Transfer Taxes

Source: Transfer and Business Taxation

Enrico D. Tabag and Earl Jimson R. Garcia
2022 Edition
Transfer Taxes
Imposed upon gratuitous disposition on private
properties or rights.

Gratuitous Transfers Transfer taxes

Transfer

Onerous Transfers Business taxes

Nature of Transfer Taxes

Transfer tax is classified as an excise tax. It shall not be construed as a

property tax.

Subject matter: PRIVILEGE of the transferor/donor to gratuitously

transfer property/rights which takes effect at the death of the transferor
(donation mortis causa) or during the lifetime of the donor and donee
(donation inter vivos)
 Transfer Taxes
ESTATE TAX

Gratuitous Transfers Transfer taxes

Transfer DONOR’S TAX

Onerous Transfers Business taxes

Transfer Taxes
Gratuitous Transfers may take effect:
at the time of death of the donor
OR
during the lifetime of both the donor and the donee.

Estate Tax (donation mortis causa) – takes effect at the time of death of the donor

Donor’s Tax (donation inter vivos) – takes effect during the lifetime of the donor
and the donee.
 ESTATE TAX

Source: Enrico Tabag: Transfer and Business Taxation

2022 Edition
 • - The first estate tax law in the Philippines which
took effect on July 1, 1916
• It imposes graduated estate tax rates computed on
Act 2601 the net inventoried property left by a decedent.

• The law imposing upon “every transmission by

virtue of inheritance, devise, bequest, gift mortis
Revised causa, or advance in anticipation of inheritance,
Administrative devise or bequest.
Code of the
Philippines
 • Took effect on January 1, 1998.
• It further restructured the tax base and tax
RA 8424 rates for both estate and donor taxes
“Tax Reform
Act” or the
NIRC

• Took effect on January 1, 2018.

• It substantially amended the estate tax law
by getting rid of the use of graduated tax
RA 10963 rates and changed it to a single rate of 6%
“Tax Reform for
Acceleration and of the net taxable estate.
Inclusion (TRAIN) Act”
Estate Tax

Why is there an Estate Tax?

Succession - is a mode of acquisition by virtue of which, the

property, rights, and obligations to the extent of the value of the
inheritance of a person are transmitted through his death to another or
others either by his will or by operation of law.
ELEMENTS OF SUCCESSION

Decedent
Estate – properties and/or rights and obligations
which are NOT EXTINGUISHED by death.

Successor/Heirs
Types of Succession

Testamentary

Intestate

Mixed
Requisites for a Valid Will
It must be in writing and executed in a language or dialect known
to the testator.
It must be subscribed at the end thereof by the testator himself
or by the testator’s name written by some other person in his
presence and by his express direction.
It must be attested and subscribed by three or more credible
witnesses in the presence of the testator and of one another.
The following are disqualified from being witnesses to a will (Art. 821
CC):
Any person not domiciled in the Philippines.
Those who have been convicted of falsification of a document,
perjury, or false testimony.
Intestate Succession (Legal Succession)

a type of succession which is effected by law since the decedent

did not executed a will or if the last will and testament executed
by him is void.

What causes an intestate succession?

Mixed Succession
a type of succession which is effected partly by “will“ and partly
by operation of law.
Types of Heirs
Compulsory Heirs
Primary
Secondary
Voluntary Heirs
Legal or Intestate Heirs
Types of Heirs

Compulsory Heirs or Forced Heirs

those who succeed by force of law to some portion of inheritance,
in an amount predetermined by law, known as legitime.
They cannot be deprived by the testator of their legitime except by
disinheritance properly effected.
 Decedent’s • To be inherited by:
Estate
• This portion of the estate is reserved by law
LEGITIME specifically for Compulsory Heirs,
regardless of whether a last will and
(i.e., 75% of the estate) testament was prepared.

FREE • As provided in the LWT

• In the absence of a will, this portion of the
PORTION estate shall be distributed to “intestate
(i.e., 25% of the estate) heirs” based in the order of priority.
ORDER OF INTESTATE SUCCESSSION

1. Legitimate Children or descendants

2. Legitimate parents or ascendants
3. Illegitimate children or descendants
4. Surviving Spouse
5. Brothers and Sisters, nephews and nieces
6. Other collateral relatives within 5th degree
7. State or the government
Disinheritance
Disinheritance
- a testamentary disposition by which a compulsory heir is deprived of, or
excluded from the inheritance to which he has a right.
- It is not applicable to voluntary heirs.

How should an heir be disinherited?

 Requisites for Disinheritance:
Effected only through a valid will
For a cause expressly stated by law
Cause must be stated in the will itself
Cause must be certain and true
Unconditional
Total (there is no partial disinheritance)
The heir disinherited must be designated in such a manner that there can be no doubt as to
his identity.
Voluntary Heirs – those instituted by the testator in his will to succeed to
the inheritance of the position thereof which the testator can freely dispose
(free portion).
Legal or Intestate Heirs – those who succeed to the estate of the decedent
by operation of law.

Note: Brothers and sisters are neither compulsory heir nor strangers. But the may be
voluntary heirs.
 Estate 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.
It is an excise tax imposed on the act of passing the ownership
of property at the time of death.
Taxpayer is the “Estate” of the decedent as a juridical person.
Law that governs the imposition of Estate Tax

It is a well-settled rule that estate taxation is governed by the statute

in force at the time of death of the decedent.

Example:
Decedent died before 2018 - within 6 months after death
Decedent died on or after Jan. 01, 2018 - within one year from
the date of death of the decedent.
The estate tax accrues as the date of death of the decedent and
the accrual of the tax is distinct from the obligation to pay the
same.

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.
Example:
Pedro died on November 1, 2022. His estate is composed of the following:
Cash in bank 1,000,000
Commercial building 5,000,000
Cars 1,000,000
House and Lot 3,000,000
Juan is the only heir of the decedent. The executor of Pedro’s estate filed the estate tax return
and paid the corresponding estate tax on April 30, 2023. The properties left by the decedent
were finally distributed to Juan on June 30, 2023.

When will the transfer of ownership from the decedent to the heir take effect?
When should the estate tax accrue?
November 01, 2022

Assume that Pedro’s total outstanding liabilities as of the time

of his death amounted to P 12M, how much of the outstanding
liabilities should be assumed by Juan?
P 10, 000,000.00
Note: the amount of liabilities to be assumed by the heir/s shall be limited only to the
extent of the value of properties and rights inherited.

Art. 774 of the Civil Code provides:

“Succession is a mode of acquisition by virtue of which, the property, rights, and obligation to the
extent of the value of the inheritance, of a person are transmitted through his death to another or
others either by his will or by operations of law.
Classification of Decedents
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

2) Tangible Personal property situated in the Philippines
• Non-resident Alien 3) Intangible personal property with situs in the Philippines,
unless excluded on the basis of reciprocity.
Reciprocity Clause
There is a reciprocity if:

The decedent at the time of his death was a resident citizen of a foreign
country which at the time of his death did not impose an estate tax of any
character in respect of intangible personal property of citizens of the
Philippines not residing in that foreign country;
OR
The laws of the foreign country of which the decedent was a resident
citizen at the time of his death allow a similar exemption from estate taxes
of every character, in respect of intangible personal property owned by
citizens of the Philippines not residing in that foreign country.
Properties considered situated in the Philippines
The following shall be considered as situated in the Philippines (for estate tax
purposes)
Franchise which must be exercised in the Philippines.
Shares, obligations or bonds issued by any corporation or sociedad anonima
organized or constituted in the Philippines in accordance with its laws.
Shares, obligations or bonds issued by any foreign corporation, 85% of the
business of which is located in the Philippines.
Shares, obligations, or bonds issued by any foreign corporation if such shares,
obligations or bonds have acquired a business situs in the Philippines.
Shares or rights in any partnership, business or industry established In the
Philippines.
 SITUS OF TANGIBLE AND INTANGIBLE
PROPERTIES
PROPERTY SITUS

• Real Property
Location of the property
• Tangible Personal Property

• Shares, franchise, copyright, Where the intangible is exercised regardless of

and the like. where the corresponding certificate is stored
• Receivables Residence of the debtor

• Bank deposit Location of the depository bank

Exercise: A decedent has the following properties. Check the appropriate box if included in the
gross estate.

Non-Resident Alien Decedent

Resident
Decedent Without With
Reciprocity Reciprocity
House and Lot, USA ✘ ✘
Condominium unit, Philippines
Furniture and appliances, Philippines
Car, USA, recently purchased ✘ ✘
Bonds, Philippines ✘
Common shares of stock not traded in the local stock
exchange, Philippine Corporation
✘
Preferred shares of stock, Foreign Corporation, 85% of
the business in the Philippines
✘
Illustration: A non resident alien decedent left the following estate:

House and lot – Hongkong, inherited before marriage P 15,000,000

Car, acquired during marriage in Cebu 1,500,000

Shares of stocks issued by a corporation, 20% of its operation is in the Philippines 250,000

Bank deposit with PNB branch in New York, New York representing income earned
500,000
during marriage
Shares of stock issued by PLDT Group of Companies, a corporation organized
500,000
under Philippine laws
5-year, 12% promissory note, received 2 years ago, during marriage. The debtor is a
500,000
resident of Q.C.

Case 1: Assume there is no reciprocity, what is the correct value of the GE?
Case 2: Assume there is reciprocity, what is the correct value of the GE?
Case 1: Assume the is no reciprocity, what is the correct value of the
GE?
House and lot – Hongkong, inherited before marriage P 15,000,000

Car, acquired during marriage in Cebu 1,500,000

Shares of stocks issued by a corporation, 20% of its operation is in the Philippines 250,000

Bank deposit with PNB branch in New York, New York representing income earned
500,000
during marriage
Shares of stock issued by PLDT Group of Companies, a corporation organized
500,000
under Philippine laws
5-year, 12% promissory note, received 2 years ago, during marriage. The debtor is a
500,000
resident of Q.C.
Interest Income (500,000 X 12% X 2 years) 120, 000

Gross Estate P 2, 620, 000

Case 2: Assume there is reciprocity, what is the correct value of the
GE?
House and lot – Hongkong, inherited before marriage P 15,000,000

Car, acquired during marriage in Cebu 1,500,000

Shares of stocks issued by a corporation, 20% of its operation is in the Philippines 250,000

Bank deposit with PNB branch in New York, New York representing income earned
500,000
during marriage
Shares of stock issued by PLDT Group of Companies, a corporation organized
500,000
under Philippine laws
5-year, 12% promissory note, received 2 years ago, during marriage. The debtor is a
500,000
resident of Q.C.

Gross Estate P 1, 500, 000

Valuation of the Gross Estate (as amended by RA 10963; RR 12-2018)

The estate of the decedent shall be appraised at

its fair market value at the time of his death.
Valuation of the Gross Estate
Specifically, the following rules shall apply in determining the valuation of the estate:

In General ▪ Fair Market Value (FMV) at the time of death

Real Property The higher value between:

▪ FMV determined by the Commissioner; and
▪ FMV determined by the provincial/city assessors
(assessed value)

Personal Property ▪ Fair Market Value (FMV) at the time of death

 Valuation of the Gross Estate
▪ Unlisted Common Share: Book Value per share of the issuing
corporation.
▪ Unlisted Preference Shares: Par Value per share
Shares of Stocks ▪ Listed Shares: FMV shall be the arithmetic mean between the
highest and lowest quotation at the date nearest the date of death if
none is available on the date of death itself.

Units of participation in any ▪ The bid price nearest the date of death published in any newspaper
association, recreation or or publication for general circulation.
amusement club (i.e golf, polo,
similar clubs)
▪ In accordance with the latest Basic Morality Table taking into
account the probable life of the beneficiary, to be approved by the
Right to usufruct, use, or
Secretary of Finance upon recommendation of the Insurance
habitation, and annuity
Commissioner.
Illustration: Pedro bought a brand new car with a cash price of
P 3,000,000. He bought the car on installment with the following
terms: Down payment of P 500,000 and annual installment of
P 700,000 for four years. On his way home, he run over an
approaching truck and died.

Determine the correct amount to be included in the gross estate of

the decedent. P 3,000,000
Mr. Bi Go granted a P 1,200,000 loan to his friend in December
2022 with a 10% interest per annum evidenced by a note, payable
after 3 years. In December 2024, he died due to heart failure.

Determine the correct amount to be included in the gross estate of

the decedent. P 1,440,000
Principal amount plus interest of 10% for 2 years
P 1,200,000 + (1.2M x 10% x 2 years)
Illustration: A decedent left 10,000 PLDT shares. The shares were traded in the
local stock exchange. At the time of death, the following were available:

Mean between the highest and lowest quotations P 500 per share
Book value P 350 per share

What is the value included in the decedent’s gross estate? P 5,000,000

Note: VALUATION OF SHARES OF STOCKS:

▪ If traded, FMV shall be the average between the highest and lowest
quotation nearest the date of death.
Book value per share (Common Ordinary Shares)
▪ If not traded,
Par value per share (Preference Shares )
Illustration: Illustration: A decedent left 20,000 PLDT shares. The shares were
traded in the local stock exchange. At the time of death, the following were
available:
Highest quotation P 300 per share
Lowest quotation P 100 per share
Book value P 150 per share
Determine the correct amount to be included in the gross estate of the
decedent.
P 4,000,000
20,000 shares x [(300+100)/2]
Illustration: Mr. Zekey Abello owns 100,000 ordinary shares of Alpha Company at the time of
his death. At that time, Alpha’s outstanding shares were 1,000,000 with P 10 par value and
Retained Earnings amounting to P 5,000,000. The shares are not traded in the stock exchange.
Determine the correct amount to be included in the gross estate of the decedent.

P 1,500,000
100,000 shares x P 15

𝑇𝑜𝑡𝑎𝑙 𝑆ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟 ′ 𝑠 𝐸𝑞𝑢𝑖𝑡𝑦 P 10M+5M

BVPS = = = 15
𝑂𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔 𝑆ℎ𝑎𝑟𝑒𝑠 1M
Exemptions and Exclusions from the Gross Estate
Exclusions under Sections 85 and 104 of the Tax Code
Exclusions under Section 87 of the Tax Code
Exclusions under Special Laws
Exclusions under Sections 85 and 104 of the Tax Code

Exclusive property of the Surviving Spouse

Property outside the Philippines of a Non-resident Alien
decedent.
Intangible personal property in the Philippines of a Non-
resident alien under Reciprocity Law.
Exclusive property of the Surviving Spouse
The Gross Estate in case of married decedents, is composed of:
Exclusive properties of the decedent
Common properties of the decedent and the surviving spouse.

Husband “Capital”
Exclusive
Properties

Wife “Paraphernal”

Whether such property is exclusive or common will depend on the type of

Property Relations or marriage settlement of the husband and wife.
 Format Computation:

UNMARRIED DECEDENT: MARRIED DECEDENT:

Gross Estate Pxx Gross Estate Pxx

LESS: Ordinary Deductions (xx) LESS: Ordinary Deduction (xx)
Special Deductions (xx) Special Deductions (xx)

Net Taxable Estate Pxx Net Estate before SSS Pxx

LESS: SSS (xx)
x Estate tax rate 6%
Net Taxable Estate Pxx
Estate tax due Pxx
x Estate tax rate (under TRAIN Law) 6%
LESS: Estate tax credit (xx)
ESTATE TAX DUE Pxx
Estate tax payable Pxx
LESS: Estate tax credit (xx)
Estate tax payable Pxx
Property outside the Philippines of a Non-resident Alien
decedent.

Intangible personal property in the Philippines of a Non-

resident alien under Reciprocity Law.