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Business and Transfer Tax Reviewer for accountancy
students
Accountancy (Arellano University)
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Business and Transfer Taxes Reviewer
National Internal Revenue Taxes
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They are the primary source of the government’s revenue
Based on several, theories, principles, and doctrines
They are grounded with inherent and constitutional limitations
Principles of Taxation – fundamental or basic truths on which our tax laws must be based upon
1. Fiscal adequacy – funds generated must be sufficient to meet government expenditures
2. Equality or theoretical justice – taxes must be based on the taxpayer’s ability to pay
3. Administrative Feasibility – tax laws must be capable of being effectively enforced
Theories of Taxation – set of accepted beliefs that explain and guide our law makers in making tax laws
1. Necessity theory (theory of taxation) – power to tax is an attribute of sovereignty emanating
from necessity
2. Lifeblood theory (importance of taxation) – without taxes, the government would be paralyzed
for lack of the motive power to activate and operate it.
3. Benefits – protection theory/reciprocal duties theory (basis of taxation) – there is a symbiotic
relationship between the state and its citizens
Graduated Tax and 8% - Applicable only to individual taxpayers
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Gratuitous – Transfer of property without renumeration or compensation, given for free.
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Mortis Causa – transfer happens after death, it is subject to estate tax
Inter Vivos – transfer happened during the life of the transferor, it is subject to donor’s tax
Onerous – Transferee is obliged to compensate the transferor, subject to business tax
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Value added tax – consumption tax
Percentage Tax - If annual gross sales/receipts don’t exceed 3 million
Excise tax -imposed on sinful and luxurious products OR tax on a right.
Documentary Stamp Tax – imposed on every transaction entered by any taxpayer especially when the
transaction is in writing.
Transfer Tax
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Are excise taxes (privilege taxes)
Are imposed for gratuitous transfer or passing of privately-owned properties to another either
during the lifetime or upon death
Donor’s tax
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Excise tax imposed on the right to transfer gratuitously during one’s lifetime
Imposed on the right of the donor and not the donor himself
Basic purpose of imposing donor tax is to prevent the escape of payment of estate tax through
lifetime transfers of property that would’ve been transferred by will or through death of the
donor
Estate tax
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The right to transfer the economic benefits and enjoyment of property from a decedent person
to their heir
State protects the right of the individual on his property and supervises its transfer from
generation to another
Principles and Theories that justify the imposition of estate tax
1. Redistribution of wealth theory –
a. inheritance received by the heir contributes to the unequal distribution of wealth and
earnings because the heir has not worked for it.
b. Imposition of estate tax helps redistribute economic benefit that should’ve been solely
enjoyed by the heir
2. Benefit-received theory
a. Government provides services for the transfer of estate of the decedent either by law or
by will
b. It is fair that the government collects its equivalent compensation in protecting
individual persons and properties or rights
3. Privilege or state partnership theory
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a. State is a passive and silent partner in the accumulation of wealth as it protects every
individual in its territory.
b. Has the right to collect its share that is due to it
4. Ability to pay theory
a. Every inheritance received by an heir is unearned wealth
b. Effect of inheritance increases the wealth of the heir therefor creating an ability to pay
the tax
Estate Tax Accruance
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All transfer taxes accrue at the time of transfer
Donor tax – upon completion of the gift
Estate tax – accrues as of the time of death
Basic Succession
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Effected upon the death of the decedent
Transfer of property left by the deceased accrues upon death
o Consequently, determination of the tax on property is traced back to the moment of
death
Concept of Succession
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Mode of acquisition by virtue of which the property, right and obligations to the extent of the
value of the inheritance of a person are transmitted through his death to another or other by
will or operation of law
Basis of Succession
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Family Relations
o Principle of natural law necessitates a person to provide to those he left behind
o Wealth acquired during lifetime is presumed intended for the benefit of his loved ones
Implicit ownership
o The heirs assume ownership of the property left behind because they have primary right
over inheritance
Socio-economic
o Wealth left by decedent should be actively used to provide economic benefit to the
community
Elements of Succession
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Decedent – person whose property is transmitted through succession
o Person who died and whose property is transmitted through succession
o A testator, person whose properties are in a written will
o Transfer of property without a will is intestate succession
Estate – refers to all property, right and obligations
Successors and heirs – persons called to the succession to succeed the estate of the decedent
o Have the legal right to receive the estate
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o
Classified as:
 Primary Compulsory Heirs – successors to whom legitime of the estate is first
reserved by the law
 Secondary Compulsory Heirs – successors to receive the estate in absence of
the primary compulsory heirs
 Absence of Compulsory Heirs
Testamentary Succession
Types of Succession:
1. Testamentary – if there is a will
a. Results from the designation of a heir
b. May dispose his properties in the manner he wants
c. Must reserve some for compulsory heirs
2. Intestate – if there is no will
3. Mixed
Notarial or Ordinary Will – will that is created for a testator by a third party
Holographic will – entirely written, dated and signed by the hand of testator himself
Codicil – supplement or addition to a will
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Intestate Succession
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Legal succession because it takes effect through the operation of law
Entire state of the decedent is distributed to the heirs
Testamentary compulsory heirs are the same with Intestate
o Include brothers and sisters, collateral relatives within the fifth degree of consanguinity
and the state
No free portion
Administrator – person appointed by the court in accordance with the governing statute to administer
and settle intestate estate
Order of Succession
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Nearer excludes the farther
Surviving spouse and illegitimate children are concurrent heirs with the legitimate decendents
Right of representation takes place in direct descending line
A renouncer may represent but can’t be represented
Adopted child cant represent nor be represented
In the collateral line, right of representation takes place only in favor of the children of brothers
and sisters whether they be full or half blood
Full blood brothers and sisters share twice or double that of half blood
Should there be more than one ascendant of equal degree, they will divide the inheritance per
capita
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Disinheritance – owner of an estate deprives a person the right to inherit
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Can only be effected through a will whereby legal cause must be specified
Causes of Disinheritance – children and descendants
1. If found guilty of an attempt against the life of the testator, spouse, descendants, ascendants
2. If they accused, the testator for a crime with imprisonment of 6 years or more has been found
groundless
3. When child or descendant has been convicted of adultery or concubinage with the spouse of the
testator
4. By fraud, violence, intimidation, or undue influence caused the testator to make a will or change
one
5. Refusal without justifiable cause to support parent or ascendant who disinherits such child or
descendant
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6. Maltreatment of testator by words or by deed
7. Child or descendant leads a dishonorable life
8. Conviction of a crime with the penalty of civil interdiction
Causes of Disinheritance – parents and ascendants
1. Have abandoned their children or induced them to live a corrupt or immoral life
2. Has been convicted of an attempt on the life of the testator, spouse, descendants or ascendants
3. If they accused, the testator for a crime with imprisonment of 6 years or more has been found
false
4. When parent or ascendant has been convicted of adultery or concubinage with the spouse of
the testator
5. By fraud, violence, intimidation, or undue influence caused the testator to make a will or change
one
6. Loss of parental authority for causes specified in the code
7. Refusal to support children or descendants without justifiable cause
8. Attempt by one of the parents against the life of the other unless there has been reconciliation
Gross Estate
Situs of Taxation
Decedent/Donor
Estate Tax
Donor’s Tax
Resident Citizen
Taxed Globally
Taxed Globally
Non-Resident Citizen
Taxed Globally
Taxed Globally
Resident Alien
Taxed Globally
Taxed Globally
Non-Resident Alien
Taxable within only the PH
Taxable within only the PH
Residents
And
Citizens
–
All
real
and personal properties are
Pro Forma Computation
taxed wherever situated
Gross Estate
xx
Less:
Ordinary Deductions
Special Deductions
Net Taxable Estate
Multi: Estate Tax Rate
Estate Tax Due
Less: Estate Tax Credit
Estate Tax Payable
(xx)
(xx)
xx
6%
xx
(xx)
xx
Non-Resident Aliens – Real and Tangible personal
properties located in the Philippines are taxed while the
intangible personal properties are exempted on the basis of
reciprocity
Gross Estate Valuation: Real Properties
General Rule: the gross estate shall be valued at its fair market value at the time of death of the
decedent
Real Properties are valued at the appraisal value thereof as of the time of death which shall be higher of:
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The fair market value as determined by the commissioner
Fair market value as shown in the schedule of values fixed by the provincial and city assessors
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Gross Estate Valuation: Personal Properties
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7.
Current Market Price = recently acquired
Second-hand market price = previously acquired
Grossed-up loan value = loaned or pawned
Fair value plus accrued interest = interest-bearing receivables and bank deposits
Discounted Value = non-interest-bearing notes receivables
Face value = Philippine Currency
Converted Philippine Peso value = foreign currencies
Gross Estate Valuation: Usufructuary rights
Usufruct – legal right to use and enjoy the benefits and profits of property belonging to another
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To determine the value, the probable life of the beneficiary in accordance with the latest Basic
Standard Mortality Table should be used
Bare Dominium Value = value left after deduction of usufruct value
Gross Estate Valuation: Shares of stock
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As a rule, all properties tangible or intangible are valued at the time of death for estate taxation
purposes
Share is the smallest denomination of a company’s stock
It represents equity ownership in a corporation
It is evidenced by a share certificate, that is why it is an intangible property
If traded in the local stock exchange:
1. Shares multiplied by the closing price on the date of death
2. If above is not available, closing price on the day nearest to the date of sale, transfer or exchange
If not traded in the local stock exchange:
1. Ordinary shares/Common shares – book value based on the latest available financial statements
2. Preference shares – liquidation value
a. IF BOTH ARE AVAILABLE, computation for book value per common share is:
Addition to Gross Estate
Taxable transfers made during the lifetime
1. Transfer in contemplation of death – death must be contemplated, though of death must be the
impelling cause of transfer
a. Following are deemed in contemplation of death
i. Where a donation was made concurrently with the execution of the will
ii. Where donation was made due to the decedent’s age and/or the decedent’s
known serious illness at the time of the gift
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2.
3.
4.
5.
iii. Where the time between the making of the gift and the death was relatively
close
Revocable transfers – transfer of property with retention of right over the property by the
donor(decedent) while he still lives
a. By gift where the donor has reserved the power to alter, amend and revoke donation
b. Donor retains the option to relinquish such power in contemplation of death
c. Conditional transfer where attached conditions are not completed by the done prior to
the donor’s death
Transfer passing under General Power of Appointment – GPA means that the decedent must
have power exercisable in favor of himself, his estates or creditors of his estate
a. A power is special if it is expressly not exercisable in favor of the decedent, his estate or
credit of his estate
Transfer for insufficient consideration (applied to personal properties)
a. If it is a valid sale (good faith, free from any donative intent) no amount shall be included
in the gross estate
b. The consideration received is less than adequate and there was a donative intent, the
amount included is the different between the FMV at the time of death less than
consideration received
c. Transfer made is without consideration as in the case of contemplation of death,
revocable transfers, and transfers under the GPA the amount included is FMV at the time
of death
Proceeds of life insurance with revocable beneficiary – following rules apply as regards to the
proceeds of life insurance:
a. Beneficiary is any third person other than estate, executor or administrator and the
designation is irrevocable = excluded in the gross estate
b. Beneficiary is any third person other than estate, executor or administrator and the
designation is revocable = included in the gross estate
c. Beneficiary is the estate, executor or administrator regardless whether revocable or
irrevocable = included in the gross estate
Others
1. Decedent’s interest accrued at the date of death
a. Refers to the value of interest in the properties or rights accrued in favor of him on or
before his death which is received only after his death
b. Example: Dividends, Profit share in a partnership, Accrued interest on deposits or loans,
and Rents accrued before his death
2. Usufruct right transferrable to the decedent’s heirs
3. Claims against insolvent persons – claims refer to the receivable left by the decedent which the
court found the related debtor insolvent
a. Claims against an insolvent person must be reported as part of the decedent’s gross
estate in full amount
i. However due to the insolvency of the debtor the same amount may also be
deducted from the gross estate
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4. Amount received by the heirs under RA 4917 – retirement benefits received by officials or
employees of private firms in accordance with a reasonable private benefit plan maintained by
the employer is exempt from all taxes and shall not be liable to attachment, garnishment, levy
and seizure = except to pay a debt concerned to the private benefit plan or liability arising from
imposed criminal action
a. The retiring official or employee has been in service of the same employer for at least 10
years and not less than 50 years of age at the time of his retirement
b. Benefits granted by the act shall be availed only once by the employee or official
c. In case of death, sickness or other physical disability or for any cause beyond the control
of the official or employee any amount received by him or his heir from the employer as
a consequence such separation shall likewise be exempt
Property of Relations
Rules in Determining the property of relationship
1. Agreement on marriage settlement – prenuptial agreement
a. If no prenuptial agreement:
i. Marriage before August 3, 1988 – conjugal partnership of gains
ii. Marriage on or after August 3, 1988 – absolute community of property
General Assumption:
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Property for personal and exclusive use of either the spouse shall be exclusive
Jewelry is communal property
Property acquired in exchange of exclusive property shall be exclusive
Any property acquired during marriage are presumed to be communal unless proven otherwise
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MIDTERMS
Exclusions from Gross Estate:
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Capital or exclusive property of the surviving spouse
Properties outside the Philippines of a non-resident alien decedent
Intangible properties of a non-resident alien in the Philippines when the rule of reciprocity
applies
Merger or usufruct in the owner of the naked title
o
Transmission
delivery of
inheritance
legacy of the
fiduciary heir
legatee to
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or
the
or
or
the
fideicommissary
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from
done
with
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All
Transmission
the first heir,
legatee, or
in favor of
another
beneficiary, in
accordance
the will of the
predecessor
bequest,
devices,
legacies, or
transfers to social welfare, cultural, and charitable institutions, provided:
o No part of the net income is said institution inure the benefit of any individual
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o Not more than 30% of such transfers shall be used for administration purposes
Proceeds of life insurance and benefits received by members of the GSIS
Benefits received by members from SSS by reason of death
Amounts received from Philippines and United States governments for war damages
Amounts received from United States Veterans Administration
Allowable Deductions from Gross Estate
Categorized:
1. Ordinary deductions
2. Special deductions
3. Share of the surviving spouse
Family Home = 10 million
Deduction related to exclusive properties are deducted from exclusive properties and deductions related
to conjugal/communal properties are also deducted from such
Deductions which are unattributable to whether exclusive or conjugal property are presumed deductible
from conjugal property
All deductions must be duly substantiated except the standard deduction
Ordinary deductions: losses, indebtedness, and taxes (LIT) – losses incurred during the settlement of
the estate
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Arise from fires, storms, shipwreck, or other casualties, or from robbery, theft, or embezzlement
and may be claimed as deduction
o Provided that such losses are not compensated for by insurance, or if insured only the
amount to the extent not covered for by the insurance may be claimed
Such losses have not been claimed as a deduction for the income tax purposes in an income tax
return
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Such losses were incurred not later than the last day for the payment of the estate tax (within 1
year of death)
Indebtedness – any amount of debts which remains unpaid upon the death of the decedent
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Claims against the estate – obligations of the decedent to the creditors which remain unpaid
upon the death
o Must be duly notarized, and if the loan was contracted within 3 years before death,
administrator or executor shall submit a statement showing disposition of the proceeds
of the loan
o Verification as to the beneficiary of the proceeds must be made
o In case of accommodation only, the amount must also be claimed as receivable included
in the gross estate
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Clai
ms
of
the
deceased against insolvent persons – loans or obligations of a debtor to the decedent which
remains unpaid and for which the court found the related debtor insolvent
o For claims of the deceased against insolvent persons where the value of the decedent’s
interest therein is included in the value of the gross estate
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Unpaid mortgages or any indebtness – shall be limited to the extent that they were contracted
and for an adequate and full consideration in money or money’s worth
o For unpaid mortgages in respect to property, the value of the decedents interest therein
must be included in the gross estate, undiminished by such mortgage or indebtness
Accrued and unpaid taxes – taxes must have accrued but not paid as of the time of death
o Non-deductible:
 Income tax for income received after death
 Property tax not accrued prior to death
 Estate tax
Ordinary Deductions: Transfer for public use – these are donations and contributions, by virtue of
death, to:
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Government or its political subdivisions
Non-government organizations (accredited)
Charitable and religious institutions
These are exemptions from estate tax provided that not more than 30% are used for administrative
purposes and the income of such institutions does not inure to the benefit of private individuals
Ordinary Deductions: Vanishing deductions – also known as property previously taxed, are allowed to
be deducted from the decedent’s gross estate but the amount to be deducted are diminished depending
on the years gap from the prior transfer
To qualify the property should’ve been already subjected to estate tax or donor’s tax
Purpose – to minimize the effects of double tax on the same property within the short period of time
Conditions for allowance:
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There is a property forming a part of the gross estate of the present decedent situated in the
Philippines
The present decedent acquired the property by inheritance or donation within 5 years prior to
his death
Property was previously taxed upon inheritance or gift
Amount of vanishing deductions: the amount to be deducted as vanishing deduction may be claimed as
follows depending on the interval between the prior transfer (inheritance or gift) to the death of the
current decedent
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Summary of Steps in computing vanishing
deductions
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Special Deductions
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Only residents and citizens have the privilege of claiming special deductions
Old NIRC – standard deduction of 1,000,000 was only available to resident citizen, aliens and
non-resident citizens
TRAIN LAW – non-resident aliens could now enjoy a standard deduction of 500,000 while other
could deduct an amount of 5,000,000
Standard Deduction
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Citizen or resident of the Philippines, deducting from the value of the gross estate of 5,000,000
Non-resident aliens , deducting from the value of the gross estate which at the time of death is
situated in the Philippines a standard deduction of 500,000
Standard deduction maybe deducted without the need of substantiation
Family Home – must be the actual residential home of the decedent and his family at the time of death
as certified by the Barangay Captain
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Family home at its fair value at the time of death must be declared and included in the gross
estate of the decedent
Amount deductible must be equivalent to the current fair market value of the decedent’s family
home not exceeding 10,000,000
If a conjugal property it must be divided by two
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RA 4817 – Retirement Benefits Act
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Any benefits received upon retirement or upon death of the decedent is exempted from any
taxes
o As a requisite, despite being exempted from tax, the amount must be fully included in
the gross estate
o Also, the same amount must be deducted from the gross estate under special
deductions
Share of the surviving spouse
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For single and unmarried decedent, computation of estate tax is simple and straightforward as
there is no need to determine whether properties or deductions are exclusive or communal
For married decedent, the share of the surviving spouse from the conjugal or communal
property is allowed as deduction from total gross estate to arrive at net taxable estate
Computation of Estate Tax for unmarried decedent
Rate of estate tax – resident or non-resident of the Philippines, a tax at the rate of 6% based on the value
of such net estate
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Computation of Estate Tax for married decedent
Rate of estate tax – resident or non-resident of the Philippines, a tax at the rate of 6% based on the value
of such net estate
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