ESTATE TAX GUIDE

TRANSFER TAXES
TRANSFER TAXES are taxes imposed upon the gratuitous disposition

of private property.
a.
Benefits-Received Theory The State expects to be

paid or should be remunerated for the services that it
has rendered in a system of distribution or property.
b.
State Partnership Theory or Privilege Theory

Succession to the property of a deceased person is
not a fundamental right and consequently, the
legislature can constitutionally burden such
succession with a tax. The State is hailed to be the
silent-passive partner of the decedent in the
accumulation or increase of his wealth.
c.
Ability to Pay Theory Those who have more

properties to transfer to their heirs upon death shall
pay more estate taxes.
d.
Redistribution of Wealth Theory This is founded

upon the principle of reduction of social inequality.
The taxes paid by rich people are programmed for
disbursement by Congress more for the benefit of the
poor in terms of social services, education, health,
etc.
However, it is to be noted that even if the transfer is onerous, the

transfer may still be taxable, subject to income tax, VAT, percentage
and other sales tax.
Under the Tax Code, transfer taxes refer to:
1.
2.
ESTATE TAX (donation mortis causa) Tax levied on the

transmission of properties from a decedent to his heirs.
Estate tax is the tax on the privilege to transmit property
at death (mortis causa transfers) and on certain transfers
which are made the equivalent of testamentary
dispositions by the statute.
DONORS TAX (donation inter vivos) Tax levied on the
transmission of properties from a living person (donor) to
another living person (donee).
ESTATE TAX
I.
NATURE AND PURPOSE OF ESTATE TAX
Nature. Estate tax is laid neither on the property nor on

the transferor or the transferee. It is an EXCISE TAX or
PRIVILEGE TAX and its object is to tax the shifting of
economic benefits and enjoyment of property from the
dead to the living.
Purpose:
1.
The primary reason for all taxes is to raise revenues.
2.
To supplement income taxation because in the

absence of transfers of property from one hand to
another during the lifetime of a person, the
government cannot collect taxes. So, to supplement
this, there is estate tax.
II. APPLICABLE LAW IN ESTATE TAXATION
III. KINDS OF DECEDENT
3.
The law in force at the time of death of the decedent

governs. Succession takes effect at the time of death. By
operation of law, whatever properties are left by the
decedent is transmitted to the heirs or to the successors.
Therefore, taxability should be reckoned at the time of
death. Tax accrues at the point of death of the decedent
because it is at this time that his personality ceases.
In estate taxation, the primary liability for the burden of

tax falls upon the estate itself. For purposes of taxing the
estate, the estate is classified as to whether the decedent
is:
1.
Resident Citizen one who is a Philippine citizen and

a resident of the country;
2.
Resident Alien one who is not a Filipino but is

nonetheless residing in the Philippines;
3.
Non-Resident Citizen a Filipino who is not residing

in the Philippines; OR
4.
Non-Resident Alien one who is not a Filipino and is

neither a resident of the country but one who may
have identifiable properties left in the Philippines.
To prevent undue accumulation of wealth.
Inheritance Tax. Inheritance tax us a tax on the right of the

heirs or beneficiaries to receive the estate of the deceased
person. It is levied upon the part of an estate which each
heir receives. The law imposes only an estate tax.
Inheritance tax is no longer imposed. Both taxes have
been integrated into an estate tax. The rates of estate tax,
like income tax, are also progressive or graduated.
Tax Imposed on Estate. The estate is primarily liable for
the payment of the estate tax. But somebody (executor,
administrator or any legal heir) has to do the actual
payment. But the liability falls on the estate. The estate tax
imposed is different from estate income tax. The latter
covers for the income generated by the estate during
judicial settlement while the former covers the privilege of
transferring property gratuitously.
Residence. Residence: refers to the permanent home or

domicile, the place to which whenever absent, for
business or pleasure, one intends to return.
In Income Taxation, a Resident Alien is classified as such
according to whether or not he intends to make
Philippines his temporary home. However, in estate
taxation, residence shall mean domicile.
Justification of Estate Tax. There are four theories which

support the imposition of estate taxes, to wit:
T A X A T I O N II Pre Midterms| maru.mhealler|404
For purposes of income taxation, an alien becomes a

resident alien if his intention in the Philippines is not to
become a mere transient or sojourner. He has an
indefinite purpose of a lengthy stay in the Philippines,
thereby making the Philippines his temporary home.
residence of the owner. This principle, however, does not

apply (a) when it is inconsistent with express provisions of
a statute, or (b) when justice does not demand that it
should be, as when the property has in fact a situs
elsewhere.
Be reminded that the 180 day yardstick in income taxation

does not classify whether an alien has established
residence or not. It is only necessary to distinguish
whether the alien is engaged in trade or business or
otherwise.
Under the Tax Code, the following intangible personal

properties have situs 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 is such shares, obligations or bonds have
acquired business situs (i.e., they are used in
furtherance of its business in the Philippines by the
foreign corporation) in the Philippines;
5.
Shares or rights in partnership, business or industry

established in the Philippines (Sec 104, NIRC).
Therefore, in estate tax, there are only 2 categories for

purposes of knowing how to tax the estate:
1.
2.
RESIDENT OR CITIZEN
-
Resident : RC or RA
Citizen: RC or NRC
NON CITIZEN, NON RESIDENT = NRA
IV. PROPERTIES COVERED BY GROSS ESTATE, IN

GENERAL
Real
Personal Tangible
Personal Intangible
Resident, Non-Resident
Citizen, Resident Alien
Within and without
Within and without
Within and without
Non Resident Alien

Within
Within
Within
Rule)
(General
All properties and interests in properties of the decedent

at the time of his death shall be included in his gross
estate. The properties includible in the gross estate of the
decedent would depend on whether or not the decedent
is a citizen or alien and whether or not the alien decedent
is a resident of the Philippines at the time of his death.
Thus,
1.
Citizen and Resident Alien Decedent:
Reciprocity Rule as to Intangible Personal Property. A

decedents intangible personal property may be subject to
transfer taxes both in his place of domicile or residence
and in the place where such property has a situs or is
located. In order to prevent multiplicity of taxation, the
Tax Code provides that the tax imposed by this Title shall
be credited with the amounts of any estate tax imposed by
the authority of a foreign country, subject to limitation
(Sec. 86[E], NIRC).
The rule applies only in the case of intangible personal
properties belonging to a non-resident alien. So that if
reciprocity applies, these intangible personal properties
will not be included in the computation of the net estate
of the NRA.
(a) Real property wherever situated;

(b) Tangible personal property wherever situated;
(c) Intangible personal property wherever situated
2.
(b) Tangible personal property situated in the

Philippines
(c) Intangible personal property with a situs in the
Philippines, unless exempted on the basis of
reciprocity.
Intangible Personal Property. As a general rule, the situs of
intangible personal property is at the domicile or
RECIPROCITY RULE: No tax shall be imposed in respect to

intangible personal property of the NRA:
Non-Resident Alien Decedent:

(a) Real property situated in the Philippines;
In all other cases RA, RC, NRC their intangible personal

property will always form part of the gross estate.
(a) When the foreign country does not impose transfer

tax of any character in respect of intangible personal
property of citizens of the Philippines not residing in
that foreign country, or
(b) When the foreign country imposes transfer taxes but
grants similar exemption from transfer taxes in
respect of intangible personal property owned by the
citizens of the Philippines not residing in that foreign
country.
V. VALUATION OF THE GROSS ESTATE

The estate shall be appraised at its fair market value as of

the time of death since by fiction of law, property is
deemed to be transferred at such time.
Real Property. If the property is a real property, the fair

market value shall be the FMV as determined by the
Commissioner or the FMV as shown in the schedule of
values fixed by the provincial and city assessors, whichever
is higher.
Personal Property. Since there is no listing of FMV in the

directories of the BIR or the LGU, FMVs would be the FMV
in the market the price at which the seller is not
compelled to sell and the buyer is not compelled to buy.
In arriving at the estate tax payable, what will be covered

by the gross estate shall first be determined. Deductions
thereafter reduce the estate and the share of the surviving
spouse is removed to obtain the net estate. This is when
tax rates of 5-20% are multiplied to arrive at the estate tax
due.
Estate tax credits may be available which can be offsetted

against the estate tax due in order to arrive at the estate
tax payable. Note that tax credits shall not be available to
NRAs since they are not taxed for properties abroad.
VII. COMPOSITION OF THE GROSS ESTATE
Unlisted Shares of Stock. Unlisted common shares are

valued based on their book value while unlisted preferred
shares are valued at par value.
Shares Listed in the Stock Exchange. For shares which are
listed in the stock exchange, the FMV shall be the
arithmetic mean between the highest and lowest
quotation at a date nearest the date of death, if none is
available on the date of death itself.
VI. ESTATE TAX FORMULA, in brief

FORMULA ESTATE TAX
Less:
X
Less:
Gross estate
(1) Deductions
(2) share of surviving spouse
Net estate
Estate Tax Rates
Estate tax due
Tax Credits
Estate tax payable
1.
The decedents gross estate include the following:

1.
Decedents interest;
2.
Transfers in contemplation of death;
3.
Revocable transfers;
4.
Property passing
appointment;
5.
Proceeds of life insurance;
6.
Prior interests;
7.
Transfers for insufficient consideration;
8.
Capital of the surviving spouse (Sec. 85, NIRC)
Less:
Less:
Less:
Gross estate
(1) Cost
Gross Income
Deductions
Net Taxable Income
Tax Rates
Tax Due
Tax Credits
Income Tax Payable
2.
general
power
of
DECEDENTS INTEREST
VERSUS
FORMULA INCOME TAX
under
The general rule is that all property owned by

the decedent has to be included in the gross
estate, to the extent of the value of his interest
in such property at the time of his death. Thus, if
the decedent fully owns a piece of property, the
value of such property shall be included in the
gross estate. However, if he owns only a
proportionate share in the property, or is
entitled only to its use, it is only the value of
such share or such use that has to be included.
TRANSFER IN CONTEMPLATION OF DEATH

-
Transfers in contemplation of death cover those

which are transfers made during the lifetime but
are considered as part of the gross estate. If the
motive behind the transfer is due to an
impending death that he has been called or he
perceives, then the transfers may be in
contemplation of death and at the time of his
death it will be considered as transfer in
contemplation of death and it will be considered
as part of his gross estate subject to estate tax.
The term in contemplation of death mean that

it is the thought of death, as a controlling
motive, which induces the disposition of the
property for the purpose of avoiding the tax. The
decedent either has retained for his life or for

any period which does not in fact end before his
death (a) the possession or enjoyment, or the
right to the income from the property, or (b) the
right, either alone or in conjunction with any
person, to designate the person who shall
possess or enjoy the property or the income
therefrom, except in case of a bona fide sale for
an adequate and full consideration in money or
moneys worth.
-
The purpose of the law is to reach such transfers

and thus prevent the evasion of estate tax.
To be free from the estate tax, the transfer inter

vivos must involve actual transfer of ownership,
i.e., the transfer must be absolute with no
strings attached whatsoever by the transferor or
a bona fide transfer for an adequate and full
consideration.
Circumstances taken into account include:
So the transfer may be done days before, weeks

before, even years before so long as the motive
behind the transfer is the thought of an
impending death. Before there was a bench
mark of 3 years, if the transfer was made within
3 years, it will be considered as transfer in
contemplation of death. But now, the 3 years
has been scrapped off and it is based on the
motive behind
a.
Age and state of health of the decedent at

the time of gift, especially where he was
aware of a serious illness;
b.
Length of time between the gift and the

date of death. A short interval suggests the
conclusion that the thought of death was in
the decedents mind, and a long interval
suggests the opposite.
c.
Concurrent making of a will or making a

will within a short time after the transfer.
3.
To relieve the donor from the burden of

management;
b.
To save income or property taxes;
c.
To settle family litigated and unlitigated

disputes;
d.
To provide
dependents;
e.
To see the children enjoy the property

while the donor is alive;
independent
income
To protect the family from hazards of

business operations; and
g.
To reward services unrendered.
REVOCABLE TRANSFER
-
A revocable transfer is made when there is a

transfer of property with the transferor or
decedent retaining the rights to alter, amend,
terminate or revoke the transfer during his
lifetime whether or not such rights to revoke,
terminate, amend or alter has been exercised. So
long as that right remains until the day of his
death, it is still under the control of the
decedent, it is part of his properties because he
actually will enjoy the income, the rights and the
enjoyment of the property.
Revocable transfers is when there is a transfer of

property, the transferor having reserved the
rights to alter, revoke, amend or terminate the
enjoyment of the property by the transferee.
Example is a CONDITIONAL TRANSFER of a
property to an heir or another person and when
the transfer will sit or the transferee
predeceases, the property reverts back to the
transferor. It is a conditional transfer, revocable
transfer.
Transfers With Retention of Rights vs. Revocable

Transfers:
In revocable transfers, it involves the transfers
of property with the transferor reserving his
right to alter, amend revoke or terminate the
enjoyment of the property by the transferor, and
such property even if transferred will form part
of the gross estate even if the transfer has not
been exercised, the alteration, amendment, the
termination or the revocation of the property.
Point is, so long as the transfer will retain those
rights until the day of his death, it is as if he has
full dominion of his property and it is part of his
gross estate.
Motives associated with life that precludes the

category of transfer in contemplation of death
are:
a.
f.
With respect to transfers with retention,

transfer of a property still but with a retention or
reservation of some rights. Not totally the same
as revocable transfers but somewhat takes the
form of a revocable transfer because there is a
right that has been retained or reserved by the
transferor during the time that the property has
been transferred during his lifetime. So long as
the transfer has retained those rights until the
day of his death, he can still say that he the
transferor may have at anytime have taken back
the property. So its equivalent to full dominion
over the property, still part of his gross estate as
if there was no transfer made.
for
EXCEPTION TO THE RULE THAT INTER VIVOS

TRANSFERS
TAKING
THE
FORM
OF
TESTAMENTARY
DISPOSITION
SUBJECTED TO ESTATE TAX:
SHALL
BE
If the beneficiary is other than the estate,

executor, or administrator and the designation is
revocable (which is the default in the insurance
code), THE INSURANCE PROCEEDS FORM PART
OF THE GROSS ESTATE.
If the beneficiary is other than the estate,

executor, or administrator and the designation is
irrevocable, THE INSURANCE PROCEEDS WILL
NOT FORM PART OF THE GROSS ESTATE. The
transfer is absolute and the insured did not
retain any legal interest in the insurance.
When the transfer is made bona fide for an

adequate and full consideration in money or
moneys worth.
4.
PROPERTY PASSING
APPOINTMENT
-
5.
UNDER
GENERAL
POWER
OF
A power of appointment refers to a right to

designate the person or persons who shall enjoy
or possess certain property from the estate of a
prior decedent.
It is general when it gives to the donee the
power to appoint any person he pleases,
including himself, his spouse, his estate,
executor or administrator, and his creditor, thus
having as full dominion over the property as
though he owned it.
Note that as long as the beneficiary is the estate, executor,

or administrator, the insurance proceeds will ALWAYS
form part of the gross estate regardless of the manner of
designation.
The proceeds of life insurance are not taxable in the

following cases:
a.
It is special when the donee can appoint only

among a restricted or designated class of
persons other than himself.
Accident insurance proceeds. Tax Code specifically

mentions only life insurance policies;
b.
The power to dispose of property at death by

the exercise of a general power of appointment
is equivalent of ownership.
Proceeds of a group insurance policy taken out by a

company for its employees. The law speaks of policies
taken out by the decedent upon his own life;
c.
Proceeds of insurance policies issued by the GSIS to

government officials and employees are exempt from
all taxes;
d.
Benefits accruing under the SSS law;
e.
Proceeds of life insurance payable to heirs of

deceased members of military personnel
PROCEEDS OF LIFE INSURANCE
Beneficiary:
Estate/Executor/Admini
strator
Always part of the Gross Estate

6.
PRIOR INTERESTS
PART OF THE GROSS ESTATE: If

Beneficiary: Other than Revocable
Estate/Executor/Admini NOT PART OF THE GROSS
strator
ESTATE: If Irrevocable
Proceeds from life insurance are exempt from income tax

(Sec. 32-B, NIRC) but ARE NOT EXEMPT FROM ESTATE TAX.
The life insurance policy must be taken out by the

decedent himself. If it is not taken by the decedent
himself, it shall not be part of the estate.
Taxation of the proceeds of life insurance will depend on

the designated beneficiary and the manner of designation
of such beneficiary, such that:
-
If the beneficiary is the estate itself, the executor

or the administrator, IT FORMS PART OF THE
GROSS ESTATE.
7.
This is a catch all provision. The government is making sure

that everything will be considered in determining the gross
estate. So all transfers, trust estates, interests, rights,
powers and relinquishments of powers made before or
after the effectivity of the tax code will still be pulled in
together but it doesnt matter now in determining the
gross estate why the tax code is already in effect 12 years
ago.
TRANSFERS FOR INSUFFICIENT CONSIDERATION
If during the lifetime of the decedent, he has entered into

transactions for inadequate or insufficient consideration,
the property that was sold for insufficient consideration
will still form part of his gross estate at the time of his
death provided that no prior donors tax has been paid on
the said transaction.
The law does not provide for a time frame wherein

transfers may be classified as one with insufficient
consideration. For as long as it transpired during the
decedents lifetime, it should be included in the gross
estate.
estate taxation, it shall first form part of the gross estate.

But further on, it is a deduction. In effect, it will zero out
and the result is that it is not subjected to estate tax.
What will be included in the gross estate is only the

difference between the consideration and the propertys
FMV at the time of death. So as a rule, it is not the whole
amount of the property that is included because there was
consideration only that the consideration of the sale was
inadequate.
Example:
A motor vehicle valued at P 1M at the time of sale, was
sold for only P 100,000, you can say that this is insufficient
for the consideration is inadequate. At the time of death,
the FMV of the motor vehicle reduced to P 900,000. How
much will form part of the gross estate?
VIII.
ACQUISITIONS AND TRANSMISSIONS NOT
SUBJECT TO ESTATE TAX
1.
FMV during Transfer Php 1,000,000
Gross Selling Price
Php 100,000
FMV at the time of Death
Php 900,000
This involves a situation where upon the death of a

decedent, property is transferred to one person
(usufructuary) giving the latter the right to enjoy the
property, and to a second person (naked or beneficial
owner), the naked title to the property.
When the usufructuary dies and that the enjoyment of the

property is transferred to the naked owner (merger), this
transfer is not subject to estate tax because the same
property has already been subjected to tax upon the
decedents death. The transfer between the decedent and
the usufructuary has already been subjected to estate tax.
The subsequent transfer from the usufructuary to the
naked owner should be therefore no longer taxed.
Answer: Php 800,000 (Php 900,000 Php 100,000)
Example:
FMV during Transfer Php 1,000,000

Gross Selling Price
Php 100,000
FMV at the time of Death
Php 2,000,000
Property which
appreciate
2.
TRANSMISSION BY THE FIDUCIARY HEIR OR LEGATEES TO THE

FIDEICOMISSARY
This involves fideicomissary substitution wherein the

decedent provides in his will that upon the death of the
fiduciary heir, the property shall be transferred to the
fideicomissary heir.
The subsequent transfer (from fiduciary heir to

fideicomissary) shall be free from estate taxation because
the same property has already been taxed upon the first
transfer.
Answer: Php 1,900,000 (Php 2,000,000 Php 100,000)
These involve transfers or transmittals which do not give

rise to estate tax even though it is in some way connected
to someones prior death.
MERGER OR USUFRUCT IN THE OWNER OF THE NAKED TITLE
Property which
depreciate
But for properties which appreciate in value, it would be

more burdensome for the estate. If the FMV at the time of
death is P 2M, it was transferred for P 100,000. P
1,900,000 will form part of the gross estate of the
decedent.
In other words, it is part of the gross estate but it is also a

deduction against the gross estate.
These transactions are treated as if there is no transfer

actually made; only an advance payment which is the
insufficient consideration given to the decedent.
In transactions TANTAMOUNT TO A FICTITIOUS SALE OR

SIMULATED SALE, where no consideration was in fact
given, the entire FMV at the time of death will form part of
the gross estate of the decedent.
Decedent
Subject to Estate Tax
Fiduciary Heir
8. CAPITAL OF THE SURVIVING SPOUSE
This involves the exclusive properties of the surviving

spouse and his/her share in the conjugal property.
This is included first in the gross estate and later excluded

in the formula.
REPUBLIC ACT 4917
RA 4917 provides for retirement benefits. Retirement

benefits are exempt from income tax. But with respect to
NOT Subject to Estate Tax
Fideicommissary
This is actually a method of avoiding tax. Had there been

no provision in the will regarding the fideicomissary
st
substitution, the subsequent transfer between the 1 and
nd
2 heir would be subjected to estate tax.
3.
TRANSMISSION FROM THE FIRST HEIR, LEGATEE OR DONEE IN

FAVOR OF ANOTHER BENEFICIARY (in accordance with the
desire of the predecessor)
This contemplates a situation where the decedents will

provides that his property shall be transmitted to two
heirs proportionately. The subsequent transfer from the
st
nd
1 heir to the 2 heir will not be subject to estate tax if
such transfer was made in accordance with the will of the
decedent. This is so because the estate tax has already
st
been imposed on the 1 transfer.
Example:
If in the will of decedent A there will be two beneficiaries,
B and C, each given of the property, if B transfers his half
nd
to C thereby making the property whole, this 2 transfer is
NOT SUBJECT TO ESTATE TAX.
The other transmissions of property or receipts/proceeds

of the estate of the decedent that are not subject to estate
tax are the following:
a.
Benefits received from SSS or GSIS;
b.
Benefits
received
Administration;
c.
War benefits given by the Philippine government

and U.S. government due to damages suffered
during the war;
d.
Grants and donations

Administration;
e.
If the decedent holds a property in trust for

someone else, usually a beneficiary, the general rule
is that it does not form part of the estate of the
decedent because ultimately, it will be in favor of
the beneficiary, unless it falls under the general
power of appointment over which the decedent has
been holding on to it with the free reign to designate
himself as the ultimate beneficiary;
f.
Transfers by way of bona fide sales of adequate and

full consideration;
g.
Life insurance proceeds from GSIS and from private

insurance companies so long as the beneficiary
designated irrevocably is a third person other than
the estate, administrator, executor. It will never
form part of the gross estate of the decedent; anf
h.
Capital of the surviving spouse. Even if initially we

consider the assets of both spouses during lifetime,
we eventually exclude the exclusive properties of
the surviving spouse.
A
Subject to ESTATE TAX
Subject to ESTATE TAX
2nd Transfer
1/2
C
1/2
Not subject to ESTATE TAX!

B eventually transfers to C which causes the merger.
4. BEQUESTS, DEVISES, LEGACIES OR TRANSFERS TO SOCIAL

WELFARE, CULTURAL AND CHARITABLE INSTITUTIONS
In order for this transmission to be considered nontaxable, 3 requisites must be present:

a.
Transfer to a social welfare, cultural and charitable

institutions;
b.
No part of the income inures to the benefit of any

individual; and
c.
Not more than 30% of the said bequests, devises,

legacies or transfers shall be used for administrative
purposes.
This transfer also includes transmissions made to NONSTOCK, NON-PROFIT EDUCATION INSTITUTIONS. Although
not included in the enumeration provided for under the
NIRC, such exemption is provided for in Art. XIV, Sec. 4(4)
of the 1987 Constitution which provides that bequests to
be actually, directly and exclusively used for educational
purposes shall be exempt from tax.
5. OTHERS
NOTE: The first 200K of the net estate is exempt from

estate tax.
from
to
U.S.
the
Veterans
Intramuros
IX. DEDUCTIONS ALLOWED TO A CITIZEN OR A

RESIDENT
A.
EXPENSES, LOSSES, INDEBTEDNESS AND TAXES (ELIT)

1.
FUNERAL EXPENSES
For expenses to be considered under this category, such
expenses must be incurred from the moment of death
until interment.
The following are considered funeral expenses:
Mourning apparel of the surviving spouse and

unmarried minor children of the deceased,
bought and used on the occasion of the burial
Expenses for the deceaseds wake, including

food and drinks
Publication charges for death notices (obituaries)
Telecommunications expenses incurred

informing relatives of the deceased
in
Cost of burial plot, tombstones, monument or

mausoleum but not their upkeep. In case the
deceased owns a family estate or several burial
lots, only the value corresponding to the plot
where he is buried is deductible.
Interment and/or cremation fees and charges
All other expenses incurred for the performance

of the rites and ceremonies incident to
interment
In the case of funeral expenses, the amount allowable as

deductions is:
-
The amount actually paid or incurred, OR
5% of the gross estate, WHICHEVER IS LOWER
But in no case to exceed P 200,000
of the 200K threshold is NOT allowed to be claimed as a

deduction under claims against the estate. The claims
against the estate shall not include funeral expenses
because it has been categorized differently. So whatever
has been unsettled or any funeral expenses in excess of
what can be claimed, for example, the 50K, it remains as
funeral expenses not deductible from gross estate.
Gross estate
4M
Actual Funeral Expenses
250K
5% of gross estate
200K
Maximum limit of funeral expenses
3,000,000
Funeral expenses (Actual payment)
180,000
5% of the gross estate
150,000
Maximum deductible funeral expenses
200,000
In effect, in funeral expenses, there are three choices,

whichever is the lower of the three. Refer first to the
actual funeral expenses or 5% of the gross estate,
whichever is lower of the two but such amount must never
go beyond P 200K (the maximum funeral expense that can
be claimed as deductible against the gross estate).
In the example above, only P 150K can be claimed since it
is the lowest amount among the 3.
Funeral expenses NEED NOT BE PAID in order to be
deductible from the gross estate. It is sufficient that such
funeral expenses have been INCURRED.
Example:
Assuming gross estate is 4M. Actual funeral expense is
250K. 5% of the gross estate is 200K. Maximum limit is
200K. Of the 250K actual funeral expense, 200K is paid
while 50K is unpaid. However way you look at it, only 200K
funeral expense is deductible, which is the 200K actually
paid as well.
The 50K unpaid funeral expense cannot be categorized
under claims against the estate which is also deductible.
Because Revenue Regulations provide that the unpaid
portion of the funeral expenses incurred which is in excess
200K
Note that in order for funeral expenses to be deductible, IT

MUST BE INCURRED BY THE FAMILY MEMBERS. If the
funeral expense has been paid for voluntary or as a
donation by someone else, it cannot be deductible from
the estate. Such rule is also applicable to judicial expenses.
In other words, judicial and funeral expenses must be
shouldered by the immediate family; otherwise, such
expenses are not deductible against the estate.
2.
Deductible amount
50K unpaid
Not deductible
Example:
Gross estate
200K paid
JUDICIAL EXPENSES
These are incurred with respect to settlement of the
estate, testamentary or intestate. These expenses include:
fees of executor or administrator, attorneys fees, court
fees, accountants fees, clerk hire, costs of preserving and
distributing the estate, costs of storing or maintaining
property of the estate, brokerage fees for selling property
of the estate, etc.
In the case of CIR v. CA, CTA and Josefina Pajonar, the
court ruled that the notarial fee paid for the extrajudicial
settlement is clearly a deductible expense since such
settlement effected a distribution of Pedro Pajonars
estate to his lawful heirs. Similarly, the Attorneys fee paid
to PNB for acting as the guardian of Pedro Pajonars
property during his lifetime should also be considered
deductible as an administration expense. PNB provided a
detailed accounting of decedents property and gave
advice as to the proper settlement of the latters estate,
acts which contributed towards the collection of
decedents assets and subsequent settlement of the
estate.
It is irrelevant whether the settlement is judicial or
extrajudicial. So long as the expenses are in relation to the
settlement of the estate, they can be claimed as part of
judicial expenses.
In order for judicial expenses be deductible, they must be
incurred during the settlement of the estate but not
beyond the last day prescribed by law, or the extension
thereof, for the filing of the estate tax return. So expenses

within the 6 months period or within the 30 day extension
granted are still deductible as judicial expenses.
3.
If the settlement of the estate should take 10 years, losses

th
occurring on the 9 year are not deductible losses since
the losses must be incurred not later than the last day for
payment of the estate tax.
LOSSES
These are CASUALTY LOSSES losses which arose from
fires, storms, shipwrecks or other casualties or LOSSES
FROM ROBBERY, THEFT, OR EMBEZZLEMENT.
Such losses must occur during the settlement of the estate
but not later than the last day for payment of the estate
tax. This means that if there was a 30 day extension
granted, such loss which incurred during that period are
not deductible. Only losses incurred during the 6 months
filing period are deductible.
Losses before death are never deductible losses because
the computation of the gross estate is reckoned from the
decedents point of death and therefore does not
contemplate property that has been lost prior to his death.
Only losses occurring after death are deductible because
these are losses of properties that have already been
considered part of the gross estate and eventually lost.
The gathering of the gross estate should

commence on Nov. 12
4.
CLAIMS AGAINST THE ESTATE

These 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
judgment. They may arise out of contract, tort or
operation of law.
The requirements for the deductibility of claims against
the estate are:
a.
Must be a personal obligation of the deceased

existing at the time of his death (except unpaid
funeral expenses and unpaid medical expenses);
b.
Liability must have been contracted in good faith and

for adequate and full consideration in money or
moneys worth;
Requirements in order for losses to be deductible:

a.
Incurred after death and during the settlement

of the estate;
b.
Arose from fires, storms, shipwreck or other

casualties, or from robbery, theft or
embezzlement;
c.
e.
c.
The claim must be a debt or claim which is valid in law

and enforceable in court
d.
Indebtedness not condoned by the creditor or the

action to collect from the decedent must not have
prescribed
e.
General rule: Must be duly substantiated.
Must not be compensated by insurance;

-
d.
Otherwise, if its compensated by

insurance, its as if nothing has been lost.
Therefore, if insured, it cannot be deducted
against the gross estate. If there has been
partial insurance, only such part which has
not been insured can be deductible as
losses.
Are not claimed as a deduction for income tax

purposes in an ITR in favor of either the
decedent or the estate itself; and
Were incurred not later than the last day for
payment of the estate tax.
-
a.
Losses during the 30 day extension period

are no longer deductible.
Mr. A went abroad. He left his house unattended. He was

to come back on Nov. 12 but on Nov. 11, his house was
ransacked. His Nov. 12 flight met an accident. Mr. A died.
The casualty loss is not deductible from his

estate since it occurred prior to his death.
Just like funeral expenses, you cannot claim

funeral expenses w/o presenting receipts,
invoices for the costs.
If the claim against the estate arose from a contract of

loan or a promissory note, the following additional
requirements are needed:
The debt instrument must be duly notarized at the
time the indebtedness was incurred
-
Example:
Example of debt contracted in bad faith: When

the decedent obtained a loan at the time when
he knew that he will only be living for 2 months.
So such contracted debt will not form part of
claims against the estate.
Except: Loans granted by financial institutions

where notarization is not part of the business
practice/policy of the financial institution-lender
b.
Duly notarized certification from the creditor as to

the unpaid balance of the debt, including interest as
of the time of death
c.
Proof of financial capacity of the creditor to lend the

amount at the time the loan was granted, as well as
its latest audited balance sheet with a detailed
schedule of its receivable showing the unpaid balance

of the decedent-debtor
d.
mortgage or indebtedness, is included in the value of the

gross estate. The unpaid mortgages must be contracted
bona fide and for an adequate and full consideration in
money or moneys worth (Sec. 86[e], NIRC).
A statement under oath executed by the

administrator or executor of the estate reflecting the
disposition of the proceeds of the loan if said loan
was contracted within 3 years prior to the death of
the decedent.
Here, the decedent has mortgaged his property during his

lifetime. It is a payable on the part of the decedent in the
form of a mortgage wherein the decedent is a mortgagor.
Therefore, the estate should be reduced. It is likened to a
claim against the estate, only that it is in the form of a
mortgage.
If the claims against the estate arose from a simple

purchase of goods or services, it need not be substantiated
by a contract or a promissory note. They are usually
substantiated by invoices and receipts for the purchase of
the goods or services a certification from the creditor
still that the amount is collectible, including interest.
Requisites in order for unpaid mortgages to be deductible

against the gross estate:
a.
If the debt is condoned, the general rule is that it should

not be deductible.
-
5.
Except: If the debt is condoned after the death,

the same is deductible. Condonation should be
taken at the point of death. (This exception goes
against the lifeblood doctrine. Furthermore,
whether or not the condonation is before or
after the decedents death, such will not reduce
his estate. The most plausible view must be to
favour the lifeblood doctrine and that any
condonation of debt must be non deductible.
Nonetheless, the exception is upheld because of
jurisprudence.)
The value pertains to the propertys FMV at the

time of the death of the decedent on the
mortgaged property.
Where the indebtedness was secured by

mortgage of a real property situated outside the
Philippines, the value may not be deducted
because the same is not includible in the gross
estate for the reason that the decedent at the
time of his death was a non-resident alien.
In an accommodation mortgage, the value may

be deductible as long as the executor records
the same as a receivable. Otherwise, it is nondeductible.
CLAIMS AGAINST THE INSOLVENT

In claims against the insolvent, it is the decedent who is
the creditor who has extended a loan but can no longer
collect the loan because the debtor is already insolvent. A
person is insolvent when his liabilities exceeds his assets.
For claims against insolvent persons to be deductible from
the gross estate (Sec. 86(d), it is important to show that:
Such deduction shall be limited to the extent that

they were contracted bona fide and for an adequate
and full consideration in money or moneys worth, if
such unpaid mortgages or indebtedness were
founded upon a promise or an agreement;
a.
The amount of said claims has been initially included

as part of his gross estate; and
b.
The incapacity of the debtors to pay their obligations

is proven, not merely alleged.
CLAIMS AGAINST THE

ESTATE
Decedent is DEBTOR
Claim is a PAYABLE
Need not be included first
in the gross estate
6.
Value of the decedents interest in the property

encumbered by such mortgage or indebtedness is
included in the value of the gross estate;
CLAIMS AGAINST THE

INSOLVENT
Decedent is the CREDITOR
Claim is a RECEIVABLE
It is required that the value
of the decedents interest is
included first in the value of
the gross estate before
deducted.
UNPAID MORTGAGES OR INDEBTEDNESS

Unpaid mortgages upon, or any indebtedness in respect to
property shall be deductible from gross estate, where the
value of decedents interest therein, undiminished by such
10
b.
c.
The mortgage must be contracted during the lifetime

of the decedent.
-
7.
Where the decedent owned only of the

property mortgaged, only half of its value should
be included in the estate and thereafter
deductible. This is true even if the executor paid
the entire mortgage debt, inasmuch as the
executor would be subrogated to the rights of
the mortgagee as against the co-owner and comortgagor.
It must be a mortgage personally contracted by

the decedent. Otherwise, if the heirs were the
ones who mortgaged the property, the value is
not deductible.
UNPAID TAXES
Unpaid income tax upon income received after the death
of the decedent, or property taxes not accrued before his
death, or any estate tax shall not be deductible from gross
estate. The unpaid taxes must be contracted bona fide and

for an adequate and full consideration in money or
moneys worth (Sec. 86[e], NIRC).
Example: If decedent died on Dec. 8, 2011,

expenses must be incurred on Dec. 9 up to Dec.
8, 2011.
Requisites for unpaid taxes to be deductible against the

gross estate:
Leap years are irrelevant, that is to say that even

if decedent died on a leap year, the same
computation for the 1 year period applies.
a.
The taxes must have accrued as of the death of the

decedent or prior to the death of the decedent.
-
The reckoning point is the point of death. So all

taxes which accrue during the lifetime of the
decedent up to the point of death is considered
deductible against the gross estate. Note that
the gathering of the gross estate is always
reckoned upon the date of death. Any taxes
accruing after death will be considered as a
separate taxable entity.
b.
The expenses are duly substantiated with official

receipts for services rendered by the decedents
attending physicians, invoices, statements of account
duly certified by the hospital, and such other
documents in support thereof;
c.
Provided, that the total amount thereof, whether paid

or unpaid, does not exceed Five hundred thousand
pesos (P 500,000)
-
Property taxes accrued prior to the decedents

death, unpaid taxes on income received by
decedent during his lifetime, donors taxes which
are unpaid upon death are properly deductible
against the estate.
Income earned before death
Jan. 1
Any amount of medical expenses exceeding P 500K, even if

unpaid, shall not be allowed as deduction under the
medical expenses. Neither can this excess amount be
allowed to be deducted from the gross estate as claim
against the estate (same rule in funeral expenses).
The medical expenses need not pertain to the cause of

death of the decedent for it to be a deductible medical
expense. It can be for any type of illness and the cause of
death maybe any other illness, or accident, etc. for as long
as the requisites are present.
Income earned
after death
Nov. 17 (Death)
So all medical expenses, whether paid or unpaid,

for as long as they have been incurred are
considered.
Dec. 31
C. FAMILY HOME
Deductible
Non-deductible
The same rules apply to real property taxes.

However, the difference lies in the due date
when the real property taxes shall be paid. In
income tax, the taxes shall be due on or before
th
the 15 of April following the close of the
taxable year. Real property taxes are due once
every January 1.
b.
They were unpaid as of the time of death.
c.
This deduction shall not include income tax upon

income received after death, or property taxes not
accrued before his death, or the estate tax due from
the transmission of his estate.
B. MEDICAL EXPENSES
Requisites for deductibility of medical expenses:

a.
11
The expenses (cost of medicines, hospital bills, doctors

fees, etc.) were incurred within one (1) year prior to
the death of the decedent;
Family home means the dwelling house, including the land

on which it is situated, where the husband and wife, or a
head of the family, and members of their family reside, as
certified to by the Barangay Captain of the locality. The
family home is deemed constituted on the house and lot
from the time it is actually occupied as a family residence
and is considered as such for as long as any of its
beneficiaries actually resides therein (Arts. 152 and 153,
Family Code).
-
The family home consists of the house and the

lot on which the house is situated.
Only one family home can one person own.
Married individuals and heads of the family

whether single, widowed or divorced can claim
family home as a deductible item against the
gross estate.
For income tax purposes, the head of the family

no longer has a useful definition since all
individuals regardless of the status is entitled to
the personal exemption of P 50K. The difference
lies in whether a taxpayer has dependents which
entitles him/her to an additional exemption of P
25K for every dependent.
But for estate tax purposes, the definition of the

head of the family is still significant. A head of
the family is:
An individual who is single, legally

separated or widowed, etc. who is
chiefly supporting a child, whether
legitimate, illegitimate, legally adopted
or naturally acknowledged, not more
than 21 years of age, where such child
is not gainfully employed, unmarried
and he can be more than 21 if he is
mentally incapacitated or physically
disabled.
c.
An individual who is chiefly supporting

a parent living with him.
An individual who is supporting a

senior citizen whether or not related to
each other, provided that the latter be
60 years of age or above and not
earning more than P 5K a month.
b.
12
Only P 750K can be claimed as deduction

because the deductible amount is the actual
value of the family home or P 1M, whichever is
lower.
Decedent: Mr. A, married, owns a house worth P 300K and

lot worth P 500K.
For income tax purposes, among the 4 types of

dependents, only a child can entitle a taxpayer
to avail of the P 25K additional exemption. But
for estate taxes, if youre classified as a married
individual or single but head of the family, then
your family home can be considered as a
deductible item.
Gleaning from this requisite, the family home

must be located in the Philippines because of the
fact of need of a certification from the Barangay
Captain.
Only 1M can be deductible being the maximum

amount allowed.
Decedent: Mr. A, single but head of the family, owns a

house worth P 250K and lot worth P 500K.
Conditions for the allowance of family home as deduction

from the gross estate:
Examples:
An individual who is chiefly supporting

a brother or sister living with the
former, provided that the latter shall
be no more than 21 years of age,
unmarried and not gainfully employed.
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 where the family home is situated;
Any excess of the P 1,000,000 is subjected to

estate tax.
Decedent: Mr. A, single but head of the family, owns a

house worth P 750K and lot P 500K
An amount equivalent to the current or fair market value

of the decedents family home, whichever is higher:
Provided, however, That if the said current or fair market
value or zonal value exceeds one million pesos (P
1,000,000), the excess shall be subject to estate tax. As a
sine qua non condition for the exemption or deduction,
said family home must have been the decedents family
home as certified by the barangay captain of the locality
(Sec. 2, No.4, RA 7499)
a.
Allowable deduction must be in an amount

equivalent to the current fair market value of the
family home as declared or included in the gross
estate, or the extent of the decedents interest
(whether conjugal or community, or exclusive
property), whichever is lower, but not exceeding P
1,000,000.
Determine first whether the property is conjugal

or exclusive property.
If the house and lot are exclusive properties of

the decedent, the entire P 800K is deductible.
If both the house and lot are conjugal properties,

only P 400K [(300K/2) + (500K/2)] is deductible
because the division between the spouses is
always or 50% in the absence of a property
relation before marriage.
If the house is exclusive and the lot is conjugal, P

550K is deductible [300K + (500K/2)]
If the house is 1.3M conjugal and the lot is 500K

exclusive, the result obtained is 1.15M [(1.3M/2)
+ 500K] but since P 1M is the maximum
deductible amount, only P 1M can be claimed as
deduction.
D. PROPERTY PREVIOUSLY TAXED (VANISHING DEDUCTIONS)
Vanishing deductions or property previously taxed in

estate
taxation
refers
to
the
diminishing
deductibility/exemption, at the rate of 20% over a period
of five (5) years until it is lost after the fifth year, of any
property (situated in the Philippines) forming part of the
gross estate, acquired by the decedent from a prior
decedent or donor who died within a period of five (5)
years from the decedents death.
The total value of the family home must be included

as part of the gross estate of the decedent; and
The vanishing deduction, so-called because of the

diminishing exemption at the rate of 20% until it is lost
after the fifth year, is designed to mitigate the harshness
of successive taxation.
Vanishing deductions shall be allowed only under the

following conditions, to wit:
1.
Prior Transfer. There is a prior decedent or donor

who gave a property;
2.
Death. The present decedent died within 5 years

after receiving the inheritance from the prior
decedent or gift from the prior donor;
-
3.
5.
13
7.
Example: So if Mr. Z transmitted a parcel of land

to Mr. A, it should be the same parcel of land
that will form part of Mr. As gross estate.
Example: In order to claim for vanishing

deductions, the parcel of land must first be
included in the gross estate of Mr. A.
The value of the property shall be according to

the FMV at the time of death of the present
decedent. If at the time of the inheritance the
parcel of land was valued at 1M and at the time
of Mr. As death, the property is already valued
at 1.2M, the latter amount should be included in
the gross estate.
Previous Taxation of the Property. The estate tax on

the prior succession, or the donors tax on the gift,
must have been finally determined and paid by the
prior decedent or by the donor as the case may be.
Example: If the property transmitted by Mr. Z to

Mr. A was a motor vehicle which was located
previously in the US, the requirement is satisfied
for as long as during the death of the present
decedent, the subject property has already been
transferred in the Philippines. The motor vehicle
must be located in the Philippines as of Dec. 8,
2011 (Mr. As death).
Example: If Mr. A, a NRA decedent, has a motor

vehicle located in the US at the time of his death.
It was transmitted as an inheritance to Mr. B, a
RC who died within 1 year from receiving the
motor vehicle. The motor vehicle was already in
the Philippines at the time of death of Mr. B.
Vanishing deductions shall not be allowed in this
case. Even if the property has indeed been
transferred in the Philippines, the problem is
that Mr. A, when he died as a NRA, all his
properties located outside of the Philippines are
not covered by Philippine estate taxation, which
means that the transfer has not been subjected
to a prior transfer tax.
Limitations as to amount of deduction allowable:
1.
Value of the property The deduction is limited by the

value of the property previously taxed (prior decedents
estate) or the value of such property in present decedents
gross estate, whichever is lower.
-
In including the value of the property in the

gross estate, the FMV at the time of death shall
be the basis. However, this is not the case in
obtaining for the initial basis of the vanishing
deductions allowed. The value shall be prior or
present FMV, whichever is lower.
Example: Lets say that the FMV at the time of

the inheritance was 1 M and at the time of
death, the FMV was 1.2M. To obtain the initial
basis, the FMV of 1M shall be used being the
lower amount.
Example: When Mr. Z transmitted the property

to Mr. A by inheritance, the proper estate tax
should have been paid.
No Previous Vanishing Deduction on the Property.

No such deduction on the property, or the property
given in exchange therefore, was allowed in
determining the value of the net estate of the prior
decedent. This limitation is intended to preclude the
application of vanishing deduction on the same
property more than once (Sec. 86[A][2], NIRC).
Example: Should Mr. Z also acquire the same

property by inheritance or donation last Aug. 8,
2007 (Aug. 8, 2007 until Dec. 8, 2011 is still
within the five year period. For purposes of this
requirement, if there had been two transfers,
such transfers must have transpired within 5
years of each other.), Mr. Z should not have
claimed vanishing deductions for the same
property in the computation of his estate tax if
Mr. A should be allowed to claim the such
deductions. If Mr. Z had already claimed
vanishing deductions over the parcel of land, Mr.
A can no longer claim for vanishing deductions
over the same property. Vanishing deduction
shall be allowed only once.
The property should be located in the Philippines.
Inclusion of the Property. The property must form

part of the gross estate of the present decedent.
6.
Example: Mr. A, present decedent, died on Dec.

8, 2011, has previously acquired a parcel of land
through inheritance from Mr. Z last Aug, 2008. In
order for the rules on vanishing deductions to
apply, the present decedent must have died
within 5 years from such inheritance.
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;
-
4.
2.
Deduction for mortgage or other lien. The initial value

above shall be reduced by the total amount paid, if any, by
the present decedent, on any mortgage or other lien on
the property where a deduction was allowed.
-
3.
FMV (prior or present, whichever is lower) 1M

Less
This happens when the property transmitted by

inheritance or donation has an accompanying
mortgage or lien. The value of the property is
reduced by any amount paid by the present
decedent with respect to the mortgage that was
taken by the prior decedent. This is because
what the present decedent inherited is not really
the full value of the property because of the
accompanying mortgage.
Example: If theres no mortgage payments
made, the value of P 1M in #1 above is carried
over. At this point, we have the INITIAL BASIS.
Less
Example: If the total gross estate is 5M, the

initial basis of 1M shall be divided by 5M. The
ratio obtained is 20%. This ratio shall be
multiplied with the ELIT and TFPU. Lets say we
have ELIT of 500K, multiplied by 20%, the second
deduction is 100K (500K x 20%).
E.
F.
In this case, 1M 100K = 900K (FINAL BASIS)
100% if the present decedent dies within 1 year,
80% if the present decedent dies more than 1 year

but not more than 2 years,
60% if the present decedent dies more than 2 years

but not more than 3 years,

but not more than 4 years

but not more than 5 years
-
Example: If the present decedent dies within 1

year, the full amount of 900K is deductible (900K
x 100%). If the present decedent died more than
4 years after the death of the first decedent,
only 180K is deductible (900K x 20%)
1M
Pro rata deductions [(1M/5M) x 500K ELIT) (100K)
Vanishing Deduction Rate
G.
900K
x 20%
180K
AMOUNT RECEIVED BY HEIRS UNDER RA 4917
Any amount received by the heirs from the decedents

employer as a consequence of the death of the decedentemployee in accordance with RA 4917. This law provides
that retirement benefits of private employees shall not be
subject to attachment, levy, execution or any tax
PROVIDED that such amount is included in the gross estate
of the decedent.
So it zeroes out in the end. The amount received by the

heirs under RA 4917 is deductible so long as such amount
has been included as part of the gross estate, otherwise,
not part of the gross estate, not deductible. In the end, its
not a taxable asset of the decedent or the estate.
STANDARD DEDUCTION
An amount equivalent to 1M shall be deducted from the

gross estate without need of substantiation
Standard deduction shall be considered as automatic

deduction against the gross estate of a decedent and if the
decedent is a married individual, it is considered as a
conjugal deduction shared by both spouses so
effectively, only half.
Percentage of Deductions The vanishing deduction shall

be the value in #3 multiplied by the following percentage
of deduction:
INITIAL BASIS
VANISHING DEDUCTION ALLOWED
The INITIAL BASIS in #2 shall be further reduced

by the deductions in #3 to obtain the FINAL
BASIS.
4.
(0)
FINAL BASIS
Deduction for expense, losses, indebtedness, taxes,

transfers for public use The value as reduced above shall
be further reduced to the extent of the pro rata
deductions based on the principle that a portion of the
expenses (ELIT and TFPU) pertains to the percentage of
the property inherited for vanishing deduction over the
total gross estate.
-
Mortgage payments
TRANSFERS FOR PUBLIC USE
The whole amount of all the bequests, legacies, devises or

transfers to or for the use of the Government of the RP, or
any political subdivision thereof, for exclusively public
purposes shall be deductible from gross estate, provided
such amount or value had been included in the gross
estate.
The transfers to the government or political subdivisions

include only provinces, cities, municipalities and
barangays. IT DOES NOT INCLUDE GOCCs.
For bequests to charitable institutions, social welfare, etc.,

they are not deductible since in the first place, they are
exempt transmission of property. In other words, they are
not includible in the gross estate. Unlike a deduction which
must first be included as part of the gross estate and
subsequently deducted.
In sum, the computation above is as follows:
14
H.
If the TFPU has been previously made during the lifetime

and prior to the death of the decedent, it will not form
part of the gross estate of the decedent.
XI. NET ESTATE AND ESTATE TAX RATES

OVER
Not all transmissions to the government are deductible.

What is contemplated under the law are transfers for
public use, if the purpose is private, it is not deductible.
200,000
500,000
2 million
5 million
10 million
TFPU are allowable deduction in order to encourage

decedents to put into writing or in the will or to make
transfers to the government, to give them incentives such
as deductions and exemptions from tax.
BUT NOT
OVER
TAX IS
PLUS
OF THE
EXCESS
OVER
200,000
500,000
2 million
5 million
10 million
And over
Exempt
0
15,000
135,000
465,000
1,215,000
5%
8%
11%
15%
20%
200,000
500,000
2 million
5 million
10 million
SHARE OF SURVIVING SPOUSE IN CONJUGAL PROPERTY
The share in the conjugal or community property of the

surviving spouse on such estate is deductible.
A.
X. DEDUCTIONS ALLOWED TO A NON-RESIDENT

ALIEN
In the case of NRA, where the estate situated only in the

Philippines is subject to the tax, the deductions are limited
to
a.
EXEMPTION FROM ESTATE TAX
The first P 200,000 value of the net estate is exempted

from tax.
The net estate is simply the gross estate less the

deductions (including the surviving spouses conjugal
share)
Example: If we have a net estate of P 5,404,000, the tax

due is:
The proportion of the ELIT which the value of his

gross estate in the Philippines bears to his entire
gross estate wherever situated;
-
Not the entire ELIT of the estate is deductible.
Example: Decedent: Mr. A, NRA

Global Estate:
100M
Phil Estate:
20M
465K + (15% of 404,000) = 525,600

B.
ESTATE TAX CREDITS
In income taxation, only RCs are allowed to offset foreign

income taxes against Philippine income tax while others
are not allowed to claim income tax credits.
However, in estate taxation, only NRAs are not allowed to

offset foreign estate tax against Philippine estate tax while
all others are allowed to claim estate tax credits in order to
lessen the burden of double taxation on properties that
are located outside the Philippines. For NRAs, the
Philippine estate tax due would only refer to properties
located in the Philippines, so theres no risk of double
taxation.
Funeral Expenses: 500K

Allowable ELIT deductions
= (20M/100M) x 500K
= 20% x 500K
= 100K
b.
Vanishing deductions on the property located in the

Philippines previously taxed (estate or donors tax)
also gradually diminishing at the rate of 20%
annually until the fifth year; and
-
Provided that the 7 requisites are present.
c.
Transfer for public purposes to the Philippine

Government or its political subdivisions.
d.
Conjugal share of the surviving spouse
The NRA cannot claim deductions for family home,

standard deduction, medical expenses, and amounts
received under RA 4917.
The NRA cannot deduct family home because he cannot

be considered to have a domicile or family home in the
Philippines.
15
RC
NRC
RA
NRA
Income Tax Credits
X
X
X
Estate Tax Credits
Formula:
ESTATE TAX PAYABLE = Philippine Estate Tax Due Foreign Tax

Credits
For estate tax credits, you cannot automatically deduct the

actual estate taxes paid abroad. We have to observe
whichever is lower between the actual foreign estate tax
paid as against the limitation per country and as against
the global imitation for the worldwide estate.
Limitations:
PER COUNTRY LIMITATION
A. SINGLE DECEDENT
GLOBAL or OVERALL LIMITATION
Mr. A, single, no dependent, died on Nov. 22, 2010
Example: Mr. X, RC
PHILIPPINES
COUNTRY A
COUNTRY B
GROSS
ESTATE
8M
7M
5M
20M
NET
ESTATE
5M
3M
2M
10M
TAX DUE
1.215M
500K
200K
LIMITATION
607,500
364,500
243,000
Global Tax Credit Allowed is

564,500 (200K + 364,500) being
the lower amount as against
607,500.
1) Decedents interest
- Real property
- House and lot (inherited from Mr. Z, father)
FMV, Nov. 23, 2007 (Mr. Zs death)
w/ unpaid mortgage
- Personal properties
Php 4M
Php 2MFMV today)
Php 1.5M
Php 100K
Php 3M
2) Previous transfers
- Revocable transfer
(Date of transfer: Nov. 27, 2008)
- Property sold
(Date of sale: Dec. 15, 2005)
of sale)
FMV Dec. 15, 2005
time of sale)
FMV Nov. 22, 2010
time of death)
Php 1M
Php 100K (consideration
Php 1,200,000 (FMV at
Php 1,100,000 (FMV at
PER COUNTRY LIMITATION

NE COUNTRY A
WORLDWIDE NE
PHIL ESTATE TAX DUE = LIMITATION
3M/10M
1.215 M =
364,500 (Country A)
2M/10M
1.215 M =
243,000 (Country B)
GLOBAL LIMITATION
FOREIGN COUNTRIES NE
WORLDWIDE NE
5M/10M
1.215 M =
PET DUE = LIMITATION
607,500 (Global Limit)
XII. GROSS/NET ESTATE OF A DECEDENT
Less:
Gross estate
Deductions
share of surviving spouse
Net estate
Estate Tax Rates
Estate tax due
Less: Tax Credits
Estate tax payable
16
3) Others (amounts expected to be received by heir after death)

- Life Insurance proceeds (estate is the beneficiary) Php 1.5M
- Amount received under RA 4917
Php 1M
- Receivable from Mr. B, Bankrupt
Php 500K
4) Expenses
- Funeral expenses
- Judicial expenses
- Casualty losses on Nov. 23, 2010
death)
- Outstanding bank loan (date of death)
(duly supported by a notarized document)
Principal
Interest
- Unpaid mortgage taken out by Mr. Z (father)
and paid by Mr. A during his lifetime
unpaid mortgage that is deductible
- Accrued income taxes as of the date of death
Php 250K
Php 250K
Php 500K(A day after
Php 700K
Php 100K
Php 100K note: not the
Php 150K
GROSS ESTATE:
Real Property
4M
House and lot, inherited from Mr. Z
2M
Personal properties
3M
Revocable transfer
1M
Property sold
1M
Life insurance proceeds
1.5M
Amounts received under RA 4917
1M
Receivable from Mr. B, insolvent
500K
TOTAL GROSS ESTATE:
14M
EXPENSES:
NET ESTATE:
- Receivable from Mr. B, declared Bankrupt
Php 500,000
Given Expenses
- Funeral expenses
- Judicial expenses
- Casualty losses on Nov. 23, 2010
Principal
Interest
- Unpaid mortgage taken out by Mr. Z (father)
and paid by Mr. A during his lifetime
- Accrued income taxes as of date of death
Php 250,000
Php 250,000
Php 500,000
Php 700,000
Php 100,000
Php 100,000
Php 150,000
TOTAL GROSS ESTATE

Less:
ELIT:
Funeral expenses
Judicial expenses
Casualty losses
Claims against the estate
Claims against insolvent
Unpaid taxes
Vanishing deduction
Standard deduction
RA 4917
TOTAL NET ESTATE
14,000,000
(2,400,000)
[200K]
[250K]
[500K]
[800K]
[500K]
[150K]
(696,000)
(1,000,000)
(1,000,000)
8,904,000
VANISHING DEDUCTIONS:
B. MARRIED DECEDENT
Given:
- House and lot (inherited from Mr. Z, father)
w/ unpaid mortgage
Php 2,000,000
Php 1,500,00
Php 100,000
Mr. A, RC, married, no dependents, died on Nov. 22, 2010

1) Decedents interest
- Real property (conjugal)
4M
- Agricultural land
H&L (Lesser FMV)
Less: Unpaid Mortgage
Equals: Initial Basis
Divided: Gross Estate
Proportionate Deduction Percentage
1,500,000
100,000
1,400,000
14,000,000
10%
(inherited from Mr. Z, father during marriage) 2M

- Personal properties (exclusive)
1.5M
3M
- Family home, lot (exclusive) 600K & house (conjugal) 900K
ELIT Expenses
Multiply: Proportionate Deduction Percentage
Proportionate Deduction Allowed
2,400,000
10%
240,000
Initial Basis
Less: Proportionate Deduction Allowed
Basis of Vanishing Deduction
X Percentage of Deduction Level (at 3 years)
Vanishing Deduction
1,400,000
240,000
1,160,000
60%
696,000
2) Previous transfers
- Revocable transfer (conjugal) (Date of transfer: Nov. 27, 2008)
1M
- Property sold (exclusive) (Date of sale: Dec. 15, 2005) 100K
consideration
FMV Dec. 15, 2005
1.2M
FMV Nov. 22, 2010
1.1M
3) Others (all conjugal)

- Amount received under RA 4917
1M
- Receivable from Mr. B, judicially declared Bankrupt 500K
17
4) Expenses
2.
Family home (house) 900K
- Funeral expenses
250K
3.
Revocable transfer 1M
- Judicial expenses
250K
4.
Amounts received under RA 4917 1M
- Casualty losses
500K
5.
Receivable from Mr. B judicially bankrupt 500K

Principal
700K
Interest
100K
- Unpaid mortgage taken out by Mr. Z and paid by Mr. A during his
lifetime
100K
- Accrued income taxes, date of death
TOTAL 7,400,000
Total conjugal ordinary deductions:

1.
Funeral expenses 200K
2.
Judicial expenses 250K
3.
Casualty losses 500K
4.
Accrued income taxes 150K
5.
Claims against insolvent 500K
6.
Claims against the estate 800K
150K
ANSWER:
Exclusive
6,600,000
Conjugal
7,400,000
Total
14,000,000
(Total
property/Gross
estate)
[2,400,000]
(Total
conjugal
ordinary
deductions/expenses)
5,000,000 (net conjugal
estate)
[2,500,000]
(Exclusive
deductions/expenses as
share of the surviving
spouse)
[1,000,000]
(Standard
deduction)
6,600,000
[696,000] (Vanishing
deduction)
[600,000]
5,304,000
1. [Gross conjugal properties Total conjugal

ordinary deductions]/2 (as share of surviving spouse)
= Exclusive deductions
Exclusive deductions = [7,400,000

2,400,000]/2 = 2,500,000
-
(Family home)
Initial basis = 1.5M 100K = 1.4M
Final basis = 1.4M [(1.4M/14M) x

2.4M) = 1.16M
3.
Vanishing deduction = Final basis x 60%
Vanishing deduction = 1.16M x .6 =

696,000
1.
Agricultural land inherited from Mr. Z 2M
2.
Personal properties 3M
Rules in Property Ownership between Spouses
3.
Family home (lot) 600K
4.
Property sold 1M (1.1M-100K)

TOTAL 6,600,000
Gross conjugal properties:

1.
18
Initial basis = FMV unpaid mortgage
2. Final basis = Initial basis [(Initial basis/gross

estate) x ELIT]
5,404,000 (Net
taxable estate)
Gross exclusive properties:
Vanishing deductions:
1.
Computations:
-
Exclusive deductions:
[400,000]
[1,000,000] (RA 4917)
100,000
TOTAL 2,400,000
In the absence of any other facts contradicting, we use absolute

community of property on the assumption that marriage took
place after the effectivity of the new FC. Under the absolute
community of property, whatever you bring into marriage is
usually considered as conjugal. What remains as exclusive is
when during marriage, one of the spouses receives a donation
or an inheritance and there is no indication that such property
belonged to the spouses, it will be considered as exclusive.
Real property 4M
In conjugal partnership of gains, whether during marriage or

before marriage, any inheritance or donation received will be
considered as exclusive property of such spouse. Any property
brought into marriage is still exclusive property of the spouse.
amount not exceeding 20K without the said

certification (Sec. 97, NIRC).
-
Expenses more often than not are considered as conjugal

expenses/conjugal deductions. Even to the extent of standard
deduction of 1M, it shall be offsetted against the conjugal
property but its not an expense. Standard deduction is an
arbitrary amount deducted.
What will become exclusive deduction or expenses are those
expenses incurred on an exclusive property. So if its an
encumbrance or a mortgage taken out by the spouse on an
exclusive property, such expense would be exclusive. If its a
vanishing deduction on an exclusive property, such vanishing
deduction is also exclusive. It will not reduce the conjugal
property. This issue becomes relevant because we really have
to know how much is the net conjugal estate for purposes of
taking out the 50% belonging to the surviving spouse.
C.
Obituary is sufficient notice to the bank.
FILING OF THE ESTATE TAX RETURN
The estate tax return shall be filed within 6 months from

the date of death, unless the period is extended for not
more than 30 days by the Commissioner on meritorious
grounds.
Instances when an estate tax return is required:

1.
Whenever the decedent has left property and the

transmission of property would result to an estate
tax liability. In all transfers where an estate tax has to
be paid, meaning more than the first 200K net estate,
an estate tax return has to be filed.
2.
Whenever the gross value of the estate exceeds

200K, an estate tax return is to be filed even if
youre not liable for estate tax.
XIII. ADMINISTRATIVE MATTERS

A.
NOTICE OF DEATH
Notice of death is not necessary in all cases. The

Commissioner shall be notified of the fact of death in the
following cases:
1.
In all cases of transfers subject to tax, OR

-
2.
B.
Notice of death shall be necessary when the

death of the decedent would result to estate
taxation, meaning it will be subject to tax
beyond the 200K limitation.
Where, though exempt from tax, the gross value of

the estate exceeds 20K
-
3.
Even if the estate is not subjected to tax for as

long as the gross value of the estate exceeds
20K, a notice of death shall be necessary.
Purpose. For purposes of the government to be prepared

in computing for the estate tax.
The notice of death shall be given to the Commissioner or

his/her alter ego within two months after the decedents
death or within a like period after the executor or
administrator qualifies as such.
When a bank has knowledge of the death of a person who

maintains a bank deposit account, it shall not allow any
withdrawal from such account. In effect, pending the
settlement of the estate, the decedents account having
deposits/funds is thereby freezed.
-
19
EXCEPTION: When the Commissioner has

certified that the estate taxes have been paid or
that the heirs of the decedent may, upon
authorization by the Commissioner, withdraw an
Example: Decedents gross estate is 250K. This is

not a taxable estate since in view of the standard
deduction of 1M, taxability does not result.
Nonetheless, the law requires for an estate tax
return to be filed in such instance in order for
the government to monitor whether or not the
gross estate is indeed subject to estate tax.
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 BIR is required as a condition
precedent for the transfer of ownership thereof in
the name of the tranferee.
-
BANK DEPOSITS OF A DECEDENT
Such exception is allowed in order to cover for

the expenses in the settlement of the estate
because in some cases, a decedent may have left
all tangible items excluding cash and the cash is
in the bank.
If it is not covered to taxation because the

amount does not exceed the standard deduction
of 1M, still there must be proof that estate tax
return has been filed and the clearance from the
tax authorities has been given so that transfer
can smoothly be made.
If the gross value of the estate exceeds P 2M, the return

shall be supported with a statement duly certified to by a
CPA containing the following:
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 Phils.,
of that part of his gross estate situated in the Phils.
D.
b.
Itemized deductions from gross estate allowed in Sec.

86; and
c.
The amount of tax due whether paid or still due and

outstanding
determination of the amount of the estate tax and

discharge from personal liability therefore, the
Commissioner (as soon as possible, and in any event
within one (1) year after the making of such application, or
if the application is made before the return is filed, then
within one (1) year after the return is filed, but not after
the expiration of the period prescribed for the assessment
of the tax in Section 203 shall not notify the executor or
administrator of the amount of the tax. The executor or
administrator, upon payment of the amount of which he is
notified, shall be discharged from personal liability for any
deficiency in the tax thereafter found to be due and shall
be entitled to a receipt or writing showing such discharge.
PAYMENT OF THE ESTATE TAX DUE
Person primarily liable to pay the estate tax. It is the

estate that is primarily charged for the estate taxes but it
will have to be coursed through the executor or
administrator who shall be considered as the person
primarily liable to pay the estate tax.
When to pay the estate tax. The estate tax is due and
payable at the same time that the return is filed, i.e.,
within six months after the decedents death.
E.
Extension of time to pay estate tax. When the

Commissioner finds that the payment on the due date of
the estate tax or any part of the said amount would
impose undue hardship upon the estate or any of the
heirs, he may extend the time for payment of such taxes
or any part thereof not to exceed 5 years in case of judicial
settlement or 2 years in the case of extrajudicial
settlement.
If extension granted, the Commissioner may require the
executor, or administrator, beneficiary, as the case may
be, to furnish a bond in such amount, not exceeding
double the amount of the tax and with such sureties as the
Commissioner deems necessary, conditioned upon the
payment of the said tax in accordance with the terms of
the extension.
Where to pay the estate tax. Except in cases where the

Commissioner otherwise permits, the return shall be filed
and the estate tax paid at:
An Authorized Agent Bank (AAB), or
Revenue District Office (RDO), or Collection

Officer, or
Duly authorized Treasurer of the city or

municipality in which the decedent was
domiciled at the time of his death, or
If there be no legal residence in the Phils., with

the Office of the Commissioner
PENALTIES FOR NON-COMPLIANCE
In the event of a violation of the law, in respect to the foregoing, as

well as of regulations promulgated thereunder, criminal penalties
and civil liabilities (surcharges, ad valorem penalties, and interest)
are imposed (Secs. 93, 247, NIRC).
o
If its a simple extension of time to pay, the add-on penalty

would only be the 20 % interest.
Surcharge would only come in for absolute noncompliance with the requirement. If you file the return
late, you will be imposed of a 25% surcharge.
If you filed an inaccurate return, you will be imposed of a

25% surcharge.
If you filed a fraudulent return, you will be imposed of a

50% surcharge.
The surcharge will be totally based on the basic amount of taxes due
and on top of that, interest from the time that money could have
been collected by the government up to the time that the money
was actually collected by the government.
And on top of these, if you filed at the wrong venue, the 2 things can
happen:
1. You may be imposed of a 25% surcharge for wrongvenue in payment and filing; or
2. You could totally be considered as no-payment in the

proper venue, you have to pay the full amount 100% plus
the surcharge of 25% in the proper venue. So what you
can do is simply file a refund in the wrong venue where
you make the payment.
Motion filed with Probate Court. After estate taxes have

been paid and settled, the best thing for an executor or
administrator to do is to ask the court a written discharge
from personal liability on such settlement of estate so that
if later on, it is found out that there have been
miscalculations, he cannot be considered as personally
liable.
SEC. 92. Discharge of Executor or Administrator from
Personal Liability. - If the executor or administrator makes
a written application to the Commissioner for
20
DONORS TAX
I.
NATURE AND PURPOSE
Donors tax is imposed on gratuitous transfers of rights and property

that shall take effect during the LIFETIME of the donor (Donation
Inter Vivos).
Unlike estate tax, where transfers during the lifetime can be subject
to estate tax, donors tax only pertains to transfer during the lifetime
and not to donations taking effect after death of the donor.
Any contribution in cash or in kind to any candidate, political

candidate, political party or coalition of parties for campaign
purposes shall be governed by the Election Code.
III. KINDS of DONORS

A. INDIVIDUAL PERSONS:
1. Residents or Citizens Resident citizen (RC), Non-resident citizen
(NRC) and Resident Alien (RA)
2. Non-resident and non-citizen Non-resident alien (NRA),
whether engaged in trade or business is immaterial
Not all transfers inter-vivos are subject to donors tax especially if it

is coterminous or the transfer of economic benefits would take
effect only after death (subject to estate tax)
B. JURIDICAL PERSONS:
Donors tax is not a property tax but an excise tax imposed on the
privilege of the owner to give.
2. Partnership
Purposes of Donors tax:
1. Corporation
Note: Unlike in estate taxation wherein juridical persons cannot

be the transferor of property
a. To raise revenues (lifeblood doctrine)
IV. KINDS of DONEES, as to relationship to DONOR
b. To supplement estate tax
a. Non - Stranger - a person who is a:
c. To prevent avoidance of income tax through the device of splitting

income among numerous donees
(1) Brother, sister (whether by whole or half-blood), spouse,

ancestor and lineal descendant
Ancestors and lineal descendants are not limited to certain
degree. So even great great great grandfathers or
grandchildren are still considered non-strangers
II. APPLICABLE LAW IN DONORS TAXATION
The law in force at the time of the perfection and completion of

the donation
Donors tax shall not apply unless and until there is a completed
gift.
This includes legally adopted and illegitimate children.

(2) Relative by consanguinity in the collateral line within the
fourth degree of relationship (first cousin is not a stranger)
Perfection upon knowledge of acceptance by the donee

during the lifetime of the donor
Note: Only the spouse and adopted child are non-strangers

that are not blood-relatives
Completion upon delivery, actual or constructive / full

transfer of control over economic benefits
b. Stranger
Note: If perfection and completion does not fall on the same

date, law on date of COMPLETION should govern
A gift that is incomplete because of reserved powers becomes

complete when either:
a.
the donor renounces the power
b.
his right to exercise the reserved power ceases because of

the happening of some event or contingency or the
fulfilment of some condition other than because of
donors death
Renunciation by the surviving spouse of his/her share in the

conjugal property after the dissolution of the marriage in favor
of the heirs of the deceased spouse or any other person is
subject to donors tax whereas a general renunciation of
his/her share in the hereditary estate left by the decedent is
subject to estate tax.
21
other than those abovementioned

juridical persons are considered as strangers (whether
parent-subsidiary or sister corporations)
Reason for the classification:

-
Higher rates for strangers (30% for strangers while only 215% for non-strangers)
No cumulation of donation for strangers
V. REQUISITES OF A TAXABLE GIFT (DCRAAIF or AFRAID-C)

-
If one element is missing, then the donation is void
A. DONATIVE INTENT, in General

Donative intent pertains to the intent of the donor to DONATE
without consideration since its a gratuitous transfer (act of
liberality).
It refers to the proper declaration of the legal owner of a property or

right to transfer ownership to another without consideration
(consideration means money or equal value or some goods or
service capable of being evaluated in money, hence love and
affection does not amount to consideration).
may give each other on the occasion of any family

rejoicing.
G.R. Donative intent is required to effect a valid donation (applicable

only to Direct Gifts)
Moderate gifts depend on the financial capacity of the

donor
Exception: Indirect Gifts
If donation was void because it is not a moderate gift, then

such transfer will be considered as income tax (all income
from whatever source is subject to income tax) on part of
the donee.
The prohibition shall also apply to persons living together

as husband and wife without a valid marriage.
1. Transfer for insufficient / inadequate consideration

Note: this is also one of the transfers subject to estate
taxation. Hence, in order to reconcile the law, to determine
whether it is subject to donors or estate tax, the reckoning
point is the POINT OF DISCOVERY.
The donee need not be capacitated to receive the gift. It can be

received by his guardian or legal representative.
Exception Incapacitated donees:
If the transfer was discovered during the lifetime donors

tax
a. Those under civil interdiction

b. Spouses and man and woman living together without
the benefit of marriage (to avoid undue influence)
If discovered after death estate tax

However, determine first, whether the transfer is irrevocable
or not. If the transfer is revocable, then it may not be
considered a valid donation and hence, subject to donors
tax.
c. Lawyers who notarized the will is incapacitated to

receive donation or inherit
d. Gifts to public officers or their spouses or relatives by
reason of public office
In cases, where transfers have been considered as donations

subject to donors tax and later found out to be a
testamentary disposition, then claim for refund on donors
tax paid and pay the appropriate estate tax.
(Further discussion in a later topic)
2. Condonation of debt (as long as not coupled with future service
or predicated on a past service performed)
Note: Condonation of debt that does not result to increase in
patrimony of the donees assets will not as well result to
donors tax and not even income tax
General renunciation (not specific nor categorical) of estate does not
equate to donation subject to donors tax. Accretion takes place on
properties renounced and is now subject to estate tax (Estate of
Spouses Reyes v. CIR)
B. CAPACITY OF THE DONOR
This refers to the condition and legal capacity of the donor to

enter into a valid contract
Incapacitated donors:
a. Insane persons
b. Minors
C. Spouses (to each other)
Art. 87. Every donation or grant of gratuitous advantage,
direct or indirect, between the spouses during the marriage
shall be void, except moderate gifts which the spouses
22
e. Those incapacitated to receive in succession due to

undue influence (i.e. priests, doctors, one who accuses the
donor on an attempt on his life etc)
Gift received by a disinherited heir is subject to donors tax.
C. REDUCE THE ASSETS OR PATRIMONY OF THE DONOR

D. ACCEPTANCE OF THE DONEE DURING LIFETIME OF THE DONOR
Must be made known to donor during his lifetime
form of acceptance depends on the formalities required for the

donation to be valid (to be discussed later)
Acceptance must generally be made personally or can be made

through another as long as authorized to accept such SPECIFIC
donation (authorized person with a special power for that
purpose or with a general and sufficient power)
E. INCREASE IN THE ASSETS OR PATRIMONY OF THE DONEE

F. DELIVERY (ACTUAL OR CONSTRUCTIVE) OF THE GIFT
Note: general renunciation is subject to estate tax not donors tax
because it would be as if the property did not pass to the heir and
accretion takes place as a consequence. However, if renunciation is
specific and categorical to one or more heirs but not to all then
subject to donors tax since it is tantamount to acceptance then
donating the renounced share.
G. FORMS TO EFFECT DONATION
a. Oral donation with simultaneous delivery personal property

amounting to P5,000 or less; acceptance is also done orally
b. Shares of stocks of foreign corporations (situs is within

if at least 85% of operations within the Phils; if 50% to
less than 85% then pro-rata)
b. In writing (whether public or private) personal property

exceeding P5,000; acceptance also done in writing whether made on
the same instrument or not
c. Franchises, patents, copyrights and royalties exercised

in the Philippines
c. Public document (otherwise void ab initio) real property

regardless of the amount; acceptance may be made in the same
instrument or in a separate public document, however, if on a
separate document, the donor shall be notified of such acceptance
in authentic form and noted in both instruments.
Transfers in Trust
VI. PROPERTIES COVERED AS GIFTS, in General
From the Trustor to the Trustee
Gross Gift - includes real and personal property, whether tangible or

intangible, or mixed, wherever situated: Provided, however, That
where the donor was a nonresident alien at the time of his death or
donation, as the case may be, his real and personal property so
transferred but which are situated outside the Philippines shall not
be included (Sec. 108)
First, determine if there is relinquishment of control. If there is

none, then there is no donation and such transfer is considered
revocable and included in the estate. If there is relinquishment of
control, then such transfer is subject to Donors tax.
Rules on Reciprocity of intangible personal properties also applies to

NRA for purposes of donors tax computation
No longer subject to donors tax since it was already subjected to tax

during the transfer from trustor to trustee. The trust was intended
for his benefit. (same concept as transfer from fiduciary to
fideicommissary in estate taxation)
Type of
Taxpayer
Real
property
Citizen or
Residents
(RC, NRC,
NRA)
Non Resident
and Non
Citizen (NRA)
Intangible
Personal
property
Within and Without

(Global)
Within
Domestic
Corporation /
Resident
Foreign Corp.
Non-Resident
Foreign
Corp.(NRFC)
Tangible
Personal
property
Within
Within but
subject to Rule
on reciprocity
The parties to a trust are the trustor (transferor), trustee (holds the
property in behalf of the beneficiary) and the beneficiary (ultimate
recipient of the property held in trust)
From the Trustee to Beneficiary
Who is liable to pay Donors tax?

It is the donor (thats why it is called donors tax not donees tax).
The statutory taxpayer is the donor. However, the parties can agree
that the donee will be the one liable. Notwithstanding the
agreement, when there is non-payment of donors tax, the govt will
still go after the donor since he is the statutory taxpayer.
VII. TRANSFERS FOR LESS THAN AN ADEQUATE

CONSIDERATION
Where property, other than real property referred to in

Section 24(D) [capital gains tax], is transferred for less than an
adequate and full consideration in money or money's worth,
then the amount by which the fair market value of the property
exceeded the value of the consideration shall be deemed a gift,
and shall be included in computing the amount of gifts made
during the calendar year (Sec. 100)
Basis of donors tax is the difference between fair market value

(FMV) and the consideration received at the time of execution
of the deed of sale.
Within and Without

(Global)
Within
Within
Within but
subject to Rule
on reciprocity
Note: Only NRA and NRFC are taxed for donations involving
properties within the Philippines and subject to Rule on Reciprocity
on intangible personal properties. All others are taxed on global
donations.
Intangible Personal Properties include:
a. Shares of stocks of domestic corporations (rationale:
Benefits received theory)
Note: If preceded by a Contract to Sell, the FMV at the date of

contract to sell is used and not the FMV at the time of the
execution of the Contract of Sale.
Exception to transfers for insufficient consideration subject to

donors tax:
a. Real property subject to capital gains tax
b. Shares of stock not traded in the stock exchange
23
Rationale for exception:

There is no danger of evading the tax on such transactions since
the capital asset is already subjected to Capital gains tax (CGT),
hence, no longer subject to donors tax. What is taxed in CGT is
not only the difference in value or the income on the sale but
the value of the property itself.
proportion to their respective interests. In other words,

there will be two donations made and two separate
computations of donors taxes.
If parents (Mr. X and Mrs. Y) of the bride donate 50,000
each to the bride and groom, how many returns will be
filed and how much is the donors tax if any?
This applies to transfers by both natural and juridical persons.
4 tax returns (2 for Mr. X and 2 for Mrs. Y)
It is important to determine whether assets are capital or

ordinary to know whether they are exempted from donors tax.
Each can claim 10,000 dowry exemption.
Review:
Mr. X:
Gift to daughter
If engaged in leasing of commercial spaces, then idle lot is sold.

Is this subject to donors tax?
No. Because, the sale involves ordinary asset. He is
engaged in real estate business, hence, all real assets are
considered ordinary assets.
50,000 less 10,000 (dowry) = 40,000

Since first 100,000 is exempt for donations to
non-strangers, then no tax on this gift.
Gift to son-in-law
Generally, real property used in business is ordinary asset and

those used for personal purposes is a capital asset.
Note: Even if you are registered as having a primary purpose of
business other than engaging in real estate, what is followed is
the actual business. Hence, if you sell property for more than 5
times in a year (meaning at least 6), then you are already
considered engaged in real estate business.
VIII. EXEMPTION OF CERTAIN GIFTS VS. DEDUCTIONS

FROM GROSS GIFT
Exemptions of Certain gifts are different from exclusions which are
totally not included in the computation of the gross gift.
50,000 x 30% = 15,000 gift to stranger

Mrs. Y (same as above)
(2) 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;
Applies to any entity created by any of its agencies which
is NOT conducted for profit
Ex. National Water Resource Board, Bureau of Local
Government Finance (BLGF)
2
(3) Gifts in favor of: (C AR PETS)
IX. EXEMPT GIFTS FOR RESIDENTS AND CITIZENS (Sec.

101 A) applicable to RC, NRC and RA
(1) Dowries or gifts made on account of marriage and before its
celebration or within one year thereafter by parents to each of their
legitimate, recognized natural, or adopted children to the extent of
the first Ten thousand pesos (P10,000):
Must be on account of marriage meaning there is an
impending marriage.
If made before marriage, no time limit. If after marriage,
then must be within one year from marriage.
a. educational and/or
b. charitable,
c. religious,
d. cultural or
e. social welfare corporation, institution,
f. accredited nongovernment organization,
g. trust or
Only applicable to your child whether legitimate,

illegitimate or adopted. Donation to your son or daughter
in-law is not allowed exemption.
h. philanthropic organization or
Can only claim once per child per legal marriage on the
first 10,000.
Additional conditions/requisites: GAN DA
Donation by Parents/Spouses
The spouses are co-owners of conjugal property. Thus, a
gift made by the spouses of conjugal property shall be
deemed separate donations by the husband and wife in
24
i. research institution or organization:

3
a. Not more than thirty percent (30%) of said gifts shall be used
by such donee for administration purposes (N)
b. Non-stock, non-profit entity (N)
c. Pays no dividends (D)
d. Governed by trustees who receive no compensation (G)

(however honorariums are allowed)
Hence, not all encumbrances are deductions. Only those that

were assumed by the donee.
e. Devoting all its income, whether students' fees or gifts,

donation, subsidies or other forms of philanthropy, to the
accomplishment and promotion of the purposes enumerated in
its Articles of Incorporation (A)
Encumbrances are deductions because the actual benefit

received by the donee is the value of the property less the
encumbrance.
B. Diminutions
f. If NGO, must be duly accredited (N)

NOTICE OF DONATION by a DONOR engaged in Business
In order to be exempt from donors tax and to claim full deduction
of the donation given to a qualified donee institution, the donor
engaged in business shall give notice of donation on every donation
worth at least P50,000 to the Revenue District Office which has
jurisdiction over his place of business within thirty (30) days after
receipt of the qualified donee institutions duly issued certificate of
donation, stating that no more than 30% of the said donation shall
be used for administration purposes
X. EXEMPT GIFTS MADE BY A NONRESIDENT NOT A

CITIZEN OF THE PHILS (SEC. 101 B) APPLICABLE TO
NRA
No dowry exemption
(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.
-
Same as for Residents / citizens
(2) Gifts in favor of an educational and/or charitable, religious,

cultural or social welfare corporation, institution, foundation, trust
or philanthrophic organization or research institution or
organization: Provided, however, That not more than thirty
percent (30% of said gifts shall be used by such donee for
administration purposes.
-
Less stringent requirements
Only 2 requirements
This pertains to a charge or conditions made by the donor upon

donation that the donee will have to spend or shoulder
Ex. Donor gives 100,000 to Donee on the condition that 30,000
will be given to charity. Hence, the net gift is only 70,000.
XII. NET GIFT AND DONORS TAX RATES

A. Principle of Accumulation
Each gift made during the calendar year must be included in the
return which is added every time a new donation is made and
the donors tax already paid is deducted in computing the
donors tax due on the latest donation.
Principle of accumulation only applies to non-strangers since
strangers are subject to a flat rate of 30%. Donors tax is always
computed on a calendar year basis.
All donations made in one calendar year are taxed at the same
graduated tax rates as if they had been made at one time. New
computation of donors tax is made for gifts made by the donor
in another calendar year.
Rationale for accumulation:
1. To facilitate the claiming of the deduction of 100,000.
The exempt portion only pertains to the first 100,000.
2. To subject the subsequent donations to a higher tax rate
based on the graduated schedule
Exemption from Donors Tax under special laws (From
Mamalateo not discussed)
a. not more than 30% used for administration purposes
1. Donations to Phil. Govt for scientific engineering and

technological research, invention and devt
b. non-stock and non-profit entity
2. Donations to social welfare, cultural and charitable org.
Here, NGO need not be accredited. Rationale is to encourage

NRAs to donate.
XI. DEDUCTIONS FROM GROSS GIFT
3. Donations to the Intl Rice research Institute

4. Donations to Ramon Magsaysay Award Foundation
Gross gift deductions = Net gift
5. Donations to the National Museum, National Library

and the archives of the National Historical Institute
A. Encumbrances
6. Donations to the Southern Phils. Devt Administration
This pertains to mortgages, security interest, or unpaid taxes on

the donated property (not donors tax) by the donor attaching
to the property and there is an agreement that the donee will
assume all of these encumbrances or liabilities.
7. Donations to the Intramuros Administration

C. Donors Tax Credits
Same as in Estate tax. Still apply the Global and Per Country
Limitation.
25
XIII. DONORS TAX COMPUTATION

Date
Donee
1/1/2011
friend
2/1/2011
brother of
mom
4/1/2011
school
6/1/2011
11/1/2011
1/1/2012
Amount
=304,000
100,000
30,000
1,000,000
44,000
500,000
150,000
Sister
1,000,000
80,000
First 100,000 is exempt
grandparent
2,000,000
180,000
Hence, no donor's tax
100,000
Exempt
Principle of accumulation not applicable since it is a

different year
brother
Donor's tax payable:

304,000 - 124,000 (tax already paid) = 180,000
Friend = stranger
100,000 x 30% = 30,000
204,000 + (10% of 1M [the excess over 3M])
Donor's Tax
Payable
Brother of mom = non-stranger
Brother = non-stranger
Note: To save on donors tax, you can allocate your donation to

different years so that you can avail of the 100,000 exemption every
year (gift-splitting)
MANNER OF COMPUTING THE DONORS TAX
Within 4th degree of consanguinity
Each of the spouses shall be considered as separate donors for

the common or conjugal property to the extent of the spouses
share which is automatically %
Based on the table the tax for 1M is 44,000
Both spouses are expected to file separate donors tax returns
School = stranger
However, if the property donated pertains to the exclusive

property of the donating spouse, he alone is required to file a
donors tax return.
not mentioned whether it meets the requirements

500,000 x 30% = 150,000
No accumulation of gifts among strangers
XIV.
ADMINISTRATIVE MATTERS
(A) Requirements. - any individual who makes any transfer by gift

(except those which, under Section 101, are exempt from the tax
provided for in this Chapter) shall, for the purpose of the said tax,
make a return under oath in duplicate.
The return shall set forth:
sister = non-stranger
1M + 1M = 2M
(1) Each gift made during the calendar year which is to be

included in computing net gifts;
(2) The deductions claimed and allowable;
44,000 + (8% of 1M [the excess over 1M])

=124,000
Donor's tax payable:
124,000 - 44,000 (tax already paid) = 80,000
grandparent = non-stranger
2M + 2M = 4M
26
(3) Any previous net gifts made during the same calendar year;
(4) The name of the donee; and
(5) Such further information as may be required by rules and
regulations made pursuant to law.
(B) Time and Place of Filing and Payment. - The return of the donor
required in this Section shall be filed within thirty (30) days after
the date the gift is made and the tax due thereon shall be paid at
the time of filing.
Filing within 30 days from donation
Distinction between Estate and Donors tax
Payment Upon filing

Except in cases where the Commissioner otherwise permits, the
return shall be filed and the tax paid to:
A. an authorized agent bank,
B. the Revenue District Officer,
C. Revenue Collection Officer or
D. duly authorized Treasurer of the city or municipality
where the donor was domiciled at the time of the
transfer,
E. if there be no legal residence in the Philippines, with
the Office of the Commissioner.
In the case of gifts made by a nonresident, the return may be
filed with:
A. the Philippine Embassy or Consulate in the country
where he is domiciled at the time of the transfer, or
DONOR'S TAX
ESTATE TAX
Imposed upon the privilege to

give
Imposed upon the privilege

to transmit property to heirs
Inter vivos
Mortis Causa (generally)
May be made between natural

and juridical persons
Only between natural

persons
Less deductions
More deductions
Non-strangers 2-15%,
Strangers 30% flat rate
5-20% (higher tax rates)
first 100K exempted if

between non-strangers
first 200K is exempted
payment and filing within 30

days
payment and filing within 6

months
Principle of accumulation
applicable
Principle of accumulation
not applicable
B. directly with the Office of the Commissioner

(C) Penalties for Non-Compliance
a. For late filing and late payment 25% surcharge
b. For fraudulent declaration of return 50% surcharge
c. Aside from the surcharge, 20% interest per annum based on
the basic donors tax
27
VALUE ADDED TAX

The value-added tax is an indirect tax and the amount of tax may be
shifted or passed on to the buyer, transferee or lessee of the goods,
properties or services.
VAT is imposed on any person who, in the course of trade or
business (as a rule) sells, barters, exchanges, leases goods or
properties, renders services, or engages in similar transactions,
and/or any person who imports goods.
Also known as Anti-Poor Tax
I.
NATURE AND CHARACTERISTICS OF VAT
It is a regressive tax
-
Constitution does not prohibit it, it

encourages progressive system of taxation
merely
Regressive system of VAT is minimized by the many

VAT exemptions and by zero-rating
Pres. Arroyo increased the rate from 10% to 12% on

February 1, 2006. This was merely ministerial on her part
since the amendments of the Tax Code explicitly allowed
the President to increase the VAT rate when the following
conditions are met:
There is no cascading in the VAT system

-
Tax is said to cascade when there is tax on tax.
VAT is ultimately a tax on consumption, even though it is

assessed on many levels of transactions on the basis of a fixed
percentage. It is the end user of consumer goods or services
which ultimately shoulders the tax, as the liability therefrom is
passed on to the end users by the providers of these goods or
services16 who in turn may credit their own VAT liability (or
input VAT) from the VAT payments they receive from the final
consumer (or output VAT). The final purchase by the end
consumer represents the final link in a production chain that
itself involves several transactions and several acts of
consumption. The VAT system assures fiscal adequacy through
the collection of taxes on every level of consumption, yet
assuages the manufacturers or providers of goods and services
by enabling them to pass on their respective VAT liabilities to
the next link of the chain until finally the end consumer
shoulders the entire tax liability.
(CIR v. Magsaysay)
Purpose of VAT
-
To supplement income tax
II. APPLICABLE LAWS
VAT collection as a percentage of GDP of the

previous year exceeds 2 4/5%; or
A.
B.
National govt deficit as a percentage of GDP of

the previous year exceeds 1 %
C.
Sections 105-115 of RA 8424, amended by RA 9337

Revenue Regulations No. 16-05 (Consolidated VAT
Regulations)
Regulations amending RR No. 16-05
III. STATUS IN RELATION TO VAT

12% tax imposed on the gross selling price or gross
receipts derived from the sale, barter or even exchange of
goods, properties, or services
1. Subject to VAT at 12% or 0% (zero-rated)

2. VAT exempt
Seller is the statutory taxpayer meaning the seller is the

one who pays the BIR but the burden falls on the buyer.
The impact of taxation is on the seller upon whom the tax
has been imposed while the incidence of tax is on the final
consumer, the place at which the tax comes to rest.
End-user is the one who consumes the goods or services

and ultimately shoulders the tax
Simply, it is the tax on value added because you can

deduct the claim as tax credit the VAT from purchases.
Items in their original state are nto subject to VAT
Additional Characteristics (Mamalateo)
It is collected through the tax credit method
It is a transparent form of sales tax
It is a broad-based tax on consumption of goods,

properties or services I the Philippines
The Phils. adopted the tax-inclusive method
28
MANDATORY Registration VAT System:

Every person who in the course of trade or business, sells,
leases goods, or properties or services subject to VAT is
REQUIRED to register under the VAT system if the aggregate
amount of his ACTUAL or EXPECTED gross sales exceed 1.5
million during any 12 month period.
For those not required to be VAT-registered:
They may still opt to be registered to VAT even if there sales do
not exceed 1.5 million.
G.R. : Either you are subject to VAT or percentage tax.
Some opt to be VAT registered because you cannot claim tax
credit (INPUT VAT) unless you are VAT-registered.
However, even if you are not VAT-registered, it does not mean
that you are absolutely not VAT taxable. Some transactions are
VAT taxable even if the person is not VAT-registered.
IV. PERSONS LIABLE TO VAT

A. Seller or transferor
- must be done in the course of trade or business
'In the course of trade or business' means the regular conduct or
pursuit of a commercial or an economic activity, including
transactions incidental thereto, by any person regardless of whether
or not the person engaged therein is a nonstock, nonprofit private
organization (irrespective of the disposition of its net income and
whether or not it sells exclusively to members or their guests), or
government entity.
The selling by NDC of its NMC shares and vessels were not done in
the course of trade or business since the reason for selling was
pursuant to the policy of the government to relinquish its right over
the shipping vessels due to the privatization policy. It was an isolated
transaction and not capable of being repeated.
(CIR v. Magsaysay)
-
The Government is not exempt from VAT. Though it is

exempt from income tax, it is still subjected to VAT since
VAT is an indirect tax. VAT is already added on the cost of
goods or services purchased or availed of by the
government.
Donations to government are not subject to donors tax

and also not subject to VAT
Non-stock non-profit organizations are subject to VAT.
Collection of association dues and common charges by

condominium corporations as long as no beyond the
actual charges are not subject to VAT
1. of goods or properties
The term 'goods' or 'properties' shall mean all tangible and
intangible objects which are capable of pecuniary estimation and
shall include:
Sale or exchange of services means the performance of all kinds of

services in the Philippines for others for a fee, remuneration or
consideration, including:
1. those performed or rendered by construction and service
contractors;
2. stock, real estate, commercial, customs and immigration
brokers;
3. lessors of property, whether personal or real;
4. warehousing services;
5. lessors or distributors of cinematographic films;
6. persons engaged in milling, processing, manufacturing or
repacking goods for others;
7. proprietors, operators or keepers of hotels, motels,
resthouses, pension houses, inns, resorts;
8. proprietors or operators of restaurants, refreshment parlors,
cafes and other eating places, including clubs and caterers;
9. dealers in securities;
10. lending investors;
11. transportation contractors on their transport of goods or
cargoes, including persons who transport goods or cargoes for
hire and other domestic common carriers by land relative to
their transport of goods or cargoes;
12. common carriers by air and sea relative to their transport of
passengers, goods or cargoes from one place in the Philippines
to another place in the Philippines;
13. sales of electricity by generation companies, transmission,
and distribution companies;
(a) Real properties held primarily for sale to customers or held

for lease in the ordinary course of trade or business;
14. services of franchise grantees of electric utilities,

telephone and telegraph, radio and television broadcasting
and all other franchise grantees except those under Section
119 of this Code;
(b) The right or the privilege to use patent, copyright, design or

model, plan, secret formula or process, goodwill, trademark, trade
brand or other like property or right;
15. non-life insurance companies (except their crop insurances),

including surety, fidelity, indemnity and bonding companies;
and
(c) The right or the privilege to use in the Philippines of any

industrial, commercial or scientific equipment;
16. similar services regardless of whether or not the

performance thereof calls for the exercise or use of the physical
or mental faculties (i.e. lease of properties).
(d) The right or the privilege to use motion picture films, tapes
and discs; and
(e) Radio, television, satellite transmission and cable television

time.
-
Properties refer to real properties. Goods refer to all

things other than real properties
2. of Services
29
Enumeration of the sale or exchange of services subject

to VAT is not exhaustive
VAT on tollway operators do not amount to a tax on tax and will not
impair the tollway operators right to a reasonable return of
investment.
Tollway operators are, owing to the nature and object of their
business, franchise grantees. The construction, operation, and
maintenance of toll facilities on public improvements are activities of
public consequence that necessarily require a special grant of

authority from the state. In sum, fees paid by the public to tollway
operators for use of the tollways, are not taxes in any sense. A tax is
imposed under the taxing power of the government principally for
the purpose of raising revenues to fund public expenditures. Toll fees,
on the other hand, are collected by private tollway operators as
reimbursement for the costs and expenses incurred in the
construction, maintenance and operation of the tollways, as well as
to assure them a reasonable margin of income. Although toll fees
are charged for the use of public facilities, therefore, they are not
government exactions that can be properly treated as a tax. Taxes
may be imposed only by the government under its sovereign
authority, toll fees may be demanded by either the government or
private individuals or entities, as an attribute of ownership.
Exc. : Those transactions exempt from custom duties are also VAT
exempt
Parenthetically, VAT on tollway operations cannot be deemed a tax

on tax due to the nature of VAT as an indirect tax. In indirect
taxation, a distinction is made between the liability for the tax and
burden of the tax. The seller who is liable for the VAT may shift or
pass on the amount of VAT it paid on goods, properties or services to
the buyer. In such a case, what is transferred is not the sellers
liability but merely the burden of the VAT. (Diaz et. al v. Sec. of
finance et. al.)
V. TRANSACTIONS SUBJECT TO VAT
Since the activity of showing motion pictures, films or movies by

cinema/ theater operators or proprietors is not included in the
enumeration, it is incumbent upon the court to the determine
whether such activity falls under the phrase similar services. The
intent of the legislature must therefore be ascertained. The
legislature never intended operators or proprietors of
cinema/theater houses to be covered by VAT. It is now covered under
the Local Government Code and subjected to amusement taxes (a
percentage tax). It is not subject to VAT otherwise it will amount to
double taxation.
(CIR v. SM Prime Holdings et. al.)
-
On the part of the seller, VAT accrues on the time of

payment. So if VAT is recorded on a VAT taxable
transaction (because payment was received), however
later, the contract was breached, you may still adjust the
VAT return (submitted quarterly) if the breach was done
within the quarter when VAT was recorded. However
when breach happened in another quarter, claim the VAT
paid as tax credit.
B. Importer
- is a person who brings into Philippine ports goods or properties
from outside the Phils.
The importer whether an individual or corporation and whether or
not made in the course of his trade or business shall be liable to pay
VAT.
For importation, the statutory taxpayer is the importer-buyer.
Exportation is also VAT taxable. However, it is subject to 0% VAT if
VATregistered and VAT exempt if not VAT-registered.
G.R. : All importations are subject to VAT
30
Example : Bringing in the Phils. of personal household effect not

in commercial quantities with the intent of using here in the
Phils. except vehicle, aircraft, machinery etc.
C. Non-resident Aliens are subjected to VAT whether engaged in
trade or business when they are PERFORMING SERVICES in the
Philippines.
This does not include sale of goods or properties by Nonresident aliens. They may only be taxed on sale of goods or
properties when conducted in the usual trade or business.
Certain persons and transactions may be subject to VAT. You may be

not VAT-registered but if the transaction is subject to VAT then you
will still have to pay VAT.
A. TRANSACTIONS MADE IN THE COURSE OF TRADE OR BUSINESS
requires rule of regularity
Exception - services rendered in the Philippines by nonresident
foreign persons shall be considered as being course of trade or
business whether isolated transaction or not
B. TRANSACTIONS MADE INCIDENTAL TO THE PRINCIPAL BUSINESS
- An incidental transaction is something that is necessary
appertaining to or depending upon another business which is named
or termed as a principal business of the seller or transferor
Ex. Main function - Manufacturing business
Incidental function delivery and handling charges
Disposition of property related to the course of conduct of the
business is considered incidental to business
Differentiate incidental transaction from isolated transaction.
Isolated transactions are those not done in the course of trade or
business and not capable of being repeated.
C. IMPORTATION
Except those conditionally free importation meaning VAT exempt if
certain documentary requirements are complied
D. SUBSEQUENT SALE OF TAX-FREE IMPORTATION
Transfer of Goods by Tax-exempt Persons. - In the case of
tax free importation of goods into the Philippines by
persons, entities or agencies exempt from tax where such
goods are subsequently sold, transferred or exchanged in
the Philippines to non-exempt persons or entities, the
purchasers, transferees or recipients shall be considered
the importers thereof, who shall be liable for any internal
revenue tax on such importation. The tax due on such
importation shall constitute a lien on the goods superior to
all charges or liens on the goods, irrespective of the
possessor thereof.
2 types of tax-free importation

a. Importation of a tax free product regardless of the status of
the importer subsequently sold
b. Importation of the product that is taxable but exempt
because of the status of the importer as VAT exempt and
subsequently sold to a non-exempt person
Not all property dividends are subject to VAT. Only those

property dividends which constitute stocks in trade or
properties primarily held for sale or lease including those
that are used in the course of business (incidental) are
subject to VAT
(b) Creditors in payment of debt

- distribution or transfers of goods that are:
If the person is exempt, whatever the nature of the

transaction, he is still exempt
VAT exemption can be either on the product itself or on
the person. If it is on the product itself then subsequent
transfer is not taxable. If the exemption is on the person,
the subsequent transfer is generally taxable (exempt only
if the transferee is also exempted from paying VAT).
This is to avoid circumvention of the law.
Technical importation it would be as if the buyer from

the VAT-exempt importer is the real importer and will
hence be the one ultimately liable to pay the VAT thereon.
E. TRANSACTIONS DEEMED SALE
(a) originally intended for sale

(b) part of the inventory
(c) used in business distributed to the creditors for
purpose of paying debts
- the basis of the VAT is the fair market value (FMV) of the
property and not the amount of indebtedness.
If the value of the debt is more than the FMV of the property, the
difference is considered a condonation of indebtedness subject
either to income or donors tax
If the value of the debt is less than the FMV of the property, the VAT
base is still the FMV of the property
Not actual sale in the course of business but subjected to VAT.

So, either way, the FMV is always the tax basis
The purpose why they are deemed sale because these transactions:
a. Deprive the government from computing tax (OUTPUT VAT)
thereon and
b. Allows the taxpayer to claim the tax credit (INPUT VAT) on
these transactions.
1. Transfer, use or consumption not in the course of business of
goods or properties originally intended for sale or for use in the
course of business;
Ex. VAT-registered person withdraws goods from his business for
personal use
-
Any donation of ordinary assets is subject to VAT because

it would deprive the government of tax
The basis of the VAT is the Gross Selling Price had it been
sold and reckoned at the time it was transferred, used or
consumed
If such goods or properties are not part of the inventory or

intended for sale, the tax base is the fair market value of
the property at the time of occurrence
- If services are performed to pay off debt and such services is not
done in the course of trade or business, the performance of the
service will result to income tax
- for it to be subjected to VAT, it has to be a transaction that the
government expects to collect VAT from; it should be a transaction
which should be VAT taxable in the first place
3. Consignment of goods if actual sale is not made within sixty (60)
days following the date such goods were consigned
Whether or not you were able to sell the goods as long it is not
withdrawn within 60 days from date of consignment then it is
already subject to VAT.
No sale may have occurred but it is deemed that there was sale
The statutory taxpayer is the consignor and not the consignee (the
one holding the goods)
How to avoid payment of VAT in this situation?
2. Distribution or transfer to:

(a) Shareholders or investors as share in the profits of the VATregistered persons
- In the form of property dividends
a. return the goods

b. consignor withdraws the items before the 60-day period
would lapse and reconsign it again
Consignment does not involve the physical change of the goods
consigned; if you convert it (like changing flour to bread), then it
already considered sold, not because you consign it but due to its
actual consumption.
4. Retirement from or cessation of business, with respect to
inventories of taxable goods existing as of such retirement or
cessation
31
What is peculiar in this transaction is that you are not actually

making any transfer nor distribution, you simply stop business
operation or continue with another type of business transaction.
However, you are still subject to VAT because you already claimed
the tax credit on the purchase the goods used and you deprive the
govt from taxes it should have gained from the sale of such goods.
Ways:
AS TO
12% VAT
ZERO-RATING
Claiming of tax
credit (input vat)
Allowed tax credit
Allowed
credit
Treatment of tax
credit
Separate item to be
deducted
from
Output VAT
Separate item to
be
deducted
from Output VAT
Output VAT
Taxable
None
VAT-registration
Required
Required
AS TO
ZERO RATING
VAT - EXEMPT
Claiming of tax
credit (input vat)
Allowed tax credit
Not allowed tax

credit
Treatment of tax
credit
Separate item to
be deducted from
Output VAT
Included as part
of cost
Output VAT
None
None
VAT-registration
Required
No registration
12% VAT
ZERO RATING
VAT EXEMPT
Claim Input VAT
Claim Input VAT
No input VAT
(part of cost)
Output VAT
No Output VAT
No Output VAT
a. Entirely stop business
tax
b. Change business form (sole proprietorship to partnership)

c. Merge / consolidate
Review:
Not all mergers will result to a VAT taxable transaction. When
the transaction is a tax-free exchange
a) Transactions made pursuant to plan of merger or
consideration.
i. A corporation, party to a merger or consolidation
exchanges its properties solely for stock in a corporation,
which is a party to the merger or consolidation.
ii. A stockholder of a corporation party to a merger or
consolidation exchanges his stock solely for stock in
another corporation, party to that merger or
consolidation.
b) If a person (natural or juridical), alone or together with
others or not exceeding four (4), exchanges his property for
stock in a corporation and this person or persons, after this
exchange, acquired controlling interest over that corporation.
This means that they acquired at least 51% of the shares of
stock of such corporation.
Note: The above transactions are not only exempt from income
tax but also from VAT
Change in business activity from VAT-registered to VAT-exempt
-
Considered a cessation of business and is a transaction

deemed sale as to items in inventory where the tax credit
(input VAT) has already been claimed.
In sum:
VAT basis the acquisition cost or FMV whichever is higher

Reasons for the change in business:
a. Optionally registered as VAT even not really VAT taxable
in the first place
Purchase cellphone
Cost
20,000.00
VAT (input)
2,400.00
Selling Price
30,000.00
b. You realized that you are not going to meet the 1.5M
benchmark for any 12-month period
VII. VAT RATES:

a. 12% VAT
Sale of cellphone
VAT (output)
3,600.00
b. 0% VAT (zero-rating)
32
Particulars
12% VAT
VAT
exempt
0% VAT
Not discussed:
Sale of property not subject to VAT
Output VAT
3,600.00
Sale of residential lot 1.5M and below
Sale of residential house and lot (H&L) 2.5M and below

Input VAT
2,400.00
2,400.00
VAT Payable /
(Credit)
1,200.00
(2,400.00)
Sale of commercial lot /H&L no ceiling

Domestic common carrier by air or sea is subject to VAT.
If by land, not subject to VAT but subject to common carriers
tax (percentage tax) of 3%.
Sale
30,000
30,000
30,000
Cost of sale
20,000
20,000
22,400
Carriage of cargo or goods whether by land, air or sea is subject

to 12% VAT.
Sale of electricity is subject to VAT.
Majority of zero-rated sales are export sales and also includes sale of
gold to BSP. Rationale:
a. To encourage exportation
Senior Citizens have 20% discount for VAT payments.

Non-life insurance payments subject to VAT
Life insurance payments not subject to VAT.
b. To strengthen reserves
Cross-Border Doctrine / Destination Principle
According to the Destination Principle, goods and services are taxed
only in the country where these are consumed.
In connection with the said principle, the Cross Border Doctrine
mandates that no VAT shall be imposed to form part of the cost of
the goods destined for consumption outside the territorial border of
the taxing authority.
Hence, actual export of goods and services from the Philippines to a
foreign country must be free of VAT, while those destined for use or
consumption within the Philippines shall be imposed with 10% (now
12%) VAT. Export processing zones are to be managed as a separate
customs territory from the rest of the Philippines and, thus, for tax
purposes, are effectively considered as foreign territory. For this
reason, sales by persons from the Philippine customs territory to
those inside the export processing zones are already taxed as
exports. (Atlas Consolidated Mining and Devt Corp v. CIR G.R. Nos.
141104 & 148763 )
Following the above principles, as a general rule, we can only tax
those transactions that are consumed in the Philippines
VIII. TRANSACTIONS SUBJECT TO 12% VAT

Majority of transactions are subject to 12% VAT (eating at a
restaurant, buying stuffs, rentals etc.), so, it is easier if we will
identify those subject to 0% VAT and VAT exempt transactions and
deem all others subject to 12% VAT.
Sale of real properties not primarily held for sale is always subject to
VAT if you are engaged in a real estate business. If not, then
determine whether it is incidental to your business (subject to VAT).
If not, then not subject to VAT.
33
Difference between automatic and effective zero-rating.

Automatic refers to actual exports while effective zero-rating applies
sale within the Phils but subject to zero-rating because of special
laws or intl agreements (i.e. PEZA and SBMA companies)
In Mamalateos book, the differences are: automatic ZR needs no
application form and BIR approval to be zero-rated and not require
to stamp zero-rated on the face of its invoices/receipts while in
effective zero rating, there is a need for application, BIR approval
and stamping.
IX. TRANSACTIONS SUBJECT TO ZERO-RATE

Note: Do not think that since it is zero-rated, it is not subject to VAT
anymore. It is still subject to VAT, its just that the rate is 0%.
No VAT will be passed on or shifted to the consumer in zero-rated
transactions but tax credit (input taxes) from purchases can be
claimed.
GOODS
a) Export Sales. - The term 'export sales' means:
(1) The sale and actual shipment of goods from the Philippines to a
foreign country, irrespective of any shipping arrangement that may
be agreed upon which may influence or determine the transfer of
ownership of the goods so exported and paid for in acceptable
foreign currency or its equivalent in goods or services, and
accounted for in accordance with the rules and regulations of the
Bangko Sentral ng Pilipinas,(BSP);
Actual exportation
2 requirements
(5) Those considered export sales under Executive Order No. 226,
otherwise known as the Omnibus Investment Code of 1987, and
other special laws
a. paid for in acceptable foreign currency and
a. actual exportation
b. accounted for in accordance with rules and

regulations of BSP (must be deposited in a bank duly
accredited by BSP and inward remittance)
b. constructive exportation:
Note: Personal payment (i.e. going abroad to pay in person

the transaction) is not in accordance with BSP rules and
regulations
Sales to bonded manufacturing warehouses of

export-oriented manufacturers
Sales to export processing zones
Sales to enterprises duly registered and accredited

with the Subic Bay Metropolitan Authority (SBMA)
Sales to registered export trader operating bonded

trading warehouses supplying raw materials in the
manufacture of export products
Sales to diplomatic missions and other agencies

and instrumentalities granted tax immunities, of
locally manufactured, assembled or repacked
products whether paid for in foreign currency or
not
Note: If exportation is done by non-VAT registered entity, it is not

zero-rated but considered as VAT exempt
(2) Sale of raw materials or packaging materials to a nonresident
buyer for delivery to a resident local export-oriented enterprise to
be used in manufacturing, processing, packing or repacking (MPPR)
in the Philippines of the said buyer's goods and paid for in
acceptable foreign currency and accounted for in accordance with
the rules and regulations of the Bangko Sentral ng Pilipinas (BSP)
- indirect export
Elements:
a. Sale of Raw materials / Packaging materials
b. To a non-resident buyer
c. For delivery to a RESIDENT local Export-oriented enterprise to
be used in MPPR
c. Sales made by a VAT-registered supplier to a BOI-registered

manufacture/producers
(6) The sale of goods, supplies, equipment and fuel to persons
engaged in international shipping or international air transport
operations.
-
d. Paid for in acceptable foreign currency

e. Accounted for in accordance with the rules and regulations
of BSP
(3) Sale of raw materials or packaging materials to export-oriented
enterprise whose export sales exceed seventy percent (70%) of total
annual production;
- Constructive export
Elements:
a. Sale of Raw materials / Packaging materials
b. To Export-oriented enterprise whose export sales exceed
70% of total annual production
Export-oriented enterprise primarily devoted to the production of
goods and services for export that demonstrably contributes foreign
exchange to the economy
-
Twin requirement in no. 1 is not included.
(4) Sale of gold to the Bangko Sentral ng Pilipinas (BSP);

-
Sale of other precious metals not included nor sale to

banks other than BSP
34
Must be from a port in the Phils. directly to a foreign port

or vice-versa without docking or stopping at any port in
the Phils.
Ex. If Manila to HK and vice-versa not subject to 12% VAT
If Vigan to Clark to Bangkok, then only the sale related to
the Clark to Bangkok flight is not subject to 12% VAT
The phrase without docking or stopping at any other port

in the Phils has been interpreted to mean an intl airline
that makes a stopover in a Phil. Port to unload passengers
and/or cargoes for foreign destination or to pick up
passengers and/or cargoes for foreign destination is
deemed not to have docked or stopped at any other port
in the Phils.
(b) Foreign Currency Denominated Sale. - The phrase 'foreign

currency denominated sale' means sale to a nonresident of goods,
except those mentioned in Sections 149 and 150, assembled or
manufactured in the Philippines for delivery to a resident in the
Philippines, paid for in acceptable foreign currency and accounted
for in accordance with the rules and regulations of the Bangko
Sentral ng Pilipinas (BSP).
Elements:
a. Sale of locally assembled or manufactured goods
b. For delivery to a Phil. Resident
c. Sale to a non-resident
d. Paid for in acceptable foreign currency
e. Accounted for in accordance with the rules and regulations
of BSP
-
Section 149 and 150 pertains to those goods subject to

excise taxes (i.e automobiles and non-essential goods like
perfumes, jewelry, and precious stones)
Such goods are subject to 12% VAT
Automobiles only pertain to 4-wheel cars and does not

include trucks, buses and vans
(c) Sales to persons or entities whose exemption under special laws

or international agreements to which the Philippines is a signatory
effectively subjects such sales to zero rate.
-
Whenever a company is granted tax exemption, it does

not include indirect tax (VAT) except if expressly provided.
Companies located inside Philippine economic zones are

granted tax exemption including VAT under a special law
(RA 7916). Hence, they cannot be passed BAT. If the seller
is VAT-registered, the seller would simply treat the
transaction or sale to these PEZA companies as zero-rated.
If the seller is non-VAT registered, simply treat the sale as
VAT-exempt.
Under this section, the Asian Development Bank and

International Rice Research Institute (IRRI) is subject to
VAT at zero rate
Elements:
a. Services other than Processing, manufacturing or repacking
goods
b. For other persons doing business outside the Phils or nonresidents not engaged in business outside the Phils
c. Paid for in acceptable foreign currency
d. Accounted for in accordance with the rules and regulations
of BSP
CIR v. BWSCM
The Court recognizes the rule that the VAT system generally follows
the "destination principle" (exports are zero-rated whereas imports
are taxed). However, there is an exception to this rule. This exception
refers to the 0% VAT on services enumerated in Section 102 and
performed in the Philippines. For services covered by Section
102(b)(1) and (2), the recipient of the services must be a person
doing business outside the Philippines. Thus, to be exempt from the
destination principle under Section 102(b)(1) and (2), the services
must be (a) performed in the Philippines; (b) for a person doing
business outside the Philippines; and (c) paid in acceptable foreign
currency accounted for in accordance with BSP rules.
In this case, the payer-recipient of respondents services is the
Consortium which is a joint-venture doing business in the Philippines.
While the Consortiums principal members are non-resident foreign
corporations, the Consortium itself is doing business in the
Philippines.
To be subject to VAT at zero-rate, the payer-recipient must be
engaged in business outside the Philippines
SERVICES
(1) Processing, manufacturing or repacking goods for other persons
doing business outside the Philippines which goods are
subsequently exported, where the services are paid for in
acceptable foreign currency and accounted for in accordance with
the rules and regulations of the Bangko Sentral ng Pilipinas (BSP);
Elements:
a. Processing, manufacturing or repacking goods
(3) Services rendered to persons or entities whose exemption

under special laws or international agreements to which the
Philippines is a signatory effectively subjects the supply of such
services to zero percent (0%) rate;
- same as goods
(4) Services rendered to persons engaged in international shipping
or international air transport operations, including leases of
property for use thereof;
b. For other persons doing business outside the Phils

c. Paid for in acceptable foreign currency
d. Accounted for in accordance with the rules and regulations
of BSP
(2) Services other than those mentioned in the preceding
paragraph rendered to a person engaged in business conducted
outside the Philippines or to a nonresident person not engaged in
business who is outside the Philippines when the services are
performed, the consideration for which is paid for in acceptable
foreign currency and accounted for in accordance with the rules
and regulations of the Bangko Sentral ng Pilipinas (BSP);
- not goods and fuel but services including lease of

property
(5) Services performed by subcontractors and/or contractors in
processing, converting, or manufacturing goods for an enterprise
whose export sales exceed seventy percent (70%) of total annual
production;
- same as goods
(6) Transport of passengers and cargo by air or sea vessels from the
Philippines to a foreign country; and
Elements:
a. transport of both passengers and cargo by air or sea vessels
35
b. From the Phils to a foreign country

Review:
If within the Phils., air and sea - 12% VAT
If by land 3% percentage tax if passenger, 12% if cargo
(7) Sale of power or fuel generated through renewable sources of
energy such as, but not limited to, biomass, solar, wind,
hydropower, geothermal, ocean energy, and other emerging
energy sources using technologies such as fuel cells and hydrogen
fuels.
- regardless of buyer
- does not extend to the sale of service in the maintenance
and operation of the equipments or plants generating such power
36
CHAPTER I - ESTATE TAX

SEC. 84 Rates of Estate Tax. - There shall be levied, assessed, collected and
paid upon the transfer of the net estate as determined in accordance with
Sections 85 and 86 of every decedent, whether resident or nonresident of
the Philippines, a tax based on the value of such net estate, as computed in
accordance with the following schedule:
But not Over
The Tax
Shall be
100,000.00
exempt
200,000.00
200,000.00
500,000.00
1,000,000.00
3,000,000.00
3,000,000.00
5,000,000.00
5,000,000.00
10,000,000.00
404,000.00
12%
5,000,000.00
10,000,000.00
and over
1,004,000.00
15%
10,000,000.00
Net Gift Over
100,000.00
Plus
Of the Excess
Over
2%
100,000.00
500,000.00
P 2,000.00
4%
200,000.00
1,000,000.00
14,000.00
6%
500,000.00
44,000.00
8%
1,000,000.00
204,000.00
10%
3,000,000.00
SEC. 85. 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.
(A) Decedent's Interest. - To the extent of the interest therein of the
decedent at the time of his death;
(B) Transfer in Contemplation of Death. - To the extent of any interest
therein of which the decedent has at any time made a transfer, by trust or
otherwise, in contemplation of or intended to take effect in possession or
enjoyment at or after death, or of which he has at any time made a transfer,
by trust or otherwise, under which he has retained for his life or for any
period which does not in fact end before his death (1) the possession or
enjoyment of, or the right to the income from the property, or (2) the right,
either alone or in conjunction with any person, to designate the person who
shall possess or enjoy the property or the income therefrom; except in case
of a bonafide sale for an adequate and full consideration in money or
money's worth.
(C) Revocable Transfer. (1) To the extent of any interest therein, of which the decedent has at any
time made a transfer (except in case of a bona fide sale for an adequate and
full consideration in money or money's worth) 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 (in whatever capacity exerciseable) by the
decedent alone or by the decedent in conjunction with any other person
(without regard to when or from what source the decedent acquired such
power), t o alter, amend, revoke, or terminate, or where any such power is
relinquished in contemplation of the decedent's death.
(2) For the purpose of this Subsection, the power to alter, amend or revoke
shall be considered to exist on the date of the decedent's death even though
the exercise of the power is subject to a precedent giving of notice or even
37
though the alteration, amendment or revocation takes effect only on the

expiration of a stated period after the exercise of the power, whether or not
on or before the date of the decedent's death notice has been given or the
power has been exercised. In such cases, proper adjustment shall be made
representing the interests which would have been excluded from the power
if the decedent had lived, and for such purpose if the notice has not been
given or the power has not been exercised on or before the date of his
death, such notice shall be considered to have been given, or the power
exercised, on the date of his death.
(D) Property Passing Under General Power of Appointment. - To the extent of
any property passing under a general power of appointment exercised by the
decedent: (1) by will, or (2) by deed executed in contemplation of, or
intended to take effect in possession or enjoyment at, or after his death, or
(3) by deed under which he has retained for his life or any period not
ascertainable without reference to his death or for any period which does
not in fact end before his death (a) the possession or enjoyment of, or the
right to the income from, the property, or (b) the right, either alone or in
conjunction with any person, to designate the persons who shall possess or
enjoy the property or the income therefrom; except in case of a bona fide
sale for an adequate and full consideration in money or money's worth.
(E) Proceeds of Life Insurance. - To the extent of the amount receivable by
the estate of the deceased, his executor, or administrator, as insurance
under policies taken out by the decedent upon his own life, irrespective of
whether or not the insured retained the power of revocation, or to the
extent of the amount receivable by any beneficiary designated in the policy
of insurance, except when it is expressly stipulated that the designation of
the beneficiary is irrevocable.
(F) Prior Interests. - Except as otherwise specifically provided therein,
Subsections (B), (C) and (E) of this Section shall apply to the transfers, trusts,
estates, interests, rights, powers and relinquishment of powers, as severally
enumerated and described therein, whether made, created, arising, existing,
exercised or relinquished before or after the effectivity of this Code.
(G) Transfers of Insufficient Consideration. - If any one of the transfers,
trusts, interests, rights or powers enumerated and described in Subsections
(B), (C) and (D) of this Section is made, created, exercised or relinquished for
a consideration in money or money's worth, but is not a bona fide sale for an
adequate and full consideration in money or money's worth, there shall be
included in the gross estate only the excess of the fair market value, at the
time of death, of the property otherwise to be included on account of such
transaction, over the value of the consideration received therefor by the
decedent.
(H) Capital of the Surviving Spouse. - The capital of the surviving spouse of a
decedent shall not, for the purpose of this Chapter, be deemed a part of his
or her gross estate.
SEC. 86. Computation of Net Estate. - For the purpose of the tax imposed in
this Chapter, the value of the net estate shall be determined:
(A) Deductions Allowed to the Estate of Citizen or a Resident. - In the case of
a citizen or resident of the Philippines, by deducting from the value of the
gross estate (1) Expenses, Losses, Indebtedness, and taxes. - Such amounts (a) For actual funeral expenses or in an amount equal to five percent (5%) of
the gross estate, whichever is lower, but in no case to exceed Two hundred
thousand pesos (P200,000);
(b) For judicial expenses of the testamentary or intestate proceedings;

(c) For claims against the estate: Provided, That at the time the indebtedness
was incurred the debt instrument was duly notarized and, 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;
(d) For claims of the deceased against insolvent persons where the value of
decedent's interest therein is included in the value of the gross estate; and
(e) For unpaid mortgages upon, or any indebtedness in respect to, property
where the value of decedent's interest therein, undiminished by such
mortgage or indebtedness, is included in the value of the gross estate, but
not including any income tax upon income received after the death of the
decedent, or property taxes not accrued before his death, or any estate tax.
The deduction herein allowed in the case of claims against the estate, unpaid
mortgages or any indebtedness shall, when founded upon a promise or
agreement, be limited to the extent that they were contracted bona fide and
for an adequate and full consideration in money or money's worth. There
shall also be deducted losses incurred during the settlement of the estate
arising from fires, storms, shipwreck, or other casualties, or from robbery,
theft or embezzlement, when such losses are not compensated for by
insurance or otherwise, and if at the time of the filing of the return such
losses have not been claimed as a deduction for the income tax purposes in
an income tax return, and provided that such losses were incurred not later
than the last day for the payment of the estate tax as prescribed in
Subsection (A) of Section 91.
(2) Property Previously Taxed. - An amount equal to the value specified
below of any property forming a part of the gross estate situated in the
Philippines of any person who died within five (5) years prior to the death of
the decedent, or transferred to the decedent by gift within five (5) years
prior to his death, where such property can be identified as having been
received by the decedent from the donor by gift, or from such prior decedent
by gift, bequest, devise or inheritance, or which can be identified as having
been acquired in exchange for property so received:
One hundred percent (100%) of the value, if the prior decedent died within
one (1) year prior to the death of the decedent, or if the property was
transferred to him by gift within the same period prior to his death;
Eighty percent (80%) of the value, if the prior decedent died more than one
(1) year but not more than two (2) years prior to the death of the decedent,
or if the property was transferred to him by gift within the same period prior
to his death;
Sixty percent (60%) of the value, if the prior decedent died more than two (2)
years but not more than three (3) years prior to the death of the decedent,
to his death;
Forty percent (40%) of the value, if the prior decedent died more than three
(3) years but not more than four (4) years prior to the death of the decedent,
to his death;
Twenty percent (20%) of the value, if the prior decedent died more than four
(4) years but not more than five (5) years prior to the death of the decedent,
to his death;
38
These deductions shall be allowed only where a donor's tax or estate tax
imposed under this Title was finally determined and paid by or on behalf of
such donor, or the estate of such prior decedent, as the case may be, and
only in the amount finally determined as the value of such property in
determining the value of the gift, or the gross estate of such prior decedent,
and only to the extent that the value of such property is included in the
decedent's gross estate, and only if in determining the value of the estate of
the prior decedent, no deduction was allowable under paragraph (2) in
respect of the property or properties given in exchange therefor. Where a
deduction was allowed of any mortgage or other lien in determining the
donor's tax, or the estate tax of the prior decedent, which was paid in whole
or in part prior to the decedent's death, then the deduction allowable under
said Subsection shall be reduced by the amount so paid. Such deduction
allowable shall be reduced by an amount which bears the same ratio to the
amounts allowed as deductions under paragraphs (1) and (3) of this
Subsection as the amount otherwise deductible under said paragraph (2)
bears to the value of the decedent's estate. Where the property referred to
consists of two or more items, the aggregate value of such items shall be
used for the purpose of computing the deduction.
(3) Transfers for Public Use. - The amount of all the bequests, legacies,
devises or transfers to or for the use of the Government of the Republic of
the Philippines, or any political subdivision thereof, for exclusively public
purposes.
(4) The Family Home. - An amount equivalent to the current fair market value
of the decedent's family home: Provided, however, That if the said current
fair market value exceeds One million pesos (P1,000,000), the excess shall be
subject to estate tax. As a sine qua non condition for the exemption or
deduction, said family home must have been the decedent's family home as
certified by the barangay captain of the locality.
(5) Standard Deduction. - An amount equivalent to One million pesos
(P1,000,000).
(6) Medical Expenses. - Medical Expenses incurred by the decedent within
one (1) year prior to his death which shall be duly substantiated with
receipts: Provided, That in no case shall the deductible medical expenses
exceed Five Hundred Thousand Pesos (P500,000).
(7) Amount Received by Heirs Under Republic Act No. 4917. - Any amount
received by the heirs from the decedent - employee as a consequence of the
death of the decedent-employee in accordance with Republic Act No. 4917:
Provided, That such amount is included in the gross estate of the decedent.
(B) Deductions Allowed to Nonresident Estates. - In the case of a nonresident
not a citizen of the Philippines, by deducting from the value of that part of his
gross estate which at the time of his death is situated in the Philippines:
(1) Expenses, Losses, Indebtedness and Taxes. - That proportion of the
deductions specified in paragraph (1) of Subsection (A) of this Section which
the value of such part bears to the value of his entire gross estate wherever
situated;
(2) Property Previously Taxed. - An amount equal to the value specified
below of any property forming part of the gross estate situated in the
Philippines of any person who died within five (5) years prior to the death of
the decedent, or transferred to the decedent by gift within five (5) years
prior to his death, where such property can be identified as having been
received by the decedent from the donor by gift, or from such prior decedent
by gift, bequest, devise or inheritance, or which can be identified as having
been acquired in exchange for property so received:
One hundred percent (100%) of the value if the prior decedent died within
one (1) year prior to the death of the decedent, or if the property was
transferred to him by gift, within the same period prior to his death;
Eighty percent (80%) of the value, if the prior decedent died more than one
(1) year but not more than two (2) years prior to the death of the decedent,
to his death;
Sixty percent (60%) of the value, if the prior decedent died more than two (2)
years but not more than three (3) years prior to the death of the decedent,
to his death;
Forty percent (40%) of the value, if the prior decedent died more than three
(3) years but not more than four (4) years prior to the death of the decedent,
to his death; and
Twenty percent (20%) of the value, if the prior decedent died more than four
(4) years but not more than five (5) years prior to the death of the decedent,
to his death.
These deductions shall be allowed only where a donor's tax, or estate tax
imposed under this Title is finally determined and paid by or on behalf of
such donor, or the estate of such prior decedent, as the case may be, and
only in the amount finally determined as the value of such property in
determining the value of the gift, or the gross estate of such prior decedent,
and only to the extent that the value of such property is included in that part
of the decedent's gross estate which at the time of his death is situated in
the Philippines; and only if, in determining the value of the net estate of the
prior decedent, no deduction is allowable under paragraph (2) of Subsection
(B) of this Section, in respect of the property or properties given in exchange
therefore. Where a deduction was allowed of any mortgage or other lien in
determining the donor's tax, or the estate tax of the prior decedent, which
was paid in whole or in part prior to the decedent's death, then the
deduction allowable under said paragraph shall be reduced by the amount so
paid. Such deduction allowable shall be reduced by an amount which bears
the same ratio to the amounts allowed as deductions under paragraphs (1)
and (3) of this Subsection as the amount otherwise deductible under
paragraph (2) bears to the value of that part of the decedent's gross estate
which at the time of his death is situated in the Philippines. Where the
property referred to consists of two (2) or more items, the aggregate value of
such items shall be used for the purpose of computing the deduction.
(E) Tax Credit for Estate Taxes paid to a Foreign Country. (1) In General. - The tax imposed by this Title shall be credited with the
amounts of any estate tax imposed by the authority of a foreign country.
(2) Limitations on Credit. - The amount of the credit taken under this Section
shall be subject to each of the following limitations:
(a) 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
this Title bears to his entir net estate; and
(b) 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 this Title bears to his entire
net estate.
SEC. 87 Exemption of Certain Acquisitions and Transmissions. - The
following shall not be taxed:
(A) The merger of usufruct in the owner of the naked title;
(B) The transmission or delivery of the inheritance or legacy by the fiduciary
heir or legatee to the fideicommissary;
(C) The transmission from the first heir, legatee or donee in favor of another
beneficiary, in accordance with the desire of the predecessor; and
(D) All bequests, devises, legacies or transfers to social welfare, cultural and
charitable institutions, no part of the net income of which insures to the
benefit of any individual: Provided, however, That not more than thirty
percent (30%) of the said bequests, devises, legacies or transfers shall be
used by such institutions for administration purposes.
SEC. 88. Determination of the Value of the Estate. (A) Usufruct. - To determine the value of the right of usufruct, use or
habitation, as well as that of annuity, there shall be taken into account the
probable life of the beneficiary in accordance with the latest Basic Standard
Mortality Table, to be approved by the Secretary of Finance, upon
recommendation of the Insurance Commissioner.
(B) Properties. - The estate shall be appraised at its fair market value as of
the time of death. However, the appraised value of real property as of the
time of death shall be, whichever is higher of -
(3) Transfers for Public Use. - The amount of all bequests, legacies, devises or
transfers to or for the use of the Government of the Republic of the
Philippines or any political subdivision thereof, for exclusively public
purposes.
(1) The fair market value as determined by the Commissioner, or
(C) Share in the Conjugal Property. - the net share of the surviving spouse in
the conjugal partnership property as diminished by the obligations properly
chargeable to such property shall, for the purpose of this Section, be
deducted from the net estate of the decedent.
SEC. 89. Notice of Death to be Filed. - In all cases of transfers subject to tax,
or where, though exempt from tax, the gross value of the estate exceeds
Twenty thousand pesos (P20,000), the executor, administrator or any of the
legal heirs, as the case may be, within two (2) months after the decedent's
death, or within a like period after qualifying as such executor or
administrator, shall give a written notice thereof to the Commissioner.
(D) Miscellaneous Provisions. - No deduction shall be allowed in the case of a

nonresident not a citizen of the Philippines, unless the executor,
administrator, or anyone of the heirs, as the case may be, includes in the
return required to be filed under Section 90 the value at the time of his death
of that part of the gross estate of the nonresident not situated in the
Philippines.
39
(2) The fair market value as shown in the schedule of values fixed by the
Provincial and City Assessors.
SEC. 90. Estate Tax Returns. (A) Requirements. - In all cases of transfers subject to the tax imposed
herein, or where, though exempt from tax, the gross value of the estate
exceeds Two hundred thousand pesos (P200,000), or regardless of the gross

value of the estate, where 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, the executor, or the administrator, or any of the
legal heirs, as the case may be, shall file a return under oath in duplicate,
setting forth:
extension is granted shall be paid on or before the date of the expiration of

the period of the extension, and the running of the Statute of Limitations for
assessment as provided in Section 203 of this Code shall be suspended for
the period of any such extension.
(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;
If an extension is granted, the Commissioner may require the executor, or

administrator, or beneficiary, as the case may be, to furnish a bond in such
amount, not exceeding double the amount of the tax and with such sureties
as the Commissioner deems necessary, conditioned upon the payment of the
said tax in accordance with the terms of the extension.
(2) The deductions allowed from gross estate in determining the estate as
defined in Section 86; 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.
Provided, however, That estate tax returns showing a gross value exceeding
Two million pesos (P2,000,000) shall be supported with a statement duly
certified to by a Certified Public Accountant containing the following:
(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;
Where the taxes are assessed by reason of negligence, intentional disregard

of rules and regulations, or fraud on the part of the taxpayer, no extension
will be granted by the Commissioner.
(C) Liability for Payment - The estate tax imposed by Section 84 shall be paid
by the executor or administrator before delivery to any beneficiary of his
distributive share of the estate. Such beneficiary shall to the extent of his
distributive share of the estate, be subsidiarily liable for the payment of such
portion of the estate tax as his distributive share bears to the value of the
total net estate.
For the purpose of this Chapter, the term 'executor' or 'administrator' means
the executor or administrator of the decedent, or if there is no executor or
administrator appointed, qualified, and acting within the Philippines, then
any person in actual or constructive possession of any property of the
decedent.
(b) Itemized deductions from gross estate allowed in Section 86; and
(c) The amount of tax due whether paid or still due and outstanding.
(B) Time for filing. - For the purpose of determining the estate tax provided
for in Section 84 of this Code, the estate tax return required under the
preceding Subsection (A) shall be filed within six (6) months from the
decedent's death.
A certified copy of the schedule of partition and the order of the court
approving the same shall be furnished the Commissioner within thirty (30)
after the promulgation of such order.
(C) Extension of Time. - The Commissioner shall have authority to grant, in
meritorious cases, a reasonable extension not exceeding thirty (30) days for
filing the return.
(D) Place of Filing. - Except in cases where the Commissioner otherwise
permits, the return required under Subsection (A) shall be filed with an
authorized agent bank, or Revenue District Officer, Collection Officer, or duly
authorized Treasurer of the city or municipality in which the decedent was
domiciled at the time of his death or if there be no legal residence in the
Philippines, with the Office of the Commissioner.
SEC. 91. Payment of Tax. (A) Time of Payment. - The estate tax imposed by Section 84 shall be paid at
the time the return is filed by the executor, administrator or the heirs.
(B) Extension of Time. - When the Commissioner 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, he may extend the time for
payment of such tax or any part thereof not to exceed five (5) years, in case
the estate is settled through the courts, or two (2) years in case the estate is
settled extrajudicially. In such case, the amount in respect of which the
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SEC. 92. Discharge of Executor or Administrator from Personal Liability. - If

the executor or administrator makes a written application to the
Commissioner for determination of the amount of the estate tax and
discharge from personal liability therefore, the Commissioner (as soon as
possible, and in any event within one (1) year after the making of such
application, or if the application is made before the return is filed, then
within one (1) year after the return is filed, but not after the expiration of the
period prescribed for the assessment of the tax in Section 203 shall not notify
the executor or administrator of the amount of the tax. The executor or
administrator, upon payment of the amount of which he is notified, shall be
discharged from personal liability for any deficiency in the tax thereafter
found to be due and shall be entitled to a receipt or writing showing such
discharge.
SEC. 93. Definition of Deficiency. - As used in this Chapter, the term
'deficiency' means:
(a) The amount by which the tax imposed by this Chapter exceeds the
amount shown as the tax by the executor, administrator or any of the heirs
upon his return; but the amounts so shown on the return shall first be
increased by the amounts previously assessed (or collected without
assessment) as a deficiency and decreased by the amount previously abated,
refunded or otherwise repaid in respect of such tax; or
(b) If no amount is shown as the tax by the executor, administrator or any of
the heirs upon his return, or if no return is made by the executor,
administrator, or any heir, then the amount by which the tax exceeds the
amounts previously assessed (or collected without assessment) as a
deficiency; but such amounts previously assessed or collected without
assessment shall first be decreased by the amounts previously abated,
refunded or otherwise repaid in respect of such tax.
SEC. 94. Payment before Delivery by Executor or Administrator. - No judge
shall authorize the executor or judicial administrator to deliver a distributive
share to any party interested in the estate unless a certification from the
Commissioner that the estate tax has been paid is shown.
SEC. 95. Duties of Certain Officers and Debtors. - Registers of Deeds shall not
register in the Registry of Property any document transferring real property
or real rights therein or any chattel mortgage, by way of gifts inter vivos or
mortis causa, legacy or inheritance, unless a certification from the
Commissioner that the tax fixed in this Title and actually due thereon had
been paid is show, and they shall immediately notify the Commissioner,
Regional Director, Revenue District Officer, or Revenue Collection Officer or
Treasurer of the city or municipality where their offices are located, of the
non payment of the tax discovered by them. Any lawyer, notary public, or
any government officer who, by reason of his official duties, intervenes in the
preparation or acknowledgment of documents regarding partition or disposal
of donation intervivos or mortis causa, legacy or inheritance, shall have the
duty of furnishing the Commissioner, Regional Director, Revenue District
Officer or Revenue Collection Officer of the place where he may have his
principal office, with copies of such documents and any information
whatsoever which may facilitate the collection of the aforementioned tax.
Neither shall a debtor of the deceased pay his debts to the heirs, legatee,
executor or administrator of his creditor, unless the certification of the
Commissioner that the tax fixed in this Chapter had been paid is shown; but
he may pay the executor or judicial administrator without said certification if
the credit is included in the inventory of the estate of the deceased.
SEC. 96. Restitution of Tax Upon Satisfaction of Outstanding Obligations. - If
after the payment of the estate tax, new obligations of the decedent shall
appear, and the persons interested shall have satisfied them by order of the
court, they shall have a right to the restitution of the proportional part of the
tax paid.
SEC. 97. Payment of Tax Antecedent to the Transfer of Shares, Bonds or
Rights. - There shall not be transferred to any new owner in the books of any
corporation, sociedad anonima, partnership, business, or industry organized
or established in the Philippines any share, obligation, bond or right by way
of gift inter vivos or mortis causa, legacy or inheritance, unless a certification
from the Commissioner that the taxes fixed in this Title and due thereon
have been paid is shown.
If a bank has knowledge of the death of a person, who maintained a bank
deposit account alone, or jointly with another, it shall not allow any
withdrawal from the said deposit account, unless the Commissioner has
certified that the taxes imposed thereon by this Title have been paid:
Provided, however, That the administrator of the estate or any one (1) of the
heirs of the decedent may, upon authorization by the Commissioner,
withdraw an amount not exceeding Twenty thousand pesos (P20,000)
without the said certification. For this purpose, all withdrawal slips shall
contain a statement to the effect that all of the joint depositors are still living
at the time of withdrawal by any one of the joint depositors and such
statement shall be under oath by the said depositors.
CHAPTER II - DONOR'S TAX
SEC. 98. Imposition of Tax. -
SEC. 99. Rates of Tax Payable by Donor. (A) In General. - The tax for each calendar year shall be computed on the
basis of the total net gifts made during the calendar year in accordance with
the following schedule:
But not Over
The Tax
Shall be
50,000.00
exempt
50,000.00
100,000.00
1.5%
100,000.00
200,000.00
P 750.00
3%
100,000.00
200,000.00
500,000.00
3,750.00
5%
200,000.00
500,000.00
1,000,000.00
18,750.00
8%
500,000.00
1,000,000.00
3,000,000.00
58,750.00
10%
1,000,000.00
3,000,000.00
5,000,000.00
258,750.00
15%
3,000,000.00
5,000,000.00
and over
558,750.00
20%
5,000,000.00
Net Gift Over
Plus
Of the Excess
Over
50,000.00
(B) Tax Payable by Donor if Donee is a Stranger. - When the donee or

beneficiary is stranger, the tax payable by the donor shall be thirty percent
(30%) of the net gifts. For the purpose of this tax, a 'stranger,' is a person
who is not a:
(1) Brother, sister (whether by whole or half-blood), spouse, ancestor and
lineal descendant; or
(2) Relative by consanguinity in the collateral line within the fourth degree of
relationship.
(C) Any contribution in cash or in kind to any candidate, political party or
coalition of parties for campaign purposes shall be governed by the Election
Code, as amended.
SEC. 100. Transfer for Less Than Adequate and full Consideration. - Where
property, other than real property referred to in Section 24(D), is transferred
for less than an adequate and full consideration in money or money's worth,
then the amount by which the fair market value of the property exceeded
the value of the consideration shall, for the purpose of the tax imposed by
this Chapter, be deemed a gift, and shall be included in computing the
amount of gifts made during the calendar year.
SEC. 101. Exemption of Certain Gifts. - The following gifts or donations shall
be exempt from the tax provided for in this Chapter:
(A) In the Case of Gifts Made by a Resident. -
(A) There shall be levied, assessed, collected and paid upon the transfer by
any person, resident or nonresident, of the property by gift, a tax, computed
as provided in Section 99.
(1) Dowries or gifts made on account of marriage and before its celebration
or within one year thereafter by parents to each of their legitimate,
recognized natural, or adopted children to the extent of the first Ten
thousand pesos (P10,000):
(B) The tax 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.
(2) 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; and
41
(3) Gifts in favor of an educational and/or charitable, religious, cultural or

social welfare corporation, institution, accredited nongovernment
organization, trust or philanthrophic organization or research institution or
organization: Provided, however, That not more than thirty percent (30%) of
said gifts shall be used by such donee for administration purposes. For the
purpose of the exemption, a 'non-profit educational and/or charitable
corporation, institution, accredited nongovernment organization, trust or
philanthrophic organization and/or research institution or organization' is a
school, college or university and/or charitable corporation, accredited
nongovernment organization, trust or philanthrophic organization and/or
research institution or organization, incorporated as a nonstock entity,
paying no dividends, governed by trustees who receive no compensation,
and devoting all its income, whether students' fees or gifts, donation,
subsidies or other forms of philanthrophy, to the accomplishment and
promotion of the purposes enumerated in its Articles of Incorporation.
(B) In the Case of Gifts Made by a Nonresident not a Citizen of the
Philippines. (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, foundation, trust or philanthrophic
organization or research institution or organization: Provided, however, That
not more than thirty percent (30% of said gifts shall be used by such donee
for administration purposes.
(C) Tax Credit for Donor's Taxes Paid to a Foreign Country. (1) In General. - The tax imposed by this Title 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 tax of any character and description imposed by the authority of
a foreign country.
(2) Limitations on Credit. - The amount of the credit taken under this Section
shall be subject to each of the following limitations:
(a) 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 net gifts situated within such country taxable under this Title bears
to his entire net gifts; and
(b) The total amount of the 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 this title bears to his entire net
gifts.
SEC. 102. Valuation of Gifts Made in Property. - If the gift is made in
property, the fair market value thereof at the time of the gift shall be
considered the amount of the gift. In case of real property, the provisions of
Section 88(B) shall apply to the valuation thereof.
SEC. 103. Filing of Return and Payment of Tax. (A) Requirements. - any individual who makes any transfer by gift (except
those which, under Section 101, are exempt from the tax provided for in this
Chapter) shall, for the purpose of the said tax, make a return under oath in
duplicate. The return shall se forth:
42
(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; and
(5) Such further information as may be required by rules and regulations
made pursuant to law.
(B) Time and Place of Filing and Payment. - The return of the donor required
in this Section shall be filed within thirty (30) days after the date the gift is
made and the tax due thereon shall be paid at the time of filing. Except in
cases where the Commissioner otherwise permits, the return shall be filed
and the tax paid to an authorized agent bank, the Revenue District Officer,
Revenue Collection Officer or duly authorized Treasurer of the city or
municipality where the donor was domiciled at the time of the transfer, or if
there be no legal residence in the Philippines, with the Office of the
Commissioner. In the case of gifts made by a nonresident, the return may be
filed with the Philippine Embassy or Consulate in the country where he is
domiciled at the time of the transfer, or directly with the Office of the
Commissioner.
SEC. 104. Definitions. - For purposes of this Title, the terms 'gross estate' and
'gifts' include real and personal property, whether tangible or intangible, or
mixed, wherever situated: Provided, however, That where the decedent or
donor was a nonresident alien at the time of his death or donation, as the
case may be, his real and personal property so transferred but which are
situated outside the Philippines shall not be included as part of his 'gross
estate' or 'gross gift': Provided, further, That 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 by any foreign
corporation eighty-five percent (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, shall be considered as situated in the
Philippines: Provided, still further, that no tax shall be collected under this
Title in respect of intangible personal property: (a) if the decedent at the
time of his death or the donor at the time of the donation was a citizen and
resident of a foreign country which at the time of his death or donation 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
(b) if the laws of the foreign country of which the decedent or donor was a
citizen and resident at the time of his death or donation allows a similar
exemption from transfer or death taxes of every character or description in
respect of intangible personal property owned by citizens of the Philippines
not residing in that foreign country.
The term 'deficiency' means: (a) the amount by which tax imposed by this
Chapter exceeds the amount shown as the tax by the donor upon his return;
but the amount so shown on the return shall first be increased by the
amount previously assessed (or Collected without assessment) as a
deficiency, and decreased by the amounts previously abated, refunded or
otherwise repaid in respect of such tax, or (b) if no amount is shown as the
tax by the donor, then the amount by which the tax exceeds the amounts
previously assessed, (or collected without assessment) as a deficiency, but
such amounts previously assessed, or collected without assessment, shall
first be decreased by the amount previously abated, refunded or otherwise

repaid in respect of such tax.
VALUE- ADDED TAX
SEC. 105. Persons Liable. - Any person who, in the course of trade or
business, sells barters, exchanges, leases goods or properties, renders
services, and any person who imports goods shall be subject to the valueadded tax (VAT) imposed in Sections 106 to 108 of this Code.
"The term 'gross selling price' means the total amount of money or its
equivalent which the purchaser pays or is obligated to pay to the seller in
consideration of the sale, barter or exchange of the goods or properties,
excluding the value-added tax. The excise tax, if any, on such goods or
properties shall form part of the gross selling price.
"(2) The following sales by VAT-registered persons shall be subject to zero
percent (0%) rate:
"(a) Export Sales. - The term 'export sales' means:
The value-added tax is an indirect tax and the amount of tax may be shifted
or passed on to the buyer, transferee or lessee of the goods, properties or
services. This rule shall likewise apply to existing contracts of sale or lease of
goods, properties or services at the time of the effectivity of Republic Act No.
7716.
The phrase 'in the course of trade or business' means the regular conduct or
pursuit of a commercial or an economic activity, including transactions
incidental thereto, by any person regardless of whether or not the person
engaged therein is a nonstock, nonprofit private organization (irrespective of
the disposition of its net income and whether or not it sells exclusively to
members or their guests), or government entity.
The rule of regularity, to the contrary notwithstanding, services as defined in
this Code rendered in the Philippines by nonresident foreign persons shall be
considered as being course of trade or business.
SEC. 106. Value-Added Tax on Sale of Goods or Properties. "(A) Rate and Base of Tax. - There shall be levied, assessed and collected on
every sale, barter or exchange of goods or properties, a value-added tax
equivalent to ten percent (10%) of the gross selling price or gross value in
money of the goods or properties sold, bartered or exchanged, such tax to be
paid by the seller or transferor: Provided, That the President, upon the
recommendation of the Secretary of Finance, shall, effective January 1, 2006,
raise the rate of value-added tax to twelve percent (12%), after any of the
following conditions has been satisfied:
"(i) Value-added tax collection as a percentage of Gross Domestic product
(GDP) of the previous year exceeds two and four-fifth percent (2 4/5%); or
"(ii) National government deficit as a percentage of GDP of the previous year
exceeds one and one-half percent (1 1/2%).
"(1) The term 'goods or properties' shall mean all tangible and intangible
objects which are capable of pecuniary estimation and shall include:
"(a) Real properties held primarily for sale to customers or held for lease in
the ordinary course of trade or business;
"(b) The right or the privilege to use patent, copyright, design or model, plan
secret formula or process, goodwill, trademark, trade brand or other like
property or right;
"(c) The right or the privilege to use in the Philippines of any industrial,
commercial or scientific equipment;
"(d) The right or the privilege to use motion picture films, films, tapes and
discs; and
"(1) The sale and actual shipment of goods from the Philippines to a foreign
country, irrespective of any shipping arrangement that may be agreed upon
which may influence or determine the transfer of ownership of the goods so
exported and paid for in acceptable foreign currency or its equivalent in
goods or services, and accounted for in accordance with the rules and
regulations of the Bangko Sentral ng Pilipinas,(BSP);
"(2) Sale of raw materials or packaging materials to a nonresident buyer for
delivery to a resident local export-oriented enterprise to be used in
manufacturing, processing, packing or repacking in the Philippines of the said
buyer's goods and paid for in acceptable foreign currency and accounted for
in accordance with the rules and regulations of the Bangko Sentral ng
Pilipinas (BSP):
"(3) Sale of raw materials or packaging materials to export-oriented
enterprise whose export sales exceed seventy percent (70%) of total annual
production;
"(4) Sale of gold to the Bangko Sentral ng Pilipinas (BSP);
"(5) Those considered export sales under Executive Order No. 226, otherwise
known as the Omnibus Investment Code of 1987, and other special laws; and
"(6) The sale of goods, supplies, equipment and fuel to persons engaged in
international shipping or international air transport operations.
"(b) Foreign Currency Denominated Sale. - The phrase 'foreign currency
denominated sale' means sale to a nonresident of goods, except those
mentioned in Sections 149 and 150, assembled or manufactured in the
Philippines for delivery to a resident in the Philippines, paid for in acceptable
foreign currency and accounted for in accordance with the rules and
regulations of the Bangko Sentral ng Pilipinas (BSP).
"(c) Sales to persons or entities whose exemption under special laws or
international agreements to which the Philippines is a signatory effectively
subjects such sales to zero rate.
"(B) Transactions Deemed Sale. - The following transactions shall be deemed
sale:
"(1) Transfer, use or consumption not in the course of business of goods or
properties originally intended for sale or for use in the course of business;
"(2) Distribution or transfer to:
"(a) Shareholders or investors as share in the profits of the VAT-registered
persons: or
"(b) Creditors in payment of debt;
"(e) Radio, television, satellite transmission and cable television time.

"(3) Consignment of goods if actual sale is not made within sixty (60) days
following the date such goods, were consigned; and
43
"(4) Retirement from or cessation of business, with respect to inventories of

taxable goods existing as of such retirement or cessation.
"(C) Changes in or Cessation of Status of a VAT-registered Person. - The tax
imposed in Subsection (A) of this Section shall also apply to goods disposed
of or existing as of a certain date if under circumstances to be prescribed in
rules and regulations to be promulgated by the Secretary of Finance, upon
recommendation of the Commissioner, the status of a person as a VATregistered person changes or is terminated.
"(D) Sales Returns, Allowances and Sales Discounts. - The value of goods or
properties sold and subsequently returned or for which allowances were
granted by a VAT-registered person may be deducted from the gross sales or
receipts for the quarter in which a refund is made or a credit memorandum
or refund is issued. Sales discount granted and indicated in the invoice at the
time of sale and the grant of which does not depend upon the happening of a
future event may be excluded from the gross sales within the same quarter it
was given.
"(E) Authority of the Commissioner to Determine the Appropriate Tax Base. The Commissioner shall, by rules and regulations prescribed by the Secretary
of Finance, determine the appropriate tax base incases where a transaction
is deemed a sale, barter or exchange of goods or properties under
Subsection (B) hereof, or where the gross selling price is unreasonably lower
than the actual market value."
"SEC. 107. Value-Added Tax on Importation of Goods. "(A) In General. - There shall be levied, assessed and collected on every
importation of goods a value-added tax equivalent to ten percent (10%)
based on the total value used by the Bureau of Customs in determining tariff
and customs duties, plus customs duties, excise taxes, if any, and other
charges, such tax to be paid by the importer prior to the release of such
goods from customs custody: Provided, That where the customs duties are
determined on the basis of the quantity or volume of the goods, the valueadded tax shall be based on the landed cost plus excise taxes, if any:
Provided, further, That the President, upon the recommendation of the
Secretary of Finance, shall, effective January 1, 2006, raise the rate of valueadded tax to twelve percent (12%), after any of the following conditions has
been satisfied:
"(i) Value-added tax collection as a percentage of Gross Domestic Product
"(ii) National government deficit as a percentage of GDP of the previous year
"(B) Transfer of Goods by Tax-exempt Persons. - In the case of tax free
importation of goods into the Philippines by persons, entities or agencies
exempt from tax where such goods are subsequently sold, transferred or
exchanged in the Philippines to non-exempt persons or entities, the
purchasers, transferees or recipients shall be considered the importers
thereof, who shall be liable for any internal revenue tax on such importation.
The tax due on such importation shall constitute a lien on the goods superior
to all charges or liens on the goods, irrespective of the possessor thereof."
"SEC. 108. Value-added Tax on Sale of Services and Use or Lease of
Properties. (A) Rate and Base of Tax. - There shall be levied, assessed and collected, a
value-added tax equivalent to ten percent (10%) of gross receipts derived
from the sale or exchange of services, including the use or lease of
44
properties: Provided, That the President, upon the recommendation of the

Secretary of Finance, shall, effective January 1, 2006, raise the rate of valueadded tax to twelve percent (12%), after any of the following conditions has
been satisfied:
(i) Value-added tax collection as a percentage of Gross Domestic Product
(ii) National government deficit as a percentage of GDP of the previous year
"The phrase 'sale or exchange of services' means the performance of all kinds
of services in the Philippines for others for a fee, remuneration or
consideration, including those performed or rendered by construction and
service contractors; stock, real estate, commercial, customs and immigration
brokers; lessors of property, whether personal or real; warehousing services;
lessors or distributors of cinematographic films; persons engaged in milling,
processing, manufacturing or repacking goods for others; proprietors,
operators or keepers of hotels, motels, rest-houses, pension houses, inns,
resorts; proprietors or operators of restaurants, refreshment parlors, cafes
and other eating places, including clubs and caterers; dealers in securities;
lending investors; transportation contractors on their transport of goods or
cargoes, including persons who transport goods or cargoes for hire and other
domestic common carriers by land relative to their transport of goods or
cargoes; common carriers by air and sea relative to their transport of
passengers, goods or cargoes from one place in the Philippines to another
place in the Philippines; sales of electricity by generation companies,
transmission, and distribution companies; services of franchise grantees of
electric utilities, telephone and telegraph, radio and television broadcasting
and all other franchise grantees except those under Section 119 of this Code
and non-life insurance companies (except their crop insurances), including
surety, fidelity, indemnity and bonding companies; and similar services
regardless of whether or not the performance thereof calls for the exercise
or use of the physical or mental faculties. The phrase 'sale or exchange of
services' shall likewise include:
"(1) The lease or the use of or the right or privilege to use any copyright,
patent, design or model plan, secret formula or process, goodwill, trademark,
trade brand or other like property or right;
"(2) The lease or the use of, or the right to use of any industrial, commercial
or, scientific equipment;
"(3) The supply of scientific, technical, industrial or commercial knowledge or
information;
"(4) The supply of any assistance that is ancillary and subsidiary to and is
furnished as a means of enabling the application or enjoyment of any such
property, or right as is mentioned in subparagraph (2) or any such knowledge
or information as is mentioned in subparagraph (3);
"(5) The supply of services by a nonresident person or his employee in
connection with the use of property or rights belonging to, or the installation
or operation of any brand, machinery or other apparatus purchased from
such nonresident person;
"(6) The supply of technical advice, assistance or services rendered in
connection with technical management or administration of any scientific,
industrial or commercial undertaking, venture, project or scheme;
"(7) The lease of motion picture films, films, tapes and discs; and
"(8) The lease or the use of or the right to use radio, television, satellite
transmission and cable television time.
"Lease of properties shall be subject to the tax herein imposed irrespective of

the place where the contract of lease or licensing agreement was executed if
the property is leased or used in the Philippines.
"The term 'gross receipts' means the total amount of money or its equivalent
representing the contract price, compensation, service fee, rental or royalty,
including the amount charged for materials supplied with the services and
deposits and advanced payments actually or constructively received during
the taxable quarter for the services performed or to be performed for
another person, excluding value-added tax.
"(B) Transactions Subject to Zero Percent (0%) Rate. - The following services
performed in the Philippines by VAT-registered persons shall be subject to
zero percent (0%) rate:
"(1) Processing, manufacturing or repacking goods for other persons doing
business outside the Philippines which goods are subsequently exported,
where the services are paid for in acceptable foreign currency and accounted
for in accordance with the rules and regulations of the Bangko Sentral ng
Pilipinas (BSP);
"(2) Services other than those mentioned in the preceding paragraph
rendered to a person engaged in business conducted outside the Philippines
or to a nonresident person not engaged in business who is outside the
Philippines when the services are performed, the consideration for which is
paid for in acceptable foreign currency and accounted for in accordance with
the rules and regulations of the Bangko Sentral ng Pilipinas (BSP);
"(3) Services rendered to persons or entities whose exemption under special
laws or international agreements to which the Philippines is a signatory
effectively subjects the supply of such services to zero percent (0%) rate;
"(4) Services rendered to persons engaged in international shipping or
international air transport operations, including leases of property for use
thereof;
"(5) Services performed by subcontractors and/or contractors in processing,
converting, or manufacturing goods for an enterprise whose export sales
exceed seventy percent (70%) of total annual production;
"(6) Transport of passengers and cargo by air or sea vessels from the
Philippines to a foreign country; and
"(7) Sale of power or fuel generated through renewable sources of energy
such as, but not limited to, biomass, solar, wind, hydropower, geothermal,
ocean energy, and other emerging energy sources using technologies such as
fuel cells and hydrogen fuels.
45

ESTATE TAX GUIDE

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ESTATE TAX GUIDE

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TRANSFER TAXES

TRANSFER TAXES are taxes imposed upon the gratuitous disposition

Benefits-Received Theory The State expects to be

State Partnership Theory or Privilege Theory

Ability to Pay Theory Those who have more

Redistribution of Wealth Theory This is founded

However, it is to be noted that even if the transfer is onerous, the

ESTATE TAX (donation mortis causa) Tax levied on the

NATURE AND PURPOSE OF ESTATE TAX

Nature. Estate tax is laid neither on the property nor on

The primary reason for all taxes is to raise revenues.

To supplement income taxation because in the

II. APPLICABLE LAW IN ESTATE TAXATION

III. KINDS OF DECEDENT

The law in force at the time of death of the decedent

In estate taxation, the primary liability for the burden of

Resident Citizen one who is a Philippine citizen and

Resident Alien one who is not a Filipino but is

Non-Resident Citizen a Filipino who is not residing

Non-Resident Alien one who is not a Filipino and is

To prevent undue accumulation of wealth.

Inheritance Tax. Inheritance tax us a tax on the right of the

Residence. Residence: refers to the permanent home or

Justification of Estate Tax. There are four theories which

T A X A T I O N II Pre Midterms| maru.mhealler|404

For purposes of income taxation, an alien becomes a

residence of the owner. This principle, however, does not

Be reminded that the 180 day yardstick in income taxation

Under the Tax Code, the following intangible personal

Franchise which must be exercised in the Philippines;

Shares, obligations, or bonds issued by any

Shares, obligations, or bonds issued by any foreign

Shares, obligations, or bonds issued by any foreign

Shares or rights in partnership, business or industry

Therefore, in estate tax, there are only 2 categories for

NON CITIZEN, NON RESIDENT = NRA

IV. PROPERTIES COVERED BY GROSS ESTATE, IN

Non Resident Alien

All properties and interests in properties of the decedent

Citizen and Resident Alien Decedent:

Reciprocity Rule as to Intangible Personal Property. A

(a) Real property wherever situated;

(b) Tangible personal property situated in the

RECIPROCITY RULE: No tax shall be imposed in respect to

Non-Resident Alien Decedent:

In all other cases RA, RC, NRC their intangible personal

(a) When the foreign country does not impose transfer

V. VALUATION OF THE GROSS ESTATE

The estate shall be appraised at its fair market value as of

Real Property. If the property is a real property, the fair

Personal Property. Since there is no listing of FMV in the

In arriving at the estate tax payable, what will be covered

Estate tax credits may be available which can be offsetted

VII. COMPOSITION OF THE GROSS ESTATE

Unlisted Shares of Stock. Unlisted common shares are

VI. ESTATE TAX FORMULA, in brief

The decedents gross estate include the following:

Transfers in contemplation of death;

Proceeds of life insurance;

Transfers for insufficient consideration;

Capital of the surviving spouse (Sec. 85, NIRC)

FORMULA INCOME TAX