person. It is not the mere transfer that constitutes a
transfer in contemplation of death but the retention of some type of control over the property
transferred. In effect, there is no full transfer of all interests in the property inter vivos.

3. Revocable transfer

It is a transfer by trust or otherwise, where the enjoyment thereof was subject at the date of his
death to any change through the exercise of a power to alter or amend or revoke or terminate
such transfer by:
1. Decedent alone;
2. By the decedent in conjunction with any other person without regard to when or from what
source the decedent acquired such power, to alter, amend, revoke or terminate; or
3. Where any such power is relinquished in contemplation of the decedent’s death other than a
bone fide sale for an adequate and full consideration in money or money’s worth (Sec. 85(C)(1),
NIRC).

The power to alter, amend or revoke shall be considered to exist on the date of decedent’s death
even though:

1. The exercise of the power is subject to a precedent giving of notice; or

2. 2. The alteration, amendment or revocation takes effect only on the expiration of a stated
period for the exercise of the power, whether or not on or before the date of the decedent’s
death a. Notice has been given b. The power has been exercised.

4. Property passing under general power of appointment

It is the right to designate by will or deed, without restrictions, the persons who shall succeed to
the property of the prior decedent. The appointment could be in favor of anybody, including
himself, his estate, his creditors, or the creditors of his estate.

NOTE: A power is specific if it can be exercised only in favor of one or more designated person or
classes of persons exclusive of the decedent, his estate, his creditors and creditors of his estate,
or if it expressly not exercisable in favor of the decedent, his estate, his creditors, or creditors of
his estate.

General Power of Appointment vs. Special Power of Appointment

General Power of Appointment Special Power of

As to nature Donee has the power to appoint any
person he chooses or enjoy the
property without restriction
As to tax implications Makes appointed property, for all
intents, the property of the donee;
thus, forms part of the gross estate of
the Donee
Appointment
Donee appoints the
successor to the property
who is within a limited group
or class of persons according
to the will of the Donor
Not includible in the gross
estate of the Donee when he
dies

As to effects Donee holds the appointed property Donee holds the appointed
with all the attributes of ownership property in trust or under the
under the concept of an owner concept of a trustee

5. Proceeds of life insurance

When the proceeds of an insurance policy considered as part or not part of the gross estate:
1. Part of the gross estate to the extent of the amount receivable when the beneficiary in a life
insurance is:
a. The estate of the decedent, his executor or administrator taken out by the decedent upon his
own life regardless of whether the designation is revocable or irrevocable; OR
b. A third person, other than the decedent’s estate, executor, or administrator provided that the
designation is not irrevocable

Under the Insurance Code, in the absence of an express designation, the presumption is that the
beneficiary is revocably designated. Notwithstanding the foregoing, in the event the insured does
not change the beneficiary during his lifetime, the designation shall be deemed irrevocable (Sec.
11, R.A. 10607).

2. Not part of the gross estate when:

a. Proceeds from a life insurance policy is receivable by a 3rd person (NOT the decedent’s estate,
executor or administrator) AND that the said beneficiary is designated as irrevocable;
b. Where the life insurance was not taken by the decedent upon his own life even though the
beneficiary is the decedent’s estate, executor, or administrator;
c. Accident insurance proceeds. NIRC specifically mentions only life insurance policies;
d. Proceeds of a group insurance policy taken out by a company for its employees;
e. Proceeds of insurance policies issued by the GSIS to government officials and employees are
exempt from all taxes;
f. Benefits accruing from SSS law; g. Proceeds of life insurance payable to heirs of deceased
members of military personnel.

6. Prior interests

Prior Interest are all transfers, trusts, estates, interests, rights, powers and relinquishment of
powers made, created, arising existing, exercised or relinquished before or after the effectivity of
the NIRC (Sec. 85, NIRC).

Coverage of prior interest

1. Transfers in contemplation of death

2. Revocable transfers
3. Life insurance proceeds to the extent of the amount receivable by the estate of the deceased,
executor or administrator under policies taken out by the decedent upon his own life or to the
extent of the amount receivable by any beneficiary not expressly designated as irrevocable

7. Transfers of insufficient consideration

When a transfer is for insufficient consideration, only the excess of the fair market value of the
property at the time of the decedent’s death over the consideration received shall be included in
the gross estate.

This is applicable to:

1. Transfers in contemplation of death

2. Revocable transfers
 3. Transfers under general power of appointment

NOTE: The above transfers should be made/exercised for a consideration in money/money’s

worth but is not a bona fide sale for an adequate and full consideration in money and money’s
worth.

It is also subject to Donor’s Tax if there is no reference to:

1. Revocable transfer
2. Contemplation of death
3. General power of appointment.

NOTE: It is subject to estate tax if the 3 instances mentioned are present (Sec. 100 in rel. to Sec
85[B], NIRC).

8. Share of the Surviving Spouse (Sec 85, NIRC)

a. Expenses, losses, indebtedness and taxes

b. Claims against the estate

Claims are debts or demands of a pecuniary nature which could have been enforced against the
deceased in his lifetime and could have been reduced to simple money judgments.

Sources of claims (CTO): 1. Contract 2. Tort 3. By Operation of law

Claims against the estate may be claimed as a deduction by a Filipino citizen, whether resident or
not, or of a resident alien decedent provided that:

1. At the time the indebtedness was incurred the debt instrument was duly notarized; and
2. If the loan was contracted within three (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 (Sec 86[A][1][c], NIRC).

The difference in the treatment of ELIT as deduction allowed to nonresident decedents is that in
the case of a nonresident not a citizen of the Philippines, ELIT is allowed such proportion of the
deduction allowed to resident decedents which the value of such part bears to the value of his
entire gross estate wherever situated
NOTE: Nos. 2, 3, 4 and 7- properties not physically in the estate (these have already been
transferred during the lifetime of the decedent but are still subject to payment of estate tax). They
are transfers inter vivos which are considered part of gross estate.

h. Deductions and exclusions from estate

Deductions for Resident Decedent

1. Standard deductions of Php 5million
2. Claims against the estate
3. Claims of the decedent against insolvent persons
4. Unpaid mortgages upon or any indebtedness in respect to, property where the value of
decedents interest therein, is included in the value of the gross estate
 5. Losses incurred during the settlement of the estate arising from fire, storms shipwreck or
otherwise
6. Property previously taxed
7. Transfers for public use
8. Family home – P 10M or less; if more shall be subject to estate tax

Deductions allowed to nonresident estates

1. Standard deduction PhP 500,000
2. Claims against the estate
3. Claims of the decedent against insolvent persons
4. Unpaid mortgages upon or any indebtedness in respect to, property where the value of
decedents interest therein, is included in the value of the gross estate
5. Losses incurred during the settlement of the estate arising from fire, storms shipwreck or
otherwise
6. Property previously taxed
7. Transfers for public purposes

EXCLUSIONS
Exclusions from estate under Sec. 85 and 86 NIRC:
1.Exclusive Property (capital/paraphernal) of surviving spouse (Sec. 85 (H), NIRC);
2. Property outside the Philippines of a non-resident alien decedent;
3. Intangible personal property in the Philippines of a non-resident alien if there is reciprocity.

i. Tax credit for estate taxes paid to a foreign country

Estate Tax Credit is a remedy against international double taxation to minimize the onerous effect
of taxing the same property twice.

Only the estate of a citizen or a resident alien at the time of death can claim tax credit for any
estate taxes paid in a foreign country.

Limitations in estate tax credit:

1. The amount of the credit in respect to the tax paid to any country shall not exceed the same
proportion of the tax against which such credit is taken, which the decedent’s net estate situated
within such country taxable under the NIRC bears to his entire net estate (per country basis); and
2. The total amount of the credit shall not exceed the same proportion of the tax against which
such credit is taken, which the decedent’s net estate situated outside the Philippines taxable
under the NIRC bears to his entire net estate (overall basis).

j. Exemption of certain acquisitions and transmissions

Transmissions exempted from the payment of estate tax

1. The merger of usufruct in the owner of the naked title
2. The transmission or delivery of the inheritance or legacy by the fiduciary heir or legatee to the
fideicommissary, Provided that:
 3. The transmission from the first heir, legatee or donee in favor of another beneficiary, in accordance
with the desire of the predecessor
4. All bequests, devises, legacies or transfers to social welfare, cultural and charitable institutions.
Provided:
i. no part of the net income of which inures to the benefit of any individual; and
ii. Not more than thirty percent (30%) of the said bequests, devises, legacies or transfers shall be
used by such institutions for administration purposes (Sec. 87, NIRC).

a. The substitution must not go beyond one degree from the heir originally instituted
b. The fiduciary or the first heir must be both living at the time of death of the testator.

k. Filing of notice of death (repealed under the TRAIN Law)

Notice of death required when:

1. Transfers subject to tax; or
2. Even if exempt from tax, if gross value of estate exceeds P20,000 (Sec. 89, NIRC).

It is filed within 2 months (60 days) after the decedent’s death or within the same period after
qualifying as executor or administrator.

It is filed by the executor, administrator, or any legal heir. It is filed to the CIR in order to inform him
that the estate of the decedent is subject to tax.

l. Estate tax return

Estate tax return required in cases of:

1. Transfers subject to tax; or
2. Regardless of the gross value of the estate, where the said estate consists of registered or
registrable property (Sec. 90[A], NIRC).

It is filed within 6 months from the decedent’s death (Sec. 90[B], NIRC). Extension to file an estate tax
return is allowed in meritorious cases but not to exceed 30 days (Sec. 90[C], NIRC).

The following shall file the estate tax return:

1. Executor
2. Administrator
3. Any legal heir

Filing of estate tax return

1. If it is a resident decedent - To an authorized agent bank, RDO, Collection Officer, or duly authorized
Treasurer in the city or municipality where the decedent was domiciled at the time of his death, or to
the Office of the CIR.
2. If it is a non-resident decedent - To the RDO or to the Office of the CIR (Sec. 90[D], NIRC).

Donor’s Tax

a. Basic Principles, concept and definition

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 (Art. 725, Civil Code).

Donor’s tax is an excise tax imposed on the privilege of transferring property by way of a gift inter
vivos based on pure act of liberality without any or less than adequate consideration and without any
legal compulsion to give.

Subject of donor’s tax:

The subject of donor’s tax is the gift or donation. Article 725 of the Civil Code defines a gift or donation
as “an act of liberality whereby a person disposes gratuitously of a thing or right in favor of another
who accepts it.”

The law in force at the time of the perfection/completion of the donation governs the imposition of
donor’s tax (Sec. 11, R.R. 2-2003).

Kinds of donations:

1. Donation inter vivos - a donation made between living persons. Its perfection is at the moment
when the donor knows the acceptance of the donee. It is subject to donor’s tax.
2. Donation mortis causa - a donation which takes effect upon the death of the donor. It is subject to
estate tax.

b. Nature, purpose and object

It is an excise tax on the privilege of the donor to give or on the transfer of property by way of gift
inter vivos. It is not a property tax.

Two-Fold Purpose of Donor’s tax:

1. To supplement estate tax
2. 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 taxation

c. Time and transfer of properties

The transfer of property by gift is perfected from the moment the donor knows of the acceptance by
the done; It is completed by the delivery either actually or constructively of the donated property to
the done. Thus, the law enforce at the time of the perfection/completion of the donation shall govern
the imposition of the donor’s tax

d. Requisites of a valid donation

Requisites for a gift to be taxable [ADIC]

1. Capacity of donor to donate
The donor’s capacity shall be determined as of the time of the making of the donation (Art. 737, NCC).
2. Donative Intent
NOTE: Donative intent is necessary only in cases of direct gift. If the gift is indirectly taking place by
way of sale, exchange or other transfer of property as contemplated in cases of transfers for less than
adequate and full consideration (Sec. 100, NIRC), not always essential to constitute a gift.

3. Acceptance by the donee

4. Actual or constructive Delivery of gift

e. Transfer which may be constituted as donation

1. Sale/exchange/transfer of property for insufficient consideration

Rule regarding transfer for less than adequate and full consideration:
GR: Where a property is transferred for less than adequate and full consideration in money or money’s
worth, the amount by which the FMV exceeds the consideration shall be deemed a gift and be
included in computing the amount of gifts made during the calendar year. It is as if the property was
donated but in order to avoid paying donor’s tax, the donor opted to transfer the property for
inadequate consideration.
XPN: Where property transferred is real property located in the Philippines considered as capital
asset, the transfer is not subject to donor’s tax but to a capital gains tax, which is a final income tax of
6% of the fair market value or gross selling pric e, whichever is higher, and therefore, there can be no
instance where the seller can avoid any tax by selling his capital assets below its FMV.

2. Condonation/remission of debt\

Rule regarding forgiveness/condonation of indebtedness:

If the creditor condones the indebtedness of the debtor the following rules apply: 1. On account of
debtor’s services to the creditor the same is in taxable income to the debtor. 2. If no services were
rendered but the creditor simply condones the debt, it is taxable gift and not a taxable income.

f. Classification of donor
1. Resident
a. Resident citizen
b. Non-resident citizen
c. Resident alien
d. Domestic corporation
2. Non-resident
a. Non-resident aliens
b. Foreign corporation

NOTE: A corporation, domestic or foreign, cannot be made liable to pay estate tax, but may be liable
to pay donor’s tax.

g. Determination of gross gift

Gross gifts – All property, real or personal, tangible or intangible, that was given by the donor to the
donee by way of gift, without the benefit of any deduction (Sec. 104, NIRC).

Net gift is the net economic benefit from the transfer that accrues to the donee.
h. Composition of gross gift

Included in the gross gifts:

1. For resident (RC, NRC, RA)
a. Real property wherever situated (within & without the Philippines);
b. Personal property wherever situated, tangible or intangible.
2. For non-resident (NRA);
a. Real property situated within the Philippines;
b. Personal property:
i. Tangible property situated within the Philippines
ii. Intangible personal property with situs in the Philippines unless exempted on the basis
of reciprocity

i. Valuation of gifts made in property

1. Personal property - the fair market value of the property given at the time of the gift shall be the
value of the gross gift.
2. Real property - the fair market value as determined by the CIR (zonal value) at the time of donation
or the value fixed by the assessor (assessed value), whichever is higher (Sec. 102).

j. Tax credit for donor’s tax paid to a foreign country

The donor’s tax imposed by the NIRC upon a donor who was a citizen or a resident at the time of
donation shall be credited with the amount of any donor’s taxes of any character and description
imposed by the authority of a foreign country.

Only donors who are citizens or residents at the time of the donation are entitled to claim tax credit.

Limitations on tax credit:

The following are the limitations to the tax credit:

1. The amount of credit shall not exceed the same proportion of the tax against such credit is taken,
which the net gifts situated within such country taxable under Philippine laws bears to the entire net
gifts (Per country basis)
2. The amount of the tax credit shall not exceed the same proportion of the tax against which such
credit is taken, which the donor’s net gifts situated outside the Philippines taxable under Philippine
laws bears to his entire net gifts (Overall basis)

Formula in computing the donor’s tax credit:

Lower of actual tax paid and the amounts derived by computing the tax limits as follows:

Limitation A (per country):

Net gifts (foreign country)__ X Phil. Donor’s tax

Net gifts (world)

Limitation B (by total):

Net gifts (outside Philippines) X Phil. Donor’s tax
Net gifts (world)

k. Exemption of gifts from donors tax

Transactions exempt 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 Government
2. Gifts in favor of an educational and/or charitable religious, cultural or social welfare organization,
trust or philanthropic organization or research institution or organizations
3. Certain gifts made by non-resident aliens Sec. 101[B], NIRC)
4. Donation of intangibles subject to reciprocity (Sec. 104, NIRC)
5. Donation for athlete’s prizes and awards (R.A. 7549)
6. Donation under the “Adopt-a-School Program” (R.A. 8525)

l. Person liable

Any person making a donation is required to file donor’s tax return unless the donation is specifically
exempted under NIRC or other special laws. He is required for every donation to accomplish under
oath a donor’s tax return in duplicate (Sec. 98, NIRC).

Donor’s tax return is filed within thirty (30) days after the date the donation or gift is made.

m. Tax basis

The tax for each calendar year shall be six percent computed on the basis of the total gifts in excess
of 250,000 exempt gift made during the calendar year.