TAXATION REVIEWER
Gross Estate
Estate Tax Definition and Nature
In the Philippines, Estate Tax is a tax imposed on the privilege that a person is given in controlling
to a certain extent, the disposition of his property to take effect upon death. It is an excise tax
imposed on the act of passing the ownership of property at the time of death and not on the value
of the property or right. On this basis, estate tax should not be construed as a direct tax on the
property of the decedent although the tax is based thereon. Since estate tax accrues as of the
time death, the right of the State to tax the privilege to transmit the estate vests instantly upon
death. The accrual of the tax is distinct from the obligation to pay the same.
Justification for the Imposition of Estate Tax
1. Benefit Received Theory
2. Privilege or State Partnership Theory
3. Ability to Pay Theory
4. Redistribution of Wealth Theory
Benefit-Received Theory
The law considers the service rendered by the government in the distribution of the estate of the
decedent, either by law or in accordance with his wishes. For the performance of these services
and other benefits that accrue to the estate and the heirs, the State collects the tax.
Privilege or State Partnership Theory
Under this theory, inheritance is not a right but a privilege granted by the State and legatees have
been acquired only with the protection of the State. Consequently, the State as a passive silent
partner in the accumulation of property has the right to collect the share which is properly due to
it.
Ability to Pay Theory
Receipt of inheritance which is in the nature of an unearned wealth or windfall, are place assets
into the hands of the heirs and beneficiaries. This creates an ability to pay the tax and thus
contributes to government income.
Redistribution of Wealth Theory
The receipt of inheritance is a contributing factor to the inequalities in wealth and incomes. The
imposition of estate tax reduces the property received by the successor, thus helping to promote
equitable distribution of wealth in society. The tax base is the value of the property and the
progressive scheme of taxation is precisely motivated by the desire to mitigate the evils of
inheritance in the present form.
Classification of Decedents
RECIPROCITY CLAUSE (Section 104 of the Tax Code, as amended)
The Tax Code excludes "intangible" personal property with situs in the Philippines from the gross
estate of a non-resident alien decedent if there is reciprocity. • There is reciprocity if:
● The decedent at the time of his death was a resident citizen of a foreign country which at the
time of his death did not impose an estate tax of any character in respect of intangible personal
property of citizens of the Philippines not residing in that foreign country; or
● The laws of the foreign country of which the decedent was a resident citizen at the time of his
death allow a similar exemption from estate taxes of every character, in respect of intangible
personal property owned by citizens of the Philippines not residing in that foreign country.
Intangible Asset
The term "intangible asset" was not defined in the Tax Code, nonetheless, Accounting Standards
defines intangible asset as an "identifiable nonmonetary asset without physical substance". They
derive their value from intellectual or legal rights, and from the value they add to the other assets.
As a rule, the situs of intangible personal property is the domicile of the owner, also known as
"mobilia sequntur personam". However, such rule is not applicable if the intangible property has
situs elsewhere or where the intangible property has acquired a business situs in another
jurisdiction because the principle of "mobilia sequntur personam" is only used for convenience. It
must yield to the actual situs of such property. The situs of Franchise, for instance, should not be
based on the domicile of the owner but the place where such franchise is exercised.
INTANGIBLE ASSETS WITH SITUS "WITHIN" THE PHILIPPINES
Section 104 of the Tax Code enumerates the following intangible personal property with situs in
the Philippines, for estate tax purposes:
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 if such shares,
obligations or bonds have acquired a business situs in the Philippines.
5. Shares or rights in any partnership, business or industry established in the Philippines.
Situs of Tangible and Intangible Property
Valuation of Gross Estate
The estate of the decedent shall be appraised at its fair market value at the time of his death.
Since succession and the accrual of the corresponding estate tax takes effect upon death, it shall
only be fair to appraise the estate at its fair market value at the time of the decedent's death.
Specifically, the following rules shall apply in determining the valuation of the estate:
1. In General : Fair Market Value at the time of death
2. Real Property: The higher value between:
-FMV determined by the Commissioner; and .
-FMV as shown in the schedule of values fixed by the provincial and city assessors (also known as
assessed value or FMV for real estate tax purposes).
3. Personal Property :Fair market value at the time of death 4. Shares of stock
○ Unlisted common share: Book value per share of the issuing corporation (Appraisal surplus
shall not be considered, as well as the assigned amount to preference shares, if any).
○ Unlisted Preference share: Par value per share
○ Listed shares: 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 (RR 2-2003/ RR
12-2018).
5. Units of participation in any association, recreation or amusement club (ie., golf, polo, similar
clubs)
• The bid price nearest the date of death published in any newspaper or publication for general
circulation.
6.. Right to usufruct, use or habitation, and annuity
• In accordance with the latest Basic Standard Mortality Table taking into account the probable life
of the beneficiary, to be approved by the Secretary of Finance upon recommendation of the
Insurance Commissioner [Section 88(A)-NIRC].
A. Exclusions under Sections 85 and 104 of the Tax Code
1. Exclusive property of the surviving spouse [Sec. 85(H)].
The gross estate in case of married decedents, is composed of:
● Exclusive properties of the decedent: and
● Common properties of the decedent and the surviving spouse
Exclusive properties of the surviving spouse should be excluded in the gross estate because
these properties are not owned by the decedent upon his death. For estate tax purposes,
exclusive properties of the husband are known as "capital" while exclusive properties of the wife
are known as "paraphernal" properties (Article 135 of the Civil Code). Whether such property is
exclusive or common will depend on the type of property relations or marriage settlement of the
husband and wife.
2. Property outside the Philippines of a non-resident alien decedent (Sec. 85 and 104).
The Tax Code provides that for nonresident alien decedents, only his properties situated or with
situs within the Philippines shall be included in his gross estate. Consequently, properties outside
of the Philippines are excluded in determining the gross estate of a nonresident alien decedent.
3. Intangible personal property in the Philippines of a non-resident alien under the Reciprocity
Law.
Section 104 of the Tax Code expressly provides that "intangible" personal property in the
Philippines of a nonresident alien decedent shall be excluded from the gross estate if there is
reciprocity.
B. Exclusions under Section 87 of the Tax Code
1. The merger of usufruct in the owner of the naked title.
2. The transmission or delivery of the inheritance or legacy by the fiduciary heir (also known as
the 1st heir) or legatee to the fideicommisary (also known as the 2nd heir).
3. The transmission from the first heir, legatee or donee in favor of another beneficiary, in
accordance with the desire of the predecessor (also known as "Transfer under Special Power of
Appointment").
4. All bequest devises, legacies or transfers to social welfare, cultural and charitable institutions,
no part of the net income of. which inures to the benefit of any individual: Provided, however, that
not more than thirty percent (30%) of the said bequest, devises, legacies or transfers shall be
used by such institutions for administration purposes.
Fideicommissary transfer of property is in substance, the same with transfer of property received
under Special Power of Appointment (SPA), except that the relationship of the 1st heir and the 2nd
heir should not be more than one (1) degree apart.
Elements of a fideicommissary substitution:
● The substitution must not go beyond one degree from the heir originally instituted (i.e. father to
son).
● The fiduciary(first heir) and the fideicommissary(second heir) must be both living at the time of
the testator's death
C. Exclusions under Special Laws
1. Proceeds of life insurance and benefits received by members of the GSIS (RA728).
2. Accruals and benefits received by members from the SSS by reason of death (RA1792).
3. Amounts received from Philippines and United States governments for war damages (RA227).
4. Amounts received from United States Veterans Administration.
5. Payments from the Philippines of US government to the legal heirs of deceased of World War II
Veterans and deceased civilian for supplies/services furnished to the US and Philippine Army
(RA136).
6. Retirement benefits of officials/employees of a private firm (RA4917).
7. Personal Equity and Retirement Account (PERA) assets of the decedent-contributor (Sec. 14,
RA 9505 - Personal Equity and Retirement Account Act of 2008).
8. Compensation paid to private and public health workers who have contracted COVID-19 in case
of death, the said amount shall not be included as part of the gross estate of the decedent subject
to estate tax as provided under Republic Act No. 11494 or the
"Bayanihan to Recover as One Act"
COMPOSITION OF THE GROSS ESTATE
Generally, gross estate consists of all the property owned by a decedent or which the decedent
had an interest at the time of death, such as:
● Real property
● Personal tangible property
● Intangible personal property (shares of stocks,
○ Shares of stock
○ Bank deposit
○ 'Dividends declared before his death but received after death.
○ Partnership profit which have accrued before his death.
○ Usufructuary & rights
1. Property owned by the decedent that are actually and physically present in his estate at the
time of his death such as land, buildings, shares of stock, vehicles, bank deposit, and the like.
Decedent's Interest [Sec. 85(A)].
The Tax Code provides that Decedent's Interest to the extent of the interest therein of the
decedent at the time of death shall be included in the gross estate.
Decedent Interest refers to the extent of equity or ownership participation of the decedent on any
property physically existing and present in the gross estate, whether or not in his possession,
control or dominion. It also refer to the value of any interest in property owned or possessed by
the decedent at the time of his death (interest having value or capable of being valued or
transferred).
2. Property NOT PHYSICALLY IN THE ESTATE but are still subject to payment of estate tax.
These properties have already been transferred during the lifetime of the decedent, however,
such properties shall still form part of his gross estate because the transfers were either intended
to take effect only upon his death or does not actually convey full ownership over the property
transferred.
a. Transfers in Contemplation of Death [Sec. 85(B)]
The Tax Code, as amended, provides:
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.
A transfer in contemplation of death is a disposition of property prompted by thought of death. It
is the thought of death, as a controlling motive which induces the disposition of the property.
Included within this concept is donation mortis causa.
The gross estate shall include the value of property transferred by the decedent during his
lifetime in anticipation of his death (transfer in contemplation of death) such as:
1) Transfer of property in favor of another person, but the transfer was intended to take effect only
upon the transferor's death.
2) Transfer by gift intended to take effect at death, or after death,' or under which the donor
reserved the income or the right to designate the persons who should enjoy the income.
3) Transfer with retention or reservation of certain rights. The decedent had transferred his
property during his lifetime, but retained for himself beneficial enjoyment of the thing or the right
to receive income from the same.
Section 85 of the Tax Code, as amended, provides that there is no transfer in contemplation of
death when the transfer of property is a bonafide sale for an adequate and full consideration in
money or money's worth.
b. Revocable Transfers [Sec. 85(C)]
It is a transfer where the terms of enjoyment of the property may be altered,
amended, revoked or terminated by the decedent. It is sufficient that the decedent had the power
to revoke though he did not exercise the power. Section 85(C) of the Tax Code, as amended,
provides:
(1) To the extent of any interest therein, of which the decedent has at any time made a transfer
(except in case of a bonafide sale for an adequate and full consideration in money or monev'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 exercisable) 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), to alter, amend, revoke, or terminate, or where
any such power is relinquished in contemplation of the decedent's death.
c. Transfers under a General Power of Appointment [Sec. 85(D)]
Power of appointment refers to the right to designate the person or persons who will succeed to
the property of the prior decedent. The power of appointment may be "general" or "special". It is
considered "general" when the power of appointment authorizes the donee of the power to
appoint any person he pleases. The power may be exercised in favor of anybody including the
donee-decedent. The donee of a general power of appointment holds the appointed property with
all the attributes of ownership thus, the appointed property shall form part of the gross estate of
the donee (beneficiary) of the power upon his death.
Special Power of Appointment (SPA) exists when the donee can appoint only from a restricted or
designated class of persons other than himself. Property transferred under a special power of
appointment should be excluded from the gross estate of the donee of the power because the
donee-decedent only holds the property in trust. Refer also to Exclusions under Section 87 of the
Tax Code
The power of appointment may be exercised by the donor-decedent through the following modes:
a) By will
b) By deed to take effect in possession or enjoyment at or after his death.
c) 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.
d) The possession or enjoyment of, or the right to the income from the property.
e) 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.
d. Transfers for Insufficient Consideration [Sec. 85(G)
When a sale or transfer (other than a bonafide or valid sale) was made for a price less than its fair
market value at the time of sale or transfer, the excess of the fair market value of the transferred
property at the time of death over the value of the consideration received should be included in
the gross estate. For this purpose, the following fair market values shall be used:
FMV of the property at the time of sale or transfer.
This is use to determine whether or not the consideration was full and adequate. If the
consideration received is substantially the same with the fair market value at the time of transfer,
such sale or transfer is considered a bona fide sale, hence, not subject to estate tax.
When a sale or transfer (other than a bonafide or valid sale) was made for a price less than its fair
market value at the time of sale or transfer, the excess of the fair market value of the transferred
property at the time of death over the value of the consideration received should be included in
the gross estate. For this purpose, the following fair market values shall be used:
FMV of the property at the time of death.
This is used to determine the amount to be included in the gross estate. If the consideration
received is substantially lower or for less than full and adequate consideration compared to the
fair market value at the time of sale or transfer, such sale or transfer was made for insufficient
consideration. In such cases, the excess of the fair market value at the time of death over the
consideration received at the time of sale or transfer should be included in the gross estate of the
decedent.
MISCELLANEOUS ITEMS
a. Claims against insolvent persons (Sec. 85)
For estate tax purposes, an insolvent is a person whose properties are not sufficient to satisfy,
whether fully or partially, his debts). A judicial declaration of insolvency is not required but the
incapacity of the debtor to pay his obligation should be proven. As a rule regardless of the amount
the debtor is unable to pay, the full amount of the claim against the insolvent person should be
included in the gross estate of the decedent. The portion of the claim which is not collectible
should be allowed as a deduction from the gross estate.
b. Proceeds of life insurance [Sec. 85(E)]
Proceeds of life insurance taken out by the by the decedent on his own life should be included in
the gross estate if the following requisites are present:
1. It must be an insurance on the life of the decedent; and
2. The beneficiary must be either of the following;
o His estate or executor/administrator (revocable or not)
o Any third person (other than estate Or administrator/executor) provided that the
designation is not irrevocable
If the policy does not expressly say that the designation of the beneficiary is irrevocable, then it is
presumed to be revocable. Also, proceeds of life insurance under a group insurance taken by the
employer are not subject to estate tax.
ESTATE TAX RATE
The transfer of the net estate of every decedent, whether resident or non-resident of the
Philippines, as determined in accordance with the Tax Code, as amended, should be subject to the
estate tax. Beginning January 1, 2018 or upon the effectivity of RA 10963, otherwise known as the
"Tax Reform for Acceleration and Inclusion Act" (TRAIN Law), the net estate of every decedent,
whether resident or non-resident of the Philippines, shall be subject to an estate tax rate of six
percent (6%).
Filing of Estate Tax Return and Payment of Estate Tax Due
The Tax Code, as amended, provides that the estate tax shall be paid by the executor/
administrator or any of the legal heirs at the time the return is filed (Pay as you file system).
FILING and PAYMENT:
● Primary responsibility to file and pay - Executor or administrator;
● Secondary responsibility to file and pay - any of the heirs
Filing of Estate Tax Return and Payment of Estate Tax Due
Estate tax returns showing gross value exceeding five million pesos (P5,000,000) 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 nonresident, not a citizen of the Philippines, of that part of his gross estate
situated in the Philippines;
b) Itemized deductions allowed from the gross estate under Section 86 of the Tax Code, as
amended;
c) Theamountoftaxdue,whetherpaidorstilldueandoutstanding
TIME for FILING the Estate Tax Return
Section 90(B) of the Tax Code, as amended, provides that the estate tax return is required to be
filed within one (1) year from the decedent's death. The court approving the project of partition
shall furnish the Commissioner with certified copy thereof and its order within thirty days (30)
after promulgation of such order.
The period allowed to file the estate tax return shall be distinguished from the "accrual" date of
the estate tax due. The accrual of the estate tax is distinct from the obligation to pay the same.
The estate tax due "accrues" immediately at the time of death. The one-year time of filing is the
allowable period of filing the return without incurring surcharge/penalty and interest.
EXTENSION of Time to File the Estate Tax Return
Under Sec. 90(C) of the Tax Code, "the Commissioner or any Revenue Officer authorized by him
pursuant to the NIRC shall have the authority to grant, in meritorious cases, a reasonable
extension not exceeding thirty (30) days for filing the return". The application for the extension of
time to file the estate tax return must be filed with the Revenue District Office (RDO) where the
estate is required to secure its Taxpayer Identification Number (TIN) and file the tax returns of the
estate, which RDO, likewise, has jurisdiction over the estate tax return required to be filed by any
party as a result of the distribution of the assets and liabilities of the decedent.
When the Commissioner finds that the payment 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 (Judicial Settlement), or two (2) years in case the estate is settled extrajudicially
(extrajudicial settlement). In such case, the amount in respect of which the 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 deficiency assessment shall be suspended for the period of any
such extension.
REQUEST FOR EXTENSION OF TIME, INSTALLMENT PAYMENT AND PARTIAL DISPOSITION OF
ESTATE
Request for extension to file the return, extension to pay the estate tax and payment by
installment shall be filed with the Revenue District Officer (RDO) where the estate is required to
secure its TIN and file the estate tax return. This request shall be approved by the Commissioner
or his duly authorized representative.
PLACE OF FILING THE RETURN
In case of a resident decedent, the administrator or executor shall register the estate of the
decedent and secure a new TIN therefor from the Revenue District Office where the decedent was
domiciled at the time of his death and shall file the estate tax return and pay the corresponding
estate tax with the Accredited Agent Bank (AAB), Revenue District Officer or Revenue Collection
Officer having jurisdiction on the place where the decedent was domiciled at the time of his death,
whichever is applicable following prevailing collection rules and regulations.
In case of a non-resident decedent, whether non-resident citizen or non-resident alien, with
executor or administrator in the Philippines, the estate tax return shall be filed with and the TIN for
the estate shall be secured from the Revenue District Office where such executor or administrator
is registered. Provided, however, that in case the executor or administrator is not registered, the
estate tax return shall be filed with and the TIN of the estate shall be secured from the Revenue
District Office having jurisdiction over the executor or administrator's legal residence.
Nonetheless, in case the non-resident decedent does not have an executor or administrator in the
Philippines, the estate tax return shall be filed with and the TIN for the estate shall be secured
from the Office of the Commissioner though RDO No. 39-South Quezon City.
The foregoing provision, not withstanding, the Commissioner of Internal Revenue may continue to
exercise his power to allow a different venue/place in the filing of tax returns.
LIABILITY FOR THE PAYMENT OF ESTATE TAX
The executor/administrator of an estate has the primary obligation to pay the estate tax but the
heir or beneficiary has subsidiary liability for the payment of that portion of the estate which his
distributive share bears to the value of the total net estate. The extent of his liability, however,
shall in no case exceed the value of his share in the inheritance.
Where 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 must file the
return. The Estate Tax imposed under the Tax Code shall be paid by the executor or administrator
before the delivery of the distributive share in the inheritance to any heir or beneficiary.
Where there are two or more executors or administrators, all of them are severally liable for the
payment of the tax. The estate tax clearance issued by the Commissioner or the Revenue District
Officer (RDO) having jurisdiction over the estate, will serve as the authority to distribute the
remaining/distributable properties/share in the inheritance to the heir or beneficiary.
PAYMENT BY INSTALLMENT
In case the available cash of the estate is insufficient to pay the estate tax due, payment by
installment shall be allowed within two (2) years from the statutory date for its payment without
civil penalty and interest, using the payment form (BIR Form 0605) or a payment form dedicated
for this transaction for succeeding installment payments after filing the first (1st ) payment
through the estate tax return.
Civil penalties and interest
Any amount paid after the statutory due date of the tax, but within the extension period, shall be
subject to interest but not to surcharge. Penalty of 25% if there is no false or fraudulent intent on
the taxpayer. Penalty of 50% if there is false, malice or fraudulent intent on the taxpayer. Interest
shall be computed on the unpaid amount of tax from the date computed until fully paid (20% prior
to TRAIN Law; 12% upon effectivity of the TRAIN Law).